Money Management (October 6, 2011)

The publication for the personal investment professional

www.moneymanagement.com.au

FOFA TRANCHE TWO: Page 5 | FINANCIAL PLANNING SOFTWARE: Page 14

Adviser sentiment heads south Wealth Insights Financial Planner Sentiment Index

40

39

38 31

29

24 16

20

15 15

7

-3

5000 4500

-9 -19

-20

-14

-31 -36

-40

4000

-60

clients’ reactions to market volatility and negative reporting of global economic events.

“It seems people are just not doing anything,” she said.

McMahon said despite the declining sentiment, few financial planners appeared unduly financially stressed by the downturn.

‘Own occupation’ TPD phase-out questioned

By Chris Kennedy THE Government’s recent Stronger Super announcement states it will be phasing out the option to hold ‘ownoccupation’ Total and Permanent Disability (TPD) insurance policies within superannuation – but it’s unclear what repercussions this could have for members who hold such policies.

Throughout the Stronger Super consultation process stakeholders have raised concerns that super fund members who hold ‘own-occupation’ TPD policies are unable to extract claims payments from their superannuation funds until they meet the stricter provisions of ‘any occupation’ TPD insurance, as required by the Superannuation Industry Supervision Act (SIS), or until they meet conditions for the release of superannuation funds under SIS. The latest Stronger Super announcement released a fortnight ago states the Government “will end this practice” and indicates this change needs to be made “as rapidly as possible”. The Gov-

ernment stated it will consult with industry on a suitable timeframe for the phasing out of existing policies.

The Stronger Super consultation process found that stakeholders felt that for all types of insurance, the definitions should be consistent across the MySuper and choice segments for the release of insurance payments. There should also be a standard definition of TPD across funds.

But the consultation paper did not indicate support for the removal of ownoccupation TPD, and Australian Institute of Superannuation Trustees chief executive Fiona Reynolds expressed disappointment that the option would be removed.

“This is a valuable benefit and one that some funds have put a lot of effort into negotiating for their members. We will need to ensure that there is sufficient time for those funds to transition to the new regime and phase out existing policies that may not satisfy the new arrangements,” Reynolds said.

Continued on page 3

Feb '11 45% 44%

Sept ' 11

42%

33%

18% 8%

3500

0% 2%

3000

Very bad

Source: Wealth Insights

ing conditions as being “good” or “very good” declined from 47 per cent to just 21 per cent.

Commenting on the research findings, Wealth Insights managing director Vanessa McMahon said planner feedback suggested planners had been made extremely cautious by their

In your role as a financial planner, are time good or bad for you right now?

5500

32

23 1

0

Adviser Sentiment

6000

60 53

ASX All Ordinaries Index

HIGHLY volatile markets and regulatory uncertainty have continued to take their toll on financial planner sentiment, according to the latest data released by Wealth Insights.

The data, contained in the Wealth Insights Financial Planner Sentiment Index, reveals the mood of planners is headed back into territory not seen since the early descent into the global financial crisis in 2008.

The degree to which planner sentiment has declined is also evidenced by their responses to the question – “in your role as a financial planner, are times good or bad for you right now?”

The Wealth Insights research showed a significant decline had occurred in the six months between February and September, with the number of planners reporting times as being “bad” or “very bad” rising from 8 per cent to 35 per cent, while those report-

Adviser Sentiment September 2011

Sentiment Index

By Mike Taylor

Fe b M '08 ay ' Au 08 g ' No 08 v '0 8 Fe b '09 M ay '0 Au 9 g ' No 09 v '0 Fe 9 b '1 M 0 ay ' Au 10 g '1 No 0 v '1 Fe 0 b M '11 ay Au ' 11 g '1 No 1 v '1 1

Print Post Approved PP255003/00299

Vol.25 No.38 | October 6, 2011 | $6.95 INC GST

Bad

5%

Average

Good

3%

Very good

Source: Wealth Insights

“Quite surprisingly, most of them seem to believe their businesses are weathering the period reasonably well,” she said. “It seems enough clients are still engaging with their planners and business is still rolling along.”

The Wealth Insights data

reveals that financial planner sentiment reached its lowest point at negative 36 points in February/March 2009 and currently stands at minus 14 points – a position reached in the closing months of last year.

Planner sentiment was at its most optimistic in 2007.

Online advice needs specific guidelines

By Andrew Tsanadis THE Australian Securities and Investments Commission (ASIC) believes the liability for scaled online financial advice should fall on a financial adviser, but a lack of specific guidelines means some licensees are in the dark on their compliance commitments.

The Association of Superannuation Funds of Australia’s (ASFA’s) submission to ASIC’s consultation paper Additional guidance on how to scale advice stated that a lack of specific guidance for online advice will become an issue as the market continues to expand.

“The problem of developing guidelines for scaled advice online is that ASIC can only start looking at the liability surrounding web and phone-based advice when there are enough providers to compare against, and this is starting to happen. It’s hard to give guidance until you start to see failures,” said ASFA chief executive Pauline Vamos.

“Online advice is such a new delivery mechanism and the law has generally not kept up with technology.”

AdviceConnect chief executive Mike Giles said most clients in the market want lower cost limited advice, but he is seeing a very

Pauline Vamos slow take-up of online and phone-based solutions because large institutions are “dead afraid” of meeting their compliance commitments.

“Online advice is coming, but because ASIC isn’t clear on compliance, we all have to take a baby step and see if someone tries to cut our head off,” Giles said.

According to Giles, this uncertainty becomes a real issue because clients today have the ability to choose a number of channels from Continued on page 3

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: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Cadet Journalist: Angela Welsh Tel: (02) 9422 2898 Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply.

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

Editor

mike.taylor@reedbusiness.com.au

Super blooper shows Julia’s hand WHILE Australian Prime Ministers almost inevitably incur substantial political debts as they navigate their way to the top, most of them understand the need to leave all public vestiges of those debts at the door of the Lodge.

There are good reasons for this because, in the end, a Prime Minister knows that she/he has to govern for all of Australia, not just for those who voted for the party or who provided political and financial support for their campaigns. In short, Prime Ministers need to be, well, Prime Ministerial.

The Prime Minister, Julia Gillard last week appeared to forget this when she addressed an Industry Super Network (ISN) luncheon at the Melbourne Convention Centre and proceeded to take joint ownership with the ISN of some of the most controversial elements of the Future of Financial Advice (FOFA) changes, including ‘opt-in’.

In a few brief paragraphs, the Prime Minister revealed the degree to which the Government viewed the ISN as not only a close political ally but also a key source of policy direction.

To quote the Prime Minister’s address: "You stood with us to get rid of conflicts of interest and the excessive fees. You stood with us to secure the iconic ‘opt-in’ policy

2 — Money Management October 6, 2011 www.moneymanagement.com.au

Julia Gillard

seems little doubt “sheThere felt she was among ‘friends’ and ‘comrades’ at the ISN luncheon. ”

to bring fairness to financial advice. You stood with us to bring simple, low-fee super accounts to every worker who needs one. You stood with us to distribute super tax concessions more fairly so that all Australians benefit. You play a role in broader policy debates, on occasion at the vanguard of public policy debates.

"Through ISN, you’re working with us now on issues from the upcoming tax forum, to banking competition policy and nation-building infrastructure."

Given the torrid months the Prime Minister has experienced in dealing with matters ranging from offshore illegal immigrant processing and the carbon tax through to problem gambling, there seems little doubt she felt she was among "friends" and "comrades" at the ISN luncheon in Melbourne. But it was also clear she regarded her Government as having a common agenda with the industry superannuation funds.

In the context of the ongoing discussions and consultations around the FOFA changes and Stronger Super, the Prime Minister’s speech must therefore be viewed as a watershed in terms of defining her Government’s ongoing relationship with the financial services industry.

Quite simply, those critics of the Government who have suggested it is doing the bidding of the trade union movement and the industry superannuation funds will regard their arguments as having been proved. Those who have argued the contrary will find it difficult to sustain their case.

— Mike Taylor

News ‘Own occupation’ TPD phase-out questioned Continued from page 1

Holding Redlich partner Jenny Willcocks said there had been a mismatch around TPD in super for some time, but that another solution would have been to alter the release conditions rather than removing the option of holding the policy.

Fund members holding these products will have to be transitioned over to the broader and tougher definition, and it could present a major issue for trustees and the group life sector, she said.

“It appears the Government is taking the view the ‘own occupation’ definition isn’t consistent with the purpose of superannuation, without understanding the extent of it in the market,” she said.

That option, which exists broadly throughout the industry, would have to be taken off the market and people would have to buy it outside super and pay a lot more than what they can currently get it for under a group discount, she added.

The Association of Superannuation Funds of Australia (ASFA) was less concerned,

Fiona Reynolds stating that while it did not have a policy position per se on whether such policies should be available through super, the industry should be able to cope with a phase-out as policies are reviewed and renewed on a regular basis.

However, there will be an issue with defined benefit funds where the benefit design has been incorporated into the trust deed and some provision will need to be made for these funds, ASFA stated. ASFA added it had previously raised concerns with the Government regarding the unannounced change in the definition of TPD for taxation purposes that occurred as part of the simpler super changes.

FOFA and its dates need amendment: AFA

By Chris Kennedy FUTURE of Financial Advice (FOFA) reforms will require thoughtful amendments if significant unintended consequences are to be avoided, while the stated implementation dates are also too early, according to the Association of Financial Advisers (AFA).

With some reforms, including the ban on product commissions and assetbased fees, due to come into effect on 1 July 2012 – around nine months away – this will not afford enough time for all industry participants to efficiently introduce the measures, according to AFA President, Brad Fox. “In the interests of consumers, we call on [Assistant Treasurer and Minister for Financial Services Bill Shorten] to review these key dates,” he said.

The second tranche of the FOFA reforms was released this week, but

together with the first tranche and the Stronger Super reforms, significant pieces of the jigsaw are still missing, he said.

The reforms look likely to lead to significant market concentration in the area of financial advice and significantly increase the cost of personal financial advice for every day Australians, he said.

“We believe the generic one-size-fitsall approach perpetuated by the industry funds movement and by the MySuper reforms will ultimately lead to greater consumer disengagement,” Fox said.

The AFA supports transparency in relation to all fees associated with financial advice and superannuation, but Fox expressed concern that hidden advice fees – in the form of ‘management fees’ – may remain in industry super fund and MySuper products, meaning some super fund members will be paying for personal financial advice they may never access.

Brad Fox The proposed legislation will also make it too expensive for corporate super specialists providing financial advice education, benefits and services to members of corporate super funds to continue to provide these services, Fox said.

Online advice needs specific guidelines Continued from page 1

Future-proof your Of the options available, client’s retirement with few are as dependable Challenger annuities. 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.

12491/0911

which to receive limited advice, and especially with proposed Future of Financial Advice (FOFA) legislation, licensees need to add value to the advice they provide.

He said ASIC needs to keep up with the changes because providing scaled advice over the web or on the phone will become a typical part of the advice landscape over the next few years.

A spokesperson from ASIC said the guidelines set out in the Corporations Act 2001 have enough of a general application to cover the provisions of scaled advice delivered online.

Minter Ellison partner Chern Tan said there should be no confusion as to where the accountability lies in providing scaled advice online, referring to Part 7 of the Corporations Act 2001 “You couldn’t say there is a gap in the law relating to online financial advice,” Tan said.

“It would still be the adviser who prepared the advice or the licensee,” he said.

However, Vamos said the regulator should give licensees a bit of slack because financial advisers may find difficulty in upholding their compliance obligations, which she said are still murky when it comes to liability.

“I can understand any adviser being wary about building a system that they may need to change,” Vamos said.

According to ASFA’s FOFA submission, the association supports the delivery of scaled advice online and over the phone, and the adviser should bear the onus of the advice provided.

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 252 870.

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 October 6, 2011 Money Management — 3

News

Second FOFA tranche hard on soft dollar

By Mike Taylor THE second tranche of the Government’s Future of Financial Advice legislation has revealed a ban on volume-based shelf-space fees and has sought to limit the ability of dealer groups and product manufacturers to conduct ‘professional development’ conferences offshore.

The legislative outline also clearly spells out the nature of what it regards as ‘conflicted remuneration’. It has a specific carve-out with respect to bank employees selling banking products and in relation to general insurance.

The legislative outline, released by the Treasury, states that it will ban the receipt by platform operators of volume-based benefits to

the extent such incentives are a means of product issuers and fund managers ‘purchasing’ shelf space.

However it said the bill would not seek to ban fund managers lowering their fees to platform operators where such discounts or rebates represented a reasonable value for scale.

Looking at the question of soft dollar remuneration and confer-

ences and professional development, the legislative outline makes clear that professional development must be conducted in Australia and New Zealand and that 75 per cent of the time must be spent on professional development.

As expected, the second tranche makes clear the terms of the ban on asset-based fees in geared funds.

ISN offers help to Govt on fine detail of FOFA COMMISSIONS and financial inducements have been the only reason poorly performing superannuation funds have been able to get a foothold in the Australian market, according to Industry Super Network (ISN) chief executive David Whiteley.

Commenting on the release of the second tranche of the Government’s Future of Financial Advice (FOFA) legislation, Whiteley said the legislation, if enacted, would “bring an end to costly commissions on compulsory superannuation”.

However the chief executive of the Financial Planning Association (FPA), Mark Rantall, pointed out that the FPA had introduced policy supporting the banning of commissions three years ago – well before the issue had been raised in the FOFA changes.

“We also support the banning of soft dollar benefits which further supports our existing joint venture with the Financial Services Council,” Rantall said.

However he said the Government needed to clarify a number of issues contained in FOFA drafts including the last resort compensation scheme, the final report on the advisory panel on standards and ethics, the accountants exemption and the restrictions on the use of the term ‘financial planner’.

The second tranche of the Government’s FOFA legislation directly targeted conflicted remuneration and soft dollar arrangements and provided examples of relationships which would be regarded as conflicted.

However individual planner responses received by Money Management argued that the same rules on conflict should be extended to the operation of industry superannuation funds.

Whiteley said the ISN looked forward to working with the Government on the fine detail of the legislation to ensure it achieved all of its intended policy objectives.

You see smaller companies We see hidden gems At Ausbil, smaller companies represent new territory with rich pickings for surefooted investors.

With the new Ausbil MicroCap Fund, we’ve pinpointed Australian small companies we expect to outperform, creating a high-growth portfolio that lets your clients profit from small in a big way.

Of course, we’ve applied the same precision, conviction and rigour as ever, giving us the confidence to take a strong investment position. To learn more about the approach that earned us a Lonsec recommendation, visit www.ausbil.com.au

Money does not perform. People do.

*The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned February 2011) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). 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(s) using comprehensive and objective criteria.

Ausbil Dexia Limited (ABN 26 076 316 473) (AFSL 229722) offers financial products. This advertisement does not provide advice on investment and should not be relied on as such. The information contained in the advertisement does not take account of your investment objectives, personal needs or financial situation. You should consider the Product Disclosure Statement available from us and assess whether this product fits your investment objectives, personal needs or financial situation. Neither Ausbil Dexia or any member of Ausbil Dexia Limited guarantee the return of capital, distribution of income, or the performance of any of the Ausbil Dexia funds. Investments in Ausbil Dexia funds are subject to investment risk including possible delays in repayment and loss of income and principal invested.

AUSD0011-MM01

www.moneymanagement.com.au October 6, 2011 Money Management — 5

News

Gillard lauds ISN’s ‘opt-in’

By Mike Taylor THE Prime Minister, Julia Gillard, has confirmed her Government’s closeness to the Industry Super Network, sharing credit with the ISN for Future of Financial Advice measures such as ‘opt-in’.

In an address to an ISN luncheon in Melbourne, Gillard paid particular tribute to the leadership of ISN chief executive David Whiteley, who she said had “stood with us from the earliest days in our determination to secure a better retirement for all Australians.

“You stood with us to get rid of the conflicts of interest and the excessive fees,” the Prime Minister said. “You stood with us to secure the iconic ‘opt-in’ policy to bring fairness to financial advice. You stood with us to bring simple, low fee super accounts to every worker who needs one.”

She said the ISN had also stood with the Government “to distribute super tax concessions more fairly so that all Australians benefit”.

Ms Gillard then endorsed the role of the

Julia Gillard ISN in policy formulation saying the organisation played “a role in broader policy debates, on occasion at the vanguard of public policy debates.

“Through ISN, you’re working with us now on issues from the upcoming tax forum, to banking competition policy and nation building infrastructure,” she said.

AFA calls on PM to outline real FOFA agenda ASSOCIATION of Financial Advisers (AFA) chief executive Richard Klipin has expressed concern about comments made by Prime Minister, Julia Gillard, and the Government’s broad agenda with respect to the Future of Financial Advice (FOFA) legislation.

Commenting on the Prime Minister’s speech to an Industry Super Network lunch during which she lauded the ISN’s support for the government “to secure the iconic opt-in policy”, Klipin said it was time for the government to come clean with respect to its real agenda.

The Prime Minister also lauded the efforts of Industry Super Network chief executive David Whiteley and said the ISN was “working with us now on issues from the upcoming tax forum, to banking competition policy and nation building infrastructure.

“To the extent you can examine the Prime Minister’s rhetoric, she has clearly positioned the Government alongside the ISN,” Klipin said.

“For us, the key question is how that then

Richard Klipin impacts the development of the legislation which will underlie the FOFA changes,” he said.

Klipin said that it was in these circumstances that the Government needed to come clean on its real agenda and its pursuit of extreme outcomes.

ISN uses own research to disparage retail funds THE Industry Super Network (ISN) has now turned to research generated by its own chief economist to claim people would be better off putting their money in the bank than into a retail superannuation product.

Having previously used independent third party companies such as Rice Warner, Rainmaker and even Newspoll, the ISN has this time used research undertaken by its in-house chief economist, Dr Sacha Vidler, to claim retail super funds do not typically pass on the benefits of scale to their members and pay above market rates for in-house services.

The release of Vidler’s research coincides with the ISN having significantly ramped up its

multi-million television advertising campaign and as the Government seeks to put the finishing touches to its Future of Financial Advice and Stronger Super legislative packages.

Releasing the broad findings of Vidler’s work, ISN chief policy officer Matt Linden claimed that as a result of not passing on the benefits of their scale, retail super funds returns to members had lagged those of not-for-profits by an average of nearly two per cent a year.

Linden pointed out that Vidler’s research had compared the average performance of for-profit and not-for-profit funds over a 14-year period, utilising data published by the Australian Prudential Regulation Authority (APRA).

“This research shows that the Australian retail superannuation sector is yielding for the most part unacceptably poor returns to its members,” he said. “It is extraordinary that the practices of major retail super funds over a long period of time have reduced the average returns of their members to the point where their super would be better invested in the bank.”

Vidler’s research acknowledges that asset allocation has been a significant driver of net returns, with an allocation to major unlisted asset classes having a positive effect on average and an allocation to foreign assets and foreign currencies having a powerful negative effect.

Sacha Vidler

ISN research fundamentally flawed says Brogden AMP Property Securities THE Financial Services Council (FSC) has questioned the underlying basis of research used by the Industry Super Network (ISN) which suggests people would be better off putting their money in the bank than in a retail superannuation fund.

FSC chief executive John Brogden said the ISN research was misleading because the Australian Prudential Regulation Authority (APRA) data used as its foundation was collected for prudential purposes and was not designed for consumers.

The ISN research was undertaken by its chief economist, Dr Sacha Vidler, and utilised the APRA data to claim retail super funds do not typically pass on the benefits of scale to their members and pay above-market rates for inhouse services.

However Brogden said the use of the APRA data was misleading.

John Brogden “The data reflects funds as a whole rather than the individual investment option – balanced, growth, defensive – that a person is invested in,” he said.

Brogden also slammed the ISN for “deliberate misrepresentation” of the APRA figures which

he said ensured only one result – reduced confidence in superannuation for all Australians.

He said the APRA data combined the performance of all investment options within a super fund and provided an aggregate performance return of the fund, before taking the average return of each fund and aggregating it at sector level to produce a rate of return for each sector.

A further significant factor that distorted fund level performance was that the age of fund members had a significant impact on asset allocation, Brogden said.

“These fundamental differences are not reflected in the APRA data,” he said. “APRA has said the data was not designed to provide individual members with information to compare the investment options offered and has been working to produce information that is relevant to consumers.”

6 — Money Management October 6, 2011 www.moneymanagement.com.au

S&P rating ‘on hold’

By Andrew Tsanadis STANDARD & Poor’s (S&P) Fund Services has announced that the AMP Capital Global Property Securities Fund has been placed “on hold” following the announcement of the departure of the company’s global portfolio manager for Europe, Brett Ward.

The three funds affected by the announcement are AMP Capital Global Property Securities Fund, AMP Capital Global Property Securities, and AMP Capital Global Property Securities H – which all went from a five star rating to an “on hold” standing.

According to S&P, there will be no replacement for Ward’s position, and AMP global portfolio manager for North America Jason Baine will take on responsibility for the European business. Meanwhile, global portfolio manager for the Asia-

Pacific Bernhard Kreig’s responsibilities will continue, S&P stated.

AMP Capital Brookfield was unable to address Ward’s desire to return to Australia after spending six years overseas in London and Chicago, S&P stated.

“He [Ward] is the longest serving and most experienced of the three global portfolio managers, and was important in establishing the European research team and integrating the global capability,” said S&P Fund Services analyst Kelly Napier.

S&P’s announcement also follows SQM Research’s (SQM’s) downgrade of AMP’s Capital Global Property Securities Fund from four and a half stars to four.

SQM stated they remain confident in the remaining global portfolio management team, and will release an updated rating in their next Global Property Securities Review expected in the first half of 2012.

News

Sonray director faces 24 criminal charges

By Angela Welsh

THE director of collapsed brokerage firm Sonray Capital Markets, Russell Andrew Johnson, has appeared in Melbourne Magistrates’ Court after the arrest on 24 criminal charges following an investigation by the Australian Securities and Investments Commission (ASIC).

Johnson, of Toorak Victoria, was charged with two charges to commit theft to the value of $5.78 million, two charges of conspiracy to engage in false accounting, one charge of conspiracy to obtain financial advantage by deception, 17 charges of theft to the value of $742,641, and two charges of submitting a false document to ASIC. If convicted, he would face a maximum of ten years’ imprisonment on each of the state offences.

Johnson was granted bail on the condition that he surrender his passport and not attend any international point of departure.

The proceedings against Johnson follow the February arrest of Sonray chief executive, Scott Murray.

Murray, who is Johnson’s brother-in-law, pleaded guilty to 10 criminal charges involving fake deposits, making false withdrawals and theft. He is currently

remanded in custody awaiting sentence.

Sonray, established in 2003, was one of the first brokers to provide advice on contracts for difference. In June last year, John Lindholm and George Georges of Ferrier Hodgson – a turnaround, reconstruction and forensics company – were appointed voluntary administrators, and in October 2010 Sonray was placed into liquidation.

According to the liquidators, as at June 2010 Sonray had gross client positions of $76.85m, gross client holdings in either cash/equities held by counterparties of $30.15m, a shortfall of $46.7m, approximately 3,500 clients and 54 employees.

The matter would return to Melbourne Magistrates Court on 15 December 2011.

Are you looking to sell your client base or practice?

If you are looking for a professional financial planning practice to take over the management of your clients, or if you are planning on retiring in the next three years, we want to talk to you.

Blueprint Planning is interested to talk to you about buying your existing client base or business and helping you manage an exit strategy for your business.

Intra-fund class order hardly used

By Mike Taylor THE Australian Securities and Investments Commission (ASIC) has been told that the class order clearing the way for superannuation trustees to provide intrafund advice has received little take-up in the time it has been available to the sector.

However, it has been suggested the class order relief might have been more widely used if it had allowed fund trustees to grant access to related entities or other Australian Financial Services Licence holders.

In a submission to ASIC dealing with guidance on the scaling of advice, the Association of Superannuation Funds of Australia (ASFA) acknowledged that the intra-fund advice class order was likely to be revoked as a result of the Government’s

Guardian offers advisers free SOAs

By Chris Kennedy

GUARDIAN Financial Planning has announced it will star t leveraging an inhouse paraplanning team to provide free statements of advice (SOAs) for risk insurance to advisers to help them focus on building their business and servicing clients.

At first, the offer will only apply to SOAs on personal risk insurance, but Guardian plans to roll it out to risk in super and eventually comprehensive investment advice that includes a risk component, according to Guardian executive manager Simon Harris.

Simon Harris Guardian currently has eight paraplanners in the in-house team, but may look at expanding that once demand increases,

If you are in Western Australia and are interested to talk to us about selling your practice, please contact: Greg Major on (08) 9423 0300 or greg.major@bpplanning.com.au

Blueprint Planning are Authorised Representatives of AMP Financial Planning Pty Ltd ABN 89 051 208 327 | AFS License No: 232706

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

Harris said.

The service is aimed at helping advisers better prepare for a post-FOFA (Future of Financial Advice) environment, by taking away some of the administrative burden, costs and complexities involved in preparing SOAs, he said.

The service has been piloted since May with a group of 40 advisers, with very positive feedback, he said.

The service matches advisers with a dedicated paraplanner, providing advisers with a personalised service offering, Guardian stated.

Investec recognises SMSF demand for cash products

By Andrew Tsanadis

We are a full service financial planning business located in Western Australia and are expanding our operations to service a greater number of clients in the Perth metropolitan area. We have a strong history of successful integration, and are focussed on ensuring your clients are well managed through the transition.

Future of Financial Advice (FOFA) legislative changes.

The ASFA submission said the organisation accepted that the class order would be revoked “as it is clear that the take up for the class order has been low and that the full impact of the FOFA legislation is yet to be seen”.

“However, it has also been pointed out that if the trustee model for accessing the relief was changed to one that allowed the relief to be accessed by another AFSL provider or related entity of the trustee, then the relief might be more widely used,” the submission said.

Elsewhere in its submission, ASFA pointed out to ASIC that the FOFA legislation would make elements of its consultation paper providing guidance on scaled advice redundant.

INVESTEC banking specialist Gareth Bird said high-net worth clients would remain a key part of its investment offerings, but demand for cash products has led the company to expand its cash investment options for retail investors and self-managed superannuation funds (SMSFs).

While traders have historically never wanted to move away from the wholesale market, demand from mum and dad investors is increasing the need to engage with lower-end trade, Bird said.

“It’s been a very successful part of our UK operation, in that they really have access to that wider retail base.

“The UK has far more mature businesses when it comes to retail deposit ratings, and we will continue to look to the UK for their experiences,” he said.

With interest growing, Bird said that about a year ago the company added notice accounts for passive investors, and it now makes up a third of their product offering.

The creation of foreign currency accounts, and gold and silver investment options, have also been a strong focus for the company over the past six months, especially with those adviser groups who focus on pension transfer work, Bird said. Bird added that it is a market that hasn’t been well serviced yet.

“All these initiatives are aimed at the longterm saver – they’re looking for a good return, they’re looking for it to keep track of where the yield curves are going, and for it to pay out some income if they need it,” Bird said.

“It’s about trying to add that liquidity and return element as well.”

According to Bird, interest in cash has been reflected by investor’s attitudes towards the market and the economic uncertainty in the past three years has suggested a more permanent shift to cash.

“Cash has almost become its own longterm strategic asset class,” Bird said.

“We want to target a much wider superannuation client base, whether that is the selfmanaged side or some of the bigger industry super funds.”

News Master funds in good shape despite downturn

SEQUAL welcomes Shorten’s approach

By Milana Pokrajac AN equity release industry body has praised the Assistant Treasurer and Minister for Financial Services Bill Shorten’s consultation approach before introducing changes to reverse mortgage regulation as part of its new credit consumer protections.

Chief executive of Senior Australians Equity Release Lenders Association (SEQUAL), Kevin Conlon, said the Government had been willing to take the existing standards of practice within the Australian equity release industry into account.

The new Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 includes a statutory no negative equity guarantee for reverse mortgages and additional disclosure requireKevin Conlon ments “to ensure consumers can use reverse

By Mike Taylor

THE Australian master fund market finished the financial year in good shape – despite a poor last quarter, according to the latest Plan for Life data released last week.

The data covering the year to the end of June, revealed a $26.7 billion increase (6.6 per cent) in funds under management to lift the total value of FUM to $428.4 billion.

Plan for Life noted this increase had occurred despite funds actually falling by $5.5 billion during June.

It said inflows of $106.9 billion were significantly up on the previous year’s result of $99.3 billion, but outflows had also risen by 18.6 per cent to $95.1 billion.

The analysis said all major companies apart from Suncorp and Perpetual reported some growth over the year.

Looking at wraps, the Plan for Life data said FUM stood at $148.5 billion, representing 34.7 per cent of the total market – with BT Financial, National Australia Bank/MLC and Macquarie being the leading players, and BT in particular holding 21 per cent of FUM. It said platforms comprised 50.2 per cent of the total market with $215.2 billion in FUM. Four groups hold over $200 billion in FUM, led by NAB/MLC ($49.3 billion) and Commonwealth/Colonial ($49.1 billion).

The Plan for Life data revealed master trusts accounted for 15.1 per cent of the market this quarter, with $64.7 billion in Funds Under Management – attracting only 11.7 per cent of total inflows with $12.5 billion over the year.

mortgages with confidence”.

“This has been a very good example of effective consultation between government and industry which has resulted in good outcomes for consumers,” Conlon said.

During the consultation period, however, Conlon expressed concerns about possible over-regulation of the ever-shrinking sector.

But he supported the Bill which reinforced initiatives introduced by SEQUAL, which the Financial Services Minister described as “robust”.

Conlon had also called for more to be done to protect consumers of reverse mortgages.

“We continue to encourage the Government to develop effective programs to improve the financial literacy of those facing the challenge of funding their retirement,” he added.

Pension investors will benefit from carbon tax relief

By Andrew Tsanadis

PENSION investors aged between 55 and 59 could save hundreds of dollars as par t of the Government’s proposed carbon tax relief package, according to National Australia Bank (NAB).

A recent analysis by MLC Technical Services found that under the Clean Energy (Income Tax Rates Amendments) Bill, 2011 pension investors are likely to receive an additional $1500 in taxable pension income, without paying any tax, from 1 July 2012. Then from 1 July 2015, they are likely to receive $2,000 in taxfree income when compared to the current year, MLC found.

Currently, a pension investor aged between 55 and 59 is eligible to receive taxable income payments of up to $48,158 before income tax is payable.

According to the analysis, if the bill is passed this f igure will increase to

$49,753 from 2012 and $50,189 from 1 July 2015.

“This is great news for pension investors in the 55 to 59 age group, including those who have started a transition to retirement pension,” said MLC Technical Services head Gemma Dale.

“This means they can draw more income, if required, from their pension investment without paying any tax.”

Dale said the carbon relief measures should result in a tax saving of around $280 in 2012 (if the legislation takes effect) and $360 in 2015, after taking into account the 15 per cent pension tax offset.

“This makes using super money to start a pension investment even more attractive, given you can also receive unlimited tax-free income payments at age 60 or over, as well as possible Centrelink income test concessions,” Dale said.

Gemma Dale

A balancing act Portfolio construction is an intricate process. At any point in time, there will be newly introduced stocks, others that are on their way to realise their potential, and some that are starting to tire. Understanding the inter-relationship of stocks within a portfolio is critical to success. www.platinum.com.au | 1300 726 700

3CPAMM05

www.moneymanagement.com.au October 6, 2011 Money Management — 9

News

Volatility sending investors back to unlisted property

By Chris Kennedy

CENTURIA Property Funds has seen a pick-up in enquiries from financial planners over the past four months as an increase in volatility sends investors back to unlisted property, according to Centuria chief executive Jason Huljich.

With prices looking to have bottomed, investors can get decent returns with relatively low risk, Huljich said.

And with volatility in local and overseas equity markets expected to continue in the medium term, investors are rethinking their portfolios, he said. Deposit rates on the way down meant cash was also becoming less attractive.

Unlisted property provides a true diversifier and is less

volatile than listed property investments such as Australian real estate investment trusts (A-REITs), Huljich said.

He compared long-term A-REIT figures with the Mercer Unlisted Property Index to show that unlisted property has produced better returns with less volatility over five, 10 and 25 years.

Unlisted property is also not prone to panicked sell-offs like those seen in share markets during market downturns. It has the advantage of providing the option to extend the fund at its conclusion if the market is low, allowing values to return, Huljich said.

Data shows that once property is listed it begins to exhibit the characteristics of equities, becoming subject to the

vagaries of the market and investor sentiment, and showing a high correlation to the equities market, he said.

“Unlisted property, on the other hand, is not tied to the index and can be expected to perform according to more reliable factors such as the quality of the asset and its management,” he said.

Unlisted property also benefits from direct management because the fund manager has direct control over factors such as maintenance, tenant mix and leasing terms, he said.

“Fundamentally, what it comes down to is that when markets are volatile, unpredictable and irrational, investors want some control. They don’t want to be at the mercy of a volatile share index,” he said.

Financial adviser faces 27 dishonest dealings charges

Planners need protection on ‘best interests’

By Mike Taylor FINANCIAL advisers will need appropriate protections under the new Future of Financial Advice ‘best interests’ test to ensure they are not unduly exposed to vexatious litigation.

That is the assessment of key superannuation industry organisation – the Association of Superannuation Funds of Australia (ASFA) – which has used a submission to the Treasury to argue the importance of advice providers being able to scale advice with a degree of certainty.

“One of the more difficult issues in relation to scaling or de-scoping advice is what should be the obligation of the adviser and what should be the role of the client,” it said. “ASFA is of the view that given the knowledge asymmetry between the adviser and the client and also given the fiduciary nature of the relationship, it is the adviser who, after making appropriate enquiries, is better placed to determine the scope of the advice.”

The submission said that, on this basis, the notion of an agreement between the adviser and the consumer was not appropriate but there needed to be appropriate protections for the advisor so that de-scoped advice could be provided in a cost-effective manner without exposing the adviser to vexatious litigation.

The ASFA submission said the organisation believed a “reasonable steps defence” could be appropriate when the adviser had a duty to determine the scope of the advice.

At the same time, the ASFA submission has urged the Government to drop from the draft legislation provisions relating to approved product lists (APLs).

“We are of the view that as APLs are not a regulated arrangement, it is inappropriate to regulate them in the Corporations Act,” it said. “However we do believe it is appropriate for ASIC to issue a regulatory guide in relation to them.”

FOFA unlikely to increase uptake of advice, says survey

By Tim Stewart

By Angela Welsh A FORMER Port Pirie financial adviser has appeared in court on one charge of deception and 27 charges of dishonest dealings with documents, brought by the Australian Securities and Investments Commission (ASIC).

Trevor Wayne Carll, of Port Pirie South Australia, was an authorised representative of three Australian financial services licensees at the time of the alleged offences.

ASIC alleged that Carll deceived two clients of these licensees about how he intended to use documents bearing their signatures, and dishonestly arranged for the clients’ assets to be held as security for his personal margin loan facility.

It is also alleged that on 27 occasions, Carll presented false documents intended to deceive Macquarie Bank Limited into releasing funds to him, some of which he paid to his clients.

If convicted, each offence would carry a maximum penalty of ten years imprisonment.

The alleged offences occurred between 21 June 2004 and 20 May 2010 while Carll was an authorised representative of Financial Wisdom Ltd, Financial Planning Services Australian Pty Ltd, and Genesys Wealth Advisers Ltd. The matter would return to Port Pirie Magistrates Court on 25 October 2011.

van Eyk returns Perpetual’s ‘BB’ rating

By Andrew Tsanadis

Matthew Olsen

RESEARCH house van Eyk has reinstated the ‘BB’ rating awarded to the Perpetual Australian Share Fund (ASF) following months of concern over team stability.

Perpetual’s rating was put on hold in May following the news that head of equities John Sevior would be taking six months leave from 1 July, van Eyk stated.

Sevior’s announcement occurred soon after the departure of portfolio manager John Harbot and van Eyk stated at the

time that they had been concerned about the increased responsibility placed on current head of equities Matt Williams.

Following his return from overseas, van Eyk has since made a “positive assessment” of Williams’ ability.

“We are of the view that he is fully engaged and motivated,” said van Eyk head of ratings Matthew Olsen.

“We are not concerned that his increased responsibilities will be detrimental to his ability to manage the Australian Share Fund.”

10 — Money Management October 6, 2011 www.moneymanagement.com.au

WHILE the majority of self-managed superannuation fund (SMSF) professionals believe the proposed Future of Financial Advice (FOFA) changes will improve the standard of financial advice, only 14 per cent believe the reforms will see an increase in the uptake of advice.

A Self Managed Super Fund Professionals’ Association (SPAA) survey of 360 SMSF professionals found that 57 per cent of respondents believed that FOFA would lift the standard of financial advice.

Eighty-one per cent of respondents believed they would be unaffected by the ‘best interests’ duty contained in the FOFA draft legislation – and a further 64 per cent believed they would also be unaffected by the banning of volume-based payments.

However, while they were well prepared for the FOFA environment, SMSF professionals were concerned about the Stronger Super proposal to ban off-market transfers between SMSFs and related parties.

The majority of respondents (91 per cent) said the ban was unnecessary and would drive up transaction costs for SMSFs. SPAA chief executive Andrea Slattery said the ban would create an uneven playing field in the superannuation sector.

“SPAA has advocated strongly against the banning of off-market transfers because APRA-regulated super funds (which would not have the same obligations) would have an unfair

Andrea Slattery advantage over SMSFs,” Slattery said.

The SPAA survey also found SMSF professionals were concerned about the Stronger Super requirement for auditors to be registered with the Australian Securities and Investments Commission (ASIC), with 56 per cent of respondents stating that a competency exam would reduce the number of auditors and increase compliance costs.

“SPAA believes SMSF auditors who already undertake 20 or more SMSF audits a year should be exempt from taking a competency exam as a condition of ASIC registration,” said Slattery.

When it came to contribution caps, 79 per cent of respondents believed the $50,000 cap for individuals should be restored for those over 50. Additionally, 61 per cent of those surveyed believed SMSFs should have access to a ‘last resort’ compensation scheme if they suffer a financial loss in the event of criminal activity such as fraud or theft.

News

APRA proposes super fund standards

By Mike Taylor

SUPERANNUATION funds will be required to follow stricter governance arrangements under proposed new standards released by the Australian Prudential Regulation Authority (APRA), but they will still fall short on many of the obligations imposed on the boards of publicly-listed companies.

While the proposed APRA approach tightens up the governance arrangements, they do not specifically preclude the holding of multiple directorships, and much will depend on the level of scrutiny applied by the regulator itself.

The APRA approach is a direct flowthrough from the Government’s recently announced Stronger Super proposals and confirms that beyond the existing regulatory framework, board composition will be a matter left to the superannuation funds themselves.

In fact, the APRA discussion paper said the regulator does not propose to include a requirement for a minimum number of independent directors, but “does consider it appropriate to encourage a higher standard of governance through guidance”.

However, in the event that a

SCAN BR BARCODE TO VISIT 4MINUTES ONLINE ON YOUR MOBILE.

Fiona Reynolds superannuation fund does opt to have independent directors, the proposed APRA standards have defined those who would be excluded, stating that an independent director would be one who is not, and in recent years has not been: • in an executive role with an employer-sponsor; • an official or representative of a body that has the right under the governing rules to nominate or appoint directors (or individual trustees) to represent either member or employer interests; • a director, employee or shareholder of a company related to either a standard employer-sponsor or to

the registrable superannuation entity (RSE) licensee (other than in the case of a wholly owned subsidiary of the RSE licensee).

However, on a more positive note, the proposed new standards would allow superannuation fund members the same level of information on executive remuneration as that provided to the shareholders of publicly-listed companies.

Commenting on the release of the draft standards, Australian Institute of Superannuation Trustees chief executive Fiona Reynolds said the industry would need to further consult with APRA on the finer detail of many of the new requirements.

However, she said the proposal provided clarity on the missing elements of the Stronger Super announcements, such as fund requirements on scale and operational risk reserves.

However Rule of Law Institute of Australia chief executive Richard Gilbert said the move by APRA was too little, too late in circumstances where the regulator could have acted years ago.

Gilbert said legislation had existed giving APRA sufficient power to have acted on superannuation fund governance for at least six years.

Asgard announces segmented platform offering

By Chris Kennedy ASGARD has announced the release of its Infinity eWRAP platform that will allow users to select and pay for only the particular features they want to use.

The basic core package will start from a cost of 30 basis points, which includes 11 managed funds – then clients can choose to add individual segments such as the select menu with a further 70 managed funds, equities, term deposits and insurance.

The product has been in development since 2009, as Asgard worked with advisers building and testing the product. The fee structure is loosely based on how Foxtel structures its packages, where customers choose which parts of the service they wish to use and only pay for those, according to Asgard’s national product manager Kelly Power.

The development was driven by the growth of the self-managed super fund

sector, growth in industry super funds, and recognising the need for a new product for clients with lower balances or specific needs, she said.

“We think this will have particularly strong appeal to the fast-growing selfmanaged super fund market as it’s suited to the way they invest, and also addresses their higher sensitivity to fees.

It will also help advisers grow their client base by tapping into other important and growing client segments – such as younger Australians and industry super fund clients,” Power said.

Advisers need to be able to tap into the needs of the younger generation of new clients and the new product can be tailored to suit clients who are just starting out; the low cost core base suits clients who are either fee sensitive or just starting out with financial planning and don’t need a full blown wrap, she said.

Infinity eWRAP will be available to advisers as early as this month, Power said.

YOUR WEEKLY NEWS ROUND-UP IN UNDER 4 MINUTES

MINUTES

NEWS

MONEYMANAGEMENT.COM.AU

www.moneymanagement.com.au October 6, 2011 Money Management — 11

InFocus ADVICE SNAPSHOT Half yearly profit results of the major banks1 Bad and doubtful debts

$4.7b $2.6b

2010 result 2011 result

Net profit after tax

$9.6b $12.4b

2010 result 2011 result

Be careful what you wish for

1

Half year to march for ANZ, NAB and Westpac; half year to June for CBA Source: RBA

WHAT’S ON

AFA National Conference 2011 23-25 October 2011 RACV Royal Pines, Gold Coast www.afa.asn.au/conference/2011

Finsia Financial Services Conference 2011 25 October 2011 Ivy Ballroom, Sydney www.finsia.com/events

FSC/Deloitte Lunch: Future Leaders Award Presentation 28 October 2011 Four Seasons Hotel, Sydney www.fsc.org.au/events.aspx

ASFA National Conference & Super Expo 9-11 November 2011 Brisbane Convention & Exhibition Centre www.superannuation.asn.au/con ference-2011/default.aspx

FPA 2011 National Conference 16-18 November 2011 Brisbane Convention & Exhibition Centre www.fpaconference.com.au

History suggests the advantages flowing to industry superannuation funds from the Government’s Future of Financial Advice changes may ultimately prove to be a political liability.

T

hose with long enough political memories may recall that the Howard Government’s embrace of an industrial relations environment built on individual agreements actually grew out of the previous Labor Government’s efforts to move away from centralised wage fixation.

When the Keating Government lost office, its efforts in league with the Australian Council of Trade Unions via the Prices and Incomes Accord proved to be the thin end of a wedge conveniently utilised by an administration with a very different agenda.

What does this have to do with the efforts of the current Federal Labor Government to impose new legislation on the financial planning industry? Well, quite possibly, everything.

The degree to which the Future of Financial Advice legislation may ultimately prove to be the thin end of a wedge for a Coalition Government was underlined by the release of the second tranche of the draft legislation last week.

Read in the context of the activities of financial planners and financial planning dealer groups, the legislative package could have appeared quite draconian in the manner in which it dealt with issues such as conflicted remuneration, volume-based shelf-space fees and soft dollar benefits.

However, read in the context of the same rules being extended to apply to some of the operations and practices of industry superannuation funds, the draft legislation takes on an entirely different shape – potentially a wedge shape.

While the former Howard Government was no great friend of industry superannuation funds, nor did its legislative efforts unduly seek to hamper their activities or the manner in which they do business. Some might argue that the implementation of choice of fund was aimed at undermining the industry funds, but if that were the case then it was a strategy which badly backfired.

Indeed, it was the Howard Government’s

12 — Money Management October 6, 2011 www.moneymanagement.com.au

choice of fund changes which gave rise to the Industry Super Network (ISN) and its highly effective and successful “compare the pair” advertising campaign.

While every Coalition government is inevitably seen as a “friend of the big end of town”, most Labor governments are regarded as being siblings of the trade unions.

Indeed, the Prices and Incomes Accord struck between the Hawke Labor Government and the ACTU in the early 1980s was seen as a strong and abiding policy partnership.

It is, of course, history that notwithstanding the existence of “the Accord” the Hawke Government managed to implement reforms which hit at the grass roots of the trade union movement – not the least being the lifting of the tariffs protecting the manufacturing sector.

Now, more than 20 years later, the Prime Minister, Julia Gillard has made clear that her government enjoys its own form of “accord” with the Industry Super Network, and that it has directly influenced the manner in which it has sought to implement its FOFA changes.

The Prime Minister’s views and that of her government were made clear in her address last week to an ISN luncheon in Melbourne where she referred to being amongst friends, and then told those attending they should be proud of ISN chief executive David Whiteley’s leadership, who had “stood with us from the earliest days in our determination to secure a better retirement for all Australians”.

“You stood with us to get rid of the conflicts of interest and the excessive fees. You stood with us to secure the iconic ‘opt-in’ policy to bring fairness to financial advice. You stood with us to bring simple, low fee super accounts to every worker who needs one. You stood with us to distribute super tax concessions more fairly so that all Australians benefit,” Gillard said.

“You play a role in broader policy debates, on occasion at the vanguard of public policy debates. Through ISN, you’re working with

us now on issues from the upcoming tax forum, to banking competition policy and nation building infrastructure.”

A day later, the Government released the second tranche of its FOFA legislation, in which it sought to codify many of the commercial and employment relationships existing in the financial planning industry, including volume-based shelf space fees, soft dollar and other forms of conflicted remuneration, as well as the treatment of benefits from employers to employees.

As financial planners waded their way through the legislative proposals, it was hardly surprising that some suggested that what was sauce for the financial planning industry goose ought to be sauce for the industry funds gander.

Thus, reference was made to the benefits enjoyed by union officials and superannuation fund executives, including overseas study tours sponsored by fund managers, access to sporting venue corporate boxes owed to industry fund sponsorship of major sporting teams, and the use of volume rebates flowing from the granting of group insurance mandates.

In the examples outlined in the explanatory memorandum accompanying the Government’s second tranche of FOFA, no reference was made to the manner in which the same issues might be applied across a superannuation sector which has tentacles spreading deep into the financial planning industry.

What seems certain is that in the event the FOFA legislation passes both the House of Representatives and the Senate, any incoming Coalition government will not have to do more than pass some minor amendments to have it extended to cover superannuation fund operations.

When governments create wedges, they need to be careful how they are ultimately used.

– Mike Taylor

SMSF Weekly Not all SMSF trustees equal

By Mike Taylor THE Australian Taxation Office (ATO) needs to recognise that not all self managed superannuation fund (SMSF) trustees are equal, according to the Association of Superannuation Funds of Australia (ASFA).

In a submission to the ATO dealing with the SMSF Reform Working Group, ASFA has

argued that the tax office should adopt a graduated approach to breaches by SMSF trustees.

“Generally speaking, ASFA believes the ATO should grade each breach, the levels of seriousness of the breach and whether the contravention occurred intentionally or accidentally based on a reasonably arguable position, in deter mining the

appropr iate compliance treatment,” it said.

The ASFA submission said regard also needed to be given to the fact that many SMSFs had a combination of active and passive trustees.

It said this was no more apparent than when the active trustee died, generally leaving behind the passive trustees “who are then left to a great extent to flounder with

the trusteeship of the fund.

“Notwithstanding the fact that trustees have a shared responsibility, the reality is that in many cases one trustee tends to make the decisions,” the ASFA submission said.

“For this reason any differentiated compliance treatment needs to recognise that a feature of SMSF trusteeship, be it proper or not, is that not all trustees are equal.”

Off-market transfer ban contentious THE most contentious issue for self-managed superannuation fund (SMSF) trustees to emerge from the Government’s Stronger Super package is the proposed banning of off-market transfers of assets with related parties.

That is the analysis of the Self Managed Super Professionals’ Association, which polled its members in the wake of the Stronger Super Package and found that 91 per cent believed the ban on off-market transfers was unnecessary, and would drive up transaction costs for SMSFs. Commenting on the findings, SPAA chief executive, Andrea Slattery said his organisation had advocated strongly against the banning of off-market transfers because APRA-regulated super funds (which would

not have the same obligations) would end up having an unfair advantage over SMSFs. She said the other issue of concern to SMSF professionals surveyed was Australian Securities and Investments Com-

mission (ASIC) registration of auditors.

The survey found that while 68 per cent of respondents agreed auditor registration and a competency exam would lift professional standards and the quality of audits, more than half believed a competency exam would also reduce the number of auditors and increase compliance costs.

“SPAA believes SMSF auditors who already undertake 20 or more SMSF audits a year should be exempt from taking a competency exam as a condition of ASIC registration,” Slattery said. “For these professionals, an entry level exam would do little to lift professional standards and would potentially add a costs burden in an area which, for many firms, is a marginally profitable component of their business.”

SMSF trustees still Longevity risk calls cautious on ETFs for hybrid approach WHILE recent research into the investment trends of self managed super funds (SMSFs) may indicate that exchange traded funds (ETFs) are growing in popularity, for Graeme Colley, superannuation strategy manager for OnePath, they are an investment that most trustees continue to view with caution.

“Our experience in SuperConcepts is that people are looking at them and they’re using them,” he said. “But they’re certainly not being taken up with any great enthusiasm.”

So despite the fact that Graeme Colley ETFs seem to quickly be taking the place of managed funds within individual retail investors’ portfolios, it seems caution and conservatism continue to rule within self managed super.

“I don’t actually know the reason for trustees’ reluctance in the ETF space,” Colley continued. “But if I had to hazard a guess, I would probably say that a lack of knowledge in the market is holding them back.

“That may come, but for the moment they’re still a somewhat unusual investment to come across in SMSF portfolios.”

LONGEVITY risk remains the major unsolved problem within the Australian financial services and superannuation arena, according to new analysis from Pimco.

Addressing the issue, Pimco’s head of Retirement Solutions Tony Hildyard said part of the problem was that growth-biased investment solutions often conflicted with retirees’ heightened risk aversion relating to lack of certainty.

“Generally, an asset allocation approach has been followed, [including the use of income funds or asset bucketing, in an attempt to minimise risks of running out of assets before death], but this approach does not fully address longevity risk,” he said.

Hildyard said that while the trend to take a lump sum on retirement was “an entirely rational reaction” to this conflict, this would not

generally be optimal for the retiree or super fund and an in-fund solution which focuses on retiree needs and risk appetite is required.

“While there are many solutions that attempt to address longevity risk, the only way to guarantee an income for life is through participation of an insurer.

A significant retention opportunity exists if funds and longevity providers can provide access to a suitable income and longevity protection product on their platform at a competitive price,” he said.

Hildyard said attendees at a Pimco forum had agreed “hybrid” longevity protection solutions seemed to be optimal or preferred.

He described those solutions as being guaranteed, but allowing for accessibility and flexibility and the potential for bequeathing upon death.

SMSF growth consistent

By Damon Taylor SELF managed super fund (SMSF) growth may have been impressive in recent years, but it has not been at the expense of growth within other superannuation sectors, according to Andrea Slattery, CEO of the Self Managed Super Funds Professionals Association of Australia (SPAA).

“Australia’s superannuation market is growing exponentially,” she said. “Funds under management are now at $1.3 trillion or thereabouts, where they were $350 billion eight to 10 years ago.

“So the percentage that people have of that pie is changing, but every single sector is experiencing growth.”

Slattery said that when SPAA had come into being around eight years ago, SMSFs had represented about 15 per cent of the super industry funds under management, industry funds had an approximate market share of 8 per cent and retail funds accounted for roughly 48 per cent of the market.

“Those figures are now 32 per cent, 18 per cent and 28 per cent respectively,” Slattery continued. “But even in the case of retail funds, 28 per cent of $1.3 trillion is still a great deal more than 48 per cent of $350 billion.

“So what we’re talking about here is everybody having a clear opportunity for future growth,” she added.

For Slattery, the industry’s focus has to be providing the Australian consumer with the opportunity to meet their retirement needs, irrespective of which vehicle was being used.

“But nobody really looks at it that way,” she said. “They look at who’s got their piece of the pie when, in actual fact, we should be all working together because thanks to compulsion, everybody’s going to benefit.”

www.moneymanagement.com.au October 6, 2011 Money Management — 13

Financial Planning Software

Which road to software salvation?

Technology is playing an even bigger role in financial planning. New software developments have a good chance of achieving cost and administrative efficiencies ahead of upcoming changes, writes Andrew Tsanadis.

PERHAPS the only constant feature in the financial planning industry is that there isn’t one. Not only are financial advisers facing a prospective ban on up-front commissions, they are also dealing with unprecedented regulation in the way they deliver advice itself, most recently due to the government’s Future of Financial Advice (FOFA) draft legislation.

New developments in financial planning software are now dictated by the need for advisers to not only provide quality advice, but provide it quickly from the comfort of a portable net-capable device. “‘I want it and I want it now, but I want transparency’, will be the catchcries of clients,” says Financial Planning Association (FPA)

Key points z

Focus on cost driving new developments z Software developers need more FOFA clarification to start creating real solutions z Quicker production of SOAs and opt-in tools prove to be a hit z Software to help planners with the cost and administrative burdens

chief executive Mark Rantall.

It’s a paradigm that financial software developers have struggled with: customers want their advisers to keep up with the leaps and bounds being made in technol-

14 — Money Management October 6, 2011 www.moneymanagement.com.au

ogy, but they want scaled advice that is thorough and accurate and doesn’t hurt the back pocket.

Perhaps the biggest shift in the financial planning environment is the shift towards single-issue advice, as highlighted by the recent Investment Trends 2011 Planner Technology Report.

While FOFA is the most pressing concern for advisers, it is software that is creating the greater long-term impact.

That’s according to a recent report by Tria Investment Partners titled ‘The Big 5: technology trends changing wealth management.’

The report found that while software has delivered a lot of power into the hands of advisers to strengthen their viability as the

right choice for an investor, customers now have the potential to bypass fund managers, platforms and planners to engage in direct investment, the report stated.

Although fund managers have been hit the hardest by technology, financial advisers are also feeling the strain of investors who have become increasingly ardent when it comes to handling their own affairs.

So how will software suppliers adjust in order to continue to develop products that will not only stand the test of time, but the test of an ever-more vocal investor?

A new world Rantall believes that the key issues facing financial advisers today are changing the

Financial Planning Software Stronger integration with “investment platforms may well be the solution to this — the challenge is making sure each medium has a full picture of all these transactions.

”

– Cameron O’Sullivan

way they report to their clients; building a more effective business model; and accounting for some of the reforms currently under way.

Commenting on the government’s optin reforms released at the end of August as part of the first tranche of FOFA, Rantall said the biggest challenge will be in communicating effectively with clients.

“The issue is capturing the proof of the conversations that an adviser has had with a client, and recovering and recording that proof,” he says.

The FPA recently stated that new clients should be the test for the opt-in trigger, and Rantall believes technology will be crucial in supporting advisers to meet the strict standards. At the moment though, Rantall believes there is no software that meets those needs.

While some platforms and manufacturers are trying to enter the market with their planning tools, the FPA believes there will remain a need for advisers to build their own systems around opt-in and scaled advice.

The latest planner technology report by Investment Trends was based on a July survey of 1,396 financial planners and their satisfaction with planning software.

The research house found that Iress Market Technology’s Xplan was still the main planning software used by the advisers surveyed (34 per cent), while Macquarie Group’s Coin ran second at 23 per cent.

Rounding out the top five was Iress’ Visiplan and Midwinter Financial Planning Software. Other financial planning solutions in the report included AdviserNETgain and in-house software like MLC’s Adviser Central (refer to Figure 1, page 17).

According to Investment Trends, having the capability to produce a comprehensive statement of advice (SOA) in a timely and cost-effective manner was one of the key desires of most financial planners, with the average SOA taking around six hours, 42 minutes to complete.

“While technology has dramatically reduced this time, the production of a full SOA is facing upward pressure from the end-users, with a significant group of planners shifting their focus to higher value clients as an outcome of FOFA,” says Investment Trends senior analyst Recep Peker.

Focus on cost drives innovation

Recep Peker

Demonstrating ongoing value to clients is a theme that has become more important than ever in a time of fluctuating markets and strict regulation. Peker said one outcome of FOFA is that planners will be looking more at cost-saving solutions both for their clients and their businesses.

Indeed, AdviserNETgain general

manager Darelle Jenkins said cost-saving solutions have been driving their software development process, particularly in regards to SOA production.

“When you look at how many advice documents are produced, the vast majority are for ongoing service. For every one comprehensive SOA, advisers are probably doing five or six review SOAs every year,” Jenkins says.

Jenkins says the AdviserNETgain has been focussed on improving the linkage between the needs analysis tool and the SOA engine. For example, the developer has recently incorporated fee integration from the product the adviser is recommending to come straight through to the modelling within the system.

In this area, Investment Trends found that Coin produced the quickest comprehensive SOAs, which is crucial to the continued growth of a planning practice, as well as cost savings. This is especially true when one considers that the FPA believes the optimum level of client contact should be between four and six times a year.

“Firstly, an adviser is legally required to provide details to a client, and secondly, as opt-in becomes codified in law, the burden of proof is on the financial planner to produce the documents as proof points for all of those discussions,” Rantall says.

MLC and NAB Wealth executive general manager advice and marketing Richard Nunn says the problem with current FOFA reforms is that “nothing is set in concrete”, and because of this it is difficult to start developing changes to the company’s solution. However, he says the company is a strong advocate of comprehensive advice.

“There’s a higher degree of potential for an adviser to tailor their advice strategy specifically to different clients, profiles and segments.”

New developments Coin represents the group of developers who scored highly in providing comprehensive SOA solutions to their clients. In explaining the company’s recently incorporated ‘Quick Plan’ module, former head of product and technology for Coin and web Robert McCabe says the updates to its desktop application — known as Pyramid — were specifically designed to meet scaled advice.

“As soon as an adviser opens Quick Plan, a smart paths configuration is launched and works by asking prompting questions,” says McCabe.

“The module also acts as an audit trail to prove that an adviser has indeed provided a service to their client, allowing an ease of information flow.”

McCabe says that by avoiding questions that are not relevant to a specific client’s needs, it allows the adviser to get their clients in and out quickly, if that is what they prefer.

In regards to the solution itself, McCabe believes Coin can be deployed with limited training, so the licensee can avoid providing weeks of costly training. Similarly, he says an operator at a call centre can follow the prompts precisely configured by the dealer, ensuring that compliance is followed.

Planning solutions are so advanced now that advice can be distributed via a few Continued on page 16

www.moneymanagement.com.au October 6, 2011 Money Management — 15

Financial Planning Software Continued from page 15 clicks and a swivel of a mouse. Everything from superannuation and personal risk to saving for a house deposit or planning for a child’s education are self-contained in a step-by-step format.

AdviserNETgain general manager Darelle Jenkins believes that advisers are focusing on diversifying their business and software will help to simplify the process of developing a range of advice scenarios quickly.

Running a profitable business and improving disclosure go hand-in-hand as advisers increasingly turn to technology for cost-efficient solutions.

Other examples of the AdviserNETgain’s developments include new practice management and insurance reporting capabilities so that advisers can do their own analysis of potential client needs across their entire client relationship management system (CRM).

In an effort to achieve this, Midwinter’s developments include upgrades to its “traffic light” system, which now provides dealers with alerts to ensure relevant financial and legal documents have been sent.

“The green, amber and red light system is displayed on the main client screen so users know exactly the compliance position of the client,” says Midwinter executive director strategy and technical services Matthew Esler.

another way that new financial planning software is proactively increasing the “air time” between advisers and their clients.

Scaled advice Despite criticism from some planners, industrialised advice has its place in the market, Rantall says.

“Industrial advice does not necessarily mean bad advice, it means putting systems in place to capture, record and report on the advice that has been given,” he says.

“Industrialising advice is absolutely critical to building efficiencies as well as meeting your legal obligations.”

The FPA believes FOFA represents an opportunity for software developers to deliver scenario planning configuration for clients who only need certain pieces of advice, although there will still remain a need for holistic advice.

According to Peker, 42 per cent of planners said they would provide more single issue advice going forward and found that Iress was the quickest in the industry to provide such solutions.

In demonstrating Iress’ VisiPlan application, it is easy to confuse the software with an installation wizard on your personal computer.

Using the analogy of ordering food at McDonald’s, Iress senior business development executive Michael Kinens says that while there exists the ability for clients to receive substandard advice through this model, Iress offers a number of scenariobuilding models for advisers, and clients are made aware of the type of service they were going to be given.

“If I was a client and the first time I saw an adviser and they were providing a McDonald’s service, in that I come in, they press a button, and out comes a hamburger, as long as I understand how the kitchen works, and they tell you how it works, that probably isn’t an unfair outcome,” said Kinens.

Room for more players?

Robert McCabe Similarly, Midwinter’s CRM can be set up to automatically provide opt-in statements to clients, either by hard copy, email or SMS. Esler said this improves communication with different generations of clients.

Iress believes that, if managed correctly, opt-in is not just a new legislative obligation, but also an opportunity for planners to clearly articulate the services and additional value that they bring to the relationship with the client.

As part of its Visiplan system, a notification system allows an adviser to notify a lending specialist that consultations need to take place with a particular client.

The lending specialist receives an email, while a task will be sent to the adviser’s Visiplan desktop to remind them that the specialist must contact a client to discuss their lending requirements, Kinens explains.

If the task is not completed in the set time period, the specialist and the adviser (who provided the referral) will receive a second notification. Kinens says this is yet 16 — Money Management October 6, 2011 www.moneymanagement.com.au

As network and broadband capabilities improve, McCabe says there will probably be less use in being “unplugged” in order to complete client tasks.

Looking to the US, Sungard senior vice president, wealth management business Jennifer Valdez says it is obvious how tablets like the iPad are changing the way advisers adopt technology. In a blog she posted on Sungard’s website following the (US) FPA’s Major Firms Symposium in California in September, she described the approach taken by Cambridge Investment Research, embracing social media for their advisers rather than fighting it.

“They established a dedicated support team internally and then implemented social media monitoring software that allows their advisors to use LinkedIn, Twitter and Facebook,” Valdez stated.

“They do not yet track revenue and referrals by virtue of social media, but they do have specific advisor testimonials that document how they have won new clients and revenue as a result of their efforts.”

Although this example comes from a UScentric perspective, Sungard managing director Asia Pacific John Vander Vennet believes a lot of the themes are “fairly global or will be in time”.

Certainly, Provisio Technologies’ Cameron O’Sullivan believes that the very future of advice models will revolve around dealing

Financial Planning Software with customers on multiple channels.

“Stronger integration with investment platforms may well be the solution to this — the challenge is making sure each medium has a full picture of all these transactions,” O’Sullivan said.

O’Sullivan says that because of this inherit challenge, the need for specialist providers will continue at a strong pace.

Peker agrees and says that despite market saturation there are opportunities where advisers may have issues with their existing software and new providers could come in to fill that niche.

In contrast to this view, Kinens says it is still expensive to build financial planning technology.

“What smaller software development businesses fail to understand is that the scale needed to support the solution is probably the largest part of the cost,” he says.

Indeed Commonwealth Bank senior planner Stephen Mifsud believes he does not need to use advice solutions, instead choosing to send a client’s information away to a paraplanner to generate a SOA. “If the SOA is done for you, it gives you more time to see more clients and do a lot more reviews, knowing that someone else is typing the information up for you,” Mifsud says.

Esler believes the reason for this view is that advisers have typically avoided using cumbersome and clunky tools because they’ve been so complex to look at.

“A financial planner’s core business is providing advice to clients, not how to use these systems,” he says.

Where to now?

Kinens believes the great challenge in providing advice solutions to dealerships is that some advisers still believe they are protected from change.

“Regardless of whether the physical legislation comes through, advisers are going to have to deal with a different mindset from a client in any case,” Kinens says.

“Even if clients are not smarter in all matters of finance, what they will have is more expectation around how services are provided to them.”

What financial planning software is all about now is the “now” generation which wants to see something very quickly, he says.

Certainly, Peker says one of the greatest satisfaction level increases in the Investment Trends survey was a result of the rapid production of simple financial plans.

In a similar tone, Rantall believes webbased technology in particular will provide a real “value add” for an adviser’s client base.

“My sense is that clients love the idea that they can go into a web-based environment and see what they have, financially,” Rantall said.

In complementing Rantall’s opinion, Tria stated that advances in platform technology have not only broadened choice beyond managed funds, but have also enhanced access to direct investments.

While McCabe believes that the integration of financial planning with investment platforms will continue at a strong pace, Tria’s report found that software is starting to “weaken” the bond between planner and platform.

“Firstly, it weakens the imperative for planners to centralise their clients onto a single platform for efficiency purposes,” the

Matthew Esler

Figure 1 Planning software

Percentage of planners using as main solution – Top 5

IRESS - XPLAN

34%, up from 33% in 2010

COIN

23%, up from 20%

IRESS - VisiPlan

8%, down from 10%

midwinter

7%, up from 4%

AdviserCentral (MLC)

4%, unchanged

Other software in the report (in no particular order) AdviserLogic AdviserNETgain Canstar Cannex CARM GPS (CARM) Fiducian Planner IRESS IQM IRESS IQM+ IRESS ProPlanner Microsoft Excel MoneyOne Office (Oasis) n-link/Navigator Platform Plus Wealth Planner (Count Financial) Source: Investment Trends 2011 Planner Technology Report

future for mainstream advisers will be in assisting “bothThemass-affluent and high net worth clients, who are focussed on value-based conversation. ” – Mark Rantall

research stated.

“Secondly, CRM technology can work to disintermediate platforms by making it easier for planners to move off-platform.”

Clients with larger portfolios and their planners are increasingly making use of the new tools available to them on investment platforms. This is why a number of CRM systems — including Coin and Iress — are designed with the capability to categorise these large accounts in order for planners to grow their businesses more rapidly.

“The future for mainstream advisers will be in assisting both mass-affluent and high net worth clients, who are focussed on value-based conversation,” Rantall says.

While McCabe says their clients want solutions that cater to all ends of the market, Esler says that changes to government legislation in particular (including the introduction of the carbon tax and adjustments to tax scales) will continue to transform the way the suppliers deliver solutions.

“It’s important for advisers to talk about what’s coming,” Esler says.

In an effort that will enable their clients to “earn as they learn”, Midwinter will release Adviser Tech CPD. As advisers learn technical content they will be able to accrue continuing professional development (CPD), which will be fully accredited by the FPA, SMSF Professionals' Association of Australia and the Association of Financial Advisers.

“The whole point is for us to not only educate advisers in how to use software but how to produce really good advice as well,” Esler says.

Both Rantall and Peker said selfmanaged superannuation funds will be high on the agenda for financial planners.

“Over the next five years, what’s going to be increasingly important is cashflow management for clients and, secondly, a c c o u n t a n d a s s e t c o n s o l i d a t i o n ,” Rantall says.

Rantall also said that with the marrying of the front end software and the back end, live reporting will be a critical advancement going into the future.

Meanwhile Torrisi believes there will be an increase in virtual interactivity to strengthen the relationship of an adviser with their client.

“I think the client will become more and more involved in the advice process, whereas at the moment it is more of a master and client server type of arrangement,” Torrisi says. “Going into the future the client will be more heavily involved in owning the construction of their advice.”

MM

www.moneymanagement.com.au October 6, 2011 Money Management — 17

OpinionRetirement

Tailoring retirement solutions The appropriate mix of retirement products combined with the age pension should provide certainty, growth and access to capital at a level suitable to each client. Rachel Leong looks at some of the appropriate mixes.

M

ost retirees have invested into super and will usually commence an accountbased pension. There are many benefits provided by an accountbased pension including tax-free earnings, access to capital and an account balance payable to beneficiaries (within super law) upon death. There is also scope to vary income payments, as long a s i n c o m e i s a b ov e t h e m i n i m u m pension amount for that year.

An account-based pension can also be rolled back and forth from pension to accumulation stage at any time. This may be useful for clients who have fluctuating income from other sources.

However, it is well known that the downside of an account-based pension is that income may run out before the client dies.

Retirees will often only consider an annuity if they have funds to invest and a re u n a b l e t o c o n t r i b u t e t o s u p e r (because of their age or the contribution limits). However, annuities should be considered for other reasons such as certainty, ie how long the income stream will last and exactly how much the client will receive as income. There i s g e n e ra l l y n o l u m p s u m p a y a b l e u n l e s s a re s i d u a l c a p i t a l va l u e i s payable or the client has died within the guarantee period. In addition, the client does not receive any benefit from growth on the underlying investment; the annuity provider benefits from this.

The table below compares accountbased pensions and annuities.

example, if someone is risk adverse or requires a minimum standard of living, they may prefer the certainty of a lifetime annuity. Individuals who would like to “live the high life” in early retirement (while they are physically more able) may wish to invest in an account-based pension during this time. However, some clients may see the later stage of retirement as more expensive because of aged care or increased medical costs and will therefore require more income as they age.

Therefore, for any type of investor, it is worthwhile considering a mixture of retirement products to provide the benefits of each type of income stream.

Of course, the proportion of investment will differ across each client, depending on their personal circumstances.

Centrelink treatment of retirement products Ce n t re l i n k d o e s n o t d i f f e re n t i a t e between super and non-super income s t re a m s. It s i m p l y d i f f e re n t i a t e s between long-term and short-term income streams and the types of products, eg lifetime and ter m income streams. Short-term income streams are classed as financial investments.

Lifetime income streams The assessable portion of income stream payments will be reduced by the following Centrelink deductible amount: Purchase price less commutations less residual capital value / life expectancy

Retirement goals The goals of the client will determine the appropriate retirement product mix. For

If the income stream has been set up with a reversionary beneficiary, the

18 — Money Management October 6, 2011 www.moneymanagement.com.au

longer life expectancy will be used in the above formula.

Term income streams The assessable portion of income stream payments will be reduced by the f o l l ow i n g Ce n t re l i n k d e d u c t i b l e amount: Purchase price less commutations less residual capital value / term of the income stream Short-term income streams Generally, a short-term income stream is one that has a term of five years or less. This type of income stream is treated as a financial investment and therefore deemed for the Centrelink income test.

Case study Ian, aged 70, has both an accountbased pension with a balance of $150,000 (purchased with $175,000) and an ordinary 15-year annuity, which

was purchased with $300,000. Both income streams were purchased when Ian retired at age 69. Ian’s annuity payments and age pension entitlement provides enough income to maintain a m i n i m u m s t a n d a rd o f l i v i n g . T h e account-based pension is in place to provide growth and therefore additional income. Ian is happy to accept the risk associated with investment in a balanced portfolio in return for the prospect of a higher standard of living.

Other than a few personal assets, some cash and a term deposit, Ian only has his account-based pension and annuity.

Let’s look at how each income stream impacts Ian’s age pension entitlement.

15-year annuity With an investment of $300,000, the annuity provides gross income of $25,000 per annum (no residual capital value and indexation of 3 per cent per annum). Ian has not commuted from the annuity.

Gross annuity income is reduced by the Centrelink deductible amount.

Table 1 Feature

Account-based pension

Annuity

Access to capital

Yes

No*

Death benefit payable

Yes

Yes, if the client dies within the guarantee period

Beneficiaries

Generally limited to SIS dependants or estate

Generally no limitations

Recipient of investment growth

Investor

Provider

Income certainty

No

Yes

Yes – the investor can:

No

Flexibility

• roll back to accumulation phase • cash out at any time • vary income Source: Suncorp Life * Some annuity providers do allow full lump sum withdrawals, however this is not common

Table 2 15-year annuity

Assessable assets

Assessable income (per annum)

$280,633^

$5,000

Account-based pension

$150,000

$1,538

Cash and term deposit

$50,000

$1,581*

Home contents and car

$25,000

n/a

TOTAL

$505,633

$8,119

Source: Suncorp Life ^ Assessable value of annuity

= purchase price - [(purchase price / life expectancy) x term elapsed] = $300,000 – [($300,000 / 15.49) x 1 = $280,633 * Deemed income = ($50,000 – $44,600) x 4.5% + $44,600 x 3% = $1,581.

Table 3 Gross amount (per annum) Income source

15-year annuity

$25,000

Account-based pension

$12,190

Age pension

$6,525

Total

$43,715

Source: Suncorp Life

Table 4 Gross amount (per annum) Income source

15-year annuity

$25,750#

Account-based pension

$15,000

Age pension

$6,721#

Total Source: Suncorp Life

“

An account-based pension does offer flexibility, however an annuity can provide certainty for the client. The optimal retirement solution for a given client may be a mix of both an accountbased pension and annuity.

”

Centrelink deductible amount = $300,000 / 15 = $20,000 per annum.

Therefore, assessable income from the annuity is $5,000.

$47,471 #

Previous year’s amount Indexed at 3% per annum

his age pension entitlement is calculated as follows: Income test Reduction to maximum age pension = [($8,119 / 26) - $150] x 0.5 = $81.13 per fortnight.

Account-based pension The pension was purchased with $175,000.

The current account balance is $150,000 and Ian has chosen a pension payment of $12,190 this year. Ian commuted $10,000 from the pension last year. The gross pension amount is reduced by the Centrelink deductible amount.

Centrelink deductible amount = ($175,000 - $10,000) / 15.49 = $10,652 per annum.

Therefore, assessable income from the pension is $1,538. The following table summarises Ian’s assessable assets and income.

Age pension entitlement Ian is a single homeowner and therefore

Assets test Reduction to maximum age pension = ($505,633 – $186,750)/1,000 x 1.5 = $478.32 per fortnight.

Entitlement As the assets test provides the higher reduction to the maximum age pension, this will determine Ian’s entitlement.

Ian’s age pension entitlement = $729.30 - $478.32 = $250.98 per fortnight = $6,525.48 per annum.

Ian’s income situation is summarised below.

In the following year, Ian decides he would like to take a photography course for nine months. He decides to increase his account-based pension payments

to $15,000 to pay for course costs. Ian can rely on the fact that his annuity payments will remain at the same level (indexed) to cover most of his living expenses.

As the determining test for Ian’s age pension is still the assets test, his entitlement remains the same (in today’s dollars).

Conclusion W h i l e m a n y re t i re e s c h o o s e a n account-based pension as their retirement solution of choice, it may not be the only answer. An account-based pension does offer flexibility, however an annuity can provide certainty for the client. Thought should also be given to the implications for age pension entitlements. The optimal retirement solution for a given client may be a mix of both an account-based pension and annuity.

Rachel Leong is technical services manager at Suncorp Life.

www.moneymanagement.com.au October 6, 2011 Money Management — 19

OpinionInsurance

Mind the gap The importance of maintaining insurance premiums cannot be underestimated as you never know when the unexpected will occur, writes Tim Browne.

W

hen we speak of tragedy in the insurand permanent disablement. Some cover is better ance industry, there is a common than none at all. understanding that we are referring Your client management system will also be to the cases of death, trauma, and king, with diary reminders for policy renewal disability that we encounter on a regular basis. The dates. For clients who wish to cancel their policy, tragedy of such claims is thankfully tempered by you might refer to the original Statement of Advice the many individuals who receive quality advice and remind the client why they set the cover up and are financially protected through these difficult initially. Remind them what would happen to their times – and we can certainly be proud of this adviser, family if something were to happen. You can also insurer and client relationship. explain that they can reduce the cover in the To me however, the real unspoken tragedy is the future, once their debts reduce or their children scenario where an individual has no cover in place are older. or has allowed their cover to lapse.

It's important to explain the possible conseA good example is a situation where an adviser quences to clients should they lapse. The biggest arranged a life policy for a young truck driver and his concern is that if your client stops paying premiwife – they wanted to protect the modest mortgage ums and lets the policy lapse, they lose valuable on their new house. The policy was active for two protection, possibly leaving their family at finanyears before the monthly premiums stopped. Two cial risk. Life insurance, for example, is often the months later, as the policyholder was tipping the linchpin that holds your client’s estate together. If tray on his truck, it struck power lines – he died they die prematurely, their death benefit proceeds instantly. The wife asked her adviser how she could are often required to settle final expenses, pay off make a claim but unfortunately the policy was debts and, at the very minimum, give surviving deemed to have lapsed and the claim was denied. family members room to adjust.

What makes this stor y If your client’s policy even more devastating is lapses and they seek If your client’s policy lapses that a cheque for the c ov e r a t a l a t e r d a t e, missing premium was and they seek cover at a later another concern is that found in the cabin of the date, another concern is that they they will likely need to truck and the wife was five pay more for the same will likely need to pay more for months pregnant. l e v e l o f c ov e ra g e a n d Cash flow issues may the same level of coverage and forgo policy benefits. This well have been at play in forgo policy benefits. situation occurs because this example, and are age is a key factor in clearly one of the key deciding premiums, so reasons why individuals the older the client at the allow their life insurance time of issue, the higher policies to lapse. t h e ra t e w i l l b e. A l s o, Increased living expenses u n d e r e x i s t i n g c ov e r, are also certainly not helping. As shown in the latest changes in your client’s health do not affect their Australian Bureau of Statistics (ABS) Household premium. However, if they are reapplying for cover Expenditure Survey, released in early September, their current health situation will be the basis for Australians have increased their spending on housethe premium, and may result in cover being hold goods and services by 38 per cent over the last denied altogether. six years.

I recently heard a great story from one adviser The ABS also found that the greatest increases in dealing with a young, single mother client. The average weekly spending were housing costs, which client had existing life and funeral cover but was can be put down to increases in mortgage interest finding it difficult to afford the fortnightly payments payments and rent payments (up $80), and misceland was considering cancelling the policy. The laneous goods and services (up nearly $40). adviser generated comparison premiums and was Unforseen expenses often come at the most inopable to offer more comprehensive cover, including portune time and can leave clients short of funds, trauma insurance, at a reduced cost, allowing the particularly when a number of large, unexpected client to maintain her cover. bills fall due together. Out-of-the-ordinary expensAs in the above scenario, advisers continue to es, such as braces for the kids, a full car service or a demonstrate their value by selecting the right amount medical emergency, can tip the budget into the red, of insurance for their clients, getting that insurance leaving clients struggling to pay their bills and in place and managing the claims process. With looking for expenses to cut. Then their life insurincreasingly uncertain economic times meaning ance premium notice arrives. What do they do? questioning of every dollar spent, a key role for advisThe adviser role is critical in helping clients to ers will be reinforcing the value of insurance and avoid a lapse. If affordability is the reason for a striving to keep those policies in force. policy lapse, your client may wish to decrease the sum insured, put the cover in super, increase the Tim Browne is the general manager of retail advice waiting period, decrease the benefit period, or at CommInsure. combine covers, such as term, trauma and total

“

”

20 — Money Management October 6, 2011 www.moneymanagement.com.au

OpinionRetirement

Phasing in retirement Financial planners need to develop new business models that take into account the two phases of retirement – active and elderly, according to Phil Galagher.

M

ost existing financial modelling for pre-retiree clients is designed to let them know how much in retirement savings they need for a comfortable retirement.

Planners now need to think in terms of the entirely different needs of two phases of retirement – the early, or active retiree, and the less active elderly retiree – and how this affects their clients, as well as their own business.

It means that planners need to look at their business models and develop ways of accessing the skills and products required to service elderly retirees.

The first stage of retirement is characterised by being active, independent, seeking exper iences and pursuing dreams that can be dependent on the level of income.

This is increasingly followed by an expanding second stage, characterised by frailty and less activity which – depending on the level of suppor t n e e d e d – d o e s n’t re q u i re a s m u c h income.

So looking at financial models which say “you need an indexed $x income per year throughout your retirement” is misleading.

Present financial models tend to look at an initial amount needed to fund a ‘comfortable’ retirement, which is based on travel and entertainment, and simply increase initial income by an inflation factor to meet future needs.

Such modelling doesn’t take into account that there will come a time when retirees lead a less active life and their income needs will be reduced.

At the same time, regulations require pension payouts from superannuation to increase as a percentage of capital at set ages.

So a well-managed super fund in pension mode could end up paying a l a r g e r p e n s i o n i n re a l t e r m s t o a member at age 80 than it did at age 65.

Yet when retirees consider a retirement village or aged care, a lump sum will be needed.

Therefore, when retirees slow down, they may well need advice on the best way to reinvest the income they once spent on external leisure activities, in the expectation of a probable need for an increased level of care later.

This will enable them to be better prepared for the probability of intensive medical support needed during the last months of their life.

The number of elderly retirees is only going to increase further as Australians live longer and as baby boomers grow

the needs of active retirees are well served, but “Overall, those of elderly retirees are not so well served, and as numbers continue to grow, more strain is being placed on the resources that are available to help them. ”

older. They will seek different types of service to those they found useful when they were active retirees.

While there is not a set age when an active retiree becomes an elderly retiree, and the slowing down was likely to happen gradually over a few years, it is likely that most retirees will have around 15 years of truly active retirement.

Slowing down is inevitable, however, and the time spent as an elderly retiree is likely to be almost as long as the time spent as an active retiree, for those who are now pre or early retirees.

The number of Australians aged over 85 has doubled as a percentage of the total population in the past 20 years, and at the same time increased in numbers by over 170 per cent. Their needs are clearly quite different to

those of a 65 year old.

Overall, the needs of active retirees are well served, but those of elderly retirees are not so well served, and as numbers continue to grow, more strain is being placed on the resources that are available to help them.

This can involve complicated and technical advice, such as managing intergenerational wealth transfer and acting under power of attorney, to the mundane.

People with families can usually rely on them for help, but not everyone in Australia has family nearby for all sorts of reasons.

At t h e s a m e t i m e, m a n y o l d e r Australians don’t want to be a burden on their children or grandchildren and want an entity they can trust to look after their interests.

This means providing financial planning services to elderly retirees is likely to see significant growth in the immediate future in all areas.

Some financial planning businesses already recognise this.

While the increased need for medical care and aged accommodation has been well documented, there will be a corresponding increased demand in trusted suppliers of financial services and hands-on assistance to manage the affairs of people, either no longer able t o b e, o r n o t i n t e re s t e d i n b e i n g , involved themselves.

One approach for financial planning firms is the development of strategic alliances for organisations already experienced in providing the services required by the elderly – such as trustee companies.

In d e e d , t r u s t e e c o m p a n i e s a re among very few entities that have the experience and record of service, products and knowledge (including wealth management) to deliver the across the board help that less active and frail, self funded elderly retirees need.

Phil Galagher is head of wealth management for Equity Trustees Limited.

www.moneymanagement.com.au October 6, 2011 Money Management — 21

FPA0022/MM/HE/FP

WHAT DO THE HEADS of AUSTRALIA’S

leading fund RESEARCH HOUSES

have in common?

They’ll all be addressing an exclusive FPA Portfolio Construction Masterclass, brought to you by PortfolioConstruction Forum, at the annual FPA National Conference at the Brisbane Convention and Exhibition Centre on 16 – 18 November 2011. Along with an exceptional line-up of speakers, our programme focused on professional development and FOFA transition, promises to deliver outstanding value for you and best practice for your business. Register before 30 September and receive registration discounts of up to 30% at fpaconference.com.au

FPA. BEST PRACTICE

OpinionMarkets Decade doubles dollars Stephen Hart outlines a low-risk strategy to double an investor’s money in 10 years.

P

ro p e r t y i n v e s t o r s c o m m o n l y The best option for a known return is to discuss 7 per cent compound invest in fixed rate bonds. The coupon you returns as enabling investors to receive will not change through the life of double their money in ten years. the bond. You’ll see in Figure 2 that the My simple calculation below shows this yield can be higher than the coupon. In to be the case. While I don’t quite arrive at this instance, the bond is trading at a $200 in year ten, interest in this instance discount to (less than) the face value of is only compounded annually. So having $100. The reverse is also true, where a 7 per cent interest compounding more lower yield means the bond is trading at a frequently should enable me to double my premium (higher than) face value. For money in ten years. e x a m p l e, t h e Ru ra l Re s i d e n t i a l a n d Bank bond – the bank Superannuation commercial property now being 100 per cent returns have started to funds obviously invest owned by Bendigo and decline and those with Ad e l a i d e Ba n k – w a s in a range of assets, but a vested interest in the trading at $106.50 with s e c t o r h a v e b e g u n they also charge a c c r u e d i n t e re s t o f stating the investment management fees. No $3.359 to give a total should be for the longprice for $100 face value wonder there has been term of 20 or 30 years. b o n d o n 2 0 Ju n e o f such a big shift to selfThese returns look far $109.859. If an investor more attractive than managed superfunds. paid the premium to those of the past few acquire this bond and years. The RP Dataheld the bond until Rismark Home Value maturity when they In d e x h a s s h ow n a would receive $100 face national decline in value, they would incur average home prices a capital loss. of 1.5 per cent in the There are also some ye a r t o Ap r i l 2 0 1 1 , f l o a t i n g ra t e n o t e s partly offset by a rise available that deliver in rental yields over yields of over 7 per cent, the same period, with however, the coupon h o u s e s re t u r n i n g a component of the gross 4.2 per cent and apartments a gross return is linked to an underlying bench4.9 per cent. Overall, the median returns mark, in most cases the Bank Bill Swap would be well short of the sought-after 7 Rate (BBSW ). The coupons are reset quarper cent compound return (see Figure 1). terly so that the ultimate yield will be According to research by the Australian influenced by changes in economic condiPrudential and Regulation Authority, the tions that are reflected in BBSW and the average for superannuation returns (from cash rate. In other words, the yield is not 255 entities surveyed with at least $50 guaranteed to return over 7 per cent for million in assets) in 2010 was just 4.1 per the life of the security. cent – a poor result. Worse still, if you Figure 2 and Figure 3 show bonds availconsider the UBS Composite Government able to retail investors. Those that satisfy the Bond Index (0-5 years) returned 5.46 per “wholesale investor test” also have access to cent in 2010 and we consider these bonds the following bonds (see Figure 4). “risk free” assets. Superannuation funds Rabobank and Investec also offer term obviously invest in a range of assets, but deposits with a 7 per cent interest rate or they also charge management fees. No more (see Figure 5). One of the downsides wonder there has been such a big shift to with five-year term deposits is that you self-managed super funds (SMSFs). lock away your funds, and if you require Volatile equity markets make returns access before maturity, banks usually uncertain, but if investors want a known charge a break-fee. Bonds compare well return for a set period without committing to here, as they can be sold at any time. the very long-term as property advisers To double your money in ten years you advocate, or need a better return than 4.1 will need to reinvest returns to compound per cent to sustain themselves through the interest. The current Rabobank term retirement, fixed income investments can deposit with a minimum investment of provide known 7 per cent returns. only $1,000 would help achieve your goal.

Figure 2 and Figure 3 show a range of securities available to retail investors that will Stephen Hart is head of planner services deliver a yield as stated, if they hold the secuat FIIG Securities. rity to maturity. Each of the securities has different risk/reward characteristics.

Note: This article was written on 20 June 2011.

“

”

Figure 1 Year

Start value

Rate of Return

Interest earned in

End value

1

$100.00

7.00%

$7.00

$107.00

2

$107.00

7.00%

$7.49

$114.49

3

$114.49

7.00%

$8.01

$122.50

4

$122.50

7.00%

$8.58

$131.08

5

$131.08

7.00%

$9.18

$140.26

6

$140.26

7.00%

$9.82

$150.07

7

$150.07

7.00%

$10.51

$160.58

8

$160.58

7.00%

$11.24

$171.82

9

$171.82

7.00%

$12.03

$183.85

10

$183.85

7.00%

$12.87

$196.72

Source: FIIG Securities

Figure 2

For retail investors ($50,000 minimum investment)

Issuer

Coupon Type

Coupon/IM

Yield#

HBOS Pic

Fixed

6.75%

19.87%

AXA SA*

Fixed

7.50%

10.35%

Praeco Pty Ltd

Fixed

7.13%

8.00%

Vero Insurance Ltd

Fixed

6.15%

7.77%

National Wealth Management

Fixed

6.75%

7.54%

Suncorp Metway Insurance Ltd

Fixed

6.75%

7.45%

Rural Bank

Fixed

9.50%

7.43%

Leighton Finance*

Fixed

9.50%

7.41%

Notes: *Minimum $100,000 parcels Source: FIIG Securities - yield at 20 June 2011 # to first call date

Figure 3

For retail investors ($50,000 minimum investment)

Issuer

Coupon Type

Coupon/IM

Yield#

HBOS Pic

Floating

0.26%

19.28%

AXA SA*

Floating

1.40%

10.33%

Dalrymple Bay Coal Terminal (BBI)

Floating

0.37%

7.82%

Vero Insurance Ltd

Floating

0.70%

7.70%

Suncorp Metway Insurance Ltd

Floating

1.00%

7.58%

National Wealth Management

Floating

0.63%

7.28%

Morgan Stanley

Floating

0.47%

7.16%

Notes: *Minimum $100,000 parcels Source: FIIG Securities - yield at 20 June 2011 # to first call date

Figure 4.

For wholesale investors ($50,000 minimum investment)

Issuer

Coupon Type

Coupon/IM

Yield#

Swiss Reinsurance*

Fixed

7.64%

10.39%

Suncorp Metway Insurance Ltd

Fixed

6.75%

8.16%

Rabobank Nederland

Fixed

6.42%

7.65%

Stockland Trust Management

Fixed

8.25%

7.16%

Mirvac Captial Pty Ltd

Fixed

8.00%

7.09%

Swiss Reinsurance

Floating

1.17%

10.58%

Bank of Queensland

Floating

3.75%

8.42%

Rabobank Nederland*

Floating

0.67%

7.66%

Notes: *Minimum $100,000 parcels Source: FIIG Securities - yield at 20 June 2011 # to first call date

Figure 5.

Term Deposit Issuer

Min Investment

Term

Rate

Interest Paid

Rabobank

$1,000

5 years

7.00%

Annually

Investec - Retail Client

$25,000

5 years

7.18%

Annually

Investec - Wholesale Client

$150,000

5 years

7.33%

Annually

Source: www.termdeposit.com - prices at 24 June 2011

www.moneymanagement.com.au October 6, 2011 Money Management — 23

OpinionIndia

The baby

elephant walks India is a country with many challenges. It is a democracy of over a billion people, most of whom live in poverty. However, as Shailesh Jain from Lonsec reports, it offers major potential investment opportunities.

H

aving recently returned from India, it is clearly apparent why the very mention of the country could conjure up Third World images of poor healthcare, lax security, and rampant corruption and, as recently witnessed, a less than perfect Commonwealth Games.

In a democracy of more than a billion people, packed into a land mass onethird the size of Australia, real estate is a precious commodity. India is a developing nation and for this reason the fiscal divide between the haves and the have-nots is still large.

India has an ancient, rich and vibrant culture – and enough historic sites to keep anyone busy exploring for a lifetime. But the fact remains that the majority of India’s 1.2 billion people live in poverty.

E c o n o m i c a l l y, In d i a f a c e s a n u n p l e a s a n t t r i n i t y o f m o d e ra t i n g growth, high inflation and monetary tightening. In the first three months of this year, India’s gross domestic product growth rate slipped to 7.8 per cent, down from 8.3 per cent annual rate in the fourth quarter of 2010. While there are a number of drivers, India’s heavy reliance on oil imports, (around 75 per cent of consumption) and heavy government subsidies mean that for every $10 rise above $90 there is a 10–20 basis points negative gross domestic product (GDP) impact.

The primary contributor to inflation in India – as it is in China and much of the emerging world – is food inflation.

This is not the market-based inflation of higher demand, or the industrybased inflation of unionised wage increases. It is simply the self-induced inflation of a government that is trying to keep the majority of its population from declining back to poverty. For example, the price of onions doubled within the first half-year of 2010 due to unseasonal rain during har vesting season. As at May 2011, the price of onions had dropped by 60 per cent on a year ago. While there is a pricing

movement, more broadly food inflation remains sticky at elevated levels.

In response to continued inflationary pressure, the Reserve Bank of India has raised its key borrowing rate 10 times since March 2010 – to 7.5 per cent as at June 2011. While rising interest rates due to the pickup in economic growth are not necessarily negative, excessive tightening can impact negatively on market sentiments, as appears to be the case currently.

At a time when the inflation issue refuses to go away, manufacturing growth continues to decline and interest rates inch upward quarter after quarter, the government has its hands full fighting fires on other fronts – such as the corruption charges faced by senior ministers and the ongoing struggle to maintain harmonious society.

In days gone by it was an accepted fact that many ministers asked for bribes. Now it seems they may demand shares in firms to which they are about t o a w a rd c o n t ra c t s. Re c e n t l y t h i s involved telecommunications minister Andimuthu Raja, who is accused of rigging the auction of second generation (2G) mobile telephone licences in 2008, thereby depriving the exchequer of $39 billion – a sum about equal to India’s defence budget. Scandals such as this have inhibited good decisionmaking and paralysed development projects.

However, the fight against corruption has taken a new turn with large gatherings of ever yday citizens getting actively involved by rallying against corruption and continuing scandals.

The news media has contributed significantly to bringing the issue of corruption to political India’s centre stage.

This is supported for the first time in many years by the judiciary system actively pursuing corruption cases on a day-to-day basis. This is causing businessmen, politicians and bureaucracy to readjust their thinking and strategies on existing and new projects due to fear of getting tainted.

24 — Money Management October 6, 2011 www.moneymanagement.com.au

Joys of Youth India is a young population by global standards, with more than 50 per cent of its population below the age of 25 and more than 65 per cent aged below 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan. According to UN estimates, the population is forecast to rise to 1.4 billion by 2025 and approximately 67 per cent of population is likely to be in the working age bracket. India has a large English-speaking population, many of whom are highly educated, and importantly – compared to China is an open democracy where its citizens’ personal liberties are protected and its elected leaders do not have an ironclad grip on power. Hence global players are now eyeing India as the most attractive destination for doing business and are planning aggressive investment strategies to this effect.

The consumption statistics are impressive: around 30 per cent annual growth in beer volumes, 40 per cent growth in air-conditioner sales, monthly domestic two-wheeler sales of over a million, and 15 million new mobile subscriptions added every month to the existing base of 700 million mobile connections. These figures, along with the fact that 85 per cent of India’s aggregate economic demand is domestically dr iven, illustrate that the Indian economy is more than just hype – there is a level of growth that many expect to continue for many years as India’s middle class grows and consumerism follows suit. For instance, in 2010, employees in India enjoyed a salary hike of 11.7 per cent. This is expected to jump to 12.9 per cent this year – among the highest in the world. This equates to high disposable income, which further equates to increased consumption, which results in higher growth.

The Taj Mahal of all challenges While the main restraint on India's growth remains its infrastructure, this

area also provides great opportunity.

Persistent migration to the cities is putting tremendous pressure on existing infrastructure. The building of the Taj Mahal is a good metaphor for the work that lies ahead if India is to make t h e m ov e f r o m a p o t e n t i a l g l o b a l economic power to realising this potential. The Taj Mahal took 22 years and 22,000 workers to build under the guidance of an imperial Mughal ruler in memory of his wife.

In a traffic system that's so helplessly overloaded, it would seemingly take a miracle for things to work perfectly.

Public transport continues to be a major problem. Many of the country’s dynamic entrepreneurs waste hours each day stuck in traffic. Firms are strangled with the cost of building their

own infrastructure – for example, fleets of buses are needed by companies like Deutsche Bank to ferry staff to work at subsidised rates.

Howe v e r, t h e re a re e x a m p l e s o f p r o g re s s. T h e n e w Ba n d ra - Wo r l i Sealink, a two-kilometre, eight-lane bridge in Mumbai works effectively. It currently brings together the CBD of one of the world’s most populous cities with the west side of the city, reducing travel time from 75 minutes to about 7to-10 minutes.

There are some promising changes t h a t a re s o o n t o b e i m p l e m e n t e d .

Firstly, in a positive sign that roadblocks and inefficiencies are being dealt with, t h e g ov e r n m e n t h a s c o n s t i t u t e d a committee headed by the Prime Minister to get core national infrastructure

“

But the good news is the economy has now shifted on to a higher growth trajectory, one that has made India one of the fastest growing economies in the world.

”

projects underway. The committee plans to spend US$1 trillion (8.4 per cent of GDP) annually on infrastructure under the 12th governmental five-year plan, due to start in 2012, compared with a US$542 billion (7.5 per cent of GDP) in 2010.

Secondly, the introduction of the Unique Identity Number system and establishment of bank accounts will mean around 600 million people (mainly in rural areas) will have direct access to government subsidies, which often do not reach the targeted recipient.

Clearly a number of roadblocks stand in the way of development and growth for India. Economic reforms are slow to eventuate, infrastructure issues continue to hinder many projects, overbearing poverty and malnutrition will place

higher costs on the system in the long r u n , a n d t h e g ov e r n m e n t a n d i t s systems are not easy to deal with. These problems are all too painfully visible.

But the good news is the economy has now shifted on to a higher growth trajectory, one that has made India one of the fastest growing economies in the world, and one which, if sustained, is set to see India become a stronger power in the world economy.

Even today, however, 61 per cent of the population of the countr y live below the poverty line, compared to 89 per cent just five years ago. India is heading in the right direction, but with the burden of population, it will take some time to realise its potential.

Shailesh Jain is an analyst at Lonsec.

www.moneymanagement.com.au October 6, 2011 Money Management — 25

Toolbox A little light relief Deborah Wixted questions whether provisions of limited relief regarding excess contributions tax could be classified as ‘relief’.

I

n August 2011 the Government issued a consultation paper to progress the policy announcement made in the 2011 Federal Budget regarding the provision of limited relief to those who breach their concessional contributions cap.

The key details of this measure are as follows: • A refund is available only to individuals with excess concessional contributions of up to $10,000 in a financial year. The $10,000 limit will not be indexed.

• The refund is only available for the first breach of the concessional contributions cap after 1 July 2011, with subsequent breaches not eligible.

• Excess contributions will be refunded to the individual and taxed as income in their hands, as an alternative to the deduction of excess concessional contributions tax. As a result, individuals not on the highest marginal tax rate will pay a lower amount of tax than would have been levied on the excess contribution.

• The refund of excess contributions will be optional, with individuals needing to elect to take up a refund offer made by the ATO. If the refund is not chosen, the existing excess contributions tax processes will continue.

When this measure was first announced in the 2011 Federal Budget, it was clear the measure should assist many individuals who unintentionally make a one-off breach of the concessional cap by a small amount. This was stated as the policy intent behind the measure. However, outstanding issues included: 1. The unchanged complexity of the contribution cap rules may still see many clients penalised for a second concessional cap breach in the future.

2. The interaction of the excess concessional contribution with the non-concessional cap.

3. Relief for clients who breach their concessional cap by more than $10,000.

4. The taxation treatment of the refunded contribution from the fund’s perspective.

5. Relief for individuals who breached their concessional cap in the 2010/11 or previous financial years or for inadvertent breaches of the non-concessional cap.

This article will consider the key details of the proposed measure in light of these issues.

Refund only on the first breach below $10,000 The consultation paper makes it clear that only the first concessional cap breach of under $10,000 from 2011/12 onwards is eligible for a refund. A refund will not be available: • For second and subsequent breaches, unless the or iginal breach is amended following the provision of additional information to the Australian Taxation Office (ATO) or, a successful objection to the excess contributions tax assessment occurs, which results in no excess concessional contribution being recorded.

• Where the breach is $10,000 or less but the individual decides not to have the excess contributions refunded. This may be an appropriate course of action for those on the highest marginal tax rate, where there is no difference between income tax and excess contributions tax but the amount released from super as excess concessional contributions tax is considerably lower than that released under the refund.

• For part of an excess concessional contribution under $10,000 • For excess contributions made in the 2010/11 or earlier financial years • For excess non-concessional contributions. However, where these arise from excess concessional contributions, applying the refund may mean excess non-concessional contributions are also eliminated.

No refund for breaches greater than $10,000 No relief is provided under the refund measure for an individual who breaches their concessional contributions cap by more than $10,000. However, if an amendment is made to the excess contributions assessment that results in the excess contribution being less than $10,000, refund relief may then be available. Therefore, those with excess contributions over the $10,000 limit may be well advised to thoroughly investigate the contribution information provided by their fund to ensure all opportunities are taken to reduce any excess and potentially qualify for refund relief.

Refunded excess concessional contributions treated as assessable income of the individual An important consideration in the administration of the excess concessional contributions refund is how the refunded amount is to be treated, both in the hands of the individual member and also in the hands of the superannuation fund which received the original contribution.

Individual income – refunded excess concessional contributions, grossed up for 15 per cent contributions tax, will be treated as assessable income of the individual.

Adjusted taxable income (ATI) is used to determine a broad range of government assistance and taxation benefits, such as social security payments, Family Tax Benefit, Child Care Benefit, superannuation cocontributions, deductions for personal super contributions, Commonwealth Seniors Health Card, senior Australians tax offset and mature age workers tax offset. The amount of refunded excess contributions could therefore have an effect on eligibility for these other measures, particularly if the refunded contributions would have otherwise been excluded from the person’s ATI. Two matters remain unclear on this point: • Where the excess contribution arises from a combination of reportable employer superannuation contributions and other super contributions, how should the refunded amount be characterised, both for ATI purposes and whether it is employment or non-employment income?

• As reportable super contributions themselves are included in ATI in some instances, the refunded excess may result in doublecounting. This has been highlighted in the consultation paper as a matter requiring further consideration.

Individual non-concessional contributions cap The consultation paper makes clear that refunded excess concessional contributions would not be counted to a person’s nonconcessional contributions cap. This is one of the more important aspects of this relief, as evidence suggests that there are many instances of individuals seeking to maximise their contributions under both caps, with excess concessional contributions then also resulting in excess non-concessional contri-

butions and a substantial total tax liability.

By allowing the excess concessional contributions to be refunded, subject to personal income tax rates and not counted to the nonconcessional cap, many individuals may well avoid a potential 93 per cent tax bill.

Individual superannuation balance The individual’s superannuation balance will be reduced by the released amount.

The released amount will be treated for proportioning purposes in line with the current release authority treatment: the proportioning rule will not apply, meaning that the released amount effectively comes from the individual’s taxable component.

However, current release authority treatment provides that for preservation purposes the released amount is deemed first to come from unrestricted nonpreserved benefits, then restricted nonpreserved benefits and finally preserved benefits. It remains to be seen whether this will also apply to the refunded amount.

Fund income The operation of the refund process means that superannuation funds that receive contributions which are later assessed as excessive and refunded to the member are required simply to action a release authority provided by the ATO. With no amendments needed to the fund’s own income and taxation position and with the refund fitting within the existing release authority framework, additional administration costs should be avoided.

Summary The refund of excess concessional contributions may assist some individuals to reduce their potential tax liability, particularly those who are not on the highest marginal rate of tax and who have also maximised after-tax contributions under the non-concessional cap. It may also give additional options for those who identify the potential for excess contributions early in a financial year.

However, not all individuals with excess concessional contributions can or should use the refund, meaning close analysis of each situation will be needed.

Deborah Wixted is the executive manager technical services at Colonial First State.

Get the satisfaction you’ve been looking for with FirstWrap & FirstChoice. Contact your Business Development Manager for transition services, call 13 18 36 or visit colonialfirststate.com.au/satisfaction This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider the relevant PDS available from us before making an investment decision.

Colonial First State Investment Limited ABN 98 002 348 352 is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557.

Colonial First State also issues interests in investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments. Avanteos Investments Limited ABN 20 096 259 979 AFSL 245531 is the issuer of the FirstWrap super and pension products from the Avanteos Superannuation Trust ABN 38 876 896 681. Avanteos operates the FirstWrap service. CFS2042/MM/AS/T 26 — Money Management October 6, 2011 www.moneymanagement.com.au

Appointments

Please send your appointments to: angela.welsh@reedbusiness.com.au

Move of the week ANZ has appointed Will Rathvon as global head of resources, based in Singapore, as the bank expands its regional network and boosts its resource business.

Rathvon would bring 30 years of experience in resources, and was formerly global head of the resources and energy group at HSBC Holdings. He had also been HSBC’s global head of project and export finance.

Prior to this, Rathvon was global head of project and export finance with Standard Chartered Bank, also based in Singapore.

AUSTRALIAN Ethical has announced two new appointments with the aim of adding to its client servicing, distribution and marketing arms.

Adam Kirk was named general manager, business development.

He would be responsible for building relationships with corporate superannuation clients, institutional investors and financial advisers. Kirk would bring 15 years of experience in funds management and superannuation, and had previously held roles at Catholic Superannuation, Skandia and Colonial First State.

Australian Ethical has also appointed Paul Smith as general manager, strategy and communications. Smith will take charge of marketing communications and product development, along with growing the fund's products and services. He would bring 15 years of experience in Australia and the UK in financial services, actuarial

consulting and environmental marketing. He previously worked with Schroders, Credit Suisse and Carbon Planet.

Australian Ethical managing director Phillip Vernon said the appointments of Kirk and Smith would improve the communication channels between advisers and clients.

AUSTRALIAN fixed income broker FIIG Securities Limited (FIIG) has appointed Adrian Dixon as its new chief information officer, based in Brisbane.

Dixon would direct and manage information technology (IT) strategy, policies, programs and schedules for all of the firm’s operations.

He would also manage business and finance data processing, network communications and management information services for the firm.

Dixon had over a decade of IT

experience in the financial services industry, most recently as chief information officer at Sunsuper.

His previous roles had included general manager – CommSecure Business Unit at payment service SecurePay Group, as well as senior roles at UK payment technology company Dialect Payments in both London and Brisbane.

Dixon had also worked as a qualified aircraft technician specialising in gas turbine engines, specifically on FA-18 and F-111 aircraft during his service in the Royal Australian Air Force.

Adrian Dixon Dixon’s appointment comes as FIIG continues to expand its team to service investors seeking access to secure investments, the firm stated.

RUBIK Financial has appointed a new chief financial officer and

company secretary, Paula Kensington, with effect from 16 November.

Kensington would bring over 15 years experience as a chartered and certified accountant. Her previous role was for AWA, and before that as chief financial officer of Keycorp. She had also worked in finance roles with Chubb Group, the Polestar Group, the British Printing Company and a number of accounting practices.

Kensington would replace Rubik’s chief financial officer and company secretary, John Giddings.

CUA has announced the appointment of Tony Taylor to the position of chief financial officer, effective 10 October 2011.

Taylor would bring extensive experience in the same role with the retail financial services industry, where he held a number of positions, including chief financial officer of its retail division.

During that period, Taylor had been responsible for enhancing financial management and forecasting processes.

Prior to BankWest, Taylor had been chief financial officer at Bank South Pacific in Papua New Guinea, where he oversaw the privatisation of the institution and a major merger.

CUA’s chief executive officer,

Opportunities BUSINESS DEVELOPMENT MANAGER Location: Perth Company: AIA Australia Description: AIA Australia, a specialist provider of life insurance products, is now seeking a business development manager for its Perth office. This role will suit someone who has existing relationships with the Perth adviser network and who is looking for a new challenge.

Reporting to the state manager of the Perth team, you will be responsible for achieving new business sales targets, building relationships with advisers and their support staff, and maximising productivity from individual advisers.

It is imperative that you have either a financial or sales background, and are RG146-compliant.

If this sounds like the role you have been looking for please visit www.moneymanagement.com.au/jobs or contact Rachel Andrews, HR advisor on (03) 9009 4053.

FINANCIAL ADVISER Location: Perth Company: SFR Advisory

Chris Whitehead, said Taylor’s broad industry experience, insights and track record in forecasting would be invaluable to CUA as it progresses its growth strategy.

ZURICH Financial Services Australia (Zurich) has appointed Kristen Lennis-Harvey to the role of national key account manager, retail risk.

Lennis-Harvey would join Zurich from CommInsure, where she held the position of national account manager.

Throughout her career in financial services, she had built a strong reputation for developing and maintaining strong business relationships with key dealer groups.

Lennis-Harvey’s new role would focus not only on developing strategies to maximise the relationships with existing accounts, but also seeking out new opportunities where advisers could use Zurich’s products, services and technology.

Commenting on the appointment, Zurich’s general manager sales and marketing, retail risk, Philip Kewin, said LennisHarvey’s depth of knowledge and industry connections would make her ideally suited to take advantage of the platform Zurich has established in the marketplace.

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

Description: This independent financial planning and tax practice is now seeking a financial adviser. The firm has its own unrestricted AFSL, an in-house SMSF administration service and CPA tax practice.

If you want to work for an organisation that does not use wrap accounts, and is free from institutional ownership, then please contact Garth Lovelace from SFR Advisory via Money’s Management jobs webpage: www.moneymanagement.com.au/jobs.

FINANCIAL PLANNER Location: Melbourne Company: AMP Financial Planning Description: An AMP Financial Planning practice is currently looking to expand, and requires the services of an experienced financial planner.

You will play a pivotal role in the expansion strategy, have access to a significant number of clients to engage, provide strong holistic advice, be recognised with an incentive program and have consistent back office support.

If you have demonstrated financial

planning expertise, strong communication skills and at least a DFS (or equivalent RG146), then you are encouraged to apply.

For more information, visit www.moneymanagement.com.au/jobs or contact Libby Mitchell on (03) 9622 5951.

SENIOR PARAPLANNER Location: Brisbane Company: Zanetti Recruitment & Consulting Description: A financial planning organisation specialising in superannuation and retirement planning, wealth accumulation, gearing, SMSF and warrants is looking to recruit a senior paraplanner.

In this role, you will be supporting a small team of financial planners assisting in the construction and preparation of SOAs that meet all relevant legislative, compliance and company standards. Key responsibilities include: attending client meetings, preparing client documentation and SOAs, while maintaining a high level of technical and product knowledge.

You will require a DFS, and a minimum of two years experience as a paraplanner.

For more information and to apply, visit

www.moneymanagement.com.au/jobs.

FINANCIAL ADVISOR - RISK Location: Adelaide Company: Terrington Consulting Description: An international stockbroking firm with a team of financial advisers based in the Adelaide CBD is seeking a financial planner to specialise in the provision of risk strategy to a base of high-net-worth clients.

The firm offers a strong existing client base and a clear career path for the right individual.

You will be responsible for managing a book of clients in a proactive and commercial manner, ensuring that maximum revenue and referral outcomes are achieved. You will also manage client meetings, research advice strategies, prepare complex SOAs and attend networking events.

Completion of DFP 1-4 is essential, while DFP 1-8 and the CFP accreditation are highly sought-after.

To find out more and to apply please visit www.moneymanagement.com.au/jobs or contact Emily at Terrington Consulting – 0422 918 177 / (08) 8423 4444, Emily@terringtonconsulting.com.au.

www.moneymanagement.com.au October 6, 2011 Money Management — 27

Outsider

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

Piecemeal combat in the tranches OUTSIDER was once a consultant and well understands that when you’re dealing with a difficult client it is a sound strategy to deliver them products in little bites. It also helps in building up billable hours.

So far as Outsider can tell, the Assistant Treasurer and Minister for Financial Services, Bill Shorten, was never a consultant, but he does possess a law degree and has engaged in combat in and around the Victorian Trades Hall Council, so he probably understands the value of delivering things in little pieces.

Which might go some way to explaining why the Federal Government has embraced that tedious French word, “tranche”, to cover the extended delivery of virtually all of its financial services legislation.

“Tranche”, according to Outsider’s dictionary, means a “slice” or “portion”, and thus the MySuper element of Stronger Super is being delivered in a number of tranches while, of course, the FOFA legislation has been delivered in two tranches which may possibly become three tranches. Any bets on four?

Outsider cannot understand why the Government would want to deliver legislation in tranches, but he will acknowledge that things are more quickly swallowed when they come in small morsels.

Perhaps too, the Government believes it could be a long time between meals.

A good year for Passion-Pop IT should come as no surprise to regular readers of this column that Outsider isn’t exactly averse to the odd tipple – but whether it’s a snifter of fine single malt or a flute of the best Krug, Outsider is a firm believer in quality over quantity.

With a taste for the finer things in life but without the budget to match, Outsider is particularly receptive to tipping a glass with the more well-heeled members of the financial services industry, whose deeper pockets and company credit cards are more amenable to the prospect of popping open a 1996 Bordeaux.

But whatever he’s drinking, Outsider has always tended to regard such purchases as expenses rather than investments – although one could easily make the argument that the purchase of a bottle of Glenfiddich 21-year-old is an “investment” in future happiness.

But fine wine brokers Premier Grand Cru hold a differing view – an ‘investment’ in rare and expensive wine is precisely that, and they state that in the past decade returns exceeded those of equities, commodities and property.

The London International Vintners Exchange provides real time and historic pricing data for investment grade wine, and their Fine Wine 100 Index has returned 15 per cent per annum over the past 10 years, according to Premier Grand Cru. Outsider has never heard a better reason to

splash out on a fine drop, and has decided to become the responsible entity and sole investor in a multi-strategy fund that invests in rare and expensive wine, whiskey and cigars. Unit pricing will be in Australian dollars and the fund will be domiciled entirely within Outsider’s living room.

Deadbeat Aspenites on Audi skidrow AS frequent readers of Outsider would know, his status as a humble hack covering the financial services industry means that he suffers from annual bouts of “bonus envy”.

Indeed, Outsider can only recall two occasions in the past 10 years when he was not overwhelmed by the appalling “bonus envy” affliction – 2008 and 2009 – mostly because in those years the parlous state of the markets meant that very few of his funds management friends actually earned a motza.

Looking at the state of the markets in the second half of 2011, Outsider is growing to the view that he might again avoid his annual

“

Out of context

affliction with a number of fund management operatives already whining that their new Audi might have to remain in the showroom and that the 2012 trip to Aspen might need to be put on hold.

Indeed, Outsider is sad to report that a couple of his funds management lunching buddies have found themselves taking unplanned extended breaks.

Outsider may never really be able to empathise with those who have lost a bonus, though he does feel a modicum of sympathy.

But, as one of his young hack colleagues was heard to say, you can’t miss what you never had.

“For any Labor Prime Minister, a room full of industry super funds people is a good room to be in.”

The Prime Minister, Julia Gillard, declares her allegiances at the Industry Super Network luncheon in Melbourne, and invites considerable vitriol from outsiders.

28 — Money Management October 6, 2011 www.moneymanagement.com.au

“Personally, I’ve been dreaming of this moment for four years. I have a confession, which is: I go to bed every night, I dream of another recession.”

Hobbyist trader and self-declared attention seeker Alessio Rastani shares his predictions of a Eurozone crash on BBC Television.

“Greece has probably three industries, and that's being generous if you count olives and olive oil separately.”

MLC investment strategist Michael Karagianis sums up the diversity of the Greek economy at the MLC Investment Summit in Melbourne.