Money Management (September 22, 2011)

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Vol.25 No.36 | September 22, 2011 | $6.95 INC GST

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GOVT WARNED ON DEFAULT FUND MONOPOLY: Page 5 | TIME TO KILL SAA: Page 18

Make super fund boards more transparent

By Mike Taylor SUPERANNUATION funds should be subject to the same corporate governance requirements as publicly listed companies.

That is the bottom line of a round-table exercise conducted last week by Money Management’s sister publication, Super Review, with most panellists agreeing there needed to be changes to the regulations impacting superannuation fund trustee boards to place them on a similar footing to the boards of publicly listed companies.

Mercer global partner Russell Mason (who is soon to take up a senior role at Deloitte) said irrespective of whether they were corporate, commercial, retail or industry funds, they were very large financial institutions.

“They’re massive financial institutions [controlling] many, many billions of dollars,” he said. “And they should be

subject to the same governance as a publicly listed company.”

Mason said there was a need to view members of superannuation funds as having equal rights with shareholders.

The round-table panel also emerged in broad agreement that the rules around the make-up of trustees boards needed to be reviewed, particularly with respect to people holding positions on multiple funds or companies providing services to funds.

Association of Superannuation Funds of Australia (APRA) policy general manager David Grause said an appropriate outcome could be achieved by making suitable changes to the rules.

“You know, there’s nothing to say that the trustee structure is a problem, and there’s nothing to say that any of those rules to a public company couldn’t get applied to a trustee acting in the current role,” he said.

“They could force annual general meetings,

LISTED PROPERTY

The new blossom THE listed property sector has finally started to gain some adviser interest after changing its approach and becoming a defensive asset, rather than being the asset of explosive growth witnessed in 2007.

Property trusts have cut their gearing levels almost in half and lowered their dividends, which has sparked a return to conservatism in the sector.

Some dealer groups have recently embraced listed property, albeit after a long and careful decisionmaking process.

However, industry experts claim not all bad apples have been weeded out of the sector, as listed property groups with ongoing debt issues still exist.

Research houses seem divided on where to place clients’ funds in this sector, which will spark a further period of adviser and investor caution.

To read more about trends in the listed property space, turn to page 14.

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Russell Mason they could force greater disclosure.

“So I don’t believe that the actual structure is a problem here, it’s actually just rules and regulations around it,” Grause said.

Sunsuper chief investment officer David Hartley said he could also see some issues

arising in circumstances where people were sitting on multiple boards.

MetLife chief marketing and distribution officer Eric Reisenwitz said the starting point with respect to the trustee boards of superannuation funds was that the directors needed to put members interests first.

“At the end of the day, I think the structuring of itself, whether you add more rules, take more rules away, obviously you need to have things like conflict of interest, and it has to go back and forth there, but you can’t take it away from a global understanding that the members’ interests are primary,” he said.

Mason pointed out that while there had been much discussion around the issue, there had been very few problems with respect to superannuation fund trustee boards.

“Let’s remember that, overall, the current Continued on page 3

PI insurance needs to change

By Andrew Tsanadis THE way professional indemnity (PI) underwriters assess a planner’s risk and ambiguous regulatory guidelines means a fresh approach to product regulation and safety guidelines is required.

That is according to deputy chief of the Financial Planning Association Deen Sanders, who said the reason for this was that underwriters were not reviewing a licensee’s risk correctly.

Both Sanders and Christina Kalantzis from insurance broker Alexis Compliance Risk Solutions said the Australian Securities and Investments Commission (ASIC) needed to provide better product

regulation and safety guidelines and ensure that all parties to investment – including the research house, auditors and manufacturers – are taken into account.

“Instead of looking at risk, underwriters are taking a formula of revenue and approved product list and charging premiums that reflect that,” Sanders said.

“They react too late to the issues of the market – instead of considering which licensees are the better businesses to insure, every planner is punished for the bad behaviour of a few.”

Dual Australia senior underwriter Brett Sampey said the insurer Continued on page 3

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Editor

Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Jayson Forrest Tel: (02) 9422 2906 jayson.forrest@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: 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: Lynne Hughes Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply.

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Wayward trailing commissions

P

utting aside the increasingly open question of whether the Gillard Labor Government will remain in power long enough to oversee the implementation of its Future of Financial Advice (FOFA) legislation, the financial planning industry must accept that, grandfathered or not, trailing commissions are inappropriate.

Notwithstanding the seemingly buoyant demand for books of C and D clients, there exists a bipartisan acceptance in Canberra that passive income earned from clients who planners have not seen in years and with whom they have not seriously sought to make contact is no longer acceptable or sustainable.

What those who hold large books of C and D clients also need to understand is that, irrespective of grandfathering and the level of revenue they are collecting from trails, they are indulging in a game of everdiminishing returns.

If the industry superannuation funds are to follow their long-established pattern, then financial planners can expect an advertising campaign specifically aimed at encouraging C and D clients to examine their circumstances and switch off trailing commissions by obtaining “more appropriate” advice elsewhere.

2 — Money Management September 22, 2011 www.moneymanagement.com.au

What needs to be “understood about the Government’s approach to opt-in, is that it has always represented a proxy for the more difficult task of ending trailing commissions.

”

Financial planning business brokerage Radar Results last week reflected upon the fact the $11 opt-in quoted by the Assistant Treasurer, Bill Shorten, and derived from Industry Super Network-commissioned research undertaken by Rice Warner fell well short of the reality.

However, in doing so, Radar cited research revealing “that each of the 71 financial planning practices selling today contains, on average, 544 clients”. It added, “when you further analyse the figures, these practices can have up to five times more inactive clients than active”.

In other words, the Radar results research suggested that, on average, the financial planning practices it was seeking to sell had around 108 active clients, with the remainder being inactive.

This sort of data only strengthens the hand of the industry funds in prosecuting their campaign supporting onerous opt-in arrangements, because it can be extrapolated to suggest financial planners are really actively servicing only about one-fifth of their clients.

What needs to be understood about the Government’s approach to opt-in, is that it has always represented a proxy for the more difficult task of ending trailing commissions. Sadly, opt-in looks certain to impose an undue cost on many planners who have no great exposures to trails.

With the grandfathering provisions in place on trailing commissions and with the costs involved in contacting long-inactive clients being considerable, there is little incentive for planners with big books of trails to unduly exert themselves.

With this being the case, financial planners must expect their detractors will continue to attack them, irrespective of the broader reality.

– Mike Taylor

News Make super fund boards more transparent

Draft FOFA legislation ‘ridiculously prescriptive’

By Tim Stewart

Continued from page 1 structure of not-for-profit, for industry funds, has worked well,” Mason said.

“There’s been a couple of noticeable cases where there have been major problems on the board, and very publicly the regulator APRA had to step in,” he said. “There have been many other cases where APRA has very quietly stepped in and resolved a problem, but we haven’t seen the collapse of any industry funds.

“You would have to acknowledge I think overall that most of them, the vast majority, have been well managed and well run,” Mason said.

PI insurance needs to change Continued from page 1

“We have principle-based regulation that you have to comply with, so the uncertainty of that, and then we also have a very prescriptive regime and the inflexible ‘tick a box’ regime that comes with that,” Batten said.

The prescriptive nature of the regime would inevitably lead to higher costs for licensees as they were forced to implement procedures and train their planners to comply with the new rules.

“The good licensees will react by saying ‘okay, what do we need to do to manage this risk?’ And they will impose additional requirements, which will cause additional costs to be embedded in advice, which will make potentially scalable advice less available,” Batten said.

It appeared the current draft legislation would result in outcomes that the Government clearly didn’t intend, Batten added.

Christina Kalantzis market, if regulations were introduced that expanded requirements on planners for broader cover, it is possible the PI insurance market would not respond as they already provided broad cover options.

According to Treasury’s consultation paper on the review of compensation arrangements for consumers of financial services, planners relied heavily on PI insurance for dispute resolution.

A last resort compensation scheme funded by licensees was also recommended under the preliminary review, but Kalantzis is not convinced it is a step in the right direction.

“We are one of the most heavily regulated industries and have more compensation arrangements than anyone else who is in the provision of giving goods and services – I don’t know why we should be coming up with other avenues,” she said.

Sanders also said it was “too early” to implement a last resort scheme pending the Treasury’s review, but said affordable options for licensees would become available if regulations were improved.

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had indeed taken a step backward in providing cover to financial planners, particularly smaller dealerships.

“From our experience, smaller businesses tend to take more risks, while large groups will have a more conservative portfolio and provide multiple options to clients compared to four or five options,” he said A spokesperson from ASIC said regulatory guide 126 outlines the policy for administering PI insurance to licensees, and Minter Ellison’s Chern Tan believes underwriters are meeting that minimum standard already.

Kalantzis believes ASIC’s guide is “subjective” and “ambiguous”, and would like to see the regulatory body take into account the behaviour of research houses, auditors and manufacturers in the investment process.

“For instance, what we’re seeing is that claims being made by investors that are clearly product failures are being made under the guise of inappropriate advice, and that’s where planners get hit on those fees,” she said.

Despite the limited professional indemnity cover on offer, Kalantzis said PI insurance can still be obtained, albeit at a greater cost.

“I can’t get a small to medium-sized firm a price less than $10,000. About four years ago, we could get it for $5,000,” Kalantzis said.

Vero head of casualty Alex Green said while he does not see the tightening of PI insurance policies across the

THE Government’s opt-in rules amount to “third-party meddling in contract enforcement situations,” according to Minter Ellison partner, corporate, mergers and acquisitions, Chris Brown.

The big negative for planners in the Future of Financial Advice draft legislation is that the proposed opt-in rules are “ridiculously prescriptive”, said Brown.

“What you have is a requirement that the annual notice (this goes across annual fee disclosure plus renewal) say ‘these are the services I should have provided to you in the last year, and these are the services that I actually did provide to you in the last year’,” Brown said.

“The incursion of the Government into commercial affairs of adult Australians – who ought to know what their rights and obligations are – is beyond

the pale,” he added.

However, Brown conceded that the debate about opt-in was a battle that had already been fought and lost – unless the Independents attempted to amend the legislation.

The one positive from the draft legislation was that the industry appeared to have “dodged a bullet” with the grandfathering of trailing commissions, Brown said. Because the opt-in provisions will only apply to new clients after 1 July 2012, there is a strong possibility that the current generation of established planners will never operate in a predominately opt-in environment, he added.

When it comes to the ‘best interest’ obligations contained in the drafting, they represent the “worst of both worlds”, according to Minter Ellison partner, corporate, financial services, Richard Batten.

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News

Removing accountant exemption good for SMSFs

By Chris Kennedy IF the accountant’s exemption is removed when the second tranche of draft Future of Financial Advice (FOFA) legislation is released shortly, it will have positive implications for selfmanaged super fund (SMSF) trustees, according to SMSF Partners.

If the exemption is removed, it may improve access to advice

for SMSF members who rely on their accountant for advice on their SMSF, but don’t feel they need a planner for full investment advice, according to boutique SMSF focused dealer group SMSF Partners.

Many clients already have a trusted relationship with their accountant and removing the exemption would create certainty that a licensed accountant can advise on an SMSF in accor-

dance with compliance requirements, said Rebekah Blake, adviser alliances, SMSF Partners.

Removing the exemption would also provide certainty to accountants who will know they need to obtain the licence – if they haven’t already – to advise on SMSFs, she said.

Currently there is a grey area for accountants who give advice on SMSFs and removing the exemption would clear up their

obligations, and accountants would then need to decide whether to obtain the licence to become a specialist SMSF adviser or give away their existing advice work to focus on tax and compliance work, Blake said.

SMSF Partners chief executive David Mardell said members have comfort now knowing all accountants will be on a level playing field in terms of education and licensing.

Accountants that only want to be licensed to give advice will not find many options available in terms of larger dealer groups that retain a product distribution focus and may not fit with a fully fee for service remuneration model, he said. With the proposed sale of Count Financial to the Commonwealth Bank, independent dealer groups are few and far between, he said.

First State Super denies inappropriate arrangement

By Mike Taylor BIG NSW industry fund First State Super has denied newspaper reports alleging inappropriate arrangements around the provision of death and disability insurance to ambulance officers.

First State Super chief executive Michael Dwyer issued a statement in which he said the reports did not accurately reflect the facts, and that the insurance arrangements in question had been negotiated between the NSW Department of Health and the Health Services Union (HSU) in 2008 (retrospective to November 2006) as a condi-

tion of employment reflected in the ambulance officers’ award.

A repor t published in the Sydney Morning Herald yesterday referenced an allegedly uncompetitive and compulsory death and disability insurance scheme which it was claimed delivered $35 million to First State Super.

The repor t points out that HSU national secretary Michael Williamson was a director on the trustee board of First State Super at the time the insurance arrangement was negotiated and implemented.

In the statement issued today, First State Super said it had been requested by the

4 — Money Management September 22, 2011 www.moneymanagement.com.au

NSW Department of Health to facilitate the provision of the death and total and permanent disability components of the insurance arrangements because the vast majority of ambulance officers were members of First State Super.

He said a tender had been conducted to ensure the best pricing for the insurance premium was achieved.

The statement said First State Super did not make any profit from the insurance arrangements and that, as a result of the negotiated agreement, First State Super members’ account balances were not affected by the ambulance officers insurance.

Michael Dwyer

News

Govt warned on default fund monopoly

By Mike Taylor THE Federal Government runs the risk of entrenching a significant monopoly in the superannuation industry if it proceeds to implement its Stronger Super policy proposals without at the same time addressing default funds under modern awards.

That is one of the key claims to emerge from a round-table conducted this week by Money Man-

agement’s sister publication, Super Review, where most panellists agreed that the Assistant Treasurer, Bill Shorten, was taking a significant risk by pursuing the Stronger Super changes in the absence of addressing the default fund situation.

The industry has been expecting the minister to announce the Government’s position with respect to Stronger Super within days, but one of the Super Review round-table par-

ticipants – former Financial Services Council chief executive, Richard Gilbert – said to do so without addressing concerns around default funds risked “entrenching a massive monopoly in default superannuation”.

He said he believed the Government should have acted to put the question of default funds before the Productivity Commission sooner, because current time scales meant any changes might trail the introduc-

tion of Stronger Super by as much as two years.

However, Sunsuper chief investment officer David Hartley said opening up the default fund market needed to be accompanied by greater transparency around the fees that were being charged.

“If commercial operators are willing to operate on the same profit margin as industry funds then it’s probably fair enough,” he said.

Hartley said he was happy for

Richard Gilbert commercial funds to do it (provide default superannuation funds) – as long as there was absolute clarity on what they were taking out.

Manager churn impacts fund performance

By Milana Pokrajac PORTFOLIO manager departures and turnover are having a significant impact on the performance of Australian equity funds, morale and investor relationships, according to the Standard & Poors Fund Services (S&P) analysis.

The research house analysed its rated long-only Australian equity funds and found that managers with long tenure are associated with stronger and more persistent excess returns compared to short-tenured peers.

S&P analyst Justine Gorman said employee retention was a critical factor in the performance of the business, with the loss of a key employee potentially having a dramatic effect on a fund manager’s success.

“Businesses lose intellectual capacity and corporate knowledge when a portfolio manager leaves. If not managed carefully, the repercussions of manager turnover can adversely affect morale, investor relationships and the fund manager’s corporate brand,” Gorman said.

S&P has released its Musical Chairs report earlier this year, which found the three key manager departures in the last quarter of 2010 affected almost $10 billion in funds under management (FUM) invested.

There were 40 key staff departures for last year in total, affecting $55.7 billion in FUM, the researcher said.

S&P’s analysis also discussed why portfolio manager turnover in Australia has been so high, what effect departures have on investment teams and how some teams are structured to limit the effect of sudden departures. www.moneymanagement.com.au September 22, 2011 Money Management — 5

News

SPAA applauds draft ruling on SMSF borrowings

By Tim Stewart

Peter Burgess

A NEW self-managed superannuation fund (SMSF) draft ruling from the Australian Taxation Office (ATO) has relaxed the defin i t i o n o f w h a t c o n s t i t u te s a ‘ s i n g l e acquirable asset’ within the context of limited recourse borrowing arrangements (LRBAs).

The draft ruling was welcomed by the Self Managed Super Fund Professionals’ Association (SPAA), with SPAA national technical director Peter Burgess calling it a “commonsense approach to the interpreta-

tion of the rules” that would allow SMSF trustees and financial advisers to plan with confidence.

Since 7 July 2010, borrowed funds under a LRBA could only be used to obtain a single acquirable asset (such as a property) under a single title. The draft ruling SMSFR 2011/D1 recognises that a property that exists on multiple titles can still satisfy the definition of a single acquirable asset.

The ATO also indicated it will allow improvements to assets, as long as the changes are not funded by borrowing and do no alter the ‘fundamental character’ of the asset. For

example, an asset that is destroyed during a flood or fire could be completely rebuilt with insurance money as long as it retains the original asset’s fundamental character.

“The single acquirable asset rules and the severe restrictions on asset improvements introduced last year had far reaching implications on the way assets could be acquired and the number of borrowing arrangements that needed to be in place,” said Burgess “This made it very difficult for SMSF trustees and advisers to use the LRBA rules to invest in certain assets to build for their retirement,” he added.

ACCC examines Count acquisition

Faster SOAs thanks to technology

By Mike Taylor

TECHNOLOGY is cutting the time taken to produce single issue statements of advice (SOA) from hours to just minutes, accordi n g to P rov i s i o Te c h n o l o g i e s (Provisio).

A recent technology report by Investments Trends found the average time for financial planners to produce a SOA was six hours and 42 minutes, but Provisio director Cameron O’Sullivan said there was no need to afford such a significant amount of time after a fact-find has already been conducted.

“The superannuation funds are an interesting case study here, and it’s important to remember that most super funds are using the same defined scope framework that retail advisors use,” he said.

THE competition regulator, the Australian Competition and Consumer Commission (ACCC), has given interested parties until Monday 26 September to comment on the Commonwealth Bank’s intended acquisition of accountancy-based dealer group, Count Financial Limited.

The regulator opened the way for submissions two we e k s a g o, a n d i s w e i g h i n g t h e i m p a c t o f t h e Commonwealth’s acquisition on the broader competitive environment existing in the financial planning and wealth management markets.

While the acquisition is expected to raise a few concerns for the ACCC, the regulator’s last examination of the financial services industry saw it veto the National Australia Bank’s bid for AXA Asia Pacific based on the erosion of competition with respect to platforms.

No similar concerns are expected with respect to the Count acquisition because of the number of similarly sized dealer groups operating in the market.

By Andrew Tsanadis

Australian insurance industry handles natural disasters well – Aon Global ‘B L AC K s w a n’ c a t a s t r o p h e s a re occurring more frequently around the globe, but the Australian insurance industry has coped well, a c c o rd i n g t o Ao n G l o b a l R i s k Consulting (Aon Global).

Increasingly, events which are commonly considered high-impact and difficult to predict, are now considered more common than ever before, said Aon Global chief executive officer Stephen Cross.

Speaking at Aon Global’s Advanced Risk Finance Conference in Melbourne yesterday, Aon Risk Solutions (Aon) national general manager, corporate risk services Paul Venning said the high number of natural disasters in Australia and New Zealand over such a short space of time had forced global insurers to consider the serious natural catastrophe exposures our region presents.

“There is a perception that some of those perils, in particular the

New Zealand ear thquakes, have b e e n u n d e r p r i c e d i n t h e p a s t ,” Venning said.

“We have a strong prudential regime around capital adequacy to ensure that insurance companies have the ability to pay claim, so I think we’re in very good shape,” he said.

Despite the reduction in capacity, the Australian insurance market has managed to cope well with these disasters thanks to a strong mixture of local and global capital across the industry. The concentration of risk exposure combined with a concentration on catastrophes has also presented global carriers with the opportunity to invest in Australian insurance markets, Cross said.

Cross also said there had been an increase in companies taking a more holistic view of risk as clients increase their awareness of catastrophes and the “interdependency” of such risks.

6 — Money Management September 22, 2011 www.moneymanagement.com.au

“Under defined scope, super funds are able to produce SOAs within minutes of completing the fact-find by using technology available to any planner.”

O’Sullivan said a key development in planning software was the ability to complete a SOA w h i l e i n c o nve r s a t i o n w i t h a client. By allowing advisers to engage the client via a SOA template from the beginning of the advice process, a range of different scenarios can be added and removed based on the client’s needs, reducing the need to manually edit statements later on, he said.

“Planners shouldn’t be in a situation where only higher value clients are profitable, but if SOAs take six plus hours to produce they don’t have much choice.

“But the technology is available

Cameron O’Sullivan to d r a m a t i c a l l y r e d u c e S OA demands and therefore dramatically lower the cost of advice per client,” O’Sullivan said.

ASIC announces second industry risk survey THE Australian Securities and Investments Commission (ASIC) has announced it will use the results of a controversial survey of the 20 largest financial services licensees conducted in 2010 to inform a further questionnaire targeting the next 30 largest licensees.

The initial survey of the largest 20 financial services licensees was conducted in 2010, and is the basis of a report, released today, identifying policy and regulatory issues surrounding the provision of financial product advice to retail clients.

ASIC chairman Greg Medcraf t stressed the importance risk-based surveillance in improving standards in the industry and “holding gatekeepers

Greg Medcraft to account”.

“The analysis of the information gathered [in 2010] has informed ASIC’s Risk-Based Surveillance Program and enabled us to identify which organisations to monitor and what industry practices to priori-

tise,” Medcraft said.

The resulting repor t found that licensees must manage conflicts of interest in licensee business models; focus on adviser education; comply with their stated procedures and weed out ‘bad apples; educate clients about risk and return to manage their expectations; and make sure that complaints and compensation are handled well.

The follow-up survey of the next 30 largest licensees will consist of a shortened and more targeted questionnaire that is informed by the first questionnaire. The second questionnaire will be voluntary, and is expected to take place by the end of 2011.

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News

Software developers focus on simple advice

By Milana Pokrajac

Recep Peker

MORE financial planners intend using technology to deliver simple advice, according to new research released by Investment Trends.

The research found that the technology surrounding the delivery of simple advice has been the focus of both financial planners and software developers in the last 12 to 18 months.

The Investment Trends 2011 Planner Technology Report found 42 per cent of advisers plan to provide simple advice more often as a result of the proposed Future of Financial Advice (FOFA) reforms, which senior analyst

Recep Peker said puts emphasis on software efficiency in this area.

Xplan users are currently the quickest in providing single-issue advice, while Midwinter achieved particularly strong ratings in this area, according to the report.

Another reform-driven demand coming from planners is creating more efficiency around the production of comprehensive statements of advice (SOAs).

Peker said the average time to produce an SOA remained steady at six hours and 42 minutes, with the obstacles coming mostly from the compliance end.

“Technology providers have been able to help planners in dramatically reducing this

time over the years; however, the average time to produce 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,” he said.

“The end to end process of producing a full SOA takes a whole day,” Peker added.

In terms of marketshare, IRESS-owned Xplan and Visiplan continue to lead, with 42 per cent of surveyed planners using either product.

COIN is used by 23 per cent of planners, while Midwinter (8 per cent) and MLCowned AdviserCentral (4 per cent) also remained in the top five.

Opt-in amounts to double standards: CSSA

By Chris Kennedy INTRODUCING compulsory opt-in requ irements fo r advice while also requiring a collective fee to be paid by super fund members for personal financial advice creates a double standard, according to the Corporate Super Specialist Alliance (CSSA).

The Government intends to make it possible for super fund members to access personal financial advice through a collective fee, by introducing a compulsory intra-fund advice fee into both MySuper and other corporate super funds, while also requiring other advice clients to have to opt in every

Douglas Latto two years, said CSSA president Douglas Latto.

“This is possibly the most patent demonstration of double standards we have

seen to date in the Future of Financial Advice debate,” Latto said.

“Personal financial advice is exactly that, highly personal. Why should all members of a super fund subsidise the personal financial plans of a few?”

A current class order relief allowed super funds to advise on simple matters such as contributions and insurance within super, but industr y funds want to expand that under scaled advice provisions to include things like transition to retirement and Centrelink advice, which completely flies in the face of the opt-in argument, Latto said.

A collective fee would not

be tailored to the needs of individual employers and employees but would be determined by fund trustees at a standard level for all members, Latto said.

“The Government, in its paternalistic fashion, has again decided what is good for you: in their view, one size fits all,” he said.

Latto said those seeking personal advice should pay for that advice individually.

“It is hard to see a better world for super fund members in any proposal that has them subsidising the personal financial plans of others and which legitimises the Government’s double standards and conflicted principles,” he said.

Bank guarantee still a magnet in uncertain times THE Government’s bank guarantee appears to be still acting as a magnet for investors in uncertain times.

The latest data released by Plan for Life covering the June quarter revealed that gross inflows for the year to June were down by over a quarter (26.1 per cent) on the previous twelve months to $155.6 billion.

It said this was due to a contraction in Cash Trust business with money instead flowing into bank accounts attracted by the government guarantee.

It said retail managed funds declined 1.5 per cent during the June quarter to $510.7 billion but had remained in the black over the 12 month period, finishing up slightly by 2.5 per cent something

which Plan for Life represented an achievement given the circumstances of continuing economic uncertainty.

The data revealed that Commonwealth/Colonial had led the way with inflows increasing 6.2 per cent, followed

by BT (5.4 per cent), AMP (5.4 per cent) and National Australia/MLC with 5.2 per cent.

Financial sector employment sentiment holding steady

By Tim Stewart HIRING intentions in the finance, insurance and real estate sectors have held their ground despite a national trend downwards, according to the latest Manpower Employment Outlook survey.

The net employment outlook for the finance, insurance and real estate sector stood at +27 per cent, as opposed

to +16 per cent for the national net employment outlook. Thirty-two per cent of companies in the sector were looking to increase their hiring, down from 37 per cent in the last quarter.

Employers in the sector were adopting a ‘wait and see’ approach, according to ManpowerGroup Australia managing director Lincoln Crawley. “ Re n ewe d g l o b a l e c o -

nomic uncertainty is never a good sign for this sector, but employers aren’t panicking. Instead of the deep and impulsive workforce cuts we saw last time the global outlook looked grim, employers aren’t making any sudden movements. They may not be increasing hiring, but m o s t i mp o r t a n t l y, t h ey haven’t decreased it,” Crawley said.

8 — Money Management September 22, 2011 www.moneymanagement.com.au

He added that Australia was playing “piggy in the middle” between the strong sentiment in China (where the outlook is +20 per cent) and the weak demand in the US (where the outlook it +7 per cent).

“The Asia Pacific region, including Australia, has a much more positive hiring outlook than most other places in the world,” Crawley said.

GST increase placed on agenda

By Mike Taylor AUSTRALIANS should not be concerned about an increase in the Good and Services Tax, according to key accounting body, CPA Australia, which has produced research suggesting it would result in the abolition of inefficient taxes and therefore boost productivity.

CPA Australia has released the findings of research conducted by KPMG Econtech examining the overall economic effect should the GST be increased by 12.5, 15 and 20 per cent respectively and how this might then fund the reduction or abolition of inefficient taxes.

It named some of those inefficient taxes as being insurance taxes, motor vehicle taxes, commercial conveyancing duty and payroll tax.

CPA Australia said the results showed that increases in the rate of 15 to 20 per cent respectively would deliver the greatest productivity growth with standard of living increases.

The research has been produced by CPA Australia has part of its positioning ahead of the Government’s forthcoming tax forum.

CPA Australia chief executive Alex Malley said the research highlighted the importance of reaching a broad consensus at the tax forum on the need to remove a range of inefficient taxes funded by other revenue sources.

“Our research helps demystify concerns that an increase in GST would hurt Australians,” he said.

“If the forum is to set us on the path to significant tax reform, then we must look at how we can eliminate many of the inefficient taxes Australian businesses face and this includes a serious discussion on the GST,” Malley said.

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News

Delay FOFA implementation says AFA

By Mike Taylor THE only winners from the Government’s Future of Financial Advice (FOFA) changes will be industry funds and the big end of town, according to Association of Financial Advisers (AFA) chief executive, Richard Klipin.

At the same time, the AFA has called on the Government to delay the implementation of FOFA beyond 1 July, next year.

Brad Fox

Klipin has pointed to the proposed FOFA regime as undermining the robust, healthy and vibrant independent sector, with greater consolidation spelling fewer choices for Australian consumers.

“The Government’s agenda is now on show for all to see, and the Government needs to provide evidence and modelling to back up its claims that FOFA will provide a growth strategy for the industry,” he said.

Klipin said while the changes were purportedly designed to protect consumers, the reality was the only winners would be industry funds and the big end of town.

AFA president Brad Fox also pointed to problems flowing from the prolonged period of regulatory uncertainty surrounding the FOFA changes and manner in which they were negatively impacting business flows, practice profitability and

longer-term planning.

Fox also strongly criticised the Government’s decision to release the draft FOA legislation in two stages, saying the Government had delivered its first tranche late, but had shown no signs of moving implementation beyond 1 July, next year.

“If advisers are expected to make significant changes to the way they operate, the Government must defer the implementation date,” he said.

Govt accused of Fees not top of mind for raiding Future Fund financial planning clients THE Federal Opposition has accused the Government of preparing to raid the Future Fund to help its prospects at the next election.

The opposition spokesman on Financial Services, Senator Mathias Cormann, has drawn on answers to questions during Senate Estimates to point to what he describes as a “secret plan” to raid the Future Fund.

He said the answers, provided by the head of the Department of Finance, David Tune, reference the “expected sale of assets from the Future Fund”.

Cormann described the reference to the expected asset sale as “extraordinary” in circumstances where the Government is not supposed to withdraw funds from the Future Fund.

“The Future Fund was set up by the Coalition back in 2005 to fully fund the Government’s unfunded public service superannuation liability by 2020,” he said. “It is supposed to continue to grow until the unfunded superannuation liability is completely under control.”

Cormann said under rules governing the Future Fund, withdrawals could only happen once the superannuation liability, as determined by an independent actuary, had been fully offset on or after 1 July, 2020.

The senator claimed the Government had been very secretive about its plans to withdraw funds from the

By Milana Pokrajac

Mathias Cormann Future Fund, and its decision to then allocate the revenue against its Budget bottom line in 2012/13.

He said the Government needed to come clean and explain its intentions.

“If the plan really is to return the funds to the Future Fund at a later date, the Government must confirm when that is expected to be and where that information is contained in the Budget papers,” Cormann said.

He claimed the Government had reached “a new low in fiscal recklessness”, combined “with a complete lack of openness and transparency about significant budget matters”.

RETAIL clients do not give too much thought to the remuneration model their financial planner operates on, but fee for service provides transparency and value, according to AMP financial planning head Steve Helmich.

His comments came after AMP announced Helmich would address US planners at the Financial Planning Association conference in California later this week, where he will take part in a discussion panel called “Life Without Commission – Life Without Conflict?”.

While the commission-based model has been banned in the United Kingdom, Australia (from 1 July 2012), India, Netherlands and other countries, this is not the case with the financial planning industry in the United States and Canada.

Helmich said he would outline most important factors in transitioning financial planning practices to the fee for service remuneration model.

Many US planners do operate on a fee-forservice remuneration model, but most are still entrenched in the old commission world, Helmich said.

“For those who are in the commission world, the advice I’d give them is that clients actually don’t care; however, where there is transparency there is value, and the fee-based world is a lot better in that space,” he added.

“This is important for any potential client – probably not the client you’re dealing with now, but it’s the client you might want to attract or

Steve Helmich deal with in the future,” Helmich said.

However, Helmich will not argue that the removal of commissions would rid financial planning practices of all conflicts – transparency being the future of financial planning.

“You can’t have a world without conflict; we’ve got to manage them properly and make sure consumers really understand what they’re getting for what they pay,” he said.

AMP was one of the first financial planning institutions in Australia to completely ban the commissions-based remuneration model for its planners, having introduced fee-for-service on 1 July, 2010.

He will take part in the discussion panel on Friday 15 September, alongside UK certified financial planner Robert Reid.

Boutique planners do not fear opt-in

By Chris Kennedy THE possibility of having to comply with opt-in requirements has emerged as a minor issue for members of the Boutique Financial Planning Principal’s Group (BFPPG) attending the group’s annual conference in Brisbane.

In two separate sessions on ‘hot topics’ within the industry up for discussion, opt-in was not

mentioned once, with the most contentious and widely discussed issues being risk insurance commissions, and the best way to charge for advice around risk; as well as the ideal way to charge for general advice.

Other topics that came up for discussion included exchange traded funds and the best way to use them within a portfolio, if at all; onerous compliance require-

ments and the best way to manage those; limited managed discretionary accounts; and IT systems and solutions.

Individual attitudes towards opt-in within the group ranged from those who supported the measure to those who strongly opposed it. But most seemed resigned to the measure and many members stated that they saw every client at least once per

10 — Money Management September 22, 2011 www.moneymanagement.com.au

year and did not feel it would create a risk to their business or a substantial extra cost.

Those who supported the measure said opt-in would only have a large negative effect on planners with inactive clients, and those who opposed it did so for reasons including concerns over the extra cost and because they did not think it was the Government’s place to mandate

how a financial planning contract should be conducted.

BFPPG president Claude Santucci said while he was philosophically opposed to the measure, he did not believe planners in boutique Australian Financial Services Licences would be as negatively affected as some other business models, particularly those with large numbers of inactive clients.

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SMSF Weekly ATO scrutinising re-reporting SMSF trusteeships

By Mike Taylor THE Australian Taxation Office (ATO) has signalled it will be taking a close look at the rules around life superannuation capital gains tax and excess contributions tax.

The ATO’s Assistant Commissioner, superannuation, Stuart Forsyth told the Small Independent Super Funds Association forum there was concern that in some cases the lifetime super capital gains tax cap was being used incorrectly or inappropriately to exclude amounts from the nonconcessional tax.

Stuart Forsyth “This is an area that we will be looking

at closely,” he said.

Forsyth told the forum that breaches of the excess contributions tax rules would continue to be a priority for the ATO. “We’ve identified and taken action on a number of cases of inappropriate rereporting of contributions information by self-managed superannuation funds (SMSFs) that have led to a reduction of an individual’s ECT liability,” he said.

“This is an area that we’ll continue to focus on this year,” Forsyth said.

The Assistant Commissioner said the ATO planned to undertake 100 reviews of SMSF re-reporting in the current financial year.

ATO to adopt graduated approach THE Australian Taxation Office (ATO) has signalled it will be adopting a graduated approach to handling self-managed superannuation fund (SMSF) breaches under the regime which flows from the Government’s Stronger Super regime.

ATO assistant commissioner Stuart Forsyth acknowledged the new regulatory powers would help the ATO to deal with non-compliance, but indicated it would not be adopting an unnecessarily draconian approach.

“We’re really looking to

use these new powers in a graduated way so that we’re still focused on helping people to comply, but we will have more flexibility and ability to deal with situations where circumstances don’t warrant disqualifying a trustee or making a fund

non-complying but where some sanction is still appropriate,” he said.

Forsyth pointed to the range of problems still common with respect to SMSF breaches and the measures already implemented aimed at overcoming those problems.

SMSFs dominate APRA data THE latest Australian Prudential Regulation Authority (APRA) data has confirmed the dominance of self-managed superannuation funds (SMSFs) in ter ms of the proportion of assets held by a single sector of the industry.

The APRA data revealed that

SMSFs accounted for 31.2 per cent of assets, followed by retail funds with 27.5 per cent and industry funds which accounted for 18.6 per cent of total assets.

The June quarter data found that public sector funds accounte d f o r 1 5 . 1 p e r c e n t o f a s s e t s,

while corporate funds continued their retreat to account for just 4.5 per cent.

The data also confirmed consumer preference for SMSFs over small APRA funds, revealing that the latter accounted for just 0.1 per cent of total assets.

logical for planners

By Damon Taylor FOR a sector so reliant on advice and administration, one of the forgotten segments of the selfmanaged super fund market are the financial planners and accountants who are themselves SMSF trustees.

But WLM Financial director Matthew Walker believes SMSF trusteeship represents a logical extension of the financial planning profession.

“You’ll find that people who understand and appreciate the complexities of self-managed super funds and are comfortable operating in that s p a c e w i l l b e d r aw n towards it,” he said. “And it will typically be more of a commercial approach, ie, do the economics make sense and what am I trying to invest into?

“That’s as opposed to the control element or the status symbol of having your own fund; they’re just not going to get caught up in all of that hype.”

Walker said the same reasons anyone had for starting up a self-managed super fund applied.

“So cost efficiency and selection of specific investments, particularly

Matthew Walker around investments that aren’t mainstream, are probably head of the list,” he said. “For example, investing in business real property to help support the running of your own business, collectibles, priva te e qu i t y, u n l i s te d investments, that sort of stuff.

“One of the biggest problems with self-managed super funds is the complexity and the compliance,” Walker continued. “So if people understand both of those and are very comfortable with it, then that just makes it a day-to-day consideration, and an option that they’re happy to open the door on.”

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12 — Money Management September 22, 2011 www.moneymanagement.com.au

InFocus ADVICE SNAPSHOT Percentage of assets held by different types of super funds

On the road to somewhere Despite some media reports to the contrary, Mike Taylor writes that the top 20 licensees in the financial planning industry emerged in reasonable shape from ASIC’s review of financial advice industry practice.

A

little over a year ago the Australian Securities and Investments Commission (ASIC) created a minor stir among the 20 largest financial planning dealer groups by imposing on them an extensive and time-consuming questionnaire.

The questionnaire was so extensive and the imposition on the dealer groups considered so time-consuming that ASIC’s actions were later the subject of interrogation by the Federal Opposition during Senate Estimates Committee hearings.

ASIC (as any good regulator should) drew a number of important conclusions from the questionnaire responses, but if it had decided to share some of the parameters of its research with officials within the Department of Treasury they might have found it useful in making a sound judgement on the cost impacts of the two-year ‘opt-in’.

What the ASIC research found was the top 20 licensees covered just over 13,000 individual advisers – 66 per cent of whom were authorised representatives, with the remainder being employee representatives of licensees.

The ASIC data also revealed the top 20 licensees combined had a total of 4.6 million clients, of which almost 1.5 million were identified as active.

It said the estimated average size of a client’s assets was around $131,000.

So what might the Treasury officials dealing with the Future of Financial Advice (FOFA) changes have gleaned from this information? Well they may have started from the premise that opt-in represents a formidable task in circumstances where, overall, the average planner in a large dealer group has only one-fifth of his/her clients who can be deemed active.

What they might also have gleaned from the information is what every financial planner already knows – finding and keeping high net worth clients is no easy task when the average client’s assets stand at around $131,000.

Despite some reporting to the contrary, the ASIC questionnaire tended to assess the

“

We note that disclosing conflicts of interest may not be sufficient and that licensees should also consider how they actively avoid conflicts of interest.

”

financial planning industry as one which was improving and overcoming many of the issues which had caused it reputational damage in the past.

It made clear, for the most part, that the large dealer groups were fulfilling their obligations with respect to planner education, approved product lists and advice audits.

While the ASIC analysis steered well clear of any self-criticism, many of its findings with respect to breach reporting and common standards and interpretations suggested many of the problems perceived to exist in the financial planning industry were owed to its own approach.

However, the result also reflected the fact the questionnaire was primarily focused on the situation in 2008/09, and therefore highlighted continuing deficiencies with respect to adviser remuneration and other issues subsequently addressed by way of the Parliamentary Joint Committee of Inquiry into the financial planning industry (Ripoll Inquiry) and the subsequent Future of Financial Advice legislative proposals.

However, the ASIC questionnaire succeeded in confirming other research published this year, including in Money Management, that sales continues to be a focal point with respect to adviser recruitment and remuneration.

The ASIC analysis stated: “The majority of

licensees filling out the questionnaire indicated that they remunerated their advisers based on the volume of financial products sold. This remuneration included ongoing commissions, up-front commissions and volume rebates.

In fact, it is this element of the regulator’s research which should prove most interesting for those seeking to impose new business models and remuneration regimes on the industry, because it clearly revealed the revenue sources which prevailed in 2008 and 2009.

It showed 53 per cent of advisers were being paid by way of ongoing commissions, with 28 per cent being paid by way of up-front commissions and 6 per cent being the beneficiaries of volume rebates.

ASIC concluded the top three revenue streams for licensees were linked to volume sales paid by fund mangers or product providers.

ASIC said while the proposed FOFA changes might radically change the remuneration models, it expected “all licensees to carefully manage the conflicts caused by such remuneration structures”.

It added, “We note that disclosing conflicts of interest may not be sufficient and that licensees should also consider how they actively avoid conflicts of interest”.

The ASIC analysis makes much of the regulator’s view that financial planning dealer groups represent gatekeepers for the industry and suggests this extends to recruitment of new advisers.

“Given the problems that a poor adviser can bring to a licensee, it is important that they are effectively screened and their background checked,” the analysis said.

However, while noting some inconsistency in the manner in which the top licensees undertook reference checking of new advisers, the ASIC analysis said nearly all the top 20 licensees conducted police checks.

ASIC suggested there needed to be a uniform approach adopted across the industry, and said it was “seeking to do this through our current review of the ‘Bad Apples’ project, which was originally carried out in 2007”.

31.2% 27.5% 18.5% 27.5% 4.5% 0.1%

SMSFs

retail funds industry funds public sector funds

corporate funds small APRA funds

Source: Australian Prudential Regulation Authority (APRA)

What’s on

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

Finsia Financial Services Conference 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

Property Investment Research (PIR) Property Industry Funds Forum 16-18 October 2011 Hyatt Regency Coolum, Sunshine Coast, Queensland www.pir.com.au

IPA Seminar: Financial Analysis 6 October 2011 Level 6, 555 Lonsdale Street, Melbourne www.publicaccountants.org.au/ cpe-events

www.moneymanagement.com.au September 22, 2011 Money Management — 13

Listed Property

The listed property shows new blossom

Everything old is new. It seems that the listed property sector is returning to its previous model and slowly becoming a defensive asset again. This has resulted in more positive adviser and investor attitude towards listed property, which is not to say that all bad apples have been weeded out of the sector. Benjamin Levy reports.

LISTED property is going back to basics. The 2007 investment approach of explosive growth, unsustainably high dividends, and excessive gearing levels that was shattered by the financial crisis has given way to what the sector was meant to be – a conservative, defensive growth asset offering steady, inflation protected returns.

As the sector shifts focus, it is beginning to once again attract the attention of financial planners looking for a steady income stream for retired clients and a viable alternative to the shaky performance of domestic equities.

But choosing what to invest in needs to be a careful exercise. Listed property groups with ongoing debt problems still exist and can yet prove dangerous to

investors, while others are too tied to the market to provide alternative returns for portfolios. The issue of excessive concentration in the domestic market continues to dog investors, while currency volatility in the Australian dollar threatens overseas income distributions.

In a sector where the research houses seem divided on where to place investors’ funds and cannot offer a clear approach, advisers need to carefully consider where the best opportunities can be found.

Back to basics The upheaval of the global financial crisis (GFC), which forced listed property funds to slash their debt, cut high gearing levels and lower high dividends,

14 — Money Management September 22, 2011 www.moneymanagement.com.au

“

Listed property this year is down actually about nine per cent, [and] a fair bit of that is equity market volatility even though listed property trusts have reduced their volatility compared to the broader equity market,” McGrath says.

– Andrew McGrath

”

has sparked a return to conservatism in the listed property sector.

Gearing levels in property trusts, which were once as high as 40 per cent, have been reduced to a sector-weighted average of 28 per cent. Exposure to overseas assets has been reduced, and sources of funding have been diversified to cover bonds, US capital markets and the banks.

Property trusts are moving back to their core business of managing domestic property, according to co-director of Reliance Investment Management Andrew McGrath. Reliance is the fund manager of Charter Hall Property Securities Fund.

“The sector is back to its basics, back to being a defensive asset class, and that

Listed Property

“

We recently had a new group come in and invest with us in our latest fund, and they spent six months researching us as a manager as well as researching the actual product.

- Jason Huljich

”

will gradually be recognised over time as trusts deliver on what they’ve said,” McGrath says.

Defensive trusts are announcing four to six per cent earnings growth for next year. Despite still-visible GFC scars, the current positive reporting season should draw investors back to the listed property sector.

Research house Standard and Poor’s (S&P) most recent listed property review found the domestic sector in much better health thanks to the detoxing effect of the financial crisis.

“After going on a drastic debt diet, undertaking sizable equity raising and reverting to ‘back to basics’ strategies over the past few years, most of the [AsiaPacific] region’s Real Estate Investment Trusts (REITs) emerged from the financial and economic crises with stronger balance sheets and improved r isk profiles,” the report said.

The GFC also ser ved to get rid of underperforming property trusts that were badly structured and debt-ridden, leaving up to five large, clean, well structured property groups to choose from,

and the dealer groups are taking notice. ipac is using the listed property sector to provide a real income stream for its retired investors, according to ipac chief investment officer Jeff Rogers.

The amount of leverage which inundated the listed property sector pre-GFC prevented dealer groups from using the sector to provide an income stream for their clients.

However, large scale recapitalisation and equity raisings in the past few years has reduced the amount of leverage and re-established the attributes of real underlying property and rental schemes, allowing dealer groups like ipac a second look.

“It’s a reasonably high yield, sustainable in terms of good rental streams, but an income stream that one would expect to rise at least with inflation, if not a little bit faster over time,” Rogers says.

The retail sector of Australia’s economy is looking weak. The Reserve Bank has kept interest rates on hold since late last year as consumers refused to spend, and expectations that the Reserve Bank will drop its cash rate to stimulate the economy should fuel more investor demand for the defen-

sive exposure listed property now offers.

Some of the banks have already reduced their term deposit rates.

Fund managers have already started benefiting from increased dealer group interest in listed property as a result.

AMP Capital was recently placed on Count Financial’s approved product list.

Dealer groups connected to National Australia Bank and Westpac have also started adding property options to their product lists.

“In the last 18 months to two years, there was a lot of aversion to risk, a lot of people moving into just cash, which was pretty safe, but as you know you don’t get any growth in cash, just interest,” AMP Capital head of retail distribution Ben Harrop noted recently.

However, the confluence of factors leading to a more conservative investment strategy and playing to expectations of a ‘back to basics’ approach are also leading to projections of low growth in the next few years.

There are less high risk offshore investments, less development profit being earned, and fewer non-traditional retail

office returns with volatile income.

While it’s a perfect mix for producing income, retail investors hoping for the same “shoot the lights out” result that they experienced before the financial crisis will be disappointed.

Retail investors have some way to catch up on funds under management anyway.

Institutional investors placed $5 billion in new inflows into the sector last year.

Market volatility Market volatility is driving some financial planners to invest more in listed property than they usually would.

“We’re increasing our appetite for real assets – we reckon they represent good value over equities, especially for our more conser vative investors,” says Duncan Essery, financial planner at RI Advice in Surry Hills, NSW. RI’s asset sector includes global and domestic real estate investment trusts, as well as infrastructure. Strategically, their exposure shifts between 5 and 20 per cent and their exposure is currently at 10-14 per cent.

Importantly, Australian REITs are currently less volatile than growth assets such as equities, but with inflation-protected yields of 6 to 7 per cent. That allows Essery to treat them as a growth asset.

“If you get a greater return above inflation with half the volatility of the market, that’s a good thing,” Essery says.

However, some fund managers are concerned that listed property is too correlated with the share markets.

Listed property has been going up and down with the share market for the last six to nine months, and dealer groups and asset allocators are beginning to place their AREIT exposure into equity exposure instead of property as a result, according to Centuria Property funds chief executive Jason Huljich.

Many of those dealer groups, which include the banks and large institutions, are moving into direct property for their property exposure as a consequence.

However, while the whole sector displays unusual volatility in its daily capital price, it may be a reflection of unreasonable fears that listed property may once again become as volatile as it did during the financial crisis.

That fear, which some have branded as backward-looking, also fails to take into account the internal structure of many property trusts and the steps they have taken to recapitalise and fix their balance sheets.

“Because they’ve recapitalised and because they are focused on rental schemes, even though their price can be volatile in the short-term, I’d actually say that’s not a concern if you’re focusing on the income stream, provided that the income stream is sustainable,” Rogers says.

Reliance Investment is expecting retail investors to place more funds than usual in the REIT sector.

McGrath admits that there is some downside in the correlation between listed property and the share market, but still expects a lot of interest in listed REITs as deposit rates reduce.

“Listed property this year is down Continued on page 16

www.moneymanagement.com.au September 22, 2011 Money Management — 15

Listed Property

Continued from page 15 actually about nine per cent, [and] a fair bit of that is equity market volatility even though listed proper ty tr usts have reduced their volatility compared to the broader equity market,” McGrath says.

“In a low growth environment – and we’re expecting the next couple of years to be fairly low growth – REITs should perform relatively well, so in this situation you’d probably have more than you normally would in a REIT portfolio,” McGrath says.

However, direct property will probably end up outperforming this year compared to the high volatility listed sector, because the valuations of direct property don’t move around as much.

Portfolio allocation Dealer groups need to be selective before investing in listed property. Just because the financial crisis knocked out several property trusts and taught a few harsh lessons doesn’t mean that the remaining ones are as good as new.

The listed property sector is currently split into three types of trusts. The most dangerous for investors are “the walking dead”, as Rogers colourfully labels them, with residual leverage and debt problems.

Barely surviving through the GFC, they are likely to stagger on until debt holders or the banks decide to call in their loans and shut them down, and both advisers and property trust managers should avoid them.

The second class are more traditional property structures that are closer to what the sector looked like ten years ago.

They focus on yield and income streams and should be used for income investors. The third class are much more closely correlated to the share market, have similar characteristics to equities, and will go up and down with the share market.

Dealer groups are performing significantly more due diligence on the sector these days to work out which is which.

“We recently had a new group come in and invest with us in our latest fund, and they spent six months researching us as a manager as well as researching the actual product,” Huljich says.

It’s a sign of advisers’ concerns that they are being as careful as that even when a reduced field of competitors has made it easier to pick out the winners.

“You have some pretty high quality groups left in this space, so now it’s a lot easier for these planning groups to identify the quality managers and who they should be investing with,” says Huljich.

Portfolio allocation becomes trickier when deciding over global REITs versus AREITs. The research houses and fund managers seem to be of two minds on the outlook for listed property, making it difficult to know which path to take.

ING Investment Management has anticipated a positive year for global listed property despite the debt crisis and Europe. Infrastructure spending on the few REIT properties in Japan damaged by the natural disasters there will boost economic strength in the Asia-Pacific region more generally, while quarterly returns of more than 8 per cent in the United States offers opportunities in another region, the fund manager said recently.

Standard and Poor’s weren’t nearly so positive, warning that the performance of most overseas funds is still constrained by global economic events despite small improvements. Only two global funds were upgraded out of 21 rated by the research house.

Morningstar would seem to be quite bullish towards domestic REITs at the moment, recently upgrading six of their 18 rated investment strategies. Most fund managers believe AREITs now possess attractive valuations, the researcher said.

Morningstar cited improved fundamentals and conservative investment positions across the sector for their positive performance.

That support comes with a caveat, however: Morningstar suggested only a

16 — Money Management September 22, 2011 www.moneymanagement.com.au

I think sometimes people “forget that ultimately global REITs does not deliver what people would expect from a domestic REITs portfolio.

”

- David Curtis

Global real estate investment trusts did not suffer as much as their domestic counterparts during the GFC and recent capital raisings, reconstructed balance sheets and improving fundamentals meant that payment constraints were unwinding, the researcher noted in another report.

Co-director of Reliance Investment David Curtis says both global and domestic REITs are needed in a property portfolio.

“I think sometimes people forget that ultimately global REITs does not deliver what people would expect from a domestic REITs portfolio,” Curtis says.

The two sub-sectors offer their very different risk and return profiles, Curtis says.

Global REITs have been very popular among financial planners and investors in the last couple of years, but with the amount of money that has been poured into them, valuations in that sector have been pushed to unattractive levels, such that domestic REITs are becoming more popular.

Essery’s exposure to domestic REITs has been minimal in the past 12 months and they are just now shifting focus away from global REITs. “Twelve months ago we were quite bullish on the global REITs sector, and that was a good time to move into that, so what you saw there 12 months ago is probably what you’re seeing now in Australia,” Essery says.

Domestic REITs with quality property and clean business models are trading at massive discounts to net tangible assets, and running at yields of 6 to 7 per cent, making them attractive for Essery’s clients.

“We think it’s really good exposure for our clients to be getting into,” Essery says.

Exposure to global REITs has dropped from 40 per cent to 25 per cent recently.

Tossing up between currency and diversification

minor allocation role of five per cent for dedicated AREIT exposure in a portfolio.

Only one month earlier Morningstar seemed to go the other way, noting that global listed strategies were likely to pay out income distributions at the end of the 2010-2011 financial year.

REITs were created so investors who couldn’t afford to buy an entire property could still get exposure through buying property shares. But if investors don’t buy Australian REITs, they won’t be protected against Australian inflation and will be open to overseas problems.

Morningstar noted in their recent report that volatility in the Australian dollar earlier this year resulted in large losses on currency hedging, and income distributions suffered.

The problem was only likely to persist given the continuing instability in the value of the Australian dollar, Morningstar said.

“Currency exposure can create all sorts of issues on the actual return you end up getting,” Curtis says.

Investors are caught in a catch-22 when it comes to currency. Any returns on overseas REITs can be wiped out by moves in the Australian dollar if they don’t hedge their returns, but if investors do hedge their returns they have to fork out the money they’ve earned to cover hedging costs if the currency moves the wrong way.

The danger of ruining your returns by currency hedging increases when yields on listed property around the world are forecast to be low for the foreseeable future.

But abandoning global REITs for those reasons and investing only in domestic

Listed Property REITs comes with its own problems, as well. The two stocks owned by Westfield make up approximately 40 per cent of the AREIT index.

A fund manager following the index may only be able to deviate by 3 per cent, but it would still leave them with a 37 per cent exposure to only two domestic property stocks.

That stranglehold makes it nearly impossible to achieve meaningful diversification for investors without resorting to overseas stocks.

But there are other ways to achieve diversification without going overseas.

Reliance Investment follows a benchmark unaware approach.

Fund managers wanting to concentrate on domestic REITs and still get diversification shouldn’t follow the index, McGrath says.

Managers who are benchmark unaware can overweight inflows into stocks that won’t make up a disproportionately large amount of the index, and with 40 investible stocks out of a total of 60 in the sector, there is plenty room for diversification, according to Curtis.

Investors and advisers may complain a lot about concentration and diversification in the domestic REIT sector, but they are going to have to wait for the fund managers themselves to do something to solve those issues. Most domestic REIT fund managers are still following the index.

MM

Where are REITs getting their capital?

DURING the financial crisis, listed property funds had to scrabble under the couch cushions to raise debt capital as the banks tightened the purse strings.

Drastic debt cutting measures and multiple equity raisings helped most REITs pull through the worst of the GFC, but now that markets have improved, many REITs are looking for debt funding once again. Where are they getting it, and have the conditions changed?

There are indications that the listed property funds have learnt their lessons from the debt crisis and are diversifying their funding sources.

According to S&P’s report card on debt credit trends on the listed property market which was released earlier this year, REITs that are looking to fund maturing debt in 2012 are now accessing the bond market to provide an alternative source

to the banks.

S&P called the move positive for credit quality.

REITs are also issuing their own corporate paper, as well as approaching super funds for debt funding.

The search for alternative sources like bonds and super funds for long-term debt is part of a move to shift the job of the banks from guaranteeing long-term debt to providing funding for the REIT development pipeline, according to S&P REIT credit analyst Craig Parker.

That shift would make the bank funding period less than two years in most cases, a scenario that would probably make both the banks and the property funds happy.

“The sources and the supply of credit has improved dramatically for REITs, and that’s critical because the pain was exacerbated by the fact that they had no alternatives during

the GFC, and that’s definitely changed and put the REITs in a much stronger position,” says McGrath.

Although market volatility has temporarily driven the listed property sector all over the place and caused some to fear about the high correlation between the share market and REITs, trusts have had no trouble at all sourcing funding of all kinds.

Property group Stockland raised funding for 10 years in the US bond markets last month.

But REITs that aren’t as big as Stocklands should be careful.

“The banks are more discerning in who they want to lend to, but our portfolio of rated REITs is strong and they will have the support of the banks. If you are a weaker REIT, one that we don’t rate, I’ve heard anecdotally that the banks are tr ying to reduce their exposure,” Parker says.

MM

www.moneymanagement.com.au September 22, 2011 Money Management — 17

Observer

Time to

kill SAA Strategic asset allocation may represent the conventional approach but Dominic McCormick questions whether it deserves the credibility it carries.

A

t the recent PortfolioConstruction Conference a survey of the audience showed that 57 per cent used strategic asset allocation (SAA) as their asset allocation approach for clients. Ironically, the conference contained much discussion about the need for more flexible/dynamic asset allocation (DAA), especially in the current challenging investment environment.

However, this article is not really about the case for more active asset allocation even though it is what I have believed in, previously written about and practiced for most of my years in the investment industry (after overcoming the brainwashing of my early economics and finance studies).

Nor do I suggest that successful active asset allocation is easy.

Rather, this article is a critique of the SAA approach which, as the survey suggests, retains the incumbent position for asset allocation approaches, but in my view, definitely does not deserve that role.

My argument does not rely on proving that DAA is better. Rather SAA should be abandoned, not because there are better approaches available, but because it is flawed to its core, always has been, and would never have gained credibility amongst investment industry participants if they had not been so easily seduced by the ‘efficient market’ view of the world in the 1980s and 1990s.

In fact, I challenge anyone to provide an acceptable, practically and theoretically

consistent definition of what SAA actually is. One that makes rational sense in the real investment world where assets become over and undervalued, bubbles and busts occur and where returns, volatilities and correlations vary markedly even over the long-term. Often SAA is couched in vague terms referring to some ‘long-term’ asset allocation but with little further explanation. Below are a range of definitions of SAA that are usually put forward, along with their inherent problems.

1. The ‘neutral’ asset allocation – neutral to what? By itself it is a meaningless concept.

2. The ‘normal’ asset allocation – normal compared to what? Another meaningless concept.

3. The asset allocation that will meet an investor’s long-term objectives. This says nothing about how the SAA is determined, but in any case there is no predetermined ‘set and forget’ asset allocation that can be relied on to meet reasonable investment objectives. Crucially, the likelihood of any specific asset allocation meeting such set objectives will vary markedly over time.

4. The ‘constant risk’ allocation – if risk (whether volatility or more relevant measures such as chance of return below a certain level) is changing over time, then by implication, the appropriate asset allocation to maintain equal risk cannot be static. Only by actually changing asset allocation over time does one have any chance of keeping risk constant. Therefore SAA by

18 — Money Management September 22, 2011 www.moneymanagement.com.au

definition cannot be constant risk.

5. The ‘efficient portfolio’ based on optimising return for a set level of risk using primarily historical returns, risks and correlations. This is the conventional way SAA has been constructed in the past but this backward looking approach is increasingly viewed as largely useless given returns, correlations and volatility vary markedly over time and valuations, not history, are one of the key drivers of future returns.

6. The appropriate asset allocation if all markets were valued fairly. This definition seems appealing at first until you realise that if just one asset class is overvalued or undervalued not only does this change that asset’s return forecast, but it also changes expectations for correlations and even volatility which would mean all other asset class weightings would need to change too.

No support for SAA there.

How has a concept that doesn’t make rational sense become the key foundation for the way most financial planners (and institutional investors) implement asset allocation? Part of the explanation is that SAA presents well and provides precision.

Proponents can refer to a specific long-term SAA and illustrate the exact historical risk and return characteristics of that asset mix in nice charts. It allows for precise performance attribution showing the value added or subtracted by any tactical asset allocation (TAA) around the SAA and that from investment selection within asset classes.

But this attractive analysis has been built

around a deeply flawed concept which prefers being precisely wrong rather than approximately right.

In an uncertain world the desire to anchor to a long-term SAA for multi-year periods or even decades is understandable, but risk premiums for asset classes are not constant over time – even over the longterm – and are heavily dependent on starting valuations. And that’s before even looking at correlations and volatilities – the other two inputs into most SAA models – which can also vary vastly over time. It is simply ludicrous to think that the same ‘set and forget’ SAA mix that suited an investor last year or three years ago, suits an investor investing today or next year.

The only world where SAA makes sense is one where markets are efficient and always fairly priced and asset classes consistently deliver their ‘appropriate’ long-term risk premiums. If you still believe that is the sort of investment world we live in then you are highly vulnerable to all sorts of myths.

SAA was first developed by proponents of the efficient markets school and overtheoretical applications of Modern Portfolio Theory. The SAA religion was spread by asset consultants who, whether they believed in it or not, embraced it because it facilitated the performance analysis and other tools they could sell to clients. The compromise for those who lacked belief in efficient markets was to allow for minor TAA moves anchored around the long-term

SAA. But a flawed asset allocation approach is still flawed – even with minor allowance for the real world as an afterthought.

Of course, most consultants and research houses still promote SAA to some extent, even though their faith in it is rapidly fading.

After all, it is hard for them to openly admit that what they have been promoting to their clients for several decades is rubbish.

Instead they are quietly moving away from SAA by introducing ‘strategic tilting’, variable asset class risk premiums, limited ‘dynamic asset allocation’ or simply emphasising their TAA over/under weights more.

This trend to de-emphasise SAA will continue in coming years. As usual, retail is lagging the institutional industry.

Some SAA supporters might counter with statements such as “I review SAAs often, even as frequently as quarterly or yearly and use forward looking analysis and not just history”. Fine, but such frequent SAA changes indicate you have already rejected traditional SAA and moved to flexible asset allocation. Having said that, making asset allocation changes only on certain dates of the calendar rather than as needed in response to market valuations and other key drivers is far from optimal.

Ironically, I do still see some role for ‘static asset allocation’. Static asset allocation benchmarks or simple static diversified portfolios (systematically rebalanced) are useful to compare performance against over the long-term and/or to provide a ‘base case’ asset allocation approach.

Indeed, I can understand those who say they use a static approach because other approaches are too difficult to implement.

However, a ‘static’ approach doesn’t pretend to have a robust theoretical or practical basis as SAA does and it doesn’t counter most of the concerns raised in this article. Further, while clients might not expect much from a simple static asset allocation approach they generally won’t pay much for it either. SAA sounds so much more impressive, even if in practice the two are often much the same thing.

The problem of traditional SAA is that it commits the investor to a particular set asset allocation today based on history (often also heavily influenced by competitor weightings) with little if any forward looking analysis. A new client who comes in a year or two later will likely be given much the same allocation.

But is SAA really a problem, particularly if some only use it as a reference point? Yes, because if you start with the anchor of a SAA then psychologically it is very difficult to significantly deviate from it. It is also very difficult to introduce new asset classes or sub-asset classes or investment areas that only have a small weighting in asset benchmarks. Further, the approach is also very slow to deal with structural changes in asset classes that can markedly change their risk/return profile.

One of the big debates at the moment is whether retirees have too much in growth assets. Historically, I would agree that this has been a problem, partly driven by remuneration structures that promote higher fee growth investments. However, because this debate is taking place with SAA as the incumbent asset allocation framework, the current debate is simplistic at best and plain wrong at worst. For example, is now the appropriate time to be arguing that equities (where arguably many markets are cheaper than any time in the past two decades) should be sold down and replaced with bonds (at their lowest yields in the last two decades). Indeed, this highlights a clear flaw in ‘Lifecycle’ funds that rely on different SAAs based on age. If we didn’t have the flawed SAA framework as background there would be no choice but to also incorporate long-term valuations and other fundamental drivers into such asset allocation debates.

What about risk profiling?

Surely incorporating risk profiling requires that clients with particular ‘risk profiles’ need to be directed to specific SAA’s which represent different risk levels. While this has become the accepted approach there is nothing prescriptive in legislation that necessitates a specific SAA as an outcome from formal or informal risk profiling.

In fact, I believe the relationship between risk profile and asset allocation is flawed at both ends. At the risk profiling end, it is flawed because attitude to risk varies over time (in an inverse way) so investors tend to prefer lower risk options after higher risk options have performed poorly and vice versa, a tendency that actually destroys value.

At the asset allocation end, this relationship is flawed because of the inherent problems of SAA described above and particularly because the risk of any specific SAA is not

constant anyway.

The key is to determine the level of risk and returns appropriate to meet investors’ objectives over time. At the investment end we need fewer, but more flexible asset allocation mixes which are more valuation and contrarian driven and targeting the absolute benchmarks – cash plus or CPI plus – that actually matter for retail investors, albeit over the medium-long-term. Of course, there is no certainty of meeting such objectives, but at least one is starting the journey with a focus on the right destination.

I have long argued that the use of five, six or even seven risk profiles attached to

We need to remove the “straightjacket of SAA and move towards a framework that is focused on, and flexible enough to meet, investors’ true objectives.

”

specific SAA’s is pointless overkill. With this many SAA mixes there is little variation in risk/return between them, but more importantly this approach locks in the flawed SAA approach because it creates a perception that the full range/mix of asset mixes have been covered and the allocation decision can be delegated back to the client – and their risk profile.

At the risk profiling end, I believe questionnaires and assessments should be downplayed and provide just one input into the appropriate structure of the client’s portfolio. Importantly, it is the clients various objectives over time, relative to their investment portfolio’s capacity to meet these requirements that is crucial. For example, the path of future returns is critical, so retirees should be conservatively invested at first given their inability to regain lost ground in bad markets. If a wealthy client can meet most of their objectives with a lower risk portfolio does it really make sense to give them a higher risk one just because they show up with a higher risk profile at the time? Of course, some investors will express such a high level of aversion to risk taking that a riskier portfolio might never be appropriate because they would likely bail out in difficult times, thereby undermining the case for a more aggressive portfolio in the first place.

It is managing client expectations, objectives and cash-flow consideration that most financial planners should be focused on.

Implementing a more active asset allocation approach well at the investment end will not be easy for most. Indeed, some planners and investors will make an absolute mess of more flexible asset allocation and do worse than a static approach.

They will chase asset class performance and buy high and sell low if research into investor behaviour is any guide. However, bad implementation of more active AA approaches should not be seen as reasons to support SAA. At one of the Portfolio Construction Conference’s due diligence sessions on asset allocation using scenarios, the following question was asked: “this is all great stuff but how do we implement it ourselves for clients”? The answer was handled diplomatically but the proper answer probably should have been “You can’t”, at least not without devoting major resources to the approach, including experienced people.

The reality is most financial planners will have to partially or fully outsource more dynamic asset allocation.

While I believe SAA has always been flawed, its weaknesses are being highlighted at a time of dramatic change and challenging investment markets. For example, traditional safe havens asset classes such as government bonds are being fundamentally reassessed. The role of new asset classes and sub-asset classes such as gold or commodities have needed to be considered. Equity asset classes are currently dominated by weightings in financial companies which face the challenges of deleveraging, credit risk and regulatory change. Dramatic price moves can change the prospective long-term returns on a range of asset classes by several percentage points per annum within a matter of days or weeks.

Being anchored to backward looking SAAs will inhibit the ability to deal with these challenges and risk dragging clients underwater. We need to remove the straightjacket of SAA and move towards a framework that is focused on, and flexible enough to meet, investors’ true objectives. Such approaches are by nature more qualitative and subjective, harder to judge value-add and difficult to implement successfully.

Many financial planners will find it all too hard and stay with SAA despite its flaws and the feeble rationale for its various inputs and outputs. This would be a mistake. Their clients might not currently know the difference but I suspect they will increasingly question how their asset allocation is being determined as more progressive parts of the investment industry more openly emphasise SAA’s flaws and eventually abandon it.

Increasingly, there will not be a debate about the merits of SAA versus DAA, but simply a discussion about how best to manage asset allocation in a world that has accepted that the emperor of SAA has no clothes. In my view the current SAA framework will be largely abandoned by the institutional and retail investment industry within the next 3-5 years. Why wait?

Dominic McCormick is chief investment officer of Select Asset Management.

www.moneymanagement.com.au September 22, 2011 Money Management — 19

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OpinionFOFA

Back to the future Non-aligned dealer group executives have long been warning that the new Future of Financial Advice reforms would lead to consolidation in the financial advice market. George Lucas argues the evidence is already apparent.

T

he decision by the Commonwealth Bank (CBA) to pay $373 million for the planning group Count Financial is just the latest in a growing line of acquisitions that is seeing the big getting bigger and the small and independent disappearing in the wealth management industry.

If you think that’s hyperbole, then just look at the evidence. Snowball has gone to Shadforth Financial Services, Plan B Group has picked up 31 per cent of the Queensland-based My Adviser, and IOOF has snared DKN. The daddy of them all, of course, has been AMP’s merger with AXA Asia-Pacific.

But it’s the CBA’s decision to move on Count, as well as the warning Count founder Barry Lambert issued when seemingly reluctantly agreeing to the sale, that should set alarm bells ringing in the industry, in Canberra, and most importantly, among consumers.

Lambert’s comments were prescient and blunt – the Federal Government’s reform agenda is forcing consolidation on the industry by driving out the independent financial advisers. If Lambert is right, the end result will almost inevitably see an industry dominated by the “Big Four”, as well as a few big institutions such as AMP and IOOF. When Labor began its reform agenda for financial services, there can be little doubt it had independent financial advisers in the gun, especially those who were remunerated by trails, not fees.

They were portrayed as the devil incarnate. In doing so, Labor had the explicit support of the industry funds and also the implicit support of the banks and large financial institutions, which quickly, and rightly, recognised that Labor’s reforms had the potential to deliver them new opportunities that they could capitalise on better than the industry super funds.

But what Labor’s policies are doing is

“

For the independent advisers, as Lambert argued, the struggle to compete against the larger players that have the benefits of crosssubsidisation will push many to either sell their business or leave the industry.

”

only benefiting the large institutions, and the move to break the nexus between the adviser and the product provider is being unwound by the current reforms. Labor, maybe naively, believed that the removal of trails and its replacement by a feebased industry would ensure advice in which the consumer would benefit.

The underlying assumptions driving this reform were twofold: those advisers who took trails were lazy and in conflict

with their clients’ best interests, and consumers were clamouring for the abolition of trails. On the latter, no evidence was ever proffered. Indeed, a cynic might ask what aspect of the banks’ services most riles their customers.

The one word answer is their fees.

What is happening now is what those much-maligned independent advisers argued at the time; the average consumer (for argument’s sake let us say having assets under management of $250,000 or less) is simply not prepared to pay up to $3,000 for a statement of advice, as well as ongoing fees.

But consumers still need advice, and rightly so. In the current investment climate, advice is at a premium. So where will they get it?

There may be only one option – the banks and large financial institutions.

Only they are in the financial position to be able to offer advice as a lost leader, comfortable in the knowledge they can “direct” consumers into their products.

What they are losing on the swings will be more than compensated by what they are picking up on the roundabouts.

For the independent advisers, as Lambert argued, the struggle to compete against the larger players that have the benefits of cross-subsidisation will push many to either sell their business (and the banks and institutions are buyers, seeing value in these businesses that may not be justified in the current economic climate) or leave the industry.

The number of independent advisers disappearing will be compensated by a growth spurt among advisers at the big financial institutions. The CBA now has nearly 2,000 advisers on its payroll, AMPAXA has more than double that number at 4,000 and ANZ has recently announced plans to increase the number of its advisers.

But how will these advisers be remunerated? The suspicion has to be that

part of their salary will be indirectly linked to how much of their employer’s financial product they can sell. Otherwise, the push by the banks and big financial institutions into wealth management lacks a business case.

No doubt the good advisers working for large institutions will develop good client networks and be amply rewarded.

In the past, an option for them was to then set up their own practice, expanding the industry, and in the process, generating competition. Today, that option is far less enticing.

Thus the end result of Labor’s reforms will be less competition, not more.

Instead of a diverse industry, we are on a path to having a financial planning industry dominated by the Big Four, a few large institutions and the bigger industry super funds – almost a carbon copy of our banking system. And we all know how much consumers are enamoured with the banks. Even the industry funds – Labor’s preferred winner out of the reform process – will find it difficult to compete as they lack the established infrastructure of their big competitors.

As always, the net loser, when competition is reduced, will be the consumer, who never asked for this reform in the first place. They will be confronted by a more concentrated industr y where cheap fees will come at the price of prescriptive product recommendations and asset allocations. The sad reality is that all the work done over the past decade to unwind the tied selling model and add competition into the advice industry is being unwound by the new Future of Financial Advice regulations.

It’s back to the future for financial planning.

George Lucas is managing director of the boutique investment house Instreet Investment.

www.moneymanagement.com.au September 22, 2011 Money Management — 21

OpinionAfter-tax returns Life after tax returns With a wave of reform about to hit the industry, financial advisers will soon have to change some of the considerations they take into account when recommending certain investments.

Damian Graham argues there will be more focus on after-tax returns, and lists relevant factors in generating an after-tax focused investment management outcome.

W

hen making investment recommendations on behalf of a client, an adviser has to factor in a myriad of considerations. With the upcoming regulatory reforms that are soon to be put in place – which include requirements like the best interest duty and opt-in – there are now even more considerations to take into account.

One of the key considerations that can be overlooked is the likely after-tax outcome of an investment decision, and the benefits that can be brought to a portfolio by managing investment decisions through analysis of this outcome.

While tax should never be the sole driver of an investment decision, it is certainly an important underlying consideration.

Tax impacts can soon overpower the other costs of investing and leave an investor and their adviser in a less than desirable position.

Though most would agree that it is beneficial, it is clear that after-tax management is not widely understood or readily available in a great deal of investment structures. Further, there is a significant amount of work required to individually manage even a relatively modest number of portfolios on an after-tax basis, and to reach the best outcome for each individual client.

After-tax portfolio management, in its simplest form, seeks to have as its main focus the after-tax return each investor receives, in addition to the investor’s pretax returns. The rationale for focusing on this is pretty simple: it is the after-tax returns that investors are able to use to meet their investment objectives, not their

pre-tax returns.

As a principle, I believe there are five primary factors that are most relevant in generating an after-tax focused investment management outcome. The fundamental basis of these factors is the ability to truly customise portfolio management activity to the individual client circumstances and then to monitor the real impact.

1. Firstly, the ownership structure of the assets is important, as direct ownership enables the portfolio manager to tailor the taxation ramifications of investment decisions on a client by client basis. This typically separates structures like managed accounts from structures like unit trusts, where the investment manager will be unaware of the tax situation of the underlying client.

2. Secondly, I believe the style of portfolio construction used should be different for different tax scenarios to drive after-tax efficiency and better after-tax returns.

3. Thirdly, it is important to ensure the tax impact of any portfolio management activity can be reviewed before undertaking that activity.

4. Fourthly, once a transaction is undertaken, there should be the ability to determine the taxable parcel of the security that creates the optimum after-tax outcome.

5. Lastly, the ability to measure the efficiency of a specific objective of after-tax returns should be available to the investor to help them verify whether the approach is actually tax efficient.

We can use the term “tax alpha” to define the benefit to after-tax returns from tax efficient portfolio management activity.

Tax alpha is more predictable than typical investment alpha, as the impact of a trans-

action from a tax perspective is known before the transaction is affected, whereas the impact of a transaction from an investment perspective is not.

To take a workable example, the efficiency an after-tax focus can deliver can be seen in recent off-market buy-backs undertaken by the likes of BHP Billiton and JB Hi-Fi. These opportunities are generally only suitable for those investors with a low marginal tax rate who have the ability to utilise imputation credits on franked dividends. For investors with a high marginal tax rate or for investors that cannot utilise imputation credits, these opportunities will not deliver an after-tax return above the pre-tax return. Accordingly, it is important to be able to participate in a buy-back only for those investors that will get a better after-tax return in doing so.

The issues of after-tax management introduce a number of core considerations for an investor, including those of portfolio construction, customisation and scale.

When managing clients, a portfolio manager is faced with an investment that has all the components of franked and unfranked income, capital gains discounting, holding periods for imputation credits or tax-deferred income (such as is the case with company buy-backs, property trust distributions and so forth) – the after-tax outcome will depend on the individual investor for whom the portfolio manager is making decisions. Therefore, to reach the optimal outcome, a highly customised and individual approach for a client is required.

When thinking about portfolio construction, not only would a portfolio

manager need to take into account all of the usual principles of diversification, the risk/return of each stock, the income or yield and so on, they also need to consider the tax implications of each holding too.

This brings us onto scalability and the real ability for an adviser to drill down into this level of detail for every client if they are holding direct shares. Owning securities directly in the portfolio has its advantages, as investors can tilt their portfolio based on their personal circumstances and objectives as well as ensuring portfolio management activity is undertaken to maximise after-tax returns. One of the most powerful reasons to own investments directly is the ability this grants investors to manage the timing and management of activity within the portfolio.

However, as everyone knows, managing multiple direct share portfolios for multiple clients is a challenge in itself, and has the potential to become even more so with upcoming regulatory reform.

What today’s environment is telling us is that opportunities to make the process of creating returns for clients more efficient are growing in demand. We have seen an increased uptake of managed accounts, with advisers adopting them within their broader advice offering to deliver customised and tax-managed outcomes in a scalable fashion. This is a trend that is likely to continue as advisers and clients alike demand greater flexibility and transparency.

Damian Graham is the head of Macquarie Private Portfolio Management.

Disclaimer: MPPM is part of the Macquarie Group of Companies. No members of the Macquarie Group give, nor does any member purport to give, any taxation advice. The taxation information in this document is based on laws current at the time of writing. The application of taxation laws to each investor depends on that investor’s individual circumstances. Accordingly, investors should seek independent professional advice on taxation implications before making any investment decisions.

MPPM is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959 and MPPM’s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of MPPM.

22 — Money Management September 22, 2011 www.moneymanagement.com.au

OpinionRisk

Sharpening risk tools Before giving advice, financial advisers have a positive duty to actively assess and research the risks arising in relation to an investment. Paul Resnik outlines a set of precautionary measures to help planners properly assess risk, and avoid unfavourable outcomes.

T

he issues raised in the recent New Zealand case, Armitage v Church, are typical of the challenges faced by advisors around the world. A client with specific cashflow needs seeking high interest is caught in the 2008 market turmoil. He is burned in the ensuing product failures and successfully sues his adviser. The judgment may provide a number of useful lessons to advisers, advisory groups and others seeking to understand the value of advisory businesses.

1. It is more appropriate for the advisor to undertake a cashflow analysis to identify the client’s liquidity needs rather than to rely on the investor’s analysis.

2. Disclaimers must be relevant and meaningful.

3. It is not sensible to give advice to friends or family if the local interpretation of the law may result in a judgment that might pierce the corporate veil. In this case the adviser was found personally liable.

4. The selection of simpler, less opaque and consequently more predictable investment options should be considered.

5. A diversified portfolio will avoid concentration risk.

6. An advisor cannot outsource his or her professional obligations to either an investment research house or a risk profiling provider.

The judgment was critical of the risk profiling undertaken. Over recent months the UK’s Financial Services Authority and the Australian Financial Ombudsman Service (FOS) have issued guidance on the use of risk profiling in the planning process.

The FOS commentary is particularly pithy and worthy of reflection. Some might argue that it is retrospective law.

FOS’s observations of risk profiling practices and procedures Financial services providers (FSPs) are unlikely to adequately meet their obliga-

tion to have regard to a client’s objectives, financial situation and needs by only relying on a risk profile tool. The reasons for this include: Most risk profiling tools have inherent limitations that can only be overcome by FSPs putting in place techniques that address the limitations (this may be as simple as testing the client’s responses to a questionnaire and their understanding of questions).

Risk profiling tools offer an opportunity for FSPs to educate clients on the relationship between risk and reward in terms the client is likely to understand.

FSPs who do not take this opportunity to educate clients are at risk of not obtaining the client’s informed acceptance of the risk profile and its possible investment implications.

Risk profiling tools should be used by FSPs to identify gaps between a client’s financial resources, their appetite for risk and the timeframe to achieve their objectives. Where gaps do exist, the FSP must undertake a transparent trade-off process where the FSP can either ask the client to consider: • Investing more funds; • Taking on board more risk to achieve a higher possible return; or • Modifying future goals so that they are more in line with the client’s financial resources and the timeframe to achieve the client’s objectives.

The above process is also highly relevant to the client’s informed acceptance of the risk profile and its possible investment implications.

tant part of securing the client’s informed consent to make the recommended investments and/or employ the recommended investment strategy.

If the FSP can demonstrate the client’s informed acceptance of the risk profile and the possible investment implications that may arise from the outcome of the risk profiling process, it is less likely that FOS will find the FSP had breached its obligations in this regard.

FOS’s view is the usefulness of any risk profiling methods used lays in the opportunities those methods give FSPs to open meaningful discussions with clients that could identify gaps between their objectives, the timeframe to achieve the objectives and their appetite for risk and, if gaps exist, undertake a transparent trade-off process.

It is more likely that FOS will consider an FSP’s risk profiling practices and processes to be adequate if they are likely to result in securing a client’s informed consent about the level of risk they will need to take to achieve their objectives.

(Source: Financial Ombudsman Service, Circular 6, Winter 2011, Risk Profiling in Financial Advice Disputes).

What is clear from the guidance is that the client’s informed consent to the risk in their plan is of critical importance. Over the years we have worked with advisers in many jurisdictions and have developed an overview of the planning process that seems to sit logically above local regulatory obligations. At its core is a process to help clients make an informed decision.

The Route to Informed Consent Are the FSPs’ risk profiling practices and procedures adequate?

FSPs seeking to establish their client’s tolerance to risk should not view the risk profiling process as only a means to establish the suitability of investments they recommend, but also as an impor-

Good advisory businesses serve their clients while protecting themselves by rigorously seeking to apply five proofs to their client advice process: • They can prove know-their-client: current situation (assets and liabilities), present and future cashflows, aspirations,

risk tolerance and risk capacity.

• They can prove that they have explored the range of alternative plans and strategies with the client. Strategies may include converting lifestyle assets to investment assets, a need to work longer, spend differently or change jobs.

• They can prove know-the-product for the products that they have selected. They may use external research to make those decisions, but the advisor is responsible for the final recommendation.

• They can prove that they have explained the risks in the strategy and in the products, particularly to establish performance and downside expectations. The advisor can then determine with the client the level of financial risk that the client is prepared to accept in pursuit of goals.

• They can prove that they received the client’s informed consent to accept those risks in pursuit of their goals, as well as illustrating the more probable outcomes they need to explore the worst case scenarios. They must be able to illustrate extreme events and explore the client’s risk capacities. They must be able to show the consistency of the financial plan with the client’s risk tolerance. They must have established processes for setting performance expectations and for ongoing management.

Obtaining the client’s informed consent is an ongoing activity. Ongoing informed consent is about ensuring that the advisor continues to understand not just the client’s risk tolerance (which is relatively stable), but risk perception (which can change in a heartbeat), risk required (which can change in time) and risk capacity (which also varies over time).

There is relevancy in this case to all involved in valuing financial planning businesses.

Paul Resnik is co-founder of FinaMetrica.

www.moneymanagement.com.au September 22, 2011 Money Management — 23

OpinionMarkets

Making sense of the August debacle The August market downturn gave the world a big scare and investors seemed to have run for the hills in fear the nightmare from 2008 was returning. Ron Bewley tries to make sense of last month’s debacle and finds it is hardly the end of the world.

F

ebruary and August are always special months for stock market watchers. They are the months in which companies report earnings and paint pictures for the future. There was much speculation in the media before this last August that companies would be forced to ‘confess’ before the season opened. The media called for companies to downgrade their earnings estimates in July before they reported. That didn’t really happen and about a third of companies beat market expectations, a third missed and the rest just did what we all expected.

Not bad at all. Certainly, it didn’t make the professional doomsayers happy.

But anyone who was on planet earth during August would be aware that most things that could go wrong seemed to go pear shaped. US debt was downgraded for the first time ever, the US Congress squabbled on the debt ceiling and the way forward, European leaders got in a pickle over their debt crises, the US east coast was battered by a hurricane and a 5.9 earthquake to boot. It should be no surprise, therefore, that markets tumbled.

The German DAX fell by nearly 20 per cent in August, the S&P 500 fell sharply but recovered to be about 5 per cent down, but our market fell by less than 3 per cent after its recovery. The problem I want to discuss in this note is how big really is the problem – using facts, not just emotion.

It is important to appreciate that St a n d a rd & Po o r s’ ( S & P ) g i v e t w o ratings – one for the short-term and one for the long. It didn’t get much attention in the media at the time, but S&P actually reaffirmed its top notch rating for the US short-term debt – the important one – and only downgraded the long-term rating. That means S&P sees no problems for a year or so – plenty of time for Congress to do something about it. S&P also didn’t question the US ability to control its long-term future – the downgrade was specifically given for the inability of the Congress t o c o m e t o a d e c i s i o n b e f o re t h e eleventh hour – a bit like a yellow card i n s o c c e r. T h a t c a n b e f i x e d t o o – without being sent to the sin bin. Of

course, it is all really embarrassing for President Obama and anyone involved in running (or is it not running) the country.

There are three major ratings agencies, and, like with the three tenors, most can’t remember the name of the third one – Fitch Ratings. Fitch publishes probabilities of default (PD) each day for companies in certain regions of the world. Share prices and credit default swaps (CDS), that is the price of insuri n g d e b t a g a i n s t d e f a u l t , a re b o t h subject to fundamentals and emotion.

I think the way Fitch, and others, calculate the PD is a far more robust way of

24 — Money Management September 22, 2011 www.moneymanagement.com.au

reading the extent of the real problems in the world. Fitch produces estimates of a credit event or default occurring with a one-year period and for a fiveyear period for North America, Western Europe, Asia Pacific and Emerging Markets – as well as for the world – for the ‘average company’. Chart 1 shows the one-year estimates for two of the regions.

The data is only available from March 2001 during the aftermath of the tech wreck and the Asian crisis. Of course the 9/11 terrorist attack occurred at the beginning of this data period. By 2004, the one-year PDs had settled down and

stayed that way until well into 2008: the global financial crisis (GFC). Until the end of 2009, there wasn’t much difference between the PD estimates for North America and Western Europe. In 2010 and beyond, the North American estimates returned to historic lows with a tiny flick up in August 2011. In my opinion – not the stuff of a crisis. No re p e a t o f t h e G F C i s e v e n s l i g h t l y evident in this data.

Western Europe is a different kettle of fish. While the PD estimates for Europe are low, there is now a wedge between the two regions’ estimates. To me – this is how I read the situation

Chart 1 Fitch one-year probabilities of default

“

Dr Ron Bewley is the investment consultant at Infocus Money Management.

6%

4%

2%

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 N America

2011

Europe

Source: Fitch, Thomson Reuters Datastream

Chart 2 Fitch five-year probabilities of default 30%

25%

20%

15%

10%

5%

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 N America

2011

Europe

Source: Fitch, Thomson Reuters Datastream

Chart 3 Capital gains forecasts before and after the August reporting season 35%

Before After

30% 25% 20% 15% 10% 5%

0 AS

X

20

ie

s

s

IT

co

ilit Ut

Te l

at

En

-5%

er gy er i al In s du s tri Di al sc s re tio na ry St ap le s He al t Fi na h nc ia ls Pr op er ty

0%

M

around, there were some big changes.

The reported earnings came in fine but companies’ outlook statements were guarded – why wouldn’t they be! At the time the outlook statements were being made, market volatility was almost as high as during the GFC and I think only a fool would have ignored this uncertainty in an outlook statement – even if the company did have a reasonable view of the future. I show my forecasts of capital gains for the next twelve months from both the end of July and the end of August 2011 in Chart 3.

There is no doubt that the forecasts have come off – by about 4 per cent for the ASX 200. However, the average historical market return is about 7 per cent over any reasonable time period so the implied forecasts from broker estimates of 10 per cent is for a betterthan-average next 12 months – just not as bright a future as they saw a month before.

The sector forecasts tell a really interesting story. The utilities’ and industrials’ forecast has been slashed and the new Consumer Discretionary forecast – including companies like David Jones and Harvey Norman – is weak. These changes in the sectoral forecasts are evidence of the recognition of the twospeed economy. But any portfolio with an emphasis on resources and financials – particularly when dividends are added into the mix – looks solid, based on these broker estimates and my interpretation of them.

When the dust settles on all of the world issues and the US downgrade becomes a distant memory, what will happen to these uncertain outlooks? To me – putting all these analyses together – there is some reasonable chance t h a t t h e b r o k e r f o re c a s t s w i l l b e upgraded back to where they were at the end of July. In the few days since the end of August, Italy has passed its new austerity bill, a German court has found that they can help bail out other countries, the US got a great read on both retail sales and the services sector – and we got a soft but OK employment read. Not the makings of the end of the world to me.

8%

Probability of default

”

10%

Probability of default

When the dust settles on all of the world issues and the US downgrade becomes a distant memory, what will happen to these uncertain outlooks?

Expected total returns

from watching international TV. As with S&P and the US debt, there is no imminent problem apparent from these data. But if we now move to the fiveyear estimates in Chart 2, a different picture emerges.

There is naturally a much bigger chance of a company defaulting over a five-year than a one-year period, and the scales of Charts 1 and 2 reflect this.

Apart from scale, the run-up to the GFC was similar for these two regions and the two time horizons for possible default – until the GFC was well under way. However, Europe became more problematic in 2009 and beyond as the crises in Greece, Ireland, Portugal, and to some extent Italy and Spain unfolded. I am not surprised by this comparison given my market watching. But my main reason for introducing these PD comparisons starts in August 2011. The f i v e - ye a r P D k i c k s u p s t ro n g l y f o r Eu r o p e a n d n o t i c e a b l y f o r No r t h America.

The PD for North America should not alarm – the current level (7 September 2011) is around the range experienced for 2004–2007. The kick is coming from a low base. However, the five-year PD for Western Europe didn’t even get down to the pre-GFC levels and the PD doubled during the month of August to a level that is well within the range experienced in the early part of the GFC. But it is important to put two things into perspective. The European one-year PDs are fine but the five-year are not – so the problem is not imminent. Importantly, PD should be read as ‘the probability of default within a given period if the company takes no evasive action’. This definition is roughly the one I used with the Financial Strength Indicator I used to publish at the CBA for the PD of ASX 200 companies. The problems at company level have time to be fixed but, left unattended, credit events will follow further down the track.

Contagion – or a domino effect – is the new word for some after the GFC. Of course, it was contagion that escalated the Asian currency crisis, and the So u t h A m e r i c a n c re d i t c r i s i s t h a t followed the Mexican crisis. Some people are currently claiming that credit events in Europe will sweep the world – if they start – through contag i o n . T h e i n v e s t o r s’ b e h a v i o u r contained in the PD estimates for 2011 is drawn from much the same group of investors who experienced the GFC and the Asian crisis in Charts 1 and 2. If they thought there was likely a contagion effect in the five-year PDs from Western Europe to North America, the data in C h a r t 2 w o u l d s h ow t h a t – a n d i t doesn’t. In my opinion, Europe is in for a long hard slog, but North America can largely avoid any contagion. If North America and China are fine, Australia is in reasonably good shape.

From time-to-time I publish my forecasts for the sectors of the ASX 200 and the whole market in this magazine and elsewhere. I always find it interesting to monitor these forecasts dur ing reporting seasons to see how the new information is being digested. This time

Source: Woodhall Investment Research

www.moneymanagement.com.au September 22, 2011 Money Management — 25

Toolbox

Super and tax There are many rules and requirements around claiming a tax deduction for a personal superannuation contribution. The process certainly requires some careful planning.

Andrew Biviano explains how certain events can impact the amount that can be claimed as a personal tax deduction.

S

uccessfully claiming a tax deduction for a personal superannuation contribution requires some careful planning. Not doing so could invalidate the amount that can be claimed as a deduction in full or part. TR 2010/1 details the view of the Australian Taxation Office (ATO) in relation to how certain events can impact the amount that can be claimed as a personal tax deduction.

Contributing to superannuation can be an effective way to save for retirement, given the tax concessions available. For those who are employed, this is generally done by entering into an effective salary sacrifice agreement with their employer. In cases an employer and employee arrangement does not exist, the process is somewhat different and more complex. In the latter case, the person must first make a personal contribution to super and then claim it as a personal tax deduction by completing a Notice of Intent (290-170 notice) to claim a personal tax deduction. In doing so, there are a number of issues that need to be carefully considered to ensure the intended deduction is not reduced.

Eligibility and age Claiming a tax deduction for personal contributions made to super during the financial year is generally restricted to those who satisfy the 10 per cent test. That is, less than 10 per cent of the individual’s assessable income, reportable fringe benefits and reportable employer superannuation contributions come from employment related activities. For example, if a person has income from employment related activities of $25,000 they would need to have other passive income or business income so that their total income was over $250,000, in order to meet the 10 per cent test. Where this is not the case, they would not be eligible to claim a deduction for a personal contribution made to super.

For those under 18 at 30 June of a financial year, there are additional restrictions in terms of their eligibility and the amount that can be claimed. In general, those under 18 must have business income or employment related income (subject to the 10 per cent test) and the amount that can be deducted is generally limited to the amount received from those activities.

In addition, the normal contribution rules also exist, including: a) Meeting the work test of 40 hours over 30 consecutive days for those aged 65 or over; b) Ensuring that the contribution is made no later than 28 days after the month the

member turns age 75; and c) The fund must have the member’s tax file number on file in order to accept the contribution.

Lodgement and validity Another important aspect of successfully claiming a tax deduction for a personal contribution relates to the timeframe and the validity of the completed 290-170 notice. The notice needs to be provided to the trustee and acknowledged before the earlier of: 1. The end of the day the income tax return is lodged for the financial year in which the contributions are made or 2. 30 June of the year following the financial year the contribution was made.

As described above and further clarified in TR 2010/1, once an income stream is started the ability to claim a tax deduction for a contribution made to that fund will be lost.

Consider the following example: A person has an account balance of $150,000 (of which $10,000 belongs to the tax-free component) and makes a personal contribution of $50,000. After making the contribution, they commence an account based pension with $140,000 of the money within the Fund leaving $60,000 in the superannuation accumulation phase. In doing so, they lost their opportunity to claim a tax deduction on the personal contribution that was made just prior to the commencement of the income stream, as any notice submitted would now be invalid.

To avoid this outcome, the following steps could have been considered: 1) First commence the income stream with $140,000 leaving $10,000 in the accumulation phase, then make the personal contribution of $50,000 into superannuation; or 2) Lodge the Notice of Intent before the income stream is commenced. However, this may still lead to a problematic outcome if the client does not end up having sufficient assessable income. It may also end up paying 15 per cent tax and not be able to claim a deduction on the entire amount.

Similar to the commencement of an income stream, where a member leaves the fund taking 100 percent as a withdrawal or rollover then any Notice of Intent lodged with the fund will not be valid.

On the other-hand, if the member made a partial rollover or withdrawal, ironically, different rules apply and a reduced amount can be claimed. From the same tax ruling, the reduced amount can be calculated using the following the formulae in Figure 1.

By applying the formulae to the previous example, if the $140,000 was rolled-

26 — Money Management September 22, 2011 www.moneymanagement.com.au

Figure 1 Calculate the Tax Free (TF) Component of the Remaining Interest after Rollover/Withdrawel (R/W) using the following formula: = TF Component of the Interest Before R/W -

R/W Amount x TF component of interest before R/W Value of the Superannuation Interest Before R/W

Calculate Personal Contribution Remaining, using the following formula: = TF Component of the Remaining Interest x

Personal Contribution TF component of Interest before R/W

over or withdrawn instead of using it to commence a superannuation income stream, a reduced amount of $15,000 would still be available. This can be calculated as follows: • TF component of the interest before R/W = $10,000 + $50,000 = $60,000 • TF component of the remaining interest after R/W = $60,000 – ($140,000 x ($60,000/$200,000)) = $18,000 • Personal contribution remaining = $18,000 x ($50,000 / $60,000) = $15,000 Interestingly, if a second rollover or withdrawal from the remaining superannuation balance of $60,000 were to occur, the above formulae could be reapplied. In this case, if a further $10,000 was taken, the personal contribution amount of $15,000 (that remained after the first withdrawal) would reduce to $12,500. This can be calculated as follows: • TF component of the interest before the second R/W = $18,000 • TF component of the remaining interest after the second R/W = $18,000 – ($10,000 x ($18,000/$60,000)) = $15,000

• Personal contribution remaining after the second R/W = $15,000 x ($15,000 / $18,000) = $12,500 It should also be noted that where an initial 290-170 notice has been submitted and acknowledged it cannot be revoked or withdrawn, but it can be varied down (to nil if required). However, to do so, the notice must be valid and done within the required time-frame. Importantly, where a deduction amount has been denied by the ATO, the amount initially claimed can still be varied down, but only by the amount denied so long as the other validity issues have not been triggered.

In summary, where a person makes a personal deductible contribution to super it is important to give consideration to the impact a recommendation may have on the amount that can be claimed as a deduction, especially where it relates to the use of a superannuation income stream.

Andrew Biviano is the technical services and paraplanning manager, Fiducian Portfolio Services.

Appointments

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

Move of the week COIN Financial Software has announced a change of senior management, as the head of Coin, Robert McCabe, moves into a new role within Macquarie Banking and Financial Services Group. Kirk Pitman will replace McCabe as the new head of Coin product and technology.

Pitman joined Macquarie in December 2009 to lead the mortgage intermediary investment team. He also led the project that allowed Vow Financial to be established. Pitman has since played a crucial role in building technology platforms in Macquarie Adviser Services.

Before joining Macquarie, Pitman was responsible for the mortgage intermediary strategy and channel development at St George Bank. He also worked for consulting firm Accenture in Asia and Australia, and was a human resources consultant specialising in organisational design.

Pitman would spend the next few months meeting Coin clients with Robert McCabe before the official handover on 1 October.

BLACKROCK’S exchange traded fund (ETF) business, iShares, has appointed Jonathan Howie to its product and capital markets team in Australia.

Howie joined the iShares Product and Capital Markets team as director, supporting the distribution of iShares ETFs. He would assist with the development of technical and productspecific content and management of iShares broker/dealer relationships.

Howie joined BlackRock from Macquarie Bank, where he held a position within the equities structured products business for two

and a half years and more recently on the Delta 1 trading desk.

DEUTSCHE Asset Management has appointed credit analyst Jennifer Wee to its fixed income team based in Melbourne.

In her new role, Wee would contribute to the management of Deutsche Asset Management’s Australian Fixed Income portfolios, along with local team members Chris Siniakov, Andrew Canobi and Steve Sutcliffe. She would be responsible for analysing investment grade corporate bond issuers and

Kirk Pitman

would join the investment team which numbers over 150 staff.

Wee joined Deutsche Bank with more than six years industry experience, including five years at Standard & Poor’s where she was most recently a ratings specialist in the corporate ratings area.

AVSUPER has announced the appointment of Scott Malpass to the newly created role of investment officer.

The role would focus on the analysis and monitoring of the firm’s investment portfolio with the Investment Committee,

Opportunities FINANCIAL PLANNING ASSOCIATE Location: Central Queensland Company: ANZ Financial Planning Description: ANZ Financial Planning is looking to recruit a financial planning associate. Reporting to a practice manager, you will identify and act on business opportunities, network and build internal and external relationships to promote services.

To be successful in your application, you will have a thorough knowledge of the financial planning industry, have completed the DFS 1-4 (RG146), and be progressing towards your ADFS qualification.

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

Location: Brisbane Company: Zanetti Recruitment & Consulting Description: Zanetti Recruitment is seeking a senior paraplanner to fill a position with one of its clients, based in the Brisbane central business district. In this role, you will assist its advisers in strategy and development for high net worth clients.

Reporting to the senior financial planner,

BT INVESTMENT Management (BT) has appointed Nathan Pensabene as an institutional sales business development manager for the company's sales and marketing team.

Pensabene would be responsible for managing the relationships of BT's existing institutional clients, as well as growing the client base through new

investor relationships.

Before his appointment, Pensabene was executive director of sales at Global Trading Strategies, and previously held executive positions at both Catalyst Capital Management and Apostle Asset Management.

BT head of sales Martin Franc said Pensabene’s skills in building client relationships in both Australia and Asia were vital in the decision to appoint him to the management role.

JP MORGAN Treasury & Securities Ser vices has appointed Patrick Fanning as head of transition management for the firm’s Australia and New Zealand business.

Fanning’s appointment was the latest addition to the bank’s growing Financing & Markets Products (FMP) division in the Asia-Pacific, following the recent announcement of Stewart Cowan as head of FMP for Australia, New Zealand and Japan and Michael Wynn joining the Australian transition management sales desk.

Fanning had spent the last 10 years with Citigroup Global Markets where he managed over 250 transitions including some of the largest carried out in the region. Based in Sydney, he would report to Rob Saffer, global head of transition management.

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

you will be responsible for the construction of high quality statements of advice for accumulation, SMSF and high net worth clients, advising on technical strategies across superannuation, Centrelink, pensions and risk.

To be considered for this role you must have a minimum of 2-3 years experience in a paraplanning role, possess a DFS, RG146 or be studying towards your ADFS. Experience with Coin Software is preferred, but not essential.

To read a more detailed job description, and to apply, visit www.moneymanagement.com.au/jobs.

ASSOCIATE ADVISER SENIOR PARAPLANNER

custodian and managers.

Malpass would play a crucial role in responding to increasing member demand for more commentary, information and education about superannuation investment matters in general, and AvSuper’s investment portfolio in particular.

As well as having formal financial management qualifications, Malpass was trained as a cadet in a super administration firm, where he worked with both defined benefit and accumulation accounts.

More recently, he worked for Military Super’s Investment/ Operations team dealing with unit pricing, investment compliance, fund operations and alternative investments.

Malpass also has aviation experience from the Royal Australian Air Force (RAAF), where he worked as a technician servicing aircraft engines and airframes.

Location: Melbourne Company: FS Recruitment Solutions Description: This boutique-sized investment advisory, financial planning and accounting firm is seeking an associate adviser.

The key to success in this role will come down to the pride you take in your work, diligence in keeping up with legislative and compliance issues, attention to client goals and efforts to make statements of advice more personalised. You will have a minimum of 18

months experience, a finance/commerce degree and RG146 compliance. In return you will be mentored directly by one of the Partners of the business.

To find out more, and to apply, visit www.moneymanagement.com.au/jobs or contact Kiera Brown, FS Recruitment Solutions, kbrown@fsrecruitmentsolutions.com.au.

BUSINESS DEVELOPMENT MANAGERS Location: Sydney Company: Terrington Consulting Description: An Australian-owned bank is now on the lookout for business development managers (BDMs) capable of driving growth, building brand equity and providing holistic and tailored solutions that will encourage long-term partnerships and translate into mutual growth.

BDMs will work autonomously and be responsible for building their own pipeline through the development and management of key relationships.

To be successful in the role you will possess outstanding relationship skills, a solid understanding of credit risk and the ability to manage long-term relationships.

For more information and to apply, visit www.moneymanagement.com.au/jobs or contact Emily Terrington – 0422918177, emily@terringtonconsulting.com.au.

ASSOCIATE FINANCIAL ADVISER Location: Brisbane Company: Zanetti Recruitment & Consulting Description: A financial services organisation is looking for a senior paraplanner interested in being mentored by a senior financial planner and working up to the position of associate financial planner within six months.

You must be a keen problem solver with the ability to explain complex strategies and concepts. You must also possess a high degree of organisational skills, leadership qualities and the ability to interact well at a client and colleague level.

The successful applicant will have previous experience in the financial planning industry and will possess at least an RG146, and preferably an ADFS. Experience using XPLAN is also an advantage.

For more information, visit www.moneymanagement.com.au/jobs or contact Ric Zanetti on 0413 020 864.

www.moneymanagement.com.au September 22, 2011 Money Management — 27

Outsider

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

Rogue bankers tracking victims OUTSIDER was recently bemused to be forwarded a press release sent out by a notable law firm proclaiming that vulnerable Australians were being preyed upon by “rogue” bank advisers who were being driven by sales targets.

The content was in keeping with prior communications from the firm and so in and of itself, came as no surprise, although the alarming lack of any details to support any of its claims caused Outsider to raise an eyebrow or two.

But what Outsider found most amusing was that the release was forwarded with tracked changes still intact, which revealed that the original drafting of the anti-adviser document had referred the whole way through to the clients of financial advisers as “victims” rather than clients.

Advisers were “pressuring them to sign up for financial products without any regard for their victims’ circumstances,” according to the original drafting of the release.

And: “an increasing number of victims were contacting the firm because they were locked into highly geared and high risk financial products.”

Outsider feels as though he should be relieved someone at the firm saw fit to remove the word “victims” from the release, but if anything, he’s far more concerned that a large and wellresourced law firm (that must process and send thousands of documents via email each year) managed to forward a document to the media with tracked changes still intact – and in doing so, provided a telling insight into the firm’s “guilty until proved innocent” approach.

FOFA time travel IF Outsider had a heart, it would go out to all those mid-tier financial planning dealer groups which are about to be inflicted with the requirement to provide detailed answers to a rather large Australian Securities and Investments Commission (ASIC) questionnaire.

ASIC chairman, Greg Medcraft flagged the imposition of the questionnaire at the same time as releasing the results of a similar exercise inflicted on 20 largest financial planning dealer groups, last year.

Outsider wonders, though, how much

use the whole exercise will prove to be in circumstances where the 2010 questionnaire gleaned answers relating to 2008/09 and when anything collected in 2011/12 will relate to a pre-Future of Financial Advice world when the industry is living in a post-FOFA environment.

Given the relatively modest Commonwealth funding for ASIC contained in the last Federal Budget, Outsider wonders whether Mr Medcraft is expecting a modest windfall next financial year as the regulator gears to become a little more proactive in postFOFA world.

Bluechip fried Rice HAVING been involved in the odd bit of litigation in his time, Outsider has always readily accepted that if he is being represented by Mallesons Stephen Jacques, that firm will not be representing those with whom he is in dispute.

But it occurs to Outsider that this quaint little professional (ethical?) nicety does not apply to those practicing the dark arts of public relations.

How else does one explain the fact that both the Financial Planning Association and Rice Warner have been using the services of that

“

Out of context

specialist financial services flackery, Bluechip.

Bluechip has not only issued media releases on behalf of the FPA railing against Rice Warner’s controversial $11 “opt-in” findings, it has also issued a media release on behalf of Rice Warner defending/explaining that $11 opt-in rationale.

Outsider can only admire the manner in which Bluechip have got the issue covered and assumes that their palatial Sydney CBD offices are decorated in a “Chinese wall” theme.

“One call I got was from someone in jail asking if they could withdraw their pension money to pay bail.”

T. Rowe Price vice president of technology product development Matt McOsher reminisces about the old days as a superannuation call centre worker at the AIST Super Administration conference in Melbourne.

28 — Money Management September 22, 2011 www.moneymanagement.com.au

“Don’t be ridiculous. I don’t even know how to spell superannuation.”

Superannuation complaints tribunal chairperson Jocelyn Furlan quotes a complainant accused by her super fund of being negligent in not studying her member benefit statement, also at the AIST conference.

“I don't know how to extrapolate on that.”

Assistant Treasurer and financial services minister Bill Shorten told the SISFA conference that 60% of SMSFs are in NSW and Victoria – but he's not sure why.