Money Management (September 1, 2011)

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Buy-back contracts under scrutiny A bill in

By Tim Stewart DESPITE moves in the industry to remove perceived conflicts of interest, questions still remain about ‘buyer of last resort’ (BOLR) contracts between dealer groups and their aligned planning practices.

The buy-back provision was created to provide retirement security to planners, with the first BOLR contracts offered in the late 80s, according to Paragem managing director Ian Knox. Since then, dealer groups have moved to alter their BOLR contracts to combat the perception that they offer more than the market rate to practices that favour their products.

“It’s been accepted by the [Financial Planning Association] and other entities that BOLR should be stopped,” Knox said. “How do you look after your clients’ best interests without acknowledging that you’re going to get more at retirement than would be commercially available in the market?”

For his part, FPA chief executive Mark Rantall played down the suggestion that BOLR agreements were causing planners to behave unethically.

Ian Knox “I don’t think BOLR in itself is necessarily a conflict provided it is well disclosed to clients … What is important is the individual financial planner is a member of a professional association and adheres to its code,” Rantall said.

Knox said his biggest disappointment was the leaders of the industry were undermining

the industry’s push towards professionalism by offering practices BOLRs above the market rate.

“Anyone who is going out and paying advisers hundreds of millions of dollars above commercial values is undermining the advice profession,” Knox said.

The BOLRs offered by different dealer groups vary from two times recurring revenue to a maximum of four times at AMP Financial Planning (AMPFP) for experienced planners, according to Forte Asset Solutions director Stephen Prendeville.

“AMPFP is self-perpetuating. It’s a selfcontained business unit, and there’s this expectation that everyone who’s been there for 20 years will sell at four times,” Prendeville said.

“People join with the knowledge of a BOLR, so if AMPFP were to shift that, it would pose a real business risk,” he added.

Kenyon Partners principal Alan Kenyon said AMPFP could afford to pay above the market value for the practices of experienced advisers because it had a stable of younger Continued on page 3

Post-merger cashflow most important for merging practices

By Chris Kennedy THE single most important factor to consider for financial planning practices looking at merging with or acquiring another business is demonstrating reliable future cashflow of the combined business, as lenders place greater emphasis on what are the risks associated with an acquisition.

Kenyon Partners managing director Alan Kenyon said this is a factor that it is not readily understood throughout the industry.

Lenders are most interested in what the business will look like once the new practice has been incorporated, as well as how the acquisition will be funded, what

Alan Kenyon the purchaser’s liability is, and most importantly, what the free cashflow will be after financing costs, he said.

Lenders would previously be

happy to look at the annual figures of the businesses involved and be satisfied that everything was ok, and while the criteria for lending to practices may not have changed, lenders’ ability to get a more frequent handle on how a business is tracking has changed, he said.

But the principal of Hunt’s Group consultancy Anthony Hunt believed there would be an increasing trend for lenders to focus on the EBIT [earnings before interest and tax] of the business to be acquired.

“It’s taken years to get specialist teams in banks to understand the principle of revenue multiple, but they understand earnings and are prepared to lend on an earnings

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basis,” he said.

NAB’s national manager of financial planner banking Shane Kirsch said NAB assesses the strength of the cashflow and the ability of the combined business to repay debt.

“It’s what can be produced, what the banks would be looking to partner with – that’s what the assessment has to be focused on,” he said.

“You could have a business today that might be operating successfully, then acquires another one – it’s got to prove it can manage a larger business,” he said.

“We also look at the cultural fit

two parts

By Mike Taylor THE financial planning industry may have to wait longer than expected to see the entire legislative package flowing from the Government’s Future of Financial Advice (FOFA) changes, with the Assistant Treasurer, Bill Shorten, now expected to deliver the draft bill in two tranches.

Shorten told last month’s Financial Services Council (FSC) annual conference on the Gold Coast that the draft bill would be made public in early September, but industry sources have told Money Management the two-tranche approach will see key elements delivered at a later date.

Money Management has also been told that in 11th hour negotiations with key stakeholders, Shorten has sought to use a partial removal of the ban on risk commissions inside superannuation as a bargaining chip to extract commitments from financial planning group negotiators.

Shorten told the FSC conference that the Government – having listened to the Financial Planning Association and the FSC – was prepared to revisit the proposed total ban on risk commissions inside superannuation and perhaps allow commissions to be applied with respect to individually advised risk products.

However, in negotiations which have followed his statement to the FSC conference, the minister is understood to have indicated the Government will only deliver on the concession if the planning groups fall into line.

Shorten’s attitude and the reality that a ban on risk commissions inside superannuation would serve to exacerbate Australia’s longstanding

Continued on page 3

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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Bluffing with a weak hand

I

f everything goes to the plan broadly indicated by the Assistant Treasurer, Bill Shorten, Australian financial planners ought to be able to see the first draft of the Future of Financial Advice legislation within the next few weeks.

Given that to meet that deadline the Government’s legislative draftsmen will have begun working on the bills some weeks ago, planners should not expect the document will contain any radical concessions or changes. Rather, what they will see is a direct expression of government policy as conveyed by the Department of Treasury.

Draft legislation gives legal form to government policy and is usually subject to a period of consultation before it is ultimately introduced to the Parliament. As such, the financial planning industry and other key stakeholders will have the opportunity to make further comments and representations.

However if, as expected, Shorten opts to take the legislation into the Parliament in two tranches, then the industry will have to decide what it is prepared to accept in the first tranche knowing that it will need to leave room to continue haggling with the Government over the contents of the second tranche.

2 — Money Management September 1, 2011 www.moneymanagement.com.au

“

The minister is playing a dangerous game because the move for a blanket ban on risk commissions inside super always represented dubious policy...

”

It is now apparent that the only concession on offer from Shorten is a change to the Government’s approach to the banning of all commissions on risk products within superannuation, as indicated at the Financial Services Council (FSC) conference earlier this month.

Shorten indicated to the FSC that the Government would be prepared to revisit the risk commission issue and to consider allowing the maintenance of commission-based remuneration with respect to individually advised risk products. However, it is understood that his delivery of that undertaking will be subject to the planning industry ceding at

least some ground on other issues.

The minister is playing a dangerous game because the move for a blanket ban on risk commissions inside super always represented dubious policy, carrying with it a myriad of unintended consequences – many of which, were last week laid bare by modelling undertaken by specialist risk research house DEXX&R. That modelling not only confirmed the expected significant diminution in income for those advising on risk products, it also pointed to a significant magnification of Australia’s already significant under-insurance problem.

In other words, by trying to pursue the elimination of commissions as argued by industry superannuation fund lobbyists, the Government risks exposing itself to a set of potentially politically embarrassing, unintended consequences.

Ambitious politicians looking to amass a record of viable legislative reform can ill-afford to have embarrassing unintended consequences tarnish their legacy. Reversing the Government’s approach on risk commissions in super is therefore not so much a bargaining chip as a political necessity.

– Mike Taylor

News Buy-back contracts under scrutiny Continued from page 1 advisers ready to take over the reins.

AXA Financial Planning’s BOLR is the most proactive on the market, according to Kenyon.

“It’s structured that it’s there in the event of death and disablement – it’s a proper [BOLR],” he said.

A spokesperson for AMPFP said his company’s BOLR was generally below the market rate and did not contain a bias towards products.

“We have changed our BOLR recently due to the merger of AMP and AXA. The methodology is still based on revenue, but it’s part of a negotiation so it can vary,” the spokesperson said.

MLC changed its BOLR contracts in 2006, valuing practices at the current market rate rather than through a set formula favouring in-house products – although the existing contracts were grandfathered.

A bill in two parts

Quarantine default funds from TV campaigns – FPA Mike Taylor IN circumstances where there will be no commissions attaching to MySuper and default superannuation products, industry superannuation funds should also ensure such funds are quarantined from unnecessary expenditures such as television advertising.

That is the assessment of Financial Planning Association chief executive Mark Rantall, who said the financial planning industry had addressed the question of commissions some time ago, and it was time for other sections of the financial services industry to get their own houses in order.

“Our industry addressed the question of trailing commissions and the earning of passive income some time ago as we progressively moved to a fee for service regime, but there is certainly

scope for other sections of the financial services industry to be equally fastidious,” he said.

Rantall said in circumstances where it had been clearly stated that commissions should not apply with respect to MySuper and default superannuation funds, there should be equally strong rules utilised to quarantine member balances from unnecessary expenditures.

He said in circumstances where controversy had surrounded the amount of money expended by industry superannuation funds on television advertising, it followed that funds should be required to specifically quarantine MySuper and default fund balances from use for such purposes.

Rantall said with the objective of MySuper being to protect members’ interests via a low-cost default option,

Mark Rantall such protection needed to be extended beyond commissions and applied to the other activities which served to erode member balances.

Continued from page 1

under-insurance problem has given rise to concerns that the minister has sought to use the issue as a bargaining chip to achieve grudging planning industry acceptance of a two-year opt-in.

Specialist risk research house DEXX&R last week produced modelling which showed that the imposition of a total ban on risk commissions inside superannuation would not only severely impact adviser remuneration, it would also significantly undermine levels of insurance cover with respect to life and total and permanent disablement.

It is expected that the first draft of the FOFA legislation will be a direct reflection of the Government’s position as out-

no.8

Bill Shorten lined by Shorten earlier this year, including the two-year opt-in and the ban on risk commissions.

Industry sources said a key to judging the Government’s ultimate approach would be the tenor of Shor ten’s announcement attaching to the release of the draft legislation.

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Post-merger cashflow most important for merging practices Continued from page 1 – does the management have the capability to manage a larger business is a critical part, what capital is being contributed to the acquisition, and what security is being offered up as collateral,” he said.

By the same token, a business could qualify for a loan to buy a struggling practice if the bank was confident that it could successfully incorporate that business and make it profitable, he said.

ANZ general manager advice and distribution Paul Barrett said any lending for a book buy or business is subject to typical commercial lending terms and conditions, but ultimately it was the cashflow of the business to support the loan repayments.

Other factors included the requirement to meet the financial benchmarks such as loan and interest cover ratios, loan to value ratios, profitability, and synergy gains, he said.

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This material was produced in the United Kingdom. www.moneymanagement.com.au September 1, 2011 Money Management — 3

News

Steady results for Treasury Group in difficult year

By Chris Kennedy TREASURY Group has announced an increase in funds under management (FUM) but a decrease in net profit after tax (NPAT) in what it describes as a “difficult year” for funds management.

While FUM increased almost 14 per cent to $16.7 billion, normalised NPAT was $9.72 million, a decrease of 4.5% over the year, the group announced in its full year financial results.

The group will pay a fully franked final dividend of 20 cents per share, bringing the total dividend to 34 cents, up almost a third on the previous year.

“The past 12 months have been a difficult year in funds management,” said TRG chairman Mike Fitzpatrick.

“The heightened level of caution among investors, particularly retail investors, reflects the recent volatility of global equities markets,” he said.

TRG chief executive Andrew McGill said

although the consolidated profit was down, growth in FUM and underlying aggregate earnings at group boutiques were impressive in the context of volatile financial market conditions.

“TRG’s normalised net profit after tax was marginally down – this was largely due to continuing investor caution impacting a number of managers,” he said.

“Our multi-boutique strategy will remain at the core of Treasury Group’s business, however, a strong balance sheet and the

growth of existing boutiques provide financial capacity to consider a broad range of opportunities in future,” he said.

Investment performance during year was generally strong, relative to benchmarks, and there were strong net fund flows, with institutional flows increasing, particularly at RARE Infrastructure, the group stated.

But retail investor confidence remains weak and (Investors Mutual experienced net outflows ) despite excellent performance and ratings upgrades, TRG stated.

Chris Kelaher

IOOF signals more growth ahead

By Mike Taylor

IOOF has declared it is poised for future growth after reporting a 29 per cent increase in net profit after tax of $99.5 million and delivering shareholders a 22 cents per share dividend, fully franked.

IOOF managing director Chris Kelaher described the result as solid in challenging conditions, and claimed the benefits of pursuing simplification in challenging times meant the company was streamlined and “ready for new opportunities” and “poised for future growth”.

Referring to the company’s acquisition of dealer group DKN, the company’s announcement to the Australian Securities Exchange (ASX) said it was in line with IOOF’s “adviser driven growth strategy”.

“The acquisition adds strength and depth to IOOF’s existing distribution network,” it said.

Looking at the company’s platforms, the ASX announcement said that net inflows to IOOF’s flagship platforms were $650 million, which represented annualised growth of 6 per cent ahead of the industry average of 2 per cent.

Kelaher said volatile conditions in global markets had made it difficult to provide a financial forecast for the company, but he believed IOOF was well positioned to navigate its way through challenging times.

“Off the back of this strong result, and courtesy of its strong balance sheet and simplified operating model, IOOF is ready for further new growth,” he said.

4 — Money Management September 1, 2011 www.moneymanagement.com.au

News

Australian Unity achieves $1 billion in FUA

By Andrew Tsanadis AUSTRALIAN Unity Personal Financial Services has reached $1 billion in funds under advice (FUA) – a two-fold increase over the past year.

Australian Unity general manager of personal financial services Steve Davis said the business is also seeing very strong growth in other areas.

“Our mortgage broking loan book has more than doubled over the past 12 months,

and our revenue from risk insurance increased by 27 per cent over the same period,” Davis said.

“We now have a very strong business, especially when you consider that it was just a few years ago that we restructured and moved from a retail, sales driven, shopfront approach to a modern advice driven financial services business.”

The restructure allowed Australian Unity to modernise the dealership so that it is now largely prepared for the proposed Future of

Financial Advice legislation. It also allowed them to develop a more sustainable business strategy, which included the development of an accountants’ alliance business, said Davis.

“We currently have relationships with around 160 accounting firms – most of whom refer their clients to our financial advisers and mortgage brokers for specialist financial advice – and we intend to continue to grow that,” he said.

“As a result, we are still on the lookout for

good quality advisers who want to build their practices by partnering with accountants.”

Davis said accountants are turning to Australian Unity because the dealership allows accountants to provide financial services in-house or through a referral to a specialist from Australian Unity.

“It’s a flexible, full-service model that is attractive to accountants because it makes it easy for the accountant to retain their independence and identity,” said Davis.

WHK’s “solid” performance amid mixed results ACCOUNTING business WHK has delivered a “solid” fiscal performance for 2011 despite reporting a decline on a number of fronts, including revenue and cash earnings per share, according to full year results released to the Australian Securities Exchange.

The WHK Fiscal 2011 Full Year Results recorded revenue of $406.1 million – down from $413 million in the previous financial year, representing a 2 per cent decline.

The recorded revenue represents both WHK’s Australian and New Zealand ventures, which were either flat or down by 11 per cent, respectively.

Also in decline, cash earnings per share went from 9.8 cents in 2010 to 92 cents in the year ending June 2011 (down 9 per cent), while operating cash flow was down 26 per cent to 35.6 million – a sharp drop from $47.8 million in the 2010 fiscal year.

WHK pointed to the natural disasters that impacted New Zealand as a factor in the challenging business conditions faced by the company.

WHK Managing Director John Lombard said while strong cash flow and cost control point to solid management, the focus is on organic revenue growth.

“We have a strong foundation to drive the next phase of organic growth by leveraging our scale and enhancing value to our clients,” Lombard said.

“We are seeking to establish a business that will support medium term double-digit revenue growth.”

While the business is structuring to reward performance in alignment with organic revenue growth, a new shared services model for support functions will be introduced this year to boost efficiency and cut costs, WHK said.

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www.moneymanagement.com.au September 1, 2011 Money Management — 5

News Natural disasters hit Suncorp result

By Mike Taylor NATURAL disasters and other factors have served to significantly undercut Suncorp’s annual result, with the company reporting an almost 36 per cent slump in net profit after tax of $453 million.

In an announcement released to the Australian Securities Exchange, the company said the result reflected the worst period of natural disasters in the region’s history.

At the same time, Suncorp announced it had moved chief executive Patrick Snowball from a fixed term contract to a rolling contract, on the basis of his remaining with the company until at least 2015.

Under the terms of the contract change, Snowball’s fixed remuneration will be $2.55 million a year.

Despite the profit slump, the company maintained its dividend at 35 cents per share fully franked.

The result announcement revealed the company had dealt with more than 100,000 natural hazard claims worth an estimated gross cost of $4 billion being managed across Australia and New Zealand.

It said the company’s general insurance after tax profit was $392 million, down from $557 million last year, while the core bank after tax profit was $259

Patrick Snowball million, down from $268 million last year.

Suncorp Life recorded an after tax profit of $149 million, down from $222 million last year.

Commenting on the result, Suncorp chief executive Patrick Snowball said they had confirmed the substantial improvement in the underlying strength and performance of Suncorp businesses.

He said the group’s balance sheet and capital position had strengthened considerably over the financial year due to the implementation of the non-operating holding company structure and the continued run-off of the non-core bank portfolio.

Commsec dominates online trading VOLATILE markets do not appear to have significantly impacted the number of people trading shares online, according to new data released by research house, Investment Trends.

The data revealed that while the number of online share traders had fallen late last year, it had stabilised through the first five months of 2011.

Commsec continues to dominate the online trading environment, accounting for half of active trades (up from 48 per cent in December), while E*Trade was in second place, accounting for 18 per cent of primary broking relationships, with Westpac Online Investment accounting for 8 per cent, followed

by NAB OnLine Trading (6 per cent) and Bell Direct (5 per cent).

As well, the research pointed to an increasing number of traders

More global managers eye emerging markets

By Chris Kennedy THERE has been a growing trend for global equities large cap managers to increase their exposure to developing economies, but specialist emerging market managers are still likely to deliver better results in that sector, according to Lonsec’s Global Emerging Markets sector review.

Global managers are looking to gain exposure to growing companies in markets with forward momentum, but specialist managers with dedicated resources and tailored investment approaches may still deliver superior outcomes in emerging markets, Lonsec stated.

Lonsec’s highest rated managers in this sector tend to be singularly focused on the asset class rather than investing as a bolt on approach to another strategy, said Lonsec senior investment analyst Steve Sweeney.

The only two funds to receive the highly recommended rating were the Aberdeen Emerging Opportunities Fund and the T Rowe Price Asia Ex-Japan Equity Fund.

There has also been an increase in the number of funds using the MSCI All Country World Index over the MSCI World Index as the fund’s benchmark, according to the review.

“Despite the growing global awareness of emerging markets as a source of poten-

tial return, this sector remains a more inefficient research pool than developed markets, particularly for those managers comfortable investing in the less heavily researched mid cap stocks,” Lonsec stated.

“This gives fundamental, active managers with well formulated investment research processes a greater opportunity to exploit insights gained from direct company contact and the research effort in general,” Sweeney said.

“Emerging market investors paying active fees should be more willing to afford active managers greater freedom in portfolio construction to add insight and ultimately, alpha,” he said.

S&P says SMAs have improved

By Andrew Tsanadis INVESTORS are taking up more separately managed accounts (SMAs) and the number of fund managers is growing to meet demand, according to Standard & Poor’s (S&P) latest SMA Model Portfolio Ratings.

As part of its review, S&P upgraded the Dalton Nicol Reid Australian Equities High Conviction Portfolio to four stars, while the MCPM Core Australian Equity SMA was downgraded to three stars.

Ten of the SMAs, including Goldman Sachs JBWere Core Australian Equities and Hyperion Australian Growth Companies SMA, retained their rating.

Meanwhile, the Aviva Investors Blue Chip Top 20 and Ausbil Australian Concentrated Equity were withdrawn from S&P’s ratings report.

As the SMA sector continued to grow, specifically when it came to funds inflow, S&P’s fund services analyst Rodney Lay pointed to the variety of investment strategies and platform availability as a major factor in growth.

“The sector continues to be characterised by concentrated, low portfolio turnover portfolios with predominantly large to mid-market capitalisation stocks,” Lay said.

“This is partly a reflection of investor preference, which in turn partly stems from the visibility of the constituent stocks of an SMA portfolio,” he said.

Lay said larger market capitalisation stocks are looked on favourably by investors because they provide an elevated piece of mind.

“Investors have a preference for stocks they know and understand, and low turnover,

Rodney Lay as it conveys the perception to many investors that the investment manager has a greater degree of conviction in their stock picks,” said Lay. S&P believes that, overall, the management of model portfolios has improved – particularly when it comes to managers who may have previously been criticised by the ratings house.

The rate at which invest-

6 — Money Management September 1, 2011 www.moneymanagement.com.au

ment decisions were provided to SMA platforms has also improved, while the reconciliation between the performance of funds managers and the actual performance of their model portfolios on each platform has helped to paint a clearer picture for both ongoing and potential investors.

“As a consequence of these improvements, what we refer to as SMA-specific risks, tracking error and relative performance risk between the SMA product on the platforms and the managers’ internal/unit trust equivalent has declined,” said Lay. S&P Fund Services believes SMAs are an efficient access mechanism to managers’ investment strategies, providing stock, taxation, and cash flow visibility, as well as a more efficient taxation structure for investors.

using smart phones to conduct their trades.

The survey found that while Commsec might dominate the market, ‘deep discount’ providers Bell Direct and CMC Markets led in terms of customer satisfaction.

Investment Trends senior analyst Pawel Rokicki said online traders were very much aware of market events in May, and while two-thirds saw Australia as a healthy economy, the majority were worried the European debt crisis might spell a second wave of the global financial crisis.

“Against this backdrop, the underlying number of traders held up well, although until the recent extreme volatility, trading volumes have been weak,” he said.

Yields eclipsing term deposit rates

By Tim Stewart WITH yields on equities rivalling bank term deposit rates, the Australian share market is looking attractive as a long-term investment.

“The Australian market as a whole provides a significant dividend investment play – a dividend yield of about 5 per cent,” Paul Taylor said Fidelity head of Australian Equities, Paul Taylor. “Some individual stocks obviously offer even more.”

The ASX200 Accumulation Index dividend yield of 5 per cent was edging closer to the average term deposit rate for two years of 5.7 per cent, Taylor said.

He added that due do recent volatility, the Australian market was sitting at about 10 times earnings.

“Traditionally, the Australian market trades at closer to 14-15 [times earnings]. While I don’t think the Australian market is going to go from 10 back up to 14-15 anytime soon, I think maybe we stay at that 10-11 and returns come from the dividends that get paid, as well as the earnings growth in the market,” Taylor said.

BNY Mellon Asset Management Australia managing director Bruce Murphy agreed that the banks in particular looked like a good buy, since their stocks were offering higher yields than the banks themselves were offering their customers in term deposits.

“You can buy banks at a 10 per cent yield at the moment, and that seems like a great deal. It’s a volatile market, but it’s a stock picker’s market [since] markets are probably going to go sideways for a while.”

It isn’t only Australia that is looking like a good longterm investment, according to BNY Mellon Asset Management Asia Pacific chief executive Alan Harden.

“The markets present pretty good value. In most places now – certainly in the US and here – you’re getting a better yield on equities than you are on 10-year bonds,” he said.

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News

nabInvest takes non-controlling interest in Peridiem

By Angela Welsh NATIONAL Australia Bank’s (NAB’s) direct asset management business, nabInvest, has taken a noncontrolling interest in Peridiem Global Investors LLC (Peridiem), a Los Angelesbased investment management firm specialising in global fixed income.

Peridiem’s chief executive Andrew Stenwall has more than 20 years experience in por tfolio management, nabInvest said in a statement. Stenwall has previously been responsible for managing over $170 billion in global fixed interest.

The Peridiem business comprises 15 senior investment professionals who

have worked together over the past 10 years – most recently, at Nuveen Asset Management. nabInvest chief executive Garry Mulcahy said nabInvest remained focused on partnering with investment management fir ms that have capabilities across a range of asset classes.

“Peridiem provides broad

global fixed income skills covering over 30 countries and currency markets, which complements nabInvest’s strategy to build a sustainable and diversified asset management business,” Mulcahy said.

Stenwall said he looked forward to offering income or iented strategies to Australian investors.

Banks forecast lower cash rate

By Tim Stewart

Financial Planner of the Year 2011

8 — Money Management September 1, 2011 www.moneymanagement.com.au

FIXED interest rates are sitting significantly below variable rates as lenders prepare for a cut in the official cash rate amid continuing global economic uncertainty.

Some lenders are offering fixed interest rates that are as much as 1.5 per cent below the bank’s standard variable rate on the market, according to Loan Market chief operating officer Dean Rushton.

“We haven’t seen a gap like this between fixed variable rates in some time,” Rushton said.

He said the spread between fixed and variable rates had remained consistent since the Reserve Bank of Australia (RBA) last moved on interest rates by raising them from 4.5 per cent to 4.75 per cent in October 2010. However, he added that the spread had widened in the last 12 weeks with the three-year fixed rates falling significantly below variable rates.

“During the initial months of the global financial crisis, medium term (three to five year) fixed rates stood almost 2 per cent above variable rates, which highlights the extraordinary position the market is in right now.”

Lenders have been forecasting the RBA will lower the official cash rate due to the volatile global economy and declining domestic consumer confidence, Rushton said.

He added that Loan Market had received a 15 per cent increase in enquiries from customers about fixed rate products in the last three months.

News

Grim modelling on risk commission ban

By Mike Taylor A GOVERNMENT decision to ban risk commissions inside super would have a devastating impact on not only planner remuneration but levels of coverage, according to a new analysis published by specialist risk research company, DEXX&R. The analysis, published last week, does not take account of the announcement by the Assistant Treasurer and Minister for Financial Services, Bill Shorten, that the Government is prepared to cede ground with respect to commissions on individually advised risk products, and paints a grim picture of the industry in the event of a total ban.

Shorten announced earlier this month that the Government might be prepared to revisit the question of a ban on individually advised risk commissions, but has yet to formally declare a precise approach.

The DEXX&R modelling imposes a number of assumptions around the impact of a zero commission being payable on superan-

nuation business, including a 30 per cent reduction in superannuation premium rates, a 50 per cent decline in adviser super new business from 2013, and a compensating increase in adviser ordinary new business as advisers recommend risk benefits be held as ordinary rather than superannuation business.

The modelling also assumes a compensating increase in adviser ordinary new business, replacing new business that would otherwise have been written under group super policies included in master funds and wrap accounts.

Utilising these assumptions, the DEXX&R research claims the projected outcome on individual lump sum business would be a decrease in each year from 2013, with the decrease in new premium in 2013 being $31 million growing each year to a $183 million decrease in new premium in the 12 months ending 2020.

It then foreshadows a total decrease in new lump sum business between 2013 and 2020 to be $742 million, with new

Bill Shorten business commissions projected to be $294 million lower by 2020.

The DEXX&R modelling forecasts a proportionately similar picture with respect to Individual Disability Income business.

Property developer court case finalised

By Angela Welsh THE corporate regulator has finalised proceedings in the Supreme Court of New South Wales against property development company Great Northern Developments Pty Ltd (Great Northern).

Based in Richmond, New South Wales, Great Northern raised funds from investors through loan arrangements and promissory notes to finance its building projects in Queensland.

As at 30 June 2008, Great Northern owed in excess of $24 million to investors.

The Australian Securities and Investments Commission (ASIC) commenced proceedings against Great Northern in September 2009, alleging that Great Northern had offered the loans and promissory notes in breach of the Corporations Act 2001 (the Act), and that it is just and equitable that Great Northern be wound up by the Court.

In September, the Court confirmed that Great Northern had contravened 283AA of the Act by failing to enter into a trust deed and by failing to appoint a trustee that complies with 283AC before making offers of debentures that require disclosure.

The Court accepted an undertaking from Great Northern that it would enter into a trust deed and appoint a trustee in compliance with the Act. Great Northern was unable to secure a trustee. However, ASIC assisted the company to achieve regulatory compliance – by ensuring that those investors who elected to continue with their investment were transferred to the La Trobe Australian Mortgage Fund – a registered managed investment scheme operated by La Trobe Capital and Mortgage Corporation Limited; making sure the continuing investors obtained a mortgage over Great Northern’s properties; and ensuring those investors who did not wish to join the scheme were fully repaid their original investment and interest.

ASIC Commissioner, Dr Peter Boxall AO, said the regulator’s action was consistent with ASIC’s objective of achieving compliance as a first step to safeguard investor funds.

“Where appropriate, and in the best interest of investors, ASIC will take steps to ensure that fundraising schemes which might be operating outside the requirements of the law are made compliant so that investors are afforded the relevant legal protections,” Dr Boxall said.

Clients OK about opt-in FINANCIAL planners might not like the proposed two-year ‘opt-in’ rule or socalled ‘dollar fee’ invoicing, but that is what most clients really want, according to a study conducted by MSI Global Alliance.

The MSI Global Alliance – which markets itself as one of the world’s leading international alliances of independent legal and accounting firms – has published the findings of a survey of 570 business owners which it says confirms pressure from clients for financial planners to move to charging time-based fees.

And while the survey outcome clearly contains some negative results, it also noted that planners were “the most trusted source of retirement planning advice”.

On the fee for service question, the survey found that 68 per cent of participants want financial planners to charge a ‘dollar fee’ via a tax invoice for the number of hours work on their investment, with 22 per cent happy to be charged a percentage of funds under management.

Dealing with the two-year opt-in, the survey found that 66 per cent of respondents regarded it as a positive move, with just 14 per cent saying it was a backward step.

It suggested that while respondents agreed opt-in would impose higher costs on planners, nearly half believed the costs would not be significant.

Commenting on the survey results, MSI Global Alliance spokesman, Charles Hornor, said it had confirmed two things – that financial planners were the most trusted source of investment advice and that there was concern over what fee for service should really mean in practice.

“Clients are looking for value for money more than ever before, and they are saying that a dollar fee based on the time actually spent on their financial affairs is preferable to being charged a percentage of funds under management,” he said.

Five clear reasons to invest internationally with Five Oceans 1. Aims to deliver strong, consistent performance.

2. Benchmark unaware investment approach.

3. Reduced volatility via hedging.

4. Active currency management.

5. Diverse investment ideas.

12450/0811

For information on the Five Oceans World Fund visit www.5oam.com The Lonsec Limited (‘Lonsec’) ABN 56 061 751 102 rating (assigned May 2011) presented in this document is limited to ‘General Advice’ and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria.

Challenger Managed Investments Limited ABN 94 002 835 592, AFSL 234 668 (CMIL) is the responsible entity and issuer of interests in the Five Oceans World Fund ARSN 117 060 769 (Fund). This advertisement is not intended to be financial product advice and does not take into account any person’s investment objectives, financial situation or needs. Accordingly, investors should consider these matters, the Fund’s product disclosure statement (PDS) and its appropriateness to them before making an investment decision. The PDS is available from www.challenger.com.au and should be considered prior to making an investment decision. Five Oceans Asset Management Pty Limited ABN 90 113 453 160 , AFSL 290 540 is the Fund’s appointed investment manager. www.moneymanagement.com.au September 1, 2011 Money Management — 9

News

Super returns start 2011/12 in the red

By Mike Taylor AUSTRALIAN superannuation fund returns have started the new financial year in the red.

That is the bottom line of the latest data from Chant West, which has reported that returns for the median growth superannuation fund fell 1.5 per cent in July on the back of weak share

markets, with the Australian market down 3.8 per cent for the month and with international equities falling 2.6 per cent in hedged terms.

Chant West principal Warren Chant said share markets had been the main drivers for growth fund performance, and reacted sharply to news whether it was good or bad.

“In the early weeks of the new financial year we’ve seen share markets take a beating, bringing back grim memories of the global financial crisis,” he said.

Chant said for the financial year to 19 August, Australian and international shares were down about 10.5 per cent and 15.5 per cent respectively, on the back of concerns about the debt crisis in

MLC announces insurance upgrades

By Chris Kennedy MLC is aiming to reduce insurance turnaround times by up to 70 per cent through a new offer with upgraded service, product and technology benefits.

The improvements are based on adviser feedback and aim to give them more time to focus on their clients, said MLC executive general manager of insurance, Duncan West.

Adviser s have been asking for an upgraded product that is more competitive in the marketplace, as well as a service and technology of fering that makes it easier for them to do business, West said.

Launching from 17 October, MLC will present improvements to its online application engine, Riskfirst, and a new desktop based quotation tool called Illustrator, West said.

“From launch day we expect at least 20 per cent of applications completed online will be approved immediately,” he said. Currently applications have to be signed off manually and depending on the rate at which the technology is taken up we could see higher rates of online approvals, he said.

The new offer will bring together the best elements of Protectionfirst and MLC’s Personal Protection Por tfolio, West said.

“We’re excited about these developments and will work closely with advisers to support their businesses through implementation,” he said.

10 — Money Management September 1, 2011 www.moneymanagement.com.au

Europe and the US. “We estimate that the median growth fund is down about 5.5 for this period,” he said.

Chant said industry funds, with their lower weighting to listed markets, returned minus 1.5 per cent and therefore outperformed master trusts which, on average, returned minus 1.9 per cent in July.

News

Annuities drive strong Challenger result

By Mike Taylor CHALLENGER Limited ended the financial year in good shape, posting a 7 per cent increase in normalised net profit after tax of $248 million on the back of strong product sales and cash earnings.

The company said increased advertising, marketing and distribution activity, and an outlook for

ongoing equity market volatility had helped drive organic retail sales of annuity products up by 56 per cent to $1.46 billion.

As well, Challenger chief executive Dominic Stevens said in the company’s announcement to the Australian Securities Exchange he believed there was considerable scope for further growth in annuity sales.

“While Challenger’s annuity

sales have already grown by an annual compound rate of 33 per cent since 2006, we believe we’re still in the early stages of a fundamental change in the Australian retirement savings market,” he said.

Stevens said to match expected demand the company had grown its distribution team, targeting 25 per cent retail annuity growth, 10 per cent retail book growth and a

record $430 million in cash earnings for the life company.

“In the medium term, we believe this growth rate is sustainable because baby boomers controlling 60 per cent of the assets in our trillion dollar super system are beginning to retire,” he said.

Challenger rewarded investors with a final dividend of 9.5 cents, with the full-year dividend up 14 per cent to 16.5 cents.

Dominic Stevens

Mortgage Choice reports a 7.4% profit boost

By Milana Pokrajac MORTGAGE Choice has recorded a $15.9 million net profit after tax, an increase of 7.4 per cent on the previous corresponding period.

The mortgage broker has deemed this result a healthy financial performance, with the group’s loan book also rising 6 per cent to $42.4 billion.

Chief executive officer Michael Russell said the past financial year was one of the most demanding for the company’s brokers and staff in its 19 years of operation.

“First homebuyers’ home loan appetite showed the largest fall because many were encouraged into the 2009 and 2010 marketplace by the First Home Owner Grant (FHOG) boost.”

The number of dwellings financed for first home buyers in the 2011 financial year was down 35 per cent on the last corresponding period.

“Financial year 2011 was especially challenging for mortgage brokers due to the prior financial year’s FHOG boost bringing many purchases forward and the drop in Australians’ financial confidence,” Russell said.

“This damage was caused by a range of living cost hikes, November’s out of cycle interest rate rises, and speculation about further rises and a socalled housing bubble,” he added.

Mortgage Choice received total commission revenue on a cash basis of $132.9 million, down 1.6 per cent. www.moneymanagement.com.au September 1, 2011 Money Management — 11

News

IOOF to retain DKN staff and execs

By Chris Kennedy IOOF will aim to retain the majority of existing DKN employees and offer retainers to senior executives if a proposed takeover of the group goes ahead – although certain positions may become redundant, according to a proposed scheme of arrangement released to the Australian Securities Exchange.

Subject to a review of the DKN business, IOOF said it intends to retain the majority of existing employees that support the Lonsdale dealer group and DKN wealth management practice joint ventures, and where relevant, relocate those employees to IOOF’s head office.

However, IOOF also said it expected some corporate, managerial and operational duplication between the businesses, and as such,

certain positions may become redundant – although the extent of this would not be known until after a review was completed.

IOOF also said it has agreed to make a retention payment of $180,000 and issue 100,000 IOOF employee options to DKN director and chief executive Phil Butterworth.

IOOF would also make retention payments and issue IOOF employee options with an exercise price of $7.50 to DKN senior executives Andrew Rutter, Mario Modica and Ken Costas, if the scheme becomes effective.

The total of all such executive retention payments is approximately $335,000 in cash with 200,000 IOOF employee options, with those payments aimed to ensure continuity of service for up to two years following the scheme implementation date, IOOF stated.

IOOF stated the DKN business will

continue in substantially the same manner as it is presently, with no other redeployment of the fixed assets of DKN. The proposed merger comes as part of a stated intention by IOOF to grow through vertical integration, and the opportunity to cross-sell products to an enlarged distribution network.

The proposed acquisition should add strength and depth to IOOF’s distribution network, broaden DKN’s product offering and accelerate the growth of DKN’s business under IOOF’s larger vertically integrated wealth management model; and create more efficient operations by leveraging IOOF’s capital and scale to implement change, IOOF stated.

Shareholders are to vote on the scheme proposal on 27 September, 2011.

Zenith secures Global uncertainty drives fund outflows new mandates

By Tim Stewart RATINGS house Zenith Investment Partners has been added to the research panel of Melbourne-based financial advisory group, RetireCare Personal Wealth Management.

Zenith announced the mandate last week, along with the fact it had been appointed by Adelaide-based People’s Choice Credit Union as a primary research provider.

Commenting on the appointments, Zenith national sales manager John Nicoll said many dealer groups were reassessing their service relationships.

“The value of good portfolio construction is particularly impor tant during volatile equity markets,” he said.

CONCERNS about global economic growth have led to outflows from 19 of the 25 major equity, bond and sector fund groups monitored by funds data tracker EPFR Global over the last few weeks.

Investors redeemed $2 billion from high-yield bond and commodities sector funds, and continued reducing their exposure to Asian exporters.

But one theme that was standing out among the outflows was an increased appetite for dividendpaying equities, according to EPFR Global director of research Cameron Brandt.

“Recently the flows have been more along sector than country lines, but so far this year equity funds with a dividend focus have pulled in nearly $13 billion, versus collective outflows for all the equity funds we track of over $45 billion,” Brandt said.

Amid sovereign debt worries in the Eurozone, investors have turned to the ‘safer’ sovereigns, with German, Canadian and Swiss equity funds recording record inflows for the week ending 17 August, according to EPFR Global managing director Brad Durham.

“At least in the developed markets space, investors are heeding the old dictum that in tough times you invest in the creditor, not the debtor,” Durham said.

US equity funds recorded moderate outflows, as redemptions from US exchange-traded funds balanced out inflows into actively

managed funds – although the EPFR data didn’t take into account the recent poor employment and industrial production data, Durham added.

Emerging markets equity funds came in at $2.77 billion, with Asia ex-Japan equity funds accounting for over half of that amount, as investors became less bullish about exporters in the region.

Middle Eastern and African equity funds extended their run of outflows to 15 weeks, as civil unrest, weaker oil prices and a softening outlook for commodities took their toll.

LMI fact sheet will provide greater education for borrowers: Genworth

By Andrew Tsanadis MORTGAGE insurer Genworth Financial has supported a government move to introduce a fact sheet to educate homebuyers on home loans with lenders mortgage insurance (LMI).

The announcement comes on the back of the Government’s bank competition reform package, and will provide greater transparency and education for borrowers, said Genworth.

Genworth said the mandatory fact sheet could be similar to the Government’s key fact sheet for home loans, and could be handed out to lenders just prior to borrowers signing their home loan contract.

“Genworth believes it is important that homebuyers know how LMI works and the benefits it offers, plus their potential rights in relation to existing refund schedules if they switch home loans,” Genworth CEO and President, Ellie Comerford said.

By Ellie Comerford “We also support Treasury’s findings and the Government’s decision to rule out the introduction of a scheme to allow the transfer of LMI between lenders,” she said.

As part of the fact sheet, Genworth said borrowers should be made aware of the reason

12 — Money Management September 1, 2011 www.moneymanagement.com.au

that LMI is required by a lender, and the cost of insurance – which is most often spread over the entire term of the loan.

Genworth said home buyers should also be made aware that discounted mortgage insurance at the outset of the loan may be provided instead of a refund.

In a consumer survey conducted in June, Genworth found more than two-thirds of Australian borrowers agree that LMI is a helpful product for first home buyers.

“At a time when the dream of owning a property looks increasingly unattainable, risk products such as LMI insurance are helping aspiring homebuyers buy a home sooner,” Comerford said.

“Consumers value that LMI is a community priced product, meaning that borrowers who take out loans pay the same amount whether they live in, for example, Western Sydney, Brisbane or regional Australia.”

David Knox

Higher SG more important than carbon tax

By Mike Taylor AUSTRALIA’S world-class retirement savings system is in danger of failing unless the Government moves more promptly to lift the superannuation guarantee to 12 per cent, according to leading retirement income specialist, Mercer senior partner, David Knox.

Knox claimed the 12 per cent superannuation guarantee (SG) rise proposal had been sidelined by the focus on the carbon tax, which overlooked the reality that superannuation would have a much bigger impact on personal living standards than either a carbon tax or an emissions trading scheme.

He said opponents to the increase in the superannuation guarantee from 9 to 12 per cent claimed taking 3 per cent from wages would lead to a drop in living standards, but Mercer did not believe this would be the case.

“The real decline in living standards will come much later as our incomes drop when we hit retirement, unless we raise the superannuation guarantee now,” Knox said.

He pointed to recent Organisation for Economic Cooperation and Development research which showed under the current 9 per cent SG regime retirees could look forward to a net income, after allowing for tax and the age pension, that was little more than half their net income before they retired.

“This is not good enough for a retirement savings system that continues to be held up as one of the best in the world,” Knox said.

“Increasing the level of Australia’s compulsory superannuation will not only improve the living standards of future Australian retirees, it will boost the long-term sustainability of the economy,” he said. “More money in super means there are more funds available for a range of investments within Australia, as well as providing the economy with greater protection from external shocks.”

SMSF Weekly Australians stop spending to save for retirement

By Mike Taylor AUSTRALIANS are spending less and saving more, not only because they became worried by the impact of the global financial crisis (GFC), but also because many baby boomers now realise they will not have enough to fund their own retirement.

That is one of the findings of a research paper released by AMP Capital Investors, in which its head of macro markets Simon Warner joined with port-

folio manager Andrew Scott to investigate the phenomenon of the Australian “conservative consumer”.

Their research paper – Australian Retirement Funding and the Savings Ratio – pointed to the level of unease and changed behaviour in the household sector that has occurred within what is described as “a generally positive macroeconomic backdrop”.

Warner and Scott point to suggestions that Australian consumers will become less cautious as the economy improves, but

warn that this might not ultimately be the case in circumstances where those aged over 50 have experienced almost the perfect storm with respect to the impact of the GFC on their retirement goals.

“When the household sector does look forward, the scale of underfunding for retirement goals under a variety of realistic scenarios has the potential to generate continuous upward pressure on the savings rate in Australia,” they said.

“It seems possible that the standard norms of what constitutes ‘adequate’

Equities exposures hurt amid volatility SELF-MANAGED superannuation fund (SMSF) investors with higher than average exposure to equities will have started the new financial year in negative territory.

That is the bottom line of data released by two specialist superannuation fund research and ratings houses – Chant West and SuperRatings.

Ac c o rd i n g t o C h a n t We s t principal Warren Chant, the median growth superannuation returned minus 1.5 per cent in July on the back of the declining value of both domestic and international equities – bringing back memories of the global financial crisis.

At the same time, Super Ratings managing director Jeff

Bresnahan said the median balanced fund had fallen by 1.4 per cent for the month, and pointed out that this had occurred before the sharp equity market sell-off began in August.

Further, Bresnahan said the extreme bout of market volatility was not expected to go away any time soon.

Like Chant, Bresnahan said the greatest pain had been felt by those funds with greatest exposure to equities.

The confir mation of the decline of superannuation fund returns into the red during July has come amid other data suggesting many investors have sought to gain greater exposure to cash products, including term deposits.

SMSF options in pension phase

By Damon Taylor

Warren Chant

Govt warned to stop super tinkering THE Federal Government needs to ensure more stability around the legislation and regulations surrounding superannuation if it wants community support for lifting the superannuation guarantee (SG) to 12 per cent, according to Institute of Chartered Accountants in Australia specialist, Liz Westover.

Discussing the proposed rise in the SG on the ICAA web site, Westover said if more hard-earned cash was going to be directed to superannuation

savings – such as historical levels of savings rates, debt to income, or debt to assets – are on their own insufficient metrics to utilise in understanding the current savings rate dynamic,” the research paper said.

“The increase in the savings rate has been meaningful, and our analysis suggests that the current savings rate may have reached long run equilibrium levels,” it said. “However, investors should be aware that in our judgement the risks around the savings rate remain to the upside.”

funds, the rules needed to stop changing “so we can be sure it will still be there when we retire”.

“We need to know that what we warn is heading into an efficient system which is managed without conflicts, with reasonable costs, and without overly complex rules that are easily breached,” she said.

Westover said the Cooper Review and other initiatives had provided the opportunity to get things right, but once that had occurred, it was imperative that the tinkering stopped.

SELF-MANAGED superannuation fund trustees are just as well placed in the pension phase as those in conventional funds, and may even enjoy greater flexibility during periods of market volatility, according to Peter Crump, Superannuation Strategist for ipac South Australia.

“They're probably even more flexible in pension phase,” he said. “In the first instance, you move from a tax concessional environment to an even better tax environment, which is either more tax-free in terms of exempt investment income or fully tax-free.”

Next in the list, according to Crump, is the ability to reset some of the tax components from an estate planning perspective by drawing money out.

“And if you're either below 65 or still working, you can put money back in and recirculate money under the withdrawal re-contribution process,” he added. “Thirdly, you have the flexibility where you can actually start to contemplate the direction of your eventual benefit payments or pension payments for estate planning purposes.”

For Crump, the perception of agility during pension phase can be a significant drawcard, and is probably a large part of the reason behind SMSF start-ups occurring in the years leading up to retirement.

“People want to be more agile, and that agility is hard to achieve at a fund where you're not the trustee,” he said.

“For example, stopping and resetting pensions involves a series of paperwork in a public offer fund, but it involves simple paperwork in a self-managed fund.

“In many cases, it’s a perception rather than reality, but people believe that they have greater agility and convenience,” Crump said.

www.moneymanagement.com.au September 1, 2011 Money Management — 13

InFocus PERFORMANCE SNAPSHOT Indices Versus Active Funds Performance over a five

Winners:

70%

of Australian equity small-cap funds outperformed the S&P/ASX Small Ordinaries Index

Losers:

70%

of Australian equity general funds were beaten by the S&P/ASX 200 Accumulation Index

60% While all about you lose their heads

of all active funds underperformed, relative to their benchmark

60%

of active Australian A-REIT funds also failed to beat the

70%

of active Australian bond funds fell short of the benchmark Source: Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA Australia)

WHAT’S ON AFA Australian Microcap Investment Conference 18-19 Oct 2011 Sofitel Melbourne on Collins, Melbourne www.afa.asn.au/profession_even ts.php#state

ACI Annual Conference 20-21 October 2011 Hilton Brisbane www.compliance.org.au

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

FPA 2011 National Conference 16-18 November 2011 Brisbane Convention and Exhibition Centre www.fpa.asn.au

Australian superannuation fund returns have started the 2011/12 financial year in negative territory but, as Mike Taylor reports, most members have learned enough from the GFC not to crystallise their losses.

A

t the close of the 2010/11 financial year, many Australian superannuation fund members could look at their account statements and, if they knew how, make the assessment that while they had enjoyed close to 18 months of positive returns, they still had some way to go to make up losses incurred during the global financial crisis (GFC).

The market volatility which has marked the closing weeks of July, and most of August, suggests it may be as much as another 18 months before members of Australian superannuation funds can claim to have regained their GFC losses.

Data released last week by specialist research houses Chant West and SuperRatings confirmed that Australian superannuation funds had started the new financial year in red figures, with the median growth fund declining 1.5 per cent in July (Chant West) while the median balanced fund declined by 1.38 per cent (SuperRatings).

Importantly, neither Chant West principal, Warren Chant, nor SuperRatings managing director, Jeff Bresnahan were predicting the market volatility which had undermined returns was likely to end any time soon.

According to Bresnahan, the current extreme bout of market volatility is not expected to go away quickly.

“It has been with us since the GFC and will remain with us,” he said.

While superannuation fund returns through July and August were reminiscent of the GFC, so too was the relative performance of industry funds and retail master trusts. Just as had been the case in 2008/09,

14 — Money Management September 1, 2011 www.moneymanagement.com.au

retail master trust returns proved to be harder hit than those of industry superannuation funds due to the former’s higher exposure to equities.

Therefore, on the back of their higher exposure to unlisted and less frequently valued assets, the industry superannuation funds will emerge from the opening months of the new financial year in better shape than their retail master trust competitors.

According to Chant West pr incipal, Warren Chant, industry funds with their lower weighting to listed markets returned minus 1.5 per cent during July compared to minus 1.9 per cent for industry funds.

What both Chant and Bresnahan might have noted, however, is that retail master trust returns outstripped those of the industry funds through much of 2010 because the same exposure to equities which saw returns diminished also sufficed to see them recover at the same pace as the equity markets.

At the same time, the returns of many industry funds languished amid some slow adverse revaluations of their unlisted asset holdings.

The good news for financial planners and their clients is that having experienced the adversity of the global financial crisis, they are well aware of the scenarios that are likely to evolve and the reality that switching funds in a crisis most often results in the crystallisation of losses.

Hardly surprising in the face of two consecutive months of negative returns, Chant and Bresnahan were last week choosing to point to the fact that superannuation is supposed to be a long-term investment and that, taken over the long haul, has

tended to outperform expectations.

Chant points out that both growth and conservative superannuation strategies based on CPI plus 3.5 per cent and CPI plus 2 per cent respectively have performed above expectations about 60 per cent of the time.

Bresnahan argues that market downturns are going to occur about once every five years, and that a panicked switch to cash is not the way to go.

“Short-term, knee-jerk reactions are never a good idea, and even less so when they involve retirement savings and lead to the crystallisation of losses,” he said.

“The fact is that over the longer term, balanced funds and even fixed interest funds, outperform cash.”

“Members certainly shouldn’t panic, having been through the worst of the GFC and then seeing their balances recover,” Bresnahan said.

While at the height of the GFC, a number of superannuation funds undertook advertising campaigns which appeared aimed at encouraging disenchanted members to switch funds, the latest Roy Morgan Research suggests that switching is not high on most members’ agendas.

Switching is still most likely to occur when people change jobs but the Roy Morgan research confirms that the most important element for members remains the level of their returns.

When superannuation returns are in negative terr itor y across the board, Australians appear to have learned enough to stay put – knowing that industry funds returns may be slower to decline, but very often they are even slower to recover.

OpinionHealth Superannuation and the terminally ill While a reflex action to terminal illness might be to claim super immediately, Sarina Raffo examines a better strategy for dealing with a worst-case scenario.

T

aking superannuation early is generally par for the course for someone who is terminally ill.

However, it may be worthwhile stopping and thinking of better options from a financial planning perspective for your client if they are in this unfortunate and all too common predicament.

Specifically, there are some key issues to consider: • Access; • Taxation; • Estate planning; and • Insurance proceeds.

Insurance proceeds

Access There are potentially two conditions of release available to a terminally ill client: permanent incapacity and terminal medical condition. There are some important distinctions between the two.

The terminal medical condition of release requires certification from two registered medical practitioners (including one practitioner who is a specialist on the particular injury or illness) that the person suffers from an illness or has incurred an injury that is likely to result in their death within a (certification) period that ends no more than 12 months after the date of the certification. To satisfy the terminal medical condition requirements, the client must have a life expectancy of less than 12 months.

In contrast, a trustee of a super fund may release super benefits under the permanent incapacity condition of release if the trustee is reasonably satisfied that the individual is unlikely to engage in gainful employment for which the person is qualified.

Medical certification is not a requirement under permanent incapacity, rather, it is up to the trustee as to the standard of proof they require to enable them to be reasonably satisfied that the definition has been met.

A client who is permanently incapacitated must be unlikely to be able to work, whereas a terminally ill client can conceivably continue working (subject to capacity).

Terminal medical condition benefits cannot be rolled over within the superannuation system, although a terminal medical condition and permanent incapacity benefits may be retained in the super fund indefinitely.

Both a terminal medical condition and permanent incapacity benefit can be paid in the form of a lump sum or an income stream.

Taxation Terminal medical condition benefits A terminal illness lump sum benefit is paid tax-free, regardless of the recipient’s

stream for ongoing tax benefits. Alternatively, the client could commence an income stream while alive, with a reversionary nomination to the surviving spouse.

Where a terminally ill individual has non-tax dependent beneficiaries, it may be preferable to take a tax-free lump sum benefit and distribute the money immediately.

age and the underlying tax components.

In addition, it is not assessable income, and it is not exempt income.

Concessional tax treatment does not apply to a terminal medical condition income stream; any taxable component is taxed at marginal tax rates, similar to a disability income stream. However, the 15 per cent tax offset only applies between preservation age and age 60 or if the disability super benefit definition has been met. A terminal medical condition income stream can only be commenced from the client’s existing fund (ie, the benefit cannot be rolled over to another fund). However, a client can roll their benefit to another fund (that pays an income stream) before declaring terminal illness. Alternatively, the client can withdraw their benefit and recontribute it to another fund (if eligible).

Permanent incapacity benefits A lump sum disability benefit is taxed as a normal super lump sum (ie, it is paid tax-free from age 60 but may be taxable under the age of 60). However, an additional tax-free amount may apply to lump sum benefits paid under age 60 to reflect the future period the individual would have been expected to work. Since the formula relates to days to retirement (generally age 65), the younger the individual, the more tax-free component.

Importantly, insurance proceeds are included in the lump sum benefit to which the formula is applied.

For the additional tax-free amount to be calculated, a crystallising event must take place – ie, a super lump sum must be paid, or alternatively, the benefit can be rolled over. In addition, two legally qualified medical practitioners must certify that because of the person’s illness or

injury, it is unlikely he or she will ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training. The additional tax-free amount does not apply to a disability income stream. For someone who is under 60, the taxable component of the income stream payments is taxed at their marginal tax rate. However, the taxable portion will be entitled to a 15 per cent tax offset, regardless of the recipient’s age.

Income payments to an individual aged 60 or over are tax-free.

Estate planning If an individual who is terminally ill or permanently disabled withdraws their benefit from super, they may distribute some money to children and grandchildren at that point. However, it may be more tax-effective to retain some or all the money in super and have it distributed as a death benefit.

If the terminally ill individual does not require the money and has tax dependent beneficiaries (eg, spouse or child under 18), it may be worth considering leaving the money in accumulation so the beneficiary can take advantage of the anti-detriment provisions, and potentially receive a larger death benefit. The antidetriment is essentially a refund of the 15 per cent contributions tax paid. As not all super funds pay an anti-detriment benefit, the client could roll their benefit to another fund (that pays an anti-detriment amount); this must be done before declaring terminal illness.

If benefits will be paid to a tax dependant (particularly if there are minor children) consideration could be given to retaining the benefit in super so they can have the option of taking an income

If a client receives insurance proceeds (either total and permanent disability or terminal illness), these will be added to the taxable component of their superannuation balance. This will have implications if benefits are retained in super or an income stream is commenced.

It is likely that an untaxed amount will arise upon payment of a death benefit to non-tax dependants (ie, tax of up to 31.5 per cent will apply to a portion of the death benefit).

Where an income stream is commenced, the tax components will be proportioned between taxable and taxfree components. The insurance proceeds will create a larger taxable component.

This will mean more tax on a terminal medical condition or permanent incapacity income stream before age 60.

An anti-detriment amount is calculated on a lump sum death benefit to a spouse or child (of any age); however, the calculation excludes the insurance proceeds. An untaxed amount (if any) is calculated on the entire death benefit (ie, the death benefit increased to include the anti-detriment amount).

Care needs to be taken if rolling to another fund before declaring terminal illness (to take advantage of the anti-detriment) to ensure this doesn’t terminate or adversely affect the client’s insurance arrangements.

Conclusion In the instance where a client is able to satisfy both the permanent incapacity and terminal medical condition of release, the terminal medical condition of release will provide a better tax outcome for most clients under age 60 who take a lump sum.

However, if an income stream is commenced, individuals will only qualify for the 15 per cent pension offset if they are age 55 to 59 or satisfy the disability super benefit (more likely if they pursue the permanent incapacity condition of release).

Where a client wishes to provide for dependants, retaining some or all of the benefits in super may give beneficiaries a potentially larger death benefit (where an anti-detriment is paid) or the option of taking an income stream.

If a speedy payment is required, terminal illness is generally paid more quickly than permanent incapacity due to simpler administrative processes.

Sarina Raffo is a technical services consultant at Suncorp Life.

www.moneymanagement.com.au September 1, 2011 Money Management — 15

Reverse Mortgages

Light at the end of the tunnel Reverse mortgages have largely been ignored by financial planners and mortgage brokers, with the product supply rapidly shrinking over the years. Milana Pokrajac finds the needs of the ageing population coupled with government endorsement might bring reverse mortgages back to life.

“REVERSE mortgages are different from other credit products, and it is important the law takes into account their unique characteristics.”

Those were the words of the Assistant Treasurer and Financial Services Minister Bill Shorten, who had recently announced what he said would be positive changes for both the consumers and the equity release sector.

As reverse mortgages have long been perceived as dangerous by both consumers and financial planners, the rise in popularity of this product might not come easy.

The lack of interest in reverse mortgages triggered a chain reaction and the sector had shrunk to less than a handful of active providers in 2011. However, experts believe the needs of the ageing population coupled with government endorsement could bring reverse mortgages back to life.

Perception Reverse mortgages are not only complex, but also deal with a very sensitive issue for many seniors – letting go of the equity in homes most have worked their whole lives to pay off.

Depriving family members of all or part of their inheritance does not help the popularity of reverse mortgages which also was further dented by negative media coverage less than a decade ago.

A careful decision making process is required before a client is recommended to release equity in their home.

However, some industry commentators claim reverse mortgages have been largely misunderstood. National Information Centre for Retirement Investment (NICRI) chief executive, Wendy Schilg said product providers were not giving enough information about these products to borrowers and many have been burnt.

“I think that’s where they got their bad name – people go into a reverse mortgage and five years down the track find out that it’s really eating into the equity in their home and they suddenly realise that the house is not theirs anymore,” Schilg said.

NICRI has unsuccessfully sought funding from the Government to set up an equity release information centre.

Targeted consumers still believe reverse mortgages are associated with the loss of home, according to managing director of a reverse mortgage brokerage firm Seniors

First, Darren Moffatt.

“That’s not right, and when I tell people that they establish the loan amount they want and that they don’t get charged interest on money they do not use – they realise there is a very acceptable level of risk associated with reverse mortgages,” he said.

In fact, research conducted by Deloitte (see Figure 1) found that the average loan size as at December 2010 was $72,474, mostly used for regular income, home improvement or debt repayment.

Shrinking space Although the reverse mortgage market has been growing slowly but steadily since 2005, the number of providers has dramatically shrunk.

The number of Seniors Equity Release Lenders Association of Australia (SEQUAL) members peaked in the 2007-08 financial year, with 15 financial institutions having a reverse mortgage offering. Those included BankWest, Commonwealth Bank (CBA), Macquarie Bank, St. George, ANZ, Suncorp, Over Fifty Group, Australian Seniors Finance (AFS), and other smaller providers.

Of major institutions, Suncorp and ANZ left the sector within a year of joining, while Macquarie left within two years of tapping into the reverse mortgage space.

By 2011 SEQUAL membership was reduced to eight members, with only four – BankWest, CBA, St. George, and AFS – still actively lending.

According to Moffatt, lack of supply in the market presents one of the major challenges for the reverse mortgage industry.

He further points to the “very basic and stale” product ranges currently available on the market.

“Banks will have to wake up to the fact that the days of previous credit growth rates

Figure 1:

are gone, and if they are going to have any hope at all matching that, they’re going to have to innovate,” Moffatt said.

“Eventually, they’ll turn their gaze to the baby boomer market – that’s where the numbers are, that’s where the product need is, and that’s where the property equity resides,” he added.

Lack of planner interest The reverse mortgage sector has grown from $900 million in December 2005 to $3 billion in December 2010, according to Deloitte figures.

Borrowers are usually assessed based on their age and the value of their home; the age requirement used to be 65, but some providers are now offering reverse mortgages to those aged 60 years. There were more than 5,000 new borrowers last year, which – although appearing miniscule when compared to other sectors within the financial services industry – represents growth.

However, financial advisers need to step up to the realisation that Australia is on the cusp of change as to how the family home will be viewed in the future, according to SEQUAL chief, Kevin Conlon.

Reverse mortgage sector figures Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Outstanding market size

$0.9 billion

$1.5 billion

$2 billion

$2.5 billion

$2.7 billion

$3 billion

Number of loans

16,584

27,898

33,741

37,530

38,788

41,600

Average loan size

$51,148

$54,223

$60,000

$66,150

$69,896

$72,474

Settlements

$315 million

$520 million

$466 million

$321 million

$264 million

$322 million

Facility (settlements)

$519 million

$714 million

$627 million

$426 million

$367 million

$449 million

Additional drawdowns

n/a

n/a

$125 million

$116 million

$126 million

$131 million

Discharges

n/a

n/a

$203 million

$253 million

$309 million

$354 million

Source: Deloitte Australia

16 — Money Management September 1, 2011 www.moneymanagement.com.au

Reverse Mortgages “I’ve been challenging the advice industry to do a better job of providing affordable and accessible advice and to shift attitudes from adviser preferences to client preferences,” Conlon said.

“Equity release is not the only answer, but certainly the family home is going to be significant in whatever strategy they use,” he added.

Being a baby boomer herself, Schilg agreed that the current generation of people heading into retirement would be much more willing to let go of the equity in their home.

“Our children have been on a superannuation guarantee since they started work, so they don’t need that inheritance and the expectation is not there,” she added.

Chief executive officer of the Financial Planning Association, Mark Rantall, commented that financial planners have been making a wide loop around equity release products because of their unpredictability.

However, with the right protection mechanisms in place and proper government regulation, Rantall said these products have a good chance of attracting adviser interest.

Government regulation and endorsement

Figure 2: Consumers • Ability to release equity while remaining in the family home.

• Top up to current income stream to enable reasonable standard of living.

• Access to funds for basic home maintenance and/or to adapt home to meet needs of ageing in the home.

• Flexibility in use of funds for one-off needs such as holidays and large items (eg, white goods and vehicles).

• Enables gifting to children in the present rather than on inheritance.

• non-negative equity guarantee.

Providers • Fills a gap in the market.

• Increasing the range of products available to clients.

• The market’s growth potential as the population ages.

Associated risks

• Compounded long term interest.

• Interest rates above market levels.

• Unplanned longevity.

• Lack of expertise of many legal and financial service providers.

• Break fees for premature finalisation.

• Falling housing prices.

• Any negative future tax rulings regarding means testing for the aged pension and for home care assessment.

• Falling valuations resulting in reaching negative equity levels earlier than anticipated.

• Any negative future tax rulings regarding means testing for the aged pension and for home care assessment.

Obstacles to take up

• Lack of expertise and understanding of many legal and financial service providers.

• Lack of access by certain sub populations (exclusion clauses).

• Inability to borrow against retirement village units.

• The requirement of ongoing regular fees in addition to compound interest in a number of products available in the market.

• Lack of usage of reverse mortgage calculators by many brokers or lenders.

• Lack of information regarding the range of products available.

• Minimum age applied to youngest borrower for access to reverse mortgages.

• Complexity of product and consequent requirement and costs of high levels of documentation required.

• Current commission levels.

• Exclusion clauses.

• Low community awareness of product.

Benefits of reverse mortgages

Source: Australian Housing and Urban Research Institute

The better Australians are able to fund their own retirement the less reliant they are on the Government, which presents a huge factor considering that baby boomers will massively pullout from the workforce over the next two decades.

Although reverse mortgage providers were already subject to many governmentproposed changes as part of being members of SEQUAL, the Government appears to be determined in increasing client confidence in reverse mortgages by embedding these requirements into law.

The Government released its draft amendments to the National Consumer Credit Protection Act 2009 last month, which would see the introduction of a statutory no negative equity guarantee for clients, allowing them to draw down on the equity in their home without having to repay more than their home is worth. Other changes include better disclosure of financial consequences of entering into a reverse mortgage, as well as the introduction of certain ethical requirements on lenders. The Government was, however, encouraged to endorse reverse mortgages during the consultation process, when the Productivity Commission released its inquiry report recommending the Government establish an Australian Aged Care Home Credit Scheme “to assist older Australians to make a co-contribution to the costs of their aged care and support”.

While acknowledging the complexity of equity release products and the consumer nervousness around them, the Commission’s report stated “a public scheme could play an important role in inspiring confidence in equity release products and stimulating market development, although it could also crowd out the further development of private schemes”.

Ageing population to boost the sector “It is very important to note that the first of the baby boomers have moved into retirement at age 65 this year,” Conlon said.

Continued on page 18

www.moneymanagement.com.au September 1, 2011 Money Management — 17

Reverse Mortgages Continued from page 17

Mark Rantall

According to a research report conducted by the Australian Housing and Urban Research Institute (AHURI), 81.2 per cent of people over 60 were home owners in 2006. AHURI’s report “Reverse Mortgages and older people: growth factors and implications for retirement decisions” noted the market for reverse mortgage borrowers is the population of home owners aged 60 years and over, who tend to be

“well informed and proactive in managing their own affairs”.

For those who had already taken out a reverse mortgage, the decision was made based on the ability to manage cash flow, the flexibility on uses for the funds and the ‘no negative equity’ guarantee, which will soon become a statutory requirement.

More importantly, the factor that most influenced their decision was helpfulness of the broker or lender, according to the report, which is where Conlon believes

financial planners could find their value proposition.

“The big story is not only the demographic shift, but the shift in attitude as to how the family home will be viewed: as storage of wealth rather than with the sentimentality that has always been attached to it,” Conlon said.

Numerous research papers have shown that the majority of Australian retirees will not have adequate superannuation balances to fund their retirement.

Unless they took a proactive

approach to boost their savings, most would be dependant on the Government’s age pension within years. Rantall believes the demands of the ageing population would help boost the take-up of reverse mortgages, given the right consumer protections were in place.

“With the ageing population, with property prices where they are, and where you’ve got retirees wanting to stay in their home rather than move to a smaller dwelling, reverse mortgages could well be an appropriate source of lifestyle funding – with the right protection mechanisms in place,” he said.

From a financial planner point of view, Rantall said consumer protection is the main consideration.

Outlook Although there are very few predictions that reverse mortgages will take off in the short term, industry commentators claim the demands of baby boomers with insufficient superannuation balances will provide the necessary boost over the next two decades.

The AHURI report concluded that the demand for reverse mortgage products is expected to rise significantly over the next 25 years.

“As people are living longer, home owners may be willing to trade off housing equity for a level of financial security in retirement,” the report said.

However, Schilg said it is important to consider the economic outlook, too.

“With the economy the way it is at the moment, it is too difficult to guess; but 12 months ago we were saying that the boost might be within the next five years – this might be accurate, but it could also take longer,” Schilg added.

Moffatt from Seniors First blamed the stagnant market on provider lethargy.

“It is interesting that SEQUAL’s numbers on the transactional volume have gone back to the same level of the previous peak, yet there is no marketing or advertising,” he said.

“The natural demand is coming through, and the Government is sending a message that this is something you should endorse, but if banks were advertising – it would explode.”

MM 18 — Money Management September 1, 2011 www.moneymanagement.com.au

Reverse Mortgages

Home is where the equity is Lack of planner interest in reverse mortgages presents one of the major challenges for the equity release sector. John Thomas lists some of the things to consider when recommending a reverse mortgage to a client.

H

ome equity release products (the most popular of which is the reverse mortgage) have been around for many years, going back at least to the days of the Advance Building Society. However, it is only in the last six or seven years that senior Australians have embraced them.

Family home becomes an asset This change has seen seniors – with the general support of their families – recognise the home as an asset which they have the right to access for their needs in senior years. It saw them overcome the long held Australian philosophy that the family home should be bequeathed to the family, regardless of the size of the dwelling. With the support of the family, home equity release is now recognised as an entitlement and certainly should not be seen as a failure to provide.

As a result of this thinking there are now just over 41,000 reverse mortgages operating in Australia (there are other home equity release products such as shared equity in addition to these) representing a loan book of $3 billion with an average loan of $72,500.

This book of business has been generated almost exclusively through the direct sales channels of product providers (55 per cent) and intermediaries (45 per cent).

The intermediary channel is almost exclusively represented by mortgage brokers with almost none coming from the financial planning industry.

Some sources suggest that financial planners are not interested in this product because of the low commission rewards, especially where in most cases there is no trail commission. Intensive labour is also required to complete a sale - most mortgages are processed within three or four discussions with the borrowers and sometimes their families.

It is distressing that planners have not been more active in this area of retirement planning and to some degree ignore the social responsibility that exists to the seniors of our society. It is somewhat understandable that there hasn’t been any great engagement with the existing reverse mortgage borrowers given that the average age of current borrowers is 74 years, most of whom haven’t had any exposure to a planner.

Shift in demographics This situation will change as the incoming seniors will be mostly the baby boomers, who almost certainly will have engaged with a planner during their working life and will see the home from a different perspective to their parents. They will see it as an asset to maintain their lifestyle desires and requirements. Therefore, home equity release could well become the fourth pillar of retirement and

financial planning. This will surely cause planners to engage with their clients to determine when to use the equity in their homes as part of their financial plan. In some cases it can be desirable to access equity in the home before accessing superannuation or other investments. This is where planners can add value by providing the correct strategy, including providing affordable financial advice, to achieve the best result for consumers and protect entitlements to appropriate government benefits. This often involves engagement with families, so it provides opportunities not only to continue to serve existing clients, but possibly develop practices through engagement with family members.

Things to consider Reverse mortgages (as well as all home equity release products) have been used for a wide range of purposes and whilst

the use of the money is the exclusive right of the borrowers, we have found that almost all borrowers take just the amount they need and the three top uses are for: • Regular income to supplement existing income • Home improvement in order to allow access to government home care services, allowing them to stay in their home, and • Repayment of debt, mostly credit card debt.

Reverse Mortgages provide a number of benefits and protections for customers: 1. There is no need for regular repayments of principal or interest.

2. Guarantee to live in the home for as long as the borrowers wish.

3. A no negative equity guarantee which ensures that borrowers, or their estate, are never required to repay more than the net sale proceeds of the security when it is sold.

Similarly there are protective requirements to be obser ved prior to the

completion of the mortgage: • Mandatory independent legal advice on the mortgage contract • Strong recommendation to engage with the family • Check Centrelink requirements It is here that financial planners can play an important role by making financial advice more accessible and affordable.

Presently, the cost of financial advice can be prohibitive, especially for those who are taking a reverse mortgage to deliver their life’s needs.

So while the planning industry has not been to the forefront in using home equity release as a retirement and financial planning tool, there is a growing need. The opportunity exists for financial planners to engage in the sector now to the benefit of both consumer and adviser.

John Thomas is the chairman of the Senior Australians Equity Release Association.

www.moneymanagement.com.au September 1, 2011 Money Management — 19

OpinionBonds

Bond havens Many clients are currently seeking safer asset classes to protect their wealth from further market downturns. Tamara Radice examines ways in which bond portfolios can deliver high returns.

A

re you one of the many financial planners whose clients are seeking safer asset classes to protect their wealth? Are you unsure of the options? Bonds could provide the solution. They are a safer asset class than shares as the investments sit higher in a corporate or bank capital structure (see Figure 1 below), they pay a known return, and in most cases capital is repaid at maturity.

Figure 2 shows the performance of Co m m o n we a l t h Ba n k s e c u r i t i e s throughout the global financial crisis.

Equities or shares were clearly the most volatile, hybrids a little less so, and bonds (in this case subordinated debt)

sitting higher in the capital structure performed most consistently, protecting investors’ hard-earned capital.

Global volatility is set to continue. In particular, US debt, possible (in my opinion, probable) debt default by EU countries, economies recovering or experiencing natural disasters ( Japan, New Zealand, Australia, Somalia), and an Australian carbon tax all make for a period – perhaps extending to years – of share market volatility. What assets do your clients hold that will protect their wealth? Does their asset allocation match their age profile?

Older clients – especially those no longer earning an income – have little

Capital Structure Corporate Figure 1: Capital Structure ––Corporate

or no capacity to recover lost capital.

To ensure they have enough capital to live well for the remainder of their years (with some left over to provide an inheritance) you’ll need to allocate the funds to relatively safe asset classes.

One rule of thumb we use is that the maximum equity holding an investor should have is 100 minus their age. So a 70 year old investor would have a maximum allocation to equities of 30 per cent.

Many Australians are great fans of shares, and with good reason. Resource stocks have performed well, but consider what percentage they make up in your clients’ share portfolios and total

Figure 2:

portfolios. BHP Billiton – the largest compa ny o n t he Au st ra l i a n St o c k Exchange, worth approximately $238 billion – is rated by Standard and Poor’s (or equivalent) as ‘A+’; four notches lower than the highest ‘AAA’ rating (only attr ibuted to the Commonwealth Government in Australia). That means its debt is considered to have a low probability of default. BHP’s shares – which are lower in the company’s capital structure – are higher risk. Part of the reason BHP’s debt is only rated ‘A+’ is that the company largely trades in commodities. Commodities are cyclical, so we know that their prices will go up and down, and will impact earnings.

CBA share price 31 December 2007 to 30 June 2011

Senior Secured Debt

$140 $120

Senior Debt

Subordinated Debt Hybrids

Application of losses

$100 $80 $60 $40 $20

Equity

highest risk Source: FIIG Securities

20 — Money Management September 1, 2011 www.moneymanagement.com.au

-D ec 31 -07 -M ar -0 8 30 -Ju n08 30 -S ep -0 8 31 -D ec 31 -08 -M ar -0 9 30 -Ju n09 30 -S ep -0 9 31 -D ec 31 -09 -M ar -1 0 30 -Ju n10 30 -S ep -1 0 31 -D ec 31 -10 -M ar -1 1 30 -Ju n11

$0

31

Priority of payment in liquidation

lowest risk

CBA Sub debt FRN 28/9/16 Source: FIIG Securities

CBA Perls III

CBA Equity

Figure 3: Bond Portfolio Friday, 29 July 2011 Issuer

Maturity/ Call Date

Issue Trading Coupon % EXP Margin Margin Type

Capital Structure

YTM

Running Capital Face Yield Price Value

Capital Value

Accrued Interest

Total Value

National Capital Instruments

30/09/2016 0.95% 3.63% Floating 25.59% T1 Capital

8.89%

6.72%

89.00

$500,000

$445,000

$2,785

$447,785

Elm Bv (Swiss Re)

25/05/2017 1.17% 6.54% Floating 22.63% T1 Capital

12.10% 8.14%

78.00

$500,000

$390,000

$6,090

$396,090

AXA SA

26/10/2016 1.40% 6.14% Floating 23.33% T1 Capital

11.43% 7.84%

81.50

$500,000

$407,500

$700

$408,200

Envestra Ltd

20/08/2025 3.04% 0.08% ILB

25.06% Senior Debt 8.73%

4.10%

87.08

$587,400

$435,400

$3,100

$438,500

RaboDirect At-Call Account

30/07/2011 6.50% 1.75% Fixed

3.40%

6.50%

100.00 $59,425

Cash

6.50%

$59,425

$59,425

$2,146,825 $1,737,325 $12,675

$1,750,000

Capital Structure Exposure Cash/TD Senior Debt LT2 Sub Debt T1 Capital

3.40% 25.06% 0.00% 71.55%

Portfolio Exposure Statistics Weighted Average Yield to Maturity Weighted Average Running Yield Weighted Average Term to Maturity Weighted Average Trading Margin Weighted Average Rating

10.09% 6.64% 7.39% 3.92% A+

Source: FIIG Securities

Figure 4: Bond Portfolio Friday, 29 July 2011 Issuer

Maturity/ Call Date

Capital Structure Exposure

Issue Trading Coupon % EXP Margin Margin Type

Capital Structure

YTM

Running Capital Face Yield Price Value

Capital Value

Accrued Interest

Total Value

Cash/TD Senior Debt

7.35% 48.59%

83.00

$100,000

$83,000

$140

$83,140

LT2 Sub Debt

20.30%

5.96%

94.00

$75,000

$70,500

$553

$71,053

T1 Capital

23.75%

4.27%

106.50 $90,735

$79,875

$575

$80,450

AXA SA

26/10/2016 1.40% 5.71% Floating 23.75% T1 Capital

11.00% 7.70%

National Wealth Management Holdings Ltd

16/06/2016 0.63% 2.10% Floating 20.30% LT2 Sub Debt 7.28%

Southern Cross Airports Corporation Pty Ltd

20/11/2020 3.76% -0.08% ILB

Envestra Ltd

20/08/2025 3.04% -0.12% ILB

25.61% Senior Debt 8.53%

4.01%

89.00

RaboDirect At-Call Account

30/07/2011 6.50% 1.75% Fixed

7.35%

6.50%

100.00 $25,738

Portfolio Exposure Statistics 22.99% Senior Debt 8.40%

Cash

6.50%

$117,480

$408,953

$89,000

$620

$25,738 $348,113

$1,887

Weighted Average Yield to Maturity

8.69%

Weighted Average Running Yield

5.53% 7.98%

$89,620

Weighted Average Term to Maturity

$25,738

Weighted Average Trading Margin

1.86%

$350,000

Weighted Average Rating

A

Source: FIIG Securities

Consider if your clients hold a large proportion of their wealth in a resource company that only produces one commodity – it is going to be considered very high risk. Is the asset still appropriate?

So how do you diversify and protect your clients’ wealth?

Bonds – and if your clients already hold some, maybe more bonds. Global uncertainty will still impact debt markets, but to a lesser extent. In the majority of cases, investors know they will receive their capital back on a known date. To demonstrate current opportunities, we have put together a portfolio including household names such as National Australia Bank and AXA that can achieve a 10 per cent return while providing a weighted average rating of ‘A+’ (the same risk attributed to BHP Billiton debt). In rating agency terms, that represents just a 0.61 per cent chance of default over a five year time horizon.

However, before we move on, it is

important to point out the shortcomings: 1. This portfolio is only available to sophisticated investors, as a number of the bonds can only be sold in minimum face value parcels of $500,000. In fact, the total funds needed to replicate the portfolio are $1.75 million – not exactly small change. However, a similar portfolio based on an investment of $350,000 (available to all investors) still returns over 8.6 per cent, and could be structured by substituting a few names – albeit, with a slightly lower weighted average rating of ‘A’ (see below).

2. Diversity is only moderate, having just four bonds – two of which are insurers – plus a small allocation to a Rabobank ‘At Call’ account. Also, three of the four bonds are Tier 1 hybrid securities. Typically, we would recommend a more diversified portfolio with at least five bonds from a mix of industries.

3. The portfolio is better suited to hold

to maturity investors as Tier 1 securities could see some liquidity issues if the market is stressed at a time when these securities need to be sold quickly.

Finally, it is important to point out that three of the securities are Tier 1 callable securities, and the expected yield is based on the assumption all are called at first opportunity (which we do expect to occur). If not called, these securities are technically perpetual. The current market yield/swap curve and inflation expectations are also used to estimate the yield to (expected) maturity for the floating rate and inflation linked bonds in the portfolio.

Despite the abovementioned shortcomings, the ability to achieve close to a 10 per cent expected return from a high quality portfolio is worthy of assessment.

The National Capital Instruments is only available in minimum parcels of $500,000 face value. However, by replacing it with

National Wealth subordinated debt (a wholly owned subsidiary of NAB), a similar portfolio with a return of 8.69 per cent and a weighted average rating of ‘A’ can be achieved (‘A’ represents a 0.64 per cent probability of default over five years). Total outlay for this portfolio is $350,000.

In conclusion, it’s worth taking the time to assess the risks within your clients’ portfolios. Is their asset allocation diversified enough to withstand an extended period of share market volatility? Does it suit their age profile and capital preservation goals? (Particularly relevant for those in retirement and pay-down phase.)

Bond portfolios can offer high, known returns that are close to equity returns, yet are significantly lower risk and generally less volatile in uncertain markets.

Tamara Radice is the director for institutional investment and planner services at FIIG.

www.moneymanagement.com.au September 1, 2011 Money Management — 21

OpinionMarkets

Richard Edwards outlines some of the technical issues financial advisers need to consider when talking to their clients about possible responses to market declines.

T

he financial headlines have recently been dominated by share market volatility and the impact this has had on investment portfolios. However, when talking to clients about how they may respond to market downturns, it is also important to consider the technical issues and how they interact with the asset allocation and investment selection decisions. Volatile times can create some strategic traps and opportunities, especially for retirees and super fund members.

Strategies for pension investors Pension investors are usually the hardest hit by market downturns. It is therefore essential to assess whether their portfolios are well positioned to meet their income and other liquidity needs while minimising (where possible) the need to redeem growth assets at lower prices.

The amount and frequency of income payments drawn by account based pensioners should also be revisited. For example, they may want to reduce their income payments if they are currently drawing more than the minimum. Alternatively, if they are already receiving the minimum, they could: • Spend less than this and ‘save’ the rest (in a managed fund, for example); and/or • Change the payment frequency from, for example, monthly to annually at the end of the financial year.

Those who have other money to meet their income needs could even switch off the income payments completely by commuting and rolling the money back into the accumulation phase of super.

Each of these strategies could ensure more of their money is invested in the market so they can benefit from any future upside.

There are some implications to commuting a pension.

Before clients commute a pension, there are a range of factors that need to be considered.

For example, where a pension is

commuted back to the accumulation phase: • Investment earnings will be taxed at up to 15 per cent, not tax-free; • The commutation will trigger a calculation of the tax-free amount under the current rules for account based pensioners under the age of 60 who commenced their pension prior to 1 July 2007; • If the pension was commenced or continued due to death, it will lose its death benefit status upon commutation and the recipient will no longer be eligible for a 15 per cent tax offset if they use the money to recommence a pension under age 55; • Superannuation pensions are generally treated more favourably under the income test when compared to the deeming rates that would apply when money is held in the accumulation phase of super; and • A lower social security deduction amount could arise if and when a pension is recommenced, but this will depend on whether the account balance goes up or down, and the amount of time that elapses.

Furthermore, where a pension is fully commuted to cash: • A recent draft Australian Taxation Office ruling has indicated there may be capital gains tax (CGT) implications; • Investment earnings will be taxable at marginal rates, not tax-free; and • It may not be possible to get all the money back into the concessionally taxed super system due to the contribution caps and possibly the work test (when over the age of 65).

“

... super fund members with unrestricted nonpreserved benefits in the accumulation phase could decide to pull their money out of the super system if not sufficiently informed of the potentially adverse tax and social security implications.

- Richard Edwards

”

pension due to the reduction in the value of their assets and income.

SMSFs and investment strategy changes If self-managed super fund (SMSF) trustees want to change the investments in the fund, they will need to: • Ensure the changes are consistent with the investment strategy; • Update the investment strategy, if required; and • Ensure complete records are retained to correctly calculate any capital gains or losses.

Other social security implications Another issue to consider is, while Centrelink will usually review age pensioners’ investments twice a year, they can approach Centrelink at any time and request a reassessment based on their latest investment values. By doing this, some age pensioners may find they are now eligible for higher payments due to their reduced account balance. Retirees who previously were not eligible may now qualify for a part

22 — Money Management September 1, 2011 www.moneymanagement.com.au

independent adult children in the event of the member’s death.

Other issues to consider are: • The CGT implications when investments are sold prior to transferring the benefit; • Whether any insurance cover will be given up; • If any exit fees are payable; • If binding death benefit nominations are offered by the new fund; and • The administrative procedures and potential time lags that could apply while the transaction is being processed.

Implications when cashing out super There is the risk that super fund members with unrestricted non-preserved benefits in the accumulation phase could decide to pull their money out of the super system if not sufficiently informed of the potentially adverse tax and social security consequences.

For example, if super money is redeemed and invested outside super: • CGT will potentially be payable in the fund after the disposal of assets; • Investment earnings will be taxable at marginal rates, not a maximum rate of 15 per cent; • The money will be assessed under the social security income and assets test (whereas it is exempt if held in the accumulation phase of super and the person is under the age of age pension); and • As discussed in the pensions section, it may not be possible to get all the money back into the concessionally taxed super system.

Implications of rolling over super If super fund members are thinking about rolling over their benefit to another fund, the tax-free and taxable components will be recalculated at that time. This could be undesirable if the tax-free component declines and: • The member intends to start a pension investment before the age of 60; and/or • The benefit is passed to financially

The bottom line When markets take a dive and investors reassess what they are doing with their money, it is important to consider both the technical and investment implications, and how they interact.

Richard Edwards is technical writer at MLC Technical Services.

OpinionSuperannuation

Which cap fits best?

The Government has proposed retaining higher concessional contributions caps for those aged 50 or over, however Craig Day argues imposing eligibility criteria needs further consideration.

I

n February this year the Government released a consultation paper in relation to the proposal to retain the $50,000 concessional contributions cap for people aged 50 or over with super balances under $500,000. While the decision to retain the higher cap to allow people to make catch-up contributions closer to retirement should be supported, the idea of imposing eligibility criteria to determine who will qualify for the higher cap needs further consideration as it will increase super fund costs and increase the complexity of the super system for members.

Outline of the proposals The consultation paper outlines the key elements of the proposal, which are summarised as follows: • From 1 July 2012 a higher cap of $25,000 over and above the current concessional cap of $25,000 will apply for people over the age of 50 with a total super balance of under $500,000.

• The $500,000 threshold will not be indexed.

• All of a member’s superannuation entitlements (which will presumably include pension interests) will count towards the $500,000 threshold, including superannuation interests held in accumulation funds, defined benefit funds and untaxed and constitutionally protected funds and schemes.

• The calculation of a member’s account balance will be based on their withdrawal benefit or on the method used to determine the value of their super interests under the family law regulations.

• The value of a member’s superannuation interest will be measured at one of the following dates: – 30 June in the financial year preceding the year in which contributions are to be made, or – 30 June two years prior to the end of the financial year in which the contributions are to be made.

• The process for assessing eligibility will be based on either a self-assessment model or the Australian Taxation Office (ATO) will be required to provide a super account balance reporting facility which members could rely on to determine their eligibility to the higher cap.

One of the major concerns around these proposals is that by introducing a $500,000 threshold, the proposal will result in increased complexity and cost for super funds due to the increased reporting requirements involved. It is incongruous for this proposal to be announced so soon after the release of the final report of the Cooper review, which sought to reduce the complexity and cost of the superannuation system.

The proposal not to index the $500,000 threshold will also make the higher cap harder to qualify for over time in real terms.

As a result, this could lead to an increase in the number of people exceeding their concessional cap and having to pay excess contributions tax in the future. The proposal to assess the member’s entire superannuation entitlements, including amounts derived from non-concessional contributions, also discriminates against those members who have made personal contributions from after tax dollars.

The introduction of a $500,000 threshold may also lead people to assume that $500,000 is an adequate retirement balance for their individual situation. It could also lead to people not making additional non-concessional contributions in the lead up to retirement due to fears they may impact their ability to access the higher concessional cap.

Eligibility criteria for people who have already started drawing down The consultation paper outlines three different options for how the rules would potentially apply where a person has already commenced drawing down their super. These options are summarised as follows:

Option one This option involves adding the indexed value of any benefits previously withdrawn from a fund (excluding rollovers and amounts withdrawn on hardship grounds) back in to the member’s account balance when assessing their balance against the $500,000 threshold.

While the intent of this measure is to ensure the $500,000 is not circumvented by people withdrawing benefits where possible, it involves the re-introduction of a quasi-reasonable benefit limit system as it would require funds to repor t all withdrawals, including pension payments, and for the ATO to maintain records for each member for life. This option would impose additional costs on funds and would increase the cost of financial advice as advisers would potentially need to do additional work to identify and verify all withdrawals and to calculate the member’s notional account balance to determine their eligibility to the higher cap.

In addition, it could also undermine legitimate strategies, such as a re-contribution strategy to maximise a client’s taxfree component for estate planning purposes, as it would result in the double counting of amounts withdrawn and then re-contributed back into the fund.

For example, if a 60-year-old member with $350,000 in super withdrew the whole amount and re-contributed it as a nonconcessional contribution, their account balance for the purposes of assessing eligibility to the higher cap would be calculated as $700,000 – being their actual account balance of $350,000 plus their withdrawal of $350,000.

Option two This option involves ignoring any previous withdrawals when calculating the member’s account balance to determine their eligibility to the higher cap.

While this option lacks the cost and complexity of option one, it would allow

people who had unrestricted nonpreserved benefits to withdraw those amounts in order to qualify for the higher cap each year. This would obviously undermine the integrity of the higher cap as well as the super system in general.

Option three This option simply involves excluding those people who have already started drawing down their super from being eligible to the higher cap. For example, someone who had commenced drawing a transition to retirement pension at age 55 would be ineligible to qualify for the higher cap, regardless of the fact that their super account balance did not exceed $500,000.

This option could significantly disadvantage those members who had previously withdrawn any benefits from super and impact their ability to fund an adequate retirement.

Potential alternatives In June the Financial Services Council, the Self Managed Superannuation Fund Professionals Association and the Association of Superannuation Funds of Australia called for the higher concessional contributions cap to be set at $35,000 instead of $50,000, but to remove the $500,000 threshold and make it a universal cap for everyone over age 50.

While this measure would reduce the amount of concessional contributions a member could make after age 50, it would avoid all of the additional cost and complexities associated with the $500,000 threshold, and would remove an additional layer of uncertainty for members who are just seeking to save enough for their retirement.

Alternatively, if the $500,000 threshold must remain it should be indexed and non-concessional contributions should be excluded from the calculation.

Craig Day is the senior manager technical services at Colonial First State.

www.moneymanagement.com.au September 1, 2011 Money Management — 23

Portfolio Construction Conference attendees enjoy successful day Money Management caught up with Portfolio Construction Forum Conference attendees as they relaxed at the end of a day that featured presentations on global macro economic risks and opportunities.

John Nicoll from Zenith Investment Partners, Charles Levinge from Franklin Templeton, and David Wrigth Zenith Investment Partners.

Garry Kinnaird from Advice First, Krystyna Weston from PortfolioConstruction, and Dennis Perry from Advice First.

Fil Andronaco from van Eyk Research, and Jack Kewalram from T. Rowe Price Mark Oliver, John Jardin, Tom Keenan, and Delbert Stafford from iShares.

Money Management’s Rating House of the Year: Lonsec represented by John Ryan, Eleanor Menniti, Jeremy Pree, and Amanda Gillespie.

Winners of the BlackRock / PortfolioConstruction Forum CIMA Scholarships: Jeff Poe from AMP Financial Planning (Research), Ben Williams from BlackRock, Theo Hatsis from Colonial First State Advice, and Zaffar Subedar from BlackRock.

Graham Rich from brillient! and Michael Kitces from Pinnacle Advisory Group.

Michael Winchester, Stephen Barbarich, and Dominic McCormick from Select Asset Management Craig Muchamore from Wealth Logic, and Scott Bennett from Russell Investments.

Steve Melling from Paul Melling & Associates, Andrew Seddon from Colonial First State, Corin Jacka from Financial Foundations, Tyrone Cockle from Financial Foundations, and Patrick Malcolm from Gillham Financial Management.

Bronny Speed from AdviceIQ Partners and Mike Taylor from 0RQH\ 0DQDJHPHQW

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2

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24 — Money Management September 1, 2011 www.moneymanagement.com.au

Forum Conference

6 7

5

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10 www.moneymanagement.com.au September 1, 2011 Money Management — 25

Toolbox Repaired or improved?

Martin Breckon explains when repairs to property acquired in a SMSF using a limited recourse borrowing arrangement could be considered improvements, and the implications this could have.

Recent rule changes The laws applying to limited recourse borrowing arrangements were altered, with effect from 7 July 2010. Specifically, sections 67A and 67B of the Superannuation Industry Supervision Act 1993 tightened the requirements for arrangements existing since 24 September 2007. Notably, the borrowed monies: • Must be used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset); • May be applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset; and • Must not be applied to improving an acquirable asset.

The acquirable asset can be replaced by another acquirable asset in very limited circumstances. The Explanatory Memorandum for the amended rules gave an example of circumstances not permitting a replacement asset, which included a replacement by way of improvement to real property.

Implication of improvements When a property is acquired using a limited recourse borrowing arrangement, it is possible that repairs and maintenance could be considered an improvement to the asset. This is a very important distinction as improvements can change the state or nature of the asset to such an extent that it may be considered a different asset to the single acquirable asset, subject to the borrowing arrangement. Because the rights of the lender are limited to the rights relating to the single acquirable asset (or a replacement in limited instances) no money can be used to improve the asset if it results in a different one.

Repairs

Improvements

The word ‘repair’ ordinarily means the remedying or making good of defects, damage or deterioration of property. It contemplates the continued existence of the property and, for the most part, is occasional and partial. If a repair occurs to prevent or anticipate further defects, damage or deterioration, it is only a repair if it is done in conjunction with remedying or making good the defects, damage or deterioration. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. It involves restoration of the efficiency of function without changing the property’s character, and may include restoration to its former appearance, form, state or condition.

Works can fairly be described as repairs if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, accidental or deliberate damage, or the operation of natural causes during the passage of time. A repair sometimes improves, to some extent, the condition the property was in immediately before the repair. However, a minor and incidental degree of improvement, addition, or alteration may be done to a property and still be considered a repair.

While a repair restores the efficiency of function of the property without changing its character, an ‘improvement’ provides a greater efficiency of function in the property – usually in some existing function. To distinguish between a repair and improvement to property, you therefore need to consider the effect the work has on its efficiency of function. This is the determinative test.

An improvement involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to an improvement include whether the work will extend the property’s income producing ability, significantly enhance its saleability or market value, or extend the property’s expected life. Use of different materials is not a determinative test, but replacement or substantial reconstruction of the entirety — as distinct from the subsidiary parts of the whole — is an improvement.

Maintenance Key terminology The only guidance we have to help us define what is a repair and an improvement is Tax Ruling TR 97/23. However, this ruling was written to explain the circumstances in which expenditure incurred for repairs is an allowable deduction and doesn’t consider the implications for limited recourse borrowing arrangements.

TR 97/23 provides that expenditure for repairs to property is of a capital nature where: • The extent of the work carried out represents a renewal or reconstruction of the entirety, or • The works result in a greater efficiency of function in the property, therefore representing an ‘improvement’ rather than a ‘repair’.

Work done partly to remedy or make good defects, damage or deterioration, does not cease to be a repair if it is also done partly (even largely) to prevent or anticipate them in their very early stages. Repairs are not confined to situations where the defect, damage or deterioration has already become serious.

Some kinds of maintenance work are considered repairs, such as painting a plant or business premises to rectify existing deterioration and prevent further deterioration. However, other kinds of maintenance work, such as oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of it going wrong in the future aren’t considered ‘repairs’.

26 — Money Management September 1, 2011 www.moneymanagement.com.au

Using other SMSF funds Just as a SMSF trustee cannot put an existing fund asset into a limited recourse borrowing arrangement, they cannot use other SMSF funds to pay for improvements.

Regardless of the source of money, any capital improvements would breach the replacement asset rules in section 67B. However, funds in a cash account that are not part of the acquirable asset can be held by the trustee of the holding trust to pay expenses such as repairs.

The law clearly states you cannot use borrowed monies to make improvements to a property, but you can use borrowed monies to maintain or repair the asset to maintain its functional value. Consequently, if a prospective property requires renovations or improvements, consideration should be given to negotiating with the seller to do this prior to entering the limited recourse borrowing arrangement.

Martin Breckon is a senior technical consultant at MLC Technical Services.

Briefs MPG Funds Management Limited (MPG) has launched its $5.5 million Hardware Trust, offering investors the opportunity to acquire an interest in a soon to be completed hardware warehouse development.

The 1709 square metre property located in Wonthaggi, Victoria, is currently under construction and due for completion in 2012. It has a nine year agreement to lease with Australian home improvement retailer Bunnings Group Limited, a subsidiary of Wesfarmers Ltd. MPG is seeking to raise a minimum of $2.43 million from investors, with the property valued at $5.4 million upon completion. The single asset Trust will be closeended, with an anticipated term of seven years. The Trust has an initial forecast cash yield of 7.5 per cent per annum, which will be approximately 79 per cent tax deferred income. Distributions will be paid quarterly.

GLOBAL hedge fund investment firm Financial Risk Management (FRM) has introduced weekly liquidity for its FRM Sigma Fund. The Fund provides exposure to commodity trading advisers, trading a longer term systematic strategy in managed futures.

Richard Keary, FRM Australia Managing Director, said the enhanced liquidity of FRM Sigma reinforced its suitability for Australian investors seeking the diversification benefits of alternative assets without compromising on liquidity, simplicity transparency, and value for money.

ADVANCE Asset Management has launched three new sector multi-blend funds – the Advance Alternative Strategies Multi-Blend Fund, Advance Asian Shares Multi-Blend Fund, and Advance Cash Multi-Blend Fund.

Head of Advance investment solutions, Patrick Farrell, said the new funds reflect the firm’s multi-manager focus.

To gain additional knowledge in the growth alternative strategies sector, Advance has partnered with Ramius Alternative Solutions LLC to co-manage the Alternative Strategies Multi-Blend Fund.

The firm’s existing Advance Asian Equity Fund will become the Advance Asian Shares Multi-Blend Fund to take advantage of the firm’s multi-blend fund investment process. All existing investors in the Advance Asian Equity Fund will automatically be invested into the new structure. The fund will use two Asianbased investment managers – TT International and Wellington.

Advance is also changing the structure of the Advance Cash Management Fund, which will become the Advance Cash Multi-Blend Fund. Two cash investment managers – BT Investment Management Limited and IMS Funds Management Limited – will manage the fund.

Appointments

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

our value proposition we needed to appoint a COO who has the same energy and commitment to the industry as our members,” said Klipin.

Phil Anderson THE Association of Financial Advisers (AFA) has appointed Phil Anderson to the role of chief operating officer (COO).

Anderson’s 16 year career in financial services has so far included positions with MLC and AMP, as well as Colonial First State’s advice business where he was most recently the head of risk management and compliance.

Anderson said he has watched the AFA grow over the years, and was impressed by the association’s progress.

According to AFA chief executive officer Richard Klipin, the association has increased its membership significantly over the past five years, at a rate of 24 per cent per year.

“We recognised that in order to drive this growth and build

PROFESSIONAL Investment Holdings has announced the appointment of Peter Walther as chief executive of its financial advice business, Professional Investment Services, commencing 22 August.

Walther was most recently managing director, Asia Pacific, private equity and M&A services was for global insurer and risk adviser Marsh.

He has worked in financial services for 22 years, and previously worked as a commercial lender specialising in high leveraged transactions, including the roles of Vice President, Leveraged Finance Group with NatWest USA and Fleet Bank, respectively.

“Peter came to our attention because of his strong execution skills, his proven ability to lead top performing teams and his track record in driving shareholder value,” said PIH Group managing director Grahame Evans.

“He is a persuasive leader with impressive financial management skills who will motivate staff and network representatives to continually

test themselves in an ever changing market,” Evans said.

BNP Paribas Securities Services has appointed Barry Dench as the new head of its New Zealand business, based in Wellington.

Dench would report to the managing director of BNP Paribas Securities Services in Australia and New Zealand, Pierre Jond.

Dench was previously head of Westpac’s custody business, where he has been responsible for client service and relationship management for asset managers in Australia and New Zealand.

F I I G S e c u r i t i e s (FIIG) has appointed a new chief operating officer (COO) for its Brisbane office.

Michael Massingham will join FIIG as a member of the company’s executive committee and report to managing director Jim Stening on matters concerning custodian services and administrative support functions.

Massingham is a CPA with over 20 years experience in financial services, specialising in the management of business operations at a number of companies including ANZ,

Opportunities FINANCIAL PLANNERS Location: Perth Company: ANZ Description: ANZ Financial Planning is seeking planners to fill a number of positions in Perth. Reporting to a practice manager, you will be responsible for the provision of comprehensive financial planning services and advice.

Specifically, you will assist clients to plan for their financial goals by providing strategies, access to a diversified product range and ongoing services. You will also identify and analyse business opportunities, network and build internal and external relationships to promote services. In return, ANZ offers management support, an enviable brand and outstanding financial rewards.

You must have an extensive knowledge of the financial planning industry and be progressing towards your CFP qualification.

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

ASSOCIATE ADVISER/ SENIOR PARAPLANNER Location: Melbourne Company: FS Recruitment Solutions Description: This high net worth financial

Move of the week BANK veteran Stuart Grimshaw will join Bank of Queensland (BOQ) as its new managing director and chief executive officer, following the recent resignation of David Liddy.

Grimshaw, who will start his new role at BOQ on 1 November, has also resigned from the board of Suncorp Group, where he served as a non-executive director.

During his 30 years in the financial services industry, Grimshaw performed executive roles at Commonwealth Bank of Australia and led what was later renamed the wealth management division of Colonial First State.

He was chief executive of National Australia Bank in the UK, and most recently, chief executive officer of Caledonia Investments.

Grimshaw will receive an annual remuneration of $1.25 million at BOQ, as well as short-term and long-term bonus incentives ranging up to 160 per cent of his salary.

Fi r s t m a c , a n d C i t i g r o u p Australia and New Zealand.

The appointment of Massingham as COO reflects FIIG’s aim to expand its team to service more investors who are s e e k i n g a c c e s s t o s e c u re investments.

AU S T R A L I A N S U PE R h a s appointed Innes McKeand from UK manager Aegon Asset Ma n a g e m e n t t o t h e n e w l y created role of head of equities, working across both local and international equities as well as developed and emerging markets.

AustralianSuper said McKeand

will be responsible for the development and implementation of a comprehensive strategy for the construction and management of AustralianSuper’s equities portfolio, and will commence the role on 12 September, reporting to the fund’s chief investment officer Mark Delaney.

Prior to his role as head of equities at Aegon, McKeand was chief investment officer at AIB Investment Managers, and before that was head of investment at the Nestlé UK Pension trust, and also spent 1 4 ye a r s w i t h S c o t t i s h L i f e Assurance Company as chief investment officer, AustralianSuper stated.

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

planning business is now seeking an experienced senior paraplanner. An increase in business activity will see you helping the business owner in managing his client base.

You will be responsible for the construction of comprehensive statements of advice, ranging from wealth accumulation strategies to self-managed superannuation funds, direct equities and managed funds. As the technical expert, you will assist in the creation of new templates and the management of any template changes due to new legislation.

To find out more and to apply, please visit www.moneymanagement.com.au/jobs, or contact Kiera Brown at FS Recruitment Solutions – kbrown@fsrecruitmentsolutions.com.au, 0409 598 111.

FINANCIAL PLANNING OPPORTUNITIES Location: various states Company: Terrington Consulting Description: Terrington Consulting is interested in receiving applications from qualified financial planners who are ready to make their next move.

Current positions include: paraplanner/review planner, Adelaide;

financial planner, large chartered accountancy firm, Adelaide; financial planner, Darwin; senior financial planner (business start-up); senior financial planner (equity option), Adelaide; as well financial planners in Iron Triangle, Mt Gambier, Clare Valley, Alice Springs and Metropolitian Perth.

For more information and to apply, visit www.moneymanagement.com.au/jobs or contact Emily – 0422 918 177 emily@terringtonconsulting.com.au.

PARAPLANNER – BIG FOUR BANK Location: Melbourne Company: FS Recruitment Description: One of the big four banks is looking for a paraplanner to join its professional and supportive team, reporting to the team leader and unit manager. The position involves working on a wide range of financial plans, including strategies involving Centrelink, allocated pensions, wealth accumulation and gearing, self-managed superannuation funds, direct equities and managed funds.

The bank will provide structured training and support to its entire financial planning staff and is renowned for its track record in promoting internal staff members.

You will have a minimum of DFP 1-4 and over 12 months paraplanning experience.

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

RELATIONSHIP MANAGER – HNW FOCUS Location: Perth Company: Terrington Consulting Description: Due to continued growth, a leading bank is now seeking a relationship manager to build the high net worth client segment within a key strategic location.

The role will require effective portfolio management to ensure continued development and growth of a diverse range of personal account relationships.

This is an opportunity to work for a dynamic lender offering an extensive range of financial services including personal and commercial finance, private banking, financial planning, trade finance, treasury and financial markets, cash management and global banking.

The successful applicant must have a strong background in lending as well as proven sales and service results.

To find out more about this opportunity, please visit www.moneymanagement.com.au/jobs.

www.moneymanagement.com.au September 1, 2011 Money Management — 27

Outsider

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

Baby Boomers not guilty OUTSIDER admits it – he is a baby boomer and, as such, guilty of a myriad of sins against younger generations.

Of course Outsider could not help being born in the same year Godzilla premiered or Playboy was published (he rather enjoys the perverse symmetry), but he does take exception to the perpetual claims that he and his selfish baby boomer brethren are responsible for many of the world’s ills.

Thus, he utterly rejects the latest suggestion that baby boomers are now responsible for the length of time it will take for the US to properly emerge from the depths of the global financial crisis.

This latest heinous claim has come from the Federal Reserve Bank of San Francisco where researchers have suggested aging baby boomers may

“

Out of context

hold down US stock values for the next two decades as they sell their investments to finance retirement.

It s e e m s t h e s e g e n i u s e s h a v e concluded that baby boomers are beginning to retire at the same time as the US stock market struggles to re c ov e r, a n d t h a t t h e t i m i n g i s “disconcerting”.

The reason these researchers find this disconcerting is that it was the baby boomers who drove stock prices up, and their retirement and withdrawal of assets will mean those stock prices will now take longer to recover.

Outsider therefore has a message for other generations, and particularly Gen X and Gen Y – stop whining and pull your bloody weight. After all, someone has to pay Outsider’s pension when his money runs out.

“You can formally sponsor the ride by buying my butt.”

Future2 trustee Peter Bobbin will do anything for a buck, including

selling off sponsorship rights of his derriere for the Future2 Wheel Classic.

“I think we should give $50 a head to keep Bobbin’s clothes on. Future2 would make a fortune.”

Clearview’s Chris Blaxland-Walker

Where the beer doesn’t flow

summed up the thoughts of many at a recent industry lunch, as Peter Bobbin’s exhibitionist side came to

OUTSIDER is old enough to have worked in an era when ashtrays, cigarette butts and bottles of scotch in the bottom drawer weren’t frowned upon. However, that time has long past, and Outsider has not only quit his two-pack-a-day habit, but reserved the consumption of alcoholic beverages for after work hours – as corporate ethics dictate.

However, Outsider was very surprised when he found the same couldn’t be said about Zenith’s chief executive officer, David Wright. Although Wright is somewhat younger than yours truly, Outsider is always pleasantly surprised when a young-un adopts old-school habits.

Wright may not have been technically working when he participated in last week’s PortfolioConstruction Conference as a member of a discussion panel, but Outsider would argue it at least was in that grey area that falls

between work and beer o’clock.

Following a technical presentation by a conference guest, Wright stepped onto the stage and sat on a fancy high chair, waiting for a panel discussion to begin. Making himself comfortable, the research house executive remarked: “I’m not so sure about this bar stool without a bar and a beer!”

The auditorium burst into laughter, innocently assuming he was joking. However, a couple of moments later a caterer walked in with a beer for each panel member.

Although he enjoyed seeing the grin on Wright’s face, Outsider must say he is disappointed the beers were not distributed to the wider audience. After all, journos do need to find a way to make industry conferences seem entertaining.

the fore when he stripped off his business attire to reveal his cycling lycra underneath.

“The bad news is this is my best Aussie accent. The good news is I’ll be finished speaking in two minutes.”

There was no hiding Orbis head of retail, Johan de Lange’s South African heritage at an FPA Sydney Chapter lunch.

Fertile ground for money tree HAVE you ever been sitting outside on your back deck with a cold drink, enjoying a nice summer breeze, as one of those helpful fellas from Jim’s Mowing does the rounds of your backyard, and thought to yourself “my life would be a lot simpler if I could get this fellow to help me organise my personal loan needs, instead of having to wait in line at the bank”?

Strictly speaking, Outsider himself hasn’t been in quite that exact circumstance, but he ponders whether it would be a logical progression for any

person with personal finance needs, who also employs the services of a trusty lawn care technician.

It certainly seemed a logical enough progression to the helpful chaps from Jim’s Mowing, who Outsider has just recently learned have expanded into any number of franchises over the years – now including ‘Jim’s Finance’.

Jim’s actually has roughly 30 different franchise businesses these days, including fencing, roofing, trees, plumbing and painting, but Jim’s Finance and

Jim’s Bookkeeping appear to be the only ones that wouldn’t readily fit under the broader umbrella of ‘home maintenance’.

To be fair, Jim’s these days is something of a multi-national conglomerate, and one of the biggest franchisers in the world, and they’re not actually providing the finance – just helping customers navigate through the process and select a product – so no doubt they have the resources to provide a useful service.

But given their logo is still the same old image of a grinning, bearded handyman wearing a

28 — Money Management September 1, 2011 www.moneymanagement.com.au

terry-towelling hat, Outsider questions how many people would make the mental leap to asking that same chap to help them out with a loan.

Still, no doubt they’re far more trustworthy than one of those dastardly ‘financial advisers’ that David Whiteley keeps warning us about…