Money Management (April 12, 2012) by Cirrus Media

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Vol.26 No.13 | April 12, 2012 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

SMSF AUDITOR REGISTRATION: Page 12 | EUROPEAN AUSTERITY: Page 20

Separation of product from advice vital By Tim Stewart and Andrew Tsanadis UNALIGNED dealer groups cannot establish in-house funds management businesses and hope to maintain their independence, according to Tupicoffs partner Neil Kendall. “There’s no way you can claim to be independent and run a product provider at the same time,” said Kendall. “If you’re running an advice business and someone comes and sits in front of you and you know you lose money unless you sell them in-house products, you can’t expect client-focused outcomes,” he said. The comments come after Mercer head of wealth management Brian Long suggested that larger independent dealer groups could retain their mass affluent clients by running their own multimanager funds. “There’s an opportunity to build, own or operate your own suit of products,” said Long. He added that the multi-manager funds

would be catered to the client base of the dealer group, thereby satisfying the ‘best interests’ test. “As a dealer group you can still chase down high-net-worth clients, but suddenly you’ve got a solution for mass affluent clients that is scalable, meets the ‘best interests’ duty, and also creates a revenue stream for the dealer group,” he said. Boutique Financial Planning Principals’ Group president Claude Santucci said the model could well be viable, but he was doubtful the dealer group could continue to claim it offered independent financial advice. “I can’t see how you could be called a financial planner if you’re just a product distributor,” he said. “Independence is very important. We’ve taken a good step towards that [with FOFA]. If you take Mercer’s advice you’re probably taking a step backwards again,” he said. Shadforth Financial Group (SFG) head Nick Bedding said his group would be open

Carrying the cost of FOFA By Mike Taylor

THE financial ser vices industr y may be obliged to dig deeper to fund the implementation of the Government's Future of Financial Advice (FOFA) changes as well as its Stronger Super reform agenda. With the Government currently entering the final stages of formulating the May Budget, senior executives within both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have acknowledged the regulators will have to manage a heavier workload over the next 18 months. Continued on page 3

Neil Kendall to running its own funds management business “if we felt we could do it better than the people we’re outsourcing to”. “If you’re capable of doing that inhouse, then that shouldn’t compromise

[the ‘best interests’ duty] or your independence,” he said. One of the few unaligned dealer groups to actually operate the model advocated by Long is Professional Investment Services (PIS), whose parent company Centrepoint Alliance also owns a funds management arm (comprising of All Star Funds and Ventura Investment Management). All Star managing director Kate Mulligan said the advisers at PIS can maintain their independence because the funds management and the financial planning arms of the business are completely separate. “We have to convince the PIS advisers that our products are suitable for their clients – just like any other product. All Star and Ventura have separate compliance systems and different people,” Mulligan said. In addition, new All Star funds don’t automatically go onto PIS approved product lists, she added. “My products are subject to the requirements of any other fund manager – I have to earn a spot,” Mulligan said.

ETFs

The perfect storm THE performance of many asset classes remains uninspiring at best and disappointing at worst. Investors are increasingly expressing preference for low-cost vehicles – as well as transparency in both product and pricing – creating a breeding ground for exchange traded funds (ETFs). Despite coming from a low base, the growth rate of the Australian ETF sector in recent years was enormous, with up to three quarters of funds coming from retail investors. In Australia the first fixed income ETF was launched at the end of March 2012, enabling investors to properly diversify their portfolio solely using ETFs. But the industry has warned some “back to basics’ education is required

for both clients and financial advisers on the asset class, due to challenges in gaining meaningful direct exposure to fixed income. Industry experts believe it is the implementation that is the greatest departure from what advisers might be accustomed to with managed funds. The Australian ETF market might not remain at its current level of simplicity, as there may be a place for synthetic ETFs where the underlying exposure cannot be delivered in any other way. However, the success of this product might not come easily, as negative press resulted in a bad year for the sector globally. For more on ETFs, turn to page 14.

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: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@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 Journalist: Bela Moore Tel: (02) 9422 2897 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 Senior Account Manager: Jimmy Gupta Tel: (02) 9422 2239 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 Graphic Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2012. Supplied images © 2012 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

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ISN ads reflect good advice

ne or two advertisements do not represent the true indicator of a long-term campaign, but financial planners should take heart that the Industry Super Network (ISN) appears to have changed the “messaging” contained in its television advertising. Either by coincidence or design, the advertising appearing under the logo of the ISN through the opening months of 2012 lauds the value of superannuation without at the same time diminishing the value of advice or referencing the payment of commissions to financial planners. Of course, given the manner in which the Government developed its Future of Financial Advice (FOFA) bills and the role played by the ISN, it would have been odd, indeed, if the industry funds had opted to maintain their confrontational approach. Financial planners should be grateful for the ISN’s apparent change in tactics because it will allow them to focus on one of their most critical tasks in the immediate post-FOFA environment – reinforcing the value of good financial advice. Despite all the talk about the manner in which the FOFA changes will serve to promote vertical integration and reinforce the dominance of the major banks and

“

Those financial planners who have become too reliant on trails and who continue to carry too many ‘C’’ and ‘D’ clients on their books will need to consider whether they can survive in a post-FOFA world.

”

institutions in the delivery of financial advice, this does not need to be the case. Looked at objectively, the post-FOFA environment should prove highly beneficial for financial advisers offering quality, “full-touch”, holistic advice. Something which became clear at the roundtable conducted by Money Management in the week immediately following the passage of the FOFA bills was that neither intra-fund advice nor scaled advice represent particular problems for wellestablished “full-touch” advisory firms. Premium Wealth’s Paul Harding-Davis

made the point very clearly when he acknowledged that his dealer group probably did not have either the scale or the types of clients which would warrant pursuit of a scaled advice solution. By contrast, Mercer’s Jo-Anne Bloch made clear that scaled advice delivery was a core strategy for her organisation and something which it would be strongly pursuing in the months ahead. In other words, it is not the advent of scaled advice which will change the underlying texture of the financial planning industry; it will more likely be the manner in which the FOFA legislation impacts dealer group commercial models. Then, too, those financial planners who have become too reliant on trails and who continue to carry too many ‘C’ and ‘D’ clients on their books will need to consider whether they can survive in a post-FOFA world. Reality dictates that planners must make the best of the environment in which they now find themselves. With the industry funds having wound back their antiplanner messages, the way is clear to more forcefully sell the value of good advice – and it is a message worth selling. – Mike Taylor

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2 — Money Management April 12, 2012 www.moneymanagement.com.au

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News SPAA warns of “perfect storm” of contributions cap breaches By Chris Kennedy RECENT Australian Taxation Office ( ATO ) f i g u re s re v e a l i n g a n o t h e r increase in excess contributions tax (ECT) breaches foreshadow a potential perfect storm when the concessional contribution cap for those aged 50 and over, with a superannuation balance over $500,000, is halved again from 1 July this year. The warning, from the Self-Managed Super Fund Professionals’ Association of Australia (SPAA), follows the ATO’s ECT Statistical Report showing that ECT breaches had tripled in one year, with 45,330 excess concessional contributions assessments issued during the 2010 financial year, up from 15,315 recorded in 2008/09 and 18,068 in 2007/08. The jump in breaches coincided with

Our concern now is there is a very real possibility of “another spike in the number of members exceeding their cap. ” – Andrea Slattery

the halving of the contribution caps on 1 July 2009, SPAA stated. “Our concern now is there is a very real possibility of another spike in the number of members exceeding their cap when the concessional contribution cap for people aged 50 and over, with more than $500,000 in their account, is halved again from 1 July 2012,” said SPAA chief executive Andrea Slattery. SPAA is advocating for the restoration

of the caps to pre-2009 levels. It also wants the Government to revisit the decision to freeze indexation of the concessional contribution cap and to adopt a workable solution for those who unintentionally breach superannuation caps and incur ECT penalties. SPAA said it was encouraged that the ATO used discretion in 24 per cent of cases where there was a discretion request.

Andrea Slattery

Carrying the cost of FOFA Continued from page 1

While the Government is expected to direct at least some more funding towards both ASIC and APRA within its Budget outlays, it is also expected to prevail on the industry to carry a part of the burden via higher financial services levies. The higher workload resulting from FOFA is already impacting ASIC because, although the FO FA b i l l s a r e yet to pass the Senate, it is already in discussions with the various financial planning industr y stakeholders on questions a ro u n d the expected new regulatory environment. Among the new tasks needing to be handled by ASIC will be the regulator y framework around the best interest tests, and the a p p rova l o f c o d e s o f conduct suf f icient to enable the granting of class order relief to financial planners. In recent speeches to industr y events, both ASIC chairman Greg Medcraft and APRA deputy chairman Ross Jones have made clear the higher workloads being carried by their organisations. As well, Jones made reference to the Financial Institutions Supervis o r y L ev i e s a n d t h e manner in which they were often referred to

Ross Jones as APRA levies. An examination of the levies regime for 201112 revealed relatively modest levy increases on the basis of starting work with respect to the Government's Stronger Super agenda, while the c o mp o n e n t c ove r i n g A S I C ' s a c t i v i t i e s wa s also relatively modest, reflecting the state of p l ay w i t h r e s p e c t to FOFA and the Cooper Review. However, the demands being placed on the two regulators in the coming financial year are much greater, and are expected to result in a commensurate recommended increase in the supervisory levies. When the Government last moved to lif t the levies, APRA issued a discussion paper in May 2 011 – a n d i t i s expected to act similarly this year. www.moneymanagement.com.au April 12, 2012 Money Management — 3

News

Crackdown on Commonwealth Financial Planning advisers continues By Chris Kennedy

ANOTHER Commonwealth Financial Planning Limited (CFPL) adviser has been banned by the Australian Securities and Investments Commission (ASIC) for failing to meet his obligations as a financial adviser, making it three former CFPL advisers banned in just over a year. Under the terms of an enforceable undertaking (EU), Christopher Baker of Croydon in NSW will not provide financial services in any capacity for a minimum of five years.

The EU follows an investigation into the advice provided by several CFPL advisers, ASIC stated. ASIC found that between 1 March 2005 and 27 February 2009, Baker failed to properly complete a number of CFPL’s financial needs analysis documents, failed to determine the relevant personal circumstances, and failed to make reasonable inquiries in relation to the personal circumstances of clients before implementing advice, and had a large proportion of clients that were profiled with “aggressive” risk profiles.

He also provided property asset allocations to clients far above the recommended asset allocation for their risk profile, failed to provide a statement of advice to clients when required, and failed to include a replacement product advice record in a statement of advice, according to ASIC. Baker has also undertaken to complete appropriate professional education requirements and must adhere to supervision requirements for six months should he decide to re-enter the financial services industry, ASIC stated.

The latest EU follows the two-year banning of former CFPL financial adviser Simon Langton earlier this year and the seven-year ban handed down to Don Nguyen in March 2011. CFPL last year entered into an EU with ASIC under which it agreed to conduct a comprehensive review of its risk management framework and develop a plan to address any deficiencies in that framework. Any clients adversely affected would be compensated. ASIC said its investigation into the conduct of several other former CFPL advisers is continuing.

Some see investment as an abstract game of numbers.

Ian Knox

Hillross practice joins Paragem By Mike Taylor

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In line with our old-fashioned values, we treat money with a great deal of care, especially when it’s not ours. Your clients should particularly like our equity funds’ long-term returns and strong performance in turbulent times. If you’d like to ﬁnd out more about Aberdeen’s Australian, Asian and Global Equities funds‚ call us on 1800 636 888 or visit our website.

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4 — Money Management April 12, 2012 www.moneymanagement.com.au

VICTORIAN-based financial planning practice Future First has moved from under the Hillross umbrella to participate under the Paragem Australian Financial Services Licence (AFSL), with Paragem managing director Ian Knox saying it is the fifth Hillross practice to do so in the past 18 months. Knox said the move meant Paragem now had 13 practices working under its AFSL looking after more than $1.3 billion, making it one of the most rapidlygrowing independently owned and managed licensees in the country. Knox said he believed Paragem was now of sufficient size to generate scale and some attention in the market. He said the AFSL was continuing to work with product manufacturers to reduce costs, and claimed it was one of the few licensees in the country to consistently rebate 100 per cent volume payments and to have no soft dollar deals. Commenting on the move, Future First principal Luke Provis said the practice believed it had outgrown the vertically integrated model.

News

FPSB praises FPA on FOFA efforts By Milana Pokrajac THE Financial Planning Standards Board (FPSB) has praised its member organisation, the Financial Planning Association (FPA), for its efforts in negotiating some of the key legislative outcomes for Australian planners. FPSB – which is based in the United States and owns the Certified Financial Planner logo marks outside the US – also

praised the Australian Government and regulators in “recognising the key role of financial planning professional bodies in the oversight of financial planners”. “The FPA … negotiated with the Australian Government to encourage future regulation of financial planning to be informed – and potentially moderated – by the professional standards developed by the FPSB and localised by the FPA for the Australian marketplace,” the FPSB

wrote in a statement. These comments follow the perceived last-minute deal between the FPA and the Industry Super Network on some of the key proposals from the Future of Financial Advice reforms package – including opt-in, best interests and enshrining of the term ‘financial planner’ – which recently passed through the House of Representatives. FPSB chief executive officer Noel Maye

congratulated the Australian Government and the FPA “for taking the initiative to protect consumers seeking the services of financial planners.” “If approved, these reforms and the partnerships between government and professional financial planning bodies they encourage could provide a model for other jurisdictions seeking to establish and oversee the profession of financial planning,” Maye said.

Aus Unity takes stake in advisory practice By Chris Kennedy

AUSTRALIAN Unity Personal Financial Services has partnered with corporate financial advisory firm Certainty Financial, establishing a joint venture and taking a majority interest in the practice. Certainty has 22 staff in Melbourne and four in Sydney, including directors, and $500 million in funds under advice. It has a “quality corporate client base”, according to Australian Unity Personal Financial Services general manager Steve Davis, who said there would now be opportunities to provide those clients with access to a broader range of services including Australian Unity’s corporate health insurance programs. “Certainty Financial is a highly successful business that has substantial revenue, funds under advice and clients. Certainty Financial will be a significant contributor to increasing the scale and strength of Australian Unity Personal Financial Services,” Davis said. Australian Unity described Certainty as a high growth corporate advisory firm specialising in superannuation and group insurance solutions “The addition of Certainty Financial will better position Australian Unity Personal Financial Services to take advantage of opportunities arising from the significant regulatory and environmental changes impacting financial services such as the Future of Financial Advice reforms,” Davis said. Certainty Financial will continue to operate as a standalone business with its existing management team and staff, according to Australian Unity.

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News

Practices worth 2-3 times recurring revenue: survey By Chris Kennedy MOST planners believe the average financial planning practice is worth between two and three times recurring revenue (RR), according to a survey of planners conducted by Radar Results. Asked what a practice is worth, just over one third of respondents selected 2 to 2.5 times RR, and a similar number opted for 2.5 to 3 times RR. From a pool of around 2,400 planners, the survey received around 800 responses – around three quarters of which came from the eastern states. There was still some optimism among planners, with 15 per cent indicating a practice was worth 3-3.5

times RR and 4 per cent selecting 3.54 times. Just 7 per cent indicated they thought the average practice was worth less than 2 times RR. Western Australian planners were more bullish than their eastern neighbours, with one third of WA respondents prepared to pay between 3 and 3.5 times recurring revenue. Radar results principal John Birt said there had been a dramatic increase in the number of planners looking to sell their practices in the first three months of 2012, with the firm’s merger and acquisitions division receiving almost 30 requests from planners wanting to sell their practice. “That’s an unusually high

level of enquiries,” he said. In terms of payment method, almost a third of respondents would prefer to pay half upfront, with the balance paid over two years. One quarter opted for an 80/20 payment over one year and one in five preferred a 60/40 payment over one year. Just 7 per cent would pay the whole value upfront. Birt said it was surprising in the current environment that a 50 per cent upfront payment was the most popular, given planners over the past five years or so had tended to opt for upwards of 70 per cent as an upfront payment. When acquiring a practice or client register, the most popular

size of recurring revenue was between $100,000 and $250,000 (39 per cent of respondents) followed by $250,000 to $500,000 (31 per cent) and under $100,000 (16 per cent). Practices worth between $500,000 and $1 million, and over $1 million each polled 7 per cent. Almost half of purchasers would prefer a seller to remain in the business for one year after purchase; 11 per cent said two years, and 6 per cent said three years. However, 28 per cent would not want the seller to remain in the business at all. Eighty-two per cent of respondents also said that a clawback clause in a contract of sale is essential.

Small cap peer group highly competitive: S&P By Bela Moore

STANDARD & Poor’s (S&P) 2011-2012 Sector Report for Australian Equity Small Cap Funds has found the group remains highly competitive, with the average manager surpassing market performance benchmarks in recent years. The review rated 44 headline funds and 96 product offerings. It outlines key findings, themes and rating distribution of funds within the Australian equities small cap peer group. Seven funds were upgraded while two were downgraded. At the time of S&P’s review the rated peer group held an average of 32 per cent in non-index exposure. The median manager returned close to 4.1 per cent per year net of fees above the Small Ordinaries benchmark, according to S&P reports. The report notes that the smaller capitalised end of the market is dominated by active bottom-up managers employing less benchmark-aware

strategies compared to large-cap strategies. Key person risk remains an issue, with senior portfolio manager pairings the basis for many small cap offerings. “It is therefore important that senior members display a healthy working relationship and encourage strong team dynamics,” said John Huynh, analyst at S&P Fund Services. “During 2011 notable departures were seen in the UBS and Macquarie teams, but there was stability across the remaining peer group which was underpinned by effective lockin structures.”

AFA and FSC link on FOFA forum JUST weeks after the passage of the Future of Financial Advice (FOFA) bills through the Federal Parliament, the Association of Financial Advisers (AFA) and the Financial Services Council (FSC) have joined forces to deliver a forum on the implications of the changes for licensees and planners. The forum, to be held on 1 May, will be addressed by Australian Securities and Investments Commission (ASIC) commissioner Peter Kell. It is intended to spell out the operating environment likely to be

encountered by the planning industry once the legislation and consequent regulations are in place. Commenting on the forum, AFA chief executive Richard Klipin said it made sense for the FSC and the AFA to join together to talk to licensees in the context of the evolving regulatory environment. “Obviously, a lot of things occurred last month as the FOFA bills went through the Parliament, and the FSC and AFA believe it is important that we deliver this type of forum for the benefit of those most

Richard Klipin affected,” he said. Among the speakers at the forum will be Klipin, FSC chief executive John Brogden, FSC senior policy manager Cecilia Storniolo and AFA chief operating officer Phil Anderson.

6 — Money Management April 12, 2012 www.moneymanagement.com.au

Three- and -four star rating categories dominate ratings distribution and support S&P’s view that the majority of funds in the peer group can deliver riskadjusted returns in line with their investment objectives. Only one fund – Aviva Investors Professional Small Companies – was awarded a five-star rating. The report notes that a number of top-tier capabilities, including those managed by BT and Eley Griffiths, were constrained primarily due to concerns about capacity. Research houses face challenges brought about by the small cap group’s capacity issue, as high-rated offerings attract a greater share of investor flows, according to S&P. “Highly rated offerings can quickly become hindered by strong growth in FUM, therefore we are naturally sensitive to awarding our highest rating to offerings which are at risk of being too large,” said Huynh.

John Birt

ClearView moves in IFA market By Andrew Tsanadis CLEARVIEW Wealth (ClearView) has expanded in the independent financial adviser (IFA) market with the acquisition of three IFA practices. The acquisition of TSG Financial Solutions (TSG), East Coast Consultants and Knightcorp takes the number of ClearView financial advisers from 57 (as at 31 December 2011) to 66. ClearView stated that the acquisitions broaden its distribution footprint across Australia, with TSG based in Queensland, New South Wales-based East Coast Consultants, and Knightcorp based in Western Australia. ClearView has also announced that its life advice product suite LifeSolutions has been added to seven more dealer group-approved product lists – taking the total to 13. A key part of the company’s distribution strategy has been based on ClearView advisers and IFAs. ClearView managing director Simon Swansea said the business “is pleased with the progress year-to-date”.

ASIC accepts permanent undertaking from Adelaide financial adviser THE Australian Securities and Investments Commission (ASIC) has accepted a permanent undertaking from an Adelaide-based financial adviser to permanently refrain from providing financial services. The regulator accepted the enforceable undertaking (EU) from Barry David Hassell as part of a broader investigation that it is currently undertaking in relation to Hassell’s conduct as a financial services representative. In offering the EU, Hassall acknowledged that he: • provided advice in circumstances where the advice was not appropriate to the client; • did not provide clients

with statements of advice (SOAs) and did not retain SOAs or records of advice; • did not give clients information about his remuneration (including commission) or other benefits, interests, associations or relationships that might reasonably be expected to have been capable of influencing him in providing advice; and • at times, fabricated SOAs and other documents relating to the financial services he provided to clients. The regulatory body stated that Hassell undertook to notify current clients that he could no longer provide financial services and that they should refer any queries

about the services provided to his former Australian financial services licensee, 101 Wealth Solutions Pty Ltd. According to ASIC, Hassall has carried on the business of Hassall-Free Insurance Services since 31 August 1988 – either in his own capacity or as a director of BD & WJ Hassall Pty Ltd. Since 2004, Hassell has been an authorised representative at different times for Pivotal Financial Advisers Ltd, Guardian Financial Planning Ltd, AAA Shares Pty Ltd, AAA Financial Intelligence Ltd, and most recently, 101 Wealth Solutions, which revoked his authorisation on 28 March 2012, ASIC stated.

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Issued in Australia by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230523 (BlackRock). This document contains general information only, is subject to change and does not take into account an individual’s objectives, financial situation or needs and consideration should be given to talking to a financial or other professional adviser before making an investment decision. BlackRock believes that the information in this document is correct at the time of publication however no warranty of accuracy or reliability is given. Investing involves risk including loss of principal. No guarantee as to the capital value of investments nor future returns is made by BlackRock or any company in the BlackRock group. Past performance is not a reliable indicator of future performance. A Product Disclosure Statement (PDS) for any managed fund referred to in this document is available from BlackRock. You should consider the PDS in deciding whether to acquire, or to continue to hold, the product. Please visit our website www.blackrock.com/au to obtain a copy of the PDS for the relevant managed fund. An iShares exchange traded fund (iShares ETF) is not sponsored, endorsed, issued, sold or promoted by the provider of the index which a particular iShares ETF seeks to track. No index provider makes any representation regarding the advisability of investing in an iShares ETF. The applicable prospectus or PDS for an iShares ETF is available at iShares.com.au. You should consider the applicable prospectus or PDS in deciding whether to acquire, or to continue to hold an iShares ETF. © 2012 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. OMHKO00274_I_MM3

News

van Eyk hands down AA rating to two Australian equities funds By Andrew Tsanadis

VAN Eyk has awarded the Fidelity Australian Equities Fund and the Goldman Sachs Australian Equities Wholesale Fund an AA rating in Australian equities – the first AA rating since 2009. In its ‘Australian Equities Review 2012’, van Eyk considered the approach of 46 strategies, awarding 14 A ratings, 15 BB ratings and 10 B ratings. Along with two AA ratings, five strategies were either screened

or refused review, van Eyk stated. van Eyk head of ratings Matthew Olsen said that both the Fidelity and Goldman Sachs funds were superior to the other strategies under review due to the skill of the investment teams and the research resources available to them. According to the review, the AA rating meant van Eyk had “high confidence” the managers would outperform the benchmark over a three–year period. “We believe that managers who are willing

to go that extra mile will have the edge on their competitors,” Olsen said. The better rated managers had the will and ability to look for unique insights into stocks and industries by regularly visiting companies, customers and suppliers in person. Managers who had the ability to choose superior companies within sectors were also at an advantage, the report stated. Macroeconomic conditions will be particularly important to the performance of

Australian equity strategies in the next two to three years, according to van Eyk. In relation to the sector results, Olsen said the better managers could back up their assumptions on underlying forecasts and valuations with detailed and proprietary fundamental research at both the stock and industry level. The report also stated that van Eyk’s long-term strategic recommendation is for a balanced fund to have a 28 per cent weighting to Australian equities.

Be your own success story Mark Rantall

FPA lifts social media engagement By Mike Taylor

Creating financial independence since 1846 Find out who at ioof.com.au

8 — Money Management April 12, 2012 www.moneymanagement.com.au

THE Financial Planning Association (FPA) has looked to step up its member engagement by utilising social media. The FPA announced last week it had reached a milestone, exceeding 1,000 members who had joined the LinkedIn Members Forum which was launched in November last year. According to the FPA, on average, 40 FPA members join the forum each week. It said around 10 new discussions and over 30 comments are posted each week. The organisation also pointed to its Twitter following having dramatically increased from a standing start in just over six weeks. Commenting on the developments, FPA chief executive Mark Rantall said the organisation believed leveraging social media was another way the professional body “goes the extra mile for its members”. “Communicating with our members is especially crucial in the current climate, with so much industry reform and business change taking place,” he said.

News

WealthSure signs up Property for income: Australian to OneVue platform Unity Investments By Andrew Tsanadis

By Bela Moore

INDEPENDENT dealer group WealthSure has signed up to O n e Vu eâ&#x20AC;&#x2122;s u n i f i e d m a n a g e d account (UMA) platform amid plans to broaden its product range. WealthSure group chief executive Darren Pawski said that having the UMA platform available to its members was particularly important as the dealer planned to introduce Milliman Protected Portfolios and Mercer Model Portfolios to its offering. He said it was important for its financial advisers to have the ability to differentiate their ser vices and provide clients with a complete view of their total wealth position via one platform. WealthSure advisers would a l s o b e n e f i t f r o m O n e Vu eâ&#x20AC;&#x2122;s web-based financial planning tool WealthVue which would help give clients full visibility of their financial situation, Pawski added.

FINANCIAL planners need to re-envision property investment as a three to five year s t ra t e g y t h a t c a n p rov i d e consistent income streams for retirees, according to Mark Pratt, Australian Unity Investments general manager, property, mortgages and capital m a rk e t s, and g e n e ra l manager, property, Cameron Dickman. Dickman said that while the industry was seeing an i n c re a s e i n â&#x20AC;&#x153;t h e h i g h n e t worth self-managed super fund spaceâ&#x20AC;? on the back of platform investments, â&#x20AC;&#x153;mum and dad investorsâ&#x20AC;? were yet to j o i n t h e f ra y a n d n e e d e d education about the income stream well managed property investments could provide. â&#x20AC;&#x153;Weâ&#x20AC;&#x2122;ve got a demographic m ov e m e n t u n d e r w a y a n d they are income dependent and the biggest issue theyâ&#x20AC;&#x2122;re facing is the liability gap that

Darren Pawski OneVue head of sales Stephen Karrasch said WealthSure was a significant new client for the OneVue business. Cu r re n t l y We a l t h Su re h a s a pproxi ma te l y 420 a d v i s ers located in Western Australia, New South Wales, Queensland, Victoria, the Australian Capital Territory, and South Australia and Tasmania, OneVue stated.

theyâ&#x20AC;&#x2122;ve got about their own income retirement needs,â&#x20AC;? he said. Di c k m a n s a i d m a n y investors were burned during the global financial cr isis (GFC), but planners and retail investors who had plotted the liability issue of future income rather than target â&#x20AC;&#x153;one single hot flavour of the month income sourceâ&#x20AC;? had been able to weather the GFC. Pratt said â&#x20AC;&#x153;the institutional m a rk e t h a s i n v e s t e d a n absolute truckload of cash in the last 18 months in wholesaleâ&#x20AC;? but planners and retail investors needed to be reeducated about what to look for in commercial property and encouraged to consider the asset class â&#x20AC;&#x153;noting that some investors have had a negative experienceâ&#x20AC;?. He s a i d i n v e s t o r s h a d always looked to property investments for yield, but the past four years had proven the reward/risk equation with any

investment. Pratt said while liquidity was the risk associated with property, consistent returns of 7 to 8 per cent fit with changing demographics. â&#x20AC;&#x153;Most people in pension phase donâ&#x20AC;&#x2122;t need their capital today, they need income to live off,â&#x20AC;? Dickman added. He said property investment tackled the inflation issue of cash investments, which is where many retail investors moved their funds after the GFC. Dickman said good financial planners could assess investors funding requirements; the other pillar of property investments. â&#x20AC;&#x153;This is one of the most obvious places for income streams to be generated so the natural fit is that there is a sequential movement back to propertyâ&#x20AC;ŚProperty plays that perfect spot in between where youâ&#x20AC;&#x2122;re talking about good stable capital movementsâ&#x20AC;Ś with a strong income stream,â&#x20AC;? he said.

Rafael Calhau Bike Mechanic

What can we learn from a bike mechanic about life insurance? More options provide more ďŹ&#x201A;exibility. A bike might simply be a frame and two wheels, but if you talk to a bike mechanic, theyâ&#x20AC;&#x2122;ll tell you there are countless ways of customising it to suit the rider. BT Protection Plans offer fully featured, marketâ&#x20AC;&#x201C;leading insurance products you can tailor to meet your clientsâ&#x20AC;&#x2122; exact and unique requirements.

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;OL 0UZ\YLY VM ); 7YV[LJ[PVU 7SHUZ PZ >LZ[WHJ 3PML 0UZ\YHUJL :LY]PJLZ 3PTP[LK ()5 )LMVYL THRPUN H KLJPZPVU HIV\[ ); 7YV[LJ[PVU 7SHUZ `V\ ZOV\SK JVUZPKLY [OL ); 7YV[LJ[PVU 7SHUZ 7YVK\J[ +PZJSVZ\YL :[H[LTLU[ HUK 7VSPJ` +VJ\TLU[ ^OPJO HYL H]HPSHISL MYVT SPMLJLU[YHS JVT H\ @V\ ZOV\SK JVUZPKLY ^OL[OLY ); 7YV[LJ[PVU 7SHUZ HYL HWWYVWYPH[L MVY `V\ ( SJ

www.moneymanagement.com.au April 12, 2012 Money Management â&#x20AC;&#x201D; 9

News

In-house funds could solve FOFA concerns: Long By Tim Stewart

INDEPENDENT dealer groups wondering how they will service mass affluent clients under the Future of Financial Advice (FOFA) changes should consider starting up their own funds management business, says Mercer head of wealth management Brian Long. The business model would be underpinned with “a series of multi-manager underlying building blocks at the sector

and sub-sector level”, said Long. Those building blocks could then be combined to produce some diversified funds, he added. The construction of the in-house funds must take into account the “precise needs, preferences and culture of the dealer group and its client base”, said Long. “The problem with most multi-manager funds is that they’re very peer-aware and generic. So they don’t really meet the best interests test,” he said.

However, by catering the funds to the client base, “you come up with a series of funds that actually reflect the needs of the underlying investors”, Long said. “As a dealer group you can still chase down high-net-worth clients, but suddenly you’ve got a solution for mass affluent clients that is scalable, meets the best interests duty, and also creates a revenue stream for the dealer group,” Long said. The funds management model would only work for larger independent dealer

groups, as they would need sufficient scale to access institutional pricing for the multimanager funds, Long added. “One of the things that’s elegant about this is that it basically meets the objectives of FOFA by making advice available to the public that want advice,” Long said. “This sort of product will allow independent dealer groups to service mass affluent clients, whereas at the moment they’re all talking about getting rid of them,” he added.

BT almost half of wrap market By Milana Pokrajac BT FINANCIAL Group (BT ) now accounts for almost half of the total wrap market, resulting in even more concentration in this space, according to a latest report released by Plan for Life. Last year has seen a fall of $16.5 billion in funds under management (FUM) in the overall masterfund market, which encompasses wraps, platforms and master trusts. Both wrap and platform FUM fell by more than 5 per cent each, with disappointing net flows for all major players. However, the market is dominated by a handful of institutions which account for close to two-thirds of the overall total: BT, National Australia Bank/MLC, Macquarie and AMP. “From an administrator perspective the wrap market is even more concentrated, with BT ($68.1 billion) alone being responsible for almost half, or 48 per cent of the total,” the report said. While most leading companies recorded decreases in FUM, BT and Colonial fared best by reporting relatively little change in the overall level of their masterfund business in 2011. Perpetual, however, had a particularly tough year losing 14 per cent in FUM over the year to December 2011, followed by Macquarie, IOOF and OnePath. “Uncertain, volatile and more often than not negative underlying investment markets were responsible for this overall poor performance for 2011,” Plan for Life stated. 10 — Money Management April 12, 2012 www.moneymanagement.com.au

News

Insurers key in auto-consolidation FPAâ&#x20AC;&#x2122;s code earns By Mike Taylor THE insurance industry will need to work with the Government to develop a framework to handle auto-consolidation of superannuation accounts under the Stronger Super initiatives currently before the Parliament. That is the bottom line of a roundtable conduced by Money Managementâ&#x20AC;&#x2122;s sister publication, Super Review â&#x20AC;&#x201C; an exercise which also pointed to the fact that the Australian Institute of Superannuation Trustees (AIST) believes the Government may ultimately move to allow the autoconsolidation of accounts containing more than $10,000. Reacting to concerns from some insurers about how the auto-consolidation process would work, AIST specialist consultant David Haynes told the roundtable he did not think it was too late for the necessary discussions with the Government to take place. He said insurers had not been significantly represented in the Stronger Super working group, and this was something the Government needed to address. â&#x20AC;&#x153;Insurers werenâ&#x20AC;&#x2122;t represented significantly on that group, and I think there is a pressing need for the government to get together with the insurers to actually work out what the most appropriate way of consoli-

dating larger accounts is in a way that doesnâ&#x20AC;&#x2122;t lead to distortion or misuse,â&#x20AC;? he said. Haynes had also suggested that the $10,000 limit that had been discussed with respect to auto-consolidation was not necessarily a fixed amount. â&#x20AC;&#x153;The $10,000 limit that people are talking about, that too is not a fixed amount,â&#x20AC;? he said. â&#x20AC;&#x153;The position of AIST in fact is that the final position with auto-consolidation of those accounts should be uncapped, because the aim of this exercise should be actually to facilitate the consolidation of all accounts, not just the minority of smaller accounts. â&#x20AC;&#x153;That is also consistent with the Government position, which says that subsequent exercise will be the auto-consolidation of accounts with balances of at least $10,000,â&#x20AC;? he said. Comminsureâ&#x20AC;&#x2122;s Frank Crapis had earlier

expressed concern about the manner in which auto-consolidation would work and impact insurance once it moved beyond accounts containing $1,000. â&#x20AC;&#x153;There isnâ&#x20AC;&#x2122;t anything in the legislation thatâ&#x20AC;&#x2122;s going to outline exactly how the autoconsolidation will occur from the insurance point of view,â&#x20AC;? he said. â&#x20AC;&#x153;The two or three key risks in there are, once it moves to $1,000 itâ&#x20AC;&#x2122;s generally fine, because I think that with the auto-consolidation of accounts less than $1,000 there wonâ&#x20AC;&#x2122;t be too many accounts there anecdotally which will have the insurance impacts. â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s once it moves to $10,000 that I can see that it will have a major impact on those accounts where members have multiple accounts,â&#x20AC;? Crapis said. â&#x20AC;&#x153;The question really is around, so what will be the process? What will be the process that will be followed when those auto-consolidations of those accounts occur from an insurance point of view? â&#x20AC;&#x153;If you look at the process today, youâ&#x20AC;&#x2122;ve got eight or nine insurers out there and they all offer this choice of where members can consolidate their insurance balances, but if you look at all the process itâ&#x20AC;&#x2122;s eight different processes and thereâ&#x20AC;&#x2122;s no one uniform way of actually consolidating insurances today. Behind those eight insurers there are about six or seven different reinsurers who have different practices again, and will influence the way auto-consolidation occurs today.â&#x20AC;?

tax accreditation By Chris Kennedy

THE Financial Planning Associationâ&#x20AC;&#x2122;s (FPAâ&#x20AC;&#x2122;s) code of professional practice has earned it the status of recognised tax agent association by the Tax Practitioners Board (TPB). The accreditation shows the TPB has recognised that the FPA has rules in its code and requisite disciplinary procedures and processes that meet the TPBâ&#x20AC;&#x2122;s requirements for recognition as an association. The TPB also recognises that the FPA has appropriate professional and ethical standards for its members, the FPA stated. The accreditation means the only additional requirements FPA members will now need to fulfil to become recognised tax agents are the relevant fit and proper person test and experience requirements, according to the FPA. The formal recognition came into place on 21 March. FPA members who are already registered tax agents or registered BAS agents will be able to retain this status as members of the FPA, the association stated. FPA chief executive Mark Rantall said he believed the FPA had a world-class code which was already used by the Financial Ombudsman Service in its determinations. He said the approval of the code by the TPB was further recognition of this.

Gary Burns Harbour Pilot

What can we learn from a harbour pilot about life insurance? The best support comes with knowledge and expertise. When a large ship pulls in to an unfamiliar port youâ&#x20AC;&#x2122;ll ďŹ nd a harbour pilot at the bridge guiding the ship in to dock. Thatâ&#x20AC;&#x2122;s exactly how we run BT Protection Plansâ&#x20AC;&#x2122; award-winning claims service â&#x20AC;&#x201C; weâ&#x20AC;&#x2122;re there to help guide your clients through the difďŹ cult times.

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www.moneymanagement.com.au April 12, 2012 Money Management â&#x20AC;&#x201D; 11

InFocus MASTERFUND MARKET SNAPSHOT Funds under management at December 2011

$85.2bn BT Financial

$73.4bn National Australia Bank/MLC

$68.7bn AMP Group

$57.8bn

Commonwealth/Colonial

$33.2bn

OnePath Australia Source: Plan For Life

WHAT’S ON ACFS Funds Management: Fees and Performance Panel 13 April RACV Club, Melbourne www.australiancentre.com.au

AFA/FSC The Future of Advice Post FOFA 1 May FSC King Room, Sydney

2012 Money Management Fund Manager of the Year Awards 10 May Four Seasons Hotel, Sydney www.moneymanagement.com.au /events

SMSF, ETFs and Direct Investing 15 May Cockle Bay Wharf, Sydney www.moneymanagement.com.au /events

2012 Annual Stockbrokers Conference 31 May Crown Promenade, Melbourne www.moneymanagement.com.au /events

The eyes and ears of an industry If auditors are, indeed, the eyes and ears of the regulators in the SMSF sector, Liz Westover writes that the new auditor registration regime will prove to be crucial as the industry evolves over the next few years.

ichael D’Ascenzo, Commissioner of Taxation, has described self-managed super fund (SMSF) auditors as the eyes and ears of the Australian Tax Office (ATO). Auditors play an important role in the integrity of the SMSF industry and are relied upon heavily by the ATO to ensure trustee compliance. In his review, Jeremy Cooper also felt that SMSF auditors play a significant role in the superannuation industry, describing them as the cornerstone of the existing regulatory framework. Unsurprisingly therefore, the Cooper review panel gave some attention to SMSF auditors as part of the Super System Review. Cooper’s final report, handed to the Federal Government in 2010, made a number of recommendations with respect to SMSF auditors, including the introduction of a new registration process as well as changes to promote auditor independence.

SMSF Auditor Registration An announcement is still pending from the Minister for Financial Services and Superannuation, Bill Shorten, on various aspects of a new SMSF auditor registration process. However, it has been confirmed that a registration process will be introduced and be managed by the Australian Securities and Investments Commission (ASIC). ASIC has been tasked with developing the registration process, including registration requirements, in consultation with industry representatives. The introduction of a registration process is a real opportunity to take stock of the SMSF audit industry and develop systems and processes that will produce positive outcomes, beyond creating a list of SMSF auditors, or regulation for regulation’s sake. The new system can and should support the overall policy objective of the changes to ensure we have competent auditors carrying out quality audits. The challenge in this will be ensuring that regulation or criteria for registration do not become too onerous, and that they do not impose too significant a barrier to entry that would ultimately place a stranglehold on the industry. We need to make sure we have enough auditors to audit a growing number of SMSFs. The new registration process, developed using a collaborative approach between relevant parties, will be the best approach to ensuring a workable and useful process that will meet good policy objectives. Importantly, the new process should ensure that the professional bodies are supplied with the appropriate information to undertake directed activities to their members. It is these directed activities that will truly enhance audit quality. It has been an anomaly in the SMSF audit industry that the ATO, as regulators of the SMSF industry, has never been able to provide the professional accounting bodies (or other relevant associations) with the names of their respective members who were

12 — Money Management April 12, 2012 www.moneymanagement.com.au

reported to them as conducting audits. This created a scenario in which the ability to target those auditors with respect to education, communication and compliance was limited. The new registration regime, appropriately designed, can take away this limitation. The Government has also confirmed that a competency exam will be introduced for SMSF auditors as part of the registration process. Details of exactly who will need to sit this exam are still to be released, although it is likely that new auditors will be required to sit a test, as will some existing auditors who have only previously audited a low number of SMSFs. Experienced SMSF auditors who have been conducting large numbers of audits are not likely to be required to sit an exam prior to registration. It is questionable as to whether a competency exam will achieve any of the desired policy outcomes. Treasury’s strategic review of audit quality in Australia does not identify competency tests as a driver of audit quality. Rather, the drivers identified in the report include targeted communication and education, mentoring, on-the-job training, professional scepticism, technical training and supervision. The final design of the registration process will need to support and facilitate these drivers as being part of the new SMSF audit landscape.

Independence The independence of an auditor is a crucial aspect of audit activity. In his review, Jeremy Cooper believed “independence of auditors is crucial for the efficient and effective operation of the SMSF sector”. His final report recommended mandatory outsourcing of SMSF audit activity. That is, if a firm was offering any other services to an SMSF or its trustees, the firm would be required to decline the audit engagement and outsource to a third party in what Cooper described as “true independence”. Unfortunately, such arrangements do not ensure independence. An auditor would still be required to take a principles-based approach

to determine their independence. Imagine an arrangement between two firms whose principals happened to be best friends or where a significant portion of an auditor’s work came from one source. They may well be able to ‘tick the box’ under Cooper’s suggested arrangement, but their independence would still be questionable. In fact, under the current Code of Ethics that applies to professional accountants, it is highly likely they would be required to decline the audit engagement. The Government, in its Stronger Super reforms, rejected Cooper’s recommendation for mandatory outsourcing and instead adopted APES 110, the Code of Ethics for professional accountants as determined by the Accounting Professional and Ethical Standards Board (APESB). Independence is a subjective issue to be determined by an auditor in relation to each and every audit engagement they undertake. It cannot be determined without considering the individual facts of each case. This is why a prescriptive approach to independence would never work, and why the Government was right to back the principles-based approach as set out in APES 110. All SMSF auditors will now be required to adhere to APES 110, regardless of their membership of a professional accounting body. It is anticipated that adherence will be given legislative backing and SMSF auditors will be required to sign off on their adherence as part of their initial and ongoing registration with ASIC. As the number of SMSFs in Australia increases, it is important to ensure that SMSF auditors are providing a high-quality service that can be relied on by trustees, Government and regulators. We need to make sure the upcoming changes to the industry meet the goals of competent auditors and quality audits. Overregulation, without considering the implications, will only serve to stifle the industry.

Liz Westover is head of superannuation at the Institute of Chartered Accountants.

SMSF Weekly Is Govt using ECT breaches to close deficit gap? By Mike Taylor INSTITUTE of Chartered Accountants superannuation specialist Liz Westover has pointed to the latest Australian Taxation Office statistics on excess contributions tax (ECT ) as having confirmed just how problematic the regime remains. In analysis published last week, West-

over suggested the Government and the regulators had got it wrong in believing that ECT contributions would decline as people become more aware of the consequences. “When concessional contributions were introduced and ECT assessments started being issued, the government and regulators believed that the number of assessments would fall as people became

aware of the new rules,” she said. “The latest figures indicate that this is clearly not the case,” Westover said. “ECT was originally introduced simply as a deterrent to people breaching super contribution caps, not a revenue raiser. With the complexity surrounding the caps and the rules around super, it is clear that people are still getting it wrong, and the number of inadvertent errors

continues to rise,” she said. Westover said $132.5 million had been raised in 2009-10 financial year from ECT assessments and she was concerned that the 2010-11 figures would be even higher. “ T h e g ov e r n m e n t h a s s t a t e d i t s commitment to a budget surplus. Is its reluctance to change the ECT linked to the revenue it is collecting?” she asked.

Cap breaches Australian optimism Advice key to on the rise comfortable retirement plumbs new depth CONCESSIONAL contribution cap breaches have increased around threefold in the past three years, according to specialist self-managed superannua t i o n f u n d ( S M S F ) c o mp a ny C a n vendish Superannuation. Cavendish head of education, David Busoli this week pointed to the latest Australian Taxation Office (ATO) data on the excess contributions tax and the strong trends which had emerged. He said the number of concessional cap breaches had increased three-fold from 15,315 in 2008/09 to 45,330 in 2009/10. “This is not surprising considering that concessional contribution caps were halved in that year and there is an inevitable period of adjustment,” he said. Busoli said the result had seen an increase in the value of assessments, up from $58.4 million in $2008/09 to $130.9 million in 2009/10. He pointed out that the number of excess non-concessional contributions had fallen dramatically from 1,550 over the same period to just six.

AUSTRALIANS are feeling decidedly less optimistic about the immediate outlook for the economy, a c c o rd i n g t o t h e l a t e s t research released by Allianz Australia. The research, contained in the company’s optimism index, revealed optimism had reached a particular l ow i n Q u e e n s l a n d j u s t ahead of the recent State Election. It said that while Western Australians remained more optimistic than other Australians, their level of optimism had nearly halved since January. The data pointed to the d r o p b e i n g d r i v e n by middle-aged men (35 to 64) w h o s e o p t i m i s m s c o re s were at record lows. Co m m e n t i n g o n t h e results, Allianz Australia managing director Terr y

Towell said that overall, Au s t ra l i a n s’ s e n t i m e n t a b o u t t h e f u t u re o f t h e e c o n o m y h a d h i t a l ow p o i n t i n Ma rc h w i t h a n Optimism Score of only 5, down from the level of 8 recorded in January. “This is less than half the double-digit s c o re s achieved throughout most of 2011 and well down on the score of 20 in November 2010,” he said. “Looking at the results in more detail reveals that the overall national fall in optimism is being driven by a less optimistic outlook among men, those living in Queensland and Western Australia and those aged between 35 and 64,” Towell said. He said that in all cases, optimism about the future of the economy had hit the lowest levels recorded in the last 18 months.

ONLY two-thirds of Australian pre-retirees are on track to meet their retirement goals, according to the latest data r e l e a s e d by I nve s t m e n t Trends. The report revealed planners still have a long way to go in getting their pre-retiree clients in position to meet their objectives for a comfortable retirement. Commenting on the findi n g s , I nve s t m e n t Tr e n d s senior analyst Recep Peker said the findings were consiste n t w i t h t h e c o mp a ny ’ s investor research. Twenty-eight per cent of Australians who use a planner feel that they are not on track to achieving their retirement goals,” he said. “However, Australians who use a planner are more likely to feel on track to achieving their goals.” He said the proportion who d o n ’ t fe e l o n t r a c k wa s

Recep Peker higher, at 42 per cent, among those who don’t use a planner. T h e I nve s t m e n t Tr e n d s research found that planners anticipated that 33 per cent of their clients aged under 75 would be dependent on the age pension for more than half of their income when they retire, growing to 54 per cent by the time they are aged between 84-95.

www.moneymanagement.com.au April 12, 2012 Money Management — 13

ETFs

The

perfect

storm

Despite its relatively small size, solid growth in recent years has made the exchange-traded fund (ETF) space the envy of managed funds and some of the other sectors. Freya Purnell explores the reasons why a ‘perfect storm’ might be brewing for the growth of ETFs. THE secret to the success of exchange-traded funds (ETFs) is a ‘perfect storm’ of post-GFC investment themes – investors seeking low-cost vehicles, transparency in both product and pricing, and a preference for listed investments. Over the last five years, as traditional managed funds have floundered, ETFs have posted a compound annual growth rate of 33 per cent per annum, according to figures released by the Australian Securities Exchange (ASX). ASX-listed ETFs attracted over $500 million in net inflows during 2011, to reach an overall market cap of $4.3 billion (as at February 2012). While it’s still early days in the Australian market, the number of ETFs on offer has increased significantly – from 45 to 61 during 2011, and to 68 by the end of March – and

with new ASX regulations opening the door to fixed income ETFs for the first time this year, you have a recipe for rapid growth.

Build it and they will come? According to the Australian Securities and Investments Commission (ASIC), there is currently a high level of retail investment in the sector – between 50 and 75 per cent across most products, with self-managed superannuation funds (SMSFs) accounting for up to 30-40 per cent of the member register of Australian ETFs. By contrast, overseas, institutional investors are much stronger in this space, holding approximately 80 per cent of ETF assets in Europe and around 50 per cent of ETF assets in the US. The June 2011 BetaShares/Investment Trends ETF report also found that while

14 — Money Management April 12, 2012 www.moneymanagement.com.au

early adopters of ETFs were primarily selfdirected, 30 per cent of investors were discussing ETFs with their adviser. Around 27 per cent of planners surveyed were already using ETFs, with a further 27 per cent planning to implement them in future. So what is driving interest in these vehicles? According to iShares director Tom Keenan, there are both top-down and bottom-up factors at play. As the performance of many asset classes remains lacklustre, investors have increasingly expressed a preference for passive, low-cost investment vehicles, and ETFs offer management expense ratios of half or even a third of those charged by actively managed funds. Drew Corbett, BetaShares’ head of product strategy, says its own research indicates that investors are increasingly focused on fees.

Key points z z

Fee and portfolio transparency remain the most attractive features of ETFs. Adding fixed income to the menu enables investors to properly diversify solely using ETFs. Financial advice is crucial especially for investors who are looking to enter the fixed income space. The negative press surrounding synthetic ETFs resulted in a tough year for the sector globally.

“Investment expectations have been diminished a little by the volatility in the markets over the last 18 months. People see that the number one thing you can do to improve your returns in an investment portfolio is to lower your costs,” Corbett says. The GFC also made investors focus more on the value for fees, and why they were paying higher fees for proposed outperformance that was not being delivered.” While high net worth investors are favouring direct securities and off-platform

ETFs

products, Tria Investment Partners senior consultant Oliver Hesketh and director of Russell Investments’ Australian ETF business Amanda Skelly see this trend particularly among self-managed super fund (SMSF) trustees. “About 40 per cent of our investors are actually running their own SMSFs, and from our research it was quite clear that they have a preference for control and transparency, which trading on the share market provides,” Skelly said. In fact, liquidity and transparency are key concerns across the board for retail investors. “Since the GFC, investors have become far more worried about the liquidity of the investments they are using and far more concerned about understanding those products,” Keenan says. ETF Consulting director Tim Bradbury also says the appeal of the transparency of ETFs extends beyond just what is in the investment portfolio, to “who is getting paid to do what”. Another aspect of the appeal of ETFs – which may be going under the radar at the moment – is their tax-efficiency, according

to Morningstar co-head of fund research Tim Murphy. “The ETF structure is much more taxefficient for the investor than a managed fund or unit trust structure,” Murphy says. In addition to these strong consumer drivers, on the other side of the coin, impetus is coming from the structural change afoot in the intermediary market. The move towards fee-for-service is accelerating the process of adoption of ETFs, as advisers look to demonstrate value for clients, and the commission-free structure of ETFs fits well within this new proposition. Keenan says this transition was also critical to the growth of ETFs in the US. With these drivers at play, the managed fund sector could be forgiven for feeling a little threatened by the new kid on the block – and perhaps with good reason, if the overseas experience is anything to go by. “Looking at the US, mutual funds have been in net outflow or small inflows for some bond funds. ETFs have continued to gain a share of wallet among investors during that time. In 2008, there were huge outflows across the board in all asset classes, including managed funds, but ETFs saw net inflows of

reported that they would use Australian equities index ETFs over the next 12 months, with proposed adoption numbers also high for international equities, fixed interest and commodities ETFs, there was a big ‘if’ attached – that is, if these products were available on their approved product list (APL). Bradbury also draws the distinction between the general level of awareness of ETFs, currently high, and real ETF knowledge, which is low, and points to the need for improved education across the industry. And if the nerves and jitters continue to affect investors in 2012, they may also avoid any perceived “riskier” path, preferring to stay invested in cash and “safe haven” options, Bradbury says. This would hinder the local ETF market from reaching its medium-term targets – though he admits this is less likely as cash rates decrease.

Tom Keenan around $200 billion,” Murphy says. Despite this rosy view, there are some barriers to the growth of the sector. Distribution is a “critical hurdle” for all ETF issuers, according to Bradbury. While the 2011 Investment Trends ETF survey said that 63 per cent of planners

Opening the floodgates on fixed income From a regulatory perspective, 2012 has already brought the Australian ETF market a major win. The long-awaited changes by Continued on page 16

www.moneymanagement.com.au April 12, 2012 Money Management — 15

ETFs Continued from page 15 the ASX to the AQUA rules which cleared the way for fixed income ETFs to be listed came into effect on 9 January 2012. By the end of March, seven new cash and fixed income ETFs had already been launched, by Russell Investments, iShares and BetaShares, with more in the pipeline from issuers such as State Street Global Advisers. This move is important not just because it creates the opportunity to launch new products to the market, but because adding fixed income rounds out the major asset classes offered through ETFs. “It now enables investors to build properly diversified multi-asset portfolios across the full risk spectrum solely using ETFs. Up until now you’ve only had the risky asset classes like equities, commodities, and property,” Murphy says. This could be particularly attractive for those investors who only want to deal with ASX-listed securities. “Historically that meant using direct equities and hybrid securities, which are far from the defensive investments that people might think they are. Fixed income adds a proper defensive asset class to their investable universe,” he adds. Importantly, it makes high credit quality Australian fixed income much more accessible, enabling investors to buy bonds in the same way they buy a stock, and transparent, with pricing to be published daily. “This is a tremendous change from what we have known previously, which is a market difficult for investors to access directly due to high minimums and a cumbersome process. This really does change the game, and I think that the ease of use will mean that self-managed super fund trustees and financial advisers will rethink their allocation to fixed income and its role in a portfolio,” Keenan says. Bradbury believes fixed income ETFs are going to be of greater interest to advisers and institutions, who are skilled in portfolio construction and asset allocation, than they will be to self-directed investors. “That’s mainly because self-directed investors tend to be of an equity mindset. It’s probably a better result for them to think about buying term deposits for the time being, rather than a government bond index or high-yield ETF,” Bradbury says. Russell undertook research into how fixed income ETFs might be used in a portfolio before launching its bond ETFs, and this clearly indicated that advisers, brokers and SMSF trustees were looking for an investment solution that could be tailored and was – surprise, surprise – lowcost. For investors who don’t want as much control, Russell also created a model portfolio to provide guidance on how advisers should allocate to bond ETFs. And it’s here that the industry sounds a warning. Because in the past, it has been so challenging to gain a meaningful direct exposure to fixed income, some ‘back to basics’ education is required on the asset class, as well as the nuances of accessing it through the various ETFs. “The introduction of another asset class is exciting and it helps all of us in the market to continue to build on the story,” says Guy Maguire, head, Standard & Poor’s (S&P) Indices Australia. “What is still challenging is how we position these, and how

we support the adviser so they can feel comfortable and understand how these different ETFs will work.” The timing may also be right for fixed income ETFs. There has been a rally in government bonds of late, rendering them less attractive right now, but term deposits, which could be seen as the major competitor for these defensive dollars, are seeing declining yields. “As people start to reassess their term deposit holdings, corporate bond ETFs are a nice complement to provide liquidity and the comparable yield without equity market volatility,” Skelly says. There are, however, some pitfalls with fixed income ETFs that investors need to be aware of – for example, spreads potentially blowing out. To avoid this, Skelly suggests advisers and investors look carefully at the underlying securities held by the ETF and how liquid they are.

The trouble with synthetics Despite the good news locally, the last year has actually been a tough one for the sector globally. The negative press started last April in the US, when the Financial Stability Board sounded a warning about systemic risks relating to ETFs; fears that were compounded when a UBS junior trader generated a $2.3 billion loss through unauthorised trading through ETFs. International regulators such as the International Monetary Fund, the UK Financial Service Authority and the Bank for International Settlements added to the chorus concerns that investors might not be aware of the risks around ETFs. These concerns relate specifically to synthetic ETFs, and particularly the counterparty and systemic risks they carry, linked to the use of derivatives and leverage in their structure.

Potentially there is a place for synthetic ETFs where the “underlying exposure can’t be delivered in any other way. ”

– Tom Keenan

Though synthetic ETFs have been extremely popular in Europe, where they make up almost 45 per cent of the ETF market, new regulation could see this section of the market stopped in its tracks. The European Securities Market Authority has drawn up new guidelines to improve transparency in the market, consulting publicly on whether ETFs should be divided into complex and non-complex products, and whether the sale of derivative-based synthetic ETFs to retail investors should be restricted. In Europe, the worries have seen an exodus of investors from synthetic ETFs in favour of those that are physically backed. European synthetic products had outflows of US$7.3 billion in the three months to October 2011, according to BlackRock’s ETF Landscape Summary Report, with US$6.0 billion flowing back into physically backed products during the same period.

16 — Money Management April 12, 2012 www.moneymanagement.com.au

Although caution also infected the Australian market, it was unwarranted – in most cases, these issues haven’t even applied to products distributed locally, which are primarily physically backed by assets or cash on deposit. (Two exceptions were the BetaShares Financial and Resources Sector ETFs, up until October 2011, when the company announced it would move the funds to a physically backed structure and limit their use of derivatives “to an immaterial level”.) “I think now, more than a year ago, you can look at the whole ETF segment and say the risks are still fairly low,” Hesketh says. “ASIC has worked closely with ETF providers to ensure that the products here are next generation ETFs as opposed to those products overseas that did cause some of the concerns,” Corbett says. This close attention to getting the right rules in place was also the reason it took so

long for fixed income ETFs to come to market. “That has been due to the regulator wanting to ensure that the fixed income ETFs that are brought to market are the right solutions, so not a high reliance on derivatives, not a lot of leverage. They have been quite thoughtful in the rules,” Skelly says. Many other industry players are supportive of the careful approach ASIC has taken to regulating this emerging market, and particularly in applying the lessons learned from overseas. “Certainly I think ASIC has done a very good job of spelling out the risks to investors and educating the market, as have the ETF providers in the Australian marketplace,” Keenan says. But this is not to say the Australian ETF market will remain at its current level of simplicity. “Potentially there is a place for synthetic ETFs where the underlying exposure can’t be delivered in any other way. A great example of that is a commodity ETF – obviously you need derivatives or futures to deliver that, because you can’t warehouse the underlying commodity,” Keenan says. Bradbury agrees that greater complexity is coming – partly because issuers are looking to implement new investment ideas, and partly because some exposures can only be delivered synthetically. In the commodities area, BetaShares launched a raft of cash-backed products towards the end of last year, including oil and agriculture ETFs, as well as a broad

ETFs Releasing the report, ASIC chairman Greg Medcraft said that the regulation of ETFs in Australia is in line with these proposed international standards, and reiterated ASIC’s commitment to market surveillance and investor education in the ETF sector. The report outlined ASIC’s view that products using ‘funded swaps’ had been identified as the most risky types of ETFs in terms of counterparty risk, and that while no Australian ETF to date has used this type of mechanism, it “would consider carefully the appropriateness of any proposed product using a funded swap”. It also noted that there are currently no inverse or leveraged ETFs in the Australian market. But Bradbury believes this may change. “As ASIC and ASX become more comfortable with synthetic exposures [and ways are found to provide retail investor education and protection], we might see inverse funds across broad equity indices this year,” he wrote in the ETF Consulting Australian ETF Outlook report. “This seems a logical and sensible progression, given the lack of an active market for borrowing ETFs in Australia and the need to provide investors with superior ways to manage down-side equity risk.”

The role of the adviser

commodities basket ETF, aimed at providing access to agriculture, livestock, oil and natural gas. They’re not for everyone – Murphy, for one, warns advisers against using commodities exposures in portfolios through ETFs or other vehicles. “Particularly where you have index-based commodity exposure, like ETFs are, where they are based on futures curves rather than physical assets, the performance can vary quite a lot from the movement of spot prices. There is a whole range of different issues when you are investing in commodities, which is a big leap ahead in education and understanding,” Murphy says. ASIC’s current view of the regulation of ETFs is comprehensively outlined in its Report 282 Regulation of Exchange Traded Funds, which was released in late March. The review was undertaken as a result of the International Organisation of Securities Commissions (IOSCO) issuing proposed regulatory principles relating to ETFs for consultation. Among the principles proposed by IOCSO are a number of disclosure requirements relating to how an ETF tracks an index or basket of securities, portfolio holdings, fees and expenses, and lending and borrowing of securities, how ETFs are sold by intermediaries, management of conflicts of interest, and requirements for regulators to address risks raised by counterparty exposure, collateral management, and liquidity shocks.

Many would argue that with a new investment vehicle, there is no such thing as too much education – both for advisers and brokers and their clients – and the entry of fixed income ETFs is in fact prompting additional efforts in this area. “That alone I think is really important, because there is still a lot of uncertainty and confusion around what ETFs actually are,” Skelly says. Advice is also critical for those looking to dip a toe in the water in the fixed income space. “Our research in the SMSF sector showed that the number one reason SMSFs seek financial advice is to get advice on bonds,” Skelly says. When it comes to including ETFs in their product toolkit, boutique advice practices have tended to be among the early adopters, but this may change in the future, particularly with ETF coverage now extending across the major asset classes, a wider range of options, and products being fully researched and added to APLs. “I think many more advisers are considering how ETFs might play a part in their business. It’s not compromising the value that the adviser provides, it’s simply using additional tools to build better or more costeffective or more diversified portfolios for their clients,” Bradbury says. Hesketh believes there may also be growth in ETFs driven by the broker market switching from transaction trading to more portfolio management, while Corbett says an increased knowledge of ETFs among advisers could see them used in more sophisticated strategies such as portfolio tilting and constructing core-satellite portfolios. “As ETFs become a full suite of products and as issuers increase the offer to the full range of asset allocation tools through ETFs, advisers will recognise that there is a role for ETFs in portfolios and in helping investors to achieve their investment objectives,” says Lochiel Crafter, Asia Pacific head of investments, State Street Global Advisers. “The value of ETFs is if you have a particular view on a particular period, you

What’s next for ETFs

Tim Murphy can get price certainty in executing on that view at the time you want to do it, so it does increase that degree of flexibility.” Importantly, it is the implementation that is the greatest departure from what advisers might be accustomed to with managed funds. “The underlying investments are often largely the same, sometimes exactly the same as the investment exposure you are getting in a managed fund,” Murphy says. “But the implementation is quite different – and over time, as advisers get more confident and more understanding of that, then you would expect to see the use of ETFs among advisers growing.”

If ETFs over broad-based indices are at the vanilla end of the spectrum and synthetic and actively managed ETFs are at the highly structured end, then fixed interest ETFs, commodities ETFs and ETFs over tailored indices are somewhere in the middle ground – and it is these type of funds which will flood the Australian market over the coming year, as well as possibly some active ETFs by the second half of the year, according to Bradbury. “That’s a natural progression, because as the market starts to grow, and regulators become more comfortable that retail investors are adequately protected and informed, you are going to see variations of ETFs that aren’t simply the standard asset classes we have seen up until now,” Bradbury says. And if managed funds are starting to feel the squeeze from ETFs, there’s another option – they could take their funds onto the ASX. “If you look at the trends out of the US, some of the biggest managers there are moving their product on exchange,” Bradbury says. “The recent ASX listing of the DIGGA Mining Fund demonstrates how new specialist entities could emerge and take market share in funds management, with the help of AQUA listing rules and relatively low barriers to entry.” As the saying goes – if you can’t beat them, join them. MM

www.moneymanagement.com.au April 12, 2012 Money Management — 17

OpinionAsset allocation Bringing the defensive back The global financial crisis and heightened volatility have brought defensive funds back into the spotlight. Andrew Hair discusses the characteristics of true defensive assets and examines why some so-named funds suffered during the crisis.

he defensive por tion of an investor’s portfolio should g e n e ra l l y p r ov i d e re g u l a r income, liquidity and capital protection. It should also have a low correlation to growth assets. Asset classes such as term deposits, shortdated government bonds and cash are well-known defensive style assets which have traditionally been used to make up the defensive component of an investor’s portfolio. Government bonds, for example – at least when issued from well-rated countries – meet many of the aforementioned key characteristics of a d e f e n s i v e a s s e t c l a s s. In d i f f i c u l t economic climates, when central banks re d u c e i n t e re s t ra t e s f u r t h e r t h a n expected as a means of stimulating demand, bonds will generally perform well. They provide income and liquidity, and they protect capital in this type of environment, whereas growth assets generally perform poorly. However, bonds tend to underperform in the opposite market environment. That is, when central banks need to stem growth and raise interest rates above expectations to control inflation, bond investments may underperform. If the interest rate hikes are of a significant magnitude, the bond investment may produce a negative return, and consequently, fail to provide capital protection. Term deposits also protect capital and have a low correlation to growth assets. However, they may compromise liquidity because investors cannot exit without forfeiting return. In future, under its proposed implementation of the Basel III liquidity requirements, the Au s t ra l i a n Pr u d e n t i a l Re g u l a t i o n Authority will require Australian banks to be far more strict before allowing early withdrawal of term deposits. That said, the liquidity issue can generally be managed by diversifying across defensive portfolio options or staggering maturity dates. If these safe asset classes traditionally dominated defensive portfolios, why did so many defensive portfolios underperform or produce negative returns through the global financial crisis (GFC)? The answer is that the preGFC environment lulled investors into a false security and they shied away from these traditional vehicles. Instead, they shifted their attention to generating higher returns from their defensive portfolios rather than seeking income, liquidity and capital protection. Between 2003 and 2007, volatility was at abnormally low levels. Taking risk

Investors should “maintain an allocation to traditional defensive assets such as cash and fixed interest, regardless of the environment.

”

was generally rewarded over both the short and long-term. During this period, many “diversified income funds” came to prominence. These funds are multiasset class funds that invest i n a ra n g e o f s e c u r i t i e s. They were (and often still are) positioned as defens i v e, a n d b e c a m e a popular alternative to bonds and cash. Many of these funds aimed to achieve higher returns by t a k i n g o n a d d i tional risk, which came in the form of e x p o s u re t o g r ow t h assets such as equities, c re d i t ( w h i c h i s p o s i t i v e l y correlated to equities), property and options. The pre-GFC economic environment was extremely benign, and as such, the extra risk taken by these funds was handsomely rewarded, and for a time, many of these funds significantly outperformed. Howe v e r, d u r i n g t h e G F C , t h e performance of some of these strategies plummeted, revealing that some diversified income funds had taken on too much risk to be considered truly defensive. Investors were surprised by the high correlation between some diversified income funds and global equity markets. In addition, large negative returns from some diversified income funds occurred at the time when global equity markets suffered their worst returns. While some diversified income funds recovered over the next one to two years, it was an important reminder that should be adhered to regardless of the economic climate: defensive investing should be

18 — Money Management April 12, 2012 www.moneymanagement.com.au

assessed over a relatively short time horizon – generally up to three years. Although these funds may have a rightful place in an investor’s portfolio, they may not be suitable for a purely defensive strategy, particularly if capital preservation is a key objective. For investors seeking a true defensive style fund, it’s important to understand the range of options available. Current economic and market conditions have brought defensive investment options back into the spotlight.

Investors should maintain an allocation to traditional defensive assets such as cash and fixed interest, regardless of the environment. Where other defens i v e o p t i o n s a re c o n s i d e re d , t h e y should be risk focussed rather than return chasing – this approach will help the defensive portion of the portfolio to work throughout the economic cycle. Andrew Hair is vice president, client and consultant relationships, Acadian Asset Management.

OpinionFOFA

FOFA reborn Stephen Bartholomew proposes financial advisers take the Future of Financial Advice reforms into their own hands.

t seems to me that we’re all over the Future of Financial Advice (FOFA) reforms before they have even started. As I talk with advisers they consistently say they’ve had enough and really just want to get on with it. That is, they want to get on with giving advice. A lot of the problem, of course, is that the starting line and the finishing line keep changing. The latest news that implementation will initially only be on a voluntary basis just blurs things a little more again – even though it will be welcomed by many. Is that date of July 2013 really going to be the mandatory start date? It’s a little bit like superannuation legislation isn’t it? A bit of tinkering here, some grandfathering there, and a bit of political spin put on top for good measure. Various parties are hopefully satisfied, but mostly clients will continue to be confused. Hopefully this confusion doesn’t apply to advisers, but clearly, regular changes in any area do lead to a certain level of apprehension for all concerned. So, I say let’s say goodbye to FOFA. Let’s take hold of FOFA and claim it for ourselves. Let’s make it stand for something meaningful to all advisers in the trenches by breathing new life into it. How about Focus on Financial Advice? Instead of talking about the future of our profession, let’s focus on what it’s all about. Last time I checked, it was about giving our clients carefully considered advice. It’s not really that complicated is it? Our advice may be either simple or more complicated, but the advice itself is

always based on the single premise that our role as advisers is to get our clients from where they are now to where they want to go. As I heard recently, it’s really as simple as getting our clients’ financial houses in order and rearranging their rooms from time-to-time as they progress through their various life stages. What about the Financials of Future Advice? Does it really matter how our client chooses to pay us for the advice given? Many would argue that it doesn’t, but perception does matter to some extent. It may be that the client accepts and even appreciates having a number of payment options, but it’s unlikely that the media and other professionals will accept any method of payment other than fee-for-service. Is this really a problem? I don’t think so, and most of the advisers I talk to don’t see it as a problem either – largely as they’ve already taken the voluntary step of preparing and implementing fee-for-service models. Better still, maybe we should be referring to service for a fee? In line with a focus on financial advice, maybe the financials of future advice would be decidedly better if we focused on ‘service for a fee’ rather than ‘fee for the service’. It’s about not putting the cart before the horse. After all, a hallmark of any successful business is tailoring it to meet clients’ needs. They don’t want a fee – they want a service, and for that service they’re prepared to pay a fee. The better the service and service offering in general, the higher the fee they’re willing to pay. It might seem like a small point, but really,

For the vast majority of “advisers, and regardless of the economic environment and at times relentlessly negative press, there is no reason at all to be defensive about what we do.

”

clients will see value in advisers if we first value them. They’ll recognise that we’re acting in their best interests, as a matter of principle rather than some legislated requirement, and they’ll usually be willing, and ideally, keen to refer us to their family, friends and colleagues. In fact, it’s a goal and reality for many advisers already. Rather than needing to ask for a referral, the service and advice offered is such that clients ask their adviser to help others in much the same way that they’ve been helped. At that point, we can be confident that the service and advice given really is worthy of a fee. What about Friends of Financial Advisers? For too long it seems, advisers have been the ones seeking to build relationships with other professionals, with the thought being that those in other profes-

sions are doing us a favour by referring their clients. Building relationships with other professionals obviously makes a lot of sense, but wouldn’t it be great if our services and business models were so closely aligned to the needs of our clients that their most trusted professional relationship was with us? For some this is already the case, but in other cases a worthy goal is for other professionals to have good reason to make friends with us and thus gain our referrals. Many advisers have already taken steps to prepare for this new focus on financial advice for the simple reason that it makes good business sense. They’ve sought to adapt their businesses in the context of the wider fee-for-service debate, but more importantly, for the purpose of better serving their clients. For these advisers it really has been an evolution rather than a revolution. Yet for the vast majority of advisers, and regardless of the economic environment and at times relentlessly negative press, there is no reason at all to be defensive about what we do, and for that matter, how we get paid. We can all be proud of the role we play and we can all unite as a body of advisers to voice our vision. Our role – maybe even our calling – is to focus on giving advice to our clients today and tomorrow, and hopefully for the children of our clients as well. It really is a Focus on Future Advice. Stephen Bartholomew is practice development manager of Fiducian Financial Services.

www.moneymanagement.com.au April 12, 2012 Money Management — 19

OpinionEurozone

Busy going backwards Austerity plans all over the world – and especially in Europe – are worsening government finances while inflicting misery, writes Michael Collins. “PAIN. But no gain” was how The Independent newspaper of the UK summed up the grim news on the country’s economy one day late last year. Unemployment had jumped, the Bank of England had slashed growth forecasts, and the UK Treasury had forecast that the sluggish economy and rising joblessness would boost government debt beyond previously projected levels. “Pain. But going backwards” would have been a more accurate (though less lyrical) assessment of the austerity squeeze of David Cameron’s government. The coalition slashed spending and raised taxes to tackle a budget deficit that stood at 8.5 per cent of the gross domestic product (GDP) in 2011 and to lower government debt from 73 per cent of GDP – even though the country was under no pressure from bond investors to do so. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” Cameron said in Davos in 2011. The economic news out last November showed otherwise – as has data since. The jobless rate surged to a 15-year high of 8.3

per cent in the third quarter (2.6 million out of work). The Bank of England cut the growth forecast to just 0.9 per cent for the year to June 2012. The Office of Budget Responsibility revealed that net public borrowing targets had, in effect, been blown three years off course and past Labour’s 2010 predicted peak. Austerity is hardly a political-winning strategy because it prompted two million public servants to strike on 30 November 2011 – the UK’s biggest industrial action for at least 30 years. The UK’s experience is another testament to how austerity plans all over the world are worsening government finances while inflicting misery; the fiscal compact 25 European countries signed up to on 30 January 2012 will legally hinder them from using fiscal stimulus to spur their economies. They prove that Keynesians have a better recipe for repairing government finances over the medium term. The big flaw of Keynesian economics in practice is more subtle though.

Reality versus ideology The Keynesian medicine for tough times is the counterintuitive solution of boosting

20 — Money Management April 12, 2012 www.moneymanagement.com.au

government spending because economic growth and some inflation are the best ways to prune public deficits and debt. More people in jobs means higher tax revenue and lower spending on social security – the opposite of what austerity does. Austerity is even more pointless if a country’s trading partners are inflicting the same pain, or monetary policy can provide no help for an economy in the form of reduced interest rates or a lower exchange rate. Europe, from Portugal to Ireland and Latvia to Greece, provides endless evidence against austerity, especially the Eurozone countries. The terms imposed on Greece as part of its rescue packages included such fierce spending cuts and tax increases that they have made the country almost ungovernable while ruining its economy – Greece’s GDP shrivelled 5.2 per cent in the year to September 2011, manufacturing slumped 15.5 per cent in December from a year earlier, and unemployment is already 20.9 per cent. At the same time, these austerity policies have destroyed government finances. Greece’s ratio of government debt to GDP

has soared from 110 per cent in 2010 to about 160 per cent. Once this ratio reaches 100 per cent, it’s difficult for it to decline unless a country’s economy is growing at a faster pace than the average interest rate on government debt. Since austerity crushes growth, its adherents appear ideological as they stress how cutting government spending will give business the confidence to invest. Nobelprize winning economist Paul Krugman dismisses proponents of austerity for believing in the “confidence fairy”. Bond investors and rating agencies took little time to work out that austerity damages economies and worsens government debt positions. This is why we are witnessing the vicious cycle of rising bond yields damaging government finances leading to higher yields, which prompts a rating downgrade, leading to higher yields and so on. So austerity can lay claim to bringing on the Eurozone debt crisis. A columnist in The Telegraph of the UK has labelled Germany’s Finance Minister Wolfgang Schauble as the “most dangerous man in the world” for his push to

enforce “a reactionary synchronised tightening” on Europe’s sick economies.

Flawed comebacks Critics of Keynesian solutions cite examples of when economies grew through austerity packages. But usually the circumstances differ from today’s (and some even question the stats that prove economies grew under austerity). Economists at the International Monetary Fund recently studied 173 episodes over the past 30 years when 17 advanced economies took steps to fix government finances. While the study’s conclusion was that austerity boosted unemployment (and hence failed to mend public finances), Ireland in 1987 and Finland and Italy in 1992 coped under austerity. This was because large currency depreciations boosted net exports, or lower interest rates supported consumption and investment. “Unfortunately, these pain relievers are not easy to come by in today’s environment,” the authors said. The critics of fiscal stimulus say the US government’s US$780 billion package failed to reignite the US economy, even if it helped avoid a depression. It’s true the US economy has only wobbled along since the stimulus was approved in 2009. The problem was, though, that the package was never big enough and was poorly designed. It was about half the size

“

When the good times return, that’s when it’s time to demand prudence from governments. Not now.

”

lus package worth 16 per cent of GDP.) One worry now for the Australian economy is that the Government is wedded to having a surplus in 2012-13. This will mean sizeable cuts to government spending, estimated at $11.5 billion over four years. At least, the Reserve Bank of Australia has scope to cut interest rates to keep the economy going.

Big spenders

needed and contained incremental tax cuts and only glacial increases in public works. Any good it did was offset by reduced spending by state governments. The Australian Government’s response to the global financial crisis in late 2008 and 2009 is an example of a wellconstructed stimulus package. The “go hard, go early, go household” cash and building stimulus propped up the economy and meant the Government undershot its own debt forecasts. The Federal Government’s debt to GDP was only 7.7 per cent in 2011. (To those who think China saved Australia, authorities in Beijing kept China going with a stimu-

Advocates of Keynesian economics probably feel vindicated by what’s happened in recent years. But there is one flaw to how Keynesian economics is practised. The flipside to Keynesian economics is that during good times governments should run surpluses and reduce debt to curb inflationary pressures. If they do this, they save their firepower for tough times. The problem is this tends not to happen. The US, UK, France, Italy and Greece are guilty of running structural deficits during the good times leading up to 2008 (though Ireland and Spain ran budget surpluses before 2008 and had reduced government debt to between 30 per cent and 40 per cent of GDP – the real cause of the Eurozone debt crisis is the current account imbalances of countries on a fixed-currency regime). France – with its generous social security – last posted a budget surplus in 1973.

That’s not usual for Europe. In aggregate, the countries in the Eurozone have been in deficit for the past 40 years. The US government under President George Bush thought it could wage trillion-dollar wars while reducing tax rates for the wealthy. These governments are in trouble now because they had to bail out banks and other industries and boost social security after Lehman Brothers collapsed in 2008. The US Federal Government’s deficit in 2011 was about 9.6 per cent of GDP – its ratio of government debt to GDP at 73 per cent. France’s Government’s shortfall was about 5.9 per cent of GDP in 2011, while its ratio of government debt to GDP was 81 per cent. Australia could afford stimulus in 2008 and 2009 because government debt was low – thanks in no small way to the previous government’s asset sales (rather than to any impressive spending discipline). When the good times return, that’s when it’s time to demand prudence from governments. Not now. Even Cameron’s government is realising, sort of, that austerity is a self-fulfilling prophecy. By the end of November 2011, it was talking of a plan to invest in infrastructure to avoid a recession, but further squeezing the public sector and the poor to do so. Michael Collins is the investment commentator at Fidelity.

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www.moneymanagement.com.au April 12, 2012 Money Management — 21

ResearchReview

Analysing the raters Research Review is compiled by PortfolioConstruction Forum in association with Money Management to help practitioners assess the robustness and disclosure of each fund research house compared with one another, and given the transparency they expect of those they rate. This month, PortfolioConstruction Forum asked the research houses: should gold be a part of most investors’ portfolios? LONSEC Gold has long been considered a safe haven in difficult and uncertain times. It is generally viewed as a store of wealth when political and economic uncertainty leads investors to lose confidence in the value of paper assets such as currency, bonds and equities. Gold is an alternative asset class that has a number of unique characteristics: • It has a low or negative correlation with major asset classes; • It pays no income; • It has experienced a low rate of return, yet has a higher volatility than either cash or fixed interest; and • It is subject to different forces of supply and demand from those which affect other asset classes. These characteristics also make it an additional source of diversification within an investment portfolio. T h e re a re a n u m b e r o f w a y s f o r investors to gain exposure to gold, including via gold bullion, gold futures, shares in goldmines, exchange-traded funds (ETFs), and managed funds. These strategies are all very different in the ways they invest or gain exposure to gold, and as a result, have very different risk/return attributes, liquidity profiles and costs. Therefore, it is absolutely critical that any investor completely understands why they want e x p o s u re t o g o l d , w h a t t h e y a re purchasing, and how it potentially impacts on their portfolio. While gold has had a stellar period of late in terms of performance, it can also have sustained periods of negative performance – typically during solid economic times when investors are willing to pay for risk. The 1990s are a

Gold does not generate an income so it is very “difficult to construct a long-term view on its value. ”

good example. Gold hit a high of $416 per ounce in February 1996, and it was December 2003 before it reached that level again. Not only did it take eight years to reach a new peak, but there were 36 consecutive months of negat i v e a n n u a l r o l l i n g re t u r n s. Mo s t investors would have given up on their gold holdings, unable to tolerate such a sustained period of poor performance – both on an absolute and relative basis. Therefore, for most investors, Lonsec would not recommend a stand-alone i n v e s t m e n t i n g o l d . Ty p i c a l l y, w e believe it is best to take a more diversified approach – by which, we mean having active fund managers that will make the call as to when they believe it is most appropriate to be in gold – whether via a commodity fund, a hedge f u n d o r a n e q u i t i e s s t ra t e g y. Fo r example, the Zurich Global Thematic Equity Fund invests in gold as a theme at various points during the economic cycle. Currently, the fund has an 8.5 per cent holding in gold and precious metals. Investors can also look to alter-

22 — Money Management April 12, 2012 www.moneymanagement.com.au

n a t i v e f u n d s s u c h a s t h e Co ra l s Co m m o d i t i e s Fu n d , a d i v e r s i f i e d commodities fund able to take both long and short positions on gold – dependant on the manager’s view of both the global economic environment and gold relative to other commodities. The more diversified approach offers more attractive risk/return outcomes for most investors.

MERCER The breaking of the gold standard at the start of the 1970s clearly changed not only the way gold was valued, but arguably, also how it should be viewed as an investment. Although its direct use as a monetary asset ended, is that how it should still be viewed? Or should it be viewed as a commodity? Two s c h o o l s o f t h o u g h t e x i s t , b ro a d l y summarised as follows: • Gold continues to have importance as a monetary, and therefore, financial asset. This theory contends that gold merits a place in an investment portfolio because it will broadly retain its

value in real terms, while also providing protection against the fear of a collapse to the current fiat-based currency system. • Gold should be seen as a commodity, with no yield or income stream. As s u c h , p r i c e s s h o u l d b e s e t by t h e balance between the available supply and demand from industry and jewellery (its major physical uses). In practice, Mercer believes that both views have had merits through time. In periods of low systemic risk, the price of gold will be underpinned by commodity fundamentals. However, where systemic concerns are prevalent, the market is likely to see gold as a safe haven investment – that is, it may be viewed by some investors as a form of monetary insurance. The downside to investing in gold is that it does not always perform well when equity markets decline significantly. Indeed, the performance of gold in different market environments can be

very difficult to predict. Other problems associated with gold investing are the difficulty of assessing fair value (at some point, price must matter, but at what point?) and the practicalities of access and the expense of storage. Mercer does not recommend a strategic allocation of gold to an investor’s portfolios. However, we do believe a target allocation to a broad group of commodities (including gold) makes sense over the long-term. Commodities have historically demonstrated some unique properties that may make them beneficial as a diversifier in an investment portfolio. Indirect ownership of commodities includes ownership of stocks, bonds and other investments of c o m p a n i e s t h a t a re i m p a c t e d by changes in commodity prices. Direct investment in commodities could be in the form of ownership of the commodities themselves, or through commodities futures. Due to the costs and other i m p ra c t i c a l i t i e s a s s o c i a t e d w i t h

storage, investors typically do not invest directly in physical commodities. Mercer prefers investors gain access to c o m m o d i t i e s t h ro u g h c o m m o d i t y futures.

MORNINGSTAR Morningstar is neither a gold bull nor bear, and there is no allotment to gold in our asset allocation policy. Rather, our preference is to delegate this decision to the underlying fund managers we recommend. A number of the fund managers we rate highly do invest into gold mining companies or hold gold bullion in the physical form – based on their outlook and the underlying fundamentals. Fear and uncertainty have prompted a consistent interest in gold, fuelling t h e m e t a l’s d e c a d e - l o n g u pw a rd performance. Investors flock to gold during periods of increased risk aversion, when there's deteriorating faith in currencies, and to protect against the

risk of inflation. A key reason for gold’s performance is that the supply of this precious metal is limited. Gold does not generate an income so it is very difficult to construct a longterm view on its value. It is an investment that relies on the expectation that there will always be a buyer enticed by an ever increasing price. Like all things though, there will come a time when there are fewer buyers than sellers. Successfully timing a short-run gold investment is not an easy task. When bullion prices are soaring, it’s all too easy to jump on the gilded bandwagon. Gold prices soared in the early 1980s, and many speculative investors poured into the market – only to lose their shirts after the price of gold collapsed. There will come a time when this happens again. There has been a huge rush for gold i n re c e n t y e a r s, a n d a s a re s u l t , investors have more options to invest in it than ever before. One of the most

famous is the US-domiciled SPDR Gold Shares ETF originally listed on the New York Stock Exchange in November 2004. SPDR Gold Shares is the largest and most liquid physically-backed gold offering on the market. Investing into physical gold bullion is the cleanest way to access the precious metal. Gold mining companies bring with them other factors for a fund manager to analyse, such as mine life, management quality, debt levels, and cashflow, to name just a few. There is a lot more room to go wrong h e re, a s w e h a v e s e e n f r o m t h e performance of many listed gold companies – which often deviate far from the market price for gold. However, many fund managers are not able to invest into physical gold bullion, so the only way they can gain gold exposure is through listed companies.

Continued on page 24

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ResearchReview Continued from page 23

STANDARD & POOR’S The debate as to whether gold should be included in portfolios has raged for years and no doubt will continue. We acknowledge there is merit on both sides. However, Standard & Poor’s does not advocate a dedicated strategic allocation to gold (bullion or equivalent) in investor portfolios. Our reasoning begins with the question – what is gold? It is a metal with characteristics of scarcity, durability and malleability, and these make it ideal for minting currency – as has been the case through history. Apart from this function and its value as an adornment, the other direct industrial applications for gold are insignificant. Gold’s key source of value derives from its role as currency and as an accepted store of value (bullion), to the extent that countries have historically based their currency’s value on the amount of gold held in national reserves (the gold standard). In recent decades, many countries have moved to Fiat currencies – that is, currencies backed by faith in the strength of the national economy and its tax paying human capital rather than its store of gold. The need for countries using the Fiat system to retain gold reserves to back their currencies has substantially diminished. As an asset, gold does not of itself generate earnings. Further, holding it incurs costs such as storage, transaction costs, etc. Gold as a commodity has little intrinsic value given its current lack of industrial use. In this context, gold is worth what somebody is prepared to pay for it, notwithstanding that at times, the motivational drivers (like fear, greed or risk hedging) can see the price of gold vary significantly from the marginal cost of its liberation from the earth. From an investor's perspective, if it is believed that the Australian monetary system is at risk of significant debasement due to economic events or mismanagement (as has occurred in Zimbabwe, Russia, and Argentina since the 1980s) then an allocation to gold as a hedge is prudent. However, we don’t believe the Australian economy or currency is at risk of such an event, and hence, the need to use gold specifically as a hedge against these events is not required currently. From a philosophical perspective, S&P believes that capital is best deployed in the support of economic endeavour through equity and debt allocations to productive enterprise. Naturally, there will be times of price volatility as a result of economic, political and market events, and at these times, gold may provide an effective hedge. However, over the longer term, prudent allocations of capital to enterprise and debt have generally produced a superior outcome when compared to gold. S&P Fund Services has advised that their business activity will cease as at 1 October 2012, but meanwhile, it is ‘busi-

“

Gold is priced in US dollars, so the returns of any Australian investor who buys gold will also be affected by currency fluctuation.

”

ness as usual’ and PortfolioConstruction Forum is satisfied with the integrity of the analyst opinion provided.

VAN EYK Van Eyk believes gold should be a part of most investors’ portfolios. Gold provides somewhat of a safe haven, at times. It provides investors with diversification benefits, in that its value is not dependent on the values of stocks, bonds or other investments such as property. In times of market turmoil, when equity markets fall, the value of g o l d m a y r i s e. I f u s e d a s p a r t o f a balanced portfolio, this can lower the v o l a t i l i t y o f re t u r n s, w h i c h c o u l d increase the compound return of a portfolio over the long-term. There are various ways investors can

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access exposure to the gold price. This can be done with a physical holding of gold bars or coins, by going long gold futures or contracts for difference, by buying a gold ETF, or by buying shares in a gold mining company. A key consideration is the currency risk inherent of any investment, given gold is priced in US dollars, so the returns of any Australian investor who b u y s g o l d w i l l a l s o b e a f f e c t e d by currency fluctuation. One way to overcome this is by shorting the US dollar relative to the Australian dollar for the amount of gold purchased. If the US dollar were to fall, the investor would make money on this currency hedge and receive the underlying performance of the gold price. Buying stocks in a gold producer is a good way to benefit from a rising gold p r i c e. I f t h e c o m p a n y ’s e a r n i n g s increase when gold increases in price, the degree of upside will be determined by that company’s operating leverage. Share prices in gold producers with high fixed cost bases will benefit more in a rising gold price environment than those with a low level of fixed costs. The reverse will occur when the gold price falls, all other things being equal. When buying gold company shares, investors will also be exposed to the level of production that the company generates. Hence, this type of investment is not a pure play on the gold price. The company’s operating costs, cash burn and exploration costs will also influ-

ence the rate of return. One other point to consider is that gold does not always increase in value in times of weak economic performance. If deflation takes hold, gold may in fact fall at the same time as equity markets. Hence, gold is not a panacea to portfolio underperformance, and the inflation/deflation environment must always be taken into consideration when deciding how much of a portfolio is allocated to gold.

ZENITH INVESTMENT PARTNERS From a diversification angle, physical gold in Australian dollars has a negative correlation to most traditional assets can significantly reduce overall portfolio risk and provide inflation protection to a portfolio. While not to diminish these characteristics, Zenith tends to allocate meaningful exposures to the CTA and Global Macro alternative sectors in the Zenith Model Por tfolios. Like gold, these sectors provide strong diversification and low correlation to traditional assets, but also provide the scope of significant upside in returns versus cash. Gold on the other hand, is viewed as a store of value, and in inflation-adjusted terms, our long-term expected return of the asset is close to zero. Therefore, at present, Zenith has no exposure to gold related investments.

In association with

Gold: a knight in shining armour Is gold a good means of portfolio diversification? Is it a hedge against inflation and currency depreciation? Or is it that the past decade is an anomaly for gold and it has no place in portfolios? Dr Jack Gray explains.

old bugs promote gold as an investor’s dream. Think of the case they put in terms of what gold offers – it’s a permanent store of value, it’s an alternative (if not the only) currency, it’s a hedge against inflation, it’s a diversifier, it’s a hedge against chaos at the end of the world, it’s a symbol of power and status – and for now at least, the price is appreciating. But does it deliver on those promises?

that gold has got “twoTheveryfactdifferent sources of demand can lead to a damaging and destabilising positive valuation feedback mechanism.

”

Diversification In my research on the case for holding gold in portfolios, I could find very little discussion on its diversification benefits that wasn’t written by gold managers or sponsored by the Gold Council. The little I did find gave some credence to the diversification benefits of gold – although the correlations shown (just one measure of diversification) were not particularly low. As a practical example, I examined the AgAu Global Producer Fund. Its performance since 2004 certainly looks great compared to the MSCI. However, 2008 was a disaster – the fund was down 22 per cent. Naively, I would have expected that it would have been a great year for gold because there should have been a flight to it. So that raises a question mark around the value of gold as a diversifier. Perhaps even gold goes to hell in a hand basket when there’s a crisis.

under a gold standard. But the gold standard also caused crises. For example, when there is a massive exploration of gold – like in the 17th century in South America and Central America – gold is massively inflationary. Moreover, in normal times, gold is deflationary for the simple reason that the rate of gold production at times falls behind the production rate of the rest of the economy. Typically, this leads to a deflationary depression.

Valuation

A safe haven As a safe haven, gold has broadly delivered across millennia, across differing economic systems, even across communism, and across different civilizations and cultures. It’s remarkable that gold has been held as a safe haven for four or five thousand years. It is not the only underlying source of value in currency. Salt has been used at various times, not to mention silver, and there have been Fiat currencies that were not denominated in gold going back as far as the 9th century in China. The fact that gold is independent of time, space, economics and culture does reassure me that it will probably remain as a store of value.

An inflation hedge The data I was able to find did support the case for gold as a reasonable inflation hedge over the long-term. However, there are dramatic spikes in gold, most of which tend to be followed by equally massive collapses. For example, in 1968 in the US, gold was trading at US$35 an ounce. By 1980, it was up to US$850 an ounce (in real terms, it has not yet reached that level again). Over the twelve years, that’s a 30 per cent per annum return, with some volatility. However, by 1980, there was more invested in gold than there was in the entire productive capacity of the US

economy. If that’s not a sign of something that is totally unsustainable, I don’t know what is. Sure enough, it was unsustainable. Gold drifted along from 1980 to 1989 and then fell 60 per cent through to 1997 – a return of -11 per cent per annum for eight years. Martin Feldstein from the National Bu re a u o f Ec o n o m i c Re s e a rc h a t Harvard showed that from 1980 through to before the GFC gold was a poor hedge against inflation and currency fluctuations in the US. As mentioned, in real terms gold is not yet at US$850 today. Some gold bugs claim it will get to US$10,000. I was working in America when similar people said the Dow

would get to 100,000. Being below a historic high is not an argument in support of gold. But there is a stronger argument that gold is not in a bubble – not because of price. Since 1980, the US money base has increased eightfold, while its debts have increased about eightfold too – whereas the price of gold has increased only four and a half times. So if you accept that gold is an alternative currency, and you’re measuring one relative to the other, that’s some comfort. What that also hints at is a way of valuing gold which is sorely needed, given gold doesn’t have a yield or earnings. Perhaps the credit-induced crisis we’re living through would not have happened

Valuation is made more difficult by the use of gold as a form of currency stored in vaults – which makes the free market’s role as a price discoverer difficult. In a normal free market, rising prices lead to rising supply and falling demand, and hence falling prices, which is a selfcorrecting mechanism. With gold, that can be a bit different. For instance, the nonmonetary demand for gold is typically comprised about 70 per cent jewellery, 20 per cent investment, and 10 per cent industry. Assume there’s a shock that raises the non-monetary demand for gold. A smaller amount will then be available for monetary uses, leading to a credit squeeze and a consequent decline in aggregate commodity prices. That, in turn, induces a greater demand for gold as a commodity. So the fact that gold has got two very different sources of demand can lead to a damaging and destabilising positive valuation feedback mechanism. Dr Jack Gray is adjunct professor of Economics at the Centre for Capital Market Dysfunctionality at UTS. This is an edited transcript of his address to the PortfolioConstruction Forum Markets Summit in February 2012. www.PortfolioConstruction.com.au

In association with

www.moneymanagement.com.au April 12, 2012 Money Management — 25

Appointments

Please send your appointments to: andrew.tsanadis@reedbusiness.com.au

G E N WO RT H Au s t r a l i a has made a number of additions to its Australian board as it prepares for its minority initial public offering. The company has announced the appointment of Ian MacDonald as a non-executive director and remuneration committee chairman. MacDonald spent 34 years at National Australia Bank in a number of senior roles, including group chief information officer. He currently sits on the boards of A r a b a Ba n k Australia, Elders Limited, Rural Bank and Tasmanian Public Finance Corporation. Genwor th has also announced that Gayle Tollifson has stepped down from her role as Genwor th chair and has been appointed the audit and risk committee chair. She has over 30 years’ experience in the global finance and insurance markets and currently sits on the boards of Munich Reinsurance Australasia, RAC Insurance and Campus Living Funds Management, Genworth stated. In addition, current Genworth non-executive Tony Gill has been appointed chairman of Genworth's capital and

investment committee. The banking and securitisation professional currently holds board positions at First Ameri c a n Ti t l e In s u r a n c e o f Australia, Australian Finance Gro u p and V i r g i n Mo n e y Australia.

Move of the week FIRSTFOLIO has appointed Eric Dodd as a non-executive director and chairman of the board. Dodd replaces Anthony Wales in the role of FirstFolio chairman. Wales will remain a non-executive director of the company. With more than 30 years' experience in the insurance and financial services industry, Dodd was previously managing director and chief executive of MBF Australia. Following its merger with BUPA Australia in 2008, Dodd served as managing director of the merged entity. He has also served as NRMA Insurance managing director and chief executive of NRMA Limited. Dodd currently holds the position of SFG Australia chairman and is a non-executive director of Credit Corp Group.

Eric Dodd

Jonathan Finlay TOWERS Watson has appointed former Deloitte Australia partner Jonathan Finlay to head up the newly-established executive compensation business in Australia. Finlay will lead a team of

seven consultants including Stephen Burke, who (along with Finlay) recently retired from Deloitte Australia as a partner. Finlay has over 30 years of management and human resources consulting experience, and supports the boards of ASX 200 companies and multinational firms in their stewardship role. Burke has more than 16 years’ experience in international executive remuneration consulting experience. The team will offer services that include advice in the areas

Opportunities PLANNER'S ASSOCIATE-ESTATE PLANNING Location: Perth Company: Met Recruitment Description: A boutique financial services firm specialising in risk insurance, estate planning and business succession is seeking a planning associate to join its Subiaco office. The company takes a collaborative approach to resolving client needs and outsources all non-core services to experienced financial planners and accountants. In this role, you will be required to participate in client meetings with the principal planner and prepare advice. To be considered, the candidate will have completed their ADFP and have at least 3 years’ experience in a related role within the financial planning industry. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Mike at Met Recruitment - 0422 922 467, resumes@metrecruitment.com.au

SENIOR AUDITOR - ASSURANCE Location: Adelaide Company: Terrington Consulting Description: A second tier accounting firm is currently looking for a senior assurance accountant. Your duties will include developing audit planning strategies, conducting interim and year-end visits, facilitating the training and

of board and executive pay and governance, regulatory compliance, Australian and global share plans, annual pay reviews and market benchmarking, the company stated.

FUNDS manager Bennelong Group has appointed Michael Pratt as a non-executive director and a director on the board of the Bennelong Foundation. Pratt has significant investment management and banking experience throughout Australia and Asia, having worked for Standard Charted

Ba n k a s re g i o n a l h e a d o f consumer and SME banking, north east Asia. He has also held senior execu t i v e r o l e s w i t h We s t p a c , National Australia Bank and Ba n k o f Ne w Z e a l a n d , a n d directorships with MasterCard and BT Financial Group. B e n n e l o n g G ro u p c h i e f executive Chris Cunningham said Pratt's addition to both boards complements the existi n g d i re c t o r l i n e - u p, a n d provides an excellent cultural fit with the company's commercial and philanthropic goals.

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

development of staff, and prepare and conduct assurance of general and special purpose financial reports. To be successful, you will need over 3 years’ experience in accounting – preferably in Australia – and will need to have previously held a position in a professional services accounting firm. Working directly with the firm's partner, you will take ownership for your work and clients. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Jack at Terrington Consulting – 0412 690 268, jack@terringtonconsulting.com.au

To be considered for the position, you will be either CA or CPA qualified, have a firm understanding of Australian taxation legislation and have a proven experience working within a business services environment. You will be suitably equipped to perform taxation and advisory services at a high level. Although the role is a full-time position, the firm will consider candidates who are seeking part-time employment. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Jack at Terrington Consulting - 0412 690 268, jack@terringtonconsulting.com.au

TAX CONSULTING MANAGER/ASSISTANT MANAGER

FINANCIAL ACCOUNTANT

Location: Adelaide Company: Terrington Consulting Description: A mid-tier firm is seeking a tax consulting manager or assistant manager to provide tax advice and consulting services to a diverse client base. Along with identifying opportunities to improve tax-related client strategies, this is a great opportunity to act as a client consultant and as a resource to a senior management team. In this role you will deal with high level and complex taxation issues, provide technical tax planning advice and act as a resource to firm employees and partners.

Location: Adelaide Company: Terrington Consulting Description: A wholesale trader is currently seeking an accountant with a professional services background. The role offers progression in the short to mid-term to group accountant level, as well as ongoing professional development. Your responsibilities will include financial recording and reporting, financial analysis, providing advice to internal stakeholders, tax advice and document preparation, and assisting with audit duties. The ideal candidate will have 2-5 years' experience within a business services, audit or other professional services account field.

You will also need to have either completed or be in the process of completing a CA or CPA. This opportunity is ideal for any professional looking to transition into a commercial setting. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Victor at Terrington Consulting – victor@terringtonconsulting.com.au.

MANAGEMENT ACCOUNTANT Location: Melbourne Company: Lloyd Morgan Australia Description: A large services firm is seeking a management accountant for an 8-month contract. As a key member within the commercial team, you will liaise with both finance and operations. Your key responsibilities will include monthly/quarterly management reporting, budgeting and forecasting, financial analysis and analysis on operational performance and systems administration. To be successful, you will have proven experience as a management accountant and excellent skills in reporting and analysis. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Stewart at Lloyd Morgan Consulting (03) 9683 5200, sthomas@lloydmorgan.com.au

www.moneymanagement.com.au April 12, 2012 Money Management — 27

Outsider

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

Pollies hook into ECT therapy OUTSIDER is not exactly an avid punter, but he doesn't mind a wager or two when he thinks he's onto a sure thing. On that basis, Outsider is putting money on the Federal Government doing very little about the excess contributions tax (ECT) regime in the May Federal Budget, notwithstanding the fact that the existing arrangements seem to have more flaws than a Health Services Union credit card reconciliation form. Outsider notes the war nings from SMSF Professionals’ Association of Australia chief, Andrea Slattery, that the upcoming changes to

concessional contribution caps for those aged over 50 will create a "perfect ECT storm", but suggests that the Treasurer, Wayne Swan, is far too focused on delivering a surplus to worry about such things. Outsider recalls there was much speculation surrounding the likelihood of the Government fixing the ECT problems ahead of its 2011 Budget, b u t re f l e c t s t h a t t h e c h a n g e s u l t i m a t e l y announced seemed only to fiddle at the edges. Perhaps, then, Institute of Chartered Accountants super specialist Liz Westover is right when she points to the $131.5 million raised in ECT

When Greeks go Dutch OUTSIDER has precious little time for anyone under 50 at the best of times, but he is willing to make an exception for 10-yearold aspiring economist Jurre Hermans. Jurre, who hails from the Netherlands, has been awarded 100 euros for his entry to the Wolfson Economics Prize, which “challenges the world’s brightest economists to prepare a contingency plan for a break-up of the Eurozone”. The one-page plan (complete with illustration) plays out as follows: “All Greek people should bring their Euro to the bank. They put it in an exchange machine (see left on my picture). You see, the Greek guy does not look happy!! The Greek man gets back Greek Drachme [sic] from the bank, their old currency. “The Bank gives all these euro’s to the Greek Government (see topleft on my picture). All these euros together form a pan-

“

Out of context

penalties in 2009-10, and the likely higher amount to be shown in the Bu d g e t re c e i p t s t o b e published in May. We s t ov e r wonders whether the Government's reluctance to change the ECT is related to the revenue it generates. Outsider reckons she's right. Even incompetent farmers know better than to slaughter a very healthy cash cow.

Just what the doctor ordered

cake or a pizza (see on top in the picture). Now the Greek government can start to pay back all their debts, everyone who has a debt gets a slice of the pizza.” Jurre even addresses the possibility of a currency flight as Greece transitions back to the drachma. “If a Greek man tries to keep his Euros(or bring his euros to a bank in an other country like Holland or Germany) and it is discovered, he gets a penalty just as high or double as the whole amount in euros he tried to hide!!!” While Jurre’s ‘pancake/pizza plan’ didn’t make the shortlist for the £250,000 prize, it has generated plenty of media attention – although the 10-year-old is starting to grow weary of all the interviews. “I’d rather be playing in the sun,” he admits. Wouldn’t we all, mate!

“The American people have figured out somebody is going to have to make some serious suggestions, and they’re probably not going to be all sunshine and cotton candy." US congressman Tom Cole on unsavoury tax reform for the struggling US economy.

28 — Money Management April 12, 2012 www.moneymanagement.com.au

"…He was extremely uncertain as to what is actually going on within the Communist Party at the moment, let alone the economy!"

EVERY time Outsider leaves his office and goes out to lunch with one of his contacts in the financial services industry, he comes back a little bloated and very tipsy. It is no secret that financial services chaps like a bit of a smoke and a drink, which almost certainly explains Outsider’s strong friendships with the same lot. But this is also why he was not surprised when he heard that a WorkSafe Victoria analysis found that workers in the financial services sector are an unhealthy bunch. According to the study, bankers, insurers and brokers regularly shun exercise and the five serves of greens one ought to have daily. Not to mention incurring the through-the-roof risk of diabetes related to the consumption of junk food. Ladies in the industry, however, did yours truly proud – again – with the study revealing they smoked more then men. WorkSave Victoria attributed the poor state of workers in the financial services sector to long hours behind their desks, which limits the access to healthy food. In his younger years, Outsider was a liberal drinker, smoked more than a pack a day, and ate the most expensive items from the vending machine. Luckily for him, Mrs. O has introduced a new regime. As for the exercise…well, he only gets it if he begs hard enough.

“I try to imagine, ‘How is this going to sound in a hearing?’" BDL Compliance Consulting chief executive Brian Lenart questions the

AXA Framlington fund manager Mark Tinker concurs with the confusion of a local market strategist in relation to the Chinese economy.

ease with which customers could invest in a complex exchange-traded note without contractual permission.