Money Management (April 19, 2012)

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Vol.26 No.10 | April 19, 2012 | $6.95 INC GST

The publication for the personal investment professional

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INFOCUS: Page 10 | LIFE INSURANCE: Page 21

SMSFs hold off on direct property

By Tim Stewart ENQUIRIES about direct property are on the rise, but the subdued residential property market appears to be preventing selfmanaged superannuation fund (SMSF) clients from pulling the trigger.

Dixon Advisory’s SMSF clients have maintained a steady 6-7 per cent exposure to direct property over the past 12 months, according to Dixon Advisory associate director Tim Coates.

“We’re getting a large number of enquiries from people about buying real property in their super funds, but the conversion rate hasn’t been as high as we’ve anticipated,” said Coates.

He put the “fairly flat” take-up over the past 12 months down to the lacklustre property market and the 50 per cent auction clearance rate.

“When the wider economy gains its confidence, [direct property] will certainly be a growing sector,” he added.

Yellow Brick Road chief executive Matt

Matt Lawler Lawler has also seen a spike in enquiries about direct property investment, but he agreed the take-up had been reasonably flat over the last year.

One reason enquiries are up is that people have accumulated sizable assets in their

superannuation over the past 15-to-20 years and are wondering what to do with them, said Lawler.

There is a love affair with property in Australia, said Lawler, and “people come to us with very strong ideas about what they should be doing”.

Coates played down fears of a housing bubble in Australia, saying Dixon Advisory is “very comfortable with current prices”.

“We think the underlying supply and demand dynamics support the prices at their current levels – particularly in the capital cities,” Coates said.

But not everyone is keen about the idea of SMSF clients investing their retirement savings in the residential property market.

BBN Asset Management managing director Tony Jovevski reckons the property market is “fully priced” by most measures.

“Multiples of household rents to prices and household incomes to prices are trading at unprecedented levels, and I would expect those levels to correct,” Jovevski said.

“Investors should be very wary of putting

money into property. The returns are not that good, and there won’t be capital gains for a long, long time,” he added.

Jovevski recently went to market with a product aimed at retail investors who are concerned about a potential housing bubble, which takes a short position on the Commonwealth Bank and Westpac.

“If house prices fall, that is likely to impact on bank share prices,” he said.

However, he said his talks with SMSF managers around the country were very disappointing.

Advisers told him that it “goes against the grain” to invest in something that makes money if the market falls.

“I was dismayed by the attitude of people sitting at the top of thousands of SMSFs. Most of those were beholden to an Approved Product List of the same old, same old; products that usually make in a rising market but always lose in a falling market. Those people talk about diversification, but all they’re doing is diversifying the losses,” Jovevski said.

Addressing the cause, FOFA unknowns not the symptoms still a concern POLICY REVIEW

By Andrew Tsanadis and Bela Moore

INDUSTRY discussion in relation to what constitutes ‘churning’ in life insurance needs to be replaced with a debate on a sustainable remuneration model for switching policy providers, according to TAL chief executive for retail life Brett Clark.

The insurance industry should “embrace the fact that a financial adviser may switch policy providers based on customer needs, as it is a core part of the adviser’s value proposition”, Clark said.

According to the latest DEXX&R research, the average industry annual attrition rate of life insurance policies has risen to 15.4 per cent as at December 2011, a slight increase from 14.3 per cent the previous year.

The study found Aviva (National Australia Bank) had the highest attrition rate with 17.9 per cent, followed by CommInsure (17.1 per cent) and TAL (16.6 per cent). The attrition rates include all discontinued policies as a percentage of in-force premiums.

Clark said customers move between products all the time and he does not necessarily believe introducing a policy enforcing level commissions on life

insurance products was the answer.

“It is a question about what is the most sustainable and appropriate remuneration structure for our industry and that’s the conversation we need to be having,” he said.

According to DEXX&R managing director Mark Kachor, upfront adviser commissions and the 12-to-18 month responsibility period of most policy holders is still “a structural issue within the industry”.

Although Kachor conceded that there was a clear financial advantage to rewriting business after the responsibility period had expired, he said discontinuance rates had a tendency to increase during recession-like periods – and this might be one reason for the increase in attrition figures.

Synchron director Don Trapnell said insurance companies should be asking if replacement policies were in the best interest of the client, and he did not agree that attrition rates were a good measure of churning in the industry.

Regarding the Financial Services Council’s (FSC’s) proposed policy on curbing churning, Trapnell said that it

Continued on page 3

By Chris Kennedy THE Future of Financial Advice (FOFA) reforms may have passed through the House of Representatives but there is plenty of unknown detail causing concern to the major associations – detail which will need to be worked through in conjunction with Treasury and the Australian Securities and Investments Commission (ASIC).

ANZ general manager advice and distribution Paul Barrett said that as the industry moved from a law-making process to an execution stage, all eyes would be on ASIC as to how the regulator would interpret those laws, and how they would be enforced. He said this would bring with it a whole new level of uncertainty.

Financial Services Council (FSC) chief executive John Brogden said that although the legislation was effectively through Parliament, the FSC now needed to work closely with Treasury and ASIC to try to improve the legislation.

Brogden said the FSC was unhappy with clause G in the FOFA exposure draft pertaining to best interests duty. The clause requires an adviser either to conduct “a reasonable investigation into the financial products that might achieve the objectives and meet the needs of the client of which the provider is aware and [assess] the information gathered in the investigation”, or to use the information resulting from a previous and similar investigation.

Continued on page 3

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.

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Putting substance into a designation

T

he financial planning industry should be watching events in Canberra closely over the next six weeks for more reasons than just the handing down of the Federal Budget.

It should also be watching for the Minister for Financial Services, Bill Shorten, to start making good on a key undertaking – legislating the restricted use of the term ‘financial planner/adviser’.

The Financial Planning Association (FPA), with some reason, felt its negotiating efforts around the Government's Future of Financial Advice (FOFA) changes were justified by the undertaking extracted around use of the title ‘financial planner/adviser’. Ultimately, however, the proof of any pudding is in the eating.

Two things now need to happen. First, the Minister needs to make good on his undertakings by starting the processes necessary to deliver the relevant legislation.

Second, there needs to be a formal industry-wide understanding about what actually entitles someone to call themselves a ‘financial planner/adviser’.

Sensibly, if a person is entitled to call themselves a ‘lawyer’ by having completed a bachelor of laws, and if someone can be deemed a ‘medical practitioner’ because they have completed a doctorate

of medicine, then it follows that a ‘financial planner/adviser’ ought to hold a similar minimum educational qualification.

Notwithstanding the importance of a ‘code of conduct’ or ‘principles of practice’ with respect to accessing class order relief from ‘opt-in’, membership of an organisation such as the FPA or the Association of

The apparent “breakthrough achieved during the FOFA negotiations represents only a first step.

�

Financial Advisers (AFA) should not be held as a legislative prerequisite to being able to utilise the term ‘financial planner’ or ‘financial adviser’.

Nor should the holding of a registered designation such as the Certified Financial Planner (CFP) be held up as the criterion, albeit the educational qualifications of

many CFPs undoubtedly exceed the requirements likely to be necessary.

In other words, the question of ‘financial planners’ and ‘financial advisers’ becoming terms of professional entitlement needs to be based on the completion of an appropriate degree. Nothing less should suffice.

All of which significantly complicates the underlying achievement of having convinced the federal Minister to introduce legislation around the use of the term ‘financial planner/adviser’.

In circumstances where there are hundreds of people providing financial advice who do not hold degree qualifications, a regime based around transitional arrangements and graduated designations will need to be put in place – something that will need the industry to agree upon the underlying criteria.

Then, too, there will be the question of which existing degrees are most relevant and whether tertiary institutions will need to offer planner/adviser-specific options.

In short, the apparent breakthrough achieved during the FOFA negotiations represents only a first step on a journey unlikely to be completed within the term of the current Government. – Mike Taylor

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News

Addressing the cause, Advisers want more help with social media not the symptoms

By Chris Kennedy

Continued from page 1

would “discourage best practice and it shows no reality in their (the FSC’s) understanding of the workload and workflows that are necessary for an insurance adviser to advise his clients”.

Col Fullagar, RI Advice national manager of risk insurance, said insurers should provide incentives to promote and encourage best practice by planners with, for Brett Clark example, low lapse bonus.

Clark said he would like to think the industry was mature and professional enough that it could discuss what was the best way forward.

“Shooting this issue off to be legislated is not the best outcome for us as an industry,” he said.

FINANCIAL advisers are keen to further embrace social media but many would like more training in how best to use it, according to a recent Zurich Australia survey.

When asked about usage of social media channels, 36 per cent of advisers said they would start using or increase use of Facebook, 60 per cent said the same about LinkedIn and 20 per cent about Twitter, according to 666 survey respondents at a recent Zurich roadshow.

“These numbers clearly demonstrate the willingness of advisers to engage with their clients and prospects through social media channels. The next step is educating them on how to effectively use these channels to benefit their business,”

said Marc Fabris, Zurich Australia’s national manager sales strategies and research.

One third of those indicated they would be interested in attending one of the “boot-camp” style sessions Zurich runs for advisers keen to learn more about social media, according to Richard Dunkerley, head of marketing for the life and investments business.

The industry needed to bust the myth that social media was purely for social purposes and that it had many business applications, he said. He added that Twitter was about real time news, not updating your friends on what you had for breakfast.

He said it was also important for advisers to think strategically about the desired outcome rather than expecting the phone to start ringing

as soon as they give the business a Twitter account or Facebook page.

The survey also showed that while 34 per cent of advisers are using an iPad in their practice, only 21 per cent are using it with their clients.

This was up from just 10 per cent using iPads in the previous survey 12 months earlier.

“Advisers are either still getting familiar with these devices before using them with clients or there is a lack of apps that are client-focused (or awareness of what is available),” Fabris said.

Dunkerley said there may not be a full appreciation of the kind of apps that are already out there, which includes information or note gathering apps, sales tools, calculators, and life insurance quoting apps.

FOFA unknowns still a concern Continued from page 1 Brogden said the clause was too broad and contradicted other clauses in the best interests duty legislation. The FSC would also like to see a simple amendment to scaled advice provisions, such that the client can instruct the adviser as to the scope of the advice they were seeking. Brogden said it was critical, in order for the provision to work, that the scope of the advice was clearly outlined.

Matrix Planning Solutions managing director Rick Di Cristoforo said the industry needed clarity around opt-in and what would be an acceptable code of conduct to obviate opt-in. It also required guidance on business activity and conduct, and clarification of best interest duty and scalable advice – and how it can be delivered in a practical manner. The current obligation is to do a full fact-find, which doesn’t sit well with scaled advice, he said.

However, Mercer’s financial advice leader Jo-Anne Bloch said there would be no issue with the fact-find process, as a full fact-find would be clearly inappropriate in a scaled advice situation where the client’s needs were simple. “The issue that needs to be confirmed is the extent to which the adviser can rely

John Brogden on a client’s agreement as to the extent of scaled advice,” she said.

Industry Super Network chief executive David Whitely said he would have liked several areas of the reforms to be more rigorous.

The ISN would have preferred a principles-based approach to the drafting of best interests duty; a total ban on personal risk commissions; and opt-in should have applied to all existing clients to allow them to review and reapprove conflicting payments.

The Financial Planning Association (FPA) and Association of Financial Advisers (AFA) continue to oppose opt-in in any form.

FPA chief executive Mark Rantall and AFA chief executive Richard Klipin said each raised concerns as to what would be required under the additional fee disclosure measures.

Full feature begins page 12. www.moneymanagement.com.au April 19, 2012 Money Management — 3

News Bell Potter Securities former client advisor charged by ASIC

By Bela Moore A FORMER senior client advisor with Bell Potter Securities Limited, Glenn Russell Evans, has been charged with 15 counts of fraudulent conduct involving more than $1.06 million, following an Australian Securities and Investments Commission (ASIC) investigation.

ASIC alleges Evans entered into contracts with individuals to invest funds while he was a director of Kismet Trading during his

employment as senior client advisor for stockbroking firm Bell Potter Securities until his resignation in October 2008.

Appearing before Sydney’s Downing Centre Local Court, Evans was charged with using the funds for personal use rather than investing in Australian shares.

Evans invested client funds in two types of investment funds through Kismet Trading (which was in liquidation at the time): individually managed funds which required a minimum $100,000 investment for an indef-

inite period of time, and pooled investment funds which required a minimum of $10,000 for a two-year period. They were viewed by the firm as staff-owned accounts operated

by Evans; however client funds were used to facilitate the investments.

ASIC alleges that Evans fraudulently omitted to account to investors for the money invested with Kismet in the two types of funds from 2004 to 2008. ASIC also claims Evans is guilty of failure to invest in Australian equities and derivatives, despite

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being charged to do so; falsification of trading and performance reports; and failure to repay the balance of proceeds to investors.

Further, ASIC claims Evans authorised securities in individually managed funds as collateral for his personal trading account with Bell Potter, denying investors funds when he resigned from Bell Potter Securities with debts on his personal trading account.

The case has been adjourned until 1 May 2012, when Evans will be required to reappear in court.

Govt lags on Investment Manager Regime

By Mike Taylor

THE Federal Opposition has claimed answers provided by Treasury officials have confirmed government inaction is denying Australian fund managers the opportunity to access new investment funds from overseas.

The Opposition spokesman on financial ser vices, Senator Mathias Cormann, said a recent Treasury response to a question on notice confirmed the funds management industry was being hampered by delays to the implementation of the Investment Manager Regime recommended in the Johnson Report.

Cormann said development of the legislation necessary to give effect to the regime had been flagged as far back as D e c e m b e r, 2 010 , b u t was now being treated as a low priority by the Government.

He said this brought into question the Labor Government’s commitm e n t towa rd s m a k i n g Australia a regional financial services centre.

“A robust and internat i o n a l l y c o mp e t i t i ve Investment Management Regime would allow Australia’s world class financial services industry to compete for investment from overseas investors, e s p e c i a l l y f ro m t h e emerging economies in Asia,” Cormann said.

However he claimed this was being denied to the local industr y by delays and the low priority the Minister for Financial Services, Bill Shorten, wa s d i r e c t i n g to t h e issue.

News

Hiring sentiment in financial services forecast to dip

By Andrew Tsanadis

THE financial services industry has posted a 9.6 percentage point drop in hiring sentiment for the April-to-June period, according to the results from Hudson’s latest Employment Expectations report.

Mark Steyn, chief executive of Hudson Asia Pacific, said Australian employers remained “somewhat more cautious following economic data and news of job cuts in some industries during the first quarter,

Recep Peker

Demand grows for annuities

particularly the financial services and manufacturing sectors”.

The decline in employer sentiment in the financial services sector specifically was spurred on by planned job cuts at two major banks, the report stated.

On the whole, most Australian employers remain optimistic, with Hudson’s February survey revealing a 3.3 percentage point rise in the number of employers planning to keep headcount steady (57.3 per cent).

“Most employers still plan to either hire

new staff or keep their workforce steady while they wait for more clarity around the economy,” Steyn said.

According to Steyn, this “wait and see” approach could be detrimental to employers looking to move “quickly to identify and secure the best candidates”, many of whom are confident enough to test the market and seek out more attractive opportunities and pay packets than they might currently be offered.

“Organisations should focus their priorities on

strategic roles that help take an organisation forward and the ‘critical’ and ‘core’ roles that keep the organisation functioning on a day-to-day basis,” Hudson’s survey said.

Some see investment as an abstract game of numbers.

By Milana Pokrajac ALTHOUGH only a third of planners used annuities over the past year, demand for this product continues to grow, according to a survey released by Investment Trends.

Furthermore, a large number of Aussies worrying about their savings running out during retirement present a perfect opportunity for the annuity market to develop.

Almost half of planners surveyed for the Investment Trends December 2011 Retirement Planner Report said they would use annuities in 2012.

Meanwhile, a quarter of Australian adults surveyed expressed some interest in this product.

However, there are many barriers to financial planners using annuities, according to senior analyst Recep Peker.

“For some they compete with other products in a high interest rate environment, such as term deposits that are easier to understand and return close to 6 per cent per annum,” Peker said.

Most popular are longterm and short-term annuities, while lifetime annuities are only recommended by a small percentage of planners, according to Investment Trends.

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News

Coalition commitment to super benchmarks

By Mike Taylor THE Federal Opposition has committed to working with the financial services industry and the regulator, the Australian Prudential Regulation Author ity, to develop better per for mance benchmarks for superannuation funds.

The commitment was made by the Opposition spokesman on financial services, Senator Mathias Cormann, who said such information would represent a vital underpinning for necessary changes to the default funds under the modern awards regime.

He said new industr y-wide benchmarks and definitions would include information to help employers, particularly small businesses, select default funds.

Cormann’s undertaking has come at the same time as submissions lodged with the Productivity Commission have revealed a substantial divide within the superannuation industry between the retail funds sector and the industry and not-for-profit funds.

While both sides of the argument have backed performance as

being the most important criteria for the selection of default funds, submissions lodged by individual industry funds and the Australian Institute of Superannuation Trustees have argued against all MySuper funds being eligible for selection as default funds.

The industry funds submissions have argued for a continuing role for Fair Work Australia, with Hostplus actually arguing that the number of eligible MySuper funds would make the process too complicated for employers.

For its par t, the Financial Services Council has argued there exists little requirement for the involvement of the industrial judiciary, and that all MySuper funds should be eligible for selection.

Cormann said the Coalition suppor ted all MySuper funds being capable of selection as default funds.

“There is no need for an additional secretive and discredited p r o c e s s t h r o u g h Fa i r Wo r k Australia to further determine which MySuper products should be included as default funds under various modern awards,” he said.

Plan for aged care now: Equities Trustees

By Bela Moore

THE cost of aged care should be included in planning for a comfor table retirement, according to Equity Trustees Limited head of wealth management Philip Galagher.

Galagher said aged-care requirements needed to be nutted out at the beginning of retirement, rather than “when care looms as an unwelcome necessity”.

He said that while income needs decline in retirement, they fall further when in aged care, but that the need for capital to make a lump sum payment for aged care is likely.

“Typically, a bond for aged care is in the hundreds of thousands of dollars and will be needed for those who have a preferred care accommodation in mind,” he said.

Galagher said the issue had been flagged earlier last week by the Minister for Ageing, Mark

Philip Galagher Butler, who said the aged-care system was struggling to meet demand, and that as aged-care needs increased the system might not be capable of meeting them.

Galagher said the Government’s response to the Productivity Commission report on aged-care reform would probably include changes to the financial arrangements that support aged care in Australia.

“Increased calls for those who can afford it to contribute more towards the cost of their aged care; the reduced ability of governments to provide publicly funded care; and a huge increase in the incidence of diseases such as dementia affecting the elderly, are all issues that retirees must consider if they are to manage their own future,” he said.

Galagher said aged-care planning had a huge impact on retirement and estate planning. He said it should be discussed with family and advisers prior to the need arising, and developed in conjunction with a Will and power of attorney.

“Retirees may not be able to pass on their family home to their children, may need to set up a reverse mortgage, or not be able to set up the trust they had planned for their grandchildren’s education,” Galagher said.

Advisers guilty of ‘gaming’ default fund system SOME financial advisers have been as guilty as trade unions in seeking to “unfairly game” the system around default funds under modern awards, according to the Financial Services Council (FSC).

In a submission filed as part of the Productivity Commission review of the default funds under the modern awards regime, the FSC referenced research undertaken by Westfield/Wright which found that “at present, the default superannuation system is shrouded in opacity and the influence of special interest groups/third parties through Fair Work Australia”.

“Employers reported abuse by unions (and also financial advisers) to unfairly ‘game’ the default super system,” the Westfield Wright findings claimed.

The research also confirmed the position of the FSC that

the advent of MySuper funds as a result of the Stronger Super initiatives ought to put paid to the need for the current default funds under the modern awards regime.

The research found “the MySuper concept of standardisation, simplicity and fewer default options attracts overwhelming support”.

Elsewhere in its submission the FSC urges that the new MySuper regime be used to enable employers to select any Australian Prudential Regulation Authority (APRA)-regulated MySuper fund as a default fund from 1 July next year.

“If this were permitted, a designated Fair Work process would not be required, as an employer would be free to select any APRA-regulated MySuper product,” the submission said.

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

“This approach has the benefit of removing conflicted industrial parties from selecting default superannuation funds which are approved without proper consideration

by Fair Work Australia. “To alleviate any burden on employers in selecting from many MySuper funds, the Government should maintain a MySuper website for employers and consumers,” it said.

The submission said this approach would also remove another agency from the already complex superannuation system which involved APRA, the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office and AUSTRAC. “The more agencies involved, the higher the regulatory cost, the greater complexity and the likelihood of failings in consumer protection,” it said.

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News

Performance the key to default funds – AIST

By Mike Taylor SOLID performance should be at the core of the selection of default funds under modern awards, according to the Australian Institute of Superannuation Trustees (AIST).

In a submission filed as part of the Productivity Commission’s review of default funds under modern awards, the AIST has sought to move the argument away from the question of competition between funds to the actual performance of funds.

It says AIST ’s concern is not about whether particular types of funds are included or excluded “but that all default funds listed in awards are solid performers that deliver the best result for members”. “ We think that not for profit funds will meet this test, while retail (for profit) funds may struggle,” the submission said.

The AIST submission also urges the continued participation of the industrial judiciary in the form of Fair Work Australia.

“Employers must be confident

that the fund choices they make for their disengaged employees are the right ones,” it said. “Employers will be assisted by having a limited number of funds to choose from. The system has to work not j u s t f o r e m p l oye e s, b u t a l s o employers. Getting that balance r i g h t i s t h e r o l e o f Fa i r Wo r k Australia.

“The current system has served members well and provides an important safety net. As with other employment entitlements, superannuation issues in awards should be agreed to by industrial parties who have standing before Fair

Work Australia.”

The submission also urged the imposition of the following selection criteria with respect to default funds under modern awards: • Past performance based on 10year rolling net returns (Australian Prudential Regulatory Authority data), assessed against each fund’s investment objectives and target returns; • Cost-effective insurance and member ser vices suitable for employees covered in the award; • Transparent fund governance where the roles of employers and employees are considered, and assurance that the fund is acting in the best interests of members; and • Protecting members by not allowing listed default funds to ‘flip’ members into higher fee products on termination of employment.

It said employer and employee associations working together under the umbrella of Fair Work Australia should apply these criteria and draw upon the enhanced super fund performance data and other reporting being developed by APRA.

BFPPG lauds FPA’s FOFA outcome THE Boutique Financial Planning Principals Group (BFPPG) has thanked the Financial Planning Association (FPA) for “achieving an outcome on Future of Financial Advice (FOFA) which moves us all a step closer to recognition of financial planning as a profession”.

In a letter to FPA chairman Matthew Rowe, the president of the BFPPG, Claude Santucci, said the outcomes from FOFA as explained by the FPA had been better than expected.

“Although there is more to do to achieve legislative clarity, the first steps are encouraging,” the BFPPG letter said.

It said the FPA had conducted its negotiations in a professional manner, “focusing on the issues and promoting the best outcomes for all stakeholders – particularly the consuming public. We expected nothing less”.

“As you know, the BFPPG has always held the view that financial planning cannot become a true profession until the public understands the clear distinction between financial planning and product distribution,” the BFPPG letter said.

“Full disclosure of AFSL ownership is the essential step towards that understanding. The other important step is the restriction of the term ‘financial planner’ to those professionals genuinely providing a financial planning service. The FPA have achieved a milestone in having the minister recognise this.”

The BFPPG letter said membership of the FPA continued to be a prerequisite for membership of the BFPPG, and that the FPA’s role in the FOFA negotiations “further strengthens that important connection”.

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Super relevance or obsolescence?

Mike Taylor reports that submissions to the Productivity Commission review of default funds under modern awards have raised important questions about the relevance of Fair Work Australia in a post-MySuper world.

A

specialist committee within the Law Council of Australia has added its weight to those questioning the ability of Fair Work Australia (FWA) to play a part in making the rules around the appropriateness of particular superannuation funds to be default funds under modern awards.

The Law Council committee’s views are made clear in a submission lodged as part of the Productivity Commission’s review of the default fund regime – and the document makes cringeworthy reading for the bureaucrats and policy experts responsible for the current default fund regime.

In a very polite and non-confrontational way, the Law Council committee’s submission seriously questions the ability of FWA, as an industrial judiciary, to know enough about the technicality of superannuation to make effective decisions.

The committee was making specific reference to the possibility that it might fall to FWA to impose additional criteria on MySuper funds to make them eligible to be default funds in the modern award environment.

“The Committee questions whether FWA would have the ability or the expertise to assess the appropriateness of an investment or insurance strategy for employees covered by an award,” the Law Council submission said.

“If additional criteria are imposed on MySuper products or if FWA is required to select the funds which are included in a particular Modern Award, the following questions will be raised: • Would a trustee have standing to make submissions to FWA before FWA makes its decision?

• If not, would the trustee need to rely on representations of entities that do have standing, such as unions and employer groups?

• How would such entities obtain the information necessary to assess or make representations to FWA on these criteria?

• What would happen if a fund objected to the information given or representations made to FWA in relation to the fund?

• What would happen if a fund objected to the information given or representations made to FWA in relation to another fund?

• What would happen if a fund disagreed with

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

FWA’s assessment? Would a fund have the right to appeal in relation to FWA’s decision?

“Further, if FWA were charged with applying additional criteria, consideration would need to be given to how such criteria could be applied consistent with the concepts of natural justice, rights of appeal and other administrative law principles. This is especially the case as the viability of a fund may very well depend on whether it is named as a default fund in a Modern Award.”

The Law Council submission cautioned that consideration would also need to be given to the possibility of a fund seeking judicial review of FWA’s decisions, and the distraction away from FWA’s main functions in undertaking what could be argued to be a role traditionally played by ratings agencies.

“For these reasons, the Committee submits that subjective criteria should not be used in determining which funds should be listed as default funds in modern awards,” it said.

In doing so, the Law Council submission added considerable weight to arguments such as those contained in the submission from the Financial Services Council (FSC), which has held that any MySuper Fund should be eligible to a default fund.

Indeed, both the Law Council and FSC submissions make the point that the rules intended to govern the eligibility of superannuation funds to be MySuper funds are such that they exceed any of the existing criteria for being a default fund under modern awards.

According to the FSC, the requirements inherent in a superannuation fund becoming a MySuper fund are such that any employer should be able to nominate an Australian Prudential Regulation Authority (APRA)-registered MySuper fund as a default fund.

It said such an approach would take away the requirement for a designed Fair Work Australia process.

“This approach would have the benefit of removing conflicted industrial parties from selecting default superannuation funds without proper consideration by FWA,” the FSC submission said.

It said such an approach would “also remove another agency from the already complex superannuation system which involves APRA,

the Australian Securities and Investments Commission, the Australian Taxation Office and AUSTRAC”.

Perhaps not surprisingly, the dissenting argument has been put forward by the organisations broadly representative of the industry superannuation funds, many of which have been nominated as default funds under modern awards.

For its part, the Australian Institute of Superannuation Trustees (AIST) has argued that FWA should have a continuing role in the process, but has acknowledged that fund investment performance should be the most important criteria.

The AIST submission urged the continued participation of the industrial judiciary, saying: “Employers must be confident that the fund choices they make for their disengaged employees are the right ones. Employers will be assisted by having a limited number of funds to choose from. The system has to work not just for employees, but also employers. Getting that balance right is the role of Fair Work Australia.

“The current system has served members well and provides an important safety net. As with other employment entitlements, superannuation issues in awards should be agreed to by industrial parties who have standing before Fair Work Australia.”

The submission also urged the imposition of the following selection criteria with respect to default funds under modern awards: • Past performance based on 10-year rolling net returns (APRA data), assessed against each fund’s investment objectives and target returns; • Cost-effective insurance and member services suitable for employees covered in the award; • Transparent fund governance where the roles of employers and employees are considered, and assurance that the fund is acting in the best interests of members; and • Protecting members by not allowing listed default funds to “flip” members into higher fee products on termination of employment.

It said employer and employee associations working together under the umbrella of Fair Work Australia should apply these criteria, and draw upon the enhanced super fund performance and other reporting being developed by APRA.

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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

Policy review

Signed,

sealed...

delivered?

After three eventful years with extensive consultation and lobbying from all sides, the financial services industry finally has a clearer picture on what the future holds. The journey hasn’t been easy, writes Chris Kennedy.

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

Policy review FOFA After several years in regulatory limbo the financial ser vices industry finally has a clearer glimpse of its future, with the heavily amended Future of Financial Advice (FOFA) reforms having passed a parliamentary vote on 22 March 2012.

Following seemingly endless consultations, multiple tranches and dozens of amendments, the industry now has a confirmed state date and an indication of what it will need to be prepared for come 1 July 2013.

However, the devil in the detail is yet to be revealed as the industry now begins to move from a lobbying phase to an implementation phase.

Consultation will continue on many of the specifics, with the industry still awaiting clarity on several key areas, including how scaled advice provisions will work in practice and how these will fit with the best interest test. Professional bodies will also be keen to see what kind of a view the Australian Securities and Investments Commission (ASIC) will take to professional code of conduct requirements.

Key points z z z z

Regulations passed through Parliament now move to implementation phase.

Details still required around best interest, scaled advice and opt-in.

Industry still opposes opt-in, which the Coalition says it will repeal.

Calls for level playing field in default super.

The process The Parliamentary Joint Committee on Corporations and Financial Services – colloquially known as the Ripoll Inquiry – was prompted largely by several major and costly advice and product failures such as Storm Financial, Opes Prime and agr ibusiness managed investment scheme providers, including Timbercorp and Great Southern.

The findings were handed down in November 2009, with recommendations including the introduction of a statutory best interest duty for financial advisers, a banning of payments from product manufacturers to advisers, and increasing the powers of ASIC to ban industry participants.

Following the Ripoll Inquiry, thenMinister for Financial Services, Superannuation and Corporate Law Chris Bowen announced an overhaul of financial advice in April 2010 that incorporated major Ripoll recommendations such as a best interests duty, a ban on conflicted remuneration str uctures and increased ASIC powers.

It also included provisions to increase the availability of low-cost ‘simple advice’ or ‘intra-fund advice’ within a superannuation context, the prohibition of percentage-based fees on geared products, the removal of the accountants’ licensing exemption permitting accountants to advise on the establishment and closing of self-managed super funds (SMSFs) without an Australian Financial Services Licence and implementing simplified product disclosure statements.

The initial paper also proposed an investigation conducted by Richard St John on the need for a statutory compensation scheme and a review of the appropriateness of the existing method of classifying unsophisticated and sophisticated investors, or retail and wholesale clients (with unsophisticated or retail clients deemed to require a higher threshold of investor protection).

Consultation on the reforms began the following month on 17 May 2010.

Chris Bowen

Following the Ripoll “Inquiry, then Minister for Financial Services, Superannuation and Corporate Law Chris Bowen announced an overhaul of financial advice in April 2010.

”

In September, the financial services portfolio changed hands, being taken over

by Bill Shorten who in November 2010 unveiled a 16-member advisory panel for financial advice and professional standards. The panel, chaired by ASIC’s Greg Medcraft and featuring representatives from the Association of Financial Advisers (AFA) and Financial Planning Association (FPA) as well as other representative bodies, large planning organisations, industry funds and others commenced sitting in December 2010.

Throughout a heavy consultative period that stretched close to two years, a large number of stakeholders submitted recommendations, including in response to four consultation papers.

An options paper examining whether there should be a distinction made between wholesale and retail clients was announced on 24 January 2011 and closed on 25 February 2011. It received 45 submissions, 31 of which were public.

A review of compensation arrangements for consumers of financial services who lose their money through the misconduct of a financial ser vice provider was announced on 20 April 2011 and closed on 1 June 2011. It received 28 submissions, 23 of which were public.

Then, on 26 April 2011 the exposure draft and explanatory memorandum (EM) for the first iteration of FOFA legislation was released for consultation. It featured a stepped up proposal to ban all trailing and up-front commissions and like payments from 1 July 2013 and a broad ban on volume-based payments.

It also proposed a ban on all soft dollar payments greater than $300 and a limited carve-out for basic products from the ban on certain conflicted remuneration structures and best interests duty.

The announcement also included one of the most controversial and disputed aspects of the entire FOFA process: a prospective requirement for advisers to get clients to opt-in (or renew) their advice agreement every two years from 1 July 2012 – a proposal that was not included in any form in the Ripoll Inquiry.

The Government also indicated it would consult on whether to extend the ban on conflicted remuneration to risk insurance and consider a legal restriction on the use of the term financial planner/adviser.

Over almost five months of consultation until the closing date of 16 September 2011 the legislation received 47 submissions, 44 of which were made public.

The first tranche of draft legislation was released on 29 August 2011, covering key components including opt-in, the best interest duty and the increase in ASIC’s powers. It referenced a study from actuarial firm Rice Warner, the findings – which were hotly disputed by several major industry participants including the Financial Services Council (FSC), FPA and AFA – that the cost to industry of opt-in would be $11 per client.

The first tranche also modified the ban on risk insurance commissions, such that the ban would only apply to commissions on group life insurance in all superannuation products, and to commissions on any life insurance policies in a default or MySuper product from 1 July 2013. It also clarified that the ban on conflicted remuneration (including the ban on commissions) would not apply to the existing contractual rights of an adviser to receive ongoing product commissions – in other words, existing contracts would be grandfathered.

This tranche was tabled in parliament on 13 October 2011, including an eleventh hour change to include a retrospective annual disclosure requirement, believed to have been included at the behest of the Industry Super Network (ISN). It sparked immediate objections from the AFA and FPA, who each claimed the complexity of the requirements would drive up administrative costs.

On 28 September 2011, the second FOFA tranche was released, clarifying a ban on volume-based shelf-space fees and asset-based fees on geared funds. The Continued on page 14

www.moneymanagement.com.au April 19, 2012 Money Management — 13

Policy review Continued from page 13 second tranche also limited the ability of dealer groups to conduct offshore conferences and introduced a requirement for 75 per cent of conference time to be spent on professional development.

A further bill was introduced to parliament on 24 November 2011, which clarified the ban on conflicted remuneration and allowed for a continuation of volume-based payments in circumstances where the party accepting the payment is able to demonstrate the payment is not conflicted. The industry was largely supportive of a crackdown on soft dollar benefits and a ban on conflicted remuneration.

Several frenetic months of campaigning followed, with the industry focusing par ticularly on independent MPs Andrew Wilkie and Rob Oakeshott in its attempts to get some of the more controversial aspects of the legislation such as opt-in and increased disclosure requirements removed or altered. The industry was also vocal in its attempts to negotiate a delayed start date to the reforms.

As 2011 came to a close and the legislation was still nowhere to be seen, it

seemed impossible that the industry could be expected to implement a raft of as yet unknown changes by 1 July 2012 – yet still, the announcement finally confirming the only possible outcome did not come until 14 March 2012.

By this time, several industry participants including ANZ and IOOF indicated they had already spent considerable time and money attempting to prepare their systems as best they could in the event the Government still attempted to hold on to a 1 July 2012 star t date.

Despite the lateness of the announcement, the extra year transition time was welcomed by many stakeholders, including the FPA, FSC, AFA, ISN, Association of Superannuation Funds of Australia (ASFA), Self-Managed Super Professionals’ Association (SPAA) and institutions such as ANZ, AMP, MLC and BT. Then, a week later on 22 March 2012, several hours before the legislation was voted on in the House of Representatives, Shorten announced further amendments to the bill. The changes notably included a watering down of the hotly contested opt-in proposal – such that planners who are members of a professional association and bound by an ASIC-approved code of

Eliminating churn ‘Churn’ occurs when an adviser moves one or more clients from one life insurance policy to another for no apparent benefit to the client, but rather a bulky commission.

Therefore, it is no wonder why the practice of churning became the subject of hot debate over the past three years.

It started in 2009 when advisers took advantage of the dip in share markets to review clients’ insurance policies, with lapse rates going through the roof. Insurers accused John Brogden advisers of policy churning, while advisers blamed the competitiveness in the risk market for moving clients from one policy to another.

Attrition rates seemed to have dropped in 2010, but the FSC was not convinced, and announced a move to reduce churn in life insurance in August 2011.

The FSC acknowledged that only a small number of advisers abused their right to new business commissions, but maintained churning was a serious issue which warranted industry action. Solution: a uniform approach to commissions.

Earlier this year, the FSC revealed more details about its desired approach.

The new policy would see the establishment of a two-year adviser responsibility period, with 100 per cent commission clawback if the policy lapses; level commissions only being paid if ‘replacement business’ was arranged; and the removal of ‘takeover terms’ for a policy or a group of policies that are transferred by a financial adviser between insurers.

The FSC chief executive officer John Brogden said the measures did recognise that individual circumstances can change, and that “it may be appropriate for an existing policyholder to increase the level of cover already held for any particular life insurance product within five years of issue”.

The new framework should be ready for implementation along with FOFA by 1 July 2013, according to the FSC. As far as the industry response goes, insurers are undoubtedly motivated to reduce lapse rates and have widely supported the move. But some of the risk-focused dealer groups have wasted no time in criticising the proposed measures. Particularly vocal was Synchron’s director Don Trapnell, who said the two-year responsibility period placed onerous pressure on the income generating capacity of the adviser and had “the potential to penalise those who aren’t doing the wrong thing”.

– By Milana Pokrajac

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

Greg Medcraft

The industry now moves “from a lobbying phase to an implementation phase consulting and working with ASIC and Treasury to get the details right.

”

conduct that would obviate the need for an opt-in measure would be exempt from opt-in requirements from 1 July 2015.

Shorten also indicated he would move to enshrine the term ‘financial planner/adviser’ in law – a move for which the FPA has campaigned around 20 years.

The changes attracted particular attention because they closely matched suggestions contained in a joint proposal between the FPA and ISN that was leaked to Money Management. It has not subsequently been made clear whether the proposal arose as an initiative between the two industry bodies or

whether the dialogue was initiated by Shorten in an attempt to find a compromise to the disputed opt-in legislation with independent MPs to ensure the passage of the legislation. What does seem clear, is that a compromise was needed between the Government and the Independents regarding the disputed opt-in aspects of FOFA if the legislation was to pass.

FPA chief executive Mark Rantall told Money Management that the FPA had spoken to many stakeholders including the ISN, independent MPs and the Government in a frenetic last week of negotiations, adding that the Government and the Independents were the only entities with the power to strike a deal.

ISN chief executive David Whitely told Money Management that the ISN and FPA had attempted to find some common ground and that ultimately the amendments were developed through the Government’s negotiations with the Independents “in an effort to deliver a workable solution that would both deliver on the objectives of the reforms and gain the support of the Independents”.

“The industry is often criticised for engaging in too little dialogue, so we believe discussions between the various stakeholders should be recognised as a constructive and positive step,” he said.

The FPA remains and has always been opposed to opt-in in any form, while Whitely says the ISN supports the amended version as it provides the industry with an alternative, so long as the code of conduct is not viewed as a “get out of jail free card”. However, Whitely says he would have preferred opt-in apply to existing contracts to allow existing clients to review conflicted payments.

The result was the passage of the amended legislation through the House of Representatives late that evening with the support of independent MPs, including Rob Oakeshott.

A series of 30 amendments proposed

by Joe Hockey – including the complete abolition of any opt-in measurements within the legislation and a delayed start date for compliance with the legislation to 1 July 2013 – were voted in the negative by the House.

A series of 18 amendments put forth

by Shorten, predominantly technical changes to time frames around fee disclosure statements as well as the code of conduct alternative to the opt-in requirement, but not including a deferral of the start date, was voted on in the positive. Shorten has since indicated another amendment deferring the start date of hard compliance with the reforms to 1 July 2013 will be passed in the winter sitting of parliament.

What next?

The industry now moves from a lobbying phase to an implementation phase – consulting and working with ASIC and Treasury to get the details right. “A lot of the legislation has been passed, but a lot of detail around the ‘how’ is missing because it is subject to an explanatory memorandum or ASIC regulation guidelines, so there is still a lot of work to be Continued on page 16

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Policy review Continued from page 14 done,” says the FPA’s Rantall.

There is a question mark over what will be included in the code of conduct that will enable it to obviate the need for optin. ANZ's general manager advice and distribution, Paul Barrett, questioned whether the code would be required to place a ban on asset-based fees – and if it did, planners may prefer to deal with a biannual opt-in rather than overhaul their business model. Rantall says that with asset-based fees not dealt with in the legislation, he did not anticipate ASIC then looking to force a ban on them. It will be important to ensure the bar is set at an appropriate level to ensure professionalism, but where advisers will still want to participate, Barrett says.

FSC chief executive John Brogden says the current definition of best interest duty is too wide and contains contradictory clauses, and he would like to see an amendment to scaled advice provisions such that a client can instruct the adviser as to the scope of the advice they are seeking. For the provision to work, it is critical that the scope of adviser is clearly outlined, he says. Rantall says the biggest question mark here is whether the legislation will adequately provide for the provision of scaled advice.

Rantall was pleased by the removal of prospective additional disclosure requirements, and said the FPA never supported additional disclosure because it added to the burden of planners without providing any additional consumer protection. We are yet to see an EM dealing with additional disclosure, but Rantall remained hopeful the measures would not be applied to existing clients.

Although the move to enshrine the term “financial planner/adviser” in law is technically no closer to being legislated (other than the public commitment from Shorten), it is warmly welcomed by the FPA and AFA. Rantall described it as a great consumer protection mechanism and a legitimisation of the profession of financial planning. AFA chief executive Richard Klipin said it was a positive move that would help the industr y move towards being a profession.

The Coalition – and in particular, Shadow Treasurer Joe Hockey and Shadow Assistant Treasurer Mathias Cormann –has been very vocal in their opposition of opt-in measures, and Cormann has made the unusual move of publicly declaring a pre-election promise to remove opt-in provisions should the Coalition be returned at the next Federal election. The statement was welcomed

by Klipin, who said the AFA supported the Coalition’s proposed amendments to the legislation.

The major associations universally welcomed the open and inclusive approach taken by Treasury, and ASIC thus far in dealing with the reforms.

Stronger Super The G over nment’s Stronger Super reforms are a response to the Super System Review chaired by Jeremy Cooper, which was commissioned in May 2009 and handed down its final report in June 2010.

Platforms getting a review MOST conflicts of interests related to investment platforms have been eliminated through various FOFA proposals, such as the banning of volume rebates passed down from product providers and platforms to dealer groups, and the best interest duty.

But in March 2012, ASIC released a review of its policy on platforms – on which the industry would be consulted until June.

Apart from several minor operating and corporate structure requirements, ASIC also proposed to require platforms to disclose their selection criteria for financial products included on their investment menus.

“We also expect that licensed dealer groups and their adviser representatives will consider the investment selection processes of platform operators in providing personal financial product advice to clients about these types of matters,” ASIC stated.

While some platforms have rigorous selection criteria in place (such as gathering research and ratings on the products they are considering), ASIC said others make selection decisions on a technological or administrative basis – for example, ‘can the product be administered on our platform’?

Another potentially big change would be allowing investors the same rights as if they were investing directly. These would include a cooling-off period, withdrawing from an investment and dispute resolution.

ASIC acknowledged that there may be practical impediments to adopting this approach and sought feedback from the industry. But the regulator also noted that the platforms sector would continue to develop and expand, particularly in response to changing investor behaviour where investors may be more inclined to direct their investments without a financial adviser.

“We therefore believe that platform clients should be entitled to the same rights concerning their investments through those vehicles that they would have had if they had invested directly.”

While the industry remains busy preparing submissions to ASIC’s paper and would not comment on the specifics as yet, most of them have generally come out in support of the regulator’s efforts to improve investor confidence in platforms.

– By Milana Pokrajac

“

Paul Barrett questioned whether the code would be required to place a ban on asset-based fees - and if it did, planners may prefer to deal with a biannual opt-inrather than overhaul their business model.

”

Paul Barrett

Coalition has been “veryThevocal in their opposition of opt-in measures, and Cormann has made the unusual move of publicly declaring a preelection promise to remove opt-in provisions should the Coalition be returned at the next Federal election.

”

Mathias Cormann The G over nment announced its response to the review in December 2010 with the initial Stronger Super release in principle supporting 139 of Cooper’s 177 recommendations.

It said it was mindful of three key issues identified in the review: high fees, a lack of competition delivered by choice of fund, and that there was too much tinkering in superannuation.

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

The three main areas of focus for the reforms were the introduction of a new low cost and simple default superannuation product called ‘MySuper’, heightened duties for superannuation trustees, and a streamlining of super fund administration via Cooper’s SuperStream proposals.

On 1 February 2011 Minister for Financial Services and Superannuation Bill Shorten announced a peak consultative

group to be chaired by Paul Costello, featuring the heads of industry bodies including the FSC, ISN, ASFA, Australian Institute of Superannuation Trustees (AIST), SPAA, as well as legal, consumer group, university and union representatives.

In September 2011 the Government announced its final response to the Cooper Review, introducing a set fee requirement for MySuper products, a MySuper transition timeline for default members, an auto-consolidation requirement for inactive member accounts with balances under $1,000 and increased employer contribution reporting requirements.

In March this year, laws were passed in parliament approving an increase in the superannuation guarantee to 12 per cent and the introduction of the Low Income Super Contribution.

SuperStream Possibly the most unanimously supported proposal among all the regulatory changes across financial services in the past few years – SuperStream – aims to reduce the reliance on paper forms with increased use of web-based applications and the use of member tax file numbers as the primary locator of member accounts.

There will be a phased timeline for the introduction of improved data standards, while funds will be required to automatically consolidate inactive accounts from January 2013.

The resultant streamlining of super fund administration should benefit members by reducing both costs and the amount of time member funds spend uninvested.

The initiative has been strongly supported by stakeholders including the FSC, ASFA, AIST, ISN and major super funds. FSC chief executive John Brogden says the biggest savings to be derived from Stronger Super will come from SuperStream, and it is critical to ensure the measure is delivered on time.

ISN chief executive David Whitely says the effectiveness of the initiative will depend heavily on the co-operation of small to medium sized employers adopting proposed data standards.

Policy review MySuper Cooper’s MySuper proposals were far more contentious, which Brogden said the FSC never supported but would work with the Government to improve.

The legislation is yet to go through parliament, but as it stands funds will be able to offer a MySuper product from 1 July 2013, and from 1 October 2013 employers must make contributions for employees who have not made a choice of fund to a fund that offers a MySuper product in order to satisfy superannuation guarantee requirements.

There have been questions raised over the timeliness of the reforms, with ASFA’s general manager of policy and industry practice Margaret Stewart saying it would be difficult for some trustees to ensure they are ready to receive MySuper contributions by 1 October 2012, given upcoming SuperStream changes, while the Australian Prudential Regulation Authority (APRA) is also due to release new draft prudential standards shortly.

The Productivity Commission is also conducting a review of the processes by

“

A recommendation to ban SMSFs investing in collectibles and personal use assets has not been adopted.

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Government to commoditise super as it has in MySuper then prohibit some players from participating in the award structure.

The sentiment was echoed by FPA chief Mark Rantall and AFA chief Richard Klipin, who each called for an end to the current “uncompetitive” arrangements.

SMSFs The Government has said it will adopt many of Cooper’s recommendations with regards to SMSFs, including amending the registration and rollover processes to crack down on the illegal release of funds, introducing proof of identity checks, and increasing the standards required of auditors.

A recommendation to ban SMSFs investing in collectibles and personal use assets has not been adopted.

Governance The Government will also consult in relation to proposals to increase the regulatory oversight of APRA, and to increase the governance obligations of fund trustees.

MM

Mark Rantall which default funds are nominated in awards to assess whether the processes are sufficiently open and competitive.

Brogden says it would be absurd for the

Removing the exemption THE accountants’ exemption – which allows professional accountants to provide advice on the establishment and closure of SMSFs – was introduced in 2004 as part of the Financial Services Reform Act 2001 package.

However, in a bid to increase access to high-quality, affordable financial advice for all Australians, the Federal Government proposed the removal of this exemption as part of FOFA, but promised to find a workable replacement.

For more than two-years the accounting industry bodies and policy makers have been trying to develop an appropriate alternative that would allow accountants to provide appropriate advice.

The industry bodies supported this objective “due to the shortcomings that the accountants’ exemption posed in its current form,” according to Chartered Accountants.

On 20 February 2012, Minister Shorten promised he would announce the replacement to the exemption in two weeks, but the industry hasn’t yet seen the announcement (as of 11 April).

But the idea of accountants simply getting licensed has been floating around for a while.

In November last year, the Institute of Public Accountants (IPA) has announced a partnership with AXA and MLC to provide its 22,000 member base with a comprehensive financial services package. Accountants are now able to choose from five licensing solutions – three from AXA and two from MLC – and once qualified, members will have the ability to advise clients in relation to the establishment and closure of SMSFs. Similarly, BT-owned dealer group Securitor has also developed an offering which would allow accountants to continue to provide limited SMSF advice.

Arrangements such as these which provide accountants with the support of a dealer group, compliance tools and training or obtaining an AFSL themselves seem to be the two options available to accountants – for now.

– By Milana Pokrajac

Bill Shorten

www.moneymanagement.com.au April 19, 2012 Money Management — 17

OpinionSMSFs Ten steps to starting a SMSF pension

Cecile Apolinario explains the key issues and steps trustees need to address when starting a pension for a SMSF member.

What types of pensions can be started?

It is now generally only possible to start two types of pensions in an SMSF. These are a ‘regular’ account-based pension if the member meets a full condition of release, and a ‘transition to retirement’ ( TTR) account-based pension if the member has reached their preservation age.

A range of pension standards must be met with both options, such as minimum pension payments. TTR pensions also have a maximum annual payment of 10 per cent and commutations can only be made in limited circumstances.

Ten steps to starting a pension

1

Consult the deed Before paying a pension, the trustees should arrange for a suitably qualified person to check and review the fund’s trust deed to make sure it allows the payment of a pension, as some funds don’t. Many deed provisions will also influence when a pension can be paid, who can receive a pension and how the pension is to be operated and administered.

2

Put request in writing The member must request, in writing, that the trustee commence paying a pension. The request must indicate the pension’s intended start date, the level of income required and the frequency of pension payments. The member must provide the trustees with a tax file number declaration and details for the bank account for pension payments. The member should also decide if the pension is to revert to a death benefit dependant (usually a spouse). Alternatively, the member may want to complete a binding death benefit nomination.

3

Validate and record request The trustees need to validate the request by ensuring the member is eligible to start the pension. They then need to record in minutes that the request is valid and a resolution has been made to pay the pension.

the trustees also need to lodge a PAYG withholding payment summary statement (NAT 3447) with the Australian Taxation Office (ATO) by 14 August. Both these forms may be lodged using the ATO’s electronic commerce interface software.

4

6

5

7

Issue a PDS The trustees must consider whether they need to provide a Product Disclosure Statement (PDS) if they have not already done so. The Australian Securities and Investments Commission provides some guidance on this issue in Regulatory Guide 168. Some legal firms have created a generic PDS which can be amended as required.

Register for PAYG The trustees must register for ‘pay as you go’ (PAYG) withholding if required to withhold tax from the pension payments. This must be done before the first amount is withheld. The trustees may need to withhold tax from the taxable component of a payment that is made to a member less than 60 years old.

The withholding rates are detailed in Schedule 34 – Tax table for superannuation income streams (NAT 70982).

Trustees don’t need to withhold tax when paying a pension if the member is 60 years old or over at the time of the payment, or they are under age 60 and all the payments comprise the tax-free component.

The trustees must complete a PAYG payment summary – superannuation income stream (NAT 70987) form if they withhold tax from a member benefit payment. If a payment summary is issued,

18 — Money Management April 19, 2012 wow.moneymanagement.com.au

Determine market value Australian Taxation Office Superannuation Circular 2003/1 states that the assets supporting the pension must be valued at the net market value on the commencement day. When determining the asset value of the member’s account balance, the trustees must also account for all income and contributions received during the year.

Determine components of member’s account The tax-free and taxable components of the member’s account must then be determined at commencement.

This proportion will be used to determine the tax-free and taxable proportion of each pension payment.

8

Review investment strategy The fund’s investment strategy should be reviewed to ensure it reflects the member’s retirement needs, and be adjusted if necessary.

Members will often need to hold more cash in the pension phase than in the accumulation phase in order to meet pension payments and other liabilities. It’s important that the actual investments reflect the objectives and investment strategy. When changing investments, the objectives and strategy should be amended to ensure consistency.

9

Select segregated or non-segregated method The trustees will then have to decide whether to use the ‘segregated’ or ‘non-segregated’ method to determine the ‘exempt current pension income’ (ECPI), which is not taxable. Because the option chosen could result in different accounting and taxation outcomes, the trustees should seek advice from their accountant before making the decision.

The segregated method involves the trustees notionally segregating the assets that will be used to support the pension payments. If this method is used, the trustees are not required to obtain an actuarial certificate to qualify for the tax exemption when they pay the pension.

If the assets supporting the pension are not specifically identified, the pension is considered non-segregated and the trustees need to obtain an actuarial certificate that certifies the proportion of income that is ECPI. This must be done by the time the fund lodges its tax return for the year. The unsegregated method is more commonly used, as it is easier to administer.

10

Start the pension The trustees then start paying the pension. The member must be notified in writing of the applicable minimum payment, as well as the tax-free amount. If the member is under 60, the trustees may need to withhold tax from the pension payments. All tax must be remitted to the ATO within 21 days from the end of each quarter.

Cecile Apolinario is a technical services consultant at MLC Technical Services.

FUND MANAGER

OF THE YEAR MONEY MANAGEMENT LONSEC FUND MANAGER OF THE YEAR 2012

Book your tickets now Visit www.moneymanagement.com.au/events

g n i t a r b e Cel s r a e y In 2012 the Money Management Fund Manager of the Year Awards celebrates 25 years in recognising excellence in the funds management industry.

Entries for Best Advertising Campaign, Marketing team and Young Achiever close Thursday 19 April.

For more information please go to www.moneymanagement.com.au and look under the Events tab.

Date Thursday 10 May 2012

Venue Grand Ballroom The Four Seasons Hotel, Sydney

For more information Heather Lawson on (02) 9422 2791 or email heather.lawson@reedbusiness.com.au

OpinionRisk

With life insurance being placed in the ‘too-hard’ basket for many Australians, the industry has developed simple and convenient methods to take out cover.

However, as Tim Browne discusses, time savings upfront need to be carefully managed against potential delays at the time of greatest need: claim payment.

I

was recently looking for a book on the Amalfi Coast for my wife. I could have searched online at Amazon or iTunes, gone to our local library or tried the nearest major book store. I chose the latter, and one of the experts there steered me to the right section and ran me through my options. Today’s consumers are certainly spoilt for choice when it comes to where, when and how we purchase goods and services. The same is true of life insurance, and the industry has developed a range of distribution channels to meet different client needs when applying for cover.

The first, out of three main options, is for the client to see an adviser, where complex needs are often involved and full underwriting is typically undertaken upfront. The second option is for clients to take out life insurance through their super fund, where auto acceptance levels of cover have been agreed to between the trustee and insurer. Alternatively, clients can also go direct, taking out insurance online or over the phone. This is a simple and efficient way to fulfil life insurance needs, and can involve limited upfront underwriting with pre-existing conditions being assessed at the time of claim.

Over the past five years, the trend towards more efficient and streamlined upfront underwriting for retail life business, and finalising insurance cover as

quickly as possible, has gathered significant momentum in Australia. The main driving forces have been the increased demand from consumers to improve the application process. This has generated significant industry-wide investment in electronic applications, and the time it takes life offices to process retail applications has been reduced to hours in many instances rather than weeks, as it was in the past.

Life companies in Australia have successfully introduced online electronic applications for simple, or 'cleanskin’ retail cases, which utilise smart underwriting rules engines. These systems can provide an immediate decision, without the need for human intervention. This speed is fantastic for clients with straightforward applications. It also provides clients with confidence that their personal insurance application has been reviewed by an underwriter at policy inception.

Making it easier for more people to take out cover is a key priority for the industry and each channel has its place, particularly as life insurance is perceived as a difficult proposition by many families. In fact, in one of our recent surveys, nearly half of Australians (47 per cent) told us that one of the main reasons they do not have life insurance is that it is too complicated, or because the whole process takes too long.

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

that the right “Ensuring balance is struck between sensible and effective underwriting requirements, and practical and efficient claims management practices in retail insurance, is imperative to the future success and reputation of the industry.

”

However, as advisers assess the merit of insurance options available to their clients, there is a range of factors to consider. For instance, the introduction of direct insurance, and an increased focus on processing retail life insurance applications as quickly as possible, is leading to a shift away from traditional upfront underwriting. This change brings with it new pressures on the claims process. Time savings upfront therefore need to be carefully managed against potential delays at the time of greatest need: claim payment.

Research has also highlighted that the average life insurance payout for an

advised client is about 50 per cent higher than the average payout for clients who access insurance through superannuation. This is consistent with broader industry statistics. For example, according to research from the Financial Services Council and KPMG, the average insurance claim paid outside of superannuation is $132,537, while the average claim paid from an employer default fund is only $70,000.

Underwriting upfront has also provided individuals with an opportunity to undergo free medical examinations and blood tests, and in some instances this can provide a valuable medical update, leading to a medical problem being detected. Lives have been saved in some instances where significant medical issues such as a heart problem or raised blood pressure are identified during testing.

Ensuring that the right balance is struck between sensible and effective underwriting requirements, and practical and efficient claims management practices in retail insurance, is imperative to the future success and reputation of the industry.

Ultimately, providing peace of mind to our clients and delivering prompt payment of legitimate claims must always remain our number one priority.

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

OpinionInsurance

Bernadene Gordon discusses the way forward for mental illness and life insurance.

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ew topics have received the same industry focus and few have brought together such a broad cross-section of participants working towards a common goal, improving access to life insurance for people who suffer from or have a history of mental illness.

I know of no other topic where the life insurance industry has formed such strong partnerships with key stakeholders from outside our sector to address a shared goal – in this case, one that aims to enable more Australians access to the insurance they need.

The life insurance industry and mental health stakeholders came together more than 10 years ago to create the first Mental Health Memorandum of Understanding (MOU) – a formalised commitment to achieving an improvement in access to life and disability insurance for people with a history of mental illness.

The issue of mental illness and life insurance is very broad and complex, and the activity under the MOU has certainly acknowledged this. Areas such as education and awareness, access to information, underwriting and claims guidelines, complaints handling, and monitoring industry experience have all been key focus areas for this group.

It’s important that we continue the momentum of change that we have worked so hard to foster over the past decade.

We know this is an important issue. The impact of these conditions on our community is significant. In 2003, mental illness was the third leading cause of the total burden of disease and injury in Australia behind cancer and cardiovascular disease.

For our industry, these disorders represent a significant cause of claim. Industry data gathered by the Financial Services Council (FSC) showed that in 2009, 19 per cent of open income protection (IP) and

group salary continuance (GSC) claims were caused by mental illness. For the same period, mental illness claims represented 26 per cent of total IP/GSC costs – a further indication of the significant impact of these conditions.

The life insurance industry has made great progress in improving access to insurance for people with mental illness by focusing on the need for change in a number of different areas. We should not forget the improvements that have been made to date.

For me, the two most significant changes have been in the areas of underwriting and claims practices.

Industry guidelines for underwriting and claims that were developed under the MOU have helped shape the industry’s approach to these conditions. Increased education around the nature and severity of these conditions and the effectiveness of different medical treatments and therapies has also had an impact.

We see this demonstrated by the fact that today many people who have a history of mental illness are able to access income protection cover at standard rates.

This is a significant change from 10 years ago when many people were declined insurance, based simply on disclosure of mental illness.

In the claims space, changes in practices and attitudes have been driven by increased access to and use of medical and rehabilitation experts, in conjunction with a greater understanding of the importance of working in partnership with the client and treating doctor to ensure the best progress towards recovery.

Both these areas have also benefited from a shift in the life insurance industry’s approach to the way they obtain personal information.

The introduction of telephone underwriting and claims services has provided underwriting and claims assessors with

more detailed and tailored information as it is gathered directly from the client.

Historically, this information has not been available because of a general reliance on paper application forms and questionnaires that provided no flexibility or tailoring to the client’s personal situation.

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The industry is committed to improving research and data collection so that we better understand issu ues that exist in relation to mental illness and access to reinsurance.

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Industry statistics show we’re moving in the right direction. In 2003, only 45 per cent of people who disclosed a history of mental illness were able to access income protection – by 2007 this figure had increased to nearly 80 per cent.

There are, of course, numerous challenges that continue to exist in this area.

Firstly, there’s the issue of ‘perception versus reality’. Statistics show that as an industry we have changed our approach to underwriting. Yet there is still negativity in the general community towards the insurance industry in relation to our practices. I think this highlights that there is still work to be done on improving the way we educate and communicate with

our customers and stakeholders.

We have also seen significant change in technology and automation, which has improved the process that exists around applying for insurance. In addition, through the use of underwriting rules engines we are provided with more detailed information about an individual’s personal history. However, when it comes to underwriting applicants with a history of mental illness, quicker and faster does not always equal better. Taking a more individual approach when underwriting these conditions is critical to a better outcome, and this requires time.

Underwriting processes need to cater to this.

So what does the road ahead look like?

Working groups through the FSC are focusing on the development of education and awareness programs for the insurance industry and other stakeholders. Our underwriters, claims assessors, advisers and financial planners will be able to access and benefit from these programs.

The industry is committed to improving research and data collection so that we better understand issues that exist in relation to mental illness and access to insurance. It’s important that all stakeholders continue to contribute to these surveys because we will all benefit from the learning they reveal. There has been recent activity to review the current underwriting guidelines and claims practices to renew the guidance notes that exist for the industry. Changes to these will help ensure our processes are aligned with current best practice principles.

It will only be through continued collaboration with stakeholders and sustained focus on education and awareness that required improvements will take place in this area.

Bernadene Gordon is AMP director of underwriting and claims policy.

www.moneymanagement.com.au April 19, 2012 Money Management — 21

OpinionDemographics More people, more demand The global population is growing, but its composition is also changing. Tom Stevenson examines the effects this will have on investors and their decisions in the future.

P

ossibly the single most important factor that is shaping the global economy of the future is the changing nature of demographics. Having recently passed the seven billion mark, the global population continues to grow. Given scarce global resources, this has some very important investment implications.

Not only is the global population growing, its composition is also changing in some very meaningful ways. Understanding the demographic changes that are taking place in the world today, and how these differ across countries, is important for investors.

Here are four areas we believe are particularly relevant to investors, namely: • Population growth; • The growth of middle classes; • Changing consumption habits and behaviour; and • Ageing populations.

Global population growth Perhaps the most obvious implication of the growing global population is that it raises demand for finite resources, including the critical ones of food, water and energy. These resources have already seen strong price increases in recent years as emerging economies have grown and begun to consume a growing share of the world’s resources.

A casual observation of supermarket food prices over recent years reveals a clear upward trend. Food prices can obviously be influenced by short-term supply factors such as harvests, but on the demand side, the key long-term considerations are largely demographics-related and they are having the effect of pushing prices higher. The World Bank estimates that demand for food will rise by 50 per cent by 2030. This will be attributable in large part to rising global populations but also to the related factors of rising affluence and changing dietary habits. The rising meat prices of the last few years provide an excellent case study – prices have been supported by world population growth but also because people in places like China are getting wealthier, which is spurring demand for more expensive food items such as meat and dairy

products.

Moving further back in the supply chain, we can also see that increased demand for protein has important knock-on effects on the demand for grain. This is because livestock is reared on grain-feed – indeed, it is estimated that it takes seven kilograms of grain to produce just one kilogram of meat.

In a world growing ever hungrier for meat, the need for more grain and better yields becomes clear. One way this can be achieved is via fertilisers: fertiliser stocks such as Mosaic could therefore outperform in the future just as they did during the last episode of food inflation, when many of the themes discussed here first caught investors’ attention.

The growth of middle classes – wealth is spreading The global population is not only growing, its composition is also changing in some very important ways. Over the next few decades, the number of people considered to be in the ‘global middle class’ is projected to more than double, from 430 million in 2000 to 1.2 billion in 2030 (or from 7.6 per cent of the world’s population to over 16 per cent). Most of the new entrants will come from just two countries – China and India – two places where private consumption has been growing rapidly in recent years. In fact, to put the source and magnitude of this growth in perspective, the World Bank predicts that by 2030, 93 per cent of the global middle class will be from developing countries.

In the opinion of many seasoned investors and analysts, the growth in consumption driven by a rapidly expanding middle class in emerging markets could prove to be the defining investment theme of the next two decades. Indeed, this helps to explain why companies from all over the world are at pains to develop a presence in emerging markets – they are desperate to capture rates of consumption growth that are now unimaginable in mature western economies.

Global brands spanning from basics like toothpaste to luxury items should all stand to benefit from the middle class mega–trend. More broadly, there will be a large range of areas that could benefit,

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

including retail, autos, financial services and telecom services. As incomes grow, consumption patterns change as the proportion that is spent on basic necessities diminishes, while the proportion of income spent on discretionary consumption rises. For those companies that can successfully target the growing middle classes of the world, the rewards can be transformative – by way of example, despite very challenging conditions in many of its traditional European markets, leading German carmaker Volkswagen was still able to report record high profits of EUR11.3 billion in 2011, 58 per cent above the previous year and among the highest ever reported by any German company. Much of this profit was attributable to growing sales in emerging markets, with some estimates suggesting that as much as half of the 2011 profit was attributable to its sales in just one country – China.

Changing consumption habits and behaviour – moving to new paradigms Not only is the global population growing, but consumption habits the world over are also changing in some very significant ways. Two decades ago, relatively few people knew about the internet, but today it has rapidly grown to become an essential part of work and life in all of the developed world and increasingly so in the developing world too. Being a relatively new mode of communication and commerce, some of the associated themes have yet to be fully played out and exploited by both businesses and investors. One area of significant change is in the way that people are shopping; an ever-growing proportion of sales activity is taking place over the internet. The speed and convenience of this mode of shopping, and the fact that access to the internet is growing strongly, makes it a certainty that private sales transactions over the internet will continue to grow.

Companies that can successfully tap into this growth stand to do very well. One example of an outstanding success story is eBay, a company which is peerless in the field of online auctions. Since eBay merely provides a forum for others to trade products, it has relatively few fixed costs to worry about. With a

seemingly unassailable position in its field, the increasing global penetration of the internet alone should be a powerful sales driver for the company. eBay’s ownership of PayPal, the internet’s leading payment platform, is particularly significant because it is effectively a leveraged play on something that we can be very sure about: more consumers buying more things over the internet in the future.

Another good example of changing consumer behaviour is provided by food. As explained earlier, rising incomes and the expansion of the middle class in fast-growing emerging economies are causing structural changes in diets as consumers move from generally healthy, low calorie diets that are high in grains and vegetables to highercalorie, western-style diets that tend to contain more meat, dairy and, critically, more sugar. A great example of a stock that derives strength from the related demographics themes of changing consumer habits and increasing wealth in emerging markets is Shenguan Holdings, China’s dominant sausage casing manufacturer.

elderly people but also from government efforts to control the consequent upward pressure on healthcare costs. Japan-based generic drug producer Sawai Pharmaceutical should be a prime beneficiary of these themes, particularly in light of that domestic economy’s well-known ageing issues.

The growing number of older people is also a secular positive for a number of other industries such as cruise operators and those that specialise in providing various types of care services and assisted living facilities. Thinking more laterally, it is known that the productivity of older groups generally tends to be lower than in younger age groups. It can therefore also be argued that population ageing in the most developed countries may further strengthen the trend towards automation or robotics, favouring companies such Japan’s Fanuc, which owns Fanuc Robotics.

Conclusion

This change in diets, combined with increasing industrialisation and urbanisation, has lead to more unhealthy sedentary lifestyles for many people, creating opportunities in the healthcare sector.

This exact combination of risk factors is what tends to lead to a number of major health problems such as high blood pressure, heart diseases, cancer and diabetes, a sugar absorption malfunction. Unfortunately, diabetes is very much a growing problem throughout the world, which means that demand for products aimed at alleviating its symptoms is also growing strongly. This reality very much strengthens the long-term sales outlook for companies such as Denmark’s Novo Nordisk, the world’s pre-eminent diabetes drug manufacturer.

Ageing populations – the number of older people has more than tripled since 1950 According to the UN’s Population Division, we are living through a period of population ageing that is “without parallel in the

history of humanity”. This process is a result of the combined effects of declining fertility and falling mortality rates. Although population ageing is both a pervasive and irreversible reality in nearly all countries of the world, the trend is significantly stronger in more developed countries – the proportion of people aged 60 and over in developed countries is expected to rise to a third of the total in 2050, from around a fifth today.

Population ageing brings with it a host of economic challenges for developed countries. On the most basic level, the reduction in the working-age population means a reduced labour supply, which is one of the key determinants of long-term economic growth. However, a more immediate negative effect for national governments is rising age-related expenditure, both in terms of higher public pension costs and increased healthcare and longterm care costs. In turn, rising age-related expenditures are putting upward pressure on government budget deficits and national debt levels.

While the inescapable trend of global population ageing is creating some serious policy headaches for national governments, it can also give rise to some attractive opportunities for both businesses and investors. The most obvious example is healthcare. Although people are living longer than in the past, the functionality of the human body inevitably declines over time, thereby increasing demand for healthcare products (such as drugs, hearing aids, orthopaedics devices and eye-care products) and a wide range of healthcare services, including private hospitals.

It is an unfortunate reality of life that population ageing and rising dependency ratios bring with them all kinds of costs.

Products and services that aim to reduce such costs for either government, employers or individuals themselves could therefore do very well in the future. Generic drug manufacturers that aim to sell drugs significantly cheaper than the established ‘big names’ of the industry represent a good example of this, because they benefit not only from an increasing number of

Demographic changes will be critical in determining the structure of the global economy of the future. In summary, we believe there are four key areas for investors to consider: 1) The simple growth of the global population means there will be an increase in demand for finite resources, which will be supportive for companies involved in the extraction, transformation and selling of these resources.

2) Thanks largely to emerging markets such as Brazil, China and India, the size of the global middle class is growing rapidly.

This bodes well for global consumption demand and those companies that can provide the products and services to meet this demand.

3) Peoples’ consumption habits and behaviour are changing in some very significant ways, spurred in part by technological innovations such as the internet.

Companies that can provide products and services that are responsive to these changes stand to do well in the future.

4) The number of older people is growing throughout the world, but particularly in more developed countries. This constitutes a favourable long-term demand factor for companies that provide products and services that cater for the requirements and preferences of older people, healthcare being the most well known example. Businesses that offer solutions to rising healthcare costs, and which enable patients, employers and states to save money, should also do well.

The good news for investors is that these demographic themes are investable now and are anticipated to become more prominent in the future. Many of the longterm positive factors are not yet reflected in the price of the companies that stand to benefit. Academic studies and anecdotal evidence suggest that investors are relatively good at assessing short time horizons, but less good at factoring in the impact of slow-moving changes such as demographics. As these demographic themes continue to shape every aspect of economic life, the awareness of them among investors seems set to grow.

Tom Stevenson is the investment director at Fidelity Worldwide Investment.

www.moneymanagement.com.au April 19, 2012 Money Management — 23

OpinionFixed interest Why bother with fixed interest?

With term deposit rates still on a relative high and the annuities which help fund investors’ years in retirement, why should one bother with fixed interest? Tim Wong answers this question.

H

igh term deposit rates, annuities that address the risk of outliving one’s assets, and high-yielding hybrid securities have all attracted attention from investors and advisers looking to balance out the risks in investment portfolios. All this has prompted many to ask: why bother with fixed interest?

The answer is simple – high-quality fixed interest strategies are best-placed as an insurance policy, should risky assets like equities turn south. Their ability to do so surpasses that of annuities and hybrids, and even capital stable and government-backed term deposits.

This is because many (although not all) bond strategies possess the characteristic of interest rate duration.

When interest rates fall, the value of a fixed interest portfolio rises. The bond portfolio is worth more because these securities pay higher coupon interest than what's on offer in the market. By contrast, although term deposits maintain capital stability, they're not markedto-market, and so miss out on this revaluation effect.

Why is duration important?

Falling interest rates typically coincide with slowing economic growth and increased risk aversion. High-grade bonds providing a regular income stream are perceived as a 'safe haven', and are therefore more highlyvalued. They effectively diversify a portfolio's exposure to risky asset classes, as their value typically rises when equities fall.

Duration is not without risks though – it increases a portfolio's sensitivity to interest rate changes detrimentally if interest rates rise. This occurred in 1994, when many Australian bond strategies lost money. Nonetheless, duration gives to fixed interest diversifying qualities that supersede even term deposits.

Falling yields are ripe for bonds, which provide the portfolio insurance that term deposits lack. (It's not all one-way traffic – at certain points in the cycle, term deposits can outperform a vanilla fixed interest strategy, such as when Australian interest rates rose in 2006–07.)

What then of hybrids?

We believe that hybrids have severe shortcomings for use as a portfolio's defensive anchor. Firstly, they possess the characteristics of both debt and equity. Like equities, hybrids have tended to fall in value when growth slows. This often coincides with rising credit spreads, concerns about a company’s ability to service its debt, and in a worstcase scenario, deferred distributions.

Investors in PaperlinX PPX and Elders

Limited ELD hybrids suffered, as these companies ceased paying their income distributions.

Additionally, hybrids rank behind other bondholders – significantly diminishing the hybrid's worth in times of stress and giving it more equity-like qualities. Issuers can also include unfavourable terms such as retaining the option to convert or retiring the security before maturity to refinance at lower interest rates. Liquidity can also be problematic when risk aversion spikes – hybrids can be thinly traded, as was the case in 2008.

We therefore urge investors and advisers not to treat hybrids as purely defensive debt. They can exhibit equity-like

The lack of interest rate “duration prevents term deposits and annuities from providing the ‘insurance policy’ effect many high quality fixed interest strategies offer.

”

characteristics at the most inopportune times and lack the safeguards of highgrade bonds. Hybrids often contain an array of complex terms that can make them tricky to understand. No two hybrids are the same – while one may behave like a debt security, another could include terms that make it do anything but. Hybrids can play a role in a broader fixed interest allocation, but require careful and judicious use.

Annuities are often used as a compo-

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

nent of the defensive portion of a portfolio. While this is potentially a valid strategy, annuities are primarily designed to address longevity risks. Many investors fear outliving their assets, and annuities provide a known income stream for the remainder of one's life.

Nonetheless, annuities are not a substitute for a high-quality fixed interest investment. It comes back to duration. Annuities may provide greater certainty of capital and income, but when equities are struggling and interest rates falling, high-quality, durationsensitive securities should rise in value – all other things being equal. Conversely, the holder of an annuity will continue to receive the same payments – no bad

thing, but nowhere near as beneficial when the remainder of their portfolio is falling in value.

In conclusion, there are valid reasons for including term deposits, hybrids, and annuities in an investment portfolio.

However, none of these should be relied upon as a defensive anchor. The lack of interest rate duration prevents term deposits and annuities from providing the 'insurance policy' effect many highquality fixed interest strategies offer. And the risks and inherent complexities of hybrids are severe shortcomings that make them unsuitable for this role.

Tim Wong is a senior research analyst at Morningstar.

Toolbox

Granting unlisted options to super Adrian Hanrahan examines the complexities that arise when granting unlisted employee options to superannuation.

E

mployee share/option schemes (ESS) afford employers the opportunity to provide remuneration benefits to employees that are linked to the company’s performance. The taxation of employee share/option schemes can be a complicated area, especially where the employee wishes to defer the taxation.

This area of financial planning can be made even more complex where the employee directs the employer to grant future ESS entitlements to superannuation, as there can be issues with the acquisition and market valuation of the entitlements.

It is common for an ESS interest to be an unlisted option over a listed security. This means where the unlisted options are exercised they convert into ASX listed shares.

Granting employee options to an associate Instead of an ESS interest being granted to the employee, it can be granted to an associate of the employee. To ensure equity with the taxation law, the Income Tax Assessment Act 1997 (ITAA) requires

the employee (rather than their associate) to include the discount (ie, market value of the ESS interest at acquisition, less cost base) in their assessable income. This ensures the same taxation treatment applies, regardless of who holds the ESS interest.

An employee’s associate can be their spouse, child, company or trustee of a trust (other than the trustee of an employee share trust). Quite often employees use their superannuation fund. In these situations, the employer will still give the employee an ESS statement which includes ESS interests provided to their associates. The employee will need this statement to help complete their tax return.

Where the ESS interest is granted to an associate (ie, a SMSF) after 1 July 2009, the employee can defer the income tax where there is a genuine risk of forfeiture (under a tax-deferred scheme).

Where an ESS interest was granted to an associate prior to 1 July 2009 the employee could not choose tax deferral (as granting an ESS interest to an associate

did not meet the definition of a qualifying share/right – terminology that only applies to the previous law).

Taxed as a contribution As a tangential point, the fact that the share plan rules tax the employee on the value of the options will not stop this grant/acquisition being a concessional contribution for the super fund. As a result, there is a potential for a double taxation on the options being granted to the super fund – something to consider with the cost/benefit analysis (nevertheless, the lower tax rate in the super fund may still mean this is a worthwhile decision).

The ATO has outlined a number of tax issues (refer to Tax Payer Alert 2010/3) where the grant of the ESS entitlements are not accurately recorded as a contribution at market value. If there is any doubt, the employee should seek a private ruling.

(despite the underlying shares being listed), a breach of section 66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) (ie, related party rules) can occur.

The related party rules prevent (with some exceptions) the acquisition of an asset from a related party. When an unlisted option (over a listed security) is involved, confusion often arises as to which is the ‘asset’ for the purposes of the related party rules – the instrument (ie, unlisted option) or the underlying security (ie, share).

A close examination of APRA’s circular paper II.D.3 (paragraph 16) clarifies that the asset is in fact the instrument (ie, the unlisted option) over the underlying asset. As a result, some related party issues can occur at acquisition. We will examine two examples below.

Standard employer sponsor issues In the unique situation where the

Related party issues Where the associate is a super fund and the ESS interest is an unlisted option

Continued on page 26

www.moneymanagement.com.au April 19, 2012 Money Management — 25

Toolbox Continued from page 25 employer is a related party of the super fund (ie, standard employer sponsor) the granting of unlisted employee options to the super fund would not be permitted.

This is because the employer is a related party, and the relevant exception to this related party rule (ie, acquisition of listed securities) would not be satisfied as the ‘asset’ is unlisted.

Timing issues In more common situations, a related party transaction can occur depending on the point in time that the options were granted (to the super fund).

Where the employer granted the options to a super fund, after the employee became eligible for them (and before there was an agreement to grant them in super), it would be viewed as a breach of section 66. To understand why, we need to understand how something can be ‘acquired’ in super.

SMSF Ruling 2010/1 provides the Commissioner’s opinion on when assets are taken to have been acquired. Paragraph 33 sets out the two ways that a thing can be ‘acquired’: 1. The title to an asset moves from one party to another, and 2. One party creates new rights in another party.

When a company grants options to employees it is typically done by creating new options that have not previously existed. Therefore, the second type of acquisition (described above) is relevant.

Scenario (1) would breach section 66 of SISA and scenario (2) would not. This can be further explained using the analogy with salary sacrifice: Under a salary sacrifice arrangement, we can draw a distinction between 1) the agreement for the employer to make the contribution is made after the employee has earned the entitlement to be paid the money and 2) the agreement for the employer to make the contribution is made before the employee has earned the entitlement to be paid the money.

The first scenario is not a successful salary sacrifice arrangement and the contribution is taxed to the employee as salary. The second scenario is an effective salary sacrifice arrangement.

Going back to the granting of unlisted options to super, if the agreement between the employer and the employee is made after the employee has earned the entitlement to get the unlisted options, then the unlisted options are being notionally granted to the employee, and the super fund is notionally acquiring them from the employee, a related party, in breach of section 66.

If, on the contrary, the agreement between the employer and the employee is made before the employee has earned the entitlement to get the unlisted options, then the unlisted options are being granted to the super fund and the super fund is not acquiring them from a related party so there is no breach of section 66.

Advisers will need to “ensure that there are no related party issues, and that the approach used to determine market valuation is correct.

”

Market valuation Where an employer grants employee unlisted options in the employee’s super fund, superannuation and tax law will consider this a contribution and the contribution will need to be recorded at market value.

Determining the market value of an unlisted option can be a complicated process. When the new ESS rules were written into Division 83A of the ITAA , they did not define the market value of an ESS interest. When we examine ITAR 1997 it states (for unlisted options that must be exercised within 10 years of acquisition) an employee can choose to value such interests at either: 1. The amount determined by application of the regulations, or 2. The market value according to its ordinary meaning.

However, an employee must determine the market value according to its ordinary meaning where the deferred taxing point for an option occurs on the day the employee disposes of the option (other than by exercising it), or the deferred taxing point for an option occurs on the day the employee disposes of the share acquired on exercise of the option. a) Using the market value via the Regulations When an employee chooses to use the value determined by using the regula-

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

tions, the value will be the greater of: - The market value of the share on the day that the employee may acquire it by exercising the option, less the lowest amount that the employee must pay to exercise the option to acquire the beneficial interest in the share, and - The value determined according to the calculation tables in the regulations.

If the exercise price is nil or cannot be determined, then the value of the option is equal to the market value of the underlying share on that day.

There has been much debate as to the appropriateness of this approach when determining market value. As a result, when the new ESS rules were introduced in July 2009, the Government asked the Board of Taxation to review the rules around valuing unlisted share schemes (and options).

In February 2010, the board released their report to the Government and suggested the above methodology should continue to apply, however the tables in the regulations should be updated to reflect something closer to market conditions (ie, changes to assumptions around volatility, dividend yield, risk free rate, etc). The new version of the tables was created and is found in Appendix A of the report. In April 2010 the Government agreed with the recommendations, but deferred introducing the new tables until this year. b) Using the market value via the ordinary meaning The market value according to its ordinar y meaning must be determined where an unlisted option has an exercise period greater than 10 years, or an employee chooses not to use the amount determined by the application of the regulations for valuing unlisted options.

Any method used to determine the market value should have regard to the terms and conditions which apply to the option being valued. However, in working out the market value of the option, the employee must disregard anything which would prevent or restrict conversion of the option to money.

CPD Quiz This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. Readers can submit their answers online at www.moneymanagement.com.au.

1. Employers can grant employee options to: a) Employees b) Associates of employees c) Both 2.The taxation of granting employee options to an associate is imposed on the: a) Employee b) Associate of the employee c) Employer 3. The grant of employee options from an employer to super fund would be considered a: a) Non-concessional contribution b) Concessional contribution 4. The ‘asset’ for the purposes of the listed securities exemption (ie, related party rules) refers to the: a) Instrument (ie, option) b) Asset underlying the instrument (ie, share) 5. For employee options that must be exercised within 10 years of acquisition, the taxpayer must value the grant: a) According to the amount determined by the Tax regulations b) According to its ordinary meaning c) Either of the above.

MONEY MANAGEMENT iPad® edition

Considerations When dealing with clients that intend on having their unlisted ESS interests granted to a superannuation fund, advisers will need to ensure that there are no related party issues, and that the approach used to determine market valuation is correct. In some cases, contravention of these provisions may result in the super fund becoming noncomplying for tax purposes.

Adrian Hanrahan is the technical services manager for Plan B Group Holdings.

Exclusive to Money Management interactive cpd quiz ® iPad edition.

If you are experiencing technical problems, please call our customer service centre on 1300 360 126.

For more information about the CPD Quiz, please contact Milana Pokrajac on (02) 9422 2080 or email milana.pokrajac@reedbusiness. com.au.

Appointments

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

technical services manager at MLC for 8 years.

Martin Breckon IOOF has appointed Martin Breckon to the role of technical services manager of its IOOF TechConnect team.

In his new role, Breckon will develop and deliver technical presentations and publish technical articles for IOOF's financial adviser network.

He has over 20 years' experience developing advisers through legislative research and technical strategies, and was previously a

Equity Trustees (EQT ) has appointed Anna Hacker to the newly-created role of senior manager – estate planning.

Hacker will report to EQT head of personal estates and trusts Lachlan Wraith, who said the role was created to enhance EQT's estate planning services at a time when clients have demanded more sophisticated financial plans.

Hacker joins EQT from Moores Legal Limited where she provided legal advice to accountants, financial planners and clients about real estate planning.

Her roles at Moores included drafting wills incorporating testamentary trusts, special disability and protective trusts, and advising on superannuation, family trusts and life interests.

Boutique fund manager Merlon Capital Partners has appointed

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 experience 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 three 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

ACCOUNTANT Location: Adelaide Company: Terrington Consulting Description: A boutique professional firm is currently looking for a qualified accountant to join its team in Adelaide.

The firm services a majority of regionally-based clients across the state and is located in the city fringe.

In this role, you will be involved in the preparation of management and financial accounts, lodgment of tax returns, business

former AMP Capital staffer Adrian Lemme to the position of portfolio manager and analyst.

Lemme's appointment brings Merlon's investment team to a total of seven.

Before joining Merlon, Lemme was responsible for investment in retail, food and beverage, transport and chemical sectors.

Prior to this, he was the Commonwealth Bank of Australia's lead transport analyst for its equities research team.

QT Mutual Bank has announced the appointment of Jan Bowe as a director of the board.

Bowe has extensive experience in banking and financial services, specialising in corporate strategy and strategic marketing. She has previously held senior executive positions with both Commonwealth Bank of Australia (CBA) and Suncorp Metway.

Move of the week AMP has appointed Libby Roy interim Multiport managing director following the announcement that current Multiport managing director and founder John McIlroy would be departing in June this year.

Roy, former general manager of ipac financial planning, will transition into her new role in an interim capacity from 16 April, AMP stated.

AMP director of banking and wealth management products Rob Caprioli said McIlroy had made a significant contribution to the development of the SMSF market in Australia, with Multiport managing more than $2 billion in funds under management.

With more than 17 years’ experience across Australia and the United States, Roy was most recently responsible for ipac's inhouse and equity partner network of approximately 150 financial advisers. She has also held a number of positions in financial services including general management, marketing, product development and operations.

She is also a non-executive director for Combined Dispensaries Friendly Society and a senior executive with NRMA. While at NRMA, Bowe facilitated the development of a member strategy, designed a loyalty program, and helped to evolve the branding strategy of

the business.

Commenting on her appointment, Bowe said joining QT Mutual at such a crucial growth period for the company would allow her to make a considerable contribution to strategic direction and to develop a range of new products and services for

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

activity statement preparation, and general accounting and bookkeeping.

To be successful you will have five to 10 years' experience at a professional practice, be CA or CPA-qualified, and be a member with TIA. In addition, you will have experience with MYOB Solution 6.

The firm will offer the successful candidate a competitive salary package and a future equity option.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Victor at Terrington Consulting – 0499 771 827

MANAGEMENT ACCOUNTANT Location: Melbourne Company: Lloyd Morgan Australia Description: A large services firm is seeking a management accountant for an eight-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 19, 2012 Money Management — 27

Outsider

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

Blessed are the peacemakers – damn you!

OUTSIDER notes that not unlike the eleventh hour of the eleventh day of the eleventh month, 1918, a sort of peace has descended on the relationship between the industry funds and the financial planning industry.

As Money Management's Chris Kennedy last week went about the task of writing the policy feature which appears in this edition, both he and Outsider noted that the harsh words which had been the signature tune of relations between the industry funds and financial planning organisations seemed to have given way to polite, almost respectful assessments of the relative positions. Peaceful coexis-

tence! Peace with honour!

Peace in our time!

So with peace and light appearing to have miraculously broken out over the Future of Financial Advice battlefield, Outsider decided it was time to find another theatre of conflict – and he did not need to look very far to find many of the same combatants still exchanging fire – in flagrant breach of their non-aggression pact and whispers of undying neutrality.

A quick look through the submissions filed with the Productivity Commission as part of its review of default funds under modern awards revealed that the industry funds are just as suspicious of

the intentions of the retail sector as they have ever been.

Thankfully for journalists wishing to fill the space between the advertisements, the retail funds remain equally suspicious of the industry funds.

Indeed, after perusing the submissions and the arguments being pursued by the various parties about opening up the default superannuation arena to full competition, Outsider comforted himself with the thought that what has happened in the financial services industry postFOFA is not so much a peace

but a Korean truce.

Outsider might give the appearance of being a timorous chap, but he has always fancied himself as a war correspondent. Lest you forget.

‘The Big O’ a no-go in Bendigo OUTSIDER isn’t entirely sure what career he would have ended up in had the glitz and glamour of financial services reporting not fired his imagination from a young age.

But on all available evidence, Outsider has to concede it is unlikely that career would have been “professional singer”.

Nevertheless, Outsider was somewhat disappointed not to be invited to be a part of Bendigo Youth Choir’s upcoming tour of the USA for the World Choir Games. In fact, he only just learned about it when Bendigo Wealth’s head of wealth markets Alexandra Tullio announced the group would be sponsoring the choir’s trip.

While it’s true that Outsider is not from Bendigo (or even Victoria), cannot sing and would be stretching the definition of “youth”, it still would have been nice to be asked.

(Mrs O, after all, has been known to refer to her spouse as “The Big O” after hearing his

dulcet tones escaping the poorly soundproofed shower.) But Outsider has always been one to quickly move past life’s little setbacks, and he would like to wish the choir all the best.

This is especially so given the philanthropic nature of the group, which has held fundraising concerts for bushfire and flood victims over the past 30 years. It also has a long association with Bendigo Bank, including a performance at the opening of the Bendigo & Adelaide Centre with the Prime Minister in attendance.

According to Tullio, the 50-strong choir is “an international standard youth choir whose previous performances overseas have been acclaimed”. In fact Bendigo itself is apparently “a rich lode of artistic and cultural talent”.

Outsider could even be forced to concede the choir may be better off without his input.

Get your dance shoes on!

OUTSIDER has it on good authority that a number of fundies will want to brush the dust off their dinner suits and polish their pointed dancing shoes as Money Management’s 25th Anniversary Fund Manager of the Year Awards on the evening of 10 May is fast approaching.

This is the time of year that Outsider really becomes grateful for being a man who, in his stylish tuxedo and with his legendary good looks, will easily sail through the fashion police checkpoint.

He has no doubt that the ladies of the industry (if they are anything like Mrs. O) have already made several trips to various shopping centres in the hope of

finding themselves a stunning dress and that perfect pair of uncomfortable shoes which will help them “bust the moves” on the dance floor at the Four Seasons Hotel in Sydney.

Speaking of dancing, Outsider would like to take this opportunity to warn the attendees that some of his dance moves on the night might be too groovy to handle. If one throws alcohol into the mix, the combination might be deadly.

For more information on how to get tickets to the Fund Manager of the Year Awards night, call Heather Lawson on 02 9422 2080 or email h e a t h e r. l a w son@reedbusiness.com.au

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

“

Out of context

" …We seem happy and even proud when our sports people make it onto the list of the top 20 paid people yet for some reason when people are managing large complex businesses it is seen as excessive."

ANZ chief executive Phil Chronican questions Aussie sentiment towards high executive pay.

“You can’t expect bank stocks to go straight to the moon.”

Alpine Woods Capital Investors LLC money manager Peter Kovalski sets the tone for an expected profit dip for some US banks this quarter.

"When I die, I leave my super to my partner or my third wife or whatever it might be…"

SMSF Academy director and legal officer Ian Glenister, hypothetically confused about where his money will go when he shuffles off.