Money Management (April 26, 2012) by Cirrus Media

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Best interests put to the test By Benjamin Levy THE tendency of independent selfmanaged super fund (SMSF) clients to treat their financial planner as a consultant rather than a trusted adviser and only seek advice about some issues could cause planners to fail the best interests test. Concerns have been raised among SMSF advisers that independent clients who want total control over their investments and only approach their adviser to sign off on their own ideas could lead to planners failing the best interests test by being unaware of the client’s entire financial situation. ipac south australia superannuation strategist Peter Crump warned that a majority of SMSF clients were not treating their planner as a trusted adviser and were only approaching them to seek certain investment information, leaving the adviser incapable of considering other important issues. “The ‘coach-seeker’ wants only a little

help, they may want to ask for information and take it on board as they see fit, or ask for affirmation of what they’re proposing. In the current and proposed advice environment, that’s fairly difficult,” he said. SMSF advisers cannot engage on a single unique issue like the industry funds, and they need to convince their clients to have a higher level of engagement with their planner, Crump said. Fiducian Financial Services adviser Michael Dale suggested advisers have to make clear to SMSF clients that answers to investment-specific questions fall under scaled advice and don’t take into account the client’s wider financial circumstances. Financial planners must persuade their clients to show them their whole financial situation, Dale said. “We have a duty to give the whole picture, because very often people are not aware of the ramifications of death, or estate planning issues for example,” he said.

Michael Dale Seven out of 10 clients wouldn’t even be suited to an SMSF, Dale said. Some clients use their SMSF to hold only managed investments, in which case they would be better off using a personal

Life and annuities embedded in planner revenue By Mike Taylor

LIFE insurance and annuities have become far bigger parts o f t h e r eve n u e m o d e l fo r financial planners, according to the latest data compiled by Wealth Insights. The data, the result of surveys and focus groups conducted over the past month or so, has confirmed a significant increase in the number of planners advising on life insurance. According to the data, the provision of advice around life insurance has now become an integral part of the offering of almost all planners. The latest Wealth Insights research points to the continuation of a trend which emerged as traditional revenue streams retreated after the outset of the global financial crisis. The data suggests that the changes to the revenue models are unlikely to become embedded in practices, particularly as

Graph:

27%

22% 2011 Advisers sourcing revenue from annuities

Advisers expecting life products to become more important

56%

33% 2012 Source: Wealth Insights

planners seek to accommodate the regulatory environment emerging out of the Government’s Future of Financial Advice changes. Commenting on the data, Wealth Insights managing director Vanessa McMahon said almost all advisers now a d v i s e o n l i fe i n s u r a n c e , which typically accounts for over one-quarter (27 per cent) of planner revenue. McMahon said her company’s research also suggested the trend towards providing

Planning practices not so healthy By Chris Kennedy

Adviser revenue breakdown

Advisers sourcing revenue from life products

super provider instead, Dale said. It’s the responsibility of the adviser to tell clients if they would be better off with another option, he added. Hewison Private Wealth director Andrew Hewison warned that SMSF advisers needed to document if they were providing limited advice to an SMSF client, to cover themselves in case they weren’t being fully informed. “If they specifically state that they only want information on a particular area, then the adviser should provide a limited statement of advice detailing the fact that the advice only related to these areas,” Hewison said. Principal of Financial Services Partners practice Equilibrium Wealth Susan Du Chesne said a significant number of her clients preferred to make their own investment decisions while she provided the strategy behind the investments. The client should make it clear if they want to make their own investment decisions and only want advice around strategy, Du Chesne said.

advice around life was not about to end any time soon. “More than half of all advisers (56 per cent) expect life insurance to become more important to their practices over the next few years,” she said. Commenting on the results, McMahon said she believed the take-up of advice around l i fe i n s u r a n c e wa s b e i n g driven by a number of factors, not the least of which was Continued on page 3

THE average financial planning practice has a lot of room for improvement in major areas such as client communication and succession planning, according to data from financial planning practice consultancy Business Health. Among the key takeouts: seven out of 10 businesses have not surveyed their ‘A’ clients at any time in the past two years, and almost half contact their ‘A’ clients less than 10 times per year. Contact can include not just faceto-face meetings and personal phone calls but emails and client newsletters. Business Health director Terry Bell said the fact so few practices sought feedback from clients was one of the most surprising aspects of the data. “You’ve got a minimal communication program matched with the fact that most practices don’t know what their clients are thinking about them – it’s a double whammy.”

Bell also said it was surprising that 68 per cent of practices did not have a clearly articulated client value proposition. “Every business owner should be able to say ‘this is what I’m doing for the client’. That’s the DNA of a business,” he said. “There is a concern around how advisers are communicating the value of their advice.” More than half of practices still don’t have a succession plan in place – a statistic Bell said had changed very little in the past few years. “You should be prepared to sell even if you’re not looking at selling soon,” he said. Bell added that succession was a big issue because many advisers were approaching retirement. He said that when one looked at the mergers and aggregation in the sector, there were younger advisers who would come through who might be more qualified and more accepting of a new regime. The data also showed 35 per cent of practices do not segment 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 â&#x20AC;&#x201C; 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 â&#x20AC;&#x201C; Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. ÂŠ 2012. Supplied images ÂŠ 2012 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

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Wanted: friends in high places

n the wash-up of the Future of Financial Advice (FOFA) processes, the Association of Financial Advisers (AFA) is quite right to flag its intention to remain politically active r ight up to and including the next Federal Election. If one particular lesson ought to have been learned by the financial planning industry over the past five years, it is that political lobbying matters, particularly when you already hold the ear of an incumbent Government. Indeed, the major financial planning organisations could do worse than analyse the tactics adopted by the Industry Super Network (ISN) and the manner in which that organisation parlayed its influence with the Governm e n t t o m ov e b e yo n d b e i n g a â&#x20AC;&#x2DC; b i t playerâ&#x20AC;&#x2122; to become a â&#x20AC;&#x2DC;stakeholderâ&#x20AC;&#x2122; in the FOFA process. The degree to which FOFA has represented a success story for the ISN needs to be measured against the degree to which it ought to have ever really been a player in the game. It is, after all, only a lobby group formed by a group of industry superannuation funds which, notwithstanding the billions of dollars they hold in funds under management,

Rarely have the â&#x20AC;&#x153;traditional linkages been so influential as during the FOFA debate. â&#x20AC;?

are only small players in terms of delivering financial advice. The success of the ISN was owed to the entrĂŠe it was allowed to the highest levels of government and to the manner in which other stakeholders in the financial services industry allowed the ISN an unquestioned voice at the bargaining table. It w a s n o t e d f ro m t i m e t o t i m e through the FOFA process that the notfor-profit sector had been granted a multiplicity of voices through the likes

of the ISN, the Australian Institute of Superannuation Trustees (AIST), and even through groupings formed by the ISN, AIST and consumer group Choice. The shape and texture of the FOFA legislation should therefore be measu re d a g a i n s t t h e i n f l u e n c e o f t h e various stakeholders; and in many respects the financial planning industry should congratulate itself on the manner in which it ultimately ensured some very necessary concessions. It is political reality in Australia that the major political parties tend to be influenced by particular groups. The Australian Labor Party grew out of the trade union movement and its actions tend to reflect those origins. Similarly, the Coalition tends to reflect the views o f b u s i n e s s a n d i n d u s t r y. Ra re l y, however, have the traditional linkages been so influential as during the FOFA debate. With this in mind, and with many planners still concerned about the impact of the FOFA legislation, it makes good sense for groups such as the AFA to continue their political activism into the future. â&#x20AC;&#x201C; By Mike Taylor

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News

Life and annuities embedded in planner revenue Continued from page 1

investor sentiment, with i nve s to r s b e c o m i n g more fearful and cautious in general terms. “The increase in household savings (built on the belief that there could be rocky times ahead) has also been evident in increasing levels of insurance coverage,” she said. McMahon also pointed to a pick-up in the number of planners deriving increased revenue based on advising around annuities. She said the Wealth Insights research had

Vanessa McMahon revealed 33 per cent of planners now sourced revenue from annuities – up from 22 per cent last year.

Flying high to regulate By Mike Taylor THE Australian Prudential Regulation Authority (APRA) spent more than $1.5 million on travel for the current financial year to the end of January, with more than $900,000 of that amount spent on international travel. The regulator has provided the information as part of an answer to a question on notice from Tasmanian Liberal Senator David Bushby but has declined to provide a detailed breakdown, claiming it does not have the resources to do so. The APRA answer comes at the same time as speculation that the Government will move to lift financial services levies in the Federal Budget to cover off the cost of

implementing both its Future of Financial Advice legislation and Stronger Super. While declining Bushby’s request for detailed information, the regul a t o r d i d a c k n ow l e d g e t h a t i t provided lounge memberships to staff and that it used the Government’s centralised airline booking service to secure the best fare of the day. Its formal answer to Senator Bushby stated, “APRA does not record travel data in a way that would readily allow answers to be provided to these questions. To attempt to provide the level of detail would involve an unreasonable diversion of APRA’s resources”. “Qantas and/or Virgin airline lounge memberships are provided

to APRA staff that regularly travel interstate and internationally on APRA business to assist in their productivity while out of the office.” It said that for the financial year to 31 January 2012, the total cost of lounge memberships was $8,763 and the average cost of membership per employee was $204.

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Planning practices not so healthy Continued from page 1

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their client base – a factor that may change once Future of Financial Advice reforms came into place and practices are less able to subsidise C and D clients through A clients. Currently the average practice has 1,000 clients and only two advisers, highlighting the need for segmentation, Bell said. Although nine out of 10 clients said they would be Terry Bell prepared to refer their adviser, only five out of 10 did so, suggesting more advisers needed to ask their clients for referrals. Other findings included: 63 per cent of practices are still generating more than half of their income via commission; 43 per cent do not have a business plan; and 42 per cent do not seek any external input on running the business, for example from a business coach or business development manager. One third do not have a website. Bell said that overall the strong practices have been getting stronger because they are more prepared, have strong leadership, have kept their clients throughout the global financial crisis and have improved their service offering. The reverse was also true for the weaker practices, he added. The data was based on Business Health ‘health checks’ and ‘cat scans’. The health checks involved practice principals completing a 100-question multiple-choice questionnaire. Approximately 200 practices over 2.5 years were included in the data. The cat scans involved a survey of a practice’s clients. Business Health has collected data from around 45,000 clients over its 12 years, with the latest results based on roughly the last two years of data. Practices surveyed include both institutionally-backed and non-aligned practices.

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News

Boutique managers best for small caps: Lonsec By Tim Stewart INSTITUTIONALLY backed boutique fund managers are the best bet in the small cap space, despite their inherent ‘key person risk’, says Lonsec senior investment analyst Sam Morris. As part of Lonsec’s annual review of the small cap sector, Morris said the “boutique with backing” model had a number of advantages. “Key investment staff gain equity in the

business, increasing alignment with investors and potentially their motivation for success,” Morris said. The outsourcing of compliance, administration and distribution to the supporting backer also leaves the investment team free to do their job, he added. While the success of the ‘boutique with backing’ model relies on “the investment skill and experience of key individuals”, Lonsec believes it is a risk worth taking, said Morris. The 2011 year was a challenging one for

small cap companies. The S&P/ASX Small Ordinaries Accumulation Index returned -23.4 per cent for the year, although the Lonsec Small Cap Peer Group outperformed the index by 8.3 per cent for the calendar year. Morris pointed to the outperformance of the Lonsec peer group as evidence of the benefits of active management in the small cap space. “A well regarded small cap manager is likely to outperform the index through the

cycle,” he said. Three funds were upgraded from ‘recommended’ to ‘highly recommended’ as part of the review: Aviva Investors Small Companies Fund, Celeste Australian Small Companies Fund and Perennial Value Smaller Companies Trust. Macquarie Australian Small Companies Fund was downgraded from ‘fund watch’ to ‘redeem’ following a number of departures, including the fund’s portfolio manager Neil Carter.

Class order should include age pension

Some measure their performance by relative returns.

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By Mike Taylor

TWO key organisations have taken issue with an Australian Securities and Investments Commission (ASIC) decision not to grant superannuation funds class order relief if they include age pension calculations when providing superannuation forecasts. Both the Association of Superannuation Funds of Australia (ASFA) and the Institute of Actuaries have written to ASIC arguing strongly that the age pension can and should be included in superannuation forecasts. In a letter to ASIC signed by ASFA chief executive Pauline Vamos and Actuaries Institute chief executive Melinda Howes, the two organisations insist that the age pension will be an important part of superannuation fund members’ postretirement income. “For these members, any consideration of the adequacy or otherwise of their income in retirement without having regard to the age pension is meaningless,” the letter said. It said that, accordingly, ASIC should carefully reconsider the issue and amend the class order to take account of the age pension. The letter said that it should be up to superannuation fund trustees to decide whether the age pension was taken into account in calculations, but it was likely to be important for a majority of superannuation fund members.

News

FOFA’s true opportunity lies in scaled advice: Brogden By Milana Pokrajac

SCALED advice is the most crucial part of the upcoming reforms in getting more Australians receiving financial advice in the near future, according to the Financial Services Council (FSC) chief John Brogden. In a speech at netwealth’s launch of Pathway Financial Services in Sydney last week, Brogden referred to one of the main objectives of the upcoming

Future of Financial Advice (FOFA) regulatory changes. “It would be an absolute tragedy if the industry went through this level of reform and fewer Australians ended up getting advice,” Brogden said. “The really exciting option lies – and this might not be regarded by small players as relevant, but it is – in scaled advice,” he added. Australian retail clients are currently offered either full comprehensive advice at

one end, or intra-fund advice at the other. “But in the middle – scaled advice – is a missed opportunity now for millions of Australians,” Brogden said. “They don’t want to spend thousands of dollars, they don’t have thousands of dollars to spend and they have a very simple proposition upon which they need advice.” Brogden conceded there was still significant regulatory clarity that needed to be provided, but said that servicing and accessing a large and untapped market

with affordable advice was the outcome that “should and must arise out of these reforms”. “That’s the way we reach millions of new people in our country and provide them with the advice they need,” he added. Pathway, which provides support services to those holding or wishing to apply for an Australian Financial Services Licence, was recently acquired from Paragem by platform provider netwealth.

David Bushby

No APRA commission data By Mike Taylor DESPITE all the debate around the impact of commissions on superannuation fund balances, the Australian Prudential Regulation Authority (APRA) has admitted it has never collected specific data on the issue. Providing an answer to a question on notice from Tasmanian Liberal Senator David Bushby, the regulator said, “APRA does not collect data on commissions paid by superannuation funds as part of its current statistical collection”. Bushby had used a Senate Estimates Committee hearing to ask APRA officials whether they knew the degree to which commissions impacted superannuation fund balances. “Do you have a feel for the percentage of funds that come in – particularly the retail funds – that attract commissions?” he asked. The degree to which commissions affect superannuation fund balances represented a central element of the Industry Super Network’s ‘compare the pair’ advertising campaign, but was reliant on research from commercial ratings houses such as SuperRatings.

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*The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned February 2011) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria. Ausbil Dexia Limited (ABN 26 076 316 473) (AFSL 229722) offers financial products. This advertisement does not provide advice on investment and should not be relied on as such. The information contained in the advertisement does not take account of your investment objectives, personal needs or financial situation. You should consider the Product Disclosure Statement available from us and assess whether this product fits your investment objectives, personal needs or financial situation. Neither Ausbil Dexia or any member of Ausbil Dexia Limited guarantee the return of capital, distribution of income, or the performance of any of the Ausbil Dexia funds. Investments in Ausbil Dexia funds are subject to investment risk including possible delays in repayment and loss of income and principal invested. AUSD0011-MM01

www.moneymanagement.com.au April 26, 2012 Money Management — 5

News Australia’s streamlined regulatory system an advantage: Sherry By Chris Kennedy SEVERAL years of financial services reform in this country have been part of a global trend – but Australia is now ahead of the curve, according to former Minister for Superannuation and Corporate Law Nick Sherry. Speaking at an industry gathering in Sydney last week, Sherry, who instigated the Jeremy Cooper-chaired Super System Review, said Australia was now benefitting from the fact that financial services

was fully regulated at the federal level by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). This was an improvement from approximately four years ago, when the individual states had responsibility for around 40 per cent of Australian financial markets supervision, he said. Sherry also lauded the removal of the monopoly of the Australian Securities Exchange as a trade jurisdiction in the form of the Singapore Exchange.

While Australia’s overall financial system wasn’t threatened as a result of the global financial crisis in the way that some other markets were, there was some “poor practice at the edges” – such as the behaviour of Storm Financial – resulting in significant regulatory overhaul, Sherry said. “The most comparable countries in the world with federal structures have an extraordinarily byzantine regulatory structure. So Australia at least has the virtue of a single streamlined national

regulation in financial services, which is a great advantage in today’s world,” he said. Although Stronger Super and Future of Financial Advice reforms have passed the House of Representatives, they have not yet passed the Senate, but Sherry was hopeful each piece of legislation would be passed in the May budget week sitting. “Many of the issues the Brits are now considering, Australia has dealt with or is dealing with, so there’s worldwide interest in what’s happening here,” he added.

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HUB24 partners with another dealer By Milana Pokrajac

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PRIVATE advisor y firm Lachlan Par tners has selected HUB24 as its preferred platform provider. This is the 20th agreement executed by HUB24 since June 2011, bringing the total number of dealer groups contracted since the platform was established to 31. “The contract is particularly noteworthy for the parties, as it is structured along a par tnership model, with clear milestones set for each party, and a particularly exciting initiative being the ability for Lachlan Partners to take more responsibility in product manufacturing for its clients,” said HUB24 chief executive officer Darren Pettiona. Lachlan Partners provides services such as accounting, tax, auditing, proper ty advice and wealth management, employing 15 financial advisers. The firm is mostly owned by its principals, in addition to 19 per cent ownership by the Macquarie Group. “The continued strong organic growth coming from [Lachlan Partners] represents a quality pipeline of growth for the HUB24 business,” stated HUB24’s parent company Investorfirst.

News Software developers respond to FOFA and GFC in 2011 By Bela Moore

Risk market grows further 10 per cent By Milana Pokrajac

THE life insurance risk market has again recorded double-digit growth, with most risk companies achieving impressive results over the past year, according to research from Plan for Life. Total inflows grew by 10.4 per cent in 2011 and all sectors – individual risk lump sum, income and group risk – almost equally contributed to the end result. AMP has retained its top spot in terms of market share, though closely followed by MLC, CommInsure and TAL. Suncorp is the only insto in the top 10 to have suffered a fall (8.7 per cent) in total premiums, despite its new risk business growing almost 30 per cent over the past year. MetLife Insurance has recorded a 656 per cent growth in new business, though off a very low base, according to Plan for Life. The risk market in Australia now stands at $10.3 billion, up from $9.3 in December 2010.

INVESTMENT Trends’ 2011 Planning Software Report has found planning applications in 2011 focused on consolidating and improving functionality of existing applications rather than developing innovative features – although the leaders in the market were among the most active in adding new features to their products. The Investment Trends 2011 Planning Software Report assesses eight fully-featured planning applications frequently used by Australian financial advisers. IRESS’ XPLAN has topped the software report for the fifth year in a row for overall planning functionality, scoring 89 per cent, ahead of COIN Office with 85 per cent and AdviserNETgain with 75 per cent. “With the release of XPLAN 2, IRESS has produced an impressive advice platform that should support their strategy to take Australian-developed planning technology to international markets,” said Ian

Webster from the Investment Trends Advisory Board. The report concluded that leading providers are the most active in enhancing their products with new features. IRESS XPLAN 2’s point-andclick interface and ‘Advice Container’ approach to codifying Best Interest compliance reflect the developer’s innovation across most aspects of functionality, Investment Trends said. COIN Office includes a new best practice SOA (statement of advice) template, an Open Platform Accounts module, improvements to TTR (transition to retirement), and debt recycling strategy reporting features. AdviserNETgain successfully integrated with investment platform BT Wrap to rank first in that category. According to Investment Trends, FOFA will lead to increased activity and deployment of new online and App planning applications by planners, retail and industry fund member portals, and call-centrebased advice services, in 2012.

Big quarter for managed funds By Chris Kennedy

MOST managed funds reviewed by Morningstar generally experienced very positive returns for the March quarter, with many equities funds posting double-digit gains and some small companies funds climbing more than 20 per cent. Funds in the Australian equities large growth category averaged a return of 9.18 per cent, ahead of an index return of 8.58 per cent. Out of the 46 smaller companies funds monitored, 30 performed better than the index return of 14.98 per cent. In international equities, large growth funds averaged 11.23 per cent, but with a wider range of returns than that seen in Australian equities, and hedged strategies slightly outper formed unhedged. Emerging markets funds returned 12.23 per cent, but did not outperform the index return of

12.9 per cent. Listed property funds averaged a 6.81 per cent gain for the quarter, also just behind the index return of 7.14 per cent, but with a wide disparity between the best and worst funds. Global listed property funds in the review returned 11.52 per cent on average – again, just behind an index return of 12.31 per cent. Global infrastructure funds returned 5 per cent for the quarter, and alternative strategies comfortably outpaced their index yet still only returned 2.58 per cent. The average Australian fixed interest fund returned slightly more than the UBS Composite Bond Index's 0.78 per cent. “Generally, strategies more exposed to credit than interest rate duration did well. Overall, gains from international fixed interest funds were slightly higher than from their Australian counterparts,” Morningstar stated.

Our light is always on. It’s personal. As an independent Australian equities manager, we are in continuous pursuit of performance. Whether it’s researching iron ore demand in China, ﬁnancial regulation in Brussels or an LNG project in Gladstone, we are relentlessly seeking out investment opportunities for our clients, wherever and whenever that may be. And because we’re invested alongside our clients, that makes it personal. Find out more about our research and insights by visiting www.alphinity.com.au

Important: This information is provided by Alphinity Investment Management Pty Limited (ABN 12 140 833 709 AFSL 356 895) (Alphinity). It should be regarded as general information only rather than advice. It has been prepared without taking into account any person’s objectives, ﬁnancial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, ﬁnancial situation and needs. 13562/0412

www.moneymanagement.com.au April 26, 2012 Money Management — 7

News

SMSF trustees need to know risks By Mike Taylor SELF-MANAGED superannuation fund (SMSF) trustees should be informed of the additional risks which exist when they step outside the system overseen by the Australian Prudential Regulation Authority (APRA). That is the bottom line of an exchange within a parliamentary committee reviewing the collapse of the Trio superannuation funds, in which former Labor minister Nick Sherry queried senior APRA officials about why SMSF investors in the Trio funds might have been unaware of the reasons they would not have been eligible to access government-backed compensation arrangements. Sherr y asked the APRA officials whether they thought it would be appropriate for SMSF investors to be informed when they were stepping into particular risk

Nick Sherry areas. “At least as part of t h e i r c o n s i d e ra t i o n i n setting up an SMSF, don’t you think it is an appropriate risk issue that they s h o u l d b e a w a re o f ? ” Sherry said. The APRA officials responded that there could be similar arrangements to those that apply when people dealing with banks need to be notified that when they are dealing with finance companies they are not subject to

the depositor protection provisions of the Act. Sh e r r y s a i d h e w a s surprised by such a response because of the special status of superannuation. “Surely you would believe it appropriate that if a person does move outside the prudentially regulated sector – about which I have no specific complaint or concern in relation to APRA’s activities – and into another sector (albeit in superannua t i o n ) . . . a n d a d i f f e re n t structure that is not prudentially regulated, where there is no licensing as such and there is no direct checking of trustees – that an individual should be informed as to the level of risk they may be taking if things do not work out?” he said. “And theft or fraud has occurred in this case. Don’t you think that is a reasonable disclosure to make?” Sherry said.

Shadow shopper workshops will help planners By Bela Moore

FINANCIAL Planning Association (FPA) chief executive Mark Rantall is encouraging all financial planners to participate in upcoming shadow shopper workshops, irrespective of their opinion on the results of the Australian Securities and Investment Commission’s (ASIC) shadow shopper survey. The FPA, in conjunction with ASIC and the Financial Ombudsman Service, will address ASIC’s latest shadow shopper results in a series of workshops throughout the country in May. Rantall said that while he understood many financial planners were not happy with the results of the survey, it was important they took the time to find out what the report was designed to do, what criteria ASIC used in reaching its findings and what the specific outcomes were. “Without taking the time to get the level of knowledge to understand the background behind the report, it’s a bit difficult to draw a conclusion one way or another, so

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we’re encouraging people to come and see and hear first-hand what those requirements were,” he said. Rantall said the workshop would explore the criteria ASIC used in reaching its findings and the outcomes of the shadow shopping exercise, and address gaps identified in the financial advice process. “This is a very rare opportunity for our own members and all other financial planning professionals to gain first-hand insights from the regulator, the ombudsman, the professional body and leading practitioners,” he said. Rantall said that while the industry has seen improvement since the 2006 shadow shopper survey, the passage of time had shown the need for further improvement as illustrated in the recent survey. “The whole idea of this is not to stay static (but) to move forward, so the objective is really to ensure that we continue to grow and learn in terms of the advice process such that any future shadow shopping surveys will have a better result than what we’re currently achieving,” he said.

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IT’S A NEW WORLD. RETURNS ARE LOW. MARKETS ARE VOLATILE. UNCERTAINTY IS EVERYWHERE. One question is on everyone’s mind:

“So what do I do with my money?” You hear it from your clients every day—and it affects the answers to so many of their other questions: When will I be able to retire? Will I be able to pay for my children’s education? Will I outlive my savings?

Your professional advice has never been more important. In this age of low returns and erratic growth, the efforts you’ve been making to help your clients build more dynamic, diverse portfolios take on new importance. That’s why BlackRock is championing five key ideas to inspire even more robust conversations—and help you give investors the confidence to act.

FIVE PRACTICAL ACTIONS FOR A MORE DYNAMIC, DIVERSE PORTFOLIO 1 2 3 4 5

Rethink the Cost of Cash Seek Income in Different Places Open Your Eyes to Alternatives Be Active About Passive Use Your Longevity

BLACKROCK WAS BUILT FOR THESE TIMES. In a world that is shifting and changing faster than ever before, we have embraced a new standard of analytical rigor. In vast oceans of data, we seek the insights that can change outcomes. And to help you provide your clients with the breadth and depth these times require, we bring together capabilities and expertise across asset classes, geographies and active and passive strategies. To access information about these strategies that you can use with your clients, go to blackrock.com/newworld or call 1800 222 331 to contact a BlackRock representative.

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_MM4

News

Shorten and Cormann in super war of words By Mike Taylor

Mathias Cormann

A BATTLE has broken out between the Government and the Coalition over superannuation reforms, with the Opposition spokesman on financial services, Senator Mathias Cormann, accusing Minister for Financial Services and Superannuation Bill Shorten of being “all talk and no action”. He said that despite Shorten having talked about making changes to ensure the comparability of different superannuation funds as far back as 2010, the Minister had yet to take any action. Cormann has committed a future Coalition Government to having the Australian Prudential Regulation Authority provide data sufficient to allow people to

compare superannuation funds, particularly with respect to default funds under modern awards. However, Shorten responded that the Government had committed to a similar policy as early as 2010. Cormann said that after more than four years of the Labor Government, Australians remained unable to compare the performance of different superannuation funds on an “apples for apples” basis. The Opposition spokesman said a future Coalition Government would ensure the implementation of a range of Cooper Review recommendations, including independent trustee directors on superannuation fund boards, an end to conflicts tied to multiple directorships, and the disclosure of trustee director remuneration.

Cbus defends industry expertise on super boards BIG building industry superannuation fund Cbus has sought to defend the industrial relations processes used in determining default funds under modern awards, and also to resist claims that all such funds should be obliged to have independent directors. The fund has resisted recent calls for more independent directors by claiming the trustees of such funds should have knowledge of the industry the fund covers. The chief executive of Cbus, David Atkin, said the fund strongly supported such criteria, which had been advanced by the Industry Super Network. He said the criteria would ensure trustees’ knowledge and experience of the characteristics of the construction industry would be used in the interest

of Australians working in the relevant industry. “Our trustees’ detailed firsthand knowledge of the construction industry has ensured that unique challenges we have faced have been resolved for the benefit of our membership,” Atkin said. He said it was that detailed knowledge which had led to the fund’s unique compliance process which reflected the working of the industry, together with an insurance product which provided high levels of death and TPD (total permanent disability) cover. The Cbus position – outlined in a submission to the Productivity Commission review of default funds under modern awards – runs counter to arguments that such funds need independent directors to lift their standards of corporate governance.

Kardinia targets retail investors By Chris Kennedy

BENNELONG Funds Management boutique Kardinia Capital has opened its Absolute Return Fund to retail investors, with a minimum investment of $20,000. The fund currently holds around $24 million, predominantly on behalf of family offices, high net worth individuals and charitable organisations. Portfolio manager Mark Burgess said the likely capacity of the fund was around $500 million, but it may be closed earlier than that if the team felt it had reached an appropriate level. With the fund already having attracted a ‘highly recommended’ rating from Zenith, Burgess said he was hopeful it would be made available on several dealer group-

approved product lists as well as on wraps and platforms. “We’ve had good feedback from advisers suggesting the demand is there,” he said. There are not many Australian equity absolute return funds available to the retail market, Burgess said. Most such funds tend to be wholesale products targeted at the institutional market, and there are very few opportunities for investors

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

with smaller amounts of money to get exposure to these strategies, he said. Burgess said he was attracted to Bennelong because it had a strong brand and a pedigree in absolute return investment, with strong distribution capabilities. “That means as an investment team we can focus on managing the fund and not have to worry about peripheral issues,” he said.

Industry codes need ‘radical surgery’ By Tim Stewart

THE industry’s existing codes of conduct will require “pretty radical surgery” before the Australian Securities and Investments Commission (ASIC) is likely to deem them sufficient, says Mallesons senior associate Michael Mathieson. Under the amended Future of Financial Advice legislation, beginning in 2015 advisers will be exempt from the opt-in provisions if they sign up to an ASIC-approved code of conduct. The codes of conduct will be approved by ASIC if they are deemed to obviate (ie, render unnecessary) the opt-in obligations. “If you’re asking ‘how can a code make the opt-in requirement unnecessary?’, you need to ask the question: ‘what’s the purpose of the requirement?’” Mathieson said. The original explanatory memorandum says the purpose of the ongoing fee arrangement provisions is to ensure that advisers don’t charge open-ended fees where the client is receiving little or no service, he said. “How can a code of conduct ensure that advisers don’t charge open-ended fees without also providing a service? That’s going to be a very difficult question for ASIC to answer,” he said.

Michael Mathieson The easiest solution would be for an industry body to include an opt-in obligation in its code of conduct, Mathieson said, (tongue-in-cheek). More realistically, what ASIC might be looking for is “a genuine fee-for-service requirement that’s somehow imposed on the adviser”, Mathieson said. But that would be much harder to police than a “black and white” opt-in requirement, he added. “It imposes a real burden on ASIC, both as to whether to approve codes and what it will require in codes. ASIC would require pretty extensive powers relating to oversight, compliance and enforcement,” Mathieson said.

Morningstar reduces its exposure to Australian shares By Andrew Tsanadis MORNINGSTAR has cut its tactical asset allocation to Australian equities from 24 to 22 per cent following the results of its latest expert asset allocation panel review. The research provider stated that the panelists were less confident about growth assets continuing to outperform defensive investments and were concerned that investor sentiment had shifted from “fearing the worst to being surprised” by the current economic outlook. In its economic update for the April/May period, Morningstar stated that the outlook for the Australian economy and share market appears less positive than was previously the case. The report stated that one of the main concerns for the panel was the ramifications of the nation's “two-speed economy”. While the resources trade boom had up until recently been quite robust, it was now “wobbly at the margin”, a panel member said. In light of Australia's high exposure to international shocks, the restrained domestic economy and relatively expensive share valuations, Morningstar also increased its defensive assets exposure by upping its international fixed interest allocation from 6 per cent in January 2012 to 8 per cent in April. Furthermore, Morningstar's review said that the panel was “considerably warmer to the idea of corporate debt”. “You are being paid adequate compensation for corporate credit,” a panellist said. “Yields have come in a long way to something like fair value, they're certainly not expensive.”

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InFocus LIFE INSURANCE RISK PREMIUM SNAPSHOT Total risk premium inflows for the year ended December 2011

$1.76bn AMP Group

$1.47bn

National Australia/MLC Group

$1.36bn CommInsure Group

$1.31bn TAL Group

$1.2bn

OnePath Australia Group Source: Plan For Life

WHAT’S ON AFA/FSC The Future of Advice Post FOFA 1 May FSC King Room, Sydney www.ifsa.com.au/events.aspx FSC AMP Post-Budget Breakfast 9 May Four Seasons Hotel, Sydney www.ifsa.com.au/ 2012 Money Management Fund Manager of the Year Awards 10 May Four Seasons Hotel, Sydney www.moneymanagement.com. au/events SMAs, ETFs and Direct Investing 15 May Dockside, Cockle Bay Wharf www.moneymanagement.com. au/events SMSF Essentials 2012 30 May Central Pier, Melbourne Docklands www.moneymanagement.com. au/events

Storm warning met with teacups The collapse of Storm Financial and Trio Capital are cited as the catalysts for strengthening the powers of the regulators via FOFA and Stronger Super, but as Mike Taylor reports, that does not guarantee that history will not repeat itself.

ustralia’s financial services regulators are being handed greater powers as a result of the Government’s Future of Financial Advice (FOFA) and Stronger Super processes, but this does not mean they will, in future, act to prevent a repeat of either Storm Financial or Trio Capital. Indeed, recent events within Parliamentary Committees have raised serious questions about what, precisely, the regulators knew about Stor m Financial and Tr io Capital, and the actions they decided to pursue thereafter. Amid the continuing fallout from the collapse of Trio Capital, some disturbing facts have been revealed to a Parliamentary Committee: in particular, that the Australian Prudential Regulation Authority (APRA) had concerns about the Trio/Astarra superannuation funds up to three years before it acted. APRA officials told a hearing of the Senate Corporations and Financial Services Committee that it had elevated the rating of Trio with its Probability and Risk Rating System (PAIRS) as early as 2006. However, those same officials made clear that lifting the status of a superannuation fund or other financial services on the PAIRS system was not something that would ever be made public. Asked whether such a concerning action was something that would be made public by the regulator, APRA’s general manager of actuarial, market and insurance risk services Greg Brunner made it very clear this was something which would not occur. “The PAIRS ratings for APRA are confidential. They are something that we specifically use for our own purposes. We do not go out and specifically make an announcement that this has happened, because it informs our supervision of the entity,” he told committee members. “We do not believe that it is helpful to publish our PAIRS ratings, so we do not publish them for any entities.” Asked whether such an elevated rating would have been useful to accountants and advisers “advising vulnerable people to invest in those assets”, Brunner said that moving an entity higher in the PAIRS system “does not

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

of course, is “thatThefewproblem, financial planners have access to the same level of data as a regulator. ”

in any way suggest we have major concerns about its financial health”. “It means we believe that within the entity there are some elevated risks,” Brunner said. “It could be there for numerous reasons. It could be there because of a concern that the board does not have quite the level of expertise that we would have it have. It could be there because their administration systems are not working as effectively. It could be there because we have concerns about a higher level of unlisted assets. There are a whole range of reasons why an entity could be raised into an oversight category. There are several categories above that where concern levels are substantially higher.” However NSW Labor Senator Matt Thistlethwaite was not to be deterred, and queried the APRA officials about whether accountants and advisers ought to have been aware of the elevated risk, in circumstances where they continued to encourage clients to enter into those products. Brunner responded that the APRA action would not have acted as a deterrent because the rating it had applied to the Trio products “did not in any way suggest that it is not a safe type of entity”. “In terms of our risk profile, oversight is not a high risk. It simply means that the risk is higher than normal and therefore, from our perspective, it needs greater attention,” he said. “The greater attention that we give to these types of entities is to actually get them to make improvements to bring their risk profile down, which is one of the main things we are trying to achieve from our supervision. “In an ideal world, you would want to bring risk profiles down, but there will always be entities that take some higher risks that are

going to have some issues, whether they be management issues or systems issues, that result in some higher risk. The rating that we had placed it on was not something that rings alarm bells in the sense that we had major concerns about its health,” Brunner told the committee. What became very clear from the APRA officials’ evidence to the committee was that the regulator possessed very little knowledge about how financial planners or appropriately licensed accountants handled advice around products like the Trio funds, or the value they were likely to place on the intelligence possessed by either APRA or ASIC. Asked whether a prudent adviser might have picked up the same intelligence as that possessed by APRA, Brunner admitted he was not familiar with the information an adviser would have. “Presumably they would primarily rely on the product disclosure statements and the annual accounts of that entity,” he said. “An adviser would certainly be able to raise some questions about the nature of those investments – the fact that they were unlisted and offshore. “I would imagine that an investment adviser who was looking at a group of different funds, and looked at one that was wholly domestically invested in bonds versus one that is substantially in offshore hedge-fund type of investments, would be able to make a judgement that this one potentially has a higher risk than that one. It does certainly raise some issues.” The problem, of course, is that few financial planners have access to the same level of data as a regulator, and many do not have the background necessary to forensically interpret that data. APRA may have had concerns about the Trio/Astarra products and those managing them as early as 2006, but those concerns were certainly not reflected in the assessment provided by the major ratings houses servicing individual planners and dealer groups. The problem is that there is nothing in either the FOFA legislation nor the Stronger Super policy to suggest any of this will change or that the Trio collapse will not be repeated.

SMSF Weekly Allocation in super debate promotes SMSF benefits By Milana Pokrajac RECENT debate around asset allocation in super and funds’ exposure to equities has promoted the flexibility of self-managed super funds (SMSFs), according to the SMSF Professionals’ Association of Australia (SPAA). SPAA chief executive officer Andrea Slattery pointed to a report by Rice Warner Actuaries showing SMSFs outperformed broader superannuation vehicles, adding it was of crucial importance for investors to be able to actively manage their retirement savings. “There is no ‘one size fits all’ when it comes to saving for retirement, so it is important that individuals have the flexibility to work

Andrea Slattery out the optimal weighting for their portfolio, and an SMSF is the only vehicle which gives the investor the autonomy and flexibility to decide when and how to adjust their asset allocations,” Slattery said. Recent research by SPAA and Russell Investments

found that one-third of SMSF trustees believed equities were too volatile – double the number from 2011. “The investment behaviour of individuals tends to change as they approach retirement and become more concerned about wealth preservation and seek more liquidity in their asset holdings,” she said. “With an SMSF, as a trustee you have the choice of how you structure your asset allocation based on your personal circumstances and the retirement stage you are in.” Slatter y’s comments followed a report by Multiport which found allocation to cash in SMSFs is at its highest levels in two years, while allocation to Australian shares shrunk for the fourth consecutive quarter.

AAT reinforces need for PI By Mike Taylor

IN a decision with implications for accountants providing advice with respect to selfmanaged superannuation funds, the Administrative Appeals Tribunal (AAT) has affirmed a Tax Practitioners Board rejection of a tax agent’s request for exemption from the requirement to hold professional indemnity (PI) insurance. The decision – cited by Institute of Chartered Accountants specialist Paul Meredith – held that the accountant was required to maintain PI irrespective of his capabilities, the amount of turnover owed to handling tax matters, and his ability to meet any

claims from his own resources. The AAT held that turnover had nothing to do with the issue and that complexity of the claims involved remained the issue. The AAT also rejected the considerations of the accountant’s experience and that he had had no previous claims against him, arguing that the purpose of holding PI was to guard against unforeseen circumstances. The AAT’s decision, while acknowledging the ability of the accountant to meet any claims from his own resources, pointed out that any claims should properly be the responsibility of the PI insurer who was more likely to resolve them expeditiously with a disgruntled client.

Fund consolation continues CONSOLIDATION is continuing to impact the broader superannuation industry, according to data contained in the Association of Superannuation Funds of Australia (ASFA) submission to the Produc-

tivity Commission. The ASFA submission said that during calendar 2011 the number of funds with more than $50 million in assets had fallen from 255 to 232, with most of the drop occurring before

30 June when capital gains tax rollover relief expired. It said around half of the reduction was in retail funds and the rest was split between corporate and industry funds, with around five departures in each.

www.moneymanagement.com.au April 26, 2012 Money Management — 13

Tax strategies Continued from page 15 Although the proposal is yet to be l e g i s l a t e d , t h e G ov e r n m e n t h a s announced it intends to proceed with the change, making it important for advisers to take the opportunity this year while it is still available. “SMSFs will need to get a hurry-up and not leave it to the last minute,” Burgess cautions. “Just before 30 June it can be very busy when it comes to share transfers, so it is best not to leave it to then.” Guest agrees advisers need to plan for a 1 July start to the new regime and take a c t i o n i f n e c e s s a r y. Howe v e r, s h e cautions the decision needs to consider all the implications. “There is a need to think about the capital gains tax implications even though it can be beneficial to transfer into a vehicle with no brokerage,” she says.

Changing tax rates Looking ahead, the new 2012/13 financial year will see the arrival of several changes to existing tax thresholds and the low income tax offset. “We will see the introduction of the Carbon Tax payments and reimbursements and changes to the low income tax offset, so there will be some clients who benefit,” Guest notes. “This is not a major strategy area, but

He believes the movement in the tax rates and introduction of the new assistance payments will make areas such as a c c e s s t o Fa m i l y B e n e f i t s a n d t h e Seniors Health Card far more important. “These need to be discussed with clients as there is a lot of change in the tax regime. If you delay these discussions until halfway through the next financial year, it is too late as the planning and education needs to be done from the start,” Bridger says.

Traditional year-end issues

Aaron Dunn planners need to be aware of it as it will affect some people.” While there are some strategies that can be used to help clients benefit from the movement in the low income threshold from $6,000 to $18,000, she notes this is for “a specific group of clients only, such as those with a low income spouse”. Bridger agrees the changes should be reviewed. “The Carbon Tax changes are not a great priority as the thresholds are being increased substantially, but the impact on other benefits can be very important to some clients.”

Although clever tax strategies are always of interest, there are some bread and butter areas that need to be raised every year with clients. “One of the old chestnuts is that clients need to make sure their super contributions are paid prior to 1 July if they are self-employed,” Burgess says. Getting the paperwork right is also essential. “If they are making a contribution claim, they need to notify the fund, fill in the form and get an acknowledgement back

from the fund prior to making the claim.” Paperwork is also important when it comes to splitting super contributions. “If a couple is contribution splitting from the prior financial year, they need to make the nomination prior to this year-end,” Burgess notes. Bridger believes good recordkeeping is becoming increasingly important. “The ATO is tightening up in respect to super, so it is important that the paperwork is right for both employees and the selfemployed,” he says. “In the future payslips will have details of super contributions and if mistakes are made, in two to three years time it can be difficult to fix.” Financial year-end also means several time-honoured tax strategies should be reviewed. “You have always got the traditional end of financial year tax strategies such as the timing of income and deductions. For example, payment of insurance premiums,” Guest notes. “An oldie but a goodie is the pre-

Checklist of tax issues ALTHOUGH clients’ tax issues are the main focus for advisers at this time of year, as business owners and employers they also need to ensure enough time is set aside to tidy up the practice’s paperwork and tax affairs. After a difficult year for many planning firms, BDO’s Trevor Bridger believes advisers should be reviewing the overall position of their business. This includes preparing updated financial statements and cashflows with comparisons to previous years to enable a clear picture to emerge of how the business has performed. Preparation of the budget for the upcoming financial year is also an important task, Bridger says. “Advisers need to discuss and prepare their budget, salaries and financial arrangements for the coming year.” He believes current market conditions mean these budgets need to be thought through carefully. “It is important not to expect miracles over the next year, so you need to do your budgeting conservatively,” Bridger notes. “While the financial costs of opt-in will not apply for many advisers, there are likely to be some costs involved in the increasing level of disclosure required, and this needs to be included in the budget.” Planned expenditure such as IT upgrades to meet additional reporting requirements also needs to be factored in, according to Count Financial’s Kim Guest. “Where the adviser is an employer, they need to think about the new requirements for payslips to report super contributions and when they will be paid. They need to get their systems ready,” she notes. Under the proposed rules, employers will be required to report an ‘expected payment on or before’ date for contributions on an employee’s payslip from 1 July 2012. From 1 July 2013, the reporting requirement is expected to be extended to reporting of the fund name and actual contributions paid. For some firms, this can also be a good time to start discussing succession planning. “A succession plan is quite material for the ageing group of financial plan-

ners and now is an appropriate time to do something about it,” Bridger says. “If you are looking at succession in one to two years time, you need to set the process in motion and year-end is a good time to get started and begin making appropriate financial plans.”

Trevor Bridger Other details that need to be checked before 30 June include: • Record keeping – ensure all business records are updated and retained for five years (special requirements apply to CGT and substantiation). Ensure records itemising travel expenses, fringe benefits, motor vehicles, work related and other expenses are current. • Asset registers – review the practice’s asset register and write-off any unwanted or obsolete plant and equipment prior to 30 June. • Bad debts – review debtors and write-off any that are unlikely to be recovered. Ensure a refund is claimed for any GST paid to the ATO on the sale (if reporting income on an accrual basis). • Bonuses – consider whether bonuses will be paid. (These are only deductible when actually incurred and the business is committed to paying them and they are non-discretionary.)

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

• Company loans – ensure private loans are either repaid or documented and made subject to minimum interest and repayment terms before lodging the company tax return. Ensure interest repayments are made prior to 30 June for any prior year loans. • Capital gains tax – check if any assets have been sold during the year and whether capital gains can be matched to any capital losses. • Dividends – check whether sufficient franking credits exist or will exist by 30 June if dividends are to be paid. • Entrepreneur tax offset – consider whether this offset can be used prior to its abolition on 30 June. • Odometer readings – take a year-end odometer reading if claiming motor vehicle expenses under the old statutory fraction rate rules. • Prepay business expenses – consider whether prepaying business expenses is appropriate and if adequate cashflow is available. • Salary packaging and fringe benefits – review staff salary packaging arrangements (including salary sacrifice agreements, which need to be made prospectively for next year). • Superannuation contributions – to receive a deduction, ensure all employee superannuation entitlements are received by the relevant super fund by 30 June. Check employees’ concessional contribution levels, particularly if they are salary sacrificing. • Trust distributions – trustees of discretionary trusts need to consider if beneficiaries will be entitled to income or capital on or before 30 June and need to make a resolution in accordance with the trust deed. • Write-off assets – small businesses can write-off assets costing less than $1,000 (set to increase to $5,000 for 2012/13).

Tax strategies paying of interest of geared investments. It removes interest rate fluctuations and brings forward deductions. However, you need to keep going in the future if you decide to start it this year.” Even the performance of investments needs to be considered in light of possible tax opportunities. “If the client is carrying forward capital losses, then they could be used to offset any gains,” Guest notes. Bridger agrees: “The CGT position needs to be looked at and balancing losses with gains (if done legitimately) should be addressed.”

Tax – opportunity or headache? While year-end tax discussions are important, advisers need to ensure they

are not breaching the tax advice rules. They can provide general factual tax information, but require registration with the Tax Practitioners Board (TPB) to provide tax advice within the context of providing financial advice. From 1 July, the current exemption of financial planners from the Tax Agent Services regime expires and advisers will need to be registered through ASIC with the TPB. Members of either SPAA or the Financial Planning Association are now formally recognised by the TPB and this fulfils the requirements for registration if they also personally meet the additional fit and proper person and experience requirements. Despite this, Burgess believes advisers still need to work closely with the

client’s accountant. “In the case of a sole trader for example, financial planners may not be privy to all their tax and income information, so they need to work with the client’s accountant – especially where there are multiple super accounts.” He feels the problems around the contribution caps have made it more important than ever to cooperate. “This is especially so given the penalties involved and because there have been examples of practitioners having to pay because they got it wrong.” Although advisers need to be careful, Guest believes tax discussions are an important area for them. “Tax is an important consideration in any financial plan and financial planners need to

Table 1: The new tax scales Current Threshold ($)

2012-13 Marginal Rate

Threshold ($)

2015-16

Marginal Rate

Threshold ($)

Marginal Rate

1st Rate

6,001

15%

18,201

19%

19,401

19%

2nd Rate

37,001

30%

37,001

32.5%

37,001

33%

3rd Rate

80,001

37%

80,001

37%

80,001

37%

4th Rate

180,001

45%

180,001

45%

180,001

45%

LITO

Up to $1,500

Effective taxfree threshold*

4% withdrawal rate on income over $30,000

Up to $445

16,000

1.5% withdrawal rate on income over $37,000 20,542

Up to $300

1% withdrawal rate on income over $37,000 20,979

*Includes the effect of the tax-free threshold and the low income tax offset (LITO).

consider the implications of the advice they provide.” She believes talking about tax also helps strengthen client relationships. “Tax discussions can be a positive tool and clients really appreciate being able to get advice on structuring their affairs to minimise the tax payable,” Guest says. “Tax discussions and plans are not subject to market fluctuations and clients can see the increased benefits that it will achieve. This is a very important area for advisers.” For Bridger, advisers can also add real value by discussing cashflow and tax with clients. “Cashflow is an important issue for financial planners, as people’s situations are increasingly complex through the wealth that has built up over the past 20 years, which is significant.” He sees advisers as uniquely positioned to help. “Financial planners do a lot of work on cashflows and the way quarterly PAYG works, you can see large fluctuations in income and tax payments and tax refunds. So it is an important area for the individual,” Bridger says. “You rarely see cashflow worked out for individuals by accountants, but financial planners have a good knowledge from their interactions with clients and this can be an area where it is very beneficial to work together.” MM

Source: Australian Government Fact Sheet – Modernising and improving the personal tax system.

SAVE YOUR SEAT

SMAs, ETFs, Direct Investing 2012 This CPD accredited one day workshop is an essential event for financial planners who are looking to broaden their skills and knowledge of Managed Accounts, ETFs and Direct Equities, by showing them how to build client portfolios using a direct investing strategy.

Research Update

ETF Synthetic Structures

The latest SMA and Direct Equities research and findings from Investment Trends.

Understanding the differences between physical and synthetic ETF structures, and how to use these structures to gain exposure to difficult to access asset classes.

Managed Accounts - A game changer? How can implementing a managed account service transform an advice business? This session will look at SMAs, IMAs and UMAs.

ETFs - Something big How do you implement a client ETF strategy and use them in building a client portfolio?

Direct Fixed Interest A look at the new breed of products appearing in the market and how they can be used in client portfolios.

Earn

CPD points

WHEN

9-10 points expected

SILVER PARTNERSHIP

SYDNEY THURSDAY 17 MAY 2012 DOCKSIDE, SYDNEY

www.moneymanagement.com.au April 26, 2012 Money Management — 17

Dispute resolution

Learning a lesson Paul Derham and Sonnie Bailey share a few mistakes they’ve seen financial planners make over the years and outline tips for saving time and money. e’ve collected plenty of interesting stories in our role as “preventative law” or “compliance law ” lawyers. We’ve reviewed thousands of personal advice files and assisted with enforceable undertakings, matters concerning the Financial Ombudsman Ser vice (FOS), breach repor ts and disputes that end up in litigation.

adviser was on the “350 bus” and we suppose that what he was really saying was that $350,000 was typically affordable to his clients and covered key debts. There’s an obvious problem with this approach – it suggests a solution before it considers the client’s objectives. What happens when the widow calls the adviser to ask about why the insurance payout is only half the size of her home loan?

What can go wrong?

Sausage factory “recommendations are flags

The Australian Securities and Investments Commission (ASIC) announces its regulatory action against individual advisers and licensees on a fairly regular basis. Regulatory action can include enforceable undertakings, imposed licence conditions, civil penalties, licence cancellations and banning orders (to name a few). With the introduction of Future of Financial Advice, ASIC’s powers to ban advisers will be enhanced. In the past, ASIC has needed to have reasons to believe an adviser will not comply with the financial services law to take action of this nature. Going forward, the bar is lowered slightly by requiring ASIC to believe an adviser is likely to contravene a financial services law. Furthermore, breaches of the best interests obligations under FOFA can give rise to civil penalty action against both the licensee and the representative. And of course, many advisers are subject to disputes with their clients. Many of these disputes go to external dispute resolution schemes such as FOS, or worse still, result in litigation. We want to help you avoid these things. But if they do occur, there are steps you can take to mitigate their effect. 1. Avoid the sausage factory and tailor your advice to the client Some years ago, we were conducting a training session on the advice process. During the session, one life insurance adviser proudly announced that he always recommended his clients purchase $350,000 of term life because “everyone’s needs are the same”. That

that there may not be a reasonable basis for the advice.

”

Of course you wouldn’t do anything like that. Before reaching that conclusion, look at the recommendations in your last four statements of advice (SOAs). Are they the same? Recently, we were reviewing a number of client files prepared by one adviser, and every single file included a recommendation that the client borrow money against their home to invest in high-risk financial products. This included clients who, for all appearances, would have had “prudent” or “conservative” risk profiles.

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

There was no evidence in the SOA or in the file to substantiate a reasonable basis of the advice. Little wonder that his advising practices were subject to review by the regulator. You will also remember the AMP “super switching” enforceable undertaking, in which ASIC said that 93 per cent of all new investment or superannuation business resulting from the advice of AMP planners was invested into AMP platforms or products. According to ASIC, this was in part because of the use of template SOAs and related guidelines. Sausage factory recommendations are flags that there may not be a reasonable basis for the advice. So the first lesson is clear – tailored advice is best. Tailored advice establishes the client’s needs and objectives first, and then clearly links each need and objective to an appropriate recommendation. It’s the first line of defence in both a client dispute, or when dealing with ASIC. 2. Know what the scope is The scope sets the boundaries of your contract with your client. It sets out what you are going to do for them. It sets the agenda for your advice. It is essentially the contract between you and your client and will define the parameters of the enquiries that must be made, the needs analysis and recommendations. Accordingly, it is worth spending time to ensure that an agreed scope has been reached and that the client’s expectations of what you are going to do for them is aligned to your understanding of the task. Where the agreed scope is a narrow one, industry has tended to label this as “limited advice”. ASIC sometimes refers to this as “scalable advice”. We tend to think of it as “full advice on a limited scope”. With the coming of FOFA and best interests obligations, there is going to be a lot more said about scope and scalability, so watch this space. 3. The file needs to tell the whole story Often when we review a personal advice file, it’s not clear from the file how the advice addresses the client’s objectives and needs. Then, we sit down with the adviser who provided the advice, and they explain clearly the basis for their advice and win us over – there was a reasonable basis, after all! Unfortunately, in a dispute, the file needs to tell the whole story. The file is going to be the enduring evidence of the advice you have provided. Recently, we assisted an adviser who convinced their client back in 2008 to take a less aggressive approach to investing. The client was new to investing, cashed up, and asking to gear heavily in Australian shares. After lengthy discussions and consideration of the client’s needs and circumstances, the adviser prudently recommended a more conser-

vative portfolio, with no gearing. Then, along came the global financial crisis, and the client made a complaint against the adviser because one of the funds in the recommended portfolio failed. When looking through the file, we noted that the adviser had taken meticulous file notes with one omission. The discussion about adopting a more conservative investment strategy and not gearing was not clearly documented. This will make it harder for the adviser to substantiate their role should the matter end up in court.

“

In the event of a dispute, it is often better to be proactive in dealing with the client’s complaint. Hard as it might be, it is usually better to be commercial than to take a stand on a matter of principle.

”

Another reason why the file needs to tell the story is because a dispute often occurs years after the advice is given. In the meantime, you may have had thousands of conversations with clients. Your aggrieved client may have only had one or two such conversations. A court or ombudsman is likely to give more weight to the client’s story, unless you have file notes to support yours simply because the client’s recollection of that particular conversation is likely to be better. As well as protecting you, keeping good quality file notes can also be valuable when it comes time to sell your practice or client book. If a potential purchaser can make sense of your files, they are more likely to be comfortable with what they are buying. 4. In the event of a dispute So far we have focused on ways to avoid a dispute. But disputes can happen even to the most diligent, skilful adviser. In the event of a dispute, it is often better to be proactive in dealing with the client’s complaint. Hard as it might be, it is usually better to be commercial than to take a stand on a matter of principle. We have often heard clients say “it’s a matter of principle” at the outset of a dispute. Then, as the costs are explained to them or start to mount,

they change their view. Settling a dispute is often an appropriate option. Disputes suck up time, money and peace of mind. Also, every step in the dispute resolution process will cost you or your licensee money. For example, clients tell us that following a complaint through FOS can cost up to $12,000 – just in FOS fees. You should be focusing on other things, like providing your clients with valuable services and building your business. Remember also that an ombudsman plays by different rules. The FOS terms of reference, for example, specifically state that FOS is not bound by legal rules of evidence. Nor is FOS restricted to legal principles alone when coming to decisions. In fact, FOS’s terms of reference state that it will do what is in its opinion fair in all the circumstances, having regard to factors such as applicable industry codes or guidance as to practice, and what it considers to be good industry practice. Often, settling quickly is a big time, money and stress saver. 5. Address compliance issues proactively A sure way to turn a compliance molehill into a mountain is to do nothing about it. In the media release for the 2009 ANZ and Opes Prime Enforceable Undertaking, ASIC criticised ANZ for having “a poor compliance culture, meaning that deficiencies in processes were not identified, escalated or remedied in an appropriate or timely manner.” Similar phrasing is used in the March 2011 UBS Wealth Enforceable Undertaking. The benefits of being proactive in addressing compliance issues can best be explained by comparing the following two examples: • One of the first advisers to be prosecuted by ASIC under the FSR laws in 2005 was prosecuted for failing to provide SOAs on four occasions. • Around the same time, we reviewed an adviser who failed to provide 19 SOAs. We notified the licensee immediately who in turn promptly assessed the breaches for significance and lodged a report with ASIC, together with numerous remedial steps. ASIC took no action.

Conclusion Prevention is better than a cure. If you avoid sausage factory advice, know what the scope of your engagement is, and can proudly demonstrate a reasonable basis from the file alone, you’re most of the way there. If you are commercial in the way you handle disputes, and ensure that you remedy compliance issues proactively, you will be saving time and money in the long run. Paul Derham is a partner and Sonnie Bailey is a lawyer at Holley Nethercote Commercial Lawyers.

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

OpinionGold

Gold vs

Many prominent investors including Warren Buffett have recently questioned gold as an investment. Dominic McCormick questions their views.

t’s been a wild ride for investors in gold-related areas recently. After peaking at around $US1925 in September last year, the price has since gyrated between $US1500 and $US1850. Meanwhile, many gold mining stocks are trading at the same levels they were several years ago when gold was around $US1000. In addition, some prominent investors have declared the gold bull market dead or questioned gold as an investment, with Warren Buffett the most prominent of these. This all creates a very confusing environment for those investors considering gold exposure in their portfolios. Is the gold bull market really over? Or is this a good buying opportunity? Why are the gold mining shares languishing? Is Buffett right? Buffett’s comments in an article in Fortune and his annual shareholder letter have received extensive coverage and, as one of the world’s most successful and sensible investors, his views should be taken seriously. But he is far from infallible, and a valid question is whether he has ventured outside his own ‘circle of competence’ with these comments. Buffett discussed the characteristics of investments he disliked and those he liked. Specifically, he divided the investment world into three major categories. Firstly “currency based” investments

including cash and various debt instruments; secondly “unproductive” investments, with gold supposedly the most representative; and thirdly his preferred avenue – “productive assets” in businesses, farms or real estate. Ironically in Buffett’s discussion of the first category covering cash and bonds, he seems to totally understand t h e d a m a g i n g i m p a c t o f c u r re n c y debasement by inflation, which is one of the major factors supporting hard assets like gold. “Governments determine the ultimate value of money, and systematic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control. Even in the US, where the wish for a stable currency is strong, the dollar has fallen a staggering 86 per cent in value since 1965”. It takes no less than $7 today to buy what $1 did at that time”. Surprisingly then, Buffett fails to connect the dots that these are the very reasons one should have some gold as part of a diversified portfolio. Interestingly, one of Buffett’s least successful plays over the years has been investing in foreign currencies as a hedge against concerns he has had about debasement of the USD. If he had understood gold as money and chosen it as his currency of choice, he may have a very different view of gold today.

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

“

Despite Buffett’s talk of the gold ‘bandwagon’, it is still largely ignored by the bulk of the investment industry.

”

Instead, he views gold through the prism of conventional investment analysis only. Gold isn’t “much use nor is it procreative”. If you own one ounce of gold for an eternity, you will still own one ounce at the end.” Isn’t that the point? Gold is unchanging, and its supply expands only very slowly with annual production. Meanwhile, central banks can create unlimited new paper money at whim. Ultimately, gold is not really an asset or investment but is a currency or money. Gold’s primary attraction centres not on its own characteristics (although these – scarcity, density, malleability etc

– allow it to be seen and used as money) but in the level of confidence in the various forms of paper or fiat money. That confidence is still arguably entrenched in a multi-year bear market. James Grant of Grant’s Interest Rate Observer probably says it best. "It is the nature of gold that its valuation must forever be a mystery. It earns nothing. It pays no dividend. No conference call, no management to call up and complain to. What I do think is gold is simply the reciprocal of the world's faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold." Buffett equates the interest in gold to the tulip bubble. This is a terr ible comparison. The Tulip mania was a particular irrational bubble (of which many have occurred through history) that occurred in a small part of the world for an item that one can easily grow and which doesn’t last. Gold cannot be grown, basically lasts forever and has been a prominent part of global monetary systems for thousands of years. Buffett totally discounts this history. Buffett says that those investors purchasing gold need the ranks of the fearful to grow to support it. Perhaps he’s right, but there are strong grounds that the fearful will continue to grow in

Warren Buffett coming years. The US debt situation is unsustainable. Reigning in central bank ballooning balance sheets will be no easy task. The Euro could implode. In this environment there is plenty to be fearful of, particularly since the likely response to these challenges is to accelerate currency debasement via policies that are eventually inflationary. These are legitimate fears. Buffett seems to have that fear himself. You don’t need Armageddon to justify seeking ways of protecting your savings from debasement. Buffett brings his thoughts down to a discussion about two “piles”. Pile A contains the world’s estimated gold stock valued at around $US9.6 trillion, and Pile B contains all US crop land (400 million acres with output of about $US200 billion annually), plus 16 Exxon Mobils (each one earning $US40 million annually). It’s an interesting game but one that has little to do with building a properly diversified portfolio capable of preserving value in a range of macroeconomic environments with widely varying levels of currency stability. No sensible investor approaches i n v e s t i n g w i t h t h i s c o n c e n t ra t e d either/or approach. Most real-world investors could never handle the volatility and drawdown risk of a farmland plus Exxon portfolio. And no sensible investor would put all his money in gold. Of course, the productive assets Buffett describes should be the majority core of a sensible portfolio when they can be purchased at reasonable prices in areas without excessive political risk. But why does this preclude an exposure to areas like gold that have proved themselves throughout history as a preserver of wealth during periods of instability and flawed or unconventional economic policy. One shouldn’t hold physical gold to achieve a specific investment yield or return. Rather, it should be held because one is concerned about the debasement of money and the need to preserve its value. Buffett is concerned about that too, but believes other areas are better defenders against that debasement. However, the record of the stock market preserving real value in periods of unexpected inflation is a poor and unpredictable one. And even great companies can produce poor performance – even over the long term – if the price paid is too high. James Grant highlights the case of Buffett’s beloved Coca Cola, which has dramatically lagged gold – as well as other ‘non-productive’ assets like sugar – since 1996. Despite Buffett’s talk of the gold “bandwagon”, it is still largely ignored by the bulk of the investment industry. In a recent Barons’ survey of 51 of the

US’s best financial advisers, only two had specific allocations to gold. Negative views like Buffett’s are prominent, and very influential. Even locally, The Australian recently (14 April) had an article quoting a prominent stockbroker saying gold would halve and should be avoided. These are not the symptoms of a bubble just about to bust. Meanwhile, official holders such as a number of the world’s central banks are

cautious and reduced our exposure to gold bullion considerably. However we have seen the consolidation since as a healthy development and arguably a buying opportunity. It is true that gold seems to have become more correlated with other risk assets, so its value as a diversifier may have reduced somewhat. However, this is also true of many assets in the risk on/risk off world we live in today.

b u y i n g m o re g o l d . A s h o l d e r s o f a country’s foreign exchange reserves they would be crucified if they invested all or even a significant proportion of assets in volatile oil shares or farmland. Their choices are primarily currencies and government debt and increasingly the yields on the latter are approaching the zero yields on gold, but with increasing credit and debasement risk that gold doesn’t have. Having a modest proportion of their holdings in gold makes sense. The bubble is not gold – the bubble is certain central bank balance sheets, money supply and the miniscule sovereign bond yields of certain countries that cannot possibly pay back their debt without serious currency debasement. The line between a “safe haven” and a major credit risk is a thin one. The US 10-year bond is effectively on a Price Earnings ratio of 50, with no growth and next to no chance of beating inflation over the short or long term. Shares are more reasonably priced and have a chance of matching or beating inflation. Gold does too. Why shouldn’t investors have some of both in a diversified portfolio (as well as other diversifying investments such as inflation-linked bonds and alternatives)? This is not to say that those holding gold exposure can be complacent. The endgame for the gold bull market will almost cer tainly be some for m of bubble. When the gold rise accelerated in the middle of 2011 we became

It will be a time when “belief in gold as part of a portfolio is almost universally accepted rather than something many actively argue against.

”

Meanwhile, the gold mining stocks have struggled in recent years, underperforming the gold price significantly since 2009. There are a range of reasons put forward for this – the ease of accessing gold via other means such as ETFs, cost pressures, operational risks and the like. These are all valid reasons. However, I suspect a major reason is simply the widespread scepticism – encouraged by Buffett and others – that gold prices can maintain current high levels or even go higher in coming years.

Analysts, and by implication markets, typically have forecast long-term gold prices considerably below current levels. If they are proved wrong, gold stocks could outperform gold dramatically, and produce very good returns in coming months and years. Further, their increasingly attractive dividends nullify the “noyield” criticism of gold by Buffett. Of course, if the US economy does recover strongly, the US dollar becomes stronger and interest rates rise much earlier than currently expected, then gold may struggle. But this scenario is by no means certain, and does little to solve the US longer-term debt issues that are key factors supporting gold in the longer term. Europe’s debt issues certainly are not yet solved. Moreover, even if gold struggles in response to an improved global outlook, a well-diversified portfolio should still do well as the majority balance of the portfolio – much of it consisting of Buffett’s “productive assets” – responds to a better economic and earnings outlook. Holding 5-10 per cent gold exposure is simply a hedge that may or may not be required. There will be a time and environment where the case for holding gold exposure is definitively much weaker. That will be when real interest rates in many countries are positive and when debasement of the currency is not seen as the proper policy response to ease a debt burden and promote growth. It will be when the expansion of central banks’ balance sheets has been reversed – per haps in response to growing inflationary problems. It will be when the major developed markets, that currently can still get away with record-low bond yields despite record government debts, experience their own sovereign debt crisis. It will be a time when belief in gold as part of a portfolio is almost universally accepted rather than something many actively argue against. My guess is that this time is still at least a number of years away. Buffett’s comments, in my opinion, are just another brick in the ‘wall of worry’ for the 11-year gold bull market. It may even have created an excellent buying opportunity as it contributes to a temporarily lower gold price (and even more depressed gold shares) than would otherwise have been the case. Taking advantage of this opportunity in the current climate of volatility as well as scepticism and recent disappointment in gold is difficult, but that is the nature of contrarian investing. Dominic McCormick is the chief investment officer at Select Asset Management.

www.moneymanagement.com.au April 26, 2012 Money Management — 21

OpinionRisk Taking a step back From his conversations with financial advisers, Jim Minto identified three game-changing topics. am privileged to lead a company which enjoys access to some of the best and brightest people in the Australian financial advice sector. And if I ask any of these trusted advisers about their immediate primary challenges in business, the conversation invariably turns to one – or all – of three potentially game-changing topics. These are the lingering effects of the 2008 global financial crisis, the Government-led reforms of advice and superannuation in Australia via the Future of Financial Advice (FOFA) and Cooper Review processes and the ongoing challenges of doing business with an ever more savvy, technolog y-enabled consumer. It is interesting to see how our industry reacts to these big challenges to uncover opportunity. I observe bright prospects for those who take a step back, strip out the noise and focus on what’s really important; on what I call the fundamental building blocks. Here’s my top three. For clarity, I have illustrated my points with a subject close to my heart - income protection insurance.Why? Because loss of income through accident or illness is not only one of those fundamentally important risks we all share as individuals – and hence require protection against – but it also works as a general proxy for my comments about the value of good advice and the future for advisers.

1.The value of good advice and why we need it more than ever All the figures are telling us the same story. That is, while at a macro level we are in good shape, at a personal level we need some help. Australia’s national debt ratio, jobs growth and economic fundamentals are terrific relative to pretty much all of the rest of the world’s developed economies. Yet, as individuals, we lack confidence. People are concerned - even fearful - about the future. This is borne out in statistics such as record high personal savings into cash and term deposits, and record low borrowings and retail spending. It is precisely when people are uncertain that they benefit most from wise counsel.That’s when a steady hand from a quality financial adviser can so often make the difference between good decision-making and bad. And with just one in five Australians receiving financial advice, there is plenty of upside in this equation for everyone. I see evidence every day of the benefits that quality advice brings to people in very real and tangible ways.

Clearly, advisers have a key role to play in educating clients and the community about the value of adequate protection, including protecting the ability to earn an income. 2. Selling as education: a vital part of what we do The adage that risk insurance is a product sold, not bought, has a great deal of truth and practical experience behind it. It’s a situation that makes the role of the expert adviser acting in the best interest of his or her client even more critical. The end result for many Australians is that their adviser has played a pivotal part in helping them overcome unexpected circumstances that have prevented them from earning an income. Selling (and educating) Australians about the full breadth and depth of risks and how to effectively manage them through the right insurance choices is absolutely vital. It’s against this reality that I express my fear that the best intentions of legislators in Australia to protect against any future mis-selling by a minority of people, might inadvertently have yanked the handbrake on a culture of appropriate selling to meet a very genuine need. Again, using my income protection insurance lens, here are some figures that express that need. Just 31 per cent of Australians have income protection insurance (source: Lifewise). Yet, we all know that the ability to earn an income is our greatest individual asset. Further, the required level of income protection cover is assumed to be 85 per cent of gross income (source: Lifewise/ Rice Warner), and that the average family with children could expect to need $3,100 per month (source: Rice Warner). As a nation, these figures equate to a $408 billion income protection underinsurance gap per annum (source: Rice Warner). Advisers who are actively working to fill that gap should be proud of the role they play in helping to create a more stable future for their clients. Guidance, education, expert product choices (otherwise known as selling): all are an honourable and entirely appropriate part of this good advice legacy.

prefer to do business in an increasingly digital world. We all know Australian consumers are increasingly going online to transact. Recent data (source: CBA Equities: Online retail data) shows online retail spending increased by a sizeable 36 per cent over the 12 months to October 2010. In other words, a $12.3 billion spend during that year.The trend shows little sign of abating. The figures help to underscore the importance that Australians increasingly place on their online experiences. To my mind, we must meet our customer on their terms, in their time, and expect increasing demands for fast, transparent information, sharp product pricing and clear product benefits. It’s a must for anyone doing business in the ‘digital economy’. Jim Minto is managing director, TAL Limited (formerly TOWER Australia).

3. Secure the future by learning from your client Experience is not a one-way street. Just as clients turn to us for wise counsel and decision-making, there is much we can learn from them – such as the way they

www.moneymanagement.com.au April 26, 2012 Money Management — 23

Toolbox

A new broom before June Mark Gleeson outlines seven key tax planning strategies for 30 June, 2012.

s the end of financial year approaches, the opportunity for astute tax planning arises. In addition to the common 30 June strategies such as spouse contributions and co-contributions, the new personal tax rates from 1 July 2012 require a re-think of traditional strategies such as salary sacrifice. As the lower marginal tax rates rise, superannuation becomes relatively more attractive. The new Government low-income super contribution from 1 July 2012 also provides some new opportunities for salary sacrificing on low incomes. Here we consider key end-of- year strategies.

1. SMSF double deduction An SMSF may use a contribution reserve for the purpose of making contributions in excess of the concessional caps for a particular year. Under this strategy, part of the contributions made in June of the financial year are credited to a reserve and then allocated to the member’s account in the next financial year by 28 July. The amount counts towards the member’s cap for the financial year when it is allocated, not the year in which the contribution is made to the fund. This practice was recently confirmed in ATO Interpretative Decision 2012/16. Case Study Matthew, age 45, is a self-employed mining consultant and eligible to make a personal deductible super contribution

into his SMSF. This year has been a good year and he wishes to maximise his concessional contributions. Although his concessional contributions cap is $25,000, Matthew makes a contribution of $50,000 in June 2012 and claims a deduction of $50,000 in his tax return. The SMSF trustee allocated $25,000 of Matthew’s contribution to his account and the remaining $25,000 is credited to a reserve. Between 1 July and 28 July 2012 (inclusive), the trustee allocates the $25,000 in the reserve to Matthew’s account. Matthew has fully utilised his concessional contributions cap for 2011/12 and 2012/13 years. This strategy allows more to be contributed at an earlier stage and effectively allows a bring-forward of next year’s concessional contributions cap if a client’s taxable income warrants a larger deduction this year. Matthew has two options for his 2012/13 tax position: (i) Make a $25,000 personal deductible contribution in June 2013 – claim the deduction for 2012/13 and allocate the amount between 1 July and 28 July 2013 so it becomes a concessional contribution in the 2013/14 financial year. (ii) Make no personal deductible contributions in 2012/13 and use the double deduction strategy from 2013/14, or return to the standard annual deduction. Alternatively, if Matthew was an employee of his own company (rather than a sole-trader), the same strategy

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

Table 1 Situation The client is certain they are eligible to make personal deductible contributions: that is, the 10 per cent rule will be satisfied or there is no employment income.

What to do 1. Provide a notice of intent to claim a tax deduction to the super fund 2. Use balance to start an income stream

The client is uncertain they are eligible to make personal deductible contributions: that is, the 10 per cent rule may or may not be satisfied.

1. Delay starting the income stream until the end of the financial year to assess tax position 2. If eligible, they should: i. Provide a notice of intent to claim ii. Use balance to start an income stream iii. Lodge their personal income tax return

could be used to allow the company to claim the double deduction.

2. Avoid the traps for personal deductible contributions Clients eligible for personal deductible contributions generally include the selfemployed, employees who satisfy the 10 per cent rule and individuals under age 65 with investment/pension income only. This strategy is particularly useful for 2011/12 as it is the last time the $50,000 concessional contributions cap

Alert If the client does not subsequently satisfy the 10 per cent test, they cannot claim a deduction. As the income stream has started, a variation notice to reduce the amount of the deduction cannot be submitted. Therefore, the 15 per cent contributions tax cannot be refunded. This approach allows for changing circumstances and claiming the correct amount as a tax deduction.

is available for all individuals age 50 or more. The Government is still yet to pass legislation to retain the cap at $50,000 for individuals age 50 or more with less than $500,000 in super. A key trap for advisers is not giving the notice of intention to claim a tax deduction to the super fund within the correct timeframe. The notice must be given before the earlier of: • The lodging of the tax return • 30 June of the next financial year. Furthermore, if clients wish to start an

year when his tax position is clearer. • Submitted the notice in January, but not started the income stream. Once he identified he was ineligible for personal deductible contributions, Dean could have submitted a variation notice and have the contributions tax refunded. • Made the contribution into a separate fund. A variation notice can then be submitted to reduce the amount claimed.

3. Direct a transitional termination payment into super

income stream or roll out of the fund, the notice must be given to the super fund before doing so, otherwise the notice is invalid. A partial rollover from the fund reduces the amount of personal contributions that can be claimed as a tax deduction. Table 1 (opposite page) outlines the planning process when you wish to make a personal deductible contribution and then start an income stream for a client. Case study Dean, age 57, is a sole trader earning $100,000 p.a. gross income. He makes a $50,000 personal deductible contribution and submits the notice of intention to claim a tax deduction in January 2012. He then starts a Transition to Retirement ( TTR) pension with the accumulated balance of $400,000. To top-up his income, Dean accepts an employment role for the last four months of the year and earns $25,000 in this period. As Dean fails to meet the 10 per cent rule (regardless of the TTR income received), he is ineligible to make personal deductible contributions. Furthermore, he cannot submit a variation notice to the super fund to reduce the amount claimed under the notice. Consequently, the 15 per cent contributions tax on $50,000 ($7,500) cannot be refunded. To prevent the unnecessary payment of contributions tax, Dean could have: • Not submitted the notice in January and waited until the end of the financial

If your client is made redundant or leaves their employer, they may receive an employment termination payment. An employment termination payment is considered ‘transitional’ if the entitlement existed as at 9 May 2006 with specific terms and conditions outlined in a written contract, workplace agreement or law. Transitional termination payments can be directed, that is, rolled over, into super by 30 June 2012. If the payment is directed into super, there can be many benefits: • Tax savings on the payment, particularly where your client is – Under preservation age (at 30 June in the financial year) – Preservation age or older (at 30 June in the financial year) and the payment exceeds the lower cap of $165,000 (this threshold may be reduced if they have received previous employment termination payments). • The income maintenance period applying for certain Centrelink payments can be reduced, as a directed termination payment is disregarded for this purpose. • The amount can be directed into super without using your client’s contribution caps (providing the total taxable component of all transitional termination payments cashed or rolled over does not exceed $1million). The amount is preserved within super and cannot be accessed until a condition of release is met. It is important to check with the employer that a payment qualifies as a transitional termination payment. In some cases, an employer may not initially identify that an employee is eligible for a transitional payment, so it is worth checking the relevant industrial relations instrument. Case study Greg, age 51, receives a $120,000 termination payment upon leaving his employer. Greg joined the company in 1990. He would incur a 31.5 per cent maximum rate of tax (excluding Medicare levy surcharge and flood levy). Therefore, the total tax paid would be $37,800. However, Greg checks with his employer and they discover that the payment qualifies as a transitional termination payment. If Greg cashed the transitional termination payment, he would incur the same tax rate as before, that is, 31.5 per cent on $120,000 ($37,800). However, as it is a transitional termination payment, Greg has the option of directing the payment into super. Greg directs his employer to make the payment into his super fund and incurs only 15 per cent

tax (all taxable component). Therefore, the total tax paid is $18,000. Greg saves $19,800 in tax by discovering that the termination payment is transitional and directing it into super (see Table 2).

Tip Transitional termination payments components can be isolated Carol, age 53, receives a transitional termination payment of $100,000 upon leaving her employer. As Carol has pre-83 service with the employer, there is a tax-free component of $15,000. The taxable component is $85,000. Carol has $10,000 in credit card debt. Carol takes her tax-free component as cash and directs her taxable component into her super fund.

4. Split contributions to keep super below $500,000 Contribution-splitting allows a member to transfer their concessional contributions to their spouse’s super account, subject to certain limits. You should consider a splitting strategy for couples in respect of last financial year’s (2010/11) contributions. The strategy becomes particularly relevant when considering the proposal to retain the concessional contributions cap at $50,000 for individuals aged 50 or more with less than $500,000 from 1 July 2012. Although the proposal is not yet law, splitting contributions may help a member of a couple to keep their super below the $500,000 limit and receive the higher cap. Additional benefits of contribution-splitting may include: • Earlier access to super benefits • Access to two low-rate caps for super withdrawals between preservation age and 60 • Tax-effective funding of insurance premiums for the receiving spouse • Hedge against legislative risk. An individual can split 85 per cent of concessional contributions, but the amount cannot exceed their cap for that financial year. The receiving spouse must be below preservation age (currently 55) or if between preservation age and 65, have not permanently retired from the workforce. The concessional contributions are assessed against the cap of the original spouse who made (or received) the contributions, not the receiving spouse. The rollover to the receiving spouse does not count against the receiving spouse’s contributions caps.

5. Get a 100 per cent co-contribution Review your client’s (and their spouse’s) income situation to identify opportunities for the co-contribution. It is proposed to be the last financial year where eligible clients can receive $1 for every $1 of

non-concessional contributions up to $1,000. The Government intends to reduce the co-contribution to 50 cents for every $1 up to a maximum co-contribution of $500 from 1 July 2012. The upper threshold would reduce to $46,920 (down from $61,920). Despite the proposed reduction from next year, the co-contribution is still a useful long-term accumulation strategy and represents a guaranteed 50 per cent return on investment for eligible clients.

Tip In estimating the client’s assessable income for the financial year, consider the assessable portions of any: • capital gains • termination payments • super death benefits received as a non-tax dependant • lump sum super withdrawals under age 60

6. Building the spouse’s super In financial markets where investors struggle to obtain positive returns, a spouse contribution provides a guaranteed 18 per cent return on amounts up to $3,000. Where a spouse is a low-income earner, the taxpayer may be entitled to a nonrefundable tax offset of up to $540 when making a minimum spouse contribution of $3,000. To be eligible for the maximum spouse contribution tax offset, the receiving spouse’s assessable income (plus reportable fringe benefits and reportable employer super contributions) must be less than $10,800. The tax offset reduces above this threshold and phases out once income reaches $13,800. Spouse contributions help build up the super savings of the receiving spouse and may also assist the contributing spouse to stay below $500,000 for the proposed higher concessional contributions cap after age 50 from 1 July 2012. Case study Bill, age 53, is married to Jenny, age 48. Bill has $450,000 in super and has already maximised his concessional contributions cap for 2011/12. Jenny works parttime at the local library and earns $10,000 pa. Jenny’s super balance is $100,000. As Jenny qualifies for the co-contribution, she makes a $1,000 personal contribution to receive a $1,000 cocontribution. Furthermore, Bill makes a $3,000 spouse contribution into Jenny’s account to qualify for the $540 tax offset. Bill also decides to split 85 per cent of his concessional contributions into Jenny’s super account. This strategy allows the couple to build Jenny’s super, reduce Bill’s tax liability and keep Bill’s total super balance below $500,000 to receive the proposed higher concessional contributions cap from 1 July 2012. Continued on page 26

Table 2 Gross amount Tax Net amount

If paid as cash to Greg $120,000 $37,800 $82,200

If directed into super $120,000 $18,000 $102,000

www.moneymanagement.com.au April 26, 2012 Money Management — 25

Appointments

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

Garry Pellant and Warren Page have been appointed underwriting development consultants. AIA head of retail distribution Pina Sciarrone said the insurer was also in the process of recruiting a new head of dealerships to support the new recruits.

Move of the week HYPERION Asset Management has announced that Tim Samway will succeed Dr Emmanuel Pohl as managing director. Pohl is stepping down from his role to set up a new private equity business at Hyperion, as well as focus on Hyperion Flagship Investments and the individually managed accounts. Samway is currently Hyperion’s institutional business director and has been with the company since its inception. In his new role, Hyperion stated that he will ensure the continuity of the firm’s strategy, investment process and team. His previous experience includes senior management and board experience at Hyperion Wilson HTM, Burrows and Deloitte. Hyperion stated that the current investment team would remain intact amid Samway’s appointment, although Hyperion chief investment officer Mark Arnold will now chair the monthly investment committee meetings in addition to his duties as CIO.

PROFESSIONAL Investment Services (PIS) has announced the appointment of Len Sanders as chief information officer. Sanders has over 15 years’ experience in a number of senior information technology leadership roles and has a broad knowledge in infrastructure and technology management, strategic business planning, project management, software development and process improvement. He was most recently CIO at The Rock Building Society, a position in which he led the successful replacement of the business’ core banking technology system. Before his tenure at The Rock,

Sanders spent 14 years at the Bank of Queensland where he worked in a number of roles including senior information specialist. Sanders will commence his new role on 30 April.

AIA Australia has announced the appointment of 14 new team members to its retail division. The life insurer stated that the new hires are part of the life insurer’s effort to strengthen its position in the market and provide support to advisers in growing their businesses amid regulatory change. The appointees include Amy

Tim Samway

Mitchell as national development manager and four new client development managers – Rachael Makhoul (New South Wales), Sophie Chudnovskaya (Victoria), Guy Savage (Western Australia) and Ron Pimm (Queensland). Kirianne Hall has been appointed adviser contact team manager and Tom Gordon will step into the technical sales manager position. Four senior client development support staff have also been hired – Carmen Chong (NSW), James Wingate (VIC), Tarryn Anderson (QLD) and Cassie Handke (South Australia). In addition, Tim Barnes,

IN an effort to boost its consultancy ser vices for trustees, advisers and accountants, Multiport has appointed Marjon Muizer as a technical services consultant. Multiport technical services director Philip LaGreca said Muizer’s appointment was consistent with the demand for Multiport’s services amid the growth of the self-managed superannuation fund sector. Muizer previously worked at PKF Chartered Accountants and was also a manager in superannuation for Dixon Advisor y and Superannuation Services. “Marjon’s background working with accountants is essential in understanding advisers’ and accountants’ needs,” LaGreca said. LaGreca added that Marjon’s background working with accountants will be essential in facilitating the needs of Multiport’s adviser and accountant base, which has grown signifi-

Opportunities JUNIOR PARAPLANNER

cantly over the past six years.

TAL Life has appointed Daniel Barnes to the newly-created role of national key account manager. Before his appointment, Barnes was a key member within the Victoria/Tasmania sales, and prior to joining TAL in 2008 worked at AX A in a similar capacity. In his new role, Barnes will

Daniel Barnes focus on industry leading risk practices where he will share his expertise in practice development, high quality service and strategic thinking. TAL said Barnes is a relationship lead individual who understands the importance of working together in a successful team.

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

Location: Brisbane Company: MW Recruitment Description: A professional services firm in Brisbane is looking to hire a junior paraplanner. In this role, you will compile SOAs, undertake portfolio research and adhere to the high standards of the planning practice. You will have at least 12 months’ experience as an established paraplanner and will be DFP qualified or equivalent. You will also be confident in dealing with clients and all other external parties. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Hugh at MW Recruitment – (07) 3009 6400, hughw@mwrecruitment.com.au

development and coding of SOA and ROA documents, financial planning preparation and implementation, coordination of client reviews and in depth research and development of technical strategies. To be successful, the candidate will need to be RG146 compliant and hold a minimum DFS qualification. You will have a detailed understanding of the financial services and stockbroking industry, particularly in relation to gearing, superannuation, SMSF, retirement, tax minimisation, risk and estate planning. A working knowledge of AdviserNETgain and/or XPlan software will be a distinct advantage. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629

insurance advice for the firm’s business clients. It is therefore essential that you possess a working knowledge of tax structure, entities, estate planning and SMSFs. While reviewing the risk insurance needs of clients, you will also identify and capitalise upon business growth opportunities. To be successful in the position you will have a proven record in a similar financial planning role. In return you will have access to modern facilities and a competitive remuneration package. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629

SENIOR/TECHNICAL PARAPLANNER

RISK ADVISER

ADMINISTRATION OFFICER FINANCIAL PLANNING

Location: Adelaide Company: Terrington Consulting Description: Due to rapidly growing business, a financial planning and stockbroking firm is currently seeking a senior/technical paraplanner. You will be responsible for the

Location: Adelaide Company: Terrington Consulting Description: A business advisory firm is seeking a financial adviser / risk specialist to join its wealth management team in Adelaide. In this role you will be predominantly responsible for the detailed delivery of risk

Location: Adelaide Company: Terrington Consulting Description: A wealth management practice is currently looking for an administration officer financial planning. Along with excellent written and verbal communication, you will have at least

12-24 months’ experience in a client services/junior paraplanning capacity. You will also require solid practice knowledge in the creation and implementation of SOAs. Expertise in XPlan software will be highly regarded. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629

WEALTH PROTECTION SPECIALIST Location: Adelaide Company: Terrington Consulting Description: A number of wealth management firms are seeking experienced financial advisers to step into a wealth protection specialist role. Relevant experience is essential, particularly in the provision of both personal and business risk advice. Business and relationship development will be an integral part of your skill set. The successful candidate must have a DFP/CFP qualification. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629

www.moneymanagement.com.au April 26, 2012 Money Management — 27

Outsider

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

Grizzling…

all the way to the bank WHILE the Occupy Wall Street debate has often swayed from the ignorant to the absurd, Outsider can understand the everyday chap's frustration with the fact that some (guilty) bankers have gotten away with sinking world financial markets, seemingly scot-free. Fo r a g e i n g Br i t i s h p r o g re s s i v e rockers Jethro Tull, enough is enough, with their latest record featuring the interestingly-named B anker B ets, Banker Wins. A long-time fan of the Bedfordshire-

Weather retort AS a long-term resident of the Emerald City, Outsider is quite familiar with the friendly jostling between Sydney and Melbourne – and it’s a rivalry that is most certainly played out just as vigorously within financial services as it is elsewhere. It’s a well-trodden path – Sydney has the beaches and the landmarks, Melbourne has the laneways and the “culture”, and back and forth it goes. But Outsider is at least accustomed to Sydney having the bragging rights when it comes to the weather. As are most people, it seems, with the recent turnaround in the meteorological fortunes of the respective capitals turning into a major talking point at netwealth’s recent relaunch of Paragem Dealer Services as Pathway Licensee Services. First up, Pathway Licensee Services general manager Kate Humphries, a country NSW girl and now-reformed former Melbournite, bemoaned the terrible weather her home state was displaying (raising her voice slightly to compete with the torrential rain crashing onto the roof and against the windows at Sydney’s Cruise Bar in Circular Quay). Long-time Melbournian Netwealth director Michael Heine certainly didn’t miss his opportunity when he got his

“

Out of context

turn to speak, referring to the weather as “the worst weather week seen in Sydney since last week”. Then it was Tasmania’s turn to get in on the act, as recently retired Senator Nick Sherry first blamed a tickle in his throat on the weather, then lamented a hole in his shoe that had filled with Sydney rainwater, before proudly boasting of the “magnificent” weather Taswegians had recently been enjoying. It’s a sad state of affairs when the Tasmanians are scoring points on Sydney in the weather stakes. And the best retort that local boy, Financial Services Council chief executive John Brogden, could manage was to deflect the ridicule elsewhere – “imagine all those Poms who came out expecting a nice summer in Sydney! It makes me feel a little bit better that we can always pick on the Poms”. Always except for when the cricket’s on, John.

“As I was standing next to my son, who as all those with children will understand is a pain in the arse, he just pointed out to me they said ‘briefly’ – he knows ‘briefly’ is not a word I understand.” Although invited to speak briefly, netwealth managing director Michael Heine apparently plans to take his time at netwealth’s launch of Pathway Dealer Services.

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

bred musos, Outsider never expected to hear the legendary British band espouse the evils of "hedge funds, wraps and equities wins". Outsider especially liked the swing that the band takes at the market itself, describing the inability of governments to take action against corruption: Draconian calls for regulation are drowned in latte with Starbucks muffin Mortgage melt-down: non est mea culpa Threatened exit, stage left, laughing…

A l t h o u g h O u t s i d e r a d m i re s t h e band's romanticised effort to battle the forces of corporate greed with a microphone, guitar and flute in hand, he questions the effect that the global financial crisis has had on frontman Ian Anderson's own hip pocket. In fact, along with the millions of records the band has sold since their inception in 1967, Jethro Tull's latest effort is sure to put them even further ahead of the proverbial eight-ball. "…Exit, stage left, laughing", indeed.

Liquid assets OUTSIDER recently heard of a bar and grill in California that has come up with a novel way to give your weekend drinker the chance of trading on the stock exchange. Instead of buying and selling shares and commodities, however, punters can buy alcoholic drinks based on real-time pricing. Each bar is fitted out with television sets that display a drink price index. The more a particular drink sells, the higher the price is pushed up. Like an actual stock exchange monitor, the TV sets even display the daily highs and lows of each drink. Outsider is sure that there can be no better way to learn the very science of supply and demand than over a few

rounds with some friends. After all, a fixed-price drinks list is price fixing, which is illegal in any country. Ironically, it may be the only market in which diversifying would have a disastrous effect on your price-to-earnings ratio. Although you may beat the benchmark by continuously buying low, you may ultimately pay a higher price later in the evening when you suddenly realise your portfolio may be a little more liquid than your stomach can handle.

“Kate introduced me as the ‘current’ CEO of the Financial Services Council – maybe I might need someone to wish me the best in case there’s something I don’t know when I get back to the office.” FSC chief executive John Brogden is hoping Pathway general manager Kate Humphries doesn’t know something he doesn’t.

“We don’t love you personally, but we love the relationship we have with you.”

Brogden again, expressing a very platonic affection for netwealth.