Money Management (February 16, 2012)

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Vol.26 No.5 | February 16, 2012 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

SMSF WEEKLY: Page 10 | RISK INSURANCE: Page 18

APRA busy on industry funds

By Mike Taylor DESPITE retail master trusts often being the subject of criticism, it has been industry funds which demanded most attention from the Australian Prudential Regulation Authority (APRA) with respect to supervisory actions around unit pricing and conflicts of interest.

APRA data provided in response to parliamentary questions has revealed the regulator spent more time with industry funds than retail master trusts on unit

Table 1: Valuation and unit pricing issues since 2007* Fund Type

Requirement Recommendation

Corporate Industry

2 3

2

Total

Continued on page 3

Requirement

Licence Variation/Enforcement

Corporate

7 3

5

liquidity issues driving fund mergers.

The issues were taken on notice by APRA following questions initially asked during Budget estimates.

APRA responded that while there had been no enforcement actions taken against any superannuation funds in the last three years in relation to flawed unit pricing and/or asset valuations, where it has identified concerns surrounding the practices of a superannuation fund, “it will make recommendations or require changes in practices”.

Table 2: Conflict of interest issues since 2007* Fund Type

Public Sector Retail

pricing and conflict-of-interest issues.

However, the regulator’s involvement with the funds stopped short of enforcement actions.

APRA had been asked by Tasmanian Liberal Senator David Bushby a number of questions on notice relating to enforcement actions over flawed unit pricing and asset valuation practices, as well as actions with respect to unresolved conflict-of-interest issues.

It is understood Senator Bushby’s questions had been prompted by reporting around the controversy which enveloped MTAA Super, and discussion around

12

* These figures do not include recommendations and suggestions that individual APRA supervisors have raised with trustees as part of routine supervision activities.

6

Industry

1

Public Sector

1

Retail Total

Recommendation

2

3 1

1 2

3

10

* These figures do not include recommendations and suggestions that individual APRA supervisors have raised with trustees as part of routine supervision activities.

Mortgage funds on the way back?

By Chris Kennedy AN easing-off of term deposit rates, reduced redemption pressure and a shift to fixedterm redemptions only could make 2012 an improved year for the battered mortgage fund sector, according to property researchers SQM. SQM recently handed out its first-ever four-star rating to managers La Trobe, which SQM director Louis Christopher said was one of the few funds to “fly though” the troubles of 2008 due to its limited redemption structure as well as its management team and

relatively low gearing.

A more limited redemption str ucture and fixed-ter m redemption periods are the future for the sector, he said.

The daily liquidity offered by many funds – plenty of which disappeared following the liquidity squeeze associated with the global financial crisis – was unlikely to ever return, he said.

SQM is favourable to those funds whose redemptions are in fixed terms and where it was clear the manager was in control of the budget, he said.

Christopher said planners who have clients in cash and

are looking for some extra yield – but don’t want too much volatility or exposure to direct real estate – would be candidates for an allocat i o n t o m o r t g a g e f u n d s, which could provide relatively stable returns around 7 to 8 per cent.

“We believed this sector had a brighter future, and we think that is now coming to hand. It just boils down to the individual product provider,” Christopher said.

Australian Unity Investments head of mortgages Roy Continued on page 3

Louis Christopher

CASH

The security blanket CASH products continued their reign over other asset classes during 2011, with the allocation of new money to cash almost doubling during that period.

Year 2012 will see a similar trend, and term deposits will remain the investment of choice for many.

This appears to be a result of both financial planner and consumer sentiment currently sitting at one of its lowest points since the global financial crisis, while market volatility lingers.

However, some claim the success of cash as an asset class does not revolve solely around sentiment anymore.

According to industry experts, financial advisers are beginning to see cash as part of a long-term strategy for their clients’ portfolios, rather than just a parking mechanism until markets rebound.

The ageing population might play a crucial role in the emergence of this trend, with most baby boomers due to retire in the next decade – and many cannot afford great risks anymore.

For an in-depth analysis of the cash space, turn to page 14.

News

APRA busy on industry funds

FPA points to hypocrisy on fees

Continued from page 1

THE Financial Planning Association (FPA) has reinforced its belief that superannuation funds should not be able to obscure the cost of scaled advice within administration fees.

In a submission to the Parliamentary Joint Committee (PJC) reviewing the Government’s Stronger Super legislation, the FPA has argued that all forms of personal financial advice should be subject to the same set of rules, “irrespective of the provider or subject matter.”

The submission said the FPA believed a workable scalable advice framework was critical to enabling greater access to affordable financial advice for more Australians, with intra-fund advice being a

It said such recommendations were generally aimed at moving the trustee’s practices closer to best practice; but where required changes in processes pointed to deficiencies capable of exposing members to unacceptable risk, the changes were mandated.

APRA said that in all instances of flawed unit pricing or asset valuations errors, compensation had been paid by the fund concerned.

The analysis provided

by APRA revealed that industry funds had dominated activity around unit

David Bushby pr icing issues, with corporate funds also demanding the attention of the regulator.

Where conflict-of-interest issues were concerned, industry funds were also more dominant.

By Mike Taylor

subset of scalable advice.

“However, it is critical that the FOFA reforms such as the best interest duty and specific related remuneration provisions allow for scalable advice and are not undermined by the Stronger Superannuation reforms,” it said. “MySuper members should be permitted to access information (including general advice) about their superannuation interest as part of the administration fee, but not access personal financial advice which is paid for by all members.”

The submission said that while the FPA completely supports the facilitation of factual information and general advice services to super fund members, it does not agree with the provision and payment of ‘personal’

intra-fund advice services being bundled with an administration fee.

“The FPA has a number of concerns with this, not least the hypocrisy that underlines this position, especially in the context of the catalyst for the reform agenda underway as part of the Future of Financial Advice (FOFA) reforms,” it said.

“Hidden fees, commission, lack of transparency and paying for services not received are all problems FOFA is trying to rectify in respect to the provision of financial advice. Therefore, based on these objectives, how does hiding the fees associated with the provision of personal advice services such as intra-fund advice within the ‘administration fee’ serve to be in the interests of the super fund members?” the submission said.

Mortgage funds on the way back?

Continued from page 1 Prasad said the redemption demand from retail investors was continuing to decline, although not as fast as AUI would prefer. But investors who had participated in every redemption opportunity from mid-2008 would now be fully redeemed, suggesting that most of those still invested wanted to be there.

Roy Prasad Pra s a d s a i d 2 0 1 2 would be a significant year for mortgage funds after three years of seeing the sector contract. With redemption offers now more closely matched to underlying liquidity, it was a case of trying to reeducate the adviser community, and going through the process with researchers to get them to move from a holding pattern back to investment grade.

Prasad said it was probably the right point in the cycle now, with term deposit rates coming off and likely to slip further. There would soon come a tipping point where mortgage funds were consistently outperforming term deposits, he said.

However Morningstar co-head of fund research Tim Murphy is far less optimistic for the sector.

“Demand [for mortgage funds] in the adviser space is zero,” he said. “You can still get 6 per cent in a term deposit.”

While in theory the present is a better time for mortgage funds than the recent past, and the limited redemption structure would also help, the returns for key mortgage funds in the last few years had been less than term deposits and with less liquidity, Murphy said.

“The certainty of a term deposit versus the uncertainty and illiquidity of mortgage funds makes it very unattractive for advisers. Combined with the behavioural effects of the experience from 2008, there is not much appetite from advisers we deal with for that type of fund.” www.moneymanagement.com.au February 16, 2012 Money Management — 3

News

ipac practice expands in north Queensland

By Chris Kennedy IPAC securities-owned financial planning practice TFS Financial Planning, which has operated in Cairns since 1992, has acquired practices in Atherton and Townsville in northern Queensland.

The acquisitions add three advisers and $122 million in funds under management (FUM) to the

TFS Financial Planning business, bringing its totals to eight advisers (and total of 23 staff ) and $390 million in FUM. Townsville business Financially Yours had two advisers and $86 million in FUM, while Atherton business Magnitude Financial Planning brought $36 million in FUM and principal Don Sheppard.

TFS Financial Planning finan-

cial planning team manager Sean Ryan said the growth provided new opportunities for staff and enabled the business to help more people by having a greater presence in north Queensland.

“In today’s tough business climate our financial strength is an advantage,” he said.

The new businesses have experienced advisers and dedi-

cated support staff and would continue to be managed locally from their respective offices with the same team delivering to clients, Ryan said.

“With a large-scale backer we are well placed to enhance our services to clients and take advantage of opportunities to grow the business as they emerge,” he said.

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4 — Money Management February 16, 2012 www.moneymanagement.com.au

Industry also needs to lift its game: AFA

By Chris Kennedy

DESPITE remaining critical of aspects of proposed Future of Financial Advice (FOFA) legislation, it is up to the industry to collectively lift its game to improve its image regardless of what reforms are brought upon it, according to Association of Financial Advisers (AFA) chief executive Richard Klipin.

“As an industry, as a profession, the people providing advice, all the way through the value chain to licensees and product providers, we’ve got to get on this pathway of excellence and improvement because ultimately what’s at stake is our relationship with the Australian consumer,” Klipin said at the AFA GenXt roadshow in Sydney yesterday.

The financial advice industry needs to get better as a profession at protecting its brand and its reputation, he said.

Part of that, he said, is being part of a professional body and also being an active part of the debate around raising standards.

But it also means getting better at standing up and saying something when the wrong thing is being done so that the situation doesn’t blow up into another Storm Financial-type scenario that damages everyone’s reputations, Klipin said.

He said the AFA’s soon-tobe-launched Principles of Practice series, aimed at improving the industry’s image to consumers, was one way of addressing those issues.

“Until we have a meaningful dialogue with the Australian community we won’t be able to get our message across,” Klipin said.

News

FPA points to hypocrisy on fees

By Mike Taylor

THE Financial Planning Association (FPA) has reinforced its belief that superannuation funds should not be able to obscure the cost of scaled advice within administration fees.

In a submission to the Parliamentary Joint Committee (PJC) reviewing the Government’s Stronger Super legislation, the FPA has argued that all forms of personal financial advice should be subject to the same set of rules, “irrespective of the provider or subject matter.”

The submission said the FPA believed a workable scalable advice framework was critical to enabling greater access to affordable financial advice for more Australians, with intra-fund advice

being a subset of scalable advice.

“However, it is critical that the FOFA reforms such as the best interest duty and specific related remuneration provisions allow for scalable advice and are not undermined by the Stronger Superannuation reforms,” it said.

“MySuper members should be permitted to access information (including general advice) about their superannuation interest as part of the administration fee, but not access personal financial advice which is paid for by all members.”

The submission said that while the FPA completely supports the facilitation of factual information and general advice services to super fund members, it does not agree with the provision and payment of ‘personal’ intra-fund

advice services being bundled with an administration fee.

“The FPA has a number of concerns with this, not least the hypocrisy that underlines this position, especially in the context of the catalyst for the reform agenda underway as part of the Future of Financial Advice (FOFA) reforms,” it said.

“Hidden fees, commission, lack of transparency and paying for services not received are all problems FOFA is trying to rectify in respect to the provision of financial advice.

Therefore, based on these objectives, how does hiding the fees associated with the provision of personal advice services such as intrafund advice within the ‘administration fee’ serve to be in the interests of the super fund members?” the submission said.

Perennial Australian Property Trust ‘on hold’ following senior departure

By Andrew Tsanadis STANDARD and Poor’s Fund Services (S&P) has placed Perennial Australian Property Trust ‘on hold’ following the departure of managing director and head of Perennial Real Estate Investments (PREI) Stephen Hayes.

Hayes will leave the company in mid-February and has been replaced by former managing director of CBRE Global Real Estate Securities and senior member of Macquarie Funds Management David Kivell.

While S&P stated that Kivell is an experienced listed property investor and portfolio manager, it believes Hayes’ departure will be a “material loss”, as he was a founder of the PREI business and was instrumental in establishing its domestic and global

real estate platform.

Hayes’ expertise and ownership interest in the business has underpinned S&P’s assessment of the fund in the past, and as a result, Perennial’s property trust fund was downgraded from three stars to an ‘on hold’ rating.

The fund is under review as part of S&P’s current Australian Property - Listed sector review, and S&P will meet with Kivell to resolve the on hold rating.

Zenith Investment Partners has also reacted to the departure of Hayes by placing both the Perennial Australian Property Wholesale Trust and Perennial Global Property Wholesale Trust ‘under review’.

Zenith stated that it will be meeting with Kivell in the coming days to discuss the departure, the appointment and procedure.

ASIC action ends badly for Riotto

ASIC warns about secured debt products

By Tim Stewart

By Milana Pokrajac

TWO companies owned and controlled by former NSW President of the Finance Brokers Association of Australia, Christopher John Riotto, have been found to have engaged in “unconscionable and misleading conduct” by the Federal Court.

Sydney-based firms the Australian Lending Centre Pty Ltd and the Sydney Lending Centre Pty Ltd are finance broking companies that brokered business loans for borrowers who were seeking personal loans, according to the Australian Securities and Investments Commission (ASIC).

ASIC brought proceedings on behalf of five clients of the two companies, and in four of the cases the companies knowingly had their clients sign business loans when they wanted personal loans, effectively removing consumer protections provided by the Uniform Consumer Credit Code.

The court also found that the companies represented to lenders that the loans were for business purposes, according to ASIC. “ASIC’s action signals to brokers that attempts to circumvent the legal protections available to consumers will not be tolerated,” said ASIC commissioner Peter Kell.

In one of the cases, the court found a loan

THE corporate regulator has introduced changes to the naming of retail debt products amid concerns that the term ‘secured’ misinformed investors about the safety of these products.

The Australian Securities and Investments Commission (ASIC) deputy chairman Belinda Gibson said investors often think the ‘secured note’ description means the investment is low risk or safe.

“These investments are not in any way equivalent to a bank deposit in terms of risk, payment of interest or repayment of principal,” Gibson said. “These products may pay a higher interest rate, [which] probably reflects the fact they are riskier.”

ASIC announced a series of measures to help ensure manufacturers of notes and debentures provided enough disclosure for investors to make an informed decision.

All issuers now must make clear in their advertising that the products are not a bank deposit and should not suggest that they compare favourably to one.

The regulator will permit issuers of debt to name their product a secured note if there is a first-ranked security over some assets, so

Peter Kell was secured for a client over his house when the broker knew the client could not afford the repayments – something that has previously been referred to by the court as “asset lending”.

Another company also owned and controlled by Riotto, AMR Investments Pty Ltd, was found to have exploited a pensioner with a clearly identifiable disability by having him sign a loan with an interest rate of 5 per cent per month, which was secured over his only asset. However, in this case the court accepted that the loan was for business purposes.

The “unconscionable and misleading conduct” took place between 2005 and 2008.

Belinda Gibson long as conditions about describing the security are met.

A product may be called a debenture if the security is over tangible property.

ASIC has also updated its Regulatory Guide 69 Debentures and notes: ‘Improving disclosure for retail investors’, and uploaded more information about secured debt products on its MoneySmart website.

Gibson advised investors and financial advisers to review the most recent disclosure when invited to roll over their investment.

“Read it carefully as this is where you are likely to find out any bad news,” she added.

Retail investors need better understanding of direct equities – Instreet

By Andrew Tsanadis

AUSTRALIANS are continuing the push into self-managed superannuation funds, but most financial advisers have not thought about the risks associated with a direct equity portfolio.

While institutional investors use managed funds to manage their investment risk, independent financial planners are now demanding tools to determine the risk of a share portfolio and explain it to clients in a way that they understand.

That’s according to Instreet Investment Limited managing director George Lucas, who believes that the issue of managing a client’s portfolio has often been overlooked by financial planners, who have

traditionally relied on fund managers to develop a risk-weighted portfolio.

In an effort to stem this trend, Instreet has developed a portfolio ‘checkup’ service targeted at retail investors.

The service provides a summary of stock and sector weightings in order to determine whether the client’s portfolio is meeting their investment strategy. It also compares an investor’s portfolio with the ASX 200 and calculates how a portfolio is expected to react to movements in the Australian share market.

“We’ve tried to keep it simple because advisers will have to explain the potential risks to their client,” Lucas said.

“At the moment, the risks of investing in equities are not being communicated to advisers correctly.”

While he concedes that the service only provides a snapshot of portfolio risk, Lucas said that by taking into account market movements and sector breakdowns, advisers will be able to provide clients with a forecast on their direct equity allocation over a threemonth, six month and 12-month period.

Referring to the Future of Financial Advice (FOFA) draft legislation, Lucas said that the best interest duty is demanding that planners become “experts in the products they recommend”.

“It [the portfolio checkup] is something that an adviser could show to the Australian Securities and Investments Commission to show that they are taking reasonable steps to meet aspects of the best interest duty,” he said.

George Lucas

www.moneymanagement.com.au February 16, 2012 Money Management — 5

News Financial advice to double after FOFA: ISN

By Chris Kennedy THE number of Australians receiving financial advice will double under Future of Financial Advice (FOFA) reforms while the number of advisers will remain stable, according to research commissioned by the Industry Super Network (ISN).

The report from Rice Warner actuaries also shows that incomes for financial planners will continue to rise under the reforms, the ISN stated. This will be due to factors such as the continued growth of super assets and increase in the superannuation guarantee, reduction in the cost of advice and the ageing population, according to the ISN. There will be more than double the number of pieces of advice delivered in the 12 months from 1 June 2025

under the reforms compared to without the reforms, according to Rice Warner. FOFA changes will result in 1.77 million pieces of advice being delivered in this period rather than 831,000 without the reforms, largely driven by a six-fold increase in the provision of scaled advice from 169,000 to 1.1 million pieces of advice, the ISN stated.

The weighted average cost of advice will also decrease 44 per cent from $2135 now to $1188 in 2026, and under a worst-case scenario adviser numbers would be decrease by as much as 5 per cent, according to the report.

Adviser incomes are also expected to grow strongly, from $182,000 per annum on average now to the equivalent of $260,000 in today’s dollars in 2026, the ISN stated.

ISN chief policy adviser Matt Linden said the research provides a useful counterweight to the “alarmist” claims being made by the financial planning industry.

“The Rice Warner report is the only credible research conducted to date that investigates the impact of these reforms on the financial services industry and consumers,” he said.

“Based on sound methodology, the report clearly demonstrates consumers and the industry will benefit from these reforms. In fact, all the indicators point to a vibrant and innovative financial services industry in future, which will be driven in part by compulsory superannuation. The expected large increase in scalable advice will also produce new business opportunities.”

Study highlights independent research need THE latest Industry Super Network (ISN)-commissioned research conducted

by Rice Warner highlights the need for the Government to commission independent analysis, according to both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA).

While not specifically questioning Rice Warner’s findings that the Future of Financial Advice (FOFA) reforms would have a minimal effect on planner job numbers, FPA general manager of policy and government relations Dante De Gori said those questions will continue to be asked so long as the research is commissioned by a stakeholder with a vested interest in one side of the outcome.

Independent research would put an end to questions of potential bias, otherwise you will always get people doubting the research, he said.

AFA chief executive Richard Klipin said some of the information may be unreliable, as it is being provided by organisations that are not in the business of providing financial advice.

"In many cases, they are coming up with spurious or alleged outcomes without a deep knowledge of how the market works," he said.

The ISN press release relates the finding from the study that there will be almost double the number of individual pieces of financial advice delivered in the 12 months from 1 June 2025 under the FOFA

Richard Klipin reforms, compared to the situation if the reforms are not introduced – much of this due to an increase in the provision of scaled or single issue advice. The ISN release also points out that Rice

Warner finds adviser incomes will grow and the cost of advice will decrease.

One point contained in the research that is not mentioned within the ISN press release is that “the growth in single issue advice will come from two main sources, namely industry fund members and bank customers” – further increasing the stake of industry funds and major institutions.

According to Klipin, these numbers – as concerning as they are – show there will be a greater concentration within the marketplace within the major providers and industry funds at the expense of the independent sector.

"This is a poor outcome for consumers, who will continue to lose access to trusted personal advice," he said.

Risk advisers ‘moderately optimistic’ RISK-focused financial advisers remain optimistic about the outlook for themselves and their practices despite the changes facing the industry, according to a Zurich Financial Services Australia survey.

Overall risk adviser sentiment was calculated at 4.5 out of 7, or ‘moderately positive’, according to the survey of 300 risk advisers conducted by Beaton Research and Consulting.

Respondents were asked to rate their sentiment out of seven across five key areas: consumer demand for advised life insurance; the adviser’s current sales volume; the regulatory environment; likely sales volume for next quarter; and the long-term viability of their practice.

Colin Morgan, chief executive of

Zurich’s Australian Life and Investments business, said the results show that: “despite facing stagnant financial markets, low consumer sentiment and remaining uncertainty around [Future of Financial Advice reforms], risk advisers are looking forward with optimism to the opportunities that 2012 may bring.

“It’s reassuring to know that with our underinsurance problem still so large, risk advisers remain enthus i a s t i c a n d m o t i va t e d t o k e e p providing quality advice and insurance protection to Australian families” he said.

Dr Jelena Dodic, account director at Beaton Research and Consulting, said despite the overall negative sentiment in terms of the current

6 — Money Management February 16, 2012 www.moneymanagement.com.au

Colin Morgan regulatory environment, advisers are looking beyond the short-term and remain positive about the long-term viability of their practice.

MySuper bill 'mandates flipping'

By Mike Taylor

A SECTION of the Government's MySuper bill, as currently drafted, could actually mandate the practice of "flipping", according to Colonial First State (CFS).

In a submission lodged with the Parliamentary Joint Committee reviewing the MySuper legislation, CFS has pointed to the manner in which the Cooper Review recommendations had sought to eliminate the practice of "flipping" superannuation fund members into more expensive arrangements.

It said that while some elements of the MySuper bill ensure members are not required to be compulsorily "flipped" to a higher MySuper product fee and different insurance premium rates, section 29VB would prevent former employees from accessing the discounted administration they may have enjoyed prior to ceasing employment.

"The effect of this section is to mandate the practice of 'flipping' for these employee-members once they cease employment," the submission said. "The discounted administration fee as negotiated between the employer and trustee can no longer be charged to the former employee, meaning the trustee must apply the standard (higher) MySuper administration fee.”

The CFS submission said the section was inconsistent with other sections of the legislation and it was unclear why it had been drafted.

"We are concerned that members will be negatively impacted by this construction of the law," the submission said.

"In the absence of the ability to 'retain' former employees under their existing fee and benefit structure, the impact of flipping members to a higher fee and potentially higher insurance rates should not be underestimated.”

MLC and NAB Wealth helps drive group revenue growth WHOLESALE banking and MLC & NAB Wealth have helped boost unaudited cash earnings to $1.4 billion for National Australia Bank (NAB) in the first quarter of the 2012 financial year.

The wealth management increase was driven by an improvement in the financial markets and the acquisition of Aviva Investors Australia by nabInvest. The business did suffer net outflows, Cameron Clyne however, as investors remained cautious, NAB stated.

The improvement in wholesale banking was due to improved sales in the customer business and better trading opportunities in the risk businesses, according to NAB. However, the revenue in business and personal banking was flat, with volume growth offset by higher funding costs, which also contributed to a decline in UK banking, the group stated.

“National Australia Bank has recorded a solid performance for the first quarter of the 2012 financial year in what has been a more challenging environment,” said group chief executive Cameron Clyne.

“Higher deposit and wholesale funding costs, softening credit growth and fragile economic conditions continued to be key characteristics of the operating environment in

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News

Ryan pushed from Perpetual and succeeded by Lloyd

By Mike Taylor

PERPETUAL has a new chief executive, with former St George executive Geoff Lloyd stepping in to replace Chris Ryan.

The company cited differences between Ryan and the Board.

The Perpetual board announced the change to the Australian Securities Exchange last

week, saying that Ryan had decided to step down.

Lloyd has been group executive Private Wealth and Retail Distribution since joining Perpetual 18 months ago and was widely regarded as a future chief executive of the company.

Commenting on the appointment, the board said it believed Lloyd was ideally placed to step

into the CEO and managing director role, having been closely involved in Perpetual's review of its overall business strategy over the past 12 months.

The outgoing Chris Ryan joined Perpetual in February last year.

Commenting on Ryan's departure, Perpetual chairman Peter Scott said that while the former CEO had executed some impor-

tant business improvements, "it had become clear that there were differences between Mr Ryan and the Board around emphasis and execution of strategy for the immediate and longer-term".

"Over the weekend we agreed to disagree with Chris Ryan on these important issues and that he would leave Perpetual as a result," Scott said.

Greens’ super policy based on outdated data

White labelling should come with more adviser control, says AIOFP

By Milana Pokrajac ACQUISITIONS of platform providers should include more adviser consultation where white labelling is involved, according to the Association of Independently Owned Financial Planners (AIOFP) executive director Peter Johnston.

The issues arising from acquisitions such as that of Oasis Asset Management by OnePath (then ING Australia) in 2006 related to client ownership and equity, according to Johnston.

“These sales have resulted in the transfer of client ownership – the core asset of all practices – and it must be addressed as a high priority,” Johnston said.

AIOFP said it expected its members to demand more

involvement and equity in financial products and platforms in the future.

“Especially as a number of national dealer groups, who built the business with their white label Oasis products, received nothing from the sale to acknowledge both their contribution and efforts.”

AIOFP predicted a paradigm shift within financial services whereby advisers in growing numbers will demand greater control and management over their clients.

It added that “properly structured” private label platforms represented another strategy which could address adviser demands.

Johnston said poor inflows in recent times have seen a change in some of the major institutions as they adopt a more “conciliatory” approach.

Matchingg the Australian legal experts

,

THE Self Managed Superannuation Fund Professionals’ Association of Australia (SPAA) says the Australian Greens are using outdated and no longer relevant data to sustain the party's calls for changes to superannuation contributions tax rates.

Reacting to the release of the Greens’ policy approach, SPAA chief executive Andrea Slattery said that rather than focusing on penalising those who were saving through the community pillar of super-

with

Blake Dawson and Ashurst – more than a match.

8 — Money Management February 16, 2012 www.moneymanagement.com.au

annuation for an independent life post-working age, the Government should turn its attention to the considerable ongoing barriers to all Australians saving adequately for their retirement.

She said the statistics quoted by Greens’ leader Bob Brown in support of his party's policy were outdated and no longer relevant.

Slattery said there was also no evidence to suggest tax concessions to high-income earners represented a net drain on the Budget.

,

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News

Vigilance on FOFA bill timing

By Mike Taylor AUSTRALIA's key financial services organisations are remaining vigilant on the Parliament’s handling of the Future of Financial Advice (FOFA) bills despite assurances that the legislation will not be brought on for debate until after the Parliamentary Joint Committee (PJC) report.

Their vigilance is based on Federal Opposition concern that a draft forward

program of bills to be debated in the Parliament had scheduled the FOFA bills for debate two weeks before the PJC is scheduled to hand down its report, and well before a report from the Senate Economics Committee.

The release of the draft forward program for bills prompted the Shadow Financial Services Minister, Senator Mathias Cormann, to say he would be seeking the support of the independents in the House

of Representatives to delay debate on the bills until after the PJC report.

In the aftermath of Cormann's statement and serious concerns expressed by key players in the financial planning industry, Financial Services Minister Bill Shorten's office indicated the draft forward program was in error and that the bills would not be debated until a later date.

Both the Financial Planning Associa-

tion and the Association of Financial Advisers expressed concern at Friday's suggestions that the FOFA bills might be debated in the Parliament ahead of the PJC. Both organisations urged that debate around the bills be delayed until due parliamentar y process had been followed with respect to both the PJC findings and those of the Senate Committee.

ATO identifies miscreant tax agents THE Australian Taxation Office (ATO) has identified around 1,600 tax agents who it believes are responsible for the majority of its problems w i t h r e s p e c t to l a te returns.

The issue has been highlighted by the Commissioner for Taxation, Michael D'Ascenzo, who has told an accountancy fo r u m t h a t s o m e t a x agents are doing a much better job of ensuring their clients are covered than others.

H e s a i d t h e r e we r e around 21,000 agents lodging around 11.5 million 2010 financial year income tax returns, but "a small minority of tax agents are associated with a significant level of n o n - c o mp l i a n c e by clients".

D'Ascenzo said that around 1,600 tax agents represented half the taxpayers who use agents and had outstanding returns, while 1,900 tax agents represent 50 per c e n t o f t h e t a x p aye r s who were significantly outside the small business benchmarks.

The Tax Commissioner also claimed 1,600 agents (with more than 100 clients) were identified as having an unusually high level of claims for workrelated expenses.

"Many of these agents fall within two or three of these categories," he said. "We want to understand how we can better support tax agents generally so that you can positively influence the b e h av i o u r s o f y o u r clients." www.moneymanagement.com.au February 16, 2012 Money Management — 9

SMSF Weekly Yields the key for SMSFs in 2012

By Damon Taylor

Aaron Dunn

WITH turmoil offshore continuing to impact local investment markets, Aaron Dunn, Managing Director of the SMSF Academy, believes the focus for self-managed super funds in 2012 has to be yields.

“Whilst there’s volatility, and it really depends on the age of the investor, but predominantly what people will be looking for is strong yields,” he said. “If you take QBE as an example, it

Trend to SMSFs continues for pre-retirees INDUSTRY and retail super funds may currently dominate pre-retirement superannuation, but Deloitte partner for superannuation Russell Mason believes that a passing of the torch occurs as superannuants approach retirement.

“Pre-retirement, industry funds are fantastic beneficiaries of our superannuation system and they obviously have a key advantage over self-managed super funds when it comes to size,” he said.

“But, on current trends, there's still going to be this enormous switching to self-managed funds upon retirement, and that’s where most of the money is going to reside.”

Mason said that while there Russell Mason was no guarantee that such a trend would continue, it was up to “People want a safety net in the rest of the superannuation retirement, they want to know what industry to look at the challenges they’re investing in, and many think of post-retirement and come up they have the best chance of doing with appropriate and attractive that through a self-managed super solutions. fund.”

THE Self-Managed Super Fund Professionals’ Association of Australia (SPAA) will be arguing for an increase in contributions caps when the Govern- Andrea ment’s recently- Slattery announced Superannuation Roundtable takes place.

Individuals close to retirement are being denied the opportunity to build adequate retirement nest eggs due to the halving of the caps for those under 50 to $25,000 in the 2009 budget, SPAA said.

SPAA again called in its 2012 budget submission for a $35,000 concessional contribution cap for all individuals over 50, which would then increase in incremental amounts to a minimum $50,000 as soon as was fiscally possible.

The administrative burden of the Government’s proposed $500,000

By Andrew Tsanadis THE cost of funding a moderate to comfortable retirement remains steady, with food, health, transportation and recreation making up the largest part of the post-retirement budget, according to new research from the Association of Superannuation Funds of Australia (ASFA).

While the December quarter 2011 figures from the ASFA Retirement Standard were marginally down (0.1 per cent) on the September quarter results, the report determined that a couple seeking a “comfortable” retirement will need to spend $55,249, while those seeking “modest” retirement lifestyles would need to have around $31,675 in savings. A modest lifestyle was described by ASFA as better than the lifestyle afforded by the age pension, but still only allowing for fairly basic activities.

In o rd e r t o s u p p o r t t h e s e e x p e n d i t u re requirements, ASFA stated that retired couples would require a lump sum of around $510,000, while single retirees would need $430,000.

Assuming that the retiree already owns their own home, a couple seeking a comfortable

balance threshold for those aged 50-plus, rather than a standard increase in contribution caps, far outweighed any benefits for the industry and individuals, according to SPAA chief executive Andrea Slattery. She said this was contrary to the Government's objectives to improve the efficiency of the superannuation system.

“There's a need for individuals to be able to make catch-up contributions later in life, an opportunity which is currently denied by the current low level of concessional contribution caps,” she said.

Slattery said a $35,000 cap would avoid the complexities associated with the current proposal and offer a fairer system for those looking to maximise their retirement savings. It would also reduce reliance on the age pension system, she said.

10 — Money Management February 16, 2012 www.moneymanagement.com.au

occurred in 2011, and that they would continue to seek out those stocks which were capable of ramping up returns by anywhere from 1 to 3 per cent.

“I expect an attraction to property – specifically around SMSFs and their ability to borrow – will also continue,” Dunn added. “The fact that we had some clarity come out of the tax office last year around what you can do in terms of acquisitions under the single acquirable asset – and then also

what you can do to make improvements to properties – means that we’ll see more activity there as well.”

And on the back of recent discussion that the SMSF sector was seeing more and more younger entrants, Dunn said that such investment trends would be an attractive prospect.

“They can, after all, take a 20 or 25-year view within their fund on some of these types of investments and look to take advantage over the longer term,” he said.

Cost of retirement holds steady

SPAA focussed on contributions caps

By Chris Kennedy

was paying a very attractive yield, but then all of a sudden they’ve brought out a profit result that’s more than halved their dividend.

“So you’ll find that the selfmanaged super fund market will now be far less attracted to that stock because its ability to provide a solid income is now in question.”

Dunn pointed out that a range of SMSF investors had benefitted enor mously through the BHP Billiton and Woolworths buybacks that

retirement will need to spend around $78.20 a week on housing, while couples seeking a modest lifestyle will need to spend $55.87 a week. In contrast, a comfortably retired couple will allocate $191.86 a week to food, $120.18 a week to health, $140.02 a week to transport and around $304.83 to leisure activities.

On a positive note for retirees, between the September 2011 quarter and the December 2011 quarter the study found that there was a 1.5 per cent decrease in the amount retirees would need to spend on food.

While transport costs remained relatively u n c h a n g e d b e t we e n t h e Se p t e m b e r a n d December quarters, electricity costs and leisure goods and services rose by 0.6 per cent and 0.8 per cent, respectively.

The report also recorded a 1.2 per cent fall in the price of health services as a result of falling pharmaceutical prices, particularly as more Australians take advantage of the Pharmaceutical Benefits Scheme safety net. Despite this, ASFA noted that over the long-term, health services tend to experience higher increases in prices than other categories of consumer goods and services.

More concerns around excess contributions

By Mike Taylor

THE Institute of Chartered Accountants in Australia has raised serious questions about the Government's approach to excess superannuation contributions and the role of the Commissioner for Taxation.

The questions have been raised by the ICAA's superannuation specialist, Liz Westover, who said she was disturbed by the refund process applying to the $10,000 available with respect to excess contributions. Under it the Commissioner will deduct from the refund any tax that the individual might owe following the contribution being reassessed as income to the individual.

Liz Westover She said that while this might seem fair enough, a catch existed.

"The Commissioner can also deduct any other tax liabilities owing to the tax

office, and also any other payments owing by the individual to other government agencies," Westover said.

She said that while current tax laws may permit the Commissioner to do this as the refund is made by virtue of a tax law, "it doesn’t seem quite fair for the Government to have ‘first dibs’ on any refunded amounts".

"This approach is inconsistent with the provision of relief," Westover said.

She said it had to be remembered that the majority of excess contributions were mistakes.

"The provision of some relief should not include a debt collection medium for the Government," Westover said.

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InFocus SNAPSHOT Top Issues For Underwriters

Getting the timing right on FOFA The Government seems determined to bring on parliamentary debate on the FOFA bills well before the May Budget but, as Mike Taylor reports, the minister needs to outline a viable transition timetable.

64 W 64 %

Regulatory burden

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Staffing issues

55

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Climate change/ weather events

45

%

Increased competition Source: J.P. Morgan Deloitte General Insurance Industry Survey 2011

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hen the Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann, earlier this month lambasted the Government for seeking to debate the Future of Financial Advice (FOFA) bills ahead of the findings of a Parliamentary Joint Committee (PJC), he was relying on formal parliamentary documentation.

Cormann was relying on the contents of the House of Representatives Draft Forward Program Indicating Legislation for Debate in the Autumn Sittings 2012.

While the document was certainly a draft, Cormann would have known that its contents were the product of public servants employed within the Department of the House of Representatives, who had gathered information from the various ministers’ officers via the Government whip. In other words, someone in the Government wanted the FOFA bills to be debated in the Parliament early in the Autumn session.

What Cormann would also have known is that, while it might not be good parliamentary manners, the Government was not legally obliged to wait for the findings of the PJC before bringing the FOFA bills on for debate in the Parliament.

It follows, then, that the Government is not obliged to accept the PJC recommendations and can simply pursue the FOFA bills as they currently stand, leaving it to the Opposition and the independents to force any amendments by way of parliamentary debate.

Given the original FOFA timetable laid down by the Government, it is hardly surprising that it is moving to have the bills debated as early as possible. However, in doing so it needs to send a clear signal to the industry that it will allow an appropriate period of transition.

Putting aside the financial planning industry's ongoing strong resistance to the two-year opt-in and annual fee disclosure obligations, the most constant theme in submissions made to the Government, the PJC and the Senate Economics Committee has been the need for appropriate transition arrangements.

Allied to the calls for appropriate transition arrangements has been a call to align the FOFA implementation with that of the Stronger Super bills – also currently the subject of a review by the PJC. The industry's position has been most clearly outlined in a submission filed – by the National Australia Bank and its wealth management arm MLC – with the Senate Economics Committee reviewing the FOFA bills.

In that submission, signed off by MLC chief executive Steve Tucker, the big group argues that "transitional arrangements are essential to enable the financial services industry sufficient time to implement these reforms".

"With the referral of both tranches of the legislation to the Parliamentary Joint Committee on Corporations and Financial Services and the Senate Economic Committee, it is most likely that the FOFA legislation will not pass Parliament until

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

at least the end of the first quarter 2012 and most of the obligations are due to commence 1 July 2012," it said.

"This compressed timeframe between the legislation being passed and the commencement date is not adequate for the proper preparation to comply with the new legislative obligations.

"Referral of related Bills to Parliamentary Committees may result in a delay to the final passage of the Bills, with the additional risk of late amendments," the submission said. "In addition, the industry relies on having completed laws to accurately develop systems and processes which we feel confident will comply with requirements.

"Any timetable for significant change requires appropriate structures for providing information on requirements and costs. This period encompasses: an analysis and economic impact assessment; a design phase; funding assessment and application; resource mapping and engagement; along with amendments to legal contracts (which may require external resources); disclosure and communication; and building, testing and launching the initiatives.

"Further, at the time of writing, the final components of FOFA have not been released, including the retail/wholesale mandated definitions which have a significant impact on other aspects of FOFA (affecting conflicted remuneration).”

The MLC submission also argued strongly for alignment of FOFA and Stronger Super dates "to ensure the industry manages to implement and

comply with the full suite of provisions related to the FOFA and MySuper policies”.

It recommended both the alignment of the FOFA ban on conflicted remuneration with the date employers must make contributions for employees who have not made a choice of fund to a fund that offers MySuper (1 October 2013); and a transitional two-year implementation timeframe for both FOFA and MySuper before sanctions apply.

"MLC believes the parallel between FOFA and Stronger Super will have a significant impact on how intra-fund advice may be provided to fund members," the submission said. "The provision of intra-fund scaled advice is contemplated in the Stronger Super Reforms. Thus, it is imperative that the FOFA legislation be considered in conjunction with the introduction of MySuper.

"Importantly, the FOFA legislation cannot be considered in isolation due to the potential related impacts which may affect the viability of providing intra-fund advice."

It seems that while the industry may have no choice in accepting the Government rushing to have its legislation debated in the Parliament well before the Budget and the winter recess, it will not easily or quietly accept a rushed implementation which drives up costs and the scope for unintended consequences.

Given that an appropriate implementation period would mean the post-FOFA and Stronger Super regimes will not fully apply until after the next Federal Election, there seems little reason for the Government to rush.

Cash

The

security

blanket

The popularity of cash products does not seem to revolve solely around sentiment anymore.

Milana Pokrajac reports.

14 — Money Management February 16, 2012 www.moneymanagement.com.au

Cash SELF-made multimillionaire and financial author Robert G. Allen recently uttered these famous words: “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case”.

While Allen makes a valid point, wealth accumulation is still not the top priority for many investors and their financial planners. The memory of the 2008 plunge and the crisis which ensued is still fresh, while constant mention of another dip does little to encourage investors back into the evervolatile investment markets. Thus, priorities still seem to revolve around risk avoidance and protection from capital loss.

z

Allocation of new money to cash doubled during 2011. z Advisers are beginning to build cash into long-term strategies. z There appears to be a move away form CMTs. z Year 2012 will bring more innovation to cash products. cial planner confidence plunging to one of its lowest points in the second half of 2011.

T h e l owe s t w a s t h e Se p t e m b e r quarter, with investor sentiment falling to -81. The three months leading to December 2011 saw the confidence slightly improve, but it still sat at -76.

T h e f i g u re s f o u n d i n t h e We a l t h Insights Sentiment Index represent a huge dip in confidence, considering investors were highly optimistic in the early months of last year.

The sur vey came up with similar results to those found in the Investment Trends research, showing a significant move to cash and fixed income – a trend which was evident even in the high-networth client space.

In a recent interview, Wealth Insights managing director Vanessa McMahon attributed market aversion to news headlines that focus on Europe’s debt crisis and a possible second GFC. The popularity of cash comes as no surprise. The Australian share market delivered a loss of 6.27 per cent for the

Cash – the investment of choice In the year to November 2011, there was a substantial shift away from growth assets, according to research from Investment Trends.

Financial planners almost doubled their allocation of new money to cash products over the past year, with an estimated $56 billion having been held in aggregate excess cash (refer to Table 1).

In the survey conducted by Investment Trends, advisers indicated that the main reasons for so much money being held in excess cash revolved around the lack of confidence in the stock market and the economic recovery.

This data merely reflects the latest sentiment figures released by Wealth Insights, which show investor and finan-

Table 1:

Allocation to cash November 2011

October 2010

All cash products

28%

16%

Term deposits only

17%

8%

37%

30%

$56 billion

$47 billion

Allocation of new money to cash

Allocation of existing money to cash All cash products The amount held in excess cash All cash products

deposits,” said Rachna Chandna, head of advice distribution at ING Direct.

Colonial First State’s (CFS) FirstRate In v e s t m e n t D e p o s i t – w h i c h w a s launched last April – has grown $100 million.

Similarly, ANZ-owned OneAnswer platform introduced six new ANZ term deposits which have generated more than half a billion dollars in inflows in under a year.

Billions of dollars held in excess cash ought to be returned to the market once sentiment improves, but is the domination of cash just a sentiment story or is there more to it?

Key points

Source: Investment Trends November 2011 Adviser Product Needs Report

Here to stay Kirsty Dullahide 12-month period ending November 2011 (as measured by the S&P/ASX 300 Accumulation Index), while an average term deposit returns around 6 per cent in the initial year.

But for Kirsty Dullahide, general manager for investment and strategy at Australian Unity, cash domination is a sentiment story – and a very ironic one at that.

“The performance of the Australian stock market does contribute and feed back into the performance of our economy, which then kind of feeds into how people are feeling, and so on,” she said. “They are certainly linked, and often people’s fear is one of the biggest contributors to how our actual investment market will perform – and that goes for any asset class.”

As a result, many product providers have recorded a spike in the uptake of their cash products over the past 12 months, particularly in term deposits – the appeal of which does not seem to fade.

Around 18 months ago, ING Direct launched a suite of term deposits available only to advised clients. Since the l a u n c h , t h e p ro d u c t h a s g row n t o $1.3 billion.

“The majority of this money has gone into long-term cash and also into term

Despite the prolonged period of volatility, the histor y has shown that the markets will eventually rebound, and it is only a matter of time when equities s t a r t o f f e r i n g h i g h e r re t u r n s t h a n income producing asset classes.

But Chandna believes that cash is no longer just a parking mechanism, but has well and truly become a permanent part of investors' portfolios.

“We know cash won't be king forever, but we've got a lot of advisers asking for strategic advice on cash – things like how to build cash into strategy for the longterm,” Chandna said.

The ageing population might play a crucial role in the continuation of this trend, as the first of baby boomers have entered retirement last year, with the rest to leave the workforce in the coming years. Many cannot afford losses or great risks, according to head of cash business at Macquarie Group, Peter Forrest.

That investors are using cash as part of their long-term strategy is particularly evident amongst those who are risk adverse or heading towards retirement, Forrest said.

"In pre-retirement and retirement, it is becoming at the forefront of people’s minds that they will no longer be receiving an income," he said. "Capital secuContinued on page 16

www.moneymanagement.com.au February 16, 2012 Money Management — 15

Cash Continued from page 15 rity and providing certainty and control is really important to them, and cash provides that; it allows advisers to plan for definite outcomes."

However, these observations are probably part of a bigger trend. Since the G F C , a d v i s e r s h a v e b e c o m e m o re sophisticated in how they segment their client’s portfolios, according to Colonial First State’s head of investment research, Peter Chun. “They generally set up buckets,� Chun said. “There is an income part of the portfolio, but there is also a growth bucket that’s more long-term focused which could eventually fund longevity.� “You still need a bucket of your portfolio that is looking to achieve growth,� he added. “When someone retires, they could live another 25-30 years, so if they were to park everything to cash or very conservative assets they may run out of money to fund their retirement.�

The so-called ‘bucket strategy’ also makes the conversation between advisers and their clients a lot easier, according to Barry Whyatt, the director of sales at AMP. “If you actually split the components of their portfolio into four different buckets – cash, fixed income, high yield in shares and annuities – clients would see that they’ve got short-term money, medium-term money and longer-term

“

We are for taking different types of risk to generate a return instead of just a polarised model of swapping between cash and shares.

- Peter Chun

�

Peter Forrest money,� Whyatt said. “When the market goes down your long-term bucket goes down in value – but you’ve already earmarked that at the initial advice stage as being the long-term bucket which you won’t touch for 7-10 years; so there is no need to panic, since you’d have plenty of money in the short-term bucket, and that’s where term deposits are.�

A tipping point While banks and other institutions keep offering very competitive rates on term deposits, the question on everyone’s lips remains: will there be a point where

investors will start looking for more value elsewhere and how soon will it come?

Two consecutive rate cuts by the Reserve Bank of Australia (RBA) recently brought the official cash rate to 4.25 per cent (TBA), with a 100 basis point drop to 3.25 per cent forecast by November 2012 (refer to Graph 1).

For Whyatt, the tipping point will happen once investors stop getting more than 5 per cent interest on their term deposits. “Although equities don’t have the capital stability or guarantees, the pure income yield now from the stock market is so attractive that there’ll come a point

as term deposits drop below 5 per cent (if interest rates continue to fall and if the yield on investments is over 6 per cent) where investors will start thinking about going back to the stock market with some of their money,� he said.

There is no question that if the RBA keeps cutting interest rates, staying in cash will become rather challenging, and advisers may start to look at getting back to the market, Whyatt says.

But it may take a while until this happens. AMP Bank has increased both its six-month (now 6 per cent) and 12month (now 5.5 per cent) term deposit rates, while their competitors keep offering similar rates. According to Chun, the pendulum is still “on the cash side�, and it might take a while until the money starts flowing to other asset classes. “For most investors, the returns have been quite challenging – not just in the last 12 months, but in the last five years since the GFC,� Chun said. “So for most clients (who mostly are either retirees or just retired) it is still very attractive, having cash returns with very little volatility and also a fixed rate.�

No love for CMTs In 2010, Macquarie transformed its cash management trust (CMT) into a cash management account (CMA) following the approval of unit holders.

Peter Forrest said there were two reasons for this move.

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Cash “A CMA is a bank account, and the Government guarantee applies for a bank account,” he said. “And secondly, retail deposits are able to offer higher rates than can be achieved by a CMT, which invests into wholesale markets.”

The move away from the CMT space was also seen by Phillipa Sheehan, the managing director of My Adviser.

“If clients are wishing to sit in a cash environment, they are really sitting in a CMA term deposit space,” Sheehan said.

In December 2010, AXA made a decision to close its CMA to new business.

The company said the decision was made in recognition of a decline in market demand for retail unit trusts.

“New flows into these products are generally sourced from platform-based offers, and there have been very few new direct clients into the fund in the last two years,” AXA stated on its website.

Fixed income a segue into the market?

Term deposits, CMTs and CMAs are all very clean and simple to understand.

But when investors finally decide to

reinvest excess cash, they will take smaller steps back into the market rather than diving in, according to Kirsty Dullahide from Australian Unity. Fixed income will be a natural segue away from cash and into the market, she said.

“The fixed income sector is really developing and evolving – in the 70s and 80s fixed interest was largely government bonds, and the instruments and the counterparties have certainly made a more complicated environment,” Dullahide said, adding the lack of understanding of fixed income may have

Cash remains king in SMSFs A RECENT Multiport survey found that self-managed super funds (SMSFs) have significantly increased their cash holdings, continuing to reduce their exposure to Australian shares.

Cash holdings in 1600 funds administered by Multiport increased by nearly two percentage points in the December 2011 quarter from 24.7 per cent to 26.7 per cent, while Australian shares dropped for the fourth consecutive quarter.

ING Direct has seen a big spike in term deposit sales to SMSFs, with long-term products being a particular trend with this client segment.

Many are moving into cash to take advantage of its perceived safety and returns from term deposits, many of which come with interest rate premiums greater than 1.50 per cent over the RBA cash rate.

But head of Macquarie Specialist Investments, Peter van der Westhuyzen, said the end to the cash party might be near.

Graph 1:

The biggest contributor is the cash rate cut by the RBA. “A leveraged solution may help SMSFs get the most out of Australian equities which right now are delivering attractive dividend returns and franking credits,” he said.

“With such a large amount of cash sitting on the sidelines, it is worthwhile reconsidering Australian equities as an investment class.”

While things might be looking up as far as Australia is concerned, the move away from cash is not guaranteed.

Back in March 2010 – when investor sentiment was much more positive than it is in the first quarter of 2012 – a UBank survey found that SMSF investors had no plans to alter their cash allocation, despite improving economic conditions in Australia.

However, Multiport chief executive John McIlroy said a significant number of longer-duration term deposits that matured in the December quarter 2011 had not been rolled over.

ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve

contributed to some of the issues during the GFC. “Those fixed income funds which are more actively managed will really have a very promising and important role to play in people’s portfolios as they start taking more risks.”

Howe v e r, C h u n s e e s i n v e s t o r s jumping fixed income and bonds completely and diving straight into the share market when the time comes.

“With bonds, unfortunately, the whole difficulty consumers have understanding fixed interest has meant that for most people it’s been about cash or going to the share market,” he said.

But Colonial is advocating portfolios where investors are in bonds with duration and credit risk. “We are for taking different types of risk to generate a return instead of just a polarised model of swapping between cash and shares,” Chun said.

Outlook Whether investors stay in cash or start returning to the investment markets is going to depend on events in Europe.

Uncertainties surrounding Europe and the US are still casting a ver y dark shadow on investor sentiment, and the next 12 months will see investors remain very cautious.

But the year 2012 will also bring more innovation into cash. For both Macquarie and CFS, the theme of generating income still holds true, with both institutions flagging the development of new c a s h p ro d u c t s a n d t h e t e c h n o l o g y surrounding them.

ING Direct, too, is expecting aggressive cash portfolios in 2012, forecasting cash sector growth until at least 2015.

These predictions and data on cash allocation from the past 12 months could result in another slow year for fund managers, but Barry Whyatt from AMP believes excessive allocation to c a s h c o u l d re s u l t i n b a d n e w s f o r investors, too. “ T h e d a n g e r i s – c o m e Ap r i l t h e m a rk e t s c o u l d s u d d e n l y b o u n c e upwards very quickly and we could suddenly go from 4,200 to 4,800 in the blink of an eye, and people would have missed out on 10-15 per cent growth very quickly,” he said. “You’ve also got t o w a t c h t h e i n f l a t i o n ra t e ; a t t h e m o m e n t t h e ra t e yo u g e t i n t e r m deposits is higher than the current CPI [consumer price index], so you’re not losing money in real terms – but if the interest you get in a term deposit gets below inflation rate, then you’re losing money in real terms.”

Investors and their advisers will ultimately need to stop thinking about the preservation of capital and shift their focus to funding their retirement, said Dullahide.

“Ultimately, that preservation [of capital] is not relevant to the cost of living, so at some point in time it is important that investors do start thinking about how you go from preserving your capital in an absolute sense to preserving your capital relative to your growing costs of living – and then potentially looking to grow it,” she said.

Both Dullahide and Whyatt believe 2012 will finally bring that shift from short-term thinking to long-term. MM

Source: Australian Securities Exchange

www.moneymanagement.com.au February 16, 2012 Money Management — 17

OpinionRisk

Flexing the PECs Col Fullagar covers the topic of pre-existing exclusion clauses in risk insurance policies.

W

hat is a ‘pec’ and where can it be found? After posing this question to a group of people, a number of different answers might be forthcoming: • Those who workout in the gym, might suggest that a ‘pec’ is a muscle found around the chest region; • Those with a keen knowledge of geography might disagree, citing that Pec is a village in the Czech Republic near the German border; but • Those involved in the financial services industry might point out that a PEC is a pre-existing condition exclusion.

The last group might then add that PECs are a necessary component of insurance policies for which few, if any, underwriting questions are asked at the time of application – for example, direct insurance and some group insurance facilities.

When there is little or no requirement for underwriting information to be provided, the insurer is limited in their ability to make an assessment of the risks associated with the insured.

The presence of a PEC is therefore an important protection for the insurer against anti-selection. For example, someone with a material, pre-existing condition might otherwise seek to put in place insurance with prior knowledge that a claim is likely to ensue.

The protection that a PEC provides is to exclude claims arising from medical conditions that existed prior to the policy starting.

An example of a PEC is: “You are not covered for an insured event arising from any injury, sickness or disease contracted prior to the commencement date – unless you were not aware of, and could not reasonably be expected to have been, aware of the condition.”

A PEC can also exist by virtue of the definitions of sickness and injury: “Injury means an accidental bodily injury which is sustained after the commencement date”; and “Sickness means a sickness or disease which first becomes apparent after the commencement date.”

By reducing the insurer’s reliance on the underwriting process, the use of PECs enables insurance to be put in place quickly and inexpensively. However, the trade-off is that a proportionally higher level of assessment occurs at the time of claim with, one would expect, a higher rate of claims being declined and disputes arising.

In essence, underwriting occurs at the time of claim rather than at the time of application.

The latter position generally occurs with retail risk insurance. The insured completes an application form and the insurer undertakes a comprehensive assessment process – such that an appropriate premium rate can be charged, exclusions offered, or the risk declined.

Rather than the insurer simply asking questions and trusting the insured will respond appropriately, the position of the insurer is protected by the insured’s duty of disclosure found in section 21 of the Insurance Contracts Act (1984).

The duty of disclosure places a legal obligation on the insured to disclose all matters they know – or a reasonable person in the circumstances of the insured would be expected to know – is material to the insurer’s decision to accept the insurance.

It would, in turn, be reasonable to expect that the insured’s obligation under the duty of disclosure would require disclosure of, quoting from the above PEC: “…any injury sustained or sickness or disease contracted prior to the commencement date;” Unless, of course, the insured was: “…not aware of, and could not reasonably be expected to have been aware of, the condition.”

Not only does the Act place obligations of disclosure on the insured, but it also provides the insurer with remedies if the insured fails to meet their obligations.

The remedies are found in section 29 of the Act – in brief, the policy can be cancelled within three years if the matter not disclosed is material to the insurer’s assessment, and at any time if the non-

18 — Money Management February 16, 2012 www.moneymanagement.com.au

disclosure is fraudulent.

With this type of protection being provided to the insurer, there would appear to be no reason for the policies subsequently issued to include a PEC. Notwithstanding the apparent soundness of this logic, which may possibly be in line with popular perception, PECs are in fact alive and well in retail life insurance policies where the full application and underwriting processes are similarly alive and well.

Consider the following examples taken from currently available retail products: “We are not liable to pay a benefit … in connection with a condition which first occurred or a condition, the circumstances leading to which first became apparent, before the cover under this policy came into effect unless: • You were unaware and could not reasonably have been aware of the condition or circumstances before the cover came into effect; or • You disclosed the condition or circumstances to us before your policy came into effect and we have not excluded cover for the condition or any condition resulting from the circumstances;” And “We will not pay a benefit for any disability, condition or loss arising from or contributed to by sickness or injury that first appeared, happened or was diagnosed before this insurance started unless

disclosed to, and accepted by, us as part of the application process.”

If PECs are present in these policies, it should be assumed they are there for a reason, with the reason possibly being the insurer feels these clauses will provide protection over and above that of the duty of disclosure.

As previously noted, PECs generally exclude from cover known pre-existing conditions, whilst the duty of disclosure obliges the insured to reveal details of known pre-existing conditions.

Is it therefore possible that an insured could meet their duty of disclosure but still fall foul of a PEC? In other words, the insured is suffering from a condition at the time of application which was of a nature that did not require disclosure in the application form.

Logically, the answer must be ‘yes’, otherwise there would appear to be no point having both a PEC and a duty of disclosure co-existing in the policy.

Case study Jeff is feeling a little bit run down as he has been working longer hours than normal over the last two weeks, and to make matters worse, it appears he is suffering from the flu.

He has a prearranged appointment with his financial adviser to implement some insurance previously recommended to him. Whilst Jeff’s preference would be to

defer the appointment, he decides to go ahead as he needs the cover in place so that he can affect an investment loan.

Jeff meets with his adviser, and subsequent to Jeff being advised of his duty of disclosure and confirming he understands it, Jeff completes the application with his adviser’s assistance.

He mentions that he is suffering from (what appears to be) the flu, and asks whether or not he should mention this on the application.

Consider two scenarios: (i) Jeff advises that he does not believe the condition warrants seeing his doctor; (ii) Jeff advises that he saw his doctor who did not prescribe any treatment as it was not considered sufficiently serious to warrant it.

Both Jeff and his adviser agree that, in the circumstances, it hardly warrants disclosure.

The application is submitted online and is completed immediately.

Jeff ’s adviser congratulates Jeff and informs him that he is now on risk.

Again, consider two scenarios: (i) A week later, Jeff’s condition deteriorates; (ii) Jeff’s condition improves, and all appears okay, but several months later it flares up again.

Jeff is rushed to hospital, where he is diagnosed as suffering from a serious viral illness.

Advisers should be aware that PECs currently exist in “some retail underwritten risk policies, and they can – and have – been invoked at the time of claim. ”

If Jeff’s policy contained either of the clauses detailed above, could his claim be reasonably contested?

Section 47 of the Act provides the following protection to Jeff: “Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into.”

Uncertainty may arise in regards to matters such as: • Because Jeff was unaware of the precise

nature and underlying severity of the sickness, does section 47 protect him?

• Does the reference to “sickness or disability” suggest that a PEC might only apply to the specific condition that preexisted, as distinct from a related condition?

• Would the fact that Jeff was suffering symptoms prior to the policy starting mean that awareness is deemed to exist?

• Does a medical attendance complicate or assist Jeff’s position in that the doctor’s medical notes and opinion may influence the outcome?

• Is it necessary for the subsequent claim to be linked to the pre-policy symptoms?

• Is it necessary for a diagnosis to be made in order for the condition to be deemed a sickness?

• Would the timeline from symptoms, policy start, and claim materially influence the outcome?

Irrespective of the above, if the insurer reasonably believed that Jeff was more aware of his condition than he indicated to his adviser, the presence of the PEC within his insurance policy would give the insurer a lever to contest the claim separate to the rights that exist under section 29.

An insurer invoking a PEC may be able to avoid the claim, but PECs do not give rights in regards to cancellation of the policy. On the other hand, if the condition was sufficiently far-reaching, the policy might be rendered all but useless as it can be asserted that all future claims are linked to the now ‘excluded’ pre-existing condition.

Depending on someone’s outlook, the existence of PECs in underwritten policies might either be seen as: • A good thing that provides insurers with an additional layer of protection from fraudulent claims which would otherwise damage the insurer’s claim experience and increase rates for other insured persons; or • A little-understood clause that could be used to disadvantage an otherwise genuine claimant, and in the process, expose the adviser to personal and business risk for recommending the policy in the first place.

Section 37 of the Act places the following responsibility on insurers: “Notification of unusual terms – an insurer may not rely on a provision included in a contract of insurance … of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the contract was entered into the insurer clearly informed the insured in writing of the effect of the provision (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise).”

PECs are not present in all retail risk insurance policies, but they are present in some. Whether this is sufficient to render them an unusual term, time may tell.

The other risk for the adviser, however, comes in the way the client is briefed regarding the duty of disclosure. It may be that the presence of a PEC in the recommended policy will require the adviser to appropriately brief the client in regards to these as well.

Consider the position of Jeff, who decides to take legal action against his adviser for recommending the PEC policy instead of one without a PEC. Advisers should be aware that PECs currently exist in some retail underwritten risk policies, and they can – and have – been invoked at the time of claim.

Advisers may not need to know all the technical and legal complexities of these clauses, but irrespective of whether an adviser is representing the insurer or the insured, it may be prudent for them to know what a PEC is and where it can be found.

Col Fullagar is the national manager for risk insurance at RI Advice Group.

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

OpinionBusiness risk

A business proposition Business risk insurance should be a key component of every risk strategy, but only a fraction of companies are properly insured, writes Jason Bamford.

F

or self-employed clients or those in a small partnership, income protection insurance only provides half the necessar y protection in the event of illness or injury. That is why business expense insurance – in addition to income protection – is fundamental to ensuring the continuity of your client’s business.

Business expense insurance should be a key component of every business risk strategy – regardless of whether the client is a tradesperson with an apprentice, a dentist running their own practice, or a new growing business that is still reliant on your client generating the income. However, while there are 1.9 million Australians who own and operate one or more businesses, only 18,300 are covered by business expense insurance. This suggests many are either uninsured or relying on other insurance in place.

The concept of business expense insurance is relatively straightforward, as most business owners have taken on some debt and signed a lease. However, sole-traders who are setting up their businesses often fail to include this cover in their business plan, as minimising the burden on cashflow is seen to be more important.

People in this position are often particularly exposed, as their sole source of income is reliant upon their ability to operate their business. In the majority of cases, they simply don’t have the reserves to draw upon if they can’t work.

When the risk becomes reality Over 60 per cent of Australians will be disabled for more than one month during their working life. Further, over 25 per cent of Australians will be disabled for more than three months.

In the event the client is unable to work, income protection replaces up to 75 per cent of pre-disability income. This money can help cover everyday costs and household bills, but how will business expenses like rent, salaries and

“

No other insurance cover – be it life, total and permanent disability, critical illness or business interruption cover – is an effective replacement for this.

”

overheads be paid?

While revenue has been reduced through the client’s inability to work, the fixed business expenses have not. Effectively, this may result in one of two scenarios: 1. The client will be forced to cover their business expenses using financial resources not intended for this purpose (eg, income protection benefits, mortgage – or second mortgage – on the home).

2. Debts will simply rise and the business will be at risk.

Business expense insurance, therefore, helps businesses survive by covering the business costs while clients are unable to work due to illness or injury.

No other insurance cover – be it life, total and permanent disability, critical illness or business interruption cover – is an effective replacement for this.

Case study 1: sole-trader Amir, a glazier and keen sportsman, has recently set up his own business as a sole-trader. He earns a net income of $10,000 per month and insures himself for $7,500 under income protection (ie,

20 — Money Management February 16, 2012 www.moneymanagement.com.au

75 per cent of his income). He does not have business expense insurance.

Amir dislocates his knee while participating in a social football game and the doctor is adamant he must remain off his knee for up to six months. Although Amir has stopped earning an income, the following monthly expenses continue to accrue: • Rent of building: $1200 • Electricity: $200 • Water: $100 • Lease of work car: $400 • Advertising (contracted): $500 Amir’s income has dropped from $10,000 per month (pre-disability income) to $7,500 (income protection benefit payment) – and he must continue paying his business expenses. Once these costs are subtracted, he is left with just $5,100.

This leaves Amir with 51 per cent of his pre-disability income to cover his personal expenses including the mortgage, children’s school fees and general day-to-day costs.

Case study 2: joint partnership Dina and Brett run a successful business.

They each generate an income of $22,000 per month and are jointly responsible for meeting the total average business expenses of $20,000. This leaves them $12,000 each to draw as net income every month.

Brett has taken out income protection and business expense insurance, but Dina has only covered herself via income protection.

The tables on Page 21 show what could happen if either Dina or Brett became disabled.

Dina’s income protection cover would provide a monthly benefit of $9,000. This represents 75 per cent of her income (net of expenses) before tax.

However, because she doesn’t have business expense insurance, she will either have to rely on Brett to cover her share of the expenses (reducing Brett’s income) or fund the business expenses

out of her own pocket (most probably from her income protection benefit). As a result, she is only left with $1,000 per month to meet her personal expenses.

Effectively, Dina’s income protection policy is not replacing 75 per cent of her income. It is now being used primarily to cover the business expenses to keep the business going while she is disabled. In fact, she now has less than 10 per cent of pre-disability income to live off while disabled.

On the other hand, Brett is insured for 100 per cent of his share of fixed business expenses. He can use his income protection benefits for what they are intended for – to meet living expenses while unable to work.

Avoid a nasty tax surprise From a taxation perspective, income protection claim proceeds constitute assessable income and are assessed at the client’s marginal tax rate. However, the Income Tax Assessment Act 1997 contains provisions prohibiting the offset of business losses against other categories of assessable income.

In accordance with this legislation, the Full Federal Cour t in Watson v

Deputy Commissioner of Taxation 2010ATC20 has ruled against an income protection claimant offsetting his business expenses against the claim proceeds from his income protection policy for tax purposes.

Therefore, the failure to supplement the income protection cover with business expense cover can lead to the client having a tax liability in spite of being in a loss position economically.

In the context of Case Study 2, Dina has assessable income of $9,000. She

cannot deduct her business expenses of $8,000 to reduce her taxable income to $1,000. She is required to carry forward her $8,000 business loss and may only utilise this deduction if she derives sufficient business income in future years.

This is contrasted with the position of Brett. He receives $8,000 from his business expense policy. This is assessable business income and he has business deductions of a corresponding amount.

The $9,000 income protection claim proceeds are also assessable but his

taxable income matches the cash amount received by him.

Take the opportunity to upsell Income protection is designed to cover up to 75 per cent of taxable income so that your clients can maintain their lifestyle if they are disabled and unable to work. It is not designed to cover the fixed business expenses. Using income protection benefits for this purpose can effectively halve the protection that is needed. Additionally, your clients could be up for an unplanned tax surprise.

Business expense insurance is required to cover salaries, rent, equipment expenses, business insurances, interest on loans and everyday business overheads such as electricity and cleaning – so your client’s business can survive.

With the large number of small businesses out there and the under-penetration of business expense insurance, take the opportunity to upsell this muchneeded cover to your existing client base.

Jason Bamford is the national technical services manager at TAL Australia.

Table 1 Practice (per month)

Partner (per month)

Income

$44,000

$22,000

Business expenses

$20,000

$10,000

Income less business expenses

$24,000

$12,000

Table 2 Income protection insurance benefit

Dina

Brett

$9,000

$9,000

$0

$8,000

Business expense insurance benefit (assuming that fixed business expenses per partner are $8,000 per month) Ongoing business expenses

$8,000

$8,000

Net income less business expenses

$1,000

$9,000

Business expense insurance 101 BUSINESS expense insurance covers the fixed operating costs (not the variable expenses). Most insurance companies provide worksheets to help calculate the business expenses.

Business expense insurance can be tailored to fit within the budget. It is relatively inexpensive and the premium is tax deductible. Also, the benefit payments are used to pay ordinary business expenses, so although it is assessable as income, there is an offsetting deduction for the business expenses, provided that they meet the other requirements for tax deductibility.

Claims aren’t as complicated as many income protection claims, as the majority of expenses covered are fixed commitments – so providing documentary proof like rent is relatively easy. www.moneymanagement.com.au February 16, 2012 Money Management — 21

OpinionLarge cap

Boutique

integrity

The past 12 months have seen unusual trends emerge in the Australian equities large cap sector, according to Lin Ngin.

The following text is an excerpt from Lonsec’s Australian Equities Large Cap Sector review.

I

n the 2011 review, fund managers reported difficult trading conditions, with few institutional mandates being awarded and retail fund flows being generally flat. Conventional wisdom would suggest that smaller boutique managers are most at risk during market downturns. While this may potentially still be true for the wider market (of the large cap Australian equity managers surveyed

by Lonsec), it is the larger managers that have been generally observed managing heightened business risk. Specifically, some of the larger managers rated by Lonsec are taking action such as reviewing operations, cutting staff, and engaging in corporate activity.

Lonsec’s smaller boutique managers have generally exhibited a high level of business stability and resilience in the face of declining funds under management. That said, Lonsec has generally

rated only one genuine boutique firm (Integrity). The most prevalent form of boutique manager rated by Lonsec is the model where a boutique is backed by an institutional parent or some other supporter. At the day-to-day level, this model allows boutique managers to focus on investment management and still have access to resources and non-investment related infrastructure and marketing support from a larger organisation. At a financial level, it often allows the boutique to have access to the balance sheet (or financial support) of a parent should it be necessary. At the time of this review, Lonsec has no immediate business risk concerns regarding any of the boutique managers currently on the ‘recommended’ list. That said, it should be noted that this business model offers little protection from when the parent itself encounters difficulty.

22 — Money Management February 16, 2012 www.moneymanagement.com.au

Market environment The Australian share market (as measured by the S&P/ASX 300 Accumulation Index) delivered a loss of 6.27 per cent for the 12-month period ending November 2011. The market was weak for much of the year, with only three positive months. (Refer to Figure 1.)

The market was dominated by macro themes, particularly in terms of events offshore as investors sweated on the European sovereign debt crisis, looked for signs of a recovery in the US, and eyed China warily for evidence of a slowdown. Managers found adding value from bottom-up stock picking difficult in this environment. Given the risk on/risk off macro nature of the market, fund managers with a more “top down” element to their process should be better equipped.

However, market timing remains an

imprecise and elusive art, and many managers were caught out being “too early” in increasing the active risk in their portfolios. Lonsec notes that managers who looked to “dip their toes in the water” by increasing active risk through media stocks – rather than consumer discretionary and resource stocks – were impacted by stock specific issues with the market’s largest media stock, News Corporation (UK phone hacking scandal).

In the past several years, a number of themes have dominated the market. The two strongest themes were the performance of resources far outstripping industrials, and the outperformance of smaller cap stocks versus large cap stocks. In the 12 months to November 2011, this relationship has been flipped on its head with the S&P/ASX300 Industrials Index far outstripping the S&P/ASX300 Resources Index. Likewise, smaller cap stocks trailed

larger cap names, with the S&P/ASX Small Ordinaries lagging the headline S&P/ASX300 Index. (Refer to Figure 2.)

As signalled in last year’s sector review, Australian companies remain in relatively good shape, having cut costs, recapitalised balance sheets and reduced levels of debt post the global financial crisis. With an excess of capital on balance sheets, many companies looked to either return capital (via share buybacks) or deploy capital (through acquisitions). The major off-market share buyback was BHP, which bought back $6 billion (4.4 per cent of its capital base) in 2011. A large number of companies also undertook market capital management, including relatively small “growth” style companies such as JB HiFi and Carsales.com.au.

Initial public offerings (IPOs) were relatively thin on the ground, except for small resource companies. The last

major non-resource IPOs were QR National and Myer – neither of which were popular with Australian fund managers at the time of floating. The lack of new stocks to the market, coupled with the departure of large industrial stocks such as Fosters (acquired by SABMiller) naturally poses the question of whether the Australian market – which is already concentrated around the big four banks and BHP and Rio Tinto – has become too concentrated. Lonsec takes the view that markets are cyclical. Many of the acquisitions of businesses and companies by private equity have been opportunistic due to prices being too cheap, and it is likely that when the cycle turns, these will be put back to market.

Fund performance The peer group delivered an average excess return of 0.52 per cent (after fees)

Figure 1 Market environment: November 2010 - November 2011 15% 10% 5% 0% -5% -10%

ASX300 Accumulation

1 -1 ov N

1-

ct

-1

1

11

O

p-

g

Se 1-

1-

1 Au

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1-

1-

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11

1 1-

1-

M

Ju

ay

r-

-1

11

1

Ap

M 1-

1-

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-1

11 bFe

1-

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1-

1-

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11

10

-15%

ASX300 Resource Accumulation

ASX300 Industrials Accumulation

ASX Midcap Accumulation

ASX Small Ordinaries Accumulation

Source: LONSEC, Australia Equities Large Cap Sector Review, January 2012.

Figure 2 Benchmark

12 months to November 2011

S&P/ASX 300 Accumulation Index

-6.27%

S&P/ASX 300 Small Ordinaries Accumulation Index

-12.09%

S&P/ASX 300 Mid Cap 50 TR

-9.25%

S&P/ASX 300 Industrials Accumulation Index

-1.32%

S&P/ASX 300 Resources Accumulation Index

-16.37%

Inflows and funds under management Similarly to last year’s review, the trend towards low cost, passive alternatives in Australian equities continued in 2011, with

Source: LONSEC, Australia Equities Large Cap Sector Review, January 2012.

Figure 3

over the 12-month period to November 2011. Over the three-year period, the Lonsec peer group average excess return was +0.44 per cent per annum (after fees).

There was a large divergence between the top and bottom performing funds across the peer group, driven mainly by the respective performances of the value-style managers. The value-style managers performed strongest as a group, with an average excess return of 1.58 per cent (after fees). In contrast, the average excess return of the other style managers was negative.

The divergence between the top value fund and the worst value fund was extreme, however, with a gap of greater than 14 per cent. Lonsec also notes that the value managers were highly polarised as a group.

Investors Mutual and Perpetual had strong 12-month periods, whereas Perennial Value, Legg Mason, AXA and Zurich (ATI) were amongst the worst performers over the same period. Lonsec notes that the best performing stocks during the year were defensive stocks. However, defensive stocks were relatively expensive during the year, which would make it difficult for a true to label value-style manager to buy defensive stocks. That said, Lonsec’s quantitative style analysis of Investors Mutual and Perpetual indicates that both managers have remained true to label value managers. (Refer to Figure 3.)

Franking levels across the sector have been higher than normal. This has been driven by participation by many managers in some of the large buybacks that have occurred – in particular, the off-market buyback undertaken by BHP. The BHP buyback was structured so investors received $40.9 in cash value per share. This value represented a 14 per cent discount to BHP’s volume-weighted average price for the preceding five days to 8 April 2011.

The $40.9 comprised a capital return of $0.28 and a fully franked dividend of $40.6.

The structure of this buyback meant that the tax benefits were extensive and resulted in particularly high franking levels for funds that participated.

Active Peer Group Excess Return by Style: : November 2010 - November 2011 Value

Number of funds (active) Excess Retrun – Peer Average

Growth

Core

Style Neutral

Overall

14

8

9

7

38

1.58%

-0.30%

-0.09%

-0.09%

0.52%

Excess Return – Top

9.42%

2.06%

2.00%

2.01%

9.42%

Excess Return – Bottom

-4.77%

-3.55%

-3.23%

-1.00%

-4.77%

Difference between Top & Bottom

14.19%

5.61%

2.23%

3.01%

14.19%

Source: LONSEC, Australia Equities Large Cap Sector Review, January 2012.

retail fund inflows towards active strategies being relatively flat. In addition, the increasing popularity of exchange traded funds and availability of separately managed accounts has created increased competition for the traditional managed fund or unitised investment product.

Portfolio positioning – market cap bias The average market cap exposure of the peer group remained largely unchanged compared to the same period last year. In 2011, there was a marginal reduction in the average exposure to top 50 stocks (large cap), with a corresponding increase in the average exposure to ex-100 stocks (small caps). Compared to the benchmark, the average fund was underweight large cap stocks and overweight ex-300 stocks.

This part of the market may include dual listed stocks, hybrids, participation in placements and other corporate actions.

Cash levels stayed relatively consistent, with levels reported in the last sector review. (Refer to Figure 4.)

Consistency The outperformance ratio is the number of months that a fund outperforms the benchmark over the period, expressed as a percentage of the total number of months over that period. It is a measure of consistency, and when used in conjunction with excess return information for the same manager will indicate if returns are being generated through a small number of larger wins or a larger number of small wins.

On the measure of consistency of returns over the year to November 2011, six funds reported an outperformance ratio of 75 per cent including the Perpetual Australian Share Fund, Perpetual Concentrated Equity Fund, Ironbark Karara Australian Share Fund, Investors Mutual Industrial Share Fund, Investors Mutual Australian Share fund and the BT Imputation Fund.

Over the three-year period assessed, the Greencape Broadcap Fund was clearly the best performing fund based on consistency with an outperformance ratio of 72.2 per cent. It was followed by the Perpetual Australian Share Fund (63.89 per cent) and the Legg Mason Australian Equity Value Trust (61.11 per cent). The BlackRock Australian Share Fund reported an outperformance ratio of 25 per cent – meaning it was only able to generate outperformance in nine out of 36 months over the threeyear period to November 2011.

Note: The above text is an excerpt from Lonsec’s Australian Equities Large Cap Sector Review, which was released in January 2012.

Lin Ngin is a senior investment analyst at Lonsec.

Figure 4 Market Cap

Peer Group Average 2008

Peer Group Average 2009

Peer Group Average 2010

Peer Group Average 2011

S&P/ASX 300

Large cap (% portoflio of top 50)

70.2%

76.9%

75.3%

74.0%

81.6%

Mid cap (% portfolio by value of top 51-100)

12.3%

11.8%

10.8%

10.3%

9.3%

Small cap (% of portfolio by value outside top 100)

10.3%

5.6%

7.1%

8.6%

8.8%

Non index (% of portfolio by value ex top 300)

4.2%

3.8%

5.0%

5.0%

0%

% of portoflio by value in cash

3.6 %

2.1%

1.9%

2.1%

0%

Source: LONSEC, Australia Equities Large Cap Sector Review, January 2012.

www.moneymanagement.com.au February 16, 2012 Money Management — 23

Opinion The year of the reality check Although financial planners are in for another tough year, Mark Rantall believes this could be a good time to reflect on how to create a sustainable positive outlook for one’s business.

L

ast year once again saw an eventful 12 months punctuated at home by endless regulatory announcements dominated by, but not limited to, the Future of Financial Advice (FOFA) reforms, the usual political ructions and reshuffles, and ongoing industry tensions between factions with varied vested interests.

All of this was underpinned by the prevailing ominous cloud of global uncertainty driven from both sides of the northern hemisphere – in the United States and, more worr yingly, from Europe.

Despite a robust economy and good growth prospects, the knock-on effects of overseas events resulted in a stock market return that was 10 per cent down on the previous year.

From the Financial Planning Association’s (FPA’s) vantage point, our ‘helicopter view’ of the financial services landscape in Australia tells us that financial planners are in for another tough year in 2012.

Clients will continue to need reassurance and rebalancing of their portfolios.

Markets will continue to be unpredictable. Governments and regulators will continue to wax and wane in the course of finalising and executing new policy and legislation. Advice business models will continue to be challenged and adjusted.

And you – the professional financial planner – will continue to juggle all of these demands while striving to provide an important and valuable service to Australians in helping them to secure a healthy financial future.

This is a good time for financial planners to take stock and reflect on how they can create a sustainable, positive outlook for their business. What are your answers to the following questions?: • Do you make it crystal clear to your clients what they’re getting from you, h ow m u c h i t c o s t s a n d h ow t h e y will pay?

• Is it clear to your prospects why they should entrust their financial future in your hands?

• What additional steps can you take to reduce your compliance risks?

• How do you set yourself apart from other financial planners, and what can you do to promote your professional reputation?

• If you are growing your practice, how can you attract the best talent and distinguish your business in the community as trustworthy and working to the highest standards of care?

Tough times present tough challenges.

But it can also present a perfect opportunity to take a reality check and think about exactly how you can create a clear and vibrant future for your business.

While you can take time to reflect, consult your peers and family, or enlist the support of your dealer group, it is

24 — Money Management February 16, 2012 www.moneymanagement.com.au

also a good opportunity to engage with your professional body to seek answers to these questions.

Making a commitment to your professional body and signing up to a code of ethics are, in our view, key elements of creating a strong and fulfilling profes-

sional future for financial planners – whatever is happening in the world around you.

Mark Rantall is the chief executive officer of the Financial Planning Association.

Toolbox First Home Saver Accounts Anna Mirzoyan explains the benefits of a First Home Saver Account, client eligibility and restrictions that apply to accessing any accumulated amounts.

T

he First Home Saver Account (FHSA) was introduced by the Gover nment on 1 October, 2008 to assist first home buyers to save for their first home.

However, an account holder must meet certain conditions before they can access amounts within a FHSA.

Benefits of the FHSA A FHSA provides an account holder with taxation benefits through the concessional tax treatment of investment earnings. The earnings on the accounts are taxed at 15 per cent which is payable by the product provider. The income derived from a FHSA is not included in the account holder’s tax return and therefore does not affect any income-tested Centrelink benefits or tax offsets they may be entitled to.

Furthermore, eligible withdrawals from these accounts are tax-free.

In addition, the government will make a contribution equal to 17 per cent of an account holder’s personal contributions up to the FHSA Contribution Threshold (currently $5,500 indexed at AWOTE [average weekly ordinary time earnings] in $500 increments). By making a contribution of $5,500 to a FHSA the account holder will receive the maximum government contribution (currently $935).

All personal contributions must be made from after-tax funds and do not need to be made by the account holder.

Contributions made by a third party, such as parents, are also entitled to the government contribution.

It is possible to contribute more than the threshold amount in a financial year and there is no minimum investment. An account holder can continue to make personal contributions as long as the balance does not exceed the account balance cap (currently $85,000 i n d e x e d a n n u a l l y a t AWOT E a n d rounded down to the nearest multiple of $5,000).

Importantly, the rules governing a FSHA limit the amount contributed to the account balance cap. Therefore any contributions made after the cap has been reached must be returned to the account holder. Effectively, once the cap has been reached, only account earnings and any outstanding government contributions can be added to the balance.

Who is eligible to establish a FHSA? To establish a FHSA an individual must not have previously owned (either on their own or jointly) a home in Australia or Norfolk Island that has been their main residence. However, the individual may have owned an investment property they never lived in.

In addition, they must: 1. Be aged between 18 and 65; 2. Have a Tax File Number; 3. Not already have or previously had a FHSA unless: • They are recontributing funds that were withdrawn for a purchase of property that has failed to go through; or • They are transferring the funds from one provider to another (applies to full transfers only).

An important point to note is that the rules to establish a FHSA do not take into consideration the circumstances of the account holder’s partner. For example, an account holder can have an account even where they are living in a house owned by their spouse. Similarly, they can withdraw the funds to purchase a property with their spouse even where the spouse has previously owned a home.

Account holder’s eligibility to access the accumulated amount of their FHSA The accumulated amount can be accessed by closing the FHSA and with-

drawing when either the: • ‘Four-year’ rule has been met. This means the account holder has invested at least $1,000 in four separate financial years (one of which may be the financial year in which the account is closed). It is not necessary that the financial years are consecutive.

• The balance of the FHSA has reached the account balance cap and the account holder has held the account for at least four years.

• The account holder is building or purchasing a main residence with another FHSA holder, who is eligible to access their funds.

• The account holder has purchased their first home before meeting the fouryear rule but they have met the minimum four-year qualifying period. The year in which the main residence is purchased counts as a qualifying year.

• The account holder has turned age 60.

Similar to the rules to establish a FHSA, the rules to access the available balance of a FHSA do not take into consideration the circumstances of the

account holder’s partner. For example, an account holder is able to access their FHSA if he/she is building or purchasing a main residence with another FHSA holder who is eligible to access their FHSA. When the account holder withdraws the funds from a FHSA they must withdraw the entire balance at once and close the account. They must then spend these funds on purchasing or building a home within six months of withdrawal.

However – as noted earlier – if the purchase of the property falls through due to reasons beyond the ex-account holder’s control and a portion of the funds were spent in attempting to acquire the property, then the account holder can establish a new FHSA and recontribute the withdrawn funds, less the expenses incurred. This must be done within six months of withdrawing the funds.

Importantly, if the account holder has built or purchased their main residence before accessing the funds held Continued on page 26

www.moneymanagement.com.au February 16, 2012 Money Management — 25

Appointments

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

THE Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has appointed former OnePath national technical manager Graeme Colley as director of education and professional standards.

In his new role, Colley will focus on developing SPAA’s established professional standards and education program.

Graeme Colley With over 30 years experience in taxation and superannuation, he has served in senior positions at the Australian Taxation Office and as an assistant commissioner of the Insurance and Superannuation Commission. He has also worked with Macquarie Bank, WM Mercer

and the Institute of Chartered Accountants of Australia.

From 2001 up until joining SPAA, Colley worked at OnePath where he was responsible for providing technical advice on strategies relating to superannuation, Centrelink, aged care and taxation.

“Education of professionals and continuous professional development is imperative to an industry which will continue to change dynamically in the immediate future,” Colley said.

Jeff Bailey is Zurich Financial Services’ new Western Australia regional sales manager, investments.

Zurich head of retail sales Kristine Wade said Bailey’s appointment reflected the firm’s commitment to providing advisers with the on-the-ground support they need in WA. With over 17 years experience in the financial services industry, Bailey has spent a large part of his career promoting investments and platforms at Colonial First State (CFS), prior to joining Perennial Financial Services to service WA, South Australia and the Northern Territory. He then returned to CFS as part of its Core Equities and Colonial Geared

Move of the week PERPETUAL has named Kyle Lidbury general manager research and operations for its newly structured retail distribution function.

Lidbury has 15 years experience in financial services, including a number of senior roles at Lend Lease, MLC and nabInvest. Most recently, he was nabWealth manager research relationships.

Perpetual group executive private wealth and head of retail distribution Geoff Lloyd said that Lidbury’s team would play an important role in improving Perpetual’s ability to service target segments and create deeper client relationships.

The company stated that a general manager strategic accounts was expected to be announced before the end of February, and this would complete the implementation of the new retail distribution structure.

Investments business before taking up his current position.

WEALTH Today has announced the appointment of Bob Scherini as head of adviser services.

Scherini has over 25 years experience in financial services, having worked in both financial advice and distribution for some of Australia’s leading fund managers and platform providers.

Scherini helped to establish Adroit Financial Services, serving as its managing director and responsible manager as well as helping to build the company’s fee-for-service capacity.

Most recently he was Russell Investments business develop-

Opportunities SENIOR PARAPLANNER Location: South-East Asia Company: Questor Capital Limited Description: A South-East Asian wealth management company is seeking an experienced paraplanner to support business expansion into Malaysia and Thailand.

Dealing predominantly with the expatriate community throughout Asia, you will independently manage every aspect of the financial planning process, from arranging initial meetings, promoting the company’s services, and providing ongoing client support.

The region provides an exciting opportunity to access Australian high net worth individuals who generally do not have access to qualified Australian independent financial advice.

In return, you will have access to fund interrogation and research tools. The successful candidate will have the opportunity to earn uncapped commissions on top of generous salary.

To find out more and to apply, visit www.moneymanagement.com.au/jobs

JUNIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial services firm is offering a qualified paraplanner an entry-level position to start their career in the financial services industry.

In this role, you will assist in the preparation of SOAs, maintain relationships with a network

Australian real estate securities.

Kivell was instrumental in growing Macquarie’s domestic and global real estate businesses.

Domestic real estate assets under management grew from less than $500 million to more than $3 billion under his management.

ment manager – WA and SA. As part of his new role, Scherini will be central to Wealth Today’s transition to a Future of Financial Advice model.

Perennial Investment Partners has appointed David Kivell to the role of managing director and head of Perennial real estate investments.

He arrives with 30 years experience in funds management, research, financial services and accounting, with previous roles including managing director at CBRE Global Real Estate Securities, and Macquarie Funds Management head of global real estate securities and head of

David Kivell Commenting on his appointment, Kivell said there were great investment opportunities in listed property securities and Perennial was well positioned to capitalise on these opportunities.

Replacing Stephen Hayes, Kivell will manage a team of 10 investment professionals located in Sydney, Hong Kong, Connecticut and Amsterdam.

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

of financial planners and uphold compliance procedures.

To be considered for this role, you will be DFP-qualified and have a minimum of 12 months experience in paraplanning or in a client services capacity within a financial planning practice. Experience with COIN would be an advantage.

The successful applicant will be offered a competitive salary and a flexible and supportive working environment.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting - 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

PRIVATE CLIENT EXECUTIVE Location: Adelaide Company: Terrington Consulting Description: An experienced and innovative private client executive is needed for a leading Australian financial institution.

Working with an existing portfolio of sophisticated investors and high net worth clients, you will manage, grow and protect client’s wealth through highly-personalised financial advice.

You will also be given the opportunity to grow your own portfolio via access to an unlimited product and platform range.

To be considered for this position, you will

have several years experience as a dedicated financial adviser servicing high net worth clients.

You will also have proven sales skills and networking capabilities.

The successful candidate will be offered a highly competitive salary package and career advancement opportunities.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting - 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

PRACTICE DEVELOPMENT MANAGER Location: Adelaide Company: Terrington Consulting Description: A large financial services organisation is seeking a practice development manager to drive business growth.

Reporting to the state manager, you will be required to manage a team of financial planners based across South Australia and the Northern Territory.

To be successful, you will have a proven ability and passion for leading and coaching teams and have the means to utilise referral networks and opportunities to contribute to complex business strategies.

To be considered, you will have a proven record in leading successful sales teams within the retail or commercial banking space or experience as a financial planner.

You will be offered an excellent salary package and have the opportunity to earn a half-yearly bonus along with other incentives.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting - 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

SENIOR FINANCIAL ADVISER Location: NSW Company: Terrington Consulting Description: A well-established financial planning business is seeking a client-focused senior financial adviser.

You will be working with an existing portfolio of clients providing advice on direct investments, gearing, SMSFs, retirement planning, and personal and business protection strategies.

To be successful, you must have extensive experience in financial planning and a track record in successfully managing and growing a client base. CFP and/or CA/CPA qualifications will be highly regarded.

For successful candidates there exists the prospect for equity or upfront equity opportunities.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting - 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

www.moneymanagement.com.au February 16, 2012 Money Management — 27

Outsider

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

We shall fight them on the landing pages SITTING in front of his trusty Remington typewriter, Outsider eschews most things to do with the interweb and has always assumed that when he sees www in front of a word it means one of his young colleagues can’t spell, or that their computer keyboard is on the blink.

Outsider was therefore greatly perplexed (perhaps even amused) by the reactions of his young workmates when it was discovered that Money Management was the subject of an ongoing “Distributed Denial of Service” attack, such that its servers were overwhelmed and its website www.moneymanagement.com.au forced offline.

Outsider’s mind immediately turned to other historic surprise attacks and, in particular, the Japanese attack on

Pearl Harbour. He remembered the ringing words of former US president Franklin Delano Roosevelt: “Yesterday, December 7th, 1941 – a date which will live in infamy – the United States of America was suddenly and deliberately attacked by naval and air forces of the Empire of Japan.”

Outsider’s problem, though, was that hunkered down in their tearoom, the Money Management leadership team had no idea who was attacking their publication or why – making it hard to write noble speeches about dastardly enemies.

As best as Outsider could tell, the attack was being conducted by “botnets” – which he personally hoped

were something like an Austin Powers “fembot” – but the look of disgust from his female colleagues suggests otherwise.

Outsider suggested that an audit be carried out identifying who Money Management’s journalists may have ‘upset’ in recent editions – but even after culling all the FOFA and industry fund-related stories, the list proved to be too long.

Outsider has withdrawn to his personal fallout shelter and shall re-emerge when he receives confirmation that the last of the “botnets” has been subdued. Food parcels, preferably inclusive of a shiraz, may be sent to the usual address.

Measuring up FOFA on the sofa?

OUTSIDER, like many people who work in the financial services industry, has been hearing and writing about the proposed Future of Financial Advice changes for so long that he sometimes screams FOFA in his sleep.

Mrs O became quite suspicious at first, but when she realised Outsider was too lazy to mingle with other females, (especially those exotic types who would have Fofa or Bambi for their name), she began gently using her elbow to make him stop screaming nonsense and let her get back to sleep.

Having read numerous comments on the Money Management website, yours truly realised that FOFA surely evokes some sort of reaction, whether it be the feeling of joy or shivers down one’s spine.

Whatever feeling this acronym might evoke, Outsider is certain no financial planner, fundie or chief executive officer thinks FOFA is cute or fluffy.

This, Outsider discovered from one of his bilingual friends, is what ‘fofa’ means in Portuguese. He also learned that this word could also be interpreted as ‘a soft one’ – depending on the context, of course.

But Outsider must admit that the phrase “Bill Shorten gave rise to FOFA” will never sound the same anymore.

28 — Money Management February 16, 2012 www.moneymanagement.com.au

AS someone who is frequently prepared to dish it out, Outsider is aware that he will occasionally have to be prepared to take it. And as much as he asserts he is more than prepared to roll with the punches, his younger colleagues would no doubt insist Outsider is at his happiest when doling out a stern character assessment.

Be that as it may, Outsider was treated to a masterclass in deflecting a personal jibe by Association of Financial Advisers (AFA) chief executive Richard Klipin at the recent AFA GenXt Roadshow in Sydney.

Proceedings were commenced by the AFA’s state director for NSW and conference chair Marc Bineham, who dedicated a significant portion of his opening address to relating a joke – the punchline of which crudely brought into question the extent of Klipin’s manhood.

Delegates were perhaps stunned into silence, perhaps still too sleepy, having barely made a dent in their first coffee of the day, or perhaps too highbrow to be impressed (although this one seems unlikely).

Whatever the reason, the joke drew more awkward glances than belly laughs – although Outsider himself must admit to a hearty chuckle.

But to his credit, Klipin took the stage like a pro, let that one go through to the keeper and wasted no time into delving into the deeper issues of financial planning.

And judging from the admirable cohones Klipin has consistently displayed in attacking the less palatable aspects of the Government’s Future of Financial Advice reforms, the joke appears to have been wide of the mark anyway.