Money Management (February 9, 2012)

The publication for the personal investment professional

www.moneymanagement.com.au

INFOCUS: Page 11 | FOFA – THE MISSING PIECES: Page 18

Planners and investors stay cautious

By Mike Taylor AUSTRALIAN investor sentiment has hit one of its lowest points, according to the latest Wealth Insights Investor Sentiment Index.

Associated research by Wealth Insights has also revealed that a significant proportion of financial planners are actually urging their clients to more conservative investment settings.

The Wealth Insights Investor Sentiment Index, based on a survey process traversing the past 14 months, has revealed the degree to which Australian investors who are financial planner clients have retreated over the period.

In particular, the index reveals the manner in which the opti-

Figure 1 Investor Sentiment – December 2011 Proportion of Client Investments in Cash & Fixed Interest

Wealth Insights Investor Sentiment Index 100 80 60

Sentiment Index

Print Post Approved PP255003/00299

Vol.26 No.4 | February 9, 2012 | $6.95 INC GST

40

20

20

-1

0

-24

-20

-32

-40

-74

-60

-81

65%

35%

Other investments

Cash & fixed interest

-76

-80 -100 Oct'10

Dec'10

Feb'11 April'11 July'11 Sept'11 Dec'11

Source: Wealth Insights

mism which was evident in the early months of 2011 evaporated and reached a low point in September, and had barely improved by December.

Wealth Insights managing director Vanessa McMahon said the index seemed to reflect the volume of adverse news emanating out of Europe

Announcement close on accountant regime AFTER months of negotiations, the Federal Government is likely to replace the so-called “accountant’s exemption” with a limited, nonproduct licensing regime.

Money Management understands that the Minister for Financial Services and Workplace Relations, Bill Shorten, is close to announcing the new regime which follows the Government’s decision as part of its Future of Financial Advice (FOFA) changes to scrap the regulatory exemption which allowed accountants to provide advice around the establishment of selfmanaged superannuation funds (SMSFs).

Under the expected new regime, accountants would be able to apply for a limited licence to provide advice around specific, non-product issues – something the accountants hope will enable them to continue playing a role in the SMSF space.

The new regime follows lengthy discussions between the major accounting bodies, the Treasury, and the Australian Securities and Investment Commission, and has come amid growing levels of frustration among accountants at the uncertainty hanging over their existing business models.

That frustration continued to grow when the issue of the accountants’ exemption was not covered off when the Government tabled the second tranche of its FOFA legislation in October, last year.

Commenting on the process, Institute of Chartered Accountants in Australia superannuation specialist Liz Westover said the amount of time involved had certainly caused frustration among members of the profession.

and the US. “With news headlines that focus on volatile markets, Europe’s debt crisis and a possible second global financial

crisis, it is no wonder that investors currently lack confidence,” she said.

Other Wealth Insights research revealed the degree to which advisers themselves had reacted to the volatile market conditions and the manner in which this was reflected in the investment advice provided to clients.

McMahon said the data revealed there had been a general retreat on the part of advisers in ter ms of their clients’ exposure to markets.

As well, the data revealed that while advisers placed an average of 35 per cent of client investments in cash and fixed interest, those advisers with high-net-worth clients were likely to place significantly more into this asset class.

Expanding intra-fund advice is a ‘slippery slope’

By Tim Stewart

Liz Westover “It has been two years since the Government signaled its intention, so the frustration is understandable,” she said.

Money Management understands that the final issues being discussed between the major accounting bodies and the Government involve some of the detailed regulatory arrangements around the limited licensing regime, including the degree to which accountants would need to hold professional indemnity insurance.

The accountants are understood to have argued that because the limited licence would preclude discussion of products, the level of need for professional indemnity cover would be commensurately lower.

However, there are also broader technical issues to be dealt with, including the regulatory structure around a limited licensing regime.

– Mike Taylor

PLANNING groups have expressed serious concerns about the Australian Securities and Investments Commission’s (ASIC’s) proposal to allow transition-to-retirement (TTR) strategies within intra-fund advice.

In Consultation Paper 164, the r e g u l a to r p rov i d e d s e p a r a te examples demonstrating how an intra-fund adviser can deliver factual information, general advice and personal advice about TTR over the phone.

Financial Planning Association (FPA) general manager for policy and government relations, Dante De Gori, said he had no problem with superannuation funds delivering basic information to their members about what TTR was and how it worked.

But he is concerned by the prospect of intra-fund advisers delivering specific advice that recommends a TTR strategy, because intra-fund advice cannot, by definition, take into account all of a client’s circumstances.

Association of Financial Advisers chief executive Richard Klipin believes that a TTR strategy

Dante De Gori should only be recommended to a c l i e n t v i a c o mp r e h e n s i ve advice.

“Dealing with complex issues around TTR strategies without regard to the full circumstances of the client is a slippery slope that we don’t want the advice profession to get on,” Klipin said.

He compared the delivery of intra-fund advice on topics like Continued on page 3 Scaled advice feature on page 12

Editor

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Fiddling with the foundations

I

n the past decade Australia’s superannuation regime has been subjected to no fewer than five review processes, the largest and most expensive of which was the Cooper Review.

During that same time, successive surveys and research reports have suggested that Government fiddling with the superannuation regime has created serious distrust among ordinary Australians, particularly those who are at an age when they are thinking more seriously about retirement and worrying about the size of their retirement incomes.

Thus, last week’s announcement by the Federal Treasurer, Wayne Swan, that he had convened a Superannuation Roundtable seems to thoroughly misunderstand the consequences that go with creating further policy “fiddling� and uncertainty.

Looked at objectively, the Superannuation Roundtable is an unnecessary exercise. It is not scheduled to produce a report until December this year – something which, at best, means the earliest the Government can react is in the 2013 Federal Budget, its last budget before it must go to the polls.

Further, the Treasurer’s brief for the Roundtable skirts around the superannuation issues that bleedingly obviously need to be fixed a good deal more quickly – contribution caps and excess contribution tax. Rather, its brief seems designed to hand the Government a grab-bag of minor goodies it can trot out before the next election.

This much was clear when Swan described the first stage of the Roundtable’s work as being to “discuss and examine better ways to target and deliver certain concessions�. “As part of this initial work, the Roundtable will consider compliance cost issues raised by the superannuation industry in relation to the new higher concessional contributions cap for individuals aged 50 and over who have less than $500,000 in superannuation. The Roundtable will subsequently examine proposals to expand options in the drawdown phase, like annuities and deferred annuities, as well as appropriate offsetting savings.�

For a party which has, with some justification, claimed authorship of Australia’s highly successful compulsory superannuation regime, the Australian Labor Party has not covered itself in glory since

it regained office in 2007. Indeed, the whole issue of contribution caps and excess contributions is owed to the fiddling which occurred in its first budget.

Since then, the situation has not been helped by a range of subsequent, albeit more minor, changes aimed at seeking to contain the budget deficit.

The Roundtable exercise must also be viewed in the context of the existing uncertainty around implementation of the Government’s Stronger Super and Future of Financial Advice changes – processes which will still be on foot through much of 2013.

When the ALP regained office in 2007 the Australian superannuation regime was not seriously broken – something acknowledged by the former Minister for Financial Services and Superannuation, Senator Nick Sherry, when he described the need to “renovate the house�.

The Stronger Super process should spell the end to the renovation, and the Government needs to ensure that by fiddling at Roundtables it does not undermine public confidence in its foundations. – Mike Taylor

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News Auditor registration could reduce questionable SMSF auditors

By Chris Kennedy A PROPOSAL to introduce a registration requirement for accountants who audit self-managed super funds (SMSFs) could reduce not just the number of auditors performing a small number of audits each year, but the total number of auditors servicing the SMSF sector.

SMSF Professionals’ Association of Australia (SPAA) chair Sharyn Long said there was still concern over auditors who performed a small number of SMSF audits per year, but said the standard in the industry was generally high.

SPAA’s view is that there should be some form of assessment for those doing a small number of

audits, which would also make SMSF auditing less appealing for those who aren’t suitably qualified, Long said.

The Government has flagged the introduction of an SMSF auditor registration process which may theoretically be introduced for 1 July this year. Long said that although many accountants were waiting to see what form this might take, there had already been a surge in the number of SPAA members undertaking the group’s specialist auditor accreditation.

There are approximately 11,500 approved SMSF auditors according to Australian Taxation Office records, of whom only around a third audit more than 20 SMSFs per year, Long said. This meant a very large part of the market

Sharyn Long would be impacted by potential changes.

Multiport head of tax and accounting Kevin Sudlow said there was a definite question mark over accountants who performed five or less audits per year. In many cases, this might be due to not

wanting to refer business outside of their practices, so they were taking on work they were not adequately skilled to do, he said.

Larger administrators benefit from economies of scale and can cut down on the time and costper-audit because auditors know how the system works, but for someone doing a small number the cost-per-audit ends up being much higher. Sudlow said that adding licensing requirements meant those performing a small number of audits would disappear when those regulations come in, but that there were still more than enough quality people around to provide sufficient quality audits at a competitive price.

However, Institute of Public Accountants (IPA) chief executive

Andrew Conway said while there might be a “small number” of accountants not operating as they should, in general there was no huge problem needing to be fixed, and a burdensome or costly licence registration for SMSF auditors was unnecessary. Audit competency is not an issue for IPA members because they need to have studied it to become members, he added.

A burdensome system could see people leaving the sector, and combined with ongoing growth in SMSFs could put pressure on the supply of adequately qualified people to service the sector, Conway said. “There is a concern about the longer-term supply of professionals providing advice in SMSFs and more broadly,” he said.

Expanding intra-fund advice is a ‘slippery slope’ Continued from page 1

TTR to visiting a general practitioner who neglects to ask questions about your general health, diet, exercise routine and family history.

“It’s unthinkable that a professional would operate that way,” Klipin said.

De Gori agrees, and points out that if an FPA member did the same thing “we’d be prosecuting them because they haven’t considered the client circumstances – and the client thinks they have”.

De Gori said one of t h e m a j o r f l aw s w i t h ASIC’s phone-based personal advice TTR example was that the disclosure of the advice’s limitations was buried at the very end of the c o nve r s a t i o n , r a t h e r than upfront.

Leaving the disclosure until the end of a lengthy phone conversation could leave the consumer confused about the scope of the advice, and it also risked wasting their time, he added.

“The adviser’s saying: ‘Here’s the advice, but by the way I didn’t really consider everything, so you should be aware of that’,” De Gori said.

Association of Superannuation Funds of Australia chief executive Pauline Vamos agrees that the limitations of the

Pauline Vamos advice should be disclosed at the beginning of the phone call. But she adds that funds must be able to have conversations about TTR with members who have low account balances.

“The average woman retires on just over $110,000. They’re going to live 18 years af ter retirement. Someone’s got to tell them: ‘Maybe go to part-time work and keep contributing to super,” Vamos said.

For Vamos, the phonebased general advice TTR example in the ASIC paper almost constitutes personal advice.

“The issue is that the line between general advice and personal advice is really grey,” she said.

She added that it was difficult to comment about the examples in the ASIC consultation paper until the final definition of intra-fund advice was laid out in legislation.

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www.moneymanagement.com.au February 9, 2012 Money Management — 3

News

Retrospective fee disclosure no surprise, says CHOICE

By Tim Stewart C H O I C E c h a i r Je n n i Ma c k h a s dismissed claims by the Opposition that the imposition of an annual fee d i s c l o s u re s t a t e m e n t c a m e a s a complete surprise to the industry.

Mack highlighted a question Shadow Assistant Treasurer and Opposition s p o k e s m a n o n Fi n a n c i a l Se r v i c e s Mathias Cormann directed to professor Joanna Bird at a Parliamentary Joint

Committee hearing last Monday: “Based on the evidence we have had from others today, this whole proposit i o n o f a re t r o s p e c t i v e a n n u a l f e e d i s c l o s u re s t a t e m e n t c a m e o u t o f nowhere right at the end of the process when the legislation was introduced into the Parliament in September or October. Is that good process?” asked Cormann.

The concept of annual fee disclosure was first discussed on 24 January 2011

during a Peak Consultation Group meeting led by Treasury’s Geoff Miller, said Mack.

Du r i n g t h e m e e t i n g , c o n s u m e r groups suggested that if opt-in was to become a two-year requirement, then consumers should be told how much they paid in fees and for services in the intervening year.

The Minister for Financial Services Bill Shorten adopted the idea in his Future of Financial Advice (FOFA)

information pack released on 28 April 2011, said Mack.

In addition, when he announced the draft FOFA legislation on 29 August 2011, Shorten said the two-year opt-in requirement would also include “an annual fee disclosure statement to all clients”, according to Mack.

Mack added that it was “extraordinary” that the financial planning industry didn’t tell consumers what they have paid for services “as a matter of course”.

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4 — Money Management February 9, 2012 www.moneymanagement.com.au

By Andrew Tsanadis

FINANCIAL planners have continued to steer clear of growth assets while more than doubling their portfolio allocation to term deposits in the past year.

That’s according to the Investment Trends 2011 Adviser Product Needs Report which found that 966 financial planners surveyed in October and November 2011 invested 28 per cent of client inflows in cash and term deposits – up from 16 per cent on 2010 results. Flows into term deposits more than doubled from 8 per cent of new money to 17 per cent.

“Excluding dividends, over half of planners now say that their highest priority when choosing where to invest client cash and fixed income allocations is safety from capital loss,” said Investment Trends senior analyst Recep Peker.

Cash is still considered a safeguard against the adverse Australian market, with planners now expecting the value of the All Ordinaries to increase by just over 8 per cent over 2012, compared to 10 per cent for 2011 and 14 per cent for 2010.

Despite this outlook, the report found that planners remain far more optimistic than investors, with market return expectations for planners around 5 per cent compared to 3 per cent for clients.

Where a client’s ‘excess cash’ would normally be invested in growth assets, planners estimated investors now hold a combined $3.9 million in excess cash – up 22 per cent from the prior year.

According to the survey, 58 per cent of advisers said investment of excess cash would likely be triggered by growing confidence in economic recovery.

News

Material differences between Retirement funding should be a Budget priority FOFA policy and delivery

By Milana Pokrajac

By Mike Taylor

THE Association of Superannuation Funds of Australia (ASFA) has pointed to the Future of Financial Advice (FOFA) process as containing “material differences between some policy announcements and the draft legislation”.

In a submission filed with the Senate Economics Committee reviewing the bills, ASFA has supported the need for a transition period for implementing the legislation on the basis that “even at the best of times it is a considerable risk to authorise the expenditure of resources based on draft legislation”.

“In the context of FOFA, where there have been material differences between some policy announcements and the draft legislation, it is even riskier,” the submission said.

“Decision makers committing significant

financial and other resources to implementing change of this complexity and scale deserve legislative certainty,” it said.

ASFA pointed to the two-year transition period allowed with respect to the Financial Services Reform Act and the Superannuation Industry (Supervision) Act. It said it would support the Australian Securities and Investments Commission’s stated intention to adopt an approach of “facilitated implementation” during a transition period of 12 months from 1 July, this year.

Elsewhere in its submission, ASFA has backed other financial services industry players in calling for amendments to the legislation to enable advisers to deliver scaled advice.

It said the bill should be amended to enable the client and the adviser jointly to determine the subject matter of the advice.

Cormann demands undertaking on super taxes THE Federal Opposition has called the Minister for Financial Services and Superannuation, Bill Shorten, to give an undertaking that the Government will not impose further tax increases affecting superannuation out of its Roundtable process.

The Shadow Assistant Treasurer and Opposition spokesman on financial services, Senator Mathias Cormann, said Shorten needed to “emphatically reject the most recent push by his friends in the union movement to use the next budget to increase taxes on people’s superannuation”.

The Opposition spokesman said the minister needed to give a reassurance that the forthcoming Superannuation Roundtable was not part of an agenda to increase tax on superannuation savings.

Cormann claimed the ALP had already dramatically increased taxes on superannuation since coming to office by cutting concession superannuation contribution caps from $50,000 and $100,000 down to $25,000.

He claimed the Government’s changes to the superannuation co-contributions regime had also inhibited Australians from appropriately saving for their retirement.

FUNDING retirement for the ageing population is a national priority and should be addressed in the upcoming Federal Budget by way of reform, according to the Actuaries Institute.

In its pre-budget submission to the Federal Government, the institute has called for a number of tax and regulatory reforms to help baby boomers better prepare for retirement.

One of possible solutions could be facilitating the development of annuities, according to the institute chief executive officer, Melinda Howes.

Howes said annuities were a type of investment which

Melinda Howes addressed two key risks that ageing Australia currently faces: longevity and the risk of loosing capital due to volatile market movements.

“Australians tend to take

their superannuation balances as a lump sum on retirement – which puts pressure on the age pension because it makes it harder to manage retirement savings versus spending,” Howes said. “But new generation annuities can address key needs in retirement, enabling retirees to better manage their retirement savings and protect against longevity and market risks.”

Howes had also called for a temporary national insurance pool for high flood-risk properties.

The Actuaries Institute believes further government intervention in the flood insurance market was necessary due to high-risk properties “becoming uninsurable”.

Former Sonray platform Saxo Bank cops licence conditions

By Chris Kennedy

SAXO Bank, the former trading platform provider for collapsed broker Sonray Capital Markets, has had additional conditions placed on its Australian financial services licence following an investigation by the Australian Securities and Investments Commission (ASIC).

The investigation focused on the risk management practices of Saxo Bank, and the new licence conditions apply to Saxo Capital Markets. It will now be required to have an expert review and report on the adequacy of its risk management systems, and to implement recommended changes from the report within six months.

Saxo Capital Markets will have to continue to

engage the expert for a further 18 months of reviews and reporting, and provide ASIC on a biannual basis with independent verification of client monies held.

Under its wholesale licence Saxo had contracted a number of retail licensees, including Sonray, to facilitate the trading of various financial products on its trading platform Saxo Trader. However, it will now provide services to retail clients directly through Saxo Capital Markets, ASIC stated.

Sonray collapsed and entered voluntary administration in June 2010. In September 2011 its former director, Russell Johnson, faced 24 criminal charges in Melbourne Magistrates Court, and in October 2011 its former chief executive Scott Murray was sentenced to five years in jail.

Australia’s investment appetite sustaining the economy

ASIC bans operator of Trio MIS

By Andrew Tsanadis

THE former operator of the ARP Growth Fund, a managed investment scheme (MIS) run by Trio Capital, has been permanently banned from participating in financial services and managing companies.

The Australian Securities and Investments Commission (ASIC) found Tony Maher (formerly Paul Gresham) had engaged in misleading conduct and failed to disclose conflicts of interest, resulting in him gaining financial benefits from various financial deals.

Maher owned and controlled PST Management, which acted as the investment manager of ARP. He identified and recommended investments for ARP and its predecessor Professional Pensions Pooled Superannuation Trust (PPPST), resulting in him receiving undisclosed payments of more than $2 million and creating a conflict of interest, ASIC stated.

ASIC said it was also concerned Maher had engaged in misleading and/or deceptive conduct when valuing ARP’s largest investment, and that he had failed to undertake adequate due diligence in respect of some investments he recommended.

AUSTRALIA’S investment appetite is providing a healthy buffer against a global economic slowdown, with the value of major mining and infrastructure projects now reaching $415.4 billion.

That’s according to Deloitte Access Economics’ December 2011 issue of ‘Investment Monitor’, which stated that the value of definite projects (those classed as under construction or committed to commence soon) had grown by $18.7 billion in the December quarter. This represented an increase of 2.1 per cent on the September quarter, and a 43.0 per cent rise over the past 12 months.

The projects involved include Origin Energy’s Australia Pacific LNG development ($19.6 billion) in Gladstone and the approval of

Inpex’s gas project ($33 billion) in Darwin. According to Deloitte, engineering construction activity accounted for all of the growth in Australia’s economy during the September quarter of 2011.

A significant 57 per cent ($323.5 billion) of investments committed or in planning was dedicated to projects located in the north and west of the ‘Brisbane Line’, while mining projects accounted for 46 per cent of all investment projects currently under construction or committed. Economic infrastructure, including transport, ports and telecommunications, has also been helped along by the mining boom, particularly via a range of planned ports and energy projects, Investment Monitor stated.

Meanwhile, the value of nonresidential buildings is not expect-

ed to attract significant investment in the near future, given weak retail spending.

Deloitte expects investment levels to continue to rise over 2012 as a significant number of projects await approval, of which mining projects will again dominate.

www.moneymanagement.com.au February 9, 2012 Money Management — 5

News ASIC defines limits on super funds advice ASFA wants longer

By Mike Taylor THE Australian Securities and Investments Commission (ASIC) appears to have drawn a line under how far it is prepared to go in allowing superannuation funds to provide financial advice utilising web-based facilities and third parties without holding an Australian Financial Services (AFS) licence.

ASIC’s line was revealed in its September quarter report on relief decisions in which it refused relief sought by the provider of a web-based superannuation clearing house product which it regarded as a non-cash payment facility.

The ASIC report said the provider had sought an exemption with respect to the need for superannuation trustees to hold an AFS licence authorising the provision of financial product advice and dealing.

The ASIC report said the proposed relief would have been similar to the relief in Class Order [CO 03/705] Non-cash payment facilities – licensing exemption,

in that it would facilitate AFS licensees (in this case, superannuation trustees) providing financial product advice and arranging for dealings in certain NCP facilities (in this case, a clearing house arrangement that is an NCP facility) without being authorised by their AFS licence to do so.

It said the relief was proposed to apply when these services were provided to employers contributing to the superannuation trustee’s superannuation fund through integration of parts of the applicant’s website page for the clearing house into the superannuation trustee’s website.

ASIC said relief was required because the proposed arrangement may have constituted dealing by a trustee by

arranging for the employers to apply for and to acquire the NCP facility or for the applicant to issue it.

However in refusing the request, the regulator said: “We also considered that the applicant’s proposed arrangement may have implied a recommendation intended to influence employers and amounted to the provision of financial product advice.”

Among the reasons given by ASIC for refusing the application were that the arrangement might have made it less easy for people to understand the product.

As well, it said the trustees for whom relief was sought arguably would have derived benefits such as the enhanced ability to retain employers, and by extension default members.

“Given this and the protections provided by the application of the AFS licensing obligations, we considered that it would not be unreasonably burdensome for the relevant trustees to obtain the necessary licence authorisations,” ASIC said.

Planner job market weaker in 2012: eJobs

By Milana Pokrajac

THE financial planning job market has experienced its first year-on-year monthly fall since December 2009, with the start to the year being significantly weaker than in 2011, according to research conducted by eJobs Recruitment Specialists.

The number of job ads fell by more than 10 per cent since January last year, with almost half of practice principals separately surveyed by eJobs

intending to keep the same level of employment in 2012.

The upcoming regulatory changes, increased compliance costs and the current state of the markets are seen by practice principals as the main inhibitors to employment growth in financial planning, according to the survey.

“It is an industry which has gone [and is still going] through a lengthy and very difficult period of reduction, redevelopment and renewal,” said Trevor Punnett, managing director

and financial planning recruitment manager at eJobs.

“Along the way many practices have disappeared, many staff have had their careers disrupted and many business growth intentions have been put on hold,” Punnett said.

Some businesses have “managed to do well” by retaining their fee-for-service clients, increasing their use of technology and diversifying into other areas, but Punnett said these practices make up a small Trevor Punnett minority.

Professional recognition within sight: Helmich

By Tim Stewart THE financial planning industry may well be on the verge of a “golden age” in which planners finally get the recognition they deserve, according to AMP director of financial planning advice and services Steve Helmich.

Despite the naysayers predicting the end of the financial planning industry (something which has been predicted on a regular basis since the 1970s, he noted), certified financial planner (CFP) professionals are on course to be recognised with their peers in the legal and accounting professions, Helmich said.

“Around the world at the moment, there are 140,000 CFP professionals across 24 countries in the world. That number will double in the next five years with the growth that’s going on,” Helmich said.

But for planning to be properly recognised, there must be put in place an enforceable code of practice that in turn leads to compulsory membership of a professional association, he added.

“It is a must. I couldn’t imagine any other profession not wanting to be a member of the professional association. This is a challenge for the financial planning world,” Helmich said.

But the most important challenge for the indus-

Steve Helmich try is to alter the public’s perception of financial planners, and clearly explain what it is they do for their clients.

“Financial planning is not about getting the best returns. It’s not about making everyone rich. It’s not about finding the best investment options. It’s about helping people make informed decisions through their finances,” Helmich said.

For Helmich, financial planning is about helping clients with four things: forming a strategy about what they want to achieve in their life; putting a structure in place that suits them; contingency planning; and instilling financial discipline.

6 — Money Management February 9, 2012 www.moneymanagement.com.au

implementation on MySuper THE Association of Superannuation Funds of Australia (ASFA) is calling on the Government to provide a longer implementation period for the introduction of MySuper arrangements.

In a submission filed with the Parliamentary Joint Committee reviewing the Government’s Stronger Super bills, ASFA has argued that the employer compliance date for MySuper arrangements should be extended beyond the Government’s planned 1 October, 2013, deadline to 1 July, 2014.

The ASFA call for a longer implementation period for MySuper follows on from arguments around the Government’s 1 July, 2012, implementation date for the Future of Financial Advice (FOFA) bills.

The ASFA submission said that while the organisation supported the Stronger Super reforms, “it is important to note that compliance with these reforms will necessitate considerable changes being made to a mature and complex superannuation system”.

It said that, in addition, the FOFA reforms which are due to commence during the same period would have a significant impact on the structures of some superannuation funds.

“Some trustees will need a great deal of certainty in relation to the legislation to be able to make the threshold decision as to whether or not to provide a MySuper offering,” the submission said. “This is the case in particular where a relatively small percentage of contributions are default contributions.”

It said that following the threshold decision, there were a variety of strategic and tactical decisions which needed to be made.

“As we are unlikely to see final legislation in the first half of 2012, the time afforded to implement is greatly reduced,” the ASFA submission said.

It said that often there were capacity constraints, interdependencies and unintended consequences, especially when it came to implementing system changes.

“Rushing to meet deadlines materially increases the risks to a project and can increase costs which are ultimately born by the member,” the submission said.

Emerging market equities battered in 2011 TIGHTER monetary policy, weaker export demand and jittery international investors combined to make emerging markets equities one of the worst-performing asset classes in 2011, according to Standard & Poor’s (S&P).

The Standard & Poor’s 2011 Emerging Markets Sector Review covered 27 funds offered by 21 managers across three peer groups: global emerging markets, Asia exJapan, and single countries (ie, China and India funds).

“Market conditions in 2011 have been a reverse of the 2009 ‘risk-on’ environment, and risk aversion has dominated,” said S&P. The heaviest losses in emerging market equities markets were in countries such as Brazil, China and India, according to the report.

“The region remains vulnerable to developments and concerns in the advanced economies, and will likely continue on an unpredictable path

until there is more certainty of a resolution to the turmoil in developed markets,” said the report.

But strong domestic demand in emerging markets will likely offset the weakening of external demand, said S&P. There were two ratings changes in the review. The CFS Global Emerging Markets Select fund was upgraded from four stars to five stars, making it the only five-star fund. The Schroder Global Emerging Markets fund was downgraded from five stars to four stars, “due to several factors that we believe could hinder performance”.

The AMP Capital Asian Equity fund and the ING Global Emerging Markets Share fund remained ‘on hold’.

S&P recommended that investors adopt a five-year investment horizon when considering equities markets in the growing regions of the world, since the risk of capital losses in the short to medium-term is “relatively high”.

News

Make advice deductible in May Budget, say accountants

By Mike Taylor THE Federal Government should address an ongoing anomaly by using its May Budget to legislate for the deductibility of financial advice, according to the Institute of Chartered Accountants in Australia (ICAA).

In a submission filed with the Treasury this week, the ICAA has pointed out that one of the primary objectives of the Future of Financial Advice (FOFA) changes has been to expand the availability of low-cost, simple advice, and making the cost of advice deductible was consistent with this outcome.

“The institute believes the Government should consider changes to the existing rules that limit the availability of tax deductions and the obtaining of financial advice by taxpayers,” it said. “Clearly, allowing taxpayers to claim deductions for financial advice would play a role in helping boost the accessibility and affordability of financial advice in Australia.”

The ICAA submission referred to the Australian Taxation Office (ATO) determination dealing with the

deductibility of investment advice which stipules that fees charged for drawing up an investment plan are not deductible, because they constitute expenditure of a capital nature incurred while putting the income earning investments in place.

It noted that ongoing management fees or retainers were generally deductible, because they are expenses incurred in the management of income-producing investments.

“We believe it is an anomaly that the ongoing management of superannuation, for example, is not tax deductible (as superannuation is not income-producing), but where the advice on superannuation is related to taxation, this advice is tax deductible.”

The submission said the Institute believed changes should be considered to the income tax law to allow deductibility for fees relating to the development of a financial plan and that, in conjunction with this, consideration should be given to widening the scope of deductions available for the management of income-producing investments as well as specific non-income-producing investments such as superannuation.

Rocky road ahead for equities in 2012

By Tim Stewart EQUITIES are still attractive on a valuations basis, but volatile market conditions are likely to test the nerve of value investors in 2012, according to van Eyk head of research John O’Brien.

Just as in 2011, markets are underestimating the downside risks at the moment – and uncertainty caused by political and economic turmoil will act as an impediment to an upswing in equity markets in 2012, according to O’Brien.

But despite that, equity valuations “are not outstandingly good, but they’re not bad” according to O’Brien. The ASX 200 is trading on 11 times forward earnings, the MSCI World index is on 12 times forward earnings and the MSCI Emerging Markets index is on 9.5 forward earnings, he said.

In the short term, political risk and a potential outbreak in inflation could cause investors headaches, he said.

“We still believe that political risk as it affects market returns is underrated as we did in 2011. Iran, the Arab world, Latin America, even stable countries like Thailand could all have problems this year,” O’Brien said.

But the disillusionment of many investors in shares could be a signal to bullish investors that equities have turned a corner, he added.

O’Brien pointed to the wide gap between the benchmark US Treasury bond yield of less than 2 per cent and the equity earnings yield of 8 per cent.

“We can certainly say that piling into low-yielding assets like bonds at everhigher prices isn’t a long-term solution,” O’Brien said.

John O’Brien

8 — Money Management February 9, 2012 www.moneymanagement.com.au

Tighter disclosure rules on agricultural MIS THE Australian Securities and Investments Commission (ASIC) has moved to tighten the rules around agricultural managed investment schemes (MIS), with promoters being required to make investors more aware of the risks associated with such products.

ASIC this week released an investor guide and regulatory guidance which incorporates new disclosure benchmarks, saying the risks associated with agricultural MIS products had been highlighted since 2008 when several operators failed, causing significant investor losses.

ASIC senior executive leader investment managers and superannuation, Ged Fitzpatrick, said the new disclosure benchmarks we r e o n e c o mp o n e n t o f a m u l t i - fa c e te d approach to holding the gatekeepers in the sector to account.

“Our initial focus was on surveillance of the sector when problems emerged, and our investigations into the collapses of a number of agribusiness responsible entities [is] continuing,” he said.

The magnitude of agricultural MIS was revealed in ASIC's regulatory impact statement, in which the regulator estimated that, since the introduction of the managed investments regime in 1998, agribusiness schemes have raised over $8 billion.

It said that in the past seven years over $5 billion has been invested in agribusiness schemes by over 75,000 investors. Of this, forestry schemes represented $3.7 billion and non-forestry schemes represented $1.3 billion.

ASIC has published a number of benchmarks to be followed by promoters of agricultural MIS, based on a disclosure model that requires that they identify (for a particular financial product) the key risk areas potential investors should understand before making a decision to invest.

It encourages a responsible entity to disclose those key risks, and the details underlying the key risks.

News

SMSF trustees losing faith but shares still best: HLB

By Chris Kennedy SELF-managed super fund trustees have lost faith in investment markets and are increasingly turning to property and cashrelated products such as term deposits, but the best long-term rewards still look to be in equities, according to HLB Mann Judd Sydney.

HLB Mann Judd Sydney head of wealth management Michael Hutton said there is a feeling that things might start to pick up and markets might start to behave more normally.

Wealth management manager Chris Hogan said that although a guaranteed 6 per cent from a term deposit might seem appealing in the current environment, it was important to still hold some Australian equities.

With interest rates easing, rolling over term deposits will likely result in rates dipping down towards 5 per cent or lower, but with equities you can get around 6 per cent through the dividends, plus extra income from the franking credits. If the shares increase in value to go with the dividends, they could feasibly return

around 12 per cent for the foreseeable future.

Wealth management partner Jonathan Philpot said many trustees had discarded their long-term plans and taken a short-term view. While many had stood firm following the global financial crisis, the ongoing market volatility had eroded the resolution of all but the strongest.

But he encouraged trustees to take a 10-year view. “All the bad news is shortterm impact. Over the longer term, there is time to recover and investment returns will smooth out,” he said.

Equity Trustees posts solid Managed funds underperform in December quarter first-year results

By Andrew Tsanadis EQUITYTrustees Limited (EQT) has reported an increase in net profit after tax to $3.9 million for the six months to 31 December 2011.

The results reflect a 4.6 per cent increase in revenue compared to the same period in 2010 ($3.7 million).

The group’s latest acquisitions – Apex Super Fund in November 2010 and Lifetime Planning/Tender Living Care in August 2011 – are performing well and have helped to spur on solid first-half financial year results, EQT chairman Tony Killen said.

Commenting on the strong growth of the newly-acquired businesses, EQT managing director Robin Burns said underlying client activity was strong and business development initiatives were paying off.

“It is disappointing that we don’t yet see the benefits of this fully showing up in top line numbers due to the impact of lower markets, but the company

remains well positioned for future growth, is debt-free and is alert to potential development opportunities,” Burns said.

EQT has undertaken a review of internal structures which will be implemented during the remainder of the current year. The changes will help to deliver a stronger client focus and assist in the development of a number of long-term business strategies, Burns added.

The company also announced that it would pay future dividends to shareholders at 70 to 90 per cent of earnings per share, which rose from $43.85 to $45.08 in the six months to 31 December 2010, according to these latest results.

As a result, Killen said that he expects the interim dividend to be reduced from 50 to 40 cents per share, fully franked.

Formal confirmation of the interim dividend will be made when the audited financial results are released on Monday 27 February 2012.

AUSTRALIAN managed funds on average failed to outperform their respective indices in the December quarter in every major category except small companies funds, according to Morningstar’s latest managed fund league performance tables.

“October's rally after a dismal third quarter gave way to deteriorating conditions later in the quarter, which reduced the returns from most managed fund categories,” said Morningstar senior research analyst Julian Robertson.

Resources stocks particularly suffered, with the S&P/ASX Resources Index down 2.55 per cent, according to Morningstar.

The outperformance of the smaller companies funds over the S&P/ASX Small Ordinaries Index over the quarter and the 2011 calendar year demonstrated the greater oppor tunities for value-add in this lessresearched market segment, Morningstar stated.

Overall, there was a narrow dispersion of returns in the large-cap Australian shares sector, where only 40 of the 103 large-cap Australian share funds in the tables managed to beat the benchmark over the quarter.

The best-performed sector was property, with global-listed property funds gaining 8.86 per cent for the quarter, and Australian-listed property outperforming the wider Australian share market. Fixed income returns were modestly positive at around 2 per cent, but most did not surpass their benchmarks in the quarter.

Michael Hutton

Former insurance company director permanently banned THE Australian Securities and Investments Commission has permanently banned a former South Australian insurance company director from providing financial services after he fraudulently obtained more than $400,000 from clients over a two-year period.

Between 22 January 2007 and 23 July 2010, Craig John Horsell had been an employee and a director of insurance businesses Horsell International Pty Ltd and PSC Horsell Insurance Brokers Pty Ltd. Following an investigation, ASIC found that between 7 September 2007 and 4 May 2010, Horsell acted dishonestly and in breach of financial services laws. During that time, Horsell authorised the transfers of 72 insurance premium payments from clients totalling $409,635.24 into his personal bank account after failing to purchase the insurance products requested by clients.

Commenting on the permanent ban, the regulatory body stated that action was taken against Horsell to protect the public, deter similar conduct, and maintain consumer confidence in the financial services sector.

www.moneymanagement.com.au February 9, 2012 Money Management — 9

News Fiducian acquires State Trustees

By Milana Pokrajac FIDUCIAN Financial Services has acquired State Trustees’ financial planning business for an undisclosed sum.

The acquisition will see the financial planning side of State Trustees’ business blend into Fiducian Financial Services, while other services such as legal advice, estate planning and will preparation will remain under State Trustees.

According to both Fiducian managing director Indy Singh and State Trustees general manager sales and marketing, Vicki Hood, the acquisition was a result of the aligned products, values and service standards between the two businesses.

“I see this acquisition as a pleasing result for all stakeholders, including Fiducian shareholders, and certainly the clients of State Trustees who will greatly benefit from the expertise and quality of the Fiducian Financial Planning service offering,” Singh said.

Indy Singh

By Mike Taylor

Age discrimination undermining retirement adequacy AGE discrimination is still occurring in the workforce and is impacting the ability of over-50s to accumulate sufficient retirement savings, according to new research released by the Financial Services Council (FSC).

The research, conducted for the FSC by Westfield Wright, found 28 per cent of older workers had experienced discrimination, with the most common instance being made redundant before other, younger workers.

It found that discrimination was most acute among middle-ranking managers earning the average Australian wage of $70,000 a year.

The research reports that over-50s earning under $80,000 a year are more than twice as likely to have experienced age-related discrimination as those earning more.

The research also suggested older workers were finding the going tough in the current economic environment, with some employers seeking to recruit younger staff.

Planners get voice at super roundtable

It said this was a key concern for older workers who were trying to save as much superannuation as they could before they retired.

“Close to 50 per cent of over 50-year olds said they were dissatisfied with the amount they had put aside for their retirement, with more than half of those feeling very concerned,” it found.

Commenting on the results of the survey, FSC chief executive John Brogden said attitudes to older workers needed to change because Australia was facing an ageing population crisis.

“At current trends, by 2050 there will only be 2.7 working Australians for every citizen over 65,” he said. “Without action, this will have serious implications on the quality of life of every Australian.”

Brogden said Australia needed to end the concept of full-time work followed by full-time retirement by allowing Australians to remain in the workforce for longer periods and to stretch retirement incomes by supplementing superannuation through part-time work.

THE financial advice industry may have been denied a significant voice in consultations around the Stronger Super changes, but it has been given a solid voice on the Government’s forthcoming Superannuation roundtable.

The central voice for the planning industry will be Financial Planning Association chief executive Mark Rantall, but as well, there will be SMSF Professionals’ Association chief executive Andrea Slattery and Financial Services Council chief executive John Brogden.

Also weighing in will be a representative of the Joint Accounting bodies, Institute of Actuaries chief executive, Melinda Howes, Council of Small Business of Australia executive director Peter Strong, and Association of Superannuation Funds of Australia chief executive Pauline Vamos.

On the other side of the equation, the Industry Super Network is represented by chief executive David Whitely, alongside ACTU president Ged Kearney, Australian Institute of Superannuation Trustees chief executive Fiona Reynolds, Australian Council of Social Services chief executive Dr Cassandra Goldie, and Association of Women in Super representative Cate Wood.

The roundtable will be chaired by the Minister for Financial Services and Superannuation, Bill Shorten, but the Federal Opposition has dismissed the roundtable as another example of the Federal Government “fiddling”.

Value for money key to success for small dealer groups

By Andrew Tsanadis DEALER groups will need to deliver greater value for money in their product and service offerings in order to stay competitive in a new legislative environment.

That’s the assessment of Sentry Group chairman and chief executive Murray Hills, who believes that the new Future of Financial Advice environment and increasing demand for dealer groups to support the independent business models of its adviser network will be the key to success in 2012.

A strong business model going for ward will not be based on adviser numbers, but more importantly, the quality of the advice provided, Hills added.

“There is a lot of discounting and a price war going on, particularly with the smaller dealer groups, which will only cause ser ious hear tache for advisers in the

future,” Hills said.

In an attempt to assist advisers effectively grow and expand their businesses, Sentry’s new adviser solutions and licensee services package offers licensees managed discretionary account and unified managed account ser vices, an independent approved products list, compliance guidance, audit and policy procedures, a FOFA and fee-for-service transition program, and online 24/7 expert advice, sales, marketing and technical support.

In addition, Sentry will provide advisers with continuous personal and professional development programs, a technical, planning a n d s t ra t e g i c re v i e w s e r v i c e, professional indemnity insurance, and a complaints management service.

Advisers need to understand that it is a highly competitive financial planning market and that it is in

10 — Money Management February 9, 2012 www.moneymanagement.com.au

Mathias Cormann The Shadow Assistant Treasurer, Senator Mathias Cormann, said that instead of setting up another review, the Government “should implement the many outstanding recommendations of the Cooper and Ripoll inquiries”.

“In particular, it is high time Labor implemented the Cooper Review recommendations to improve transparency and corporate governance standards in superannuation,” Cormann said.

Announcing the roundtable, Federal Treasurer Wayne Swan said that as part of its initial work it would consider compliance cost issues relating to the new higher concessional contributions cap for individuals aged 50 and over who have less than $500,000 in superannuation.

Macquarie Specialist Investments teams with Class Super

By Chris Kennedy

Murray Hills their best interest to have strong management and technical support to stay profitable amidst widespread industry change, Hills said.

MACQUARIE Specialist Investments (MSI) and Class Super have formed a joint initiative under which investor data from Macquarie Equity Lever will be available on self-managed super fund (SMSF) administration platform Class Super.

Equity Lever provides access to selected Australian Securities Exchange-listed securities, and investors receive income distributions, franking credits and capital gains using unlisted instalment receipts, MSI stated.

The arrangement will provide advisers and trustees with more up-to-date information, and the automatic transfer of information will reduce time spent by accountants on audits and other reports, MSI and Class Super stated.

“By reducing the time spent on administration, SMSF trustees, their advisers and accountants can focus on the strategic activities which ultimately maximise returns,” said head of MSI Peter van der Westhuyzen.

InFocus More than talk needed on super The Government may be talking the talk with respect to simplifying superannuation, but according to Liz Westover its actions on excess concessional contributions suggest it is not walking the walk.

A

t a time when Australia’s superannuation system requires simplification to assist in restoring the confidence of Australians saving for their retirement, the exposure draft issued by Treasury in December for the refund of excess concessional contributions serves to highlight that the much-needed simplification simply isn’t happening. In fact, quite the opposite seems to be taking place.

The excess contributions tax (ECT) is an onerous and poorly devised tax that has no equivalent within the tax regime. No other piece of tax legislation in Australia imposes such a significant, unreasonable penalty for breaches of law, nor denies taxpayers any real opportunity to rectify mistakes. Under ECT, individuals are severely penalised for putting too much money into their superannuation funds, and its design is such that minor or unintentional breaches can trigger vastly disproportionate penalties.

Under a strict application of the law, an excess concessional contribution of a single cent could trigger a $70,000 tax liability. The irony is that the reporting mechanisms for superannuation contributions work in such a way that no-one could avoid being detected for excess contributions. Therefore, people are not going to make excess contributions thinking they will get away with not paying ECT. Where excess contributions are made, it is almost always a result of an inadvertent error.

To impose the existing penalties on individuals who are simply trying to enhance their retirement savings within the rules is both unreasonable and unjust, and certainly not in the public interest.

As part of the 2011-12 Federal Budget, the government announced a one-off opportunity to refund up to $10,000 of excess concessional contributions to provide some relief to those

who were exposed to ECT liabilities. On the face of it, it appeared to be a reasonable first step in the removal of ECT, particularly in light of the government’s budgetary constraints following its commitment to return to surplus by 2012-13. However, the devil is always in the detail, and with the December release of Treasury’s exposure draft legislation that would give effect to the Government’s budget announcement for the refund, the implications became much clearer.

The legislation offers a one-off opportunity for individuals to be refunded for their first breach of the concessional caps from the 2011 financial year onwards, and is only available where contributions are in excess by less than $10,000. Excess contributions over $10,000 would mean people lose any opportunity now and in the future for any refund. If a person does not accept a refund offered to them, they would fail to qualify for future refunds should they be unfortunate enough to breach the cap again. If someone has commenced an income stream in their superannuation fund, they would not qualify for a refund either. Furthermore, the Commissioner of Taxation has the power to amend or revoke a determination issued for a refund under a range of circumstances that could apply either before or after a payment of the refund has been made. Clearly, it is not a straightforward piece of legislation.

Likewise, the process is complex. Upon identification of excess contributions, the Commissioner would issue an offer to the relevant individual to refund the excess amount. If the offer is accepted, the Commissioner would issue a release authority to the individual’s super fund to enable the fund to release the amount identified in the authority. As the fund will have already paid 15 per cent tax on the contributions, they would only be required to release

85 per cent of the excess contribution. Refund amounts would be forwarded back to the Commissioner, not directly to the individual.

The Commissioner would then amend the individual’s income tax return for the year in which the contribution was originally made to include the excess contribution as assessable income. That is, the amount would be assessable to the individual as if it had been received by them as income in the first place. The individual would receive a tax offset for the 15 per cent tax already paid by the super fund as contributions tax, and the Commissioner would deduct from the refund any balance of tax owing on the amended assessment.

The catch, however, is that under these proposals the Commissioner is also able to deduct from the refund any other amounts owing to the government, albeit subsequent years’ or other tax liabilities to the Australian Tax Office or other government agencies. The result would be that the individual may not ever actually receive the refund. A more reasonable outcome would be for the balance of the refund to be given directly to the individual.

Ultimately, the availability of relief under these new provisions is so limited that it does little to truly address the inequities of ECT. In reality, it further complicates an already complicated piece of tax legislation. The ECT regime needs a serious and significant overhaul. The government has offered a ‘band-aid’ solution that, due to its complexity and lack of positive impact, is likely to further undermine the confidence Australians have in the superannuation system – and risks further disenfranchising the very people it intends to support.

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

Table 1: Number of ECT assessments issued at 8 May 2011 Type of assessment Excess concessional contributions only Excess non-concessional contributions only Both excess concessional and non-concessional contribution

Transitional*

2007 - 08

2008 - 09

2009 - 10

Not applicable

18,607

15,035

2,579**

1,823

2,089

2,019

< 5**

Not applicable

441

391

< 5**

**incomplete - we are only part way through issuing 2009-10 assessments.

Source: ATO - http://www.ato.gov.au/superfunds/content.aspx?menuid=0&doc=/content/00286671.htm&page=4&H4

Table 2: Value of ECT liabilities at 8 May 2011 ($m) Excess concessional contributions only Excess non-concessional contributions only Both excess concessional and non-concessional contribution

Transitional*

2007 - 08

2008 - 09

2009 - 10

Not applicable

85.4

72.5

6.2**

53.4

75.0

71.8

0.1**

Not applicable

17.5

18.8

0.1**

*Transitional non-concessional contributions cap - between 10 May 2006 and 30 June 2007, individuals could contribute up to $1 million of non-concessional contributions. **incomplete - we are only part way through issuing 2009-10 assessments.

Projected growth for retail market – June 2011 to June 2012 ($billion) Retirement Incomes

$111.88 $322.37 Super (pre-retirement)

$673.15 $1,700.37 Retail Savings

$140.11 $294.73 Risk

$12.54 $41.72 Total Retail Market

$915.16 $2,306.41 Source: DEXX&R Market Projections Report.

What’s on Effective Business Forecasting Conference 2012 14 February 2012 Park Royal Darling, Sydney www.cpaaustralia.com.au

ASIC Summer School 2012: Building Resilience in Turbulent Times 20-21 February 2012 Hilton Hotel, Sydney www.regodirect.com.au/asicss2 012

Covered Bonds: Friend Or Foe? 21 February University of NSW Campus, Sydney www.finsia.com

*Transitional non-concessional contributions cap - between 10 May 2006 and 30 June 2007, individuals could contribute up to $1 million of non-concessional contributions.

Type

SUPER SNAPSHOT

Mergers and Acquisitions Masterclass 28 February Establishment, Sydney www.finsia.com

SMSF Essentials 2012 27 March 2012 Doltone House, Sydney www.moneymanagement.com. au/eventlist

Source: ATO - http://www.ato.gov.au/superfunds/content.aspx?menuid=0&doc=/content/00286671.htm&page=5&H5

www.moneymanagement.com.au February 9, 2012 Money Management — 11

Scaled advice

It’s all about

the scale Scaled advice is a promising offering receiving a big push from the Government and industry regulators. However, lingering uncertainties are preventing the service from truly taking off, writes Tim Stewart.

A MAJOR part of the Governm e n t’s Fu t u re o f Fi n a n c i a l Advice (FOFA) reforms is the introduction of the concept of ‘scaled advice’ – that is, relatively simple advice on a single issue that can be delivered at a lower cost than comprehensive advice.

In making the argument for the provision of scaled advice, the Government c i t e d a n Au s t ra l i a n Se c u r i t i e s a n d Investments Commission (ASIC) paper released in December 2010 titled Access to Financial Advice in Australia.

The ASIC paper found that between 60 per cent and 80 per cent of Australians have never sought advice, in par t because they feel financial advice is out of their reach or not appropriate for their circumstances.

“Demand side research suggests that more than half of consumers across all age groups want simple advice (pieceby-piece) or a do-it-yourself option,” according to the ASIC paper.

AMP director of advice Scott Machin says his company identified the consumer demand for piece-by-piece a d v i c e b e f o re t h e A S I C re p o r t w a s released.

“We did some research in 2009 in conjunction with our planners and our clients, and one of the things we identified was that we needed an alternative to our comprehensive advice offer,” says Machin.

AMP wants to ensure its planners can establish relationships with new clients without consumers being scared off by the price of a full financial plan, says Machin.

Mercer financial advice leader Jo-Anne Bloch points out that while consumers are demanding simple advice, financial planners are continuing to base the business models around full, comprehensive

Key points z There is a big push by the Government

and regulators for the introduction of single-issue advice. z A lack of clarity around liability issues is preventing the take-off of scaled advice. z The financial planning industry is concerned Government changes might prevent licensees from providing cheap advice. z The method of delivery is rapidly changing, with phone and internet becoming a big part of scaled advice. advice.

“So what this has led to is a ‘one-sizefits-all’ approach which has led to an asymmetry between what people want and what the industry’s actually delivering,” says Bloch.

One of the big stumbling blocks is planner attitudes about what constitutes good advice. For years, advisers have been told – by ASIC, industr y bodies and licensees alike – that financial advice must take into account all aspects of a client’s circumstances, along with the circumstances of other family members.

“It has been drummed into planners that quality advice is comprehensive advice,” says Machin.

“And the longer you’ve been in the industry, the more likely you are to have those holistic relationships with your clients,” he says.

Many of those in the older generation of planners may have initiated their current client relationships with a simple piece of advice, says Machin. That suggests it might be easier to convince the up-and-coming generation of younger planners about the benefits of

12 — Money Management February 9, 2012 www.moneymanagement.com.au

scaled advice, he adds.

Bloch says that the current attitude of planners is that comprehensive advice is much safer – both in terms of acting in the client’s best interests as well as protecting the adviser from litigation down the line.

Furthermore, clients may wish to limit the scope of the advice, but planners are reluctant to do so until they understand the client’s full circumstances.

“Many financial advisers would say that … until you understand the financial circumstances of the client you may not be able to give them the right advice,” Bloch says.

So the idea of delivering advice to consumers on a limited basis makes planners wary. They need some reassurance from the Government and ASIC that they will be able to deliver limited advice without being exposed to legal action by a disgruntled client somewhere down the track.

Financial Planning Association (FPA) general manager for policy and government relations Dante De Gori says the main intention behind the Government’s proposals is to clarify the rules for dealer groups.

“Compliance groups apply a very conservative approach to advice and hence stop many of their financial planners from providing limited advice,” De Gori says.

The solution could potentially come in two parts. The first one would be around who sets the scope of the advice, according to ANZ general manager of advice and distribution Paul Barrett.

“If you could get clar ity that the adviser and client can agree on the scope of the advice with the relevant war nings issued, that would make things easier”, says Barrett.

“Second, is how the best interests test applies. Will the best interests test be scalable? Will best interests apply in all

Scaled advice

cases to limited advice if all of the client needs are not in scope?” he asks.

The issue of how the ‘best interests’ obligation will interact with scaled advice has also been raised by Financial Services Council (FSC) chief executive John Brogden.

Pointing to a FSC submission to the Parliamentar y Joint Committee on FOFA, Brogden gives the example of a client who has had a $10,000 windfall and wants to put the money in their superannuation. Brogden asks: if the adviser determines that the client would be better off using the money to pay off their credit card, but the client insists they want to put in their super, will the adviser be in breach of fiduciary duty if they carry out their client’s request?

“These are relatively straightforward pieces of financial advice. They don’t need the full advice spectrum. But if you apply the full best interests spectrum, then no financial adviser will provide

scaled advice because they’ll be worried about losing their licence,” Brogden says.

The implementation of a workable, s c a l a b l e a d v i c e s t r u c t u re i s “a n absolutely essential outcome of FOFA”, Brogden adds.

Advice as a transaction?

Jo-Anne Bloch

Machin describes AMP’s scaled advice offering as being “much more a transactional style, a very quick piece of advice”.

For example, it might be a bite-sized piece of advice for someone who has just taken out a mortgage, Machin says.

He uses the analogy of going to see the doctor. The doctor will take your pulse and ask you about your general health, and then ask “why are you here today?”.

“I t h i n k m o s t p e o p l e h a v e n e v e r walked out of experiences like that and thought it wasn’t the same level of quality as anything else. I think financial planners are the same,” he says.

But for Boutique Financial Planning

Principals’ Group (BFPPG) president Claude Santucci, the way the Government has framed the debate suggests it doesn’t understand what financial advice is about.

“A l l t h e e v i d e n c e p o i n t s t o [ t h e Government] believing that financial planning is a transaction-based activity,” Santucci says.

“The Government has tried to give the impression that financial planners have been out to sell a whole financial plan with a huge [Statement of Advice] and charge accordingly, when all that was required was a simple piece of advice,” Santucci adds.

He agrees that there is a place for scaled advice, and points out that many members of the BFPPG currently offer it to their clients. He adds that there was once a concept called ‘simple advice’, where you could give basic advice but Continued on page 14

www.moneymanagement.com.au February 9, 2012 Money Management — 13

Scaled advice Continued from page 13

the Government’s stated goal to make f i n a n c i a l a d v i c e a va i l a b l e t o m o re Australians, Klipin is concerned that in doing so the public’s perception of advice will be damaged.

“It’s not like the brand of financial advice is seen broadly across the Au s t ra l i a n c o m m u n i t y w i t h g re a t regard. We’re in a battle to protect the reputation of financial planning to demonstrate to the Australian community that it’s a trusted service that delivers value,” Klipin says.

If the Government wants to enact legislation that effectively turns advice into a sales process without any of the consumer safeguards, then it’s hardly surprising that the financial planning industry is up in arms against it, says Klipin.

you couldn’t wave off your own responsibilities to find out enough about the client so that advice was in context.

“Scaled advice where you can just answer the question, recommend the product and get a fee is a dangerous way to go,” Santucci says.

Intra-fund advice Sitting at the most basic end of the scaled advice spectrum is intra-fund advice. This is advice delivered to superannuation fund members which is limited to a single issue relating to their money within the fund, according to Association of Superannuation Funds of Australia chief executive Pauline Vamos.

“There was an expectation from members in a compulsory system that if I have money in your fund, then you can answer some fairly simple questions about my money in your fund,” Vamos says.

As it currently stands, superannuation funds have access to class order relief from some of the conditions in s945A of the Corporations Act in relation to ‘knowing your client’. However, ASIC has proposed that this relief be revoked because very few superannuation funds have taken it up.

The Government has announced that it intends to amend s945A to make it clear that Australian Financial Services licensees can provide scaled advice and still comply with s945A. The Government is also planning to pass legislation which will enshrine the provision of intra-fund advice in law.

However, Vamos is quick to point out that this legislation will only relate to the way intra-fund advice can be paid for, rather than creating different rules for the way super funds can deliver advice.

“No matter who you are – whether you’re an industr y fund or [a retail adviser] – you have to obtain the relevant information to provide that advice.

There are no conversations at all about giving any exemptions to super funds or anybody. The fundamental principle is: you need to collect the relevant information to give that advice,” Vamos says.

In t ra - f u n d a d v i s e r s w i l l s t i l l b e subject to the ‘best interests’ duty under FOFA, and there will be no reduction in any of their obligations as financial advisers, Vamos says.

However, the one area where intrafund advice will differ from scaled advice is fees. Most superannuation funds currently bundle up their fees for intra-fund advice in the administration fee. Planners object to this because they believe it will mean that some superann u a t i o n m e m b e r s a re p a y i n g f o r a service they don’t use.

For Association of Financial Advisers (AFA) chief executive Richard Klipin, this creates an unlevel playing field because planners are subject to a raft of fee disclosure obligations that do not apply to super funds.

“At the moment, there are millions of Australians paying for advice and not getting it, because there’s a bundled fee that pays for all manner of things – your fund’s logo on the front of someone’s

A bridge too far?

football jumper, advisers, admin, technology, and so on,” Klipin says.

But for Bloch, it is entirely reasonable for the intra-fund advice fee to be bundled up in the administration fee.

Members expect their super fund to provide them with information about their money in the fund, and they won’t be willing to pay a separate fee for it, Bloch says.

“To me, scaled advice is no different to helping members with claims management or benefit payments or a d m i n i s t ra t i o n . It’s v e r y m u c h a n administrative expense,” Bloch says.

She is sceptical about claims that members will be paying for services they don’t use, since she believes that nearly every member will phone up their fund to ask questions about their money at some point in their life.

Bl o c h a l s o s u g g e s t s t h e a d v i c e component within the member administration fee could be disclosed, if doing so would placate concerns about an unlevel playing field.

“I wouldn’t be adverse to giving some estimate [to members] that said ‘if your fee’s $1, about 1 per cent is attributable to advice’. I don’t have a problem with that, I just don’t see the point of it,” Bloch says.

But that isn’t enough for the FSC’s Brogden. He objects to the fact that the str ingent disclosure requirements within FOFA are not being applied to superannuation funds.

“It’s an act of gross hypocrisy to turn around and say ‘inside super funds there’s no need for disclosure, no need

14 — Money Management February 9, 2012 www.moneymanagement.com.au

Dante De Gori for opt-in, but outside you’ve got to disclose everything and people can opt out at any stage’,” says Brogden.

“It’s putting in place two systems, and it’s undermining all of the principles that have been laid down with respect to financial advice,” he adds.

Klipin’s biggest concern is that intrafund advice could end up being a direct sales offer masquerading as advice.

“When we start to grow the marketplace, if consumers’ experience with advice is ‘oh, well advice is like sales’ or ‘all I get is a particular piece of advice on a single-issue’, then really the world of advice becomes a fairly limited option for them,” Klipin says.

While he is completely supportive of

Currently, there are four topics that intra-fund advisers can advise on: super contr ibutions; investment choices within super; insurance within super; and accessing super under financial hardship provisions.

ASIC has proposed in Consultation Pa p e r 1 6 4 t h a t f i v e n e w t o p i c s b e included within intra-fund advice: intra-fund provisions; transition to retirement (TTR) strategies; nomination of beneficiaries; interactions between super and Centrelink benefits; and a single-issue about retirement.

Whether or not TTR and Centrelink strategies should be included in intrafund advice is a contentious point in the financial services industry.

Machin says he has “major concerns”, with industry funds talking about delivering TTR-style advice.

“To be able to deliver that kind of advice and to do it justice, you need to consider not only superannuation, but insurance needs, income, relationships and partner income. I struggle to see how you can do that in an intra-fund advice process,” Machin says.

Bloch agrees with Machin, and says that Mercer will not offer TTR advice in a scaled advice context – even if the ASIC guidance includes it in the list of approved topics.

REST chief executive Damian Hill says it would be ideal if everyone got comprehensive advice about a potential TTR setup, but “that is not a reality”.

“The fact of the matter is that a lot of people aren’t taking advantage of the TTR rules through lack of knowledge, and the default system’s not really putting them in that position,” says Hill.

Hill argues that the basics of TTR can b e e x p l a i n e d t o m e m b e r s ove r t h e phone via intra-fund advice, but if the level of complexity “ramps up” they can be referred to REST’s comprehensive advice service.

Focusing on delivery For the majority of financial planners, the concept of simple or ‘scoped’ advice is nothing new. In fact, many of them have been offering it for at least a decade, since the Financial Services Reform Act of 2001.

So what has changed since then? For Barrett, the big game-changer is the method of delivery. The telephone, for

Scaled advice example, is playing a much bigger role.

“Pa r t i c u l a r l y a s t h e t w o - s p e e d economy starts allocating people into the West, the need for video-conferencing facilities and phone-based advice in those areas is increasing,” Barrett says.

Barrett thinks the big opportunity could be for suburban planners who can utilise the Internet and the phone to reach clients who are geographically spread, with a wide range of needs.

One thing ANZ has found in its internal discussions is that simple advice needn’t always be phone-based, and complex advice needn’t always be faceto-face, says Barrett.

“You can provide complex advice over the phone, and you can provide simple advice face-to-face. It becomes more of a client need issue,” he says.

For example, time-poor clients with complex needs may feel phone-based advice is more appropriate for them, Barrett says.

Klipin says that another possible model in the scaled advice environment could be practices that limit the scope of their advice to a single-issue, such as insurance, superannuation or mortgages.

“You might even find that there will be businesses that will offer both holistic advice in the same shop that they offer scaled advice,” says Klipin. “That’s the way they’ll manage their lowervalue or younger-style clients who may have less complex needs.”

“

If we don’t provide a midmarket solution, the outcome will be that fewer Australians get advice about their financial affairs, not more.

- John Brogden

”

John Brogden

Getting costs down There is also a wide range of advice models within superannuation funds, according to Vamos.

“Some [funds] have qualified financial planners within their call centres, and they either operate under an AFSL that the super fund has or they’re operating under a third-party licence,” she says.

Bloch says that some super funds have their own in-house financial planning service, while other funds may do their intra-fund advice in-house and outsource their comprehensive advice.

The Gover nment’s stated aim is to increase the number of Australians who receive financial advice, but for that to be achieved the cost of advice needs to go down.

De Gori is concerned that the Government’s proposals will not achieve the aim of reducing the complexity and availability of advice.

“I am not sure that the Government and ASIC have actually done anything to help reduce the fears for both financial planners and the industry in

general. FOFA may indeed result in more over-compliance,” De Gori says.

Brogden says that at the moment, consumers can either get comprehensive financial advice from a planner for around $2,500 or limited intra-fund advice on their superannuation – and there is nothing in-between.

Unless a workable scaled advice s t r u c t u re c o m e s o u t o f t h e F O FA reforms, the $2,500 figure will drift up to $3,000, he adds.

“If we don’t provide a mid-market solution, the outcome will be that fewer Australians get advice about their financial affairs, not more,” Brogden says.

Barrett points out that when it comes t o re t a i l f i n a n c i a l a d v i c e, t h e f a c t remains that the true cost of advice is far higher than what people are willing to pay for it. Historically, planners have gotten around this by subsidising the cost of advice with ongoing fees – but with commissions gone that is no longer possible, says Barrett. The only option re m a i n i n g i s t o re d u c e t h e c o s t o f advice, he says.

“If we can reduce the complexity around providing this advice, we can effectively reduce the cost of providing the advice, which means there will be more people paying for it and getting it,” Barrett says.

The big question is whether or not the Government can get the regulatory settings right, he says.

MM

www.moneymanagement.com.au February 9, 2012 Money Management — 15

Opinion Markets

The forecast changes In his market forecast for 2012, Ron Bewley has a stronger sense of positive outcomes in the next 12 months.

W

ith the year less than one month old (at the time of writing), I feel the need to update my 2012 forecast for the ASX 200. My underlying forecast, as always, is derived from my quantitative interpretation of broker forecasts of company dividends and earnings as compiled by Thomson Reuters Datastream. In that sense, I cannot change the number that is my forecast as it is derived from a well-specified set of formulae – but I can, and will, change my risk assessment of my forecasts.

Volatility, as always, dominates market forecasts and last year was pretty bad when it came to market volatility. On 1 January I posted my 2012 forecasts of 11.3 per cent for capital gains and 16.9 per cent for total returns (ie, including dividends). My forecast of market volatility is just under 20 per cent. My risk assessment then was that there was limited downside risk but many investors may take some time to heal before they support any potential rally. It was well known that quarter one was going to be dominated by European bond auctions amid the debt crisis that just wouldn’t go away. China’s economy was slowing – but was it slowing too quickly and heading for a hard landing? The US had at last

started to produce some good economic data – but would it last?

Already this year, the US economic data has added significant support to the strength of its economy – including a best jobs number in four years – and confidence is on the rise. China posted a gross domestic product read of 8.9 per cent – above expectations – and that largely put paid to those commentators predicting a hard landing. On top of that, it has been reported that China is ready to relax capital rules for banks to stimulate an economy that is already running at 9 per cent per annum.

The best news so far this year though has been the manner in which the early bond auctions have gone in Europe.

France lost its AAA rating but, as with the US last August, yields fell – not rose – on the downgrade. Even some of the more fragile economies did much better on yields than in December. While nothing is certain, the panic over European debt might have peaked – and all that panic has already been priced into the stock market. Of course the European economy will grow slowly at best over coming years – but nothing new there.

Stock markets started the year well.

The S&P 500 (to 19 January) had the best start to a year in 25 years – and, at last,

16 — Money Management February 9, 2012 www.moneymanagement.com.au

the ASX started even better. The 4 per cent gain on the ASX 200 in the first 13 trading days of the year is over one third of my prediction of 11.3 per cent for the whole year – but there is long way to go.

But what really surprises me are the patterns in the measures I construct to try to better understand the markets – both here and in the US. I use my fear and disorder indexes to interpret how the market might react to future shocks. My measure of fear is one of excess intra-day volatility in the market. Disorder is a daily measure of the extent to which the different sectors’ returns are moving together or not. When fear and disorder are high, I believe overpriced markets fall more quickly than usual, while underpriced markets are more likely to stay underpriced for longer. I report my daily fear index for the 12 months to 19 January in Chart 1.

The dotted ‘tram lines’ define a range describing where my fear measure resided prior to the GFC for two thirds of the time. Being largely within the tram lines is, therefore, very good. Occasionally a little outside the tram lines is also normal (34 per cent of the time). Too much below the lower line could spell complacency. My reading of Chart 1 is that fear has been ‘normal’ since the start

of December – and there has been a lot of negative news, particularly in Europe, to digest during that time.

From the start of August to the end of November 2011, the market was extremely fearful – matching some of the data we found during the GFC. In the first half of 2011, fear was a little high – but there were earthquakes, tsunami, nuclear disasters, floods and cyclones to deal with. In my opinion, this is about the most settled the market has been in 12 months. While this measure obviously cannot predict what events will bombard the market in the year to come, I do conclude the market is in a much better position to deal with any negative news than it was in the second half of 2011.

My disorder index tells a similar story.

If different sectors are signalling disparate returns, there may be more incentive to rebalance portfolios to chase returns – or to get out of the market altogether. For the last two months disorder has been within or below its tram lines.

That means there have been two months of stability in the market as measured by fear and disorder, giving investors time to regain their sanity and look for opportunities in equities if catalysts present themselves. China, the US and European bond auctions have already provided

Chart 1: Woodhall’s fear index

over-pricing as investors try to work out fair value from the price discovery process. I show my version of mispricing in Chart 3 by sector and for the market as a whole for the end of 2011, and the most recent data at the time of writing.

After months of significant underpricing, even as recently as 30 December, the market was almost fairly priced on 19 January. My estimate of the fundamental price has fallen over the latter half of 2011, so that the massive underpricing has been eroded both by rising prices and falling fundamentals.

The sectoral view has also been compressed. While resource-related sectors were underpriced by more than 10 per cent at the end of 2011 and the Telco sector was overpriced by about 6 per cent, the range is now much narrower. The market is poised ready for a reasonably broad-based rally.

After four really bad years on the market – and a terrible last six months – I at last have a stronger sense of something positive in the wind. None of the problems (US, China, Europe) were unknown in 2008 but I, like many others, didn’t realise how long it would take to sort out these issues. In a separate piece of work, I looked at really long-run behaviour. I found an amazing result that

Ron Bewley is the director of Woodhall Investment Research.

18% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% Jan

Feb Mar

Apr May

Jun

Jul

Aug Sep

Oct

Nov Dec

Forecast origin - last 12 months Data source: Thomson Reuters Datastream

Chart 3: Sectoral estimates of exuberance

15% 10%

IT

ASX 200

Property

Financials

Health

-5%

Utilities

20%

0%

Telco

25%

Staples

30%

Industrials

Exuberance

35%

Energy

5%

40%

Materials

45%

Discretionary

10%

50%

Fear index

the average capital gain for the All Ordinaries over 130 years (except for a fouryear period) was 5 per cent per annum.

While that result of 5 per cent does not look great, that study suggests – in a long-run sense (not medium-term as with my exuberance measure) – that the market is about 15 per cent underpriced.

It takes on average 18 months for this underpricing to dissipate so that, as it happens, both pieces of research are in broad agreement. Whichever way I slice it, the market seems cheap compared to where it might be at the end of 2012.

Of course, unexpected bad news will occur and impact the market from time to time. Of course some corrections are a good thing if they are stopping bubbles forming from over-exuberance getting out of hand. Since I interpret exuberance as being in the danger zone at above +6 per cent, any rapid market rally in January/February of about 8 per cent from 19 January would take us to the +6 per cent overpricing zone – and that bubble would need to correct either by a sideways market movement for an extended period of time or a fall in price back to fair value.

Chart 2: Updated capital gains forecasts for the following 12 months

Expected capital growth

some positive signals this year.

The Australian data is not as encouraging as some that we are seeing overseas.

The two interest rate cuts at the end of 2011 were too late to yet influence employment data. But with the ANZ bank now having its own monthly decisions on whether it will raise or lower its own rates, the impact of future RBA

moves on rates seems less important.

Banks’ borrowing costs do not fall by much when the RBA cuts rates.

I believe China, and now the US, will keep our overall economy in shape, but my ‘model share portfolio optimiser’ told me to get out of consumer discretionary stocks in May 2011 and it is not telling me to get back in. Parts of the economy will not recover quickly. So, from a macro perspective, OK is my best assessment for Australia until policy changes have some positive impact on the whole economy.

The broking analysts that supply the company-level earnings and dividends forecasts presumably all take macro and company data into account when forming their views of companies’ prospects. With the next reporting season starting in mid-February, I find it important to follow what analysts are saying in the run-up. I think it would be foolish in the extreme to make a forecast on 1 January and not revise it as new information comes to hand. Stoically standing by a 1 January forecast makes it a tipping game rather than research with which to form a view of how the market is evolving. I update my forecasts every day – but for the next 12 months from that day rather than to year-end. I show the trace of these updated forecasts for the last 12 months to 19 January in Chart 2.

I should stress that my forecasts are solely based on the aforementioned broker forecasts – I add no qualitative overlay. Importantly, these analysts might not agree with the way in which I interpret these company forecasts – that methodology forms my contribution. I note from Chart 2 that there has been a strong rally in these forecasts from the October low but, more importantly, the rally continued after the New Year.

My new forecast for a slightly different period (12 months from 19 January) is now 12.3 per cent, 1 per cent above the forecast I made 13 working days before.

While there is some volatility in these day-to-day updates, I do not ignore the 3 percentage point increase in my outlook since the October low.

The final piece in my 2012 market jigsaw is mispricing or exuberance.

Markets are dominated by under and

-10%

5% 0% Feb Mar

Apr May

Jun

Jul

Aug

Sep

Oct

Nov Dec

Jan

-15%

30-Dec-2011

Last 12 months Data source: Thomson Reuters Datastream

19-Jan-2012

Data source: Thomson Reuters Datastream

www.moneymanagement.com.au February 9, 2012 Money Management — 17

OpinionFOFA The

missing pieces

Although the process involving the upcoming FOFA reforms commenced a few years ago, the reforms package still looks like an unsolved jigsaw puzzle, writes Pam Roberts.

A

lthough legislation introducing the Future of Financial Advice (FOFA) reforms has been tabled in Parliament, the reforms continue to look like a jigsaw puzzle with half of the pieces missing.

The question that immediately springs to mind is: “Why has introducing FOFA been so hard? Why have these reforms been so complex, unclear and such a moveable feast?”

On the face of it, the reform process should not have been this difficult.

Unlike other big reforms this Government has taken on, such as introduci n g a c a r b o n t a x , t h e re h a s b e e n substantial agreement across the industry about the fundamentals of FOFA.

Although the industry and the Government have disagreed in respect of ‘optin’ and commission on risk premiums, the fundamental principle of unbundling advice and product fees for investments (which effectively bans commission) is not at issue.

Industry bodies, such as the Association of Financial Advisers, the Financ i a l Pl a n n i n g A s s o c i a t i o n a n d t h e Financial Services Council, have long drawn a line in the sand of 1 July 2012 for unbundling of advice fees and product fees. As for the introduction of a statutory fiduciary duty for advisers, the main criticism was that the duty was already there in the advice process and it didn’t need to be put into statute.

18 — Money Management February 9, 2012 www.moneymanagement.com.au

So why have we struggled with this reform agenda?

Legislation by instalment The frustration we have all felt with this reform process starts with the fact that the legislation was not released in one p a c k a g e, b u t ra t h e r i n a s e r i e s o f tranches: • Tranche 1: Corporations Amendment (Future of Financial Advice) Bill 2011 was tabled in Parliament on 13 October, 2011 (referred to below as FOFA 1); and • Tranche 2: Corporations Amendment (Further Future of Financial Advice) Bill 2011 was tabled on 24 Nov e m b e r, t h e l a s t s i t t i n g d a y o f

Parliament for 2011 (referred to below as FOFA 2).

It is arguable that the Government did not have a choice here, given the complexity and scope of the policy issues involved. Also, releasing draft legislation in component form for public comment may be preferable to the inevitable delays involved in waiting for the release until all drafting has been completed. However, this method has its own inherent problems when it is not clear what will be in the next instalment of legislation. Implementing some reforms requires extensive planning and resourcing. Additiona l l y, s o m e c l a r i t y a s t o w h a t t h e requirements are and when they will be

released is essential for that planning.

The other problem with legislation by instalment is that we aren’t clear on what is to come. Will there be a third tranche of FOFA legislation? Or will the gaps be filled by regulations?

“

The difference between FOFA and FSR is that FSR allowed two years for implementation.

”

Annual disclosure of ongoing advice fees to all clients The Government has been clear that these reforms are ‘prospective’ and don’t apply to existing arrangements in place on 30 June, 2012. This includes the requirement to ‘opt-in’ to ongoing advice fees every two years, and to disclose those fees (both past and prospective) on an annual basis.

However, the explanatory memorandum to FOFA 1 extended annual disclos u re o f o n g o i n g a d v i c e f e e s t o a l l clients, “including where those arrangem e n t s b e g a n o r t h e c l i e n t s we re engaged prior to the commencement day”. This would be both retrospective (as it would apply to commission clients) and a significant cost to advisers and licensees. Furthermore, the proposal had not been flagged with the industry before.

The other issue is that the actual draft legislation appears to contradict the explanatory memorandum. According to the actual draft legislation, annual disclosure applies to: • Categor y 1 clients: New clients entering into new contracts from 1 July, 2012. These clients receive annual disclosure and must opt-in every two years; and • Category 2 clients: Existing clients who commence with new contracts

(arrangements) from 1 July, 2012. These clients receive annual disclosure but do not have to opt-in every two years.

For the third category of client, those on pre-1 July, 2012 contracts (including contracts paying commission), the draft legislation indicates that the opt-in and annual disclosure provisions should not a p p l y. T h i s i s b e c a u s e t h e a n n u a l disclosure provisions are set out in a new Division 3, which starts on 1 July, 2012. Division 3 applies where “a financial services licensee enters into an ongoing fee arrangement with another person (the client)”.

As pre-1 July, 2012 contracts have already been entered into prior to the start date (1 July, 2012) they should be e xc l u d e d f ro m a n n u a l d i s c l o s u re requirements.

Recent statements by the Minister for Financial Services and Superannuation, Bill Shorten, suggest that annual disclosure of pre-1 July, 2012 commission arrangements may be excluded from annual disclosure. However, until such

time as we receive further clarification, the confusion will continue.

Deciphering the rules for grandfathering of existing arrangements Probably the most confusing area for f i n a n c i a l p l a n n e r s a n d p ro d u c t providers is the grandfathering of existing commission arrangements. Ironically, it is probably the area where we need the greatest clarity and at the earliest time in order to implement.

It should be reasonably straightforward. This has always been a ‘prospective ban’ and Minister Shorten has clearly said that, although commissions will be banned from 1 July, 2012, “the b a n o n c o n f l i c t e d re m u n e ra t i o n (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions”. In line with this, FOFA 2 includes a new Part 10.18 which covers the grandfathering rules.

However, trying to pinpoint just what is grandfathered from the legislation from recent statements by the Government has become increasingly difficult: • The platform exclusion in FOFA 2.

The second tranche of FOFA itself only grandfathers a benefit from a product provider if the benefit is given under “an arrangement entered into” before 1 July, 2012 and is not given by a platform provider (including a master super fund).

Considering the wide use of platforms by advisers over the past decade, this carve-out seems puzzling.

Although the supporting explanatory memorandum says that benefits from platform providers will be covered by regulations, presumably this relates to previously announced special rules for grandfathering platform rebates to dealer groups. But why the holistic carve-out? The best we can hope for is an early release of draft regulations, but until then the puzzle remains unclear.

• Does the grandfathering apply only to trail commission?

The second tranche of FOFA grandfathers a benefit paid to an adviser under a pre-1 July, 2012 contract. However it also provides for regulations that may include in the ban some payments to a d v i s e r s u n d e r p re - 1 Ju l y 2 0 1 2 contracts. The only limitation on this will be where it would otherwise trigger compensation by the Gover nment under the ‘just terms’ provision in s e c t i o n 5 1 ( x x x i ) o f t h e Au s t ra l i a n Constitution.

The concern here is that recent state-

ments by the Minister (including the second reading speech to the bill) have referred to grandfather ing of trail commissions and stated that “commissions on new business and clients after 1 July 2012 will not be allowed”. So where does that put upfront commission on new contributions made to pre-1 Ju l y, 2 0 1 2 s u p e r a n d i n v e s t m e n t contracts?

Hopefully we are just dealing with a case of mixed messages by the Minister.

Note that Treasury has consistently maintained that commission arrangements on existing contracts will be grandfathered and that would include both upfront and trail commission. It would be clearly unfair if the goal posts were changed now.

Commission on life insurance The Government has gone ahead with a ban on risk commission under group insurance contracts in superannuation, and individual contracts in default super (ie, corporate/employer super plans). It has advised that this would apply from 1 July, 2013. FOFA 2 however starts on 1 July, 2012, and this includes the ban on commission in

s u p e r. How e v e r, t h e e x p l a n a t o r y memorandum says that regulations are likely to push out the start date for the ban to 1 July, 2013.

Again, we have to wait for regulations and it is not clear just what grandfathering will apply to risk commission arrangements in super from 1 July, 2013. The Stronger Super reforms recommended an absolute ban on risk commission for super in the MySuper default fund. This may mean that existing risk commission under personal super (albeit under a g ro u p i n s u ra n c e c o n t ra c t ) w i l l b e grandfathered from 2013 but corporate/employer super will not.

A looming 2012 start date The real problem we face with FOFA is time. The level of complexity of this legislation, and the fact that so much is still unclear, is daunting. Despite a welcome release from the Australian Securities and Investments Commission saying it will “go soft” on financial ser vices providers for the first 12 months, the start date remains 1 July, 2012.

To put this into context: the FOFA legislation must pass through both Houses of Parliament. Although both FOFA bills have been tabled in the House of Representatives, both have been sent off to parliamentary committees for review and reports are expected back by 14 March, 2012 at the latest. Parliament doesn’t sit in April; and May is traditionally reserved for the Budget. This means that, unless the legislation passes by 22 March, 2012, the likelihood of FOFA being passed before the end of June 2012 becomes increasingly remote.

In addition, the super reforms which a re r u n n i n g a l o n g s i d e t h e F O FA reforms will require as many, if not m o re, re s o u rc e s t o i m p l e m e n t .

However the super reforms start from 1 July, 2013. It would be preferable if the start dates for FOFA and the Stronger Super reforms were aligned.

Conclusion It is not that the financial ser vices industry is unfamiliar with change. As a n i n d u s t r y, w e h a v e u n d e r g o n e substantial reform in the past, and sometimes substantial reform can take time to bed down. It’s nearly a decade since the industry implemented the sweeping Financial Services Reforms (FSR) and looking back, there were a lot of problems with FSR in the beginning.

Substance gave way to form – in the form of 50-page Statements of Advice and 100-page Product Disclosure Statements (PDS). It took some time for these problems to settle. But the difference between FOFA and FSR is that FSR allowed two years for implementation.

From the passing of legislation, the industry had two years to implement it; to clarify procedures and for Government to get the rules right. With FOFA, unless the start date gets pushed out, we could have a couple of months.

Pam Roberts is the technical services manager at IOOF. www.moneymanagement.com.au February 9, 2012 Money Management — 19

Asset allocation Can you handle the static?

Elizabeth Moran looks at the broad risk-and-return characteristics of three investment classes: cash, bonds and equities in the Australian market between October 1989 and January 2012. and-return and away from simply the return side of the equation.

Asset class risk-and-return Many investors focus on return when determining asset allocation, but risk and the possibility of loss or loss of income should also be taken into account.

Investors should be asking themselves, “Does the return on offer compensate for the risk involved?” That is, “Am I being paid enough to compensate for a return which may be lower than my expectations and could include a possible loss?”

The annual risk of each asset class is very different as shown in Figure 2 – equities have a much higher risk, when compared to bonds and cash. Risk is calculated by looking at the standard deviation of return. Standard deviation is a statistical measure of variability, which shows how much variation exists around

Pension market percentage allocation to equities Un ite d s Fi tate Au nla s st nd ra l Be Ch ia lg ile Po ium No lan d Ca rwa na y Au da s Tu tria Ne Por rke th tug y er a la l Ice nd l s M an De ex d ic Hunma o ng rk a Sp ry ai Ita n Ja ly p Ge Isr an rm ae Es an l to y Sl ov S Gre nia l a Cz k ov ece ec Re en h pu ia Re b pu lic b Ko l i c re a

Figure 1: OECD asset allocation 60 50 40 30 20 10 0

the other main attribute of investment – the average return. A low standard deviation indicates the investment returns something very close to the average return, most of the time; it is a reliable investment.

Figure 2 shows that cash has a very low standard deviation of less than 1 per cent, but bonds also have a low standard deviation of 4 per cent. Conversely, a high standard deviation implies greater variability of return.

Equities, with a standard deviation of 15 per cent, fit this description. Thus equities have more than three times the annualised risk when compared to bonds. Equity investors avoid the tough question of risk by typically looking at the average return. Recent experience with equity returns underlines the fact that looking at average return has its pitfalls, as losses can be close to one another or fall in consecutive years, which a returnfocussed analysis doesn’t adequately highlight. Specifically, investors need to consider the likelihood of average returns being delivered, not just the level of those average returns.

Importantly, even after equity investors accept that additional risk, they are not offered all that much extra return, as

Figure 4: Annual return/annual risk

U

nderstanding the underlying risk of your asset allocation will help increase the consistency of your returns and minimise possible portfolio losses in any one year. Overwhelmingly, the greater use of bonds in asset allocation, both on a static and dynamic basis, appears to be appropriate based on the available data.

Australia has a high allocation to equities, relative to other member countries of the Organisation for Economic Cooperation and Development (OECD), as Figure 1 indicates.

Figure 1 shows Australian pension funds have the third-highest allocation to equities – roughly 47 per cent, when compared to other OECD countries. Recent equity performance has been poor and pension fund returns have been low, if positive, so perhaps it is time for us to reassess our portfolio allocations, by shifting the focus to risk-

Figure 3 shows.

The important thing to note is the ratio of risk-to-return, with Figure 4 showing cash is best and equities are worst.

These relationships are summarised in Figure 5, on the scatter plot below.

Asset allocation In order to assess the performance of these allocations, investors need to consider the risk, as well as the return, from asset allocations. Several types of allocations are available: • Static allocations, such as the typical ‘balanced’ allocation of 75 per cent equities and 25 per cent bonds, and the opposite, 25 per cent equities and 75 per cent bonds • Dynamic allocations, which alter the allocation to equities over time.

Static allocations (1) ‘Balanced’75 per cent equities and 25 per cent bonds Australians have a unique view of a ‘balanced’ asset allocation. While the rest of world takes a much more conservative approach, Australians seem to agree that an allocation of 75 per cent equities and 25 per cent bonds is a ‘balanced’ portfolio.

Annual return/annual Annual risk return/annual risk

25 20

19.45

15 10 2.15

5

0.61

Cash

Bonds

Equities

Asset class Annual return/annual risk

Source: FIIG Securities Limited, OECD, Pension Markets in Focus, No. 8, Updated 22 July 2011 Source: FIIG Securities, Bloomberg, Cash = UBS Bank Bill, Bonds = UBSA Composite Bond 0+ years, Equities = All Ordinaries Accumulation

Figure 2: Annual risk

Figure 5: Risk-and-return: various asset classes

Annual Risk

16% 12% 8% 4% 0% Cash

Bonds

Equities

Asset Class Annual risk Source: FIIG Securities, Bloomberg, Cash = UBS Bank Bill, Bonds = UBSA Composite Bond 0+ years, Equities = All Ordinaries Accumulation .

Figure 3:

Annual return

Annual return

Annual return

10% 8% 6% 4% 2% 0%

Cash

Bonds

Equities

Asset class Annual return Source: FIIG Securities, Bloomberg, Cash = UBS Bank Bill, Bonds = UBSA Composite Bond 0+ years, Equities = All Ordinaries Accumulation .

20 — Money Management February 9, 2012 www.moneymanagement.com.au

Source: FIIG Securities, Bloomberg, Cash = UBS Bank Bill, Bonds = UBSA Composite Bond 0+ years, Equities = All Ordinaries Accumulation, Data from Oct 1989 to Jan 2012

(2) 25 per cent equities and 75 per cent bonds A conservative allocation, of 25 per cent to equities and 75 per cent to bonds, has a much more balanced risk attribution, as Figure 7 indicates.

Dynamic allocation If risk is so important to asset allocation, then risk may assist in the allocation procedure itself. Specifically, we can express the annual return of the most risky asset class, equities, as a function of annual risk, in Figure 8. Here a 19 per cent negative annual return and a 19 per cent annual risk estimate would equate a negative 1. In the alternative, a 38 per cent annual return with a 19 per cent annual risk estimate would equate a positive 2.

One of the most interesting aspects of Figure 8 is the way it standardises all rolling annual returns across time, and it shows that equities begin to perform typically when the annualised return/risk is observed to be under -1.33. In addition, equity returns have a tendency to fall after return increases through two standard deviations. Hence, a possible dynamic allocation might be one where the first static allocation is used (75 per cent equities, 25 per cent bonds) where a reading of lower than -1.33 is recorded. Investors could then hold that allocation until a reading of two standard deviations is

with a low-risk asset class, like bonds.

In reality a 75 per cent weighting to equities, with 25 per cent bonds, is just an equity portfolio; there is no ‘balance’.

Investors can cut risk roughly in half, by using the Dynamic Allocation or Static Allocation 2, with return rising slightly with dynamic allocation, and falling by around 1 per cent for Static Allocation 2.

investors can cut risk by half, while only cutting return by 1 per cent, when compared to the typical ‘balanced’ allocation of 75 per cent equities and 25 per cent bonds. On a dynamic basis, using risk analysis to standardise annual returns, investors can achieve much better results, while being 75 per cent in bonds more than 80 per cent of the time. While there might be times to increase equity holdings to the typical ‘balanced’ level of 75 per cent, these occasions comprise less than 20 per cent of occurrences, between October 1989 and January 2012, if the above trading rule is implemented.

Conclusion If nothing else, this article emphasises the risk implications of asset allocation. Instead of looking at return, investors need to think of risk, and then allocate according to a combination of asset classes that provides good risk-adjusted return. Even on a static basis, by allocating 75 per cent to bonds,

Elizabeth Moran is the director of education and fixed income research at FIIG.

All ordinaries All ordinariesannual annual return/annual return/annual risk risk

Figure 8: 5 4 3 2 1 -1 -2 20

a -J

n-

91 20

a -J

n-

93 20

a -J

n-

95 20

a -J

n-

97 20

a -J

n-

99 20

a -J

n-

01 20

a -J

n-

03 20

a -J

n-

05 20

a -J

n-

07 20

09 20

a -J

n-

11

Annual all ordinaries return/annual risk (lhs) Source: FIIG Securities, ASX, Bloomberg, UBSA

8%

Dynamic asset allocation model

Figure 9:

Dynamic asset allocation model

Equity annual return/annual risk

5

"balanced" portfolio, risk attribution, 75% equities / 25% bonds Bond risk

92%

1.00

4 3 2 0.00 1 -1

2 -1

9

an -J 20

-J

an

-0

6 20

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an

-0

3 20

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an

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an

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-9

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-J

Static allocation 2

an

an

-9

4

1

-1.00

7

-2 Source: FIIG Securities, UBSA, ASX, Bloomberg

Figure 7:

n-

Date

Static allocation 1

Equity risk

a -J

red = 75% equities 25% bonds, blue = 75% bonds 25% equities

Figure 6:

observed, when investors would then switch back to Static Allocation 2 (25 per cent equities, 75 per cent bonds). Specifically, Figure 9 shows when the switch occurs; hold the 25 per cent equities/75 per cent bond portfolio where the graph is shaded in blue and hold the 75 per cent equities/25 per cent bond portfolio where the graph is shaded red.

By being more dynamic, the returns might be improved, when compared to either static allocation, as summarised below. In fact, investors can allocate to equities, through Static Allocation 1, less than 20 per cent of the time and beat the static allocation return while reducing risk substantially. Most of the time, over 80 per cent, Static Allocation 2 is used, where 75 per cent bonds are held and 25 per cent equities, as shown in Table 1 below.

However, the most important benefit of either the dynamic allocation, or Static Allocation 2, is the reduction in risk that occurs. Dynamic allocation cuts risk by over 4 per cent, which is near 40 per cent of the risk in Static Allocation 1, while Static Allocation 2 cuts risk by over 6 per cent, which is more than 50 per cent of the risk in Static Allocation 1. Lower risk will enhance the certainty of return; something that Australians have not had in the past, yet something they need in the future. Why Australians seem to think that a ‘balanced’ fund comprises 75 per cent equities does not make sense, when the risk they face is clearly not balanced. Where ‘balance’ comes from remains unclear, when such a risky asset class, like equities, is matched

Equity annual return/annual risk (standard deviations)

Yet, if investors focussed on risk, then this allocation is anything but “balanced”; the strategy is dominated with equity risk, as shown in Figure 6.

Date

1= 75% equities-25% bonds, -1 = 75% bonds 25% equities (rhs) Annual all ordinaries return/annual risk (lhs) Source: FIIG Securities, ASX, Bloomberg, UBSA

25% equity/ 75% bond portfolio risk attribution Equity risk

Bond risk

Table 1

45%

Dynamic allocation

Static allocation one: 75% equities – 25% bonds

Risk

6.88%

11.17%

4.70%

Return

10.02%

9.73%

8.71%

1.46

0.87

1.85

55%

Return/Risk

Source: FIIG Securities, UBSA, ASX, Bloomberg

Static allocation two: 25% equities – 75% bonds

Return benefit (vs. static allocation one)

0.29%

-1.02%

Risk benefit (vs. static allocation one)

-4.29%

-6.48%

Source: FIIG Securities, ASX, UBSA, Bloomberg. (Data starts in October 1989, and finishes in January 2012.)

www.moneymanagement.com.au February 9, 2012 Money Management — 21

ResearchReview Analysing the raters: Australian equity ETFs Research Review is compiled by PortfolioConstruction Forum in association with Money Management, to help practitioners assess the robustness and disclosure of each fund research house compared with one another, and given the transparency they expect of those they rate.

This month, PortfolioConstruction Forum asked the research houses: What are the pros and cons of including Australian Equity ETFs in portfolios? On balance, should they be included and if so, under what circumstances?

LONSEC Exchange-traded funds (ETFs) have been available in the Australian market for 10 years. The bulk available to retail investors aims to provide such investors with index market exposure via a listed vehicle.

However, more recently, there have been several ETFs launched in the Australian market that apply some kind of quantitative overlay to the standard index approach – in effect, resulting in an active ETF exposure.

Historically, ETFs have been used by institutional investors as a parking mechanism – that is, for maintaining market exposure while considering other investment decisions, as a way of reflecting a tactical view or by hedge fund managers (e.g. using ETFs to short certain markets).

Within the retail arena, some advisers have been using ETFs as a way of getting ‘cheap’ market exposure, as well as providing the ability to gain listed exposure to sectors outside of Australian equities.

In deciding whether ETFs are appropri-

ate for clients, advisers need to consider several things.

Firstly, why are they considering ETFs? Lonsec would argue that the decision to use any index exposure should be driven by a fundamental belief in indexing, and not by cost considerations alone.

Secondly, advisers should understand the structure of the ETF product they are considering. For example, does it give index exposure or an active approach; is it investing in physical assets or a synthetic exposure; and what is the depth of the market and what are the risks associated with the relevant structure?

The thing to remember with any passive exposure is that while the tracking error, or relative risk, will be low, investors are fully exposed to market risk (ie, beta) so there is no scope to manage downside risk. Therefore, the effectiveness of an index exposure – be it via an ETF or an indexed-managed fund – will depend on what the adviser is looking to achieve – better risk-adjusted returns or full exposure to market risk.

22 — Money Management February 9, 2012 www.moneymanagement.com.au

A passive exposure will make sense in a momentum-driven bull market where everything goes up in value. However, such an exposure may be questionable in a range-trading market. The challenge is predicting market conditions.

Lonsec takes a strategic approach to asset allocation, preferring that underlying investment managers take any active positions within their respective portfolios.

Most dealer groups we deal with apply a strategic approach to asset allocation; therefore scope to use ETFs as a vehicle for making tactical calls is limited.

MERCER The highly variable returns provided by the share market since the onset of the global financial crisis, and the subdued performance of active managers in this period, have led to a renewal of the active versus passive management debate. The volume of funds invested in ETFs has grown substantially, as has the range of available ETFs.

Investors can and do use ETFs to achieve a number of objectives. An obvious, and popular, use is as a portfolio management tool, used to carry out tasks with a relatively short time horizon: • Portfolio repositioning/rebalancing – ETFs can be used for equitising cash (they are often used in managing transitions) or for building out a strategic exposure to a particular market, prior to the identification of preferred options in the space.

• Dynamic Asset Allocation – While ETFs are not expected to outperform their respective index, they can be used to implement a tilt away from a strategic allocation to that index if the investor expects the index to outperform the broader strategic allocation.

ETFs can also be used for longer-term strategic plays: • Core/satellite structures – ETFs can be used as either core or satellite holdings. In a small portfolio, ETFs provide instant diversification with a single share purchase.

• Portfolio completion – ETFs can be

“

An increased focus on fees in the past five years has also attracted investors to ETFs because they are typically cheaper than most alternatives.

- Standard & Poors

”

is to do your homework.

As with any investment, it’s important to take the time to understand these instruments. ETF providers offer a wealth of useful educational material that can be combined with independent research to consider ETFs in light of an investor’s individual circumstances. When used appropriately, ETFs can bring significant benefits and cost savings to a portfolio. But investors need to also be aware of all risks.

STANDARD & POOR’S

used to gain exposures missing from a portfolio structure where other methods are not available. Small investors can expand the set of attainable exposures via the use of specialist ETFs. • Hedging – ETFs can be sold short, so if the portfolio is overweight a specific sector, a sector ETF can quickly offset that risk.

A typical ETF is simply a vehicle to achieve a passive market exposure, so must be evaluated against other methods of achieving that such as index-tracking funds and futures. In particular, if an ETF is chosen over an index-tracking fund, the investor must satisfy themselves as to how closely the ETF will track the index.

Importantly, if daily liquidity is not required, the costs associated with purchasing an ETF may make it inappropriate for the investor.

As mentioned above, use of ETFs naturally limits the benefits to be obtained from active management (though we note the recent development in the active ETF space). The Australian equity market has historically been a

rich source of alpha for active managers, and recent somewhat lacklustre returns should be viewed in light of the current macro-driven environment, which is seeing unusually high correlations between stocks, thus constraining the ability of active managers to add value.

In general, we expect institutional clients to use ETFs more for the shorter-term plays outlined above – their scale increases the relative attractiveness of alternatives such as passive index-tracking funds. Smaller investors may be more inclined to use ETFs as strategic investments if they are struggling to achieve diversification in a more cost-effective manner. The question of whether ETFs are the best choice for an individual client is dependent on the client’s circumstances, of course.

MORNINGSTAR ETFs offer benefits to retail investors that were previously only available to institutions. They bring the execution of a stock, with the diversification of a fund, at an ultra-low price. But there are some pitfalls.

Advantages • Cost – ETFs have low ongoing costs versus managed funds. For example, the Vanguard Australian Shares Index ETF VAS has a fee of 0.15 per cent, far cheaper than Australian equity managed funds.

• Tax advantages – Managed funds generate tax liabilities even when the investor hasn’t transacted, while ETFs do not. Capital Gains Tax events are only created when the ETF is traded, yet investors still receive franking credits. The low turnover of most ETFs can offer further tax and cost benefits.

• Diversification – For example, the Vanguard ETF mentioned brings exposure to the S&P/ASX 200. Individual investors could not practically achieve that with one purchase on the ASX. Managed funds can also offer a diversified portfolio, but come with associated fees and taxes.

• Liquidity and immediate market execution – ETFs can be traded during ASX trading hours, execution is immediate and, using limit orders, investors can know what price they will receive.

• More options – A portfolio of Australian resource stocks can be hedged or skewed using commodity ETFs, retirees can skew their portfolio towards income using a high-yield Australian equity ETF, while young investors could skew towards growth with a small-cap ETF. Drawbacks • Transaction fees – For regular investors or dollar-cost averaging approaches, ETFs may not be appropriate, as transaction costs can undermine the low fee structure.

• ETFs don’t offer the ability to outperform – All Australian-based ETFs available so far are index trackers that do not offer the ability to outperform the benchmark.

• Product proliferation burden – not all ETFs are created equal, and niche ETFs can be dangerous if misused. It’s important to use independent research.

• Tax disadvantages – ETFs can have tax consequences. For example, investors in international ETFs cross-listed on the ASX may be liable for US estate tax if the amount invested exceeds US$60,000. Again, the key

Since the global financial crisis, investors have shown an increased interest in passive investment strategies and there is increased debate about when ETFs are applicable in a diversified portfolio.

There is growing recognition of the importance of asset allocation as the dominant driver of portfolio returns. The result is an increased focus on both strategic and more-active asset allocation strategies.

From a strategic asset allocation perspective, ETFs can easily provide broad asset class exposure. In terms of more active asset allocation strategies, Australian equity ETFs can provide a fast and efficient means to tactically increase or decrease exposure to the asset class.

Furthermore, as more Australian equity thematic and sector ETFs are released (e.g. resources and high yield), investors have increased choice and opportunity to express their asset allocation and investment views.

In addition, ETFs can be perfectly suited to the role of the core exposure for an asset class in a core plus satellite portfolio construction approach. However, as most Australian equities ETFs are passively managed, investors need to be comfortable with a passive investment approach.

The popularity of passive equity strategies has grown significantly in recent years, driven by the disappointing returns generated by some active managers during a period that was conducive to alpha generation.

An increased focus on fees in the past five years has also attracted investors to ETFs because they are typically cheaper than most alternatives. Furthermore, for investors sensitive to after-tax returns, Australian equity ETFs are attractive due to low turnover and access to franking credits.

ETFs also offer a higher level of portfolio transparency than active managed funds, which may hold large-, mid-, and even small-cap stocks at varying stages.

However, while Australian equity ETFs have benefits over other investment options, there are a number of issues to consider.

Firstly, the role of the market maker is critical to keeping an ETF trading at or near net tangible assets. However, during the ‘flash crash’ in 2009, some market makers stepped back and did not perform this role.

Secondly, Australian equity ETFs typically purchase shares (real assets), but there are synthetic ETFs that use derivatives to provide investors with exposure to the strategy. This gives rise to counterparty risks.

Thirdly, Australian equity ETFs will also usually have a tracking error Continued on page 24

www.moneymanagement.com.au February 9, 2012 Money Management — 23

ResearchReview Continued from page 23 compared to the index being replicated, as a result of trading rules and efficiency in index replication.

Ultimately, though, when considering the use of ETFs in a portfolio, the core consideration should be the use of passive management. If investors are comfortable with a passive approach, the next issue is to determine whether an ETF or managed fund is the more appropriate vehicle.

VAN EYK van Eyk doesn’t recommend holding ETFs to a portfolio unless an investor understands them. Appearances are deceptive – ETFs look simple, but can mask an astonishing level of product complexity.

Take, for example, an ETF listed in Australia that invests in Asian shares. It might have its primary listing in the US, so it would be following shares that stopped trading as the US market was opening, which is a 12-hour difference. The US trading day would go by (another 12 hours), then when the US market closed, it would be another two to four hours until the Australian market opened.

Because you are jumping time zones faster than Usain Bolt on Red Bull, you would have a gap of 26 to 28 hours between when the trading in the Asian shares stopped and the trading in the Australian ETF began. It’s an extreme example, but it is true of one ETF available in the Australian market, and the price of this particular ETF does deviate substantially from the underlying index.

So it’s important to understand the detail. Once that hurdle is cleared, there are three main factors that might lead an investor to consider ETFs: (1) Cost, ease of access, and the fact that virtually all can access market liquidity; (2) Whether they can give an exposure that’s not otherwise readily available in the market; (3) Whether you believe the market will be directional.

Beyond liquidity, one reason ETFs gained traction initially in Australia was due to a failure of index funds to provide affordable options compared to active funds. Cost will still be an attraction, particularly since as the industry consolidates, it may be a race to the bottom on costs.

Exposure is another attraction – a sector or region-focused ETF may be an easier and more direct option than an actively managed fund investing across a range of sectors or regions.

ETFs may also be attractive if you believe the market will directionally trend upward, and therefore that the benefits of active management would be less apparent than in a directionless market.

Reasons for not investing might include cost (you might get a comparable index product cheaper); portfolio construction flaws that might lead to a result different from what you expected; a low level of trading (this might lead to trading inefficiencies); and the inability to weed out poor index performers that an active manager might be able to avoid. Finally, you might want to avoid ETFs because of what could be termed their opportunity cost. If you

expect the underlying index to trade sideways for a sustained period, a thoughtful investor would choose an active manager with a strong chance of outperforming such an index over time.

ZENITH INVESTMENT PARTNERS The use of Australian Equity ETFs in portfolios makes most sense for advisers and investors using direct equities within portfolios. This approach may eliminate the need to use an administration platform and the associated fees for portfolio administration and reporting.

There is little fee advantage in using ETFs over unlisted index funds, so combining in a managed fund portfolio doesn’t seem to make much sense. This approach can be very cost effective for self-managed super funds.

• The use of ETFs can provide great diversification within a direct Australian stock portfolio that would otherwise be

24 — Money Management February 9, 2012 www.moneymanagement.com.au

virtually impossible holding a portfolio of direct stocks alone. As such, they can act well as a core part of the portfolio, with individual stock holdings serving as the satellite or potential excess return component of the portfolio.

• Some of the large established Australian Equity ETFs are highly traded and offer excellent liquidity and accurate pricing, which is important for those adopting an active, more tactical approach to portfolio management.

• However, with most of the established Australian Equity ETFs being passive/index in nature, the major disadvantage is that investors are eliminating the potential to participate in any outperformance of the index. While the Australian market is relatively efficient, Zenith believes there are still quality Australian equity managers that can provide meaningful outperformance of the index after fees.

• In our opinion, there are a number of

suitable uses of Australian equity ETFs within portfolios including: • Investors wanting a cost-effective, diversified, direct ownership exposure to the Australian share market, who don’t have enough capital to invest in a portfolio of direct stocks; • Investors wanting to apply a more active, tactical asset allocation approach to managing portfolios. This suits investors who think they can add more returns through adjusting asset allocation rather than via the inclusion of active managers in a portfolio with a longer-term strategic asset allocation approach; and, • Index funds (and therefore passive ETFs) perform well in extended bull market conditions, where active managers can struggle due to investing in stocks with extended valuations that the ETFs will hold.

In association with

Still on a bull run?

The current secular bull super cycle has been driven by two key characteristics – both of which are expected to persist for years yet. Chris Watling explains.

T

he current commodity ‘super cycle’ which began in 1999 is now entering its 13th year. The last 250 years of commodity price cycles point to typical super cycles of 15-to-25 years in length. If history is any guide, this cycle looks set to last a further two to 12 years.

Since the start of this cycle, and the end of the last bear cycle, spot commodity prices have rallied aggressively. The CRB commodity index, for example, has rallied a cumulative 183 per cent trough-to-peak. Oil prices have rallied 710 per cent above 2001 levels while coal has rallied 520 per cent.

Base metals including copper (+657 per cent), lead (+773 per cent) and tin (+821 per cent) have all risen sharply to their highs since the late 1990s. Gold (+626 per cent) and silver (+1052 per cent), as well as other precious metals prices, have all also risen meaningfully, as have agricultural commodity prices including wheat (+463 per cent) and corn (+347 per cent).

This current secular bull super cycle, like others in the past 200 years, has been driven by two key characteristics – firstly, strong compound annual demand growth for most commodities coupled with a lagging supply response and, secondly, loose monetary policy. Importantly for the investment case, those factors are expected to persist for a number of years more.

Rapid demand growth Over the last two decades, China has emerged as a major global super power.

Increasingly, China’s hunger for resources has driven global commodity demand: • China accounted for nearly half the growth in the global oil market last decade.

• Without China, global steel demand would have risen 6 per cent cumulatively over the decade, but with China it was up 65 per cent.

• Without China, global copper demand would have shrunk by over 10 per cent, but with China it rose 26 per cent. China accounted for almost 140 per cent of incremental demand growth over the decade.

• Other markets such as lead and tin would have also contracted in the last decade without China’s rapid demand growth.

India is also likely to be key to long-term commodity demand growth. It is expected by many to become the third largest economy in the world by 2050. Like China, India’s urbanisation is rapid. By 2030, India will have 68 cities with populations of 1 million plus, up from 42 today (Europe has 35). India’s current 32 per cent urbanisation rate has been rising rapidly and is expected to continue to rise rapidly until it reaches 60 to 70 per cent, the historical pattern of rapidly industrialising emerging economies.

Emerging Asia – defined by the Asian Development Bank as 30 countries that are industrialising and (mostly) growing rapidly – represents a total population of 3.6 billion people, over half the world’s population and considerably larger than the population of today’s developed world. Infrastructure build-out and the emergence of a significant consuming middle class in these nations and others should drive demand for a variety of commodities for many decades.

Monetary drivers Loose monetary policy has accompanied most commodity super bull cycles and this cycle is no different. The US Federal Reserve has cut interest rates from 6.5 per cent at start of 2000 to 0.25 per cent today and engaged in quantitative easing (money creation). This has positively impacted commodity prices.

Both factors are likely to persist for many years. To retain political power, politicians need to be seen to be creating strong economic growth and jobs. At a time of structural deleveraging and future major fiscal headwinds, monetary policy will need to do much of the heavy lifting to stimulate the US economy.

Real interest rates Commodity prices have undergone four distinct phases since the early 1970s – underpinned by four distinct phases in real interest rates.

• Phase 1: From the end of Breton Woods in the early 1970s until the late 1970s/early 1980s, real interest rates were

either negative or very low.

• Phase 2: At the end of the 1970s/beginning of the 1980s, a new US Federal Reserve Chairman (Paul Volcker) stated his goal was to eradicate inflation. That was accomplished by sharply raising real interest rates until inflation had been broken during the early 1980s double-dip recession.

• Phase 3: From the end of those two recessions through to the late 1990s, real interest rates fluctuated around the 2-to-5 per cent range.

• Phase 4: Since 2001, real interest rates have once again trended lower, and have been negative for much of the last decade.

Phase 4 has been a key driver behind rising commodity prices. Commodities have no yield, so their relative attractiveness is enhanced when real interest rates are low or negative. Also, money creation typically increases when real rates are low, which theoretically leads to higher inflation.

Building inflationary pressures are – indeed, have been – anticipated by commodity prices which, as physical assets, offer a natural inflation hedge.

Dollar debasement After the US dollar index reached a major multi-year high in 2001, it devalued by a cumulative 40 per cent over the last decade. Commodities are priced in US dollars – therefore commodities prices are negatively correlated to the US dollar. It’s not surprising that the start of the commodity super cycle coincided with a major peak in the US dollar.

The actions of the Fed have weakened

the currency over the last 10 years. Loose monetary policy, money creation and negative real interest rates typically encourage a weak currency. Over and above this, the US dollar’s status as the sole global reserve currency is questionable. Presently, two thirds of world trade and the world’s central bank reserves are held in US dollars, while a considerable percentage of the world’s investable assets are also denominated in US dollars. If present trends continue, those percentages look set to fall, adding further selling pressure to the US dollar.

The Chinese are already putting in place a number of measures to start moving the Renminbi towards an internationally tradable currency. Beijing has permitted Renminbi deposit-taking offshore including in Singapore, New York and Hong Kong, as well as the issuance of Renminbi-denominated ‘dim sum’ bonds in Hong Kong.

China’s international trade has begun to be denominated in Renminbi, from zero per cent two years ago to 7 per cent today. While there is a long way to go, the emergence of an international Renminbi, coupled with and in part driving a long-term downward US dollar trend would, in turn, also support commodity prices in the long term.

Chris Watling is chief executive officer of UK-based Longview Economics and a speaker at the PortfolioConstruction Forum Markets Summit 2012 on 14 February. www.PortfolioConstruction.com.au

In association with

www.moneymanagement.com.au February 9, 2012 Money Management — 25

Toolbox Income streams in turbulent times CPD Quiz Taking action in relation to account-based pensions after significant market movements can open up some important tax and social security gains for clients, writes Tim Sanderson.

C

ontinued global uncertainty has many clients questioning their superannuation investments and their long-term retirement plans. It is important, though, not to lose sight of the generous tax advantages that superannuation and super income streams provide regardless of market volatility. In fact, times of market volatility may provide the best opportunity for clients to take action and secure a ‘better deal’ for their retirement.

Commencing an account-based pension after a period of negative market returns The proportioning of components that make up a superannuation benefit is determined very differently, depending on whether the benefit is paid from accumulation or pension phase.

In accumulation phase, the tax-free component is generally fixed and will only increase where further after-tax contributions are made. The taxable component is simply the remainder of the client’s balance. Where a benefit is paid, components are determined at the time of each payment.

An account-based pension, however, is assigned a tax-free proportion at the time it is commenced, which then applies to all future benefits paid from that pension.

This contrasting treatment means that when considering the components of a super balance, a client is relatively better off being in accumulation phase during periods of negative market returns (because returns reduce only the taxable component), and relatively better off being in pension phase during periods of positive market returns (because returns will increase compo-

Table 3

nents proportionally). It follows that the best time to commence a pension may be after a significant period of negative market returns, because a relatively high proportion of tax-free component can be ‘locked in’ for the future. (See Tables 1 and 2) By choosing to commence a pension when the value has dropped by 20 per cent, the tax-free and taxable components are fixed at 62.5 per cent and 37.5 per cent respectively (compared with 50/50 had they remained in accumulation phase). This may mean that for a client under age 60, a lower portion of the pension payment is assessable for tax purposes. In addition, for those who will leave super death benefits to nondependants, a greater proportion will be received tax-free.

Recommencing an account-based pension for social security purposes While commencing an account-based pension after a significant period of negative returns may provide a favourable outcome for tax purposes, the opposite will apply for social security purposes. This is because the calculation of the non-assessable (deductible) amount for social security income test purposes is calculated with reference to the starting balance of a pension and does not change in future years except where commutations occur.

A lower non-assessable amount may therefore be locked in for the life of the pension. This would mean that if the pension balance increases with strong earnings in the future, the required minimum payments would increase, but the amount exempt from the social security income test will remain the same – potentially reducing social security entitlements.

Jill recommences an account-based pension on 1 July 2015 1 July 2012

1 July 2015

1 July 2015

(commence initial

(no action)

(recommence pension)

account based pension) Balance1

$480,000

$519,000

$519,000

Relevant number2

22.48

-

19.92

Non-assessable amount

$21,352

$21,352

$26,054

Required payment

$27,000

$27,000

$27,000

Assessable income

$5,648

$5,648

$946

Table 2

Jill commences an account-based pension on 1 July 2012 1 July 2012

Tax free component

$300,000 (62.5%)

Taxable component

$180,000 (37.5%)

Balance

$480,000

Table 1

Over the next three years, positive returns increase super balance to previous level

1 July 2015 $324,375 (62.5%) $194,625 (37.5%) $519,0001

However, there is a simple solution to ensure that a better tax outcome is locked in and social security entitlement is optimised. This involves initially commencing an account-based pension where investment markets (and super balance) have fallen, then stopping and immediately recommencing a new account-based pension when markets return to previous levels. This course of action can enhance social security entitlements, while at the same time preserving the tax-free proportion that was locked in when the original account-based pension was commenced.

Example Jill wishes to draw $27,000 per annum from her account-based pension, while minimising her assessable income for social security purposes. As with the previous example, we assume the market will recover to previous levels by 1 July 2015. (See Table 3) By recommencing her pension after markets have recovered in 2015, Jill can take advantage of the higher balance (and lower relevant number) to secure a higher non-assessable amount. If her social security pension is determined under the income test, this action could result in an increase in her social security benefit of up to $2,351 per annum.

Importantly, by commencing an account-based pension initially, then stopping and recommencing at a later time, Jill has been able to optimise both the tax and social security treatment of her account-based pension.

Conclusion While it is not a good idea to base retirement planning decisions on expected short-term market movements, taking action in relation to account-based pensions after significant market movements can open up some important tax and social security gains for clients without increasing risk. Many clients will hold an account-based pension for several decades, and any action that can be taken now to permanently enhance the net income and associated Government benefits from this income stream should be seriously considered.

1 After allowing for pension payments of $27,000 pa.

2 Assumes Jill is aged 64 on 1 July 2012 and 67 on 1 July 2015.

Tim Sanderson is the senior technical manager at Colonial First State.

Jill (age 64) remains in accumulation phase 1 January 2012

Tax free component

$300,000

Taxable component

$300,000

Balance

$600,000

Over the next 6 months, negative returns reduce Jill’s balance by 20%

1 July 2012 $300,000 $180,000 $480,000

26 — Money Management February 9, 2012 www.moneymanagement.com.au

Over the next three years, positive returns increase super balance to previous level

1 July 2015 $300,000 (50%) $300,000 (50%) $600,000

This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. Readers can submit their answers online at www.moneymanagement.com.au in March 2012.

1. In accumulation phase, which two segments are used to calculate a client’s tax free component? a) contributions segment and undeducted segment b) crystallised segment and contributions segment c) crystallised segment and earnings segment d) contributions segment and untaxed segment.

2. What is one advantage of commencing an account-based pension after a client’s super balance has fallen due to negative investment returns? a) The Centrelink non-assessable (deductible) amount will be lower than if the pension had been commenced prior to the period of negative investment returns. b) The taxable component will be higher than if the pension had been commenced prior to the period of negative investment returns. c) There are no advantages of commencing an account-based pension where investment markets have temporarily reduced a client’s superannuation account balance. d) The tax-free proportion of the account-based pension will be higher than if the pension had been commenced prior to the period of negative investment returns.

3.The tax free proportion of an account-based pension will remain the same if an existing account-based pension is stopped and all proceeds immediately used to commence a new account-based pension.

TRUE/FALSE 4.Which statement is true regarding the Centrelink non-assessable (deductible) amount of an account based pension? a) Where strong investment performance increases the account balance and therefore the minimum required payment, the deductible amount of an existing account-based pension will increase. b) Where strong investment performance increases the account balance and therefore the minimum required payment, the deductible amount of an existing account-based pension will remain the same. c) Where strong investment performance increases the account balance and therefore the minimum required payment, the deductible amount of an existing account-based pension will decrease. d) Where strong investment performance increases the account balance and therefore the minimum required payment, the deductible amount of an existing account-based pension will always equal the minimum pension payment.

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

Appointments

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

SUNCORP Life has announced a number of executive shuffles and appointments.

The new product and service business will be headed up by Steve Carroll, who was most recently Suncorp Life New Zealand executive general manager.

V i c k i D oy l e h a s b e e n a p p o i n t e d E G M o f d i re c t customer, and will be responsible for the value proposition and channel strategy for direct customers of both life and superannuation and investments.

Adviser distribution will be headed up by Jordan Hawke, who will drive intermediated distribution, which includes Asteron Life, Guardian Advice and Standard Pacific.

Former Ellerston Capital portfolio manager Anthony Aboud has been appointed as an analyst at Perpetual Investment’s equities team.

Aboud will be working with portfolio manager (and former Ellerston colleague) Pa u l Skamvougeras on the Perpetual Share Plus Long Short Fund, as well as the development of new absolute return equity products.

From 1998 to 2006, Aboud

was lead analyst at UBS Investment Bank, covering large and small cap companies across a range of sectors. He has broad investment experience, with particular short fund expertise.

The ability to manage and build a strong investment team with high-quality professionals is a key priority for the investment company, Perpetual group executive equities Cathy Doyle said.

Betashares has appointed Tony Rumble as head of portfolio construction.

In his new role, Rumble will head up Betashares’ asset allocation and portfolio construction strategy, as well as providing ETF education and analytics to financial advisers and SMSF trustees.

He has over 25 years experie n c e i n f i n a n c i a l s e r v i c e s, having worked at PriceWaterhouseCoopers as a partner and as a lecturer at the University of New South Wales. He has also consulted to peak re g u l a t o r s i n c l u d i n g t h e Australian Taxation Office and t h e Au s t r a l i a n S e c u r i t i e s Exchange.

“He has an extensive history with financial products and will improve BetaShares’ value

Move of the week Former Mercer head of investment management for Australia and New Zealand Gary Burke has been appointed AMP Capital senior portfolio manager in the MultiAsset Group (MAG).

In his new role, Burke will assume responsibility for a number of AMP Capital’s diversified funds, reflecting the specialist investment manager’s push to deliver more resources into MAG. Burke was previously Zurich Scudder Investment Management chief investment officer, Deutsche Funds Management investment director, and Rothschild Australia Asset Management head of portfolio management.

Burke commenced his duties on 30 January and reports to AMP Capital head of portfolio management Debbie Alliston. proposition with his educative approach to portfolio construction,” said Betashares head of investment strategy and distribution Drew Corbett.

Rumble commenced his duties on 30 January, working closely with the newly-appointed director, por tfolio and national account sales, Vinnie Wadhera.

Crowe Horwath has expanded its business advisory service with the appointment of Mary O’Driscoll and Jim Softsis.

O ’ Dr i s c o l l joins the accounting firm with almost 20 years experience as a char-

tered accountant, and brings tax, accounting and business consulting experience ranging from succession planning, structuring and profit improvement.

Softsis will focus on tax, business consulting and compliance. Crowe Horwath Brisbane chief executive Chris Shay said the appointment of O’Driscoll and Softsis continued to grow the firm’s presence in the smallto-medium enterprise sector and high-worth client space.

The Actuaries Institute has appointed David Goodsall as 2012 Institute president, John

Opportunities FINANCE MANAGER Location: Sydney Company: ad people Description: A recently restructured independent public relations agency is currently seeking a senior financial professional to manage the company’s finances more strategically and proactively.

In this role you will be required to produce monthly financial reports, analyse and interpret financial data and make recommendations to increase profitability and enhance existing accounting software.

The successful applicant will be driven and confident in order to define and grow this newly-created role.

To be considered you will be a qualified accountant, have extensive experience working in a communications agency and have experience using Pegasus and BBC. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact ad people, (02) 9956 4200 / 0410 004 774.

REGIONAL MANAGER Location: Dubbo and Central NSW Company: Terrington Consulting Description: A major Australian bank is looking for an experienced regional manager to drive business growth.

You will be provided with the necessary

Gary Burke Newman as senior vice president and Daniel Smith as vice president. Goodsall, Newman and Smith will work with Actuaries Institute chief executive officer Me l i n d a Howe s to develop insights into the impacts of Australia’s ageing population and natural disasters, and contr ibute to the debate around superannuation governance. Goodsall has over 30 years exper ience in the financial services industry, his most recent role being that of the Institute’s 2011 senior vice president.

Newman and Smith are both current members of the Institute’s council.

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

support to develop a successful team of relationship managers, but your success will be dependent upon your ability to drive sales growth.

It is crucial that the successful candidate has experience managing successful sales teams and possesses a complex understanding of commercial credit.

In this role you will also have the skills to coach, mentor and manage all facets of a commercial banking team both at an operational and strategic level.

Applications are welcomed from both senior relationship managers and regional managers within the agri-banking, commercial or SME segments.

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

PROJECT MANAGER – FINANCIAL SERVICES Location: Adelaide Company: Terrington Consulting Description: An opportunity exists for an experienced project manager with intimate experience managing key projects within a financial services setting.

In this role, you will oversee critical

organisation changes pertaining to legislation, strategy, systems and distribution networks.

Although opportunities are available to project managers at all levels, applicants with strong stakeholder management skills along with a strong understanding of risk, compliance and pertinent legislation are highly sought after.

To be successful, a strong understanding of project management methodologies and systems experience is essential.

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

SENIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A well-established financial services firm is seeking a senior paraplanner to join its young and energetic paraplanning team in Adelaide’s CBD. Reporting to the paraplanning manager, you will be responsible for the preparation of complex statements of advice in superannuation, SMSF, gearing, investments and risk. As a senior member of the team, you will also manage the coaching, training and review of junior and intermediate colleagues.

To be successful you will have excellent

technical knowledge and will have either completed or be in the process of completing a DFP or advanced DFP. 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

AMP HORIZONS ACADEMY Location: Australia-wide Company: AMP Horizons Academy Description: AMP is accepting applications for its 2012 AMP Horizons Academy 12-month training program.

The paid traineeship begins with a 10-week course at the AMP’s academy in Sydney.

Graduating as a competent financial planner, you will be provided with a position in your home state and receive additional on-the-job training for nine months in an AMP Horizons practice, and be mentored by experienced financial planners throughout the year.

The successful applicants will have a Diploma of Financial Services (Financial Planning) or be RG146-compliant.

You will be rewarded with a fast-tracked career in the company and a competitive training salary.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact AMP – 1300 30 75 44.

www.moneymanagement.com.au February 9, 2012 Money Management — 27

Outsider

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

“

When a Minister snaps OUTSIDER was impressed to see Minister for Financial Services Bill Shorten demonstrate his mastery of the latest hip lingo on the ABC’s 7.30 last Wednesday night.

Responding to a question from ABC political editor Chris Uh l m a n n a b o u t t h e G ov e r n ment’s subsidisation of the automotive industry, Shorten began his answer by exclaiming “Snap, Chris!”.

Not being as down with the kids as the Minister, Outsider had to do a bit of research to discover the etymology behind the term.

As far as Outsider can determine, the phrase ‘oh, snap’ is a playful

indication of surprise, misfortune or insult – made popular by Tracy Morgan on the US sketch show Saturday Night Live.

The term has since ‘gone viral’ on the internet, and is creeping into the lexicon of teenagers ever ywhere – generally when they are reacting to a particularly amusing YouTube clip.

Ul h m a n n , t o h i s c re d i t , ploughed on with his line of questioning without missing a beat – albeit with a faint smile playing on his lips.

Ou t s i d e r re c k o n s a l o t o f G ov e r n m e n t b a c k b e n c h e r s would like to see their party "snap" out of their losing run in the polls.

Out of context

“The Labor party is in the ideas business.”

Treasurer Wayne Swan on a

government brainstorming session before Parliament resumed on Tuesday.

“… just passed the peak in

Best ball forward OUTSIDER a couple of weeks ago mentioned that Paragem boss Ian Knox had scored a hole-in-one while golfing during his holiday on Queensland's Sunshine Coast. This prompted Outsider to ask readers to nominate some of the other golfing sharpshooters in the financial services industry.

Whether it’s because most readers are studiously chasing business or because they're inveterate hackers when it comes to golf, Outsider's e-mail has not exactly been running hot, but what he has discovered is that there are quite a few financial services types who have witnessed holes-in-one, albeit they have not been the one hitting the ball at the time.

With that in mind, Outsider believes the sharpshooters can make their mark under competition conditions at the next golfing shindig put on by Money Management's sister publication, Super Review.

The Super Review Charity Golf Day will be held at Sydney's Roseville Golf Club on 14 March from midday and will be a best-ball format, with the nominated charity being the eMerge Foundation.

As it happens, Outsider knows that golfing sharpshooters such as Knox, Fiducian's Indy Singh and even Money Management's less sharpshooting Mike Taylor will be lining up on the day.

For bookings or any fur ther enquiries, please contact S a m a n t h a C o n w ay o n ( 0 2 ) 9 4 2 2 8 5 2 2 o r e m a i l samantha.conway@reedbusiness.com.au

A poke and a like HAVING been born around the time when only half of Australia’s households owned a television set, it is quite obvious that Outsider’s idea of social networking involved only alcohol, food and one or more persons in his midst.

Thus he is not too familiar with all the wonders offered by internet-based social networking “venues” such as Facebook – nor does he want to find out. Apparently, there are concerns around internet privacy and stalking. As far as stalking goes, Outsider still

prefers to do it anonymously and from the opposite side of the road – despite technological advances.

He does know, however, that the founders of Facebook have heralded a $US5 billion initial public offering – an opportunity which is expected to be quickly snatched up by US-based institutional underwriters such as Goldman Sachs, Morgan Stanley and J.P. Morgan and their richest clients.

Once listed, Facebook shares will also be within the reach of Aussie investors – again, thanks

28 — Money Management February 9, 2012 www.moneymanagement.com.au

to those ‘interwebs’ thingies – and there is no doubt that Aussie stockbrokers will fight to catch the initial price surge.

However, Outsider cannot help but wonder: considering the quick nature of success and failure of internet-based companies (many have fallen in value shortly after their public listing), is Facebook’s demise imminent?

Whatever the answer may be, Outsider is definitely envious of Facebook’s pale and somewhat dorky creators who have made billions of dollars in the process.

silliness”.

The current economic environment is asinine to Oppenheimer chief investment strategist Brian Belski.

“I’ve got a daughter turning 18 next week – she might actually become cashflow positive.”

While commenting on the fact that minors are less useful than young adults from a family trust tax perspective, HLB Mann Judd Sydney head of wealth management Michael Hutton makes an overly optimistic prediction.