Money Management (February 23, 2012)

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Vol.26 No.6 | February 23, 2012 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

BROGDEN REPORTS: Page 11 | PASSIVE FUNDS: Page 18

Opt-in hangs in the balance

By Mike Taylor AUSTRALIA’S key financial planning industry organisations have been heartened by a declaration by NSW independent Rob Oakeshott that he will oppose “opt-in” when the Governm e n t’s Fu t u re o f Fi n a n c i a l Ad v i c e (FOFA) bills are brought before the House of Representatives.

Oakeshott’s declaration, made on national television last week, has added impetus to the lobbying efforts of both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) to bring the other key independents on side, particularly Tasmania’s Andrew Wilkie and the Tamworth-based Tony Windsor.

It is understood that in earlier approaches to Wilkie and Windsor, the two independents indicated they wanted to wait for the findings of the Parliamentary Joint Committee (PJC) reviewing the FOFA bills.

While the PJC is due to report before the end of next week, it is regarded as highly unlikely that its recommendations will include amendments to the Government’s proposed two-year opt-in.

This is because the Minister for Financial Services, Bill Shorten, has remained largely unmoved on the issue throughout negotiations with the industry – something that is expected to be reflected in the attitudes of Labor members of the PJC. This means that the Federal Opposition will have to specifically move for an opt-in amendment on the floor of the house when the bills come on for debate.

However, while the Labor members are expected to decline supporting changes to opt-in, they are expected to give their backing to a bipartisan report recommending other, less controversial amendments around best interests and fee disclosure – and it is possible Shorten will agree to these changes ahead of debate.

S&P’s Australian withdrawal questions ratings’ future

By Chris Kennedy

A SCALING back of the services offered in Australia by S&P Capital IQ (S&P) could be a symptom of an overcrowded market undergoing a rationalisation – but more consolidation could be on the cards, according to several industry experts.

S&P last week announced it would be withdrawing its local funds research and local wealth management services from 1 October 2012. It said other services, such as those offered by S&P Indices and S&P Ratings Services, as well as other offerings from S&P Capital IQ, would be unaffected.

Chief executive of van Eyk Research Mark Thomas said the fact that the market had started to rationalise was positive. He said that globally there were only three credit ratings agencies – Fitch, Moody’s and S&P – but in Australia there were six agencies just rating funds. “Three is enough,” Thomas added.

He said that if the client base of a ratings house disappeared, that was a comment about its quality. If no-one was using a service, then fund managers would not pay for it.

Morningstar co-head of funds research Tim Murphy said that while he did not wish to comment Continued on page 3

Rob Oakeshott AFA chief executive Richard Klipin last week welcomed the announcement by Oakeshott that he would be opposing the opt-in arrangements, and in particular supported the manner in which the independent MP

RISK INSURANCE

DEFYING GRAVITY WHILE the wealth management sector continues to struggle amid lingering market uncertainty, risk insurance has once again defied all odds, recording strong growth over the past 12 months.

This growth was driven by a number of factors, such as increased referrals from other professionals working in financial services – for example, accountants and lawyers.

However, technology kept playing a crucial part in the risk boom, with the move to the online world seeing more efficiencies for clients, thus creating more interest.

As a result, many risk advisory practices have seen a big jump in revenue. But impressive sector growth hardly managed to put a dent in underinsurance levels, with recent figures showing the Australian population was underinsured by $3.1 billion.

Furthermore, policy churn keeps casting a dark shadow over the industry. Last year, the Financial Services Council announced it would act to halt the churning of life insurance, which caused mixed reactions from the financial advice industry.

Many financial planners claim switching clients from one policy to another can be attributed to the everchanging insurance products, rather than hunger for commissions.

For more on trends in the risk insurance sector, turn to page 12.

discussed his approach.

Oakeshott told the ABC’s 7.30 program that, “In regard to the issue of the technical term opt-in, where financial advisors have to write to all their clients and get a written response to keep them as clients every two years, I think there’s a bit of personal responsibility required, a bit of buyer-beware like in any market, and so I think that one element is a bit of over-reach.

“Personally, I don’t think a letter every two years to lock in a client and say, ‘Are you satisfied with me?’ does the job,” he said. “I think it’s full fee disclosure, plus the best interest test that does that.

“I think all we’re adding is an administrative burden and chasing up, you know, clients around the edges, when really no other market that I’m aware of has that similar standard,” Oakeshott said.

Klipin said the terms of Oakeshott’s approach to opt-in were heartening, but it would be the attitude of the other independents which would prove decisive.

Editor

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ccording to the Australian Prudential Regulation Authority (APRA), its sister financial services regulator – the Australian Securities and Investment Commission (ASIC) – will be ultimately responsible for acting on any breaches around advertising such as the Industry Super Network’s “compare the pair” campaign.

This much was made clear in APRA’s answer to a question on notice from Tasmanian Liberal Senator David Bushby when it said that if a Registrable Superannuation Entity licensee was conducting the misleading advertising it would ordinarily refer the matter to ASIC “because it related to disclosures made to fund members”.

Which makes last week’s release by ASIC of a new and updated guidance note on financial services advertising all the more important in the context of ongoing complaints from some sectors that the “compare the pair” advertising campaign was in some way misleading because its underlying assumptions failed to take account the new, low cost products introduced by Colonial First State, BT and others.

The reality, of course, is that while ASIC is responsible for policing financial services advertising, its resources are already

For opposition “parliamentarians such as Senator Bushby, the real question is whether ASIC has at any time taken action with respect to the industry fund advertisements.

”

stretched and it faces not only issues of regulatory complexity in dealing with advertising campaigns such as those mounted by the Industry Super Network, but also an element of political sensitivity.

As well, ASIC is vastly more likely to handle such matters in a facilitative manner – seeking corrections and amendments – than to pursue orders or impose sanctions.

In announcing the release of ASIC’s regulatory guide last week, ASIC commissioner Peter Kell said the regulator’s aim was “to help promoters comply with their legal obligations when advertising financial prod-

ucts and services”.

He reminded promoters of financial products and financial advice services and publishers that “ASIC will be regularly reviewing ads”.

“ASIC’s guidance will help industry participants understand their obligations,” Kell said. “However, ASIC is also sending a message that we will take a strong response to misleading ads.”

He then went on to report that, since July 2010, ASIC’s actions had resulted in 117 advertisements across the financial services sector being withdrawn or remedied in response to concerns about poor practices and potentially misleading or deceptive conduct.

For opposition parliamentarians such as Senator Bushby, the real question is whether ASIC has at any time taken action with respect to the industry fund advertisements.

Up to now, all Bushby has been told is that the regulator will not comment on “operational matters”.

All financial services advertisers coming under ASIC’s scrutiny can only hope the regulator will be similarly circumspect in dealing with their cases.

– Mike Taylor

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

News

AMP result reflects market drag

By Mike Taylor

AMP Limited has felt the impacts of volatile markets and the cost drag of its merger with AXA Asia-Pacific (AXA), reporting an 11 per cent decline in net profit after tax to $688 million for the 12 months to the end of December.

However, the company said it preferred to rely on underlying profit, which had increased to $909 million from the $760 million for the previous financial year.

While the acquisition of AXA has cer tainly boosted AMP’s capacity across a number of areas, the results announcement released to the Australian Securities Exchange (ASX) revealed the degree to which volatile markets had still served to

undermine its results.

AMP Financial Services’ (AMP) net cash outflows were $581 million for the period, down from net cash inflows of $789 million for the corresponding prior period.

The company said AMP Financial Ser vices operating earnings were $766 million, including nine months’ contributions from the relevant AXA businesses.

There were some particular high spots within the AMP Financial Services business, including assets under management within AMP Flexible Super tripling over the year to $4.3 billion while attracting $3 billion in net cashflows, and AXA’s North Platform increasing net cashflows by 72 per cent to $716 million.

The company noted that planner numbers in Australia and New Zealand had increased by 116 to 4,131, and that this had been achieved in an environment where planner number s across the Australian financial adviser profession had declined.

Commenting on the results, AMP chief executive Craig Dunn said that while challenging market conditions had continued to impact the business, “the new AMP is well positioned to continue delivering on its growth strategy, while maintaining disciplined capital and cost management”.

“AMP is a formidable competitor in our home markets of Australia and New Zealand,” he said. “The increased scale of the merged businesses will also allow us to achieve new cost efficiencies.”

Craig Dunn

S&P’s Australian withdrawal questions ratings’ future Continued from page 1

on S&P, the Australian funds management market was the most over-researched market in the world, even ahead of larger markets such as the US. S eve r al f unds m a na g e r s h ave s a i d t h e reduced competition may not be a positive for the industry. One prominent funds management identity, who did not wish to be named, raised concern that there would be less diversity of opinion in the research market.

L e s s r e s e a rc h t a l e n t would lead to more limited access to research, and potentially longer timeframes for rating outcomes.

It would also be a negative for managers who had a favourable rating from S&P and less favourable ratings elsewhere.

He also raised the question of whether managers who are currently paying for ratings provided by S&P would be entitled to any kind of refund.

Although S&P has said it will continue to offer local funds research and local wealth management services up until the withdrawal date of 1 October

Mark Thomas 2012, the source said those ratings were now essentially worthless and questioned whether managers who had paid for ratings services would be offered a partial or total refund for the remainder of the period.

Money Management understands that one of S&P Capital IQ’s last remaining major subscription clients is Westpac, which includes BT dealer groups Securitor and Magnitude. BT provided a statement saying it used S&P’s managed fund profile fact sheets throughout their advice business, but was now in the market for a new provider for this service. BT added it also has a large inhouse research team that provides wealth research, including equities and structured products.

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www.moneymanagement.com.au February 23, 2012 Money Management — 3

News

SMSF trustees want advice on strategy, not products

By Tim Stewart SELF-managed superannuation fund (SMSF) trustees find it “very challenging” to find good professional advice, and nearly half of them believe planners are out to sell products to benefit themselves, according to the latest SMSF Professionals’ Association of Australia (SPAA) research.

The Intimate with Self Managed Superannuation report was

commissioned by Russell Investments and SPAA and conducted by CoreData. It surveyed 1,406 Australian consumers, of whom 337 were SMSF trustees.

Only two in five trustees (42.1 per cent) have a dedicated financial adviser, and 41 per cent believe they don’t need one at all.

Russell managing director for retail investment services Patricia Curtin said SMSF trustees were looking for someone to

provide a ‘technician’ role that would sit between the adviser and accountant.

“I’m not sure the technician role sits between the accountant and the adviser though. I think it’s absolutely one and the same. But trustees aren’t seeing that, as such.

So [planners need to present themselves] as the technician, as the strategist – not as the product provider,” Curtin said.

Advisers needed to “sidle up” to

SMSF trustees rather than adopt an “I told you so” mentality, she added.

“Trustees will expect to be serviced in the style where they are the controller in many ways. So the control has shifted over from the adviser to the client,” Curtin said.

Planners need to lead the conversation with “what’s keeping trustees awake at night”, Curtin said. It may or may not end in a product solution, but since the

adviser will be paid on a fee-forservice basis there will be no conflict, she added.

“We need to reposition ourselves as leading with strategy.

We know that reaching their retirement income goals is [trustees’] biggest fear. What are the investment strategies/asset allocation decisions that they need to make to ensure that when they decide to retire they have enough income to do so?” Curtin said.

Bill Shorten “deeply conflicted”

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

THE Coalition would immediately replace the “closed-shop, anti-competitive” selection of default funds under modern awards with an “open, transparent and competitive process”, according to Shadow Minister for Superannuation Mathias Cormann.

Speaking at the Self Managed Super Fund Professionals’ Association of Australia conference in Sydney, Cormann said the Government had “taken a couple of years to even just start the process of thinking about [the selection of default funds]”.

The shadow minister was also highly critical of the Government’s proposal to allow intra-fund advice to be bundled up in the member administration fee, which he said went against the stated aims of the Future of Financial Advice (FOFA) reforms.

“The Government wants to enshrine in legislation a system that would institutionalise people paying for advice they won’t get through the intra-fund advice proposal. It is just completely ridiculous,” he said.

Cormann said the current Financial Services Minister, Bill Shorten, was “deeply conflicted”.

“Everything he does, in a legislative sense or a policy sense, comes from a vested interest perspective driven by the industry super funds movement that he is clearly very close to,” Cormann said.

“Labor appears to be leveraging their time in government as much as they can to give a leg up to one segment of the financial services and superannuation market against everyone else,” he added.

Cormann added that the Government was so “embarrassed” by the FOFA legislation that it had refused to have it assessed by its own Office of Best Practice Regulation.

News

ASIC suspends Aussie Rob’s AFSL

By Milana Pokrajac

THE financial services regulator has placed a one-year licence suspension on Lifestyle Investor Services (LIS), a Gold Coast-based financial advisory and options trading practice owned by Robert Wilson, who is otherwise known in the industry as ‘Aussie Rob’.

LIS’ Australian financial services licence was suspended by the Australian Securities and Investments Commission (ASIC) due to concerns that the practice had not complied with financial services laws and the conditions of its enforceable undertaking (EU).

In August 2011, ASIC accepted the EU from the practice, which followed an investigation into “misleading and deceptive conduct in the marketing of share trading software”.

ASIC found that statements made by Wilson and the two companies in marketing the software were misleading and deceptive.

“These statements included: ‘Writing covered calls is the same as ‘Share Rental’ or renting out real estate’; ‘Options trading is easy’ and ‘Returns of 5-10 per cent per month and 60-120 per cent per year can consistently be

FOFA bills risk failing a key objective

achieved through use of Lifestyle Options – Share Rental’,” ASIC revealed in its statement at the time of the EU. According to the regulator, LIS failed to notify ASIC within five days of Scott Goold resigning as the responsible manager of the business and of details relating to Goold’s replacement.

“LIS failed to maintain the competence to provide financial services following Goold’s resignation as responsible manager, with no person appointed to replace him in the role and with Goold unable to adequately perform his role from overseas,” ASIC said.

However, ASIC revealed it had reason to believe that LIS would not comply with its obligations under the law, based on concerns by Goold alleging serious issues about the management of the practice and its finances, as well as concerns subsequently identified about Goold’s fitness to be a responsible manager.

LIS’ authorised representatives will need to seek another Australian financial services licensee should they wish to continue trading, according to the regulator.

The practice was licensed to provide general financial product advice and deal in products including derivatives, foreign exchange contracts and securities.

THE Financial Services Council (FSC) has renewed its warning that the Government’s Future of Financial Advice (FOFA) bills, as currently drafted, will risk failing to achieve one of their key policy objectives – improving access to advice.

FSC chief executive John Brogden said that while the bills might achieve the objective of minimising conflicts in the planning industry, they were unlikely to improve access to advice.

“There will be fewer advisers providing advice – yes, in the best interests of their client – but at a higher cost and to fewer people,” he told a FSC Deloitte Leadership Series luncheon.

“It would be a perverse outcome of FOFA if fewer Australians received advice because of these reforms,” Brogden said.

The FSC chief executive also warned that intra-fund advice was not the answer to filling the expected advice gap. He argued that the only conceivable framework would be scaled advice.

However, he said this would only be achieved by a legal framework that allowed clients and their advisers to agree on the scope of the advice being sought.

Brogden said the FSC believed more than 80 per cent of the FOFA package would ensure Australians received better financial

We’ve taken the

John Brogden advice, but that there were factors which risked putting advice out of the reach of too many Australians.

Reflecting the fact that the FSC and other financial services bodies remain in discussion with the Government, Brogden said he was increasingly confident the Government would allow a 12-month transition for the FOFA bills, starting from 1 July this year.

“This recognises the significant investment and training required to implement these extensive reforms,” he said.

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www.moneymanagement.com.au February 23, 2012 Money Management — 5

News

FOFA bills fail best-practice test ASIC’s new rules on financial services advertising

By Mike Taylor

THE Federal Opposition has renewed its calls for the Government to conduct a proper and appropriate regulatory impact statement on its Future of Financial Advice (FOFA) legislation, following evidence given to the Senate Estimates Committee by the head of the Office of Best Practice Regulation (OBPR).

According to the shadow Minister for Financial Services Senator Mathias Cormann, the OBPR evidence confirms the Government has failed to properly assess the impact of its FOFA changes on businesses and consumers.

He said OBPR head Jason McNamara had told the committee the Government’s regulatory impact statements did not have enough information about the impact on businesses and consumers, and the cost benefit of the contentious parts of FOFA, for the Government to make informed decisions.

Cormann said that, specifically, the government had

Mathias Cormann failed to properly assess the impact on businesses and consumers of factors such as opt-in risk commissions inside super, the accountants’ exemption and the carve-out of simple products.

“It is not good enough for [Financial Services Minister] Bill Shorten to just press ahead with changes like opt-in and his illconsidered and ever-changing proposal to ban commissions on risk insurance inside superannuation,” Cormann said. “He

should not be allowed to press ahead with his vested interest agenda to make Australia the world leaders in financial advice red tape without going through proper process.”

He said the OBPR had also never even been asked to assess the Government’s latest proposal to retrospectively impose additional annual fee disclosure requirements on financial advisers.

“The least people should be able to expect is that the Government will comply with its own process requirements before pressing ahead with changes the industry says will cost $700 million to implement upfront and $350 million a year thereafter,” Cormann said.

“Bill Shorten must commission a proper Regulatory Impact Statement, which complies with the Government’s own bestpractice regulation requirements, before pressing ahead with his flawed FOFA legislation,” he said. “If he refuses, the Parliament should insist on a proper Regulatory Impact Statement before dealing with any of the FOFA Bills.”

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

THE Australian Securities and Investments Commission (ASIC) has tightened up the guidelines around financial services advertising at the same time as revealing it has taken action against 117 advertisements since July, 2010.

However, in tightening up the advertising guidelines, the regulator has allowed publishers in the financial services area the defence of not necessarily being expert in understanding the financial services products their publications advertise.

The release of the ASIC guidance also comes amid a recent response to questions on notice during Senate Estimates dealing with the Industry Super Network’s ‘compare the pair’ advertising campaign, in which the regulator said it was not in a position to comment on “operational matters”.

In releasing ASIC’s new guidance around financial products and services advertising, ASIC commissioner Peter Kell said advertisements that did not accurately represent the financial product, key features and risks or the nature and scope of financial advice, could create unrealistic expectations that led to poor financial decisions.

“It is important that ads are clear, accurate and balanced, especially when consumers are looking for lower-risk products in an uncertain global financial environment,” he said.

Much of ASIC’s approach to financial services advertising is revealed in its responses to the nearly 40 submissions filed with it by industry organisations and participants, not least on issues of whether the advertising was actually intended to help consumers make appropriate decisions.

The ASIC response document reveals the degree to which the regulator modified its approach based on the realities of industry practice.

In releasing the guidance, Kell felt the need to remind promoters of financial products and financial advice services, and publishers of such products and services, that the regulator would be regularly reviewing the advertisements.

“ASIC’s guidance will help industry participants understand their obligations,” he said. “However, ASIC is also sending a message that we will take a strong response to misleading advertisements.”

News

Shadow shop “supports need for reform”, says Kell

Wealth management struggles amid strong CommBank result

By Mike Taylor

By Tim Stewart AUSTRALIAN Securities and Investments Commission (ASIC) commissioner Peter Kell has defended the regulator’s decision to reveal the “headline results” of its recent shadow shop to the Parliamentary Joint Commission (PJC).

ASIC had promised the PJC that it would provide it with the headline results of the shadow shop ahead of the full details, Kell said.

“We wanted to do that in as timely a manner as possible so that [the PJC] understood that this project supported the need for reform, but we will be releasing further results and the detail in a few weeks’ time,” he said.

ASIC revealed to the PJC in late January that only two of the 64 financial plans scrutinised were rated ‘good’ according to the regulator’s criteria. The details of the criteria will be released in “early March”, according to Kell.

Speaking at an Association of Superannuation Funds of Australia luncheon yesterday, Kell also announced the release of new regulatory guidelines on the advertising of financial products and services (Regulatory Guide 234).

“The experience in recent years indicates that ads that do not give clear, accurate and balanced information about a financial product or service can create unrealistic expectations that can lead to poor financial decisions,” Kell said.

He added that ASIC would be taking a “strong

Peter Kell response to misleading ads”, and that the regulator’s new powers allowed it to issue infringement notices and formal public warning notices.

“We also have the power under the ASIC Act to seek civil pecuniary penalties through the courts of more the $1 million per breach,” he added.

The regulator will be closely examining the way risk is explained (or rather, not explained) to consumers, Kell said – with a focus on language about ‘guaranteed’ or ‘protected’ returns. He gave the example of one provider that advertised a geared investment as being ‘stress-free’.

Since July 2010, ASIC’s actions have resulted in 117 advertisements being withdrawn or altered, Kell said.

THE Commonwealth Bank has steamed its way to a 19 per cent increase in net profit after tax – $3.624 billion for the six months to the end of December – with cash net profit up 7 per cent to $3.576 billion.

The result saw the directors declare an interim dividend of $1.37 per share, and came despite the big banking group’s wealth management divisions continuing to struggle in what were acknowledged to be highly volatile markets.

Commonwealth Bank chief executive Ian Narev used his results presentation to specifically reference “weak growth in marketsbased business, with earnings for Wealth Management and Institutional Banking and Markets impacted by volatility in global financial markets”.

The results documentation lodged with the Australian Secur i t i e s E xc h a n g e ( A S X ) to d ay revealed a 24 per cent decline in cash net profit after tax to $272 million compared to the same

period in 2010.

It said the result had been impacted by deteriorating global investment markets, which had offset a solid insurance performance due to strong inforce premium growth and stable claims experience.

The announcement said Colonial First State’s net profit after tax had decreased by 59 per cent due to softer funds under administration growth caused by challenging market conditions, a customer mix shift towards lower-margin products and increased costs of compliance, including the imposition of an Enforceable Undertaking.

However, it said FirstChoice and Custom Solutions had continued to perform well.

Commenting on the result, Narev made clear the banking group had no plans to either send jobs offshore or to embark on major redundancy programs.

Looking over the horizon, the CEO said the outlook for the global economy remained unpredictable, with the group planning to retain its existing conservative business settings.

www.moneymanagement.com.au February 23, 2012 Money Management — 7

News

Ironstone in AMP transitions AXA FP to Charter AMP transaction

By Chris Kennedy

AMP is providing support to AXA Financial Planning (AXA FP) practices in transitioning away from the AXA branding – a process which must be completed by March 2013.

AXA Australia and New Zealand’s French parent retained the rights to the AXA branding following the group’s acquisition by AMP last year.

A transition over to a Charter branding would be a natural fit because AXA FP and Charter have for some time shared services, including a professional development program, annual adviser conference and leadership group (for example, state managers), said the director of AMP’s financial advice network (FAN) Andrew Waddell.

Practice terms and conditions and access to services would remain the same, and there had already been

By Mike Taylor SPECIALIST residential property funds management group Ironstone is to be substantially acquired by AMP Limited.

Money Management has confirmed the acquisition, which has been taking place against the background of the Ironstone funds being placed on hold by ratings business SQM. It is understood that under the terms of the acquisition, the existing Ironstone team will be retained and offered equity stakes in the business, which will be expanded to operate in all Australian states.

Ironstone was established in 2007 by a number of wellknown funds management industry identities including its chief executive Sean Preece and Jason Isherwood.

To date, Ironstone’s main offering has been the Ironstone Residential Fund – an unlisted, open-ended, ASIC-registered retail unit trust.

Money Management understands that AMP’s decision to

Margin lending continues to shrink Sean Preece

By Milana Pokrajac

acquire Ironstone is part of a broader strategy to drive further into the self-managed superannuation funds (SMSF) advisory market and is allied to its recent acquisitions of both the Super IQ and Multiport businesses.

SQM Research last week placed the Ironstone fund on hold, saying significant issues had come to its attention and that it was in the process of investigating those issues.

THINGS are not looking up for margin lending as recent data shows the sector was given a cold shoulder by financial planners yet again.

Recent Reserve Bank of Australia figures point to the total margin lending industry shrinking from a high of $42 billion four years ago back down to 2005 levels of $16 billion.

Moreover, two-thirds of financial planners who previously used margin lending were either unlikely or adamant that they would not start

using this form of borrowing in the next year, according to the Investment Trends December 2011 Margin Lending Financial Planner Report.

Margin lending no longer makes up the largest share of funds borrowed for investments via planners, falling by 2 per cent to 27 per cent in 2011.

It was surpassed by line of credit, which was steady at 28 per cent, while geared share funds, structured products and instalment warrants all recorded relative increases over the past 12 months.

According to the Investment

Synchron practice expands in Sydney

Finn Kelly

plenty of movement from AXA FP over to Charter in the past, he said.

However, practices would also have the option of adopting an independent branding or to adopt the branding from another group within the network such as AMP Financial Planning, with five branding options in total, Waddell said.

Although the group is taking a “sensible and orderly” approach to the transition, the move should be completed by September this year – well before the March 2013 deadline, he said.

The FAN leadership team will meet with practice principals over the coming weeks to discuss the migration plan, including details of logistical and financial support, but practices can expect very little disruption to the business, Waddell said.

MELBOURNE-based Synchron practice Wealth Enhancers is on the verge of opening a Sydney office, which will be headed by ex-army officer and former UBS trader Wade Tink.

The firm is currently negotiating terms to move into premises on York Street, but is virtually up and running otherwise, with meetings already taking place, according to Wealth Enhancers chief executive Finn Kelly.

The business is actively recruiting for specialist advisers to join the Sydney practice. It currently has three advisers in Melbourne as well as Tink, who is currently the firm’s

strategic adviser.

Kelly said the business would be looking for as many as five specialist advisers for the Sydney business, with admin support to remain in Melbourne and one practice manager organising the Sydney office.

Recruits go through an intensive application process, with several interviews in order to ensure candidates are not just qualified but also a cultural fit for the business, Kelly said.

Rather than looking to hire for specific roles, if the right candidate came along it would be a case of creating a suitable role, he said.

Perpetual’s cost reductions pay dividends PERPETUAL Limited has upgraded its profit forecast for the half year beyond that indicated at its annual general meeting in November last year.

The company notified the Australian Securities Exchange (ASX) today it expected underlying profit after tax to be $34.7 million, which was above the range of $26 million to $31 million indicated at the AGM. The upgrading in the forecast follows on from Perpetual’s announcement on 6 February of a parting of the ways with its former chief executive, Chris Ryan, and his replacement with Geoff Lloyd.

The company said the $2.8 million improvement reflected the benefits of recent initiatives to reduce expenses, as well as a

reduction in equity-based remuneration expense in relation to various performancebased hurdles.

The Perpetual announcement said the company’s first-half 2012 net profit after tax was expected to be $22.9 million, with the decline relative to previous periods being due to a $10.2 million after-tax expense relating to the closure of the Group’s global equities manufacturing capability in Dublin, and the restructuring of its retail distribution and marketing functions.

It said the result had also been impacted by a $2.2 million after-tax loss in relation to market-linked investments, and the foreshadowed lower rate of recovery of prior-period Geoff Lloyd losses from the Exact Market Cash Fund.

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

Trends report, financial planners cited recent volatility levels, high interest rates and risk of margin calls as main barriers to margin lending.

But the vast majority of those surveyed (who currently use margin lending) expressed high interest in so-called ‘no margin call loans’.

“Given that just 11 per cent of planners cited the lack of a no margin call loan as a barrier to recommending margin lending to clients or doing it more often, it is likely that this feature is mainly desired in order to address clients’ fear factor,” the report stated.

ETF sector kicks off 2012 with strong inflows

By Tim Stewart THE Australian exchangetraded fund (ETF) market saw net inflows of $31 million in January, after experiencing net redemptions in December, according to BetaShares.

The market cap of the sector also increased by 5 per cent to $5.1 billion, according the BetaShares Australian ETF Review for January 2012.

BetaShares head of investment strategy Drew Corbett said investors are switching to broader market and property ETFs in search of lower management fees.

“The money-switching between lower cost beta exposures was also experienced in August 2011, where investors became fee conscious amidst global economic uncertainty,” said Corbett.

Gold ETFs accounted for $22 million of the inflows in January, which reflected the anxiety of investors about the global economy.

“Investors are positioning portfolios for downside risk

through gold and US dollar exposures in the event of further bad news which might derail an economic recovery,” said Corbett.

Investors are also directing money towards high-dividend ETFs, with iShare’s High Dividend ETF receiving $2.7 million in new money and the Russell ETFs RDV and RVL attracting $4 million in new money.

However, Corbett pointed out that the bank sector ETF, QFN, had actually performed better than the more popular high-dividend products.

Given that fixed income ETFs have been given the green light by the regulator, the sector as a whole is set to perform well in 2012, he added.

“Even with uncertainty surrounding global markets, the ETF industry continued to see consistent inflows from investors. If global markets recover in 2012, we believe the industry will restart its growth trajectory after hovering around the $5 billion mark for much of 2011,” Corbett said.

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SMSF Weekly Time to act on pension options

By Mike Taylor SELF-MANAGED superannuation funds (SMSFs) which have failed their ‘high probability’ requirements should be thinking about exercising their options with respect to commuting existing lifetime or fixedterm pensions to market-linked pensions.

SMSF specialist firm Cavendish Superannuation has pointed to the fact that in June last year the Government introduced a modification to the social security arrangements that allowed a permanent waiver of debt relief for any SMSF that commuted an existing lifetime or fixed-term pension in favour of a marketlinked pension.

It said that, previously, relief was provided to any SMSF that failed the so-called ‘high probability’ requirements and rolled over to a market-linked pension by 30 June 2010, but the relief was only ever temporary.

Cavendish said the effect of the new arrangements was that any SMSF could now stop an existing lifetime/fixed term pension regardless of whether they passed or failed the high probability requirements, based on actuarial investigation.

It said they could subsequently roll-over the proceeds of the pension to a marketlinked pension, either within the SMSF or available externally.

However, it said the pension would lose its ‘Asset Test Exempt’ (ATE) status with Centrelink, which would result in Centrelink reassessing the person’s future entitlement to the age pension.

Cavendish pointed out the reassessment also assumed the individual never had an ATE pension, allowing Centrelink to assess previous entitlements for up to five years.

"This is why the modification provides a waiver of debt, as the reassessment for five years would often result in an individual

Govt urged to focus on super anomalies MOVES by the Australian Greens to persuade the Government to introduce a scaled tax on superannuation contributions has been vetoed by the Self Managed Super Fund Professionals' Association of Australia (SPAA).

The Australian Greens' leader, Bob Brown, announced his party's policy approach two weeks ago, but SPAA warned that such a move, effectively aimed at cutting tax concessions for higher income earners, would serve to undermine the incentive for Australians to build an appropriate retirement nest-egg.

"Rather than penalising those who are saving through superannuation for an independent life postworking age, the Government should turn its attention to the considerable ongoing barriers to all Australians saving adequately for their retirement," SPAA chief executive Andrea Slattery said.

Referring to the Government's proposals last year to introduce a maximum fund balance limit of $500,000 in order to access higher

Andrea Slattery contributions caps, SPAA reiterated that not only would that proposal add a large layer of complexity to the system, it would also ignore variations in work and savings patterns of different individuals.

It warned that this would be particularly the case with women, "for whom superannuation balances are inordinately low".

SPAA also cited the harshness of the current excess contributions tax (ECT) regime as a further major barrier and disincentive for people to save as much as they are able to.

having to pay back benefits previously received; now the debt is still calculated but waived," it said.

Cavendish said a lifetime/fixed term annuity payable from an external provider was the only option available for a fund that had failed the high probability requirements and wanted to retain the asset test exemption status.

"Any restructure based on this scenario must be completed within 12 weeks of obtaining an actuarial certificate, which needed to be provided to Centrelink by 31 December 2011," it said.

Roundtable must be wary of impacts THE Federal Gover nment needs to consider what impact any changes to Australia's superannuation regime will have on various sectors of the community, according to Institute of Chartered Accountants’ superannuation specialist Liz Westover.

Commenting on the Government's establishment of a superannuation roundtable, Westover said improvements to the system could mean different things to different people, and pointed to the situation with respect to retirement incomes’ adequacy and the range of options being canvassed.

She said one option being discussed was the removal of the $450 per month threshold for payment of superannuation guarantee (SG) amounts for employees, so that workers earning less than this amount will receive some for m of superannuation.

"However, when you consider the potential impact on employers, particularly on small

Liz Westover businesses, I don’t see this as a viable solution," Westover said.

"Employers are already tasked with the collection and payment of SG for their employees. The removal of the threshold would only increase the administrative and financial burden on employers, which may be significant for small business owners," she said. "Such an increase in

the administrative burden may result in many owners rethinking their employment of these workers, meaning those workers may be left without any income, let alone superannuation."

Westover said the payment of the superannuation guarantee to these low-income earners would involve minor amounts and deliver only a marginal impact to their retirement savings.

"The reality is for lowincome earners, money in their pocket now is often a higher priority than saving for retirement," she said.

"Good policy development in superannuation weighs up the pros and cons of changes to the super system and determines how it will impact on other areas of the community," Westover said. "In taking counsel from industry spokespeople at the superannuation roundtable, the government will need to be very careful to ensure the needs of other sectors are not being unduly imposed on."

Forward forecasts better on super SPECIALIST financial services software provider Provisio has this week released a white paper arguing strongly for superannuation funds to move away from past performance reporting towards future benefit analyses.

The white paper argues that superannuation fund reporting has changed little since the superannuation guarantee was introduced by the Hawke Labor Government, and that while it may be more regular and

contain more market commentary, it is "still built around last year’s performance because that is what’s absolute and easy to measure".

The Provisio white paper argues that Australians are making super investment choices based on the wrong information – and that this may increase the risk of making poor decisions and needless switching between investments or funds.

The white paper analysis claims that

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

under existing practices, the future benefits of superannuation and its ability to support retirement are glossed over, "leaving Australians with little idea of what their compulsory savings might achieve in the form of retirement income".

"Communication of super’s future benefit is a better approach," it said. "Telling a member how they are tracking toward retirement, and what they can do to improve it, tells them what they can do to

achieve the retirement lifestyle they want.

"If we want Australians to engage with their super, then we have to communicate the purpose of the whole exercise," the Provisio white paper said.

Commenting on the release of the white paper, Provisio director and co-founder Cameron O’Sullivan said short-term reporting encouraged knee-jerk reactions.

"We think that can cause bad decisions based on the wrong information," he said.

InFocus Challenges ahead for financial services The Australian financial services industry is facing some serious challenges through 2012 – something which Financial Services Council chief executive John Brogden pointed out during the first of this year’s FSC/Deloitte Leadership Series luncheons.

T

he financial services industry led the Australian economy in both size and contribution in 2011. Financial services remained the largest single sector in the economy, representing 10.6 per cent of Gross Domestic Product.

But like much of the economy, particularly on the east coast, financial services experienced a flat 2011.

Superannuation In 2012, the superannuation industry will be consumed by preparation for the commencement of the new default superannuation system from 1 July 2013.

MySuper will see the dominance of industry funds in simple, low-cost superannuation aggressively challenged by retail players.

However, the most significant changes to the superannuation sector from the Government’s reforms will be to the structure of the industry.

Consolidation of superannuation funds will accelerate in 2012 and over the next five years.

Most of this merger activity will take place in the industry fund sector.

The introduction of new, higher capital standards for Australia’s superannuation funds will also accelerate a major long-term restructure of the industry.

Given the current capital requirement of just $5 million, there will be many smaller funds which, when they review their risks, will have no choice but to hold more capital to reach a level closer to the 25 basis points of funds under management that the Australian Prudential Regulation Authority (APRA) expects licensees to hold as their target level by 2016.

64% Planners who advise on margin lending

Barriers to increased usage of margin lending

57%

Outlook for 2012: Advice No other sector will undergo as much change as financial advice will in 2012. The two Future of Financial Advice (FOFA) Bills in Parliament will drive a wholesale restructuring of the advice industry and the manner in which advice is provided.

There will be continued mergers in the financial advice segment. Increasing cost pressures from regulatory reforms will mean only providers with sufficient scale able to make the required investment in systems and training will be able to absorb costs and remain competitive.

With the advent of FOFA on our doorstep, 2012 will see more advisers leave or sell their businesses under the pressure of increased cost and compliance.

Should the new regime not stymie innovation and greater flexibility in the provision of advice, there is also great opportunity.

The critical outcome of the FOFA legislation must be the creation of a workable scaled advice framework. Between intra-fund advice at one end, and comprehensive financial advice at the other, there are many new and different forms of affordable advice that can be provided – and millions of Australians who need it.

A regulatory framework that facilitates genuine scalable advice will open up new markets of millions of consumers. The company that gets their model in the market earliest will have a massive first mover advantage.

MARGIN LENDING SNAPSHOT

High interest rate

52% Volatility in equity markets

Productivity Commission An important development in 2012 is the Productivity Commission review of the default award provisions in superannuation. The Commission delivers its final report on 6 October 2012.

It is inconceivable that the Productivity Commission review could conclude anything other than that the current arrangements for selection of default funds is conflicted, inadequate and grossly uncompetitive. A quick response from the Government and the opening up of awards to full competition is critical.

Governance Despite the Government not accepting the recommendations of Stronger Super on the governance of superannuation funds, we have seen a robust public debate on this issue break out this year. In particular, the existing ability for superannuation funds not to report the remuneration of directors has come under attack.

The debate on corporate and investment governance standards of superannuation funds will only intensify this year. We support APRA’s proposals to further align corporate governance standards in super with banking, general and life industries.

other channels, we expect competition in this segment to further intensify.

However, there is no doubt that claims experience is tightening. Managing this shift will be critical to the industry’s capital position and profitability and affordability to consumers.

Regulatory reforms Both the FOFA and Stronger Super reforms will impact on life insurance to varying degrees. If unamended, the reforms will generate greater complexity and increase the cost of life insurance.

We remain hopeful that the government will simplify its complex proposals in this area to ensure consistency in how consumers pay for advice – irrespective of whether they purchase a policy using superannuation monies or nonsuperannuation monies.

Life insurance

New capital standards During 2011, APRA undertook a General and Life Insurance Capital Review. The review sought to improve the risk sensitivity of the standards and achieve better alignment across APRA-regulated industries. The new standards do not require across-the-board increases to capital, and through 2012 the industry will prepare for their likely commencement in 2013.

Life insurance will see changes on many fronts in 2012.

Funds management

Group insurance Group insurance continues to mature – with levels of cover increasing significantly. This is a highly competitive segment and will only become more competitive as MySuper brings with it an obligation on trustees to develop an insurance strategy that addresses the insurance needs of their membership.

Direct The direct channel has led innovation in the industry. With the regulatory headwinds facing

Regulatory reforms will not impact funds management to the same extent as other segments. Indirectly, however, both FOFA and Stronger Super will intensify cost pressures across the industry and affect the way superannuation monies are invested – by advisers and superannuation funds.

Ultimately, the industry’s future remains incredibly bright with the almost certain increase in the SG to 12 per cent, and the prospect of significantly greater fund flows from offshore as a consequence of important tax changes being introduced by the Government.

38%

Risk margin calls Source: Investment Trends

What’s on Covered Bonds: Friend Or Foe? 28 February 2012 Monash Conference Centre, Melbourne www.finsia.com

The Great Reset – Adjusting to New Economic and Financial Norms 7 March 2012 Auditorium, UNSW, Sydney www.australiancentre.com.au

M&A Masterclass: Opportunities, Strategies and Risks 20 March 2012 Stamford Plaza Adelaide, South Australia www.finsia.com

Financial Services Council Life Insurance Conference 2012 22 March 2012 Sydney Convention and Exhibition Centre www.fsclifeinsuranceconf.org.au

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

www.moneymanagement.com.au February 23, 2012 Money Management — 11

Risk insurance

Defying gravity The risk insurance industry has defied all odds and continued to experience strong growth amid economic uncertainty. That is not to say the sector managed to put a dent in underinsurance levels, writes Benjamin Levy.

THE risk insurance boom is continuing unabated. Recent DEXX&R figures on risk insura n c e s a l e s t o Se p t e m b e r l a s t ye a r showed increases of more than 7 per cent for individual lump sum risk business, disability sales growth of 12.8 per cent, and a 15 per cent jump in new sales for group risk.

Risk insurance has been gunning it for two years. Plan for Life figures from last year showed that inflows into the total risk market leaped 13.4 per cent in the 12 months to September 2010.

This stellar trajectory in risk insurance is coming at a time when financial advisers are under pressure elsewhere.

The financial planning job market e x p e r i e n c e d i t s f i r s t ye a r- o n - y e a r monthly falls according to recent figures from eJobs Recruitment. The number of ads fell more than 10 per cent since January last year.

Re g u l a t o r y c h a n g e s, i n c re a s i n g compliance costs and the share market are inhibiting employment growth in financial planning, according to the eJobs 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, eJobs managing director and f i n a n c i a l p l a n n i n g re c r u i t m e n t manager.

The big four banks are also reducing their head count in retail banking. Thus far, ANZ plans to slice 130 roles, Westpac has cut 560 jobs, while NAB signalled 135 jobs will go.

Fo l l ow i n g t h e m e r g e r b e t w e e n Asteron Life and Suncorp Life and Superannuation, Suncorp Life decided it was too early to predict what might happen on the jobs front – amid continuing challenges in the market While wealth management is so far untouched, the job cuts are leading to wider unease. The Finance Sector Union expects the sector to come under scrutiny because the ability to make money in wealth is harder than in the past, accord-

Leon Carter

Alan Kenyon ing to national secretary Leon Carter.

With job uncertainty in the wider wealth management space coming up against the two-year boom that risk insurance is experiencing, risk advice may once again become the centre and powerhouse of financial planning.

Kenyon Partners has seen an unprecedented amount of interest from poten-

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

tial buyers of risk insurance businesses.

A risk insurance business is almost recession-proof, because insurance premiums are usually the last thing to get dumped by a consumer, according to managing director Alan Kenyon.

It’s also much easier for a planner to service a risk client than a full wealth management client, making a risk practice even more attractive, he adds.

Risk practice Fife Financial Services has seen 100 per cent revenue growth every six months.

Despite the practice being only two years old, its growth had surpassed revenue projections, says director Nick Fife.

The growth in adviser risk insurance is being driven by a number of factors.

As accountants, lawyers and other professionals become more aware and

Risk insurance for customers, leading to more interest than risk practices would otherwise see.

The overall effect of all this growth has seen a positive attitude among risk advisers despite wider industry changes.

A Zurich Financial Services survey t h i s m o n t h f o u n d t h a t ove ra l l r i s k adviser sentiment was moderately positive when considering consumer demand, sales volume, regulation, future sales and long-term viability for their practices.

Colin Morgan, chief executive of Zurich’s Australian life and investments business, said it was reassuring that despite the underinsurance problem, risk planners remained enthusiastic and motivated about providing insurance.

Churn The immense growth in risk is leading to charges from life insurance organisations that advisers are chur ning clients through new risk policies.

The Financial Services Council (FSC) announced last year during its annual conference that it would be acting to halt the churning of life insurance.

Colin Morgan

The life insurance “industry is perfectly capable of weeding out any bad apples on its own merit.

- Robert McCann

”

educated about the need for insurance, they encourage their clients to meet with risk advisers.

Di re c t i n s u ra n c e c o m p a n i e s i n Australia have also begun playing a more aggressive role in order to snatch potential customers from the underinsured market.

They are attempting to match their overseas competitors, who hold up to

40 per cent of the risk market where the level of risk insurance is much higher.

The side-effect has been to trigger more people to consult planners about taking out insurance, leading to a corresponding rise in advice-driven risk, Fife says.

Greater technological support for advisers is also leading to increased business.

As more insurance applications are moved online, it becomes more efficient

Using strong words that caused some consternation in the industry, FSC chief executive John Brogden said the Council would develop a binding standard to bring a stop to the “abhorrent practice” of churn.

Discussions with the regulators permitting, some of the key reforms will include banning the relaxing of standard underwriting processes for a policy transferred

between insurers, and the establishment of an adviser responsibility period, with the clawing-back of all commissions if a policy lapses within one year.

The policy isn’t without support.

Suncorp Life chief executive Geoff Summerhayes recently suggested that the number of new applications that are churn-driven may be as high as one in three.

Such a model sent a negative signal to consumers and was unsustainable, Su m m e r h a y e s w a r n e d a t t h e F S C conference.

“Surely the viability of our sector rests in making our products and services appealing to the 45 per cent of Australians with no life cover, rather than churning and cannibalising our existing customer base,” he said.

But the FSC’s approach has ruffled some feathers.

Patron Financial Advice general manager Robert McCann said trying to introduce a binding standard for insurance would push advisers to the brink and restrict consumer choice, labelling it “excessive third party micro-management”.

“To red-flag the issue of retention, label it as churn and then blame it on financial advisers is irresponsible and ill-informed,” he said.

B o t h Pa t r o n a n d r i s k l i c e n s e e Synchron said the proposal would put onerous pressure on the income generation of the adviser.

There was a perception that advisers were being penalised because of the churners but the issues weren’t being resolved, according to Asteron executive manager of national sales Mark Vilo.

Advisers churning their client books aren’t doing the right thing by the client, Fife argues.

“As an industry, we should be stamping out those advisers straight away,” he says.

There is always a certain number of clients changing products for different reasons, but if that is any more than 10 per cent of a client book on a yearly basis, then those planners are not doing it for the client, Fife says.

Br o g d e n s a y s t h e p o l i c y w o u l d improve tr ust in the life insurance industry, improve the affordability of premiums and help advisers meet the statutory requirement to act in the best interests of their clients.

However, Brogden also admitted that there was a very small number of financial advisers involved in the practice.

Aaron Zelman, associate partner at risk insurance advice group Priority Life, says that heated arguments around churn are illusory.

“It’s not really polarised because it’s not even such a debate, because everyone says churn is bad,” he says.

Where the problem lies is deciding exactly how bad it is.

Managing director of DEXX&R Mark Kachor agrees that chur n is par tly responsible for recycled new risk business, but says it has always been a part of the life insurance business.

“A lot of the products are broadly similar now, so the only main significant incentive is that the adviser gets new business commission all over Continued on page 14

www.moneymanagement.com.au February 23, 2012 Money Management — 13

Risk insurance Continued from page 13 again,” Kachor says.

Te l l i n g l y, t h e m a j o r i t y o f a d v i s e r s s t i l l s e l e c t u p f ro n t commissions, even though the option is there to choose level commissions.

“But that’s been the case for 30 years,” Kachor says.

Chief distribution and marketing officer for AIA Australia Damien Mu says churn is not a big issue for the company.

“The vast majority of advisers

that we deal with do the right thing,” he says.

Part of the problem fighting churn is the ability to identify it.

Many clients are moved from o n e i n s u ra n c e p r ov i d e r t o another all the time, because of a change in their circumstances, or an improved risk product. So deciding what constitutes churn is difficult, while gathering a consensus around it is near to impossible.

John Ashton, AMP head of product on sale, retail wealth

protection, says the constant and consistent upgrades to highcalibre products is what is really behind advisers moving clients.

“I f t h e y d o n’t m a i n t a i n contemporary products, and they allow themselves to slip behind the market too far or for too long, we almost compel an a d v i s e r t o g o o u t t h e re a n d compare what’s in the market and what’s appropriate for their client,” he says.

The Association of Financial Advisers (AFA) also believes that

product switching in response t o u p g ra d e s i s b e i n g f a l s e l y labelled as churn.

The AFA might have a better i d e a t h a n m o s t h ow m u c h switching is going on because of product development.

“Some of the conversations and some of the percentages being spoken around the marketplace over the last 12 to 18 months are speculative, and one person’s churn is another person’s better advice,” says AFA chief executive Richard Klipin.

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Adviser support Wi t h s o m a n y s i m i l a r products and features on the market and constant u p g ra d e s p r o d u c i n g a glut of choice for life risk c u s t o m e r s, adviser support has become increasingly important for insurance companies t o t r y t o d i f f e re n t i a t e t h e m s e l v e s f ro m t h e i r rivals.

OnePath launched an online application at the end of January, allowing advisers to see client and policy information for inforce policies in real time.

The extension of their a p p l i c a t i o n t ra c k i n g system was in response to i n c re a s i n g adviser demand for faster technology solutions.

Su n c o r p Life announced last month the creation of an “engine r o o m” f o r p r o d u c t , service development, and d e l i v e r y. T h e u n i t w i l l help Suncorp support the independent financial advisers (IFA) sector, the company stated.

While one channel will focus on direct distribution, the other channel, to b e h e a d e d by f o r m e r Asteron executive manager Jordan Hawke, will focus solely on adviser distribution and support. “ T h e I FA m a r k e t re m a i n s c r i t i c a l t o Suncorp Life’s business as we continue to build and sustain relationships with IFAs through our Asteron L i f e b ra n d ,” Su m m e r hayes said.

Mu makes it clear that its support for planners is what is creating a positive result for the company.

AIA is trying to focus on c re a t i n g a s e a m l e s s, speedy insurance application to encourage its advisers to stay with the company.

AIA needs to make sure it makes it as easy as possible for its partners to do business with it, Mu says.

Investment Trends’ 2011 planner risk report found that adviser satisfaction is critical to retaining business. More than 75 per cent of planners rated their insurance provider good or very good, yet 57 per cent of planner respondents said they either switched insurance providers in the last 12 months or were looking to switch within the next 12 months.

Risk insurance Insurers have also moved beyond simply supporting the selling of a product, and now help advisers move into different markets as well.

Business insurance is one key area that some advisers have moved into, supported by the life companies wanting to broaden their hold on the market.

CommInsure recently introduced a range of new courses into its Risk Sales Academy to increase adviser insurance sales.

It also implemented a new planner support website, increasing the amount of data and marketing material online.

Ashton believes the last 18 months have been more about providing service s t o a d v i s e r s ra t h e r t h a n m a k i n g product upgrades.

“The issue isn’t on working on everything independently of each other.

We’ve deter mined that all of those things combined are the offer that we make, so we are working really hard on m a k i n g s u re t h a t t h e re l a t i o n s h i p component makes it easy for advisers to work with us,” he says.

Continued on page 16

Policy proposals to combat churn DIFFERENT policy proposals are being suggested by the industry to combat churn, but they have not been universally accepted. Who should be responsible for efforts to reduce churn is also up in the air.

The most developed proposals are those aired by the Financial Services Council (FSC), which suggested banning takeover terms, and establishing a responsibility period for risk advisers.

Any policy that gets churned within one year should have its commissions entirely refunded to the client, while any policy churned within two years should have its commissions partly refunded, the FSC said.

Asteron canvassed industry opinion on the proposal with a survey sent to 5000 advisers.

More than half of the 300 respondents said removing takeover terms would not reduce churn, but a two-year responsibility period would.

Advisers in the survey also suggested reducing the amount of upfront commissions to fight the problem.

However, speaking from a personal point of view, RI Advice national manager for risk insurance Col Fullagar said the two-year responsibility period proposal probably wouldn’t work.

A more effective solution would be for life insurance companies to put more trust in remuneration systems that reward the right activities, he said.

Fullagar suggested that if lapse rates exceeded a certain level, only level commissions should be made available to the adviser responsible, with the money saved being paid as a higher rate of remuneration to those advisers doing the right thing and avoiding churn.

In other words, the life insurance companies already control the levers that can combat churn effectively, and they should be using them rather than having policy controls imposed from above.

While the government has now announced it will scrap, after concerted opposition, a proposed ban on individual risk insurance commissions in super, the proposed government ban on group risk commissions still remains. The government will also work to introduce uniform claw-back provisions in life insurance.

Fullagar noted that if the current system had been property addressed, the need for government pressure to move risk to fees wouldn’t be necessary.

The FSC has thus far declined to provide any response to industry scrutiny of their proposals other than to say that they are working with insurance and advice members on the details of their churn policy.

Nick Fife Patron Financial Advice general manager Robert McCann rejected the idea of binding standards and suggested advisers and life companies should work more closely to build a sustainable industry.

“The life insurance industry is perfectly capable of weeding out any bad apples on its own merit,” he said.

Nick Fife, director of risk practice Fife Financial Services, agrees that both advisers and life insurance companies had policy tools at their disposal to combat churn.

Fife told Money Management that he is aware of some insurance companies that have refused to continue doing business with advisers because of churning on their behalf.

More than 50 per cent of the Fife FS client book is written on level policies, removing another temptation for planners, Fife says.

Many planners may be scared away from selling a level policy instead of a stepped one, not only because of churn but also because of the difficulty of selling a higher premium to a client. However, they should never be afraid of telling a client what the true cost of an insurance policy is, Fife says.

www.moneymanagement.com.au February 23, 2012 Money Management — 15

Risk insurance Continued from page 15

“

This is an opportunity for the life insurance sector to reach out and provide greater clarity to consumers on the relative cost and value of pure life insurance.

- Neil Sprackling

Good support of an adviser can make or break an insurance relationship.

With risk comprising 60 to 70 per cent of the revenue of a practice, advisers must be satisfied with the level of support and understanding they get from insurance companies.

The right support allows an increased level of training for junior planners in a business, and an increased level of compliance, which translates to an increased level of business all round. “Having the right licensee with the right relationship with the adviser is everything,� Fife says.

�

Who is to blame for underinsurance?

John Brogden

Despite the close relationship between advisers and the insurance companies, they are failing to make a significant dent in the level of underinsurance in this country.

The gap in life insurance in Australia expanded from $540 billion to $927 billion between 2000 and 2010, according to a recent report by global reinsurer Swiss Re. It was the fifth largest increase in the world.

According to Rice Warner figures, the total population is underinsured by $3.1 billion.

T h e i n d u s t r y c a n n o t re l y o n t h e attractiveness of products to eat into

u n d e r i n s u ra n c e. T h e re h a s b e e n a renaissance in insurance products over the last five or six years to answer client needs, but take-up rates addressing underinsurance are still woefully small.

The number of consumers who are adequately insured is under 10 per cent, according to some figures.

The fact that underinsurance has continued to rise despite efforts to stem the problem has led to questions of whether the issue is also a failure of communication.

Research conducted for the AFA last

year has found that advisers and life insurance companies are failing to demonstrate the value of life cover to the majority of Australians.

Past research has shown that advisers who communicate well on financial planning generally become indispensable to their clients. What advisers need to focus on now is transferring those communication abilities to risk insurance.

Speaking at a roadshow last year, CommInsure general manager of retail advice Tim Browne warned that talking about the issue of underinsurance was

becoming a lost art.

Financial planners need to arm themselves with facts to dispel myths that insurance companies never pay out, and that insurance is too expensive, Browne said.

The Swiss Re report found that more than 50 per cent of respondents expecte d t o p a y m o re f o r l i f e i n s u ra n c e, according to head of life and client markets Neil Sprackling. “This is an opportunity for the life i n s u ra n c e s e c t o r t o re a c h o u t a n d provide greater clarity to consumers on the relative cost and value of pure life insurance,� he said.

Wr i t i n g i n Mo n e y M a n a g e m e n t , CommInsure’s Browne said that numerous statistics made it clear that the industry must do more to educate the nation on the importance and value of appropriate insurance cover.

The problem of underinsurance is a particularly cultural one. Advisers are fighting against the happy-go-lucky nature of Australians, who believe they will never get injured or fall ill.

That attitude is reflected in the figures.

Trauma protection has a penetration rate of less than 3 per cent in this country.

There are always going to be people who think they don’t need advice, according to Ashton from AMP. “We can’t change everyone’s minds, but we can try to change enough of them.�

MM

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

Observer

A mistaken identity Dominic McCormick explains why going passive is not a low risk portfolio approach.

O

utside of cash and term deposits, passive funds – either those replicating market indices or those providing certain ‘factor’ exposures to traditional asset classes – have dominated the significantly lower retail asset inflows in recent times. The greater use of passive funds to build portfolios – often using passive funds exclusively – seems to be driven by two key elements.

1. A focus on low costs in a difficult investment environment where various

participants in the wealth management chain – especially planners and dealer groups – are focused on lowering the cost of the investment ‘piece’ to at least compete with industry funds.

2. The perception that passive funds and passive approaches provide low risk portfolio approaches that have little chance of disappointing investors in a major way compared to active solutions, and therefore provide greater comfort to investors, financial planners and dealer groups.

The low cost focus has already been

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

widely discussed, and if all other things were equal, lower investment costs would obviously be preferred. However, in the real world all other things aren’t equal, and it is after-cost (and depending on the structure, after tax) returns that ultimately matter.

Obsessing about costs alone is likely to lead to the neglect of a range of important issues that can impact the robustness of the portfolio construction approach (eg, adequate diversification, structural issues in asset classes, asset bubbles, achievable alpha, etc). However, I do not intend to

focus on the cost drivers for using passive investing today.

In contrast, there has been little discussion of the widely accepted view that passive funds and portfolios (incorporating both passive sector funds and a passive approach to asset allocation) are attractive because they represent ‘low risk’ portfolio approaches that have little chance of disappointing investors in a major way – ie, they prevent planners blowing up their clients.

However, depending on how you view risk, I believe passive portfolios can be

“

Recent years have highlighted that equity risk premiums can go missing for as long as decades – a timeframe well beyond the practical long-term investment horizon of many investors.

”

considerably riskier than a well constructed active portfolio – from both an investment and business perspective.

Of course, it is understandable that dealer groups, advisers and investors disappointed with the results of many investment products in recent years – particularly more complex, structured, illiquid or non transparent investments – are attracted to the perceived simplicity of passive investments. Further, with a range of macroeconomic fears dominating, investors’ defensive positioning means investors and advisers are primarily interested in avoiding bad outcomes.

While such sentiments are understandable, the danger is that some dealer groups and financial planners have over-reacted to recent bad experiences and moved towards a relatively small, constrained corner of the total investment spectrum – throwing out many sources of potential added value, increased diversification and

reduced risk in the process. In doing so, I wonder if portfolios built using almost exclusively passive investments and passive asset allocation actually provide the “low risk of getting it badly wrong” that they seem to be seeking.

To step back, one way to look at the investment opportunity set is to divide it into six key sources of potential value added (or subtracted).

1. Traditional beta – market returns/risk premiums from the major traditional asset classes, including certain risk premiums within them such as ‘value’.

2. Traditional alpha – excess returns from skill in taking advantage of inefficiencies through long-biased investment selection in the major asset classes.

3. Alternative beta – systematic returns/risk premiums from assets and strategies outside the mainstream asset classes – eg, certain hedge fund strategies.

4. Alternative alpha – excess returns risk

from skill in selection/market timing employed in alternative asset classes – eg, global macro funds and private equity.

5. Flexible/dynamic allocation within the above components – for example, active asset allocation across the main asset classes.

6. Flexible/dynamic allocation across the above components – eg, the decision to increase or decrease the use of passive relative to active strategies.

The key problem with the passive portfolio approach is it is typically focused on the first key source only – static allocations to traditional beta. Therefore, one is focusing on only a small proportion of the full investment opportunity set in seeking to generate returns and/or to decrease risks for clients.

Of course, I am not suggesting that all the sources of increased returns and/or reduced risks listed above are easily accessible or always available, but that is the point of flexibility to move amongst them.

However, in adopting the passive approach, one has already pre-emptively excluded these other potential sources of added value and is arguably, severely constrained. Surely from this perspective, focusing only on a small proportion of the investment opportunity set has to increase risk.

However, in talking about risk we need to talk both about clients’ investment risk and the business risk of the adviser.

Of course, even investment risk has various dimensions, but on the most simplistic risk definitions such as volatility, passive index funds in equities are often higher risk than many actively managed funds. Simply because they are more concentrated in terms of sector exposure, more growth-oriented because weightings are driven by market capitalisation and – unlike active funds – are unable to lessen volatility/market risk through strategies such as holding cash or using derivatives when there are limited opportunities.

Bond index funds are arguably even more obviously higher risk, as they are most weighted towards those countries that have issued the most debt.

Even on more relevant measures of risk – such as the risk of permanent loss and/or not meeting absolute/real objectives over time – the above factors normally result in passive funds being higher risk. All passive funds are promising to do is provide the market or factor exposure and resultant risk/returns, but with no certainty that they won’t suffer large or extended drawdowns, or fail to meet risk-free objectives – even over the long-term.

Recent years have highlighted that equity risk premiums can go missing for as long as decades – a timeframe well beyond the practical long-term investment horizon of many investors. Indeed, in a recent blog, Ken French and Eugene Fama – the most famous academic proponents of ‘risk premium’ investing – reiterated that it requires 35 years or more to be reasonably confident of achieving a positive equity premium (and the value and small premiums); and even then, they admitted that “positive premiums are never a sure thing”. Yet users of predominantly passive portfolios are relying almost exclusively on these risk premium returns to preserve and accumulate wealth over a relatively short timeframe.

Of course, there is no guarantee that active funds or active portfolio approaches will deliver a better result, but if done well, these can have the advantages of: - Being more focused on, or even built specifically towards, the actual absolute or real objectives that most retail investors have; - Diversifying across a much greater range of assets and strategy risk premiums; - Being able to skew the portfolio towards those assets and strategies where the risk premiums and opportunities are currently most attractive, or away from those that are not.

It seems somewhat ironic that following a period when many investors have been battered by having too much equity market beta or market risk in their portfolios, the proposed solution is to concentrate almost totally on passive funds that give their clients more of, and only, market beta/risk.

Surely this is a time to be more diversified, not less.

At the very least, investors should be given the full picture describing the pros and cons for a restricted passive approach.

Too often, passive portfolio approaches are promoted to advisers and investors using simplistic, heavily biased and occaContinued to page 20

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

Observer

Continued from page 19 sionally vitriolic arguments against all active management with little, if any, focus on the limitations of the passive solutions themselves or proper exploration of the full investment opportunity set.

There is also the business risk issue of whether advisers are acting in their clients’ best interest in offering only, or predominantly, passive solutions. While the best interest provisions of the Future of Financial Advice changes do not require a person giving advice to go through the entire market of all available financial products to find the best possible product, it is unclear what is the minimum appropriate amount and range of financial products and strategies to consider.

Given the narrowness of a pure passive product strategy in the context of the investment universe described above, it is a valid question whether a passive approach will meet this minimum requirement without full and proper consideration of the full range of alternative approaches.

The onus is on advisers to look after the range of outcomes for their clients – not just an average return. The path of returns really matters – especially for those nearing or at retirement – so attempting to build a portfolio with a smoother path of returns is clearly a desirable goal.

There are valid concerns whether a restricted, passive approach utilising just one component of the universe of investment products and strategies is sufficient to be able to attempt to deliver the best outcomes to clients across a range of environments and circumstances.

A financial planner cannot choose a passive solution because they think its simplicity is good for their business; they need to do it because they believe it is good for their clients. Passive solutions have limitations in the real world of clients with limited investment time horizons which need to be clearly understood.

What about the argument that passive

funds ensure that clients will never be bottom of the performance pack, and so reduce the business risk of the planner and dealer group? In my view, this argument is becoming weaker over time.

For example, using index funds didn’t prevent Storm Financial destroying massive amounts of wealth; and while this required excessive gearing, it is possible to perform very badly with passive funds through poor asset allocation – particularly chasing returns of the best performing asset classes and selling out of badly performing asset classes.

Another growing problem is that the psychological benchmark that retail investors use to judge return and risk against is variable over time. In today’s environment, it is increasingly cash or term deposits. That certainly doesn’t mean the industry should respond by giving them that exposure only, but it does mean it has to be careful about what is promised in the non-cash component of investment portfolios. Talking about passive funds as low risk because they are unlikely to diverge dramatically versus other conventional funds or market benchmarks is risking disappointment if investors increasingly see cash/term deposits as their primary benchmark.

Further, there is the risk that conventional portfolios (whether using passive or active funds) are coming under pressure from more flexible portfolios with greater investment freedom and oriented more to absolute/real objectives. Thus, while a traditional diversified portfolio using passive funds is very unlikely to perform especially badly versus a conventional portfolio using standard active funds, there is a much greater probability that it may do badly against the new breed of absolute/real return portfolios – particularly if the current difficult environment continues.

If these more flexible ‘multi-asset’ portfolio construction approaches become increasingly entrenched, then such approaches (and not a traditional asset portfolio) will become the appropriate

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

It is the largely static “asset allocation of an all passive fund approach that blindly ignores the broader investment opportunity set which I belive is most vulnerable to disappointing both the risk and return expectations of clients.

”

comparison for many retail investors.

Clients will be unlikely to stay the course in a passive solution if there are different ways of building portfolios that offer a better risk/return trade-off.

Ultimately, passive approaches are reliant on a central assumption that markets and capitalism always work and appropriately reward investors for risks taken over time.

Events of recent decades have seriously called this assumption into question. Some markets have underperformed risk-free rates over multi-decade periods – even what constitutes “risk-free” in relation to sovereign bonds is currently being questioned.

There is a realisation that there is no certainty that asset classes will deliver over long timeframes – especially if one purchases when they are excessively expensive, in a bubble, or subject to major structural headwinds. Investment is not, and can never be, a “science” the way many promoters of passive funds claim.

Still, perhaps the biggest risk for many investors is not even that passive exposure to growth assets won’t deliver over the longterm – although that risk is certainly getting more attention – but that clients will give up on those growth assets at the very worst times. Arguably, this may have been

happening to some degree recently.

We can debate the active versus passive case for years, but we can be certain that investors who continually buy into booms and sell down in gloom (whether using active or passive funds) are likely to do especially poorly. While it may be part perception, the ability of an active portfolio to respond to difficult periods suggests that – all other things being equal – investors are more likely to stick with a well managed active portfolio versus a passive one through such difficult times.

It is true that some advisers and fund managers do a good job of educating their clients to stick with a passive strategy through thick and thin, but even many of those clients are likely to buckle if the current difficult times continue for an extended period.

The alternative more diversified portfolios don’t offer certainty of better outcomes, but if well run, they offer greater diversification across risks and the ability to respond to opportunities (and manage risk) that the passive approaches don’t. We are living in a world where that full flexibility is required.

Now seems to be one of those times when investors and advisers have learned the wrong lessons from recent history, and may be putting themselves in more, not less, danger going forward. Lack of adequate diversification, exclusive and excessive exposure to market risk only, and exposure to structurally flawed asset exposures has cost investors dearly in recent years. Yet this is exactly what many passive funds and portfolio approaches actually offer.

I am not suggesting that passive funds cannot be a valuable component of portfolios – we certainly use them in our own multi-asset portfolios. Further, using largely passive funds and/or exchange traded funds for a dynamic asset allocation component of portfolios could also make sense for those in a position to implement this.

However, it is the largely static asset allocation of an all passive fund approach that blindly ignores the broader investment opportunity set which I believe is most vulnerable to disappointing both the risk and return expectations of clients – particularly if the current difficult investment environment continues.

Passive solutions are almost certainly better than haphazardly put together portfolios picked from elongated approved product lists dominated by products that are currently ‘hot’, or those promoted most aggressively by fund managers.

But passive funds’ so called ‘low risk’ characteristics, as well as their ‘low cost’ benefits, have been heavily oversold in recent times – from both an investment and business perspective – particularly compared to intelligently diversified and well managed portfolios selected from a more complete investment universe.

Unfortunately, the active management industry has recently done a terrible job of making its case and defending against this passive onslaught. It’s time to get a more balanced debate going.

Dominic McCormick is the investment officer of Select Management.

chief Asset

OpinionAsia

The dragon races Will Asia’s economic growth translate to growth in equity prices in the Chinese New Year of the Dragon? David Urquhart believes it will.

A

ccording to the Chinese zodiac, 2012 is the Year of the Dragon – an auspicious symbol of good fortune and power. Will it help turn around and boost Asian equity markets this year?

Asian markets have historically performed well once they dropped to the current inexpensive valuations of 10.3 times price-to-earnings ratio (P/E) and 1.5 times trailing book value. Over the past 20 years when P/Es have been this low, we have seen rallies on average of 16 per cent or higher over 12 months, 92 per cent of the time, according to studies by Goldman Sachs and Citi.

Although Asia is not immune to the slowdown in the West, the region is proving more resilient to a global economic downturn than in the past. One reason is that the region is significantly less reliant on the West than previously, with over half of its exports now being traded within the region.

The region’s demographics also continue to be ver y favourable for companies and investors. The labour force is forecast to grow at 1.5 per cent a year for the next 10 years, compared to Europe and the US which are growing at just 0.3 per cent. The region’s steadily rising labour force will provide a

source of higher growth. As people enter the labour market they become economically productive, rather than being a drain on an economy. More people will be able to earn and therefore spend, buying goods and services that companies provide.

The rising labour force is also adding to the growing middle class in Asia, which is expected to almost double to over a billion people in the next five years. China is expected to report the biggest absolute increase, while India and Indonesia will have stronger percentage growth.

Another positive for the region is that while most Western economies have a negative current account balance, most Asian nations have a positive one (with the notable exception of India). Policymakers in the region still have more growthsupportive options at their disposal than their developed market peers. Asian economies still have the ability to use both monetary and fiscal policy to help stimulate domestic demand, while in the West high levels of government debt have made fiscal policy tools unavailable.

Most Asian central banks have been tightening their monetary policies in the past few quarters so they now have flexibility to relax interest rates and credit policy in case of a severe economic slow-

down outside their borders.

It is similar, with foreign exchange (FX) reserves. Asia accounts for 63 per cent of global FX reserves, with China having accounted for half of these at the end of 2010.

Corporate debt levels are the lowest they have been since 1981 at 25.8 per cent debt/ equity. They have been building increasingly large reserves of cash and significantly de-leveraging their balance sheets following the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008.

Strong balance sheets, cash flow and rates of return have put Asian companies in great shape, although some companies will do better than others in this kind of environment.

There are several other factors that will further contribute to Asia’s growth this Chinese New Year - including increasing participation rates in tertiary education, rising labour skills, increasing urbanisation, developing credit markets and so on.

All these should further underpin the growth opportunities of companies and their share prices in the region.

Overall, Asia’s healthy financial system, robust domestic demand, low debt levels, high savings rates and the emergence of China as an anchor of growth for the region will continue to be supportive of

multi-year growth in the region.

Because they are in better economic shape, we expect Asian equity markets – which are currently following the lead of US markets – to have greater upside when global markets do improve.

What countries will provide the best market returns?

I have returned to a slight overweight to China, as the government in Beijing should start to loosen monetary and fiscal policy there as inflation concerns reduce and growth slows in response to the slowing global economy. This should help the growth of local companies.

I also like Indonesia and Thailand, as we have identified some great businesses there with great growth potential.

This is key, as while the region as a whole is one of the strongest in the world, it is important to identify from the bottom-up those companies that are going to deliver earnings per share growth stronger than the market anticipates and currently at very attractive valuations.

These stocks should perform well over the next few years, even in the challenging macro environment.

David Urquhart is the portfolio manager of Fidelity Asia Fund.

www.moneymanagement.com.au February 23, 2012 Money Management — 21

OpinionESG

So what?

Oil spills, sweatshops in China, dodgy remuneration structures – AMP Capital’s ESG research team explores the “so what” question around ESG issues.

M

ilton Friedman, the eminent economist from the last century said: “The business of business is business”. Some investors might say: “Who cares about environment, social and governance (ESG) issues as long as you are able to make a good return on your equities portfolio? Not all companies will have a giant oil spill in the Mexican Gulf”.

These hard-nosed views of the world suggest there is little room for thinking about or acting on broader ESG issues as a company, let alone an investor. However, these days smart investors realise that ESG issues can be material. Understanding how companies are managing these issues provides additional insight with which to make better investment decisions.

While many investors are well-versed in traditional financial analysis, ESG issues are sometimes difficult to analyse. Investors may recognise the importance of the issue too late, when the share price has already reacted to a particular event. There are no magic steps for looking at ESG issues, and for many investors it is all too hard and often much easier to simply dismiss.

To really see the potential problems, investors need to call on those investment analysts who can marry a strong understanding of ESG issues with an equally strong investment background. Being bilingual, as we put it, is the key to answering the “so what?” many investors ask when confronted by ESG issues.

Coal-seam methane – environmental and community issues front and centre The challenges facing the coal-seam methane industry in Australia is a classic example of both environmental and community issues combining to shape this emerging industry.

Our analysis indicates that some of the environmental issues might be overstated – good companies will be able to address these, and therefore meet regulatory and community expectations. Others may struggle with these same issues taking up valuable management time and costs as they face continued scrutiny from regulators and the community. It will certainly impact their ability to deliver on their stated strategies.

Technical environmental issues, such as issues of groundwater and surface water, are more challenging. They rely on computer modelling to predict impacts in 10 to 50 years’ time. However, understanding these issues is important in assessing the investment risks of potential capital expenditure and significant residual liability of these projects.

The success of companies to consult and

address community concerns – regardless of whether they are real or perceived – has more immediate investment implications. Addressing community issues such as compensation, concerns of visual amenity, and the impact on the social and economic character of local communities can have important implications for constraints on exploration or development and timing of approval – important factors when considering the risk-weighted value of potential projects.

While at one level the issues may be similar, the relative importance to each company in the ESG space will depend on location and stage of development – something an investor has to understand if they want to make the best return on their money.

Poor risk/reward ratio for labour exploitation in the supply chain Sweatshop issues in Asia are nothing new.Why should investors care? Retailers might suffer brand damage and consequential revenue loss, but don’t consumers tend to have a short memory? Actually, our proprietary research shows that chasing costs in Asia can have a very poor risk/reward ratio – even when you disregard the ‘ethical’ aspects.

Like a swarm of locusts, fashion companies are moving around in Asia to satisfy its appetite for cheap labour. Last year, plagued by weakening consumer markets and higher cotton prices, many companies started to steer away from old pastures in southeastern China (eg, Guangdong) to areas with lower unit labour costs. This process was accelerated by higher costs of living and China’s five-year plan to reduce the economic gap between eastern and inland China.

Outside China, the labour unit cost is often even lower. However, the unit labour cost does not tell the full story.

The labour cost is only a small proportion of the total cost of goods sold. Also, once differences in productivity and fixed costs have been considered, the elusive savings might be even smaller or gone altogether.

By moving production to remote areas, companies are taking a gamble on poor infrastructure and potentially longer lead times, which can be painful when you rely on fast-moving fashion trends. Workers’ conditions are often poorer, which can lead to lower productivity and further production disruptions.

So outsourcing to “cheaper” countries is not the panacea that companies and investors might be looking for – the locust may have left your investment looking a bit bare.

Governance – a warning light of a crash ahead Good governance doesn’t make the nightly

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

news, but bad governance sure does, especially when the reckless behaviour of conflicted boards and management destroys shareholder value.

Corporate collapses have shown there is no point investing in the companies that make great products if no rewards flow to shareholders. But how can shareholders ensure this doesn’t happen?

After two decades of analysing corporate governance, we have learned how to spot the warning signs. When determining how well a company is governed, an assessment is made of its disclosure, board and pay structure. For instance, flashing lights appear when companies lack transparency, when boards don’t represent their public shareholders, or when pay structures reward management for risk-taking and achievements contrary to shareholders’ interests.

Companies give great comfort to shareholders by being upfront with them. Clear disclosure of various aspects of the business and its governance helps shareholders make an informed judgment on the risks and rewards of their investment.

Similarly, shareholders take comfort in board structures where directors are not only well-qualified, but are also majority independent, and hence, more likely to be free from potential conflicts of interest.

Finally, thorough analysis of executive remuneration over many years has taught us that poorly structured pay cannot only be costly to shareholders, but in the worst cases

can encourage value-destroying behaviours.

Diligent analysis of these aspects can help identify which companies to invest in, and which to avoid. Although companies perceived as poorly governed can perform well, they will often have fewer investors willing to back them. Most investors only invest in a company where they are confident funds will be used wisely.

ESG analysis can give original insight to equity investments before it is too late ESG integration is a process of identifying a company’s hidden earnings risks, making a holistic assessment of how a company is managing the risks, and considering these when forming your final investment decision.

Key to that process is to understand that the majority of a company’s value mostly relates to non-financial drivers. Companies face a broad range of different ESG issues, which can be industry or even company specific. ESG integration into investment decisions is more than ‘ethics’ and carbon emissions – it is about assessing a company’s hidden value drivers and risks.

It is not always what you see, but what you cannot see that drives a company’s earnings and share price. By analysing these drivers to equity investments, you have an opportunity to obtain original insight, which can be the difference between a good and a bad investment.

By the AMP Capital ESG research team.

OpinionMarkets

Keep ahead of the curve High returns can be accessed from fixed interest markets, but it is vital that investors have a portfolio that is properly diversified if they want to keep the returns they have captured, writes Warren Bird.

M

any investors have reassessed their allocation to fixed interest in the wake of the heightened volatility of markets. While term deposits have provided a safe and sometimes attractively yielding option, other fixed interest investments have also been on the radar for many, and the government is pursuing the development of a retail corporate bond market to provide additional options. As investors consider these possibilities, it’s important they have a clear understanding of the risks that they are taking and how best to manage them.

Corporate bond risk The most important thing for investors to appreciate is that the portfolio construction principles used when investing in equities are not transferable to a corporate bond (credit) portfolio.

With an equity investment, the investor has downside risk if the company fails.

Being last in the capital structure in the event of a windup, equity investors often lose all their capital in that situation.

Offsetting that risk is the potential for very significant upside if the company succeeds.

Credit investments, however, display

an asymmetric return profile. The upside is limited to the yield that the investment pays. Risk is concentrated on the downside – if the issuer defaults, capital and future income can be lost. Ranking ahead of equity, bond-holders typically enjoy some recovery of capital if that happens, but corporate bond investors should plan on incurring some losses at some point in time.

However, the potential for losses should not scare investors away from investing in corporate bonds.

Fixed interest portfolios that include credit provide a very reliable return if the risk of loss is managed to minimise the impact of portfolio defaults. Diversification is the key, if done properly.

Diversifying fixed interest Proper diversification in fixed interest requires many more individual investments than in an equity fund. An equity portfolio as small as 30-40 companies can be diversified enough to deliver a strong return even if two or three of the companies fail. However, a credit portfolio of 40 holdings that is generating, say, an additional 2-3 per cent in yield above the risk-free return, will probably have that excess return wiped out if two or three of the companies fail.

There are two keys to proper diversification in fixed interest.

First, the correlation of defaults within the portfolio needs to be minimised.

Default correlation tells us the likelihood that two different borrowers will default at the same time. Often, due to industry factors, defaults can occur in clusters.

Portfolios that hold assets with a high default correlation are not only more exposed if a default occurs, but also are more likely to experience default clustering than those with low default correlations. Proper diversification requires investments to be held across as many industries as possible and in as many countries as possible.

Second, individual exposures need to be limited to very small levels. Quite simply, if there’s a credit that represents 10 per cent of the portfolio’s value and that’s the holding that fails, then the portfolio wasn’t properly diversified.

Active management The principles of diversification need also to be supplemented by active management. At the security selection level, this requires credit research to monitor the financial health of each issuer and detect problems as early as possible so that the exposure can be sold. Loss minimisation

by holding small exposures is one thing, but it is far better to avoid owning a lossmaking proposition in the first place if possible.

Relative value analysis needs to be undertaken. Credit spreads can become too tight and investors should reduce their overall credit exposure at such times. For instance, in 2006 credit spreads were very tight and it was appropriate to hold underweight credit risk, but by 2009 the value proposition for credit had become compelling. Active management can take advantage of such opportunities as they arise.

Managed funds come into their own Diversification like this needs an investor to own literally hundreds of individual corporate names. This is where managed funds come into their own. Proper, thorough credit risk management requires a financial capability, research resources and access to capital markets that is beyond the reach of all but a handful of very wealthy individuals. Professional fund managers have the resources and market access to do the job, carrying out their fiduciary duty on behalf of investors.

Warren Bird is the co-head of global fixed interest and credit at Colonial First State Global Asset Management.

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

Toolbox Super contributions: What you should know Stephen Bone looks at current and potential technical issues related to superannuation contributions.

F

rom a financial planning point of view, contributions to superannuation are an individual choice between personal savings and long-term or deferred savings for a client for whom some taxation concessions are provided. Whether one is preferred over the other depends on the immediate and future plans of the client, as well as the relevant stage in the client’s life. For example, during the earlier years the preference could be for the client to defer making long-term savings and concentrate on short-term factors such as purchasing a home, bringing up a family and so on.

During those times voluntary savings to superannuation may be kept to a minimum or placed in a bank account to cover those unexpected rainy days. Any long-term savings for retirement may be limited to just compulsory super, and small amounts of voluntary savings put aside in super to gain the co-contribution. What’s important is

that in any decision to have contributions put into super, the taxation concessions are used as efficiently as possible to assist in building up retirement savings.

Let’s have a look at some aspects of the super rules for contributions. Rather than using this article as a history lesson, we will look at current issues inherited from the changes introduced in 2007, and then the potential impacts of some recent proposals, most of which have been in the pipeline for many years. Some of the proposals announced by the Government many budgets ago have been reannounced and will now form part of the Roundtable discussions.

The Superannuation Industry (Supervision) Act 1994 and Regulations have relatively strict laws to control contributions made to the fund, along with the relevant taxation concessions. These are coupled to some extent with the rules controlling a fund accepting contributions. As a general rule, contributions can be made where the

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

person for whom the contributions are made satisfies various work tests, age qualifications, quotes tax file numbers and the amount is less than specified limits.

Member contributions Member contributions include those contributions made by or on behalf of a member; personal superannuation contributions; personal injury contributions; capital gains tax (CGT) capped contributions; transfers of super from overseas; and directed termination payments. They do not include employer contributions such as Superannuation Guarantee, award and salary sacrifice contributions.

Member contributions cannot be accepted by a fund where the member’s Tax File Number (TFN) has not been quoted to the fund that is to receive the contribution.

However, if a fund receives the member’s TFN within 30 days of certain contributions being made, then there is no requirement to refund the amount.

The main issue with “concessional contributions is where a small excess has occurred. ”

“

To ensure there is reduced likelihood of the contribution caps being exceeded, individuals and their advisers need to be fully aware of what has been contributed to all superannuation funds of which the person is a member.

”

If the superannuation fund has received the member’s TFN, there may still be restrictions on the amount of member contributions that can be accepted. The maximum member contribution that can be accepted by the fund in one amount is $450,000 if he or she is less than age 65 at any time during the year; otherwise it is $150,000. Any excess is required to be refunded to the contributor within 30 days of the contribution being received by the trustee. Receipt of a contribution is discussed by the Commissioner in Taxation Ruling 2010/1.

There are a number of personal contributions to the fund which are not included for purposes of the non-concessional caps.

These include contributions for which a notice under section 290-170 of the Income Tax Assessment Act 1997 is made; personal injury contributions; CGT cap contributions; Superannuation Guarantee shortfall payments; and transfers from the superannuation holding account.

Deductible contributions Deductible contributions, more correctly described as concessional contributions, are those which are generally made by someone other than the fund member, and those made by the member to obtain a tax deduction. The most common contributions made by ‘someone else’ include employer contributions, such as salary sacrifice and Superannuation Guarantee; some transfers from the fund reserves; and those made by someone else for a child 18 or older. However, they do not include spouse contributions or those made for a minor.

The amounts that can be made to a superannuation fund have been reduced since the Simpler Super changes in 2007.

We are likely to see them come down again in July this year, with the proposed changes for those aged 50 and older. The impact of this change will be discussed later. For this financial year the cap is $25,000: however, for anyone 50 and above the cap is $50,000.

Any concessional contributions that exceed the cap are taxed at a penalty rate, and payment of the tax can be made directly by the member or by using a voluntary release authority and having the fund pay the tax.

The main issue with concessional contributions is where a small excess has occurred. According to the Australian Taxation Office (ATO), the vast majority of amounts in excess of the cap were for amounts less than $10,000. To address this issue, the Government in its 2011 Budget proposed to allow a once-off concession commencing from 1 July, 2011 to allow anyone who breached the cap by up to $10,000 to have the amount refunded and taxed at their marginal tax rate. While this may have a reasonable impact on sorting out issues with the first-time excess, there will continue to be problems with situations where the excess is caused by unexpected or unusual events, which may go undetected until the ATO notifies the client or adviser of the excess. For most clients, while this proposal is some relief, it will still mean ‘eternal vigilance’ to guard against any excess occurring in future.

The significant benefit delivered by the once-off $10,000 excess concessional contributions proposal will be in the rule which requires excess concessional contributions to be carried over to a person’s non-concessional contributions. Situations have arisen where the effect of the carry-over is to bring forward the $450,000 cap – and in later years result in an excess of non-concessional contributions. In one case, the excess concessional contribution was caused by an amount being transferred from the superannuation small holdings account,

something over which there was no control.

In some situations the Commissioner is able to exercise discretion, and where ‘special circumstances’ are in existence will ignore the excess or allocate it to another year. The conditions under which special circumstances will be exercised are very limited and are published in the ATO Practice Statement PS LA 2008/1. However, while the Practice Statement provides very strict guidelines to the exercise of discretion, there have been a number recent cases where the Commissioner seems to have eased off in a strict application of the rules, particularly where an excess concessional contribution has been applied against the non-concessional cap. As the discretion is applied on a case-by-case basis, the full circumstances need to be available to judge whether that is the situation.

The ability of a fund to accept contributions is also linked to the age of the member at the time the contribution is made. There are no limits on the amount of contribution made between age 18 and 65. For anyone under the age of 18, personal contributions can be made but a deduction for contributions is limited to situations where he or she is gainfully employed. This means a child under 18 who receives income solely from investments or distributions from family trusts cannot successfully claim a tax deduction for personal contributions.

Once a person reaches age 65, contributions can be made if they are gainfully employed part-time for at least 40 hours in 30 consecutive days. Once a person reaches age 75, personal contributions are unable to be accepted 28 days after the month in which the person reaches age 75. Beyond age 75, it is only award contributions as well as other mandated contributions which can be made to the fund. From 1 July, 2013, the Superannuation Guarantee contributions will be able to be made. This is estimated to allow about 51,000 employees to gain the benefit of Superannuation Guarantee contributions after age 75.

The fact that the superannuation fund has limited an individual contribution to the non-concessional contributions cap of $450,000 or $150,000 does not mean the member will avoid paying tax on excess contributions. There is nothing to stop a person making personal contributions up to the relevant contributions cap a number of times during the year to the same or different fund, and the aggregate exceeding the person’s non-concessional contribution cap. In those cases it could be expected an excess contributions assessment would issue to the member.

If the non-concessional cap is breached a penalty tax of 46.5 per cent will apply, while for the concessional contributions caps an extra 31.5 per cent will apply to any excess. The ATO will advise the client of the breach in a pre-assessment letter, and if the information in the letter is incorrect the member is given adequate time to have it corrected. The main issues here are situations where contributions may have been double-counted or classified by the fund as concessional contributions whereas they should have been reported as non-concessional contributions.

Continued on page 26

www.moneymanagement.com.au February 23, 2012 Money Management — 25

Toolbox Continued from page 25

CPD Quiz This activity has been pre-accredited by the Financial Planning Association for 0.75 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. Non-concessional contributions include: a) All personal contributions made by a member b) Child contributions for a person under 18 c) Contributions where no tax deduction is claimed d) All transfers from reserves of the fund on death.

2. Concessional contributions include: a) Amounts transferred from an overseas fund b) All contributions made by someone else c) Any excessive non-concessional contributions d) All salary sacrifice contributions, including the Superannuation Guarantee.

3. A trustee of a fund is required to refund: a) Concessional contributions above the cap threshold b) Non-concessional contributions above the cap threshold c) The whole contribution if the threshold is exceeded d) Only excessive personal non-concessional contributions.

4.Information about concessional and nonconcessional contributions: a) Is difficult to obtain as it is reported annually to the ATO b) Is the responsibility of the fund where contributions are excessive c) Is only able to be obtained after the end of the financial year d) Is difficult to obtain as fund members rarely know their fund.

5. One of the main issues involved with the proposal to reduce the concessional contributions cap is that: a) It will increase the number of excessive contributions tax assessments b) Most large superannuation funds will need to value members’ benefits c) The date on which the balance is determined may be some time ago d) Self-managed funds will be required to adopt new accounting standards.

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

Also, it is important to ensure that the various elections for personal deductible contributions, amounts subject to the CGT cap and information relating to compensation payments, have been lodged with the fund: otherwise the fund has no choice but to classify them as they see fit.

Once those issues have been settled, a notice of assessment will subsequently issue from the ATO requiring the member to pay the excess contributions tax. The amount of the excess contributions tax must be obtained from a superannuation fund as the source of the payment.

To have an amount released, a compulsory release authority which is provided with the notice of assessment is required to be provided to the superannuation fund. This must be given to the fund within 21 days of the notice, otherwise an additional penalty of up to $2,200 may apply plus any general interest charge.

One issue that needs to be addressed in this area is the amount of contributions that a member has made to the fund. Under the current system it is extremely difficult to obtain current information about contributions made to superannuation funds in respect of the member. In most cases it is the member, their accountant or financial planner who will know the most about the contributions being made. While this can provide most of the information required in many cases, a member may not be aware that contributions are being reported to the ATO. There are those contributions that a member, their accountant or adviser may be unaware could occur with the payment of insurance premiums to superannuation policies, or contributions that were thought to be concessional contributions turn out to be non-concessional contributions and vice-versa.

Issues may also arise with high-income earners where the policy of the company is to require a minimum super contribution equal to 9 per cent of the employee’s remuneration package. While this is not required under the Superannuation Guarantee legislation, it leads to the misconception that it is the government legislation that has forced the contribution to exceed the caps. In some rare cases it will be the case, but that is not the general rule. The maximum contribution for Superannuation Guarantee purposes is just under $4,000 per quarter.

To ensure there is reduced likelihood of the contribution caps being exceeded, individuals and their advisers need to be fully aware of what has been contributed to all superannuation funds of which the person is a member over the past two financial years as well as the current financial year. In some cases a person may be a member of only one fund, which may not create a great problem as information about contributions can usually be made by a relatively simple enquiry with the fund or the person’s employer. However, where the person is a member of more than one fund or is unaware he or she is a member of a particular fund, current

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

“

Because larger funds use an accounting standard to determine a member’s balance, there is no requirement to use that standard for self-managed funds.

”

information may not be available.

It is understood that there are no plans to have funds report contributions to the ATO on a more regular basis than the current system, which requires the information once each year.

The ATO is currently setting up a system where a client will be able to access and obtain information about funds of which they are a member and the balance they have in the fund at a particular time. While this will not provide information about contributions made to the fund, it will provide some assistance by providing the name of the fund in which the member has a benefit at a particular time.

Unfortunately, it will not provide any assistance in providing information about current super fund membership in the current year or where the fund has not yet reported information to the ATO. It is also understood that some product providers in the industry are developing systems which will let the adviser know of contributions received by the particular superannuation fund or product during the year.

What will the future hold for superannuation contributions?

Excluding a discussion of the political banter that will go on in the Roundtable, which is expected to report by the end of this year, let’s have a look at one of the proposals – the reduction of the concessional contributions cap for anyone 50 and older.

Despite many advisers thinking incorrectly this proposal is in place, it is merely a proposal and no legislation has been passed by the parliament. Other proposals include the once-only $10,000 concessional cap breach which has been discussed, deferral of the indexation of the contribution caps, the increase in Superannuation Guarantee, the abolition of the age limit for Superannuation Guarantee contributions and the lowincome contributions tax refund. The operation of these rules is mainly an extension of what is in place or will operate in a fairly automated way once the legislation is in place.

The proposal to reduce the concessional contributions cap from $50,000 to $25,000 for anyone 50 and older with an

aggregate superannuation balance of more than $500,000 is relatively easy to understand. At this stage it would appear that the proposal is to go ahead based on the recent announcements relating to the Roundtable. One thing to understand with that announcement is that the proposed change is to commence on 1 July, 2012 and the Roundtable will not be reporting until the end of the year.

As there is no legislation in place, the larger funds will not be able to meet the systems requirements by the proposed commencement date. In addition, it is essential that someone 50 or older knows which contributions cap will apply on 1 July, 2012 because they may have a limited time in which to make the relevant contribution.

The discussion paper issued by the Treasury in 2011 made a number of suggestions on how the reduction in the concessional caps for anyone 50 and above is to apply. The main issue is the date on which the balance will be determined, of which one proposal is to use the balance at the end of the financial year two years prior to the year in which the contribution is to be made.

Subsidiary issues relating to the reduction in the concessional contributions cap include the consistency in the valuation of the balance in funds.

Because larger funds use an accounting standard to determine a member’s balance, there is no requirement to use that standard for self-managed funds.

Under the proposal, where a person is a member of a self-managed superannuation fund, the balance will be required to be determined on a market basis, and where any reserves form part of the fund then it will be required to be allocated among the members.

One of the suggestions for determining the amounts that will make up the $500,000 balance is to include previous withdrawals from funds such as lump sums and pensions. How this will work, if it is brought in, will depend on a number of factors such as which amounts will be required to be notified, and the records that have been kept by the relevant fund.

For example, some members may have been receiving a pension from the fund for many years and, if that is required to be reported under the proposals, records may not exist as there is no need to retain those records for the fund.

Advisers need to ensure there is continual measuring of the amount of contributions that are going into superannuation to ensure the caps are not breached.

They need to understand the potential dangers and ensure the information they have in relation to the client’s contributions is as up to date as possible. Where advisers have clients who are 50 or older, then any changes to the contribution caps need to be fully understood so that the ‘surprise’ excess concessional contributions tax assessment and possibly excess non-concessional contributions tax assessment does not crop up.

Stephen Bone is OnePath’s technical services manager.

Appointments

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

Having held senior management positions at AMP and Mellon Bank, Rafe was most recently president of the Actuaries Institute. He has also worked as a strategy partner at Accenture and as head of the financial services practice at Trowbridge Consulting.

Barry Rafe B A R RY Ra f e , a consulting actuary focused on strategy, gover nance and high-level operational issues in the financial services industry, has been appointed a pr incipal at Professional Financial Solutions.

In his new role, he will work with major financial services clients, including superannuation funds, in order to develop solutions in a period of industry change.

Consultancy fir m Ra d a r Results has appointed Nihal De Run as an associate for Victoria and Tasmania to help financial planners and accountants sell their businesses.

De Run has considerable exper ience in buying and selling client registers and whole businesses, and will work with fellow Radar Results associate Merv Wilson.

De Run is the founder of De Run Securities, which attracted investment from ING in 2007. ING’s stake was later bought out by Professional Investment Holdings in 2009.

De Run’s practice grew to $100 million in funds under management before he decided to sell down completely in

2012. He is still engaged as a relationship manager with his former practice.

Macquarie Group has named Brendon Rodda national key account manager for Macquarie Professional Series (MPS).

With 11 years experience as an investment specialist, Rodda will suppor t the growing number of advisers accessing MPS, and will work closely with national dealer groups, platform providers and research houses.

Commenting on the management change, head of Macquarie Professional Series Adrian Stewart said 2012 looked set to be another strong year for the business thanks to the boost in financial adviser numbers and the addition of Rodda.

Perpetual Investments has recruited three industry experts to grow the business’ institutional fixed income and multisector offer.

Sa n d i Orl e ow has been

Opportunities HEAD OF SALES AND DISTRIBUTION – SUPERANNUATION Location: Melbourne Company: Lloyd Morgan Australia Description: A boutique superannuation and financial services company is seeking a commercial expert to fill a national sales manager role.

Reporting to the general manager of financial services, you will be responsible for driving the growth of the business’ superannuation funds.

You will achieve this by managing the national sales and distribution team, focusing on sales and retention, and identifying professional development, where required.

To be considered for this role, the candidate will have experience in a similar role within superannuation – specifically where you have been required to identify volume default and choice business and achieve growth targets by leading a sales team.

You will also have relevant tertiary qualifications in business and be RG146 compliant.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Liz at Lloyd Morgan, 0418 385 809 / (03) 8319 7835

RISK ADVISER Location: Western Australia Company: Terrington Consulting Description: A Western Australian business advisory firm is seeking a financial adviser

Move of the week AUSTRALIAN Ethical has appointed David Macri as chief investment officer following James Jordan’s decision to step down after nearly two years in the role.

Macri joined the fund manager in 2009 as an equities analyst and portfolio manager. Prior to that he spent time with Macquarie Group, Credit Suisse, Mellon and Mercer, covering strategic and tactical asset allocation, commercial research, portfolio construction, and ratings agency process management.

Australian Ethical managing director Phil Vernon said that Jordan would be leaving the company on 28 March to return to his career in the public service, and would assist Macri in a smooth managerial transition.

appointed senior portfolio adviser, working with clients to develop solutions that will help to grow Perpetual’s expertise in multi-asset management, beta prime and alternative strategies. Orleow was previously a senior investment consultant and head of private markets and Tower Watson.

Jeremy Rolleston steps into the role of general manager institutional business, and will deliver fixed-interest credit and multi-asset solutions. With over 15 years markets experience, he

was previously an executive director of Goldman Sachs responsible for structures asset solutions.

Darren Beesley has joined Perpetual as a quantitative investment analyst. He will work with existing portfolio managers Michael Blayney and Glen Foster to improve operational capability and efficiency at Perpetual.

Orleow, Rolleston and Beesley have commenced their respective roles and are based in Sydney.

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

– risk specialist to join its wealth management team.

In this role, your main responsibility will be to offer detailed risk insurance advice to business clients. You will also be required to identify and capitalise upon business growth opportunities for the firm.

To be considered, you will have excellent knowledge of tax structures, entities, estate planning and SMSFs. Successful candidates will also have a proven track record in a similar financial planning role, a demonstrated ability to build and maintain client relationships, and a desire to grow a successful business.

In return, you will be rewarded with state-of-the-art facilities and a competitive remuneration package.

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

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

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

To be successful, you will have a proven

ability and passion for leading and coaching teams, and have the means to utilise referral networks and opportunities to contribute to complex business strategies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

www.moneymanagement.com.au February 23, 2012 Money Management — 27

Outsider

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

Exciting economists All Shook Up OUTSIDER recently found himself rubbing shoulders with portfolio experts at the inaugural Portfolio Construction Forum (PCF).

With the theme for the convention entitled 'The King is dead…', Outsider was thrust into the debate of which asset class looked set to step up and take the throne from the supposed safety of cash.

PCF publisher Graham

Rich thought it best to demonstrate this with clips from the animated film The Lion King, the sci-fi classic Planet of the Apes, and even grainy footage of the King himself, Elvis Presley.

Watching the Mississippiborn Presley rattle his hips to his greatest hits, a twinkle forced itself upon Outsider's jaded eye, and onto those of other more ‘senior’ delegates in the hall.

Those of us old enough to remember the King remembered the joy he brought to each and every young boy and girl watching their black and whites in suburbia.

Time is a cruel mistress though, as the live footage went from Elvis' innocent and boyish youth to his autumn years on the stages of Las Vegas.

Outsider was quite amused that while it has been over 30

years since his death, the Presley film clip held the attention of the audience longer than a number of the economists on stage – there were even scattered rounds of applause for the "hound dog".

Outsider would like to believe that he would hold an audience in such awe when he meets his maker – perhaps it's time he invested in a white rhinestone jumpsuit and learned to hum a few tunes.

Valentines who say it with super TRY as he might, Outsider couldn’t help but notice that Valentine’s Day came and went recently. Mrs O has long since given up expecting a surprise outpouring of romanticism – beyond perhaps a night at the cinema for “Tightarse Tuesday”. Several decades of marriage can dull the importance of the notoriously commercial V-Day event, in Outsider’s admittedly cynical opinion.

But nothing seems to slow the deluge of Valentine’srelated promotions, and communications rained down from all manner of unexpected and

seemingly unrelated sources.

For example, you may not always think of industry super funds in especially romantic terms, but it didn’t stop Hostplus sending out no fewer than 15 Valentine’s-themed tweets.

Highlights included “nothing says ‘I love you’ like a contribution to your spouse's super account,” and “it’s Valentines Day and we need to talk. Is it time for couples therapy? (a.k.a financial advice)”.

Outsider was perhaps more impressed by research house CoreData, which went one step further and actually performed

a Valentine’s Dayrelated study. It revealed, amazingly, that 53.2 per cent of Australians surveyed do not think Valentine’s Day is important.

Which means Outsider is actually in the majority on this one.

A significant proportion of men only celebrate it to keep their ladies happy (Outsider could have predicted this one too), while two thirds of the women who don’t consider it important celebrate it anyway “because they love their partner”. Outsider interprets this as meaning that there are plenty

The Minister’s favoured organ OUTSIDER's admiration for the Minister for Employment and Workplace Relations and Minister for Financial Services, Bill Shorten, grows apace.

Outsider believes Shorten may be diminutive in build but has other bigger attributes, one of which was reflected in his decision to pretty much publish his second reading speech covering the introduction of the MySuper legislation in the Australian Financial Review before he had actually read it to the House of Representatives.

Being a traditionalist, Outsider wonders whether any of Shorten's parliamentary colleagues were upset by what was clearly a breach of convention on the part

of the upwardly mobile minister.

Equally, he wonders whether an august financial organ such as the AFR is a bit miffed about publishing a speech its Federal Parliamentary Press Gallery reporters might have otherwise overlooked.

Whatever the case may be, Outsider is grateful that the column attributed to Shorten in the AFR did not contain the opening paragraph of his second reading speech, which related to finding someone trustworthy to look after your home while you're on holidays.

It could be, however, that Shorten was worrying about who might in future be trusted to look after The Lodge and Kirribilli House over the next decade.

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

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Out of context

“It’s not return on your money – it’s return of your money.”

Investor priorities tend to change in a downturn, according to AFA chief executive Richard Klipin.

“As a regulator, our ultimate task is to make sure that everyone we deal with is equally unhappy.”

ASIC Commissioner Peter Kell

of couples out there celebrating V-Day, even though neither partner thinks it is important.

The only truly surprising result was that only 60 per cent of singles placed no importance on Valentine’s Day. Outsider assumes the other 40 per cent spent the day at home watching Titanic or The Notebook on DVD, and helping to keep Ben & Jerry’s in business.

Painting yourself into Four Corners

outlining his organisation’s modus operandi at last week’s ASFA lunch.

“Maybe we should take half a moment and turn around to your neighbour and say you’re looking terrific today.”

Portfolio Construction Forum (PFC) publisher Graham Rich feeling the love at the inaugural PFC for 2012.

OUTSIDER last week found himself attending the first o f t h i s ye a r ' s Fi n a n c i a l Services Council/Deloitte Leadership Series luncheons, where he listened to FSC chief executive John Brogden giving an outline of the issues confronting the industry as it moves further into 2012.

As is usually the case at such functions, Outsider noted the attendance of some of the bigger movers and shakers in the financial services industry, and had c a u s e t o ove r h e a r t h e i r c o n v e r s a t i o n s b e f o re, during and after the lunch.

But notwithstanding the tenor of Brogden's speech, that conversation did not i n v o lv e t h e Fu t u re o f Financial Advice, Stronger Su p e r, o p t - i n o r a u t o consolidation. Rather, it concer ned more recent

events in Canberra and the appearance of the Prime Minister, Julia Gillard, on the ABC's Four Cor ners program.

If Outsider is any judge, many financial ser vices c hi e f e xe c u t i ve s ha ve begun wondering whether they should be adapting their corporate strategies to take account of another c h a n g e i n t h e Fe d e ra l Parliamentary Labor leadership.

So m e e v e n w o n d e re d a b o u t h ow a c h a n g e i n leadership might impact the make-up of the Cabinet and carriage of the financial services portfolio.

A few hours later, they would also have been heartened to note that NSW Independent MP Rob Oakeshott used the ABC to reiterate his opposition to opt-in.