Money Management (July 12, 2012) by Cirrus Media

The publication for the personal investment professional

www.moneymanagement.com.au

LIFE IN RISK SPACE: Page 10 | AUSTRALIAN HOUSING BUBBLE: Page 18

Planners shift from managed funds By Mike Taylor ADVISER caution generated by the global financial crisis and its continuing aftermath has served to disguise a general shift away from managed funds, according to new research about to be released by Wealth Insights. The research – the Wealth Insights Planner Segmentation Report – is based on two surveys covering 800 advisers and has revealed the startling bottom line that almost half of planners now place only around 40 per cent of investment flows into managed funds. What is more, the research indicates this trend is likely to continue, with many planners increasingly focused on other

options – particularly direct shares. Wealth Insights managing director Vanessa McMahon said the trend away from the use of managed funds had been evolving for some time, but had been disguised by the fallout around the global financial crisis and more recent events in Europe. “The move away from managed funds appears to have been masked by the general crisis of confidence in investing right now and the subsequent low rate of net flows into the markets,” she said. “However, the migration to other investment products is not cyclical, and even when the money starts moving back into the markets these planners will continue to use other investment

Terminally ill – big tax bill By Tim Stewart TERMINALLY ill clients who attempt to roll over their superannuation could end up with a big tax bill, warns OnePath technical services manager Scott Quinn. If a client satisfies the terminal medical condition ( TMC) of release, they can only receive their benefit as a cash lump sum or a pension – they cannot roll it over to another superannuation fund, he said. “Because tax law doesn’t recognise it as a rollover superannuation benefit, it’s treated as a new contribution and counted against the contribution caps,” Quinn said. The situation could crop up if a client receives a terminal

illness insurance payout in one super fund, and then attempts to roll over the money to a different fund with a more favourable death benefit pension or access to an anti-detriment payment, he said. While the client may be able to utilise the ‘bring forward’ rule to reduce the breach of the non-concessional contributions (NCC) cap, anything over $450,000 will potentially be subject to the 46.5 per cent NCC cap breach, Quinn said. Colonial First State executive manager of technical services Deborah Wixted said the Australian Taxation Office would view any attempted rollover for clients

Planner Investment Flows Planner Investment Flows 100% 16%

Other Investments

84%

Managed Funds

60% 50%

40% 0% Segments Segments 1–3 4–6

products,” McMahon said. She said the bottom line confronting the major managed funds providers was that the financial planning industry had been subjected to fragmentation and the consequent development of new models. “There are now six different planner groups which behave quite differently in terms of their investment product choices, investment strategies and business,” McMahon said. She said three of these segments (accounting for almost half of planners) now placed only 40 per cent of their investment flows into managed funds. “And they expect to decrease their use of

Source: Wealth Insights

Continued on page 3

SALARY SURVEY 2012

Pockets of growth MANY sectors within the financial services industry continue to struggle amid volatile markets and legislative change, leaving only small pockets of growth on the recruitment front. Large institutions continue to hire back-office staff and financial planners to accommodate the need for scaled advice, but boutique licensees have almost ground their hiring activities to a screeching halt. In addition, constant consolidation within the financial services industry – as well as cost-cutting company restructures – has seen many high-level executives leave their positions. Colonial First State’s Brian Bissaker, Zurich’s Matthew Drennan and Snowball’s Tony McDonald, to name a few, have had their positions made redundant amid company restructures. But while many executives were pushed out in the second half of 2011, this trend had slowly started to fade in 2012. The challenging financial services employment climate could explain why almost two-thirds of finance professionals are considering changing careers this year. However, salaries in the sector have not fallen. Apart from senior managers working in large institutions, the highest paid employees in the industry include fund managers, BDMs, dealer group managers and insurance underwriters. Full story page 14.

Continued on page 3

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Editor

Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Journalist: Bela Moore Tel: (02) 9422 2897 Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Senior Account Manager: Jimmy Gupta Tel: (02) 9422 2239 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Graphic Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2012. Supplied images © 2012 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

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When haste makes waste

he Government should stop rushing because its legislative haste must inevitably give rise to undesirable unintended consequences. Money Management’s sister publication Super Review last week held a roundtable of senior superannuation industry executives at which a strong consensus emerged that the pace with which the Government was seeking to deliver on its legislative agenda was causing serious problems. From a superannuation industry perspective, the Government is seeking to meet implementation timeframes based on 2013, when the industry believes 2014 would be more appropriate. From a financial planning perspective, there are many who would argue that the 1 July 2013, Future of Financial Advice (FOFA) implementation date is also problematic. As this publication has stated many times before, the underlying problem for the financial services industry is that there are too many legislative and regulatory loose ends and unknowns. The result is that administrators and platform operators are largely flying blind and making key decisions on significant expenditure on the basis of guesswork.

“

The only certainty with respect to the taxation and regulatory environment is change.

”

The level of that guesswork is exacerbated by the fact that not only is the Government pursuing its FOFA and Stronger Super agendas, it has also tweaked and altered the tax settings around superannuation and other investments at every Budget since it came to office. Indeed, there now appears to be a feeling in the financial services industry that the only certainty with respect to the taxation and regulatory environment is change. This is hardly something which can be viewed as assisting in building confidence among Australian investors, consumers and superannuation fund members. Even those who are close to the industry have been left uncertain. There was an admission at last week’s Super Review

roundtable that the state of Australian politics and the pace of the Government’s legislative agenda meant that chief executives were keeping one eye on the policies being pursued by the Australian Labor Party and the other on the policy currently being outlined by the Federal Opposition. What this indicated was that the uncertainty which has plagued the financial services industry for most of the past halfdecade will remain a factor for at least the next 18 months to two years – the period which will see the implementation of the FOFA and Stronger Super changes as well as a Federal Election. When the Australian Labor Party regained power in 2007 the then Prime Minister, Kevin Rudd, indicated that his Government would not be in the business of radically altering the super settings. As the major parties move more formally into election mode, it would be helpful if both sides committed to engendering a more certain environment. The challenges currently confronting the financial services industry are considerable: they are only made harder by tinkering policy-makers and hasty politicians. – Mike Taylor

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2 — Money Management July 12, 2012 www.moneymanagement.com.au

News Planners shift from managed funds Continued from page 1 managed funds even further in the next few years,” McMahon said. She said the main reason for moving into other investment products – particularly direct shares – was the need to reduce investment costs. McMahon said some fund managers had been more seriously impacted than others – something Vanessa McMahon which was being reflected in the decreased level of their inflows. As well, it was likely that larger players such as AMP and MLC were less affected than some of the smaller groups. She told Money Management that the research results sent a clear message to the managed funds sector about the need to understand the fragmentation which had occurred in financial planning and the consequent need to adopt a more targeted approach. “They need to change the broadbrush approach which succeeded in the past and identify the appropriate planner segments,” McMahon said.

Direct life insurance sales growing By Chris Kennedy

LIFE insurance policies sold direct to customers without the aid of a f i n a n c i a l a d v i s e r c o n t i n u e to increase at a significant rate and will account for 40 per cent of new insurance business or $2 billion annually by 2021, according to a Plan For Life report. That is up from 25 per cent in 2010-11, with increased consumer confidence in purchasing through channels such as the web and smart-phone technology credited with much of the increase. The Direct Life Insurance in Aust r a l i a : R a c i n g o n to t h e R a d a r report, written in conjunction with global management consultants O l i ve r W y m a n , r e c o m m e n d e d insurers find new areas of focus

to gain a competitive edge, such as channel integration, new media, segmentation of insurance propositions and “reclaiming the customer relationship”. “The reality is that life insurance remains largely sold rather than bought and successful players are using sophisticated marketing techniques to reach their clients,” said Brad Clarke, report co-author and head of insurance strategy for Oliver Wyman in Sydney. “Digital adoption and technology advances as well as scaled and remote forms have assisted and will continue to present opportunities. We expect many players, however, to continue to struggle to differentiate between what sounds like a great idea and one that will result in a sustainable business,” he said.

The report said the main drivers impacting future growth will be: customer behaviour in adopting digital purchasing through channels such as social media, mobile internet and interactive tools; acceptance of direct insurance sales as a complement to adviser channels; increasing participation from “diversified financial institutions”; and growth of aggregators and other online advice and other new entrants from outside the traditional insurance arena. Clarke said players that have built a strong market position would continue to do well, and for insurers that could stay ahead of the cur ve and learn from global players “direct business will reach well beyond the fraction that it is today”.

Terminally ill – big tax bill Continued from page 1 in this situation as a cash lump sum that has been contributed to a new fund. In her experience, terminally ill clients who seek to roll over their superannuation do so in order to have their benefit paid as a pension to their surviving family. While the adviser needs to understand the consequences of any attempted rollover, the fund also has an important role to play, she said. “A good fund will understand that it is not part of the rollover system, and they should not receive it as a rollover,” Wixted said. “But some trustees are a bit more across things than others, and some selfmanaged superannuation fund [SMSF] trustees might be a little less knowledgeable about these things,” she said. SMSF Professionals’ Association director of

education Graeme Colley said in his experience retail funds were more likely to accept a rollover from a member who satisfied the TMC of release. In the examples he has seen, the retail funds simply acted on the instructions of the individual member, rather than exercising their full responsibilities as a trustee, he said. For clients who end up getting hit with the excess contributions tax as a result of an inadvertent contribution, the avenues of appeal are slim. “The only way would be to claim to the tax commissioner that special circumstances exist. But illness in that situation is generally not regarded as a special circumstance,” Colley said. “I’ve spoken to people in that situation and they tell me that ‘I don’t want to leave a tax liability for my survivors’. It’s really heartrending,” he said.

Clarification: In last week’s Money Management, the story on page 1 headlined ‘Research houses: consolidation concerns’ incorrectly asserted that NAB-owned dealer groups Apogee and Godfrey Pembroke had switched research providers from Three Sixty Research to Lonsec. This was the result of an error in the data provided to Money Management. Both groups continue to use Three Sixty as their main research provider. www.moneymanagement.com.au July 12, 2012 Money Management — 3

News

FOFA implementation may fuel practice sales By Mike Taylor

FINANCIAL planning practice mergers and acquisition consultancy Radar Results has predicted more advisers will look to sell their businesses before the Government’s Future of Financial Advice (FOFA) changes take effect from 1 July, next year. Radar Results principal John Birt said there was a belief that the new FOFA regulations would have a significant impact on

authorised representatives within respective licensee groups, preventing them from moving to another licensee unless they wanted to trigger ‘opt in’ for their clients. “In essence, grandfathering could be cancelled immediately when a client of a financial planner is moved to another licensee, whether it is by way of sale to another adviser, or simply a transfer to a new licensee for a better deal,” he said. Birt claimed that, on this basis, there could

be a mass movement of advisers to avoid being caught by the new rules. At the same time as pointing to the potential for a move by planners to beat the 1 July 2013, FOFA cut-in, Birt released the results of a survey conducted by his company covering the acquisition of financial planning practices. He said the survey had revealed the most popular size of recurring revenue sought was between $100,000 and $250,000, which had been cited by 39 per cent of respon-

dents, followed by $250,000 to $500,000 cited by 31 per cent of respondents. There was little appetite to acquire larger practices of $500,000 to $1 million, with only 7 percent of respondents citing the range. “When you multiply these recurring revenues by the multiple of two or three times to calculate the purchase price, a loan of between $250,000 and $1.5 million would be required to make the acquisition possible,” Birt said.

Some measure their performance by relative returns.

Tony Graham

Global software provider looks to acquire COIN By Chris Kennedy

We see it as your clients do; as money made or lost. At Aberdeen, we take benchmarks with a pinch of salt – they are useful in measuring the past, but they fail to illuminate the future. Most investors are not interested in relative performance, they see their investments in absolute terms – they are either growing or diminishing. We couldn’t agree more. Aberdeen’s approach to investing is based on ﬁnding quality companies that deliver solid returns over time.

We believe your clients will find Aberdeen’s investment process refreshingly straightforward and easy to understand. They will also find our prudent approach to risk reassuring, particularly in turbulent times. If you’d like to find out more about Aberdeen’s Australian, Asian and Global Equities funds‚ call us on 1800 636 888 or visit our website.

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4 — Money Management July 12, 2012 www.moneymanagement.com.au

GLOBAL financial techn o l o g y a n d s o f t w a re provider Rubik Financial has signed a conditional a g re e m e n t t o a c q u i re COIN from Macquarie Group. Macquarie will continue to service the majorit y o f CO I N ’s b o u t i q u e independent financial advice clients, under a licence from COIN, Rubik said in a statement. T h e p u rc h a s e p r i c e paid at completion may be subject to completion adjustments, but will not exceed $23.75 million, Rubik stated. In addition there will be a further net tangible asset adjustment payable in cash 12 months after completion, according to Rubik, which will fund the acquisition through existing cash reser ves and bank debt. “ We believe the proposed separation of COIN to focus on institutional and boutique businesses as two distinct and independent offerings creates a great opportunity for the growth of both of these specialist financial planning software businesses,” said head of Macquarie Adviser Services Tony Graham.

News

Industry leaders question Govt’s speed on levies By Mike Taylor A ROUNDTABLE of senior superannuation industry officials has decried the size of the financial services levies imposed by the Federal Government and the speed with which they have been enforced. The roundtable, conducted by Money Management’s sister publication Super Review, saw both the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation

Trustees (AIST) decrying not only the size of the so-called “APRA levy” but the lack of consultation around it. Both the AIST chief executive Fiona Reynolds and ASFA chief executive Pauline Vamos were highly critical of the fact that consultation had been confined to just one week, and claimed that the Government had appeared not to listen to their arguments. At the same time, Auscoal strategic project manager Colin McGuinness said

the increasing size of the levies being imposed on superannuation funds was making it difficult for trustee boards to appropriately budget and plan. Reynolds said the speed with which the Government had imposed the levy had to be weighed against the length of time and number of tranches it had taken to introduce financial services legislation. ASFA’s Vamos said “we had one week’s consultation period on the levies and we were totally ignored”.

“When you look at the ministerial determination that came out, I am sure that was written before the consultation paper came out,” she said. Reynolds said the fact that there was only a week’s notice to choose three options – and the Government had then chosen none of the options but had gone with a hybrid – was indicative of the problems. “All this other legislation we’ve been waiting for ages and ages, but with the collection of money – whoosh, it’s out,” she said.

Mark Stephen

Avenue Capital’s 30 advisers join Lonsdale By Chris Kennedy

AVENUE Capital Management’s 30 f inancial advisers across 15 practices will become authorised representatives of IOOF’s Lonsdale Financial Group, IOOF has announced. I O O F i n d i c a te d t h e deal was a par tnering arrangement rather than a purchase of the group, but said the agreement would bring “significant” increases to Lonsdale’s funds under administration. Avenue advisers will now have access to a broad range of dealer services including practice management, corporate governance, research and software suppor t, according to IOOF. “In line with our desire to grow the Lonsdale business through quality practices, the addition of these 15 practices will significantly increase Lonsdale’s adviser footprint in the [New South Wales] market,” said Lonsdale chief executive Mark Stephen.

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

www.moneymanagement.com.au July 12, 2012 Money Management — 5

News

ASIC warns financial services firms over ads By Milana Pokrajac

Peter Kell

THE financial services regulator has reminded the industry that advertising campaigns will be closely watched and regularly reviewed. The Australian Securities and Investments Commission (ASIC) Commissioner Peter Kell said the regulator would take action when companies do not comply with the law. “Advertisements should give balanced information to ensure the overall effect creates realistic expectations about a

FOS concerned over credit infringement listings By Chris Kennedy THE Financial Ombudsman Service (FOS) received a number of complaints in the first quarter of this year relating to serious credit infringements being listed by a financial services provider (FSP) on clients’ personal credit files. In the winter edition of its quarterly The Circular, FOS said it had contacted the FSP to advise that serious infringements had been listed, even though the FSP had not sufficiently determined that applicants no longer intended to comply with their credit obligations. FOS also advised the FSP it would review whether ser ious credit infringement listings had been made against other customers without a reasonable basis to believe they would no longer comply with credit obligations. The FSP advised FOS that all the relevant disputes had involved third party tracing agents, but following a review of some of those listings FOS determined a high proportion had been made incor-

re c t l y a n d t h a t t h e i s s u e w a s systemic. In addition to asking the FSP to advise of the removal of incorrect listings, FOS asked the FSP to formally consider, case by case, any claims for non-financial loss from customers whose listings were made in error. In a separate but similar case, a complainant said his FSP had not correctly assessed his application for hardship assistance regarding a hire purchase agreement for which he had acted as guarantor. FOS found the FSP had listed a commercial debt on the applicant’s personal credit file that could not be considered credit under the relevant legislation and was therefore an inappropriate listing. Again, after a review FOS found a number of incorrect default listings and determined that the issue was systemic. FOS asked the FSP to correct the incorrect listings and to provide copies of its policies and procedures relating to default listing business guarantors on their personal credit files.

financial product or service,” Kell said. His comments follow RAMS Financial Group’s amendment of its advertising campaign, which ASIC deemed potentially misleading. The ads claimed the RAMS Saver account was offering a 5.75 per cent interest rate which (under certain conditions) included a 0.8 per cent per annum bonus. The campaign, however, failed to disclose that in order to achieve the monthly bonus rate, consumers could not make any withdrawals from the

account during the month. RAMS has amended its advertisement and is also taking steps to clarify its product information with customers, ASIC stated. The regulator has recently released a regulatory guide on advertising financial products and advice services, which Kell said would “help industry participants understand their obligations”. “We are also sending a message that we will take action in response to misleading ads for financial products and services,” he added.

Russell’s survey to rank fundies’ after-tax performance RUSSELL Investments is set to launch a new survey which would measure and rank fund managers on their after-tax returns. The new Australian equities after-tax benchmarking survey would provide a benchmark to compare investment outcomes both on a pre-tax and after-tax basis – a requirement for superannuation fund investors under the Stronger Super reforms. Russell’s director of aftertax investment strategies Raewyn Williams said the new offering would answer questions clients may have around after-tax performance in light of the new legislative requirements. “ T h e s u r vey w i l l a l s o h e l p f u n d m a n a g e r s to benchmark where their strategies are at and will provide valuable informat i o n to a d d r e s s t h e i r investors’ increased interest in how their portfolios – and Australian equities as an asset class – are

performing on an after-tax basis,” she said. The new offering would report both pre-tax returns fo r Au s t r a l i a n e qu i t i e s strategies and the after-tax return – that is, adjusted for the tax value of franking credits as applicable to superannuation funds. “It is short-sighted to overlook the impact of franking credits as they represent about 1.4 per cent of a largecap Australian equities

benchmark return each year,” Williams added. “This is valued at around 70 basis points a year in additional returns to Australian equity super investors, yet is ignored in traditional surveys.” The firm’s initial survey (which is currently running) would look at strategies for the year ending 30 June 2012, while future surveys would be produced on a quarterly basis, the company had announced.

Mutual trans-Tasman recognition of financial adviser qualifications

Greg Medcraft

THE Australian Securities and Investments Commission (ASIC) and New Zealand’s Financial Markets Authority (FMA) have announced mutual recognition arrangements relating to the qualifications of financial advisers, making it easier for advisers to work in both jurisdictions. The agreement, effective from 6 July this year, means qualifications and experience advisers have attained from one country will be recognised in the other. “The announcement is a significant step which supports our mutual desire for a more dynamic, single economic market between New Zealand and Australia – par-

6 — Money Management July 12, 2012 www.moneymanagement.com.au

ticularly in financial services,” said FMA chief executive Sean Hughes. ASIC chairman Greg Medcraft said the arrangements would strengthen the Australian and New Zealand financial services industries by increasing competition and lowering transaction costs. Trans-Tasman mutual recognition legislation already applies to Australian financial services licence holders, but most of these licence holders are firms or companies, meaning a dif ferent mechanism was required to enable individual advisers to operate in both jurisdictions, ASIC stated. FMA has now granted an exemption fo r qu a l i f i e d Au s t r a l i a n a d v i s e r s ,

meaning they can apply to be authorised financial advisers (AFAs) in New Zealand based on their existing Australian qualifications. This will make them exempt from additional education requirements, but they will still be bound by New Zealand’s Code of Professional Conduct for AFAs, ASIC stated. ASIC has amended its regulator y guides which set out the minimum training requirements for individual f i n a n c i a l a d v i s e r s i n Au s t r a l i a to r e c o g n i s e N ew Z e a l a n d A FA s a n d Qualifying Financial Entity advisers, to enable them to practise in Australia in certain areas.

News

Count and BT Wrap Awards must remain integral seal distribution deal to default super, says AIST By Mike Taylor

COUNT Financial has joined with BT Wrap to announce the two companies have renewed their distribution agreement. The deal, confirmed by Count chief executive David Lane and BT Financial Group general manager of adviser distribution Chris Freeman, will see a repricing of BT Wrap products for Count advisers. Freeman acknowledged BT Wrap's 21-year partnership with Count and said it had always sought to be a platform provider which adapted to the changing environment. Lane said he regarded the repricing of the arrangement as an excell e n t o u t c o m e fo r C o u n t advisers and their clients, while Freeman said that although pricing was an

David Lane i mp o r t a n t e l e m e n t , B T Wrap's focus remained on l e a d i n g t h e p l a t fo r m market with its product innovation. The arrangement comes amid reports of attempts by BT to lure Count planners with hefty transition payments.

THE Australian Institute of Superannuation Trustees (AIST) has signalled it will be pressing the Productivity Commission to leave industrial awards as an integral part of the ability of employers to select default funds. Responding to the release of the Productivity Commission's draft report into default funds under moder n awards, AIST chief executive Fiona Reynolds said her organisation was concerned about "employers being able to select funds outside a transparent award system". She said it was something the AIST would be seeking to discuss further with the commission. "AIST is all for a transparent and rigorous selection process that has members' interests as the only criteria for assessing default funds. Anything less would be unacceptable for the millions of Australians who rely on default funds to deliver for their retirement," Reynolds said. However, she said AIST was looking forward to further discussions with the commission – "particularly around the second-stage factors required for the selection process and employers selecting funds within this process". The Productivity Commission's draft report has recommended in broad terms that approved MySuper funds should be capable of selection by employers as default funds under modern awards – something which would open up the area to players such as AMP Limited, Colonial First State

Fiona Reynolds and the other major institutional providers. However, Reynolds noted that the commission's report had also suggested that funds would need to be "fit for purpose". She said that meant they needed to be right for workplaces. "Selecting the right default funds for a particular group of employees or workplace requires careful consideration. At the end of the day, the process must be about protecting members and delivering results – not just helping some funds make more money out of super," Reynolds said.

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News

AMP appointment continues SMSF push By Chris Kennedy

AMP has appointed self-managed super fund (SMSF) specialist Craig Jameson to set up its newly formed AMP SMSF business unit. Jameson was previously managing director of the ANZ-owned SMSF specialist Super Concepts, and the appointment came less than a week af ter AMP announced it would be acquiring SMSF administrator Cavendish Group.

Jameson will be responsible for setting up the business operations for the new unit, including creating and implementing

its business architecture and overall strategy, AMP stated. Prior to joining Super Concepts in early 2009, he was ING Australia’s head of strategy and transformation, customer solutions. He has also worked as ING Australia’s head of customer service for employer superannuation, Belle Property chief operating officer, and held a number of roles at Tower Australia, including head of operations, AMP stated.

AMP SMSF comprises AMP’s existing SMSF administration businesses, Multiport and Ascend, and will work closely with SuperIQ, which is 49 per cent owned by AMP. The Cavendish acquisition was also expected to be completed in early July, AMP stated. Jameson said the business unit offers customers a choice of administration providers, and will aim to develop customer and adviser-friendly SMSF offers to drive SMSF take-up across the AMP group.

S M S F A Money Management supplement

May 31, 2012

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A PLACE FOR SEGREGATION

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Suma Donnelly (02) 9422 8796 suma.donnelly@reedbusiness.com.au

8 — Money Management July 12, 2012 www.moneymanagement.com.au

Jimmy Gupta (02) 9422 2239 jimmy.gupta@reedbusiness.com.au

Former planner pleads guilty to deception By Bela Moore

TREVOR Wayne Carll has pleaded guilty in the Adelaide District Court to one count of deception and two counts of dishonest dealing with documents. Carll, a former Adelaide-based financial planner, was caught out by l i c e n s e e s w h o brought his dealings to t h e a t te n t i o n o f t h e Australian Securities and Investments Commission (ASIC). Carll deceived two clients about the intended use of documents signed by them and arranged for their assets, totalling over $900,000, to be held as security for his personal loan margin. He also provided false documents to Macquarie Bank in an attempt to release his clients’ funds. He is yet to be sentenced for the offences, which occurred between 31 May 2005 and 16 October 2008 while he was an authorised representative of Financial Wisdom and Financial Planning Services Australia. Each sentence carries a maximum penalty of 10 years in gaol. Carll had previously pleaded not guilty to one count of deception and 27 counts of dishonest dealings with documents. ASIC banned Carll from providing financial services in February 2011.

News

‘Sales’ is not a dirty word, says Synchron By Tim Stewart

Don Trapnell

BY convincing younger advisers that ‘sales’ is not a dirty word, Synchron has succeeded in reducing the average age of its representatives by 10 years since 2006, according to managing director Don Trapnell. The average age of a Synchron planner has fallen from 59.8 to 49.6 over the past six years – something Trapnell puts down to the group’s NextGen program, which focuses on ‘soft skills’. The NextGen program is specif-

Challenger to target planners with new campaign By Milana Pokrajac CHALLENGER is set to launch a new advertising campaign targeted at financial planners which will focus on the ‘do nots’ of asset allocation for retirees. The new campaign Revelations will build on Challenger’s previous consumerbased Real Stories campaign – which presented the reality lived by a generation of retirees over-exposed to equities on the eve of the 2008 market crash. “Super in retirement is different from super in accumulation,” said Stuart Barton, Challenger’s general manager for corporate marketing and communications. “The simple aim of Revelations is to show us why some clients’ dreams may not be matched by reality – if those dreams are predicated on ‘accumulation thinking’,” Barton added. The three case studies contrast a hypothetical retiree’s expectation about their retirement finances, Challenger stated, adding it would expose hard realities relating to the mathematics of ‘balanced’ portfolios in decumulation, supported by research published by its retirement income research division. The campaign will also be launched after what Challenger expects to be a year of 30 per cent sales growth.

ically targeted to the needs of advisers under 40 who have worked almost entirely in a postfinancial services reform world and lack the ‘soft skills’ of their older colleagues, he said. This younger cohort of advisers understands the compliance and technical aspects of advising “back to front”, but “no-one ever taught them how to sell”, according to Trapnell. “Unfortunately, the PC police turned around and tried to make the word ‘sales’ a dirty word. And that’s what ‘soft skills’ is – it’s a

euphemism for the word ‘sales’. But ‘sales’ is not a dirty word. Nothing happens until something’s sold,” he said. Trapnell emphasised that he was not referring to the “hardnosed” sales techniques of real estate agents or car salesmen. “I’m talking about allowing a client to come to a logical conclusion. And removing barriers that may be in the way to make that decision,” he said. At Synchron’s most recent NextGen conference, Trapnell discovered that many younger advis-

ers were caught up in the ‘dirty word’ aspect of the word ‘sales’. “None of them wanted to sell anything. They wanted to batter their clients into submission with knowledge … That’s rubbish. You’ve got to sell something,” he said. “We found by doing this the younger advisers started to make more money. It’s the coarse reality. They satisfied more clients’ needs. As a result of that, we’ve been able to attract more younger advisers to Synchron – lowering the average age,” Trapnell said.

Liquidity concerns driving multi-asset managers FUND-OF-HEDGE-FUND (FOHF) and multi-strategy managers are tailoring their products to provide investors with improved protection in negative markets, according to Standard & Poor’s Fund Services (S&P). According to S&P’s repor t on the alternative strategies/multi-asset peer group, investor demand is “inextricably tied to the performance and flight-to-liquidity issues that arose in a difficult 2011”. Managers are continuing to make changes to their underlying holdings to provide liquidity and deliver more alternative returns, according to the report. S&P fund analyst Jason Patton noted that all asset classes are currently struggling to lure investors away from cash.

“We expect developments in Europe will dictate overall appetite for investment products other than defensive ones in the current environment,” he said. The S&P report found managers of ‘classic’ FOHFs are under pressure to demonstrate their high fees are warranted. “The inclusion of exchange-traded funds and alternative beta replicators in some newer multi-strategy portfolios is compressing average fee levels in the sector,” said the report. The report also found that managed futures and “long volatility” profile strategies are winning higher allocations within FOHFs. There is also an increasing distinction between products with high equity beta characteristics and those showing a more “alternative” return profile with limited equity beta exposure.

S&P downgrades AXA North By Mike Taylor RATINGS House Standard & Poor’s has pointed to the differences in the AXA North product set following the platform’s acquisition by AMP Limited, at the same time as instituting some downgrades. The S&P analysis, published last week, said that while overall the ratings house continued to believe North offered investors an effective mechanism to help protect wealth by managing downside risk, “since our last review there have been several changes to the features of these products”. Discussing those changes, S&P fund analyst Josh Hall said investor choice had

been impacted. “In an important change affecting investor choice, the list of available investment options over which protection is available has been reduced significantly and now only contains diversified multimanager products managed by AMP subsidiary ipac,” Hall’s analysis said. It said that, in addition, the costs associated with the protection mechanism had also increased by between 10 and 45 basis points a year, depending on the risk profile and time frame. “As a result of this reduced flexibility and increase in cost we have reduced our overall conviction in the North Protected Growth Guarantee, Protected Investment

Guarantee and PRG Products,” Hall said. S&P said it had downgraded the North Protected Growth and Protected Investment Guarantee to a rating of ‘strong’ and the North PRG to a ‘sound’ rating.

Potential tax traps for pre-retirees – Canstar By Bela Moore PRE-RETIREES need to check their superannuation contributions now to avoid the “potential tax traps” of a reduced cap for concessional contributions, according to Canstar. The Government halved the cap to $25,000 for this financial year. Canstar said retirees could end up paying up to a “nightmarish” 93 per cent by trying to balance catching up on the rules and injecting the maximum contributions. It is conceivable some people

will lose their retirement savings rather than build on them, Canstar said. The 31.5 per cent tax rate on contributions exceeding the cap would not be

desirable for those on a 30 per cent tax rate, Canstar said. And pre-retirees who exceeded the concessional cap and the after-tax contribution cap would be hit with the 46.5 per cent tax rate twice, according to one example from the Australian Taxation Office. Canstar research manager Chris Groth said despite the “potential tax traps”, contributing extra to superannuation was a good thing, and if members played by the rules they could save on tax. “The crucial thing is to check your

contributions now and speak to your financial planner for guidance. This applies equally to the retired and those thinking about retiring,” he said. Canstar has also undertaken research to highlight the five-star funds in each of the three account-based pension profiles according to average super balances. Account-based pensions are an important method of funding retirement living, it said. Agest Super, Amist Super, Media Super and VicSuper were among the funds named.

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

InFocus

Life: risky business Churn in the life/risk space remains a contentious issue, but as Col Fullagar explains, responsibility not only resides with advisers but also with the insurers and how they monitor activity levels in the sector.

rguably, over the past few years the risk insurance No. 1 “most clicked” has been “underinsurance”. Calls to rid us of this ‘vile spot’ have come from all quarters, and in the process it has been linked to almost as many social woes as the carbon tax. In recent times, however, its reign of supremacy has come under threat by a perennial Top 10 performer – upfront commission. More precisely, the rumoured link between it and its namesake, the 1960s dance craze “The Twist”. For the sake of clarity, the following terms will be defined in this article to mean … Upfront commission - a form of adviser remuneration where, upon completion of the application, a proportionately large amount of commission is paid, followed on subsequent policy anniversaries by much smaller amounts of commission – for example, 110 per cent, 10 per cent, 10 per cent, and so on. Twisting, or churning, as it is more recently called – is the act of an insured (under the influence of an adviser) cancelling, or allowing to lapse, an in-force insurance policy with a view to then immediately or soon after replacing it with another policy that provides equivalent or similar coverage. “Similar or equivalent” might be by virtue of the benefit amount, the type of benefits insured or the purpose of the cover being put in place. The new policy can either be with the same or a different insurer. The perceived link between upfront commission and churning is that churning, as defined, is not client-focussed, it is adviser-focussed – designed to give the adviser access to further upfront commission resulting from the cancellation of the policy occurring outside the commission responsibility period. Insurers, industry bodies and even politicians all seem to be clicking onto the topic

of churning, with opinions varying between those denying a material link through to those calling for a McCarthy style purging of upfront commission and all those associated with it.

Churning versus replacement business It is acknowledged by most that not all insurance that is cancelled and subsequently reissued falls within the definition of churning. Walking a fine but important line of differentiation to churning is what will be termed replacement business. Replacement business is the same in all respects as churning, except that cancellation and reissue is resultant on the findings of an appropriate advice process and the focus of the process is the client, rather than the adviser. Relevantly, therefore, if an action is to be categorised as either churning or replacement business, the only way to do this is to look at the areas of difference – ie, the advice process. The reasons for the valid replacement of business are many and varied, for example: • Client’s circumstances change, making current insurance inappropriate – either in its own right or in comparison to other insurance available elsewhere; • The client’s circumstances remain the same, but new types of products become available or access to existing products becomes broader; • Alternative cover at a lower cost, improved underwriting and/or improved benefits become available; • The service standard or claims management of the current insurer materially deteriorates or those of another insurer significantly improve; • Policy features and/or administrative facilities change – for example, in regards to ownership, splitting of cover, etc. In these situations, if an adviser does not

10 — Money Management July 12, 2012 www.moneymanagement.com.au

take some action the insurance would likely be cancelled and not replaced or it might remain in place on an inappropriate basis, which would not only leave the insured and adviser financially exposed but also lead to underinsurance being more ‘clicked.’ It is important that the integrity of the advice process is maintained by making a clear distinction in terminology between churning and replacement business. Notwithstanding the above, it is also the case that an element of churning exists. The challenge, of course, is to identify, measure and correct it. Particularly in regards to the latter element of correction, a number of suggestions have been made.

Churning timeframes One idea being mooted to combat churning is to link it to an apparently arbitrary time frame – ie, policies replaced with similar policies within five years are automatically deemed to be the subject of churning. To do this is to potentially cast aspersions on an adviser who is simply doing the right thing or who is caught up in one of the countless scenarios, for example: • Mrs Jones inadvertently allows her insurances to lapse; her adviser finds out and rewrites them with another insurer on slightly more favourable terms; or • Mr Smith’s insurance had been medically loaded. He changes advisers and his new adviser has ‘preferred status’ with a particular insurer. The insurance is replaced at a 7 per cent premium reduction. If the original policies had been in force for less than five years, the adviser is inequitably labelled a “churner”. On the other hand, an adviser who buys a mature book of business might get away with the wholesale churning of that book to new insurances. In today’s dynamic times, a client’s

circumstances can change overnight and it would therefore seem illogical to penalise an adviser simply because five years seemed like a good idea. It hardly seems that a sound solution will derive from elements that might appear to be arbitrary, inequitable and illogical.

Responsibility periods Another idea being mooted is to address churning by way of extending the commission responsibility period. Currently, the generally accepted norm is that commission – upfront or otherwise – is subject to a 12-month responsibility period, with various clawbacks applying. This has not always been the case. During the 1980s and early 1990s, responsibility periods were two years with 100 per cent clawback in the first year and a proportional clawback in the last 12 months. In the mid 1990s, the position changed when an insurer introduced a 12-month responsibility period and the others simply followed. No doubt, the others followed as a result of adviser pressure, but that does not mitigate the insurer’s right of free choice – it simply explains why it was not exercised. Historical lapse rates from these periods would make an interesting study. Those promoting an extended responsibility period generally suggest that this period should be standard across the industry. However, doing this would result in cross-subsidising of commission rates both at an adviser and licensee level. An adviser or licensee that actively promoted business retention such that the lapse rate of their book was lower than the industry/insurer average would be subsidising those with a higher than average lapse rate. Those with a low lapse rate may want to extend responsibility periods for longer than any mandated timeframe, notwithstanding the main objection to doing this

is the contingent commission debt beyond year one. If, however, the lapse rate of a book of business was and remained sufficiently low, it may well be possible to design a remuneration system such that there would be no clawback after 12 months. Rather than dictating the same responsibility period for all advisers, it would seem a better outcome might be achieved by enabling advisers to choose the responsibility period appropriate for their business, with certain commercial minimums applying. Perhaps, too, a better outcome could result if the focus was on what the remuneration system should look like â&#x20AC;&#x201C; ie, rewarding client-focussed activity such as: â&#x20AC;˘ The retention of business; â&#x20AC;˘ The rapid completion of business; and â&#x20AC;˘ A high completion rate of business. (See also, Money Management21 May 2009 â&#x20AC;&#x201C; â&#x20AC;&#x153;Unlocking profit-based commissionsâ&#x20AC;?.) If this was the focus, advisers would be financially rewarded for building into their systems client-focussed activities such as those above. Those who did not implement this focus would be less rewarded. If the development of sufficiently flexible remuneration systems came down to availability of insurer resources, advisers might be convinced to forgo the biannual policy tweaks so that resources could be reutilised.

Takeover terms A third suggestion being mooted is the eradication of so-called takeover terms. Money Management 9 December 2010 â&#x20AC;&#x153;Terms of tradeâ&#x20AC;? considered the subject of takeover terms in some detail. Issues associated with the practice were listed as: â&#x20AC;˘ Deterioration of portfolio experience; â&#x20AC;˘ Lack of client research; â&#x20AC;˘ Poor public perception; â&#x20AC;˘ Problems associated with time-based exclusions; â&#x20AC;˘ Claims complications; â&#x20AC;˘ Misunderstanding of and problems associated with abridge underwriting; â&#x20AC;˘ Not assisting underinsurance and growth issues; and â&#x20AC;˘ Impact on insurer expenses. The conclusion drawn was: â&#x20AC;&#x153;The challenge for advisers, licensees and insurers is to achieve the desired goals of safety, simplicity and profitability in the advice process as well as growth in the risk

insurance market â&#x20AC;&#x201C; but to do so in a way as to avoid more serious problems. â&#x20AC;&#x153;Takeover terms may not be the answer.â&#x20AC;? Irrespective of the issue of churning, the eradication of takeover terms may have merit in its own right.

Industry research If the mooted changes to upfront commission and responsibility periods are implemented, it is likely to impact on the financial position of a significant proportion of advisers; the actual proportion and extent of the impact, of course, being unknown â&#x20AC;&#x201C; which is indicative of a problem, as this is not the only aspect that is unknown. It seems that solutions are being floated, with the risk of minds being made up prior to the appropriate and necessary research being undertaken â&#x20AC;&#x201C; or maybe the research has been undertaken but just not made available. Traditional wisdom dictates that decisions should be based as much as possible on facts, for example: â&#x20AC;˘ Is churning undertaken by a small number of advisers or is it more widespread; â&#x20AC;˘ Is it more prevalent with particular licensees; â&#x20AC;˘ Is it driven by the practices of particular insurers; and â&#x20AC;˘ Are there reasons for it other than commission? Research is also important because it feeds both perception and reality, and is a most robust way to silence criticism and scepticism. Without research, the first two elements of identify and measure are, at best, difficult to satisfy. It may in fact be the case, however, that identification and measuring are unnecessary â&#x20AC;&#x201C; ironically, because the means of correction already exist.

The presence of a high rate could signal the presence of churning. If there was reasonable evidence to suggest the presence of churning, the insurer could implement remedial actions involving discussions with the licensee and the adviser, and the setting (if necessary) of targets and timeframes for correction. Corrective actions might include only accepting further new insurance business on a level commission basis or accepting upfront commission business with an extended responsibility period.

Advice documentation As part of the advice process, if current insurance is to be cancelled, a reason for this must be given and details of benefits lost must be provided. Whilst cursory reasons do little to inform the client or to protect the adviser to the extent that the reasons are robust and compelling, a clear distinction between churning and replacement business would exist. In this way, churning could be identified at a subsequent audit by the licensee. Measurement would be at the licensee level and simply require the setting up of a register system or the establishment of mandatory reporting in regards to this aspect of advice by the licensee. To correct the problem would also be a licensee responsibility, bearing in mind that churning per se is not in the clientâ&#x20AC;&#x2122;s interest and thus the prevention of it lies with the licensee. If this type of approach was taken, there would be no apparent need for insurer intervention nor would there be a need for advisers involved in the genuine replacement of business to be financially penalised or unfairly treated.

PLATFORM SNAPSHOT Top five in funds under management (as at March 2012).

$89.6bn BT Financial Group

$77.4bn $72.3bn $61.5bn $34.5bn

National Australia/ MLC Group

AMP Group Commonwealth/ Colonial Group OnePath Australia Group

Source: Plan For Life.

WHATâ&#x20AC;&#x2122;S ON YFP Investment Strategies: Battle for Supremacy 19 July, 120 Collins St, Melbourne www.finsia.com

SPAA State Technical Conference 2012 24 July, Shangri-La Hotel, Sydney members.spaa.asn.au/Core/Events/events.aspx

Insurer action

Summary

A proportion of all insurance cancelled is due to natural attrition for appropriate reasons â&#x20AC;&#x201C; for example, the need has ended or a claim has been paid â&#x20AC;&#x201C; and this proportion would be, on average, the same for all advisers. The availability of insurance data is vast and the ability to analyse it is considerable. It would seem reasonable to assume that insurers have the ability to identify those advisers for whom â&#x20AC;&#x201C; and/or those licensees for which â&#x20AC;&#x201C; the rate of insurance cancellation is materially higher than that which is assessed to arise from natural attrition.

No doubt the â&#x20AC;&#x2DC;clickingâ&#x20AC;&#x2122; will continue around the subject of churning and the various proposed solutions to it. It is hoped, however, that the focus is not simply on the perceived problem with a view to finding a possible solution, instead, the focus should also be on what the relevant components of the risk insurance advice process should look like â&#x20AC;&#x201C; get that right, and we might bury the problem of churning and do a merry dance on its grave. Col Fullagar is the principal of Integrity Resolutions Pty Ltd.

AFA National Roadshow Sydney 25 July, Doltone House, Sydney www.afa.asn.au

FSC Annual Conference 2012 1 August, Gold Coast Convention and Exhibition Centre www.fsc.org.au/events.aspx

Money Management's SMAs, ETFs and Direct Investing 7 August, Dockside, Cockle Bay, Sydney www.moneymanagement.com.au/events

...AFTER TIME. THATâ&#x20AC;&#x2122;S PERPETUALâ&#x20AC;&#x2122;S AUSTRALIAN SHARE FUND. /É&#x201E; -+ /0 'É&#x201E; )1 ./( )/.Ć&#x2021;É&#x201E;*0-É&#x201E; 3+ -$ ) É&#x201E; ,0$/$ .É&#x201E;/ ( ( & É&#x201E; /$1 É&#x201E;$)1 ./( )/É&#x201E; $.$*).É&#x201E; . É&#x201E;*)É&#x201E; É&#x201E;0)$,0 $)1 ./( )/É&#x201E;+-* ..É&#x201E;/# /É&#x201E;# .É&#x201E; )É&#x201E;/-$ É&#x201E; ) É&#x201E;+-*1 )É&#x201E;*1 -É&#x201E; '' ( -& /É&#x201E; 4 ' .É&#x201E;.$) É&#x201E;ĹłĹťĹ¸Ĺ¸Ć&#x2020;É&#x201E; # É&#x201E;.0 ..É&#x201E;*!É&#x201E;*0-É&#x201E; ++-* #É&#x201E; ) É&#x201E;. )É&#x201E;$)É&#x201E;/# É&#x201E;+ -!*-( ) É&#x201E;*!É&#x201E;/# É&#x201E; 0./- '$ )É&#x201E; # - É&#x201E; 0) Ć&#x2030; - )& É&#x201E;$)É&#x201E;/# É&#x201E;/*+É&#x201E;,0 -/$' É&#x201E;*1 -É&#x201E;ĹłĆ&#x2021;É&#x201E;Ĺ´Ć&#x2021;É&#x201E;ĹľĆ&#x2021;É&#x201E;ĹˇĆ&#x2021;É&#x201E;ĹšÉ&#x201E; ) É&#x201E;ĹłĹ˛É&#x201E;4 -.Ć&#x2020;* $.$/É&#x201E;222Ć&#x2020;+ -+ /0 'Ć&#x2020; *(Ć&#x2020; 0Ć¤ 0./- '$ ) ,0$/$ .É&#x201E;/*É&#x201E;Ĺ¨) *0/ (*- Ć&#x2021;É&#x201E;*-É&#x201E; *)/ /É&#x201E;4*0-É&#x201E; -+ /0 'É&#x201E; É&#x201E;*)É&#x201E;ĹłĹşĹ˛Ĺ˛É&#x201E;Ĺ˛Ĺ¸Ĺ´É&#x201E;ĹšĹ´ĹˇĆ&#x2020;

1 $' ' É&#x201E;*)É&#x201E;(*./É&#x201E;+' /!*-(.É&#x201E;$) '0 $)"Ć&#x2C6; Ć&#x152;É&#x201E; ." - Ć&#x152;É&#x201E; É&#x201E; 1$" /*Ć&#x152;É&#x201E; É&#x201E; *-/# Ć&#x152;É&#x201E; É&#x201E; - + Ć&#x152;É&#x201E; É&#x201E; - + Ć&#x152;É&#x201E; .$. Ć&#x152;É&#x201E; É&#x201E; $-./ - + Ć&#x152;É&#x201E; ) ).2 Ć&#x152;É&#x201E; ,0 -$ É&#x201E; - + Ć&#x152;É&#x201E; '/# * 0. Now on Colonial First State FIRSTCHOICE

units in the fund. Past performance is not indicative of future performance. *Source: Mercer Investment Performance Survey of Wholesale-Equity-Australian-All Cap ending March 2012. Quartile rankings / returns after fees. Fund ranked is the Perpetual Wholesale Australian Fund. www.moneymanagement.com.au July 12, 2012 Money Management â&#x20AC;&#x201D; 11

SMSF Weekly SPAA concerned about APRA levy burden By Mike Taylor SELF-MANAGED superannuation funds (SMSFs) stand to be disproportionately burdened by the Government’s move to include them in a $121.5 million Australian Prudential Regulation Authority (APRA) levy. That is the analysis of the SMSF Professionals’ Association (SPAA), which claims the logic behind including SMSFs in the levy collection is both “grossly inequitable” and “fundamentally flawed”. Commenting on the move last week, SPAA chief executive Andrea Slattery said there were about 470,000 SMSFs and, based on the call for such funds to pay an extra $38 million in levies to help cover the cost of SuperStream, it would equate to about $80 for each fund in the sector. “As most SMSFs have only one or two members, it would mean each member would be paying, on average, about $40 extra for the cost of the SuperStream measures,” Slattery said. She said that while most APRA-regulated funds would be able to spread the cost of any levy across thousands of members, the cost would be considerable for SMSF members. “That is hardly equitable,” Slattery said. She said that just because the average SMSF member had a higher balance than the average APRA fund member,

Andrea Slattery it did not mean the Australian Taxation Office would incur higher SuperStream costs for SMSF members versus APRA fund members. “In fact, the opposite might well be the case as APRA funds are more likely to have higher volumes of contributions and other transactions,” Slattery said.

ICAA positive on limited licensing ACCOUNTANTS will be able to provide broader, strategic, holistic advice to clients under the Government’s new limited licensing regime replacing the accountants’ exemption, according to the chief executive of the Institute of Chartered Accountants in Australia (ICAA), Lee White. Discussing the government announcement on the ICAA website, White said the limited licensing regime represented the best outcome for which the organisation could have hoped. He said that after more than two years of concerted advocacy work, consultation and a high visibility public awareness campaign, “we’re finally satisfied that the Government’s solution – a conditional AFSL [Australian financial services licence] for accountants – addresses the deficiencies of the current accountants’ exemption and enables accountants to provide a broader range of advice to assist their clients”. White said that while the new limited licensing regime would not be without its challenges, it “will enable accountants to provide broader, strategic, holistic advice to their clients”.

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Salary survey 2012

Pockets of growth Bela Moore and Andrew Tsanadis find some pockets of the financial services industry are on the hiring hunt, while others have brought their recruitment activities to a halt.

Key points z z z

z z

he financial services industry is big and complex, comprising many sectors driven by their own dynamics, often independent of broader market trends. While legislative changes, including the Future of Financial Advice and Stronger Super reforms, present many challenges for the industry as a whole, many sectors are quickly moving to seize the opportunity for growth. A classic example of this is the Government’s push for simple advice. Ever since scaled advice was first mentioned, virtually every institution with enough scale has moved into this space, with AMP and Mercer leading the charge. This, recruitment experts say, is why large institutions are still on the hunt for back-office staff as well as those who will face the clients in need – financial advisers. The life insurance sector has defied all market trends in recent years and has continued to record remarkable growth, which is also reflected in recruitment. But at the other end of the scale sit boutique licensees who have been hit hard by the legislative change, having to switch to the fee-for-service remuneration model for their advisers and dump commissions. This has made their holistic advice offering all the more expensive at a time when clients continue to focus on cost. Fund managers, too, have experienced a tough period ever since the global financial crisis. So it is safe to say the recruitment market ground to a halt for some areas of the financial services industry, while pockets of opportunity sprung up in others, according to the industry experts. Money Management’s Salary Survey 2012 found wealth management was an area of particular focus for an industry facing increased scrutiny and segmentation of advice roles. Compliance and risk specialists continued to be at the forefront of most boutique and institutional hiring efforts, while insurance flatlined but did not contract, appearing to have sidestepped much of

the impact of the global recession. Banking, superannuation and insurance sector data from SEEK's May quarterly report revealed funds management, risk consulting and underwriting advertisements were all up significantly – however, the big four and independent financial advisers were on the hunt for experienced financial planners, according to recruitment houses. At the beginning of the year, candidates asked employers for training, job flexibility and a defined career path. The industry appears to have responded with more cases of jobs tailored to the individual’s skill requirements or family/work balance. While high-level executives and the industry at large face a contracted pool of jobs, retention has become even more important to employers trying to hang on to the most talented staff in a depressed recruitment market.

Higher net ground A turbulent six months in the financial services industry created pockets of growth and slow signs of recovery for the finance employment market, according to recruitment experts. Hudson’s Employment Expectations report for 2012’s first quarter found employers – particularly in the financial services sector – would take a ‘wait and see’ approach to hiring for the second quarter. Caution drove some companies to expand little, with some areas “on hold”, according to Edmund Gill, director of Hays Corporate Accounts. Gill said sectors such as compliance and risk remained solid, but hiring had plateaued. He said although rationalisation had been the buzzword from June to December last year, the industry seemed to have a cautious handle on it. George McFerran, head of Asia-Pacific for eFinancialCareers agreed with Gill, saying hiring remained reasonably flat, although banks were still after risk and compliance people.

14 — Money Management July 12, 2012 www.moneymanagement.com.au

Slowdown in demand for high-level executive roles; Large institutions on the hunt as scaled advice comes into play; Boutique dealer groups appear to have slowed down their recruitment activities; Focus on retention of quality staff amid threats of drained talent pools; Almost two-thirds of finance professionals considered changing careers in 2012.

Salary survey 2012 Andrew Hanson, director of the finance division of Rober t Walters Sydney, said outside of the traditional end of year surge for general accounting professionals, hiring levels had been lower than last financial year, across both the institutional and boutique space. But director for Profusion Group Alison Loader said the market started to pick up because of major restructures and mergers. The Future of Financial Advice (FOFA) and a demand for scalable advice were driving an increased focus on customer experience and efficiency. Restructuring and rationalisation took a different turn two weeks ago when Perpetual announced it had trimmed board remuneration and sold out of the mortgage lending game to focus on new opportunities – one being its financial advice function through Perpetual Private Arm. The company’s increased focus on advice was one echoed in the market, with wealth management an area that grew significantly and an increasing focus among the big five and boutique advisers, Gill said. Hays banking hiring report for March 2012 said accounting firms and planning dealerships had been on the hunt for wealth management professionals, which Gill said held true for the first six months of the year. Underwriting and financial planning were areas still in short supply, according to Gill. “That is where most of our institutional and financial services clients are looking to grow and that’s right across the spectrum – from the paraplanner through to the back office support area, through to the qualified CFPs,” he said. However, Loader said they received little interest for financial planners but had indications it would pick up due to an increased demand for phone-based advice roles.

Slim pickings Gill and Loader said executive hiring had been scarce over the past 6-12 months. Gill said high level roles and responsibilities had been merged causing a marked slowdown in demand for positions above general manager. While restructures in response to legislation created new roles, internal reshuffles had trimmed the fat off the top, said Gill. A recent example is the departure of Brian Bissaker from the top job at Colonial First State, though he is not the only one. Former chief executive of Snowball Tony McDonald and general manager investments at Zurich Matthew Drennan were both made redundant following company reshuffles. “We’re seeing more consolidation of senior and executive roles because the areas of exper tise are ver y (well) defined,” he said. But while restructuring saw a number of executives pushed out in the latter half of 2011, Gill said it had slowed down in 2012. He said tighter margins and limited liquidity had created a higher level of hysteria in the media than was warranted. McFerran said executive hires had Continued on page 16 www.moneymanagement.com.au July 12, 2012 Money Management — 15

Salary survey 2012 Continued from page 15 slowed because employers had appointed a number of senior executives in 2009 and were more confident their choices would build and grow the business. Both Gill and Loader said business development management (BDM) roles were always in demand. “Even when recruitment slows down, they will always keep an eye out for someone with good BDM expertise and well-developed client lists,” Gill said. Loader said “talented, successful people (with) strong reputations in the market, who are trusted by their peers” would always be sought after.

A long way to the top Employers seem to be responding to an eCareerJobs report earlier this year that warned 62 per cent of Australian finance professionals had considered changing careers in 2012, wanting a definite career path and flexible working arrangements. McFerran and Gill said training and flexibility now came part and parcel with many job roles. Gill said entry-level general advice roles offered training and flexibility – experience always won out. “Education certainly doesn’t guarantee you any position or just because you have a certain qualification means you have a right to a position. It won’t open doors automatically,” he said. He said planners could begin with the RG145 and work their way to the top. Junior level phone and web-based advice roles were most likely to offer training and flexible working hours, said Gill. “That’s where a lot of organisations are actually assisting with people that want to do that so they bring them in at entrylevel,” he said. He said larger institutions continued to build out their scaled advice capabilities by recruiting RG146 graduates for parttime roles, giving simple advice. Hudson’s Accounting & Finance Salary and Employment Insights 2012 report said competition was still fierce for the most talented candidates, especially for senior strategic and managerial roles. It said skills shortages put pressure on candidates to do more to impress employees, with financial modelling and commercial management skills particularly sought after. McFerran said employers were offering training to address the skills shortages. This can be seen in professional development programs run by most of the large financial services institutions. The 2012 Hays Salary Guide said accountancy and finance shortages were

involved in self-managed super funds or geared structures due to a shortage of junior candidates. While major organisations offered training, support and development as lures to attract and retain new talent, boutiques were the ones providing individuals more choice in guiding their career, according to Gill. And that’s what counted said McFerran. “When it comes to retention, what people are really interested in is the opportunity for career development and having a career plan mapped out in front of them,” he said.

Alison Loader

Balanced options

up four per cent on last year, mainly for junior to mid-management roles. Hays and Hanson agreed that flexible workplaces were also an attempt by businesses to retain talented staff. Hanson said there is a marked shortage of paraplanners, particularly those

The experts say remuneration has changed little over the past six months, as employers continue to rationalise and employees demand more than just money in return for hard work. Hays’ last job market review found that 51 per cent of financial services industry employees increased salaries

from 3 to 6 per cent. But Loader said base salaries had hardly changed in the past six months. She said an initial rebalancing after the global financial crisis seems to have petered out, and in cases where salaries had increased, employers expected a lot more from chosen candidates. Loader said a tight job market meant average performance would not be tolerated. She said employers have a small pot to split which would be directed towards high achievers. “Reward for strong performance is the go,” she said. Sales jobs were the highest paid, and despite FOFA and the ban on commissions, would continue to attract higher salaries, Loader said. Although bonuses have neither risen or declined, commissions will be a major driver of salaries going forward – particularly as the big four continue to aggressively build their retail client base, according to Gill.

Table 1: Salaries: financial planning ($ ‘000)

NSW VIC QLD SA WA ACT TAS NT

Financial planner (qualified) 90 – 110 70 – 110 75 – 105 95 – 120 80 – 120 70 – 120 70 – 110 70 – 110

Financial planner (qualified – banking) 80 – 120 80 – 120 70 – 120 85 – 120 70 – 120 75 – 120 55 – 105 70 – 120

Associate financial planner 60 – 75 50 – 65 55 – 75 58 – 70 60 – 70 40 – 65 45 – 65 58 – 70

Practice development manager 120 – 180 110 – 170 120 – 170 110 – 150 110 – 155 80 – 130 85 – 95 90 – 140

Dealership manager

Paraplanner

Senior paraplanner

Client services

170 – 210 130 – 200 150 – 230 130 – 170 170 – 200 90 – 130 80 – 110 120 – 130

65 – 75 50 – 65 55 – 75 58 – 70 60 – 70 40 – 65 45 – 65 58 – 70

75 – 90 55 – 80 75 – 90 70 – 85 70 – 90 70 – 90 50 – 70 70 – 85

52 – 60 40 – 55 49 – 60 45 – 55 50 – 70 40 – 55 45 – 55 45 – 52

Source: 2012 Hays Salary Guide

Table 2: Salaries: funds management ($ ‘000) NSW VIC QLD SA WA ACT TAS NT

Administrator 50 – 60 45 – 50 45 – 55 38 – 48 45 – 50 40 – 52 33 – 45 42 – 50

Senior administrator 55 – 70 50 – 65 55 – 65 42 – 52 50 – 60 45 – 62 41 – 45 45 – 52

Manager 85 – 120 80 - 100 80 – 100 65 – 85 80 – 100 75 – 95 55 – 75 65 – 85

BDM 100 – 120 90 – 120 110 – 130 80 – 120 110 – 130 75 – 85 75 – 85 80 – 120

General manager 140 – 165 140 – 170 140 – 170 110 – 150 140 – 160 100 – 120 90 – 120 100 – 150

Source: 2012 Hays Salary Guide

Table 3: Salaries: life insurance ($ ‘000) NSW VIC QLD SA WA ACT TAS NT

Claims assessor 50 - 70 50 - 65 55 - 70 50 - 65 50 - 70 50 - 60 50 - 60 50 - 60

Source: 2012 Hays Salary Guide

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

Senior claims assessor 70 - 85 65 - 85 65 - 85 60 - 75 75 - 85 60 - 70 60 - 70 60 - 70

Underwriter 70 - 90 65 - 80 70 - 85 50 - 75 80 - 90 50 - 70 50 - 65 50 - 65

Senior underwriter 90 - 120 80 - 100 90 - 110 75 - 95 90 - 110 65 - 85 65 - 85 65 - 85

Salary survey 2012 He said insurance, underwriting and financial planners have the real choice opportunities due to skills shortages. And while business development and compliance roles attracted a higher than average pay packet, according to Hanson, on the whole it was a client-led market. “While employees are taking a second look at their roles in terms of work-life balance, opportunities for progression and entitlements, it’s not a market where people are going to receive massive pay rises to move from one job to the next,” he said. Employers have significant pressures to cut costs to make additional hires, according to Hanson. “If there’s no give in the market moving forward, there’s going to be a few challenges ahead in terms of staff retention,” he said. Employers, keen to retain the talent they have, have invested a considerable amount of time and resources into training and development in order to keep employees happy. Gill said employers and employees had

would increase salaries from 6-10 per cent.

“

I don’t think career change is driven so much by salary as it was three years ago. - Edmund Gill

Back to the Future

”

reached a level of mutual respect when it came to negotiating pay packets. Job security was good for the highly regarded but not so for others, according to Loader – although employees were used to uncertainty in the market and had become willing to move. Employers, for the most part, appear to be willing to compromise with employees and work towards a holistic pay package. “I don’t think career change is driven so much by salary as it was three years ago,” Gill said.

Edmund Gill “Now it’s much more about career opportunities, development, training and job security,” he said. The Hays report said 43 per cent of employers intended to increase salaries from 3 to 6 per cent, while 5 per cent

Table 4: Salaries: life insurance continued ($ ‘000) NSW VIC QLD SA WA ACT TAS NT

Customer service 38 - 50 45 - 50 40 - 50 40 - 50 40 - 45 37 - 42 37 - 42 37 - 42

Group life administrator 38 - 48 45 - 50 45 - 55 35 - 50 40 - 45 40 - 50 35 - 48 35 - 48

Life insurance consultant 45 - 60 50 - 60 50 - 70 45 - 55 45 - 55 50 - 70 45 - 52 45 - 52

Team leader 70 - 85 70 - 80 70 - 90 60 - 75 60 - 75 70 - 90 60 - 70 60 - 70

Manager 90 - 120 80 - 120 90 - 120 60 - 80 80 - 100 80 - 100 55 - 73 55 - 73

Team leader 65 - 85 65 - 80 65 - 80 60 - 75 60 - 80 58 - 72 42 - 50 60 - 75

Fund manager 120 - 150 100 - 140 100 - 160 100 - 125 110 - 140 90 - 110 90 - 110 90 - 120

Manager 90 - 120 80 - 120 80 - 120 80 - 120 90 - 110 65 - 90 55 - 65 80 - 95

Source: 2012 Hays Salary Guide

Table 5: Salaries: superannuation ($ ‘000) NSW VIC QLD SA WA ACT TAS NT

Administrator 45 - 55 45 - 55 45 - 55 40 - 50 45 - 55 35 - 45 33 - 45 40 - 50

Senior administrator 55 - 65 50 - 60 55 - 65 44 - 55 50 - 65 40 - 45 40 - 45 44 - 55

Source: 2012 Hays Salary Guide

Table 6: Salaries: superannuation (defined benefit) ($ ‘000) NSW VIC QLD SA WA ACT TAS NT

Fund administrator 55 - 60 45 - 55 45 - 55 38 - 48 45 - 55 38 - 50 35 - 42 38 - 48

Source: 2012 Hays Salary Guide

Senior administrator 60 - 70 55 - 65 55 - 65 45 - 55 50 - 60 48 - 52 38 - 42 42 - 52

Team leader 70 - 85 70 - 80 70 - 90 65 - 85 65 - 85 53 - 58 40 - 50 65 - 85

Administration manager 90 - 110 80 - 95 80 - 100 80 - 120 80 - 110 75 - 85 70 - 85 80 - 120

Fund manager 100 - 130 100 - 140 100 - 160 120 - 150 120 - 150 90 - 120 80 - 100 90 - 130

Hays' June quarterly report brought positive news for the industry, with 26 per cent of employers expecting to increase staff in accountancy and finance departments, and most predicted to be full-time. The market seemed to experience a recovery of sorts, after a period of immense change that also brought new opportunities. Gill said they were expecting the next six months to be the same as the past six months, with the wealth management space continuing to grow. While some areas would remain cautious, he said employers were not looking to rationalise unless something disastrous happened overseas. “I would say that we’re going to have a positive six months – my only caveat to that is if anything does happen in Europe or the US, then that will have a profound affect on us,” he said. Flexible phone-based advice roles also appeared to be gaining traction, according to Gill and Loader – no surprise, considering the focus on offering direct, affordable methods of scalable advice on the one hand and the demand for flexible employment options on the other. Loader said competition would increase for talented sales people – either BDMs or financial planners – especially planners who can position themselves and sell advice for a fee. She said the industry would continue to focus on efficiency, while McFerran also said employers would focus on rationalising one part of the business. Perpetual could be one early example. A recent eFinancialCareers roundtable found that hiring would be limited and dominated by replacement hiring and trying to keep headcounts steady for the next six months, he said. Gill said he did not expect massive future pay swings – although employers may be rewarded for good performance and having extensive client networks. While executive remuneration had been stable for the year, the recent development of a number of roles due to restructures hints at mounting upward pressures on executive pay over the next six months, according to Loader. Hanson said employers would pay a fair premium, however, he did not expect a huge increase in pay. He said employees and employers were more focused on achieving a work-life balance. “Employers will pay reasonably well for professionals with a specific regulatory background, but on the whole, it is a client-led market,” he said. MM

www.moneymanagement.com.au July 12, 2012 Money Management — 17

Opinion Property

f o e s u o H bubbles The Australian banking system has not had to cope with falling property values, unlike its counterparts in most developed nations. Have we just been lucky? Robert Keavney believes we have, and points to evidence suggesting there is a housing bubble in Australia.

he evidence suggests that residential property prices in Australian capital cities are in a bubble – and we all know how bubbles end. However, before assessing this evidence, let us consider the importance of residential property prices. Obviously, many Australians own their homes, which usually represents a large proportion of their net worth. There is also a considerable stock of residential property which is investor owned, and generally rented to tenants. However, changes in the value of residential property can have far-reaching

consequences on the whole economy, affecting even those who don’t own property. It is widely accepted that the collapse in the bubble of US and European house prices was a significant cause of the global financial crisis (GFC). The foundations of the world banking system were shaken by the extent to which banks were exposed to unrecoverable loans on property, either directly or through conduits like collateralised debt obligations. ( The second stage of the GFC is focussed on the extent to which banks have lent unrecoverable loans to governments, but that lies outside our subject.)

18 — Money Management July 12, 2012 www.moneymanagement.com.au

Australia has, to date, come through the global crisis relatively unscathed. Various explanations for this have been offered, including: • Self-congratulatory claims by politicians that they managed the economy well (which claims rest on the dubious idea that the economy is under the control of politicians); • The suggestion that our banks were better managed (though recent exposures about the extent of no and low doc subprime lending in Australia undermines this view); and • We were saved by China and the mining boom.

Insufficient attention has been given to another factor which has greatly contributed to Australia’s relatively benign experience through the global crisis: only in Australia has the bubble in the price of residential property remained unburst. Loans against residential property represent something in the order of 50 per cent of the value of the assets of our banks. The value of residential property is the most significant factor underpinning the asset quality of the Australian banking system. (Note: any references to property or real estate in this article refer specifically and solely to residential property.)

In the late 1990s, the Capital City Index (the blue line) began a steep and sustained assent, to a point far above the long-term trend line (the black line). Graph 2 shows real rolling 15-year changes in house prices. The dates at the bottom of the graph represent the start of each 15-year period – eg, the return showing above 1994 is for the 15-year period 1994-2009. The increase in real house prices over the past decade and a half is unprecedented. This is the bubble in house prices. My basis for claiming this to be a bubble is a principle I have used for many years: if it looks like a bubble, it is a bubble – failing manifest evidence to the contrary.

prices in the USA are only 16 per cent above their level of 1890. Stapleton also refers to a multi-century study of house prices in Amsterdam, which suggests that over almost 350 years there was no rising trend in real house prices in that city. These long-term studies suggest that the trend to rising real house prices through much of the developed world over the past three or four decades has been atypical. This may be a shock to the many individuals who have geared into property as a home or an investment, confident that strong growth in house prices will make their investment profitable.

prices in Sydney are nearly four times their “levelRealofhouse 1880, whereas house prices in the USA are only 16 per cent above their level of 1890. ”

Should house prices grow at all?

Almost alone among economically advanced nations, our banking system has not had to cope with falling property values. Why? We have been lucky.

The evidence Graph 1 represents an index of Australian capital city houses prices from 1880 to 2011, adjusted for inflation. Below, we explore in detail the not inconsiderable difficulties in creating a meaningful index of house prices, but for the moment, let’s assume this graph is a meaningful representation of real property prices. The data source is a thesis by Nigel Stapleton, whose work we will explore later.

It is worth exploring whether house prices should grow at all, in real terms. This may seem a silly question as property is generally classified as a growth asset, and it has produced strong real growth for the last quarter century. However, Graph 1 shows that house prices fell in real terms for more than 65 years from 1880. By contrast, over the past 65 years, house prices have consistently increased. Over the whole period, Australian housing has grown at a mere 1.1 per cent per annum. It is interesting to compare this with Graph 3, which shows the Case Shiller Index of US house prices. US property also fell for more than half a century, beginning in 1890. Strikingly, with the bubble in US housing having burst in 2007, house prices in real terms today are at approximately the same level as 1890. Over more than a century, there has been negligible real growth in property values in the USA of 0.12 per cent per annum. Over the longterm, American housing is not a growth asset in real terms. There might seem to be little difference between 0.12 per cent per annum and 1.1 per cent per annum, but over such a long period it does make a difference. Real house prices in Sydney are nearly four times their level of 1880, whereas house

Many other countries also experienced a bubble in house prices around the same time as the United States. It is well known that Spain, Ireland, and indeed much of Europe did likewise. In most of these cases the bubble has burst and prices have fallen back towards their trend line. Australian property also grew strongly during this period, but prices have not since fallen materially. Is our market different? Or are we due for a fall?

Australian data In this article, all Australian housing data up to 2007 is drawn from the Capital Cities Index presented in “Long Term Housing Prices in Australia and Some Economic Principles”, by Nigel Stapleton. Since 2007, the Australian Bureau of Statistics data has been used – adjusted to be consistent with Stapleton’s data. Annual data is to 30 June of each year. It must be noted that the Capital Cities Index is, in fact, a Sydney/Melbourne index. This needs to be remembered in considering how the comments in this article apply to other cities. There are long-term indices for most equity markets of the world, but most

Continued on page 20

Graph 1: Real median capital city prices 250

200

150

100

1880 1884 1888 1892 1896 1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

This principle is as an antidote to the ‘this time it’s different’ claims, which emerge in ever y asset bubble. As a current example of these claims, there are those who argue that the current level of property prices is justified by Australia’s alleged “housing shortage”. The average number of persons per house is currently lower than at almost any period in our history – that is, the number of properties per person is unprecedentedly high. It escapes me how this can be reconciled with a view that there is a housing shortage.

property data collection began in the 1970s or 1980s – yet longer term data is essential to form a complete view of a market. Stapleton makes an attempt to create an index for housing back to 1880, but explores in considerable detail the difficulties in this. These include: • Depreciation – any building owned in 1880 would have depreciated materially. In fact, every piece of timber and every nail in the property would have worn or rusted away. If the house still stood, it must have had ongoing funds spent on it merely to maintain its condition. Depreciation reduces the average value of properties. Thus, an estimate of the rate of depreciation needs to be allowed for in calculating the rate of growth of property; • Changes in quality – according to the 1861 Victorian census, the average house had 2.8 rooms. It would not have had electricity, sewerage or running water – never mind air conditioning or broadband. The average house today is far larger, with many more services. If we were to compare median house prices in 1861 with median house prices today, it would be far from a like-for-like comparison. Some of the difference in median prices would reflect changes in the quality of properties. This needs to be allowed for in calculating the historical growth rate for property; • Capital spending – large sums are spent each year on renovations and extensions to the stock of existing properties, which increases the value of properties. The cost of these needs also to be allowed for in calculating the return on property. • Geographic changes – capital cities are expanding. New areas are being opened up. In Sydney, for example, the population centre of the city is moving steadily westward. In comparing median house prices at different periods of time, an adjustment needs to be made to reflect the fact that we are not comparing likefor-like – ie, the stock of houses at different times is spread over different areas. These factors make it very difficult to create a meaningful index of median property prices. Stapleton made estimates of the impact of each of these factors, which he applied to the raw price data in

Source: Stapleton, ABS

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

Opinion Property (constant quality, real)quality, real) Graph 2: Rolling 15-year Capital Return (constant 0.06 0.05 0.04 0.03 0.02 0.01

“

The widespread expectations that residential property generates real long-term growth would be disappointed.

”

-0.01 -0.02 -0.03

order to determine the rate of capital return achieved by property owners. He concluded that the net effect of the above factors was 0.6 per cent per annum. Thus, if median property prices grew by 2 per cent in a given year, he calculated that 1.4 per cent of this was capital profit and that 0.6 per cent reflected the net effect of depreciation, changes in the average quality of properties, the cost of renovation and extensions and changes in geographic sample. It is impossible to know how realist i c t h i s a d j u s t m e n t i s, t h o u g h h i s method seems as reasonable as any other which could be determined. It must be understood that all Australian data referred to in this article is in real terms, and after allowing for this 0.6 per cent per annum adjustment.

Historical perspective Graph 1 shows a sharp jump in prices in 1950. This followed a period of price control. As a war measure, rents were fixed in 1939 and house values were fixed in 1942. This interference with the market led to predictable distortions. Stapleton reports that “price controls were circumvented in a number of ways. Firstly, low prices for houses were offset by excessive payments for furniture … When this loophole was closed, the market switched to vendors requiring ‘key money’”. As inflation was considerable through the 1940s, price controls forced a real loss on home owners. Once price controls were removed, values quickly rose to more realistic levels. These events explain the dip in prices in the late 1940s, followed by an explosive rise. The period from 1880 to today fits the old football cliché of a game in two halves. From 1880 to 1949, prices fell in real terms. As we have discussed, the last decade of this period was subject to the distortion of price controls. However, excluding this decade, prices to the end of 1930s were still down compared to the previous century. Since 1950, prices have risen – especially over the past 15 years. Prima facie, it seems reasonable that over the long-term property prices should grow broadly in line with inflation – ie, nil real growth. One would expect rents to

grow broadly in line with inflation, so failing any structural shift in rental yields, values should do more or less likewise. As it happens, the strong real growth in recent times has been accompanied by a fall in rental yields. Clearly, the trend for prices to rise more than rents cannot be sustained indefinitely. Many commentators assess the relative value of the housing market as a multiple of average family incomes. Stapleton found no sustained relationship between property prices and wages. From 1955 to 2011, mean house prices on average were more than twice as expensive – as a multiple of average income – compared to the 1901 to 1955 period. In fact, in 2011 median prices were more than four times the 1901-55 average. Many factors could have contributed to the sustained trend to property selling at higher multiples of average income, including the increase in double income families. Conversely, there are fewer people living in each dwelling than in earlier periods, which suggests more single income families through divorce, later marriage, etc. Although Stapleton found no sustained relationship between income and property prices, the current level of four times average income is further prima facie evidence of a bubble.

Worse than America With hindsight, everyone realises that American housing was hugely overblown in 2007. How does our bubble compare with that in the US pre the GFC? Graph 4 compares American property with Australia since 1980, and suggests that we may be far more overvalued than the USA at its peak. One must offer qualifications to a graph like this: Case Shiller uses different methodology to Stapleton; selecting 1980 as a start date is random, etc. Nonetheless, only those with their heads most firmly buried in the sand could fail to feel some degree of caution at the extent to which the boom in domestic residential property seems to have exceeded that in the USA, at its worst.

Conclusion History suggests that, locally and internationally, residential property produces little real long-term growth. However, during the 1990s and the early part of this century, property prices grew strongly in many parts of the developed world. In

20 — Money Management July 12, 2012 www.moneymanagement.com.au

Source: Stapleton, ABS

Graph 3: Real US Home Price Index Graph 3: Real US Home Price Index (Case Shiller) (Case Shiller) 250

200

150

100

0 1890

1910

1930

1950

1970

1990

2010

Source: S&P/Case Shiller Home Price Indices

4: Realversus Australian Versus Graph 4:Graph Real Australian US housing

US Housing

300 250

Australia

200

USA

150 100 50 0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Continued from page 19

18 80 18 86 18 92 18 98 19 04 19 10 19 16 19 22 19 28 19 34 19 40 19 46 19 52 19 58 19 64 19 70 19 76 19 82 19 88 19 94

-0.04

Source: Stapleton, ABS

many countries this resulted in a bubble, which has since burst. However, prices remain elevated in Australia. It is seems reasonable to expect that the market in Australia will normalise. This could take the form of a fall in property values, or under a more optimistic scenario, prices could cease to grow from here for an extended period. Under either of these possibilities, the widespread expectations that residential property generates real long-term growth would be disappointed. Under a worst-case scenario, bank balance sheets could be threatened by

losses on their loan portfolio, which could contribute to a weakening of the economy. As it happens, prices have reduced slightly in several Australian cities over the past year. It is not yet clear whether this is the beginning of a marked decline – only time will tell. One can often identify bubbles with a high degree of confidence – but this provides no guarantee that they won’t inflate further before their ultimate popping. Robert Keavney commentator.

industry

Commodities Hungry world offers food for thought Skye Macpherson argues that rising living standards in the emerging world are leading to higher food demand.

Since 2007, the pricing environment for soft commodities has changed. Prices have moved to a higher level which has created the incentive for private companies to invest in agriculture.

Why have soft commodities prices risen? After several decades of soft commodity prices moving largely sideways, 2007 saw a significant rally. Despite significant volatility in soft commodity prices since then due to financial market turmoil, it might surprise people that many soft commodity prices remain at least twice the 10-year historic average price. The reason that prices rallied and have stayed at these higher levels is because of inventories. Globally we have been consuming more than the world has been able to produce in eight out of the last 12 years (despite producing some of the largest grain crops on record over the past seven years).

urmoil in global financial markets has dominated headlines and investor sentiment since early 2008. Quietly in the background there have been some significant shifts occurring in our global population and the food self-sufficiency of China; both stand to have a resounding impact on agriculture. The first development was China’s demand for soft commodities growing beyond the country’s ability to produce them. This resulted in China becoming an active participant in world trade of basic foods like corn, wheat and pork. The second development saw the number of people living in urban centres shifting to more than 50 per cent of the world’s population. The urbanisation occurring in emerging economies has resulted in people shifting to cities for work, and buying rather than growing their food. The United Nations forecast that around 70 million people would urbanise on an annual basis out to 2050. With higher incomes off a low base, these people cannot only afford to consume more food, but also consume grain-intensive protein. The key driver of agricultural commodity demand going forward is the growing wealth in developing economies as urbanisation continues.

Have we reached an inflection point for global agriculture? In September 2009, the Food and Agriculture Organisation (FAO) produced a report titled ‘How to Feed the World in 2050’, a summary of the key findings following a three-day Meeting of Experts. They used the UN population forecasts of 9.1 billion people in 2050 (a 34 per cent increase from today) and the UN urbanisation forecasts of 70 per cent of the world’s population living in urban areas in 2050 (compared to just over 50 per cent today) in their assumptions. Their key finding was that in order to feed this larger and wealthier global population, global food production needs to grow by 70 per cent from 2009 levels. In order to achieve this, roughly US$83 billion is required to be invested on an annual basis into research and development, infra-

in global soft commodities. Food security is important to the Chinese government to ensure that food remains plentiful and affordable to maintain social harmony. In recent years, China’s self-sufficiency has seemingly come to an end. China has become an importer of soy, corn, wheat, pork and milk powder. Each year the number of tonnes imported increases. The amount imported relative to domestic consumption is quite small, but relative to the global trade of these commodities, it is meaningful. For example, China currently accounts for 60 per cent of the seaborne soy trade. Chinese buying has also been opportunistic, preferring to buy on pricing dips. As a result, Chinese behaviour has been providing a level of support to many soft commodity prices. This also helps explain why prices have remained much higher than their historical averages. These higher prices directly benefit farmer incomes. Despite input costs also rising, many farmers around the world are making historically high margins. This means two things for the industry. Firstly, farmers are highly incentivised to maximise their yield per acre and expand production where possible. It also means they have the balance sheet to invest in their business in order to apply the optimal amount of fertilizer, buy the best quality seeds, upgrade their equipment, and expand their business by buying nearby properties to achieve greater economies of scale. In such a buoyant rural environment, many parts of the agricultural value chain (input providers, farmers, handlers/traders) are generating decent margins and profits. While higher crop prices are incentivising farmers to maximise their yields, generally the increase in global acreage has been quite marginal in recent years. While developed markets like the US have limited additional land available for cropping, developing markets still lack the appropriate infrastructure to tap new areas. Simply put, the improvement in grain prices to date is not enough to justify the incremental costs from producing and transporting crops from more remote areas. The farmer must be certain that these higher prices are sustainable, given the investment required to establish new farmland and time required to optimise the yield.

Agriculture is a volume-driven secular story structure, environmental services and sustainable resource management. Improving productivity is one of the most effective ways we can improve agricultural output, given our limited land and water resource base. The FAO estimates roughly 80 per cent of the growth in output can be achieved through higher yields and more intensive cropping. However, this requires investment to reverse the actual trend of declining yield improvement. In 1960, yield gains achieved in cereals were 3.2 per cent compared to 1.5 per cent in 2000. An environment of falling real grain prices did not encourage investment in agriculture.

This has left global grain inventories, relative to global consumption, at historically low levels. When inventories fall to these critical levels, prices tend to move higher in order to encourage new marginal production. Interestingly, if you go back to the early 2000s and study why hard commodities like copper, nickel, coal and iron ore prices rallied and the final pricing outcome, the story is remarkably similar. The prices of hard commodities rose due to low inventories and increased to the point that would incentivise mining companies to invest and grow their production. China is becoming an important player

Few can argue against the need to increase agricultural output in the future to meet growing demand. The question for investors is how to get exposure to this growth. The most liquid way is via agricultural equities. Further, given the inherent risks of investing in agriculture (namely weather), being diversified by geography, by commodity, and by sector (fertilizer, farming, agricultural equipment and traders) helps to minimise volatility. Skye Macpherson is a portfolio manager, global resources at Colonial First State Global Asset Management.

www.moneymanagement.com.au July 12, 2012 Money Management — 21

Bonds Why the Yankee bonds are doing dandy Dr Stephen Nash argues that inflation-linked bonds offer more than protection from inflation.

lobal government stimulus aimed at increasing growth and inflation in the economy is leading to fear about the possibility of a spike in inflation. In recent times the Reserve Bank of Australia has kept inflation within its target 2-3 per cent band, but some of you will remember the runaway ‘70s where annual inflation rose to over 17 per cent. What happens to investors’ portfolios if this occurs again? How do they mitigate against this risk? The only direct hedge against inflation is inflation-linked bonds (ILBs). These bonds are tied to the Consumer Price

Index (CPI) and their capital value grows with inflation, so that over time the capital value increases. They are issued by the Commonwealth Government, some of the Australian State Governments and corporations. While it is true equities and property may, to some extent, hedge against inflation, there is no certainty. Equally, we’d expect floating rate notes, whose coupon payment is tied to the bank bill swap rate (BBSW), to offset inflation through changes to the BBSW; but there’s no guarantee it would mirror a steep rise in inflation, or situations where the BBSW is set significantly under inflation. Investors at or near retirement should

US rates

Graph 1 US rates

have an allocation to this very special security to give them peace of mind in terms of maintaining purchasing power when they’re no longer working. The US experience, as outlined below, highlights the effectiveness of a high known real yield (over and above inflation) in a lowgrowth scenario.

US experience “When the going gets tough, the tough get going”, as the saying goes. In the US, things are tough (see Graph 1), and this is reflected in the almost unbelievably low yields on US Treasuries, both nominal and ILB. While the fixed-rate

Graph 2 US real rates

8.00

US real rates

8.00

7.00

6.00 Yield less inflation

6.00 5.00 Yield

nominal bond rate is low, the ILB rate is negative. When secondary market yields are negative the bond typically still pays a positive coupon, as defined at the time of issue; however, investors receive a yield that is lower than the CPI. Hence, if the CPI is 2 per cent, and the secondary market yield is negative 50 basis points, then the investor effectively receives 2 per cent less 50 basis points, or 1.5 per cent. Graph 1 shows the following: • Investing in short-dated investments has led to low returns and uncertain future returns • Long-dated nominal investments appear to offer the highest yield, yet this is

4.00 3.00 2.00 1.00 -

4.00 2.00 -2.00 -4.00

-1.00

1/ /0

/0 31

08 31

07 31

06 31

1/ /0

/0 31

02 31

01 31

00 31

99 31

97 /0

1/ 31

/0 31

1 31 /97 /0 1 31 /98 /0 1 31 /99 /0 1 31 /00 /0 1 31 /01 /0 1 31 /02 /0 1 31 /03 /0 1/ 31 04 /0 1 31 /05 /0 1 31 /06 /0 1 31 /07 /0 1 31 /08 /0 1 31 /09 /0 1 31 /10 /0 1 31 /11 /0 1/ 12

-6.00

-2.00

Date

Date US gov. 10 yr ILB

Fed Funds

US. gov. 10 yr nominal

Source: FIIG,RBA, Bloomberg

22 — Money Management July 12, 2012 www.moneymanagement.com.au

Source: FIIG,RBA, Bloomberg

US. gov. 10 yr nominal

only around 2 per cent However, investors need to consider inflation, and Graph 2 shows the performance of floating investments (Fed Funds) and the fixed-rate nominal bond, relative to inflation. In other words, the US gives us some insight as to what happens in a low-growth, moderate-inflation environment. Not that Australia is destined to replicate the US experience. Yet to ignore the experience in the largest, most developed bond market is at your own peril. Now, looking at what the ILB return is, when inflation is accounted for, you can see that the picture is much more supportive of the ILB, as Graph 3 shows.

While the Australian experience will remain distinct from the US, we should heed the lessons that emanate from the deepest and most liquid market in the world. If growth is low, and inflation remains moderate, then nominal bonds and floating rate notes will fail to deliver acceptable outcomes. However, if an adequate interest spread is earned, as

8.00 7.00 Yield/ Annual return

12.00 10.00 8.00 6.00 4.00 2.00 -2.00

Date US gov. ILB+inflation+4.50%

US gov. ILB+inflation

Source: FIIG,RBA, Bloomberg

CGL and Liabilities semi ILB(CGLs) and semi-ILBs Graph 5 Commonwealth Government 4.25% 3.75%

3.25% 2.75% 2.25% 1.75% 1.25% 0.75% 0.25%

Date

NSW 35 ILB

6.00 5.00 4.00 3.00 2.00 1.00 -1.00

CGL 20 ILB

QTC 30 ILB

NSW 20

Source: FIIG,RBA, Bloomberg

ILB spread CGL Graph 6 Envestra 2025 and Sydney Airport to 2030 ILB spread to CGLs ILB yield spread to CGL 2020 ILB

9.00

4.95% 4.75% 4.55% 4.35% 4.15% 3.95%

3.75% 3.55% 3.35%

Source: FIIG,RBA, Bloomberg

Fed Funds

11 31

10 1/

/0 31

Date US. gov. 10 yr nominal

07 31

06 31

1/ /0 31

/0 31

1/ /0 31

02 31

01 /0 31

/0 31

US gov. 10 yr ILB

1/ 31

98 1/

/0 31

-2.00 /0

14.00

Conclusion

Graph 3 US rates and return on US ILBs

Dr Stephen Nash is the director for strategy and market development at FIIG.

and a theoretical corporate ILB at 4.50% above government Graph 4 US rates and return on US ILBs and a theoretical corporate ILB at 4.50% above government

Yield/ Annual return

While government yields have also fallen dramatically, just like the US, as Graph 5 shows, there are still opportunities in the semi-government ILB market (remember all yields in Graph 5 are quoted over and above inflation). The Queensland Treasury Corporation 2030 ILB is offering a yield of inflation plus 2.25 per cent, equivalent to 4.75 per cent based on inflation of 2.5 per cent. The rush for government debt has provided some outstanding corporate ILB opportunities for investors. Graph 6 shows the Envestra corporate ILB return, and the Sydney Airport 2030 corporate ILB return, over and above the Commonwealth Government ILB return. Importantly, the spread over Government protects the investor from shocks that may occur in the future. Earning a good spread, when the investor is in a senior position in the capital structure in solid investment credit, is one of the key takeaways from the US. If 4-5 per cent remains an attractive real return, as it has for many years, then corporate ILBs represent an excellent opportunity. Even if inflation falls to zero, the investor earns the spread above inflation, which is in the 4 per cent to 5 per cent range.

Australian Commonwealth Government ILBs, value is left in the semi-government ILBs, and especially the corporate ILBs. Specifically, the Envestra 2025 ILB and the Sydney Airport 2030 ILB, remain my favourite ILBs at this time. Note: All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.

31 /0 1/ 9 31 7 /0 1/ 9 31 8 /0 1/ 9 31 9 /0 1/ 0 31 0 /0 1/ 0 31 1 /0 1/ 0 31 2 /0 1/ 0 31 3 /0 1/ 0 31 4 /0 1/ 0 31 5 /0 1/ 0 31 6 /0 1/ 0 31 7 /0 1/ 0 31 8 /0 1/ 0 31 9 /0 1/ 1 31 0 /0 1/ 31 11 /0 1/ 12

Australian ILBs – value is still apparent

is the case in Australia, then investment outcomes are improved dramatically. Global uncertainty and volatility mean investors need to consider risk in much more detail compared to the ‘old days’, when being fully invested in equities was the standard and there were few alternatives. Today, the investment landscape is more challenging, and the need to be more cognisant of risk is widely accepted when compared to prior periods. While the market has competed away returns in US Treasury yields, and

ILB yield

Graph 3 shows that government ILBs still deliver adequate returns when inflation remains moderate in a low-growth environment. Recent experience suggests that ILBs have outperformed nominal bonds, although the critical point remains what interest rate spread, above Government, investors receive. Here, we can estimate what a US investor might receive if they obtained the same spread above Government that they receive in Australia – roughly 4.5 per cent above the government, or more – using the blue line in Graph 4. Even in the case of the US, where rates are very low, the sample corporate ILB still shows value and the achievement of reasonable returns. However, to answer this in more detail, we now turn to the Australian experience.

Date US gov. ILB+inflation

Envestra 25 ILB spread to CGL

Sydney Airport 2030 ILB spread to CGL

Source: FIIG,RBA, Bloomberg

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

Toolbox

Bonds. Investment bonds Julie Steed focuses on the advantages of investment bonds for high net worth clients.

hilst they might not be quite as suave as 007, investment bonds have matured into sophisticated products that advisers are increasingly turning to for their clients’ wealth accumulation needs. Investment bonds offer a comprehensive range of investment options to address a number of strategy solutions including: • Investing for a child’s education or house deposit; • Tax-effective investing for low-income earners; • Reducing assessable income for income test purposes (eg, Commonwealth Seniors Health card); • Cost-effective gearing using the loanback facility; • Reducing aged care fees; • Pre-emptive intergenerational wealth transfer; and • Estate planning.

An investment bond provides a tax structure that is a valid alternative to superannuation for high-income earners with surplus after-tax income who have reached their concessional contribution cap and wish to retain access to their monies. Earnings in an investment bond are charged at the maximum tax rate of 30 per cent on investment earnings – a valuable strategy for clients who are looking to manage their assessable income from non-employment sources (eg, investment income). It also provides an additional opportunity for clients with annual income greater than $300,000 who will pay additional tax on their super contributions

from 1 July 2012. This will increase the tax rate on concessional superannuation contributions to 30 per cent.

Key benefits of investment bonds When educating clients on the value of investment bonds, advisers can point to a number of key advantages over other structures and investment products including: • Tax effectiveness – In addition to the lower tax rate generally, after 10 years there is no personal income tax liability on withdrawals. If withdrawals are made within 10 years tax may be payable; however a 30 per cent tax rebate applies. • No capital gains – If clients switch

between investment options within the investment bond, no personal income capital gains tax is incurred. • Less work at tax time – There is no impact on a client’s tax return as there is no need to include any information (such as income or capital gains) in their personal tax return (unless they make a withdrawal inside of the 10-year period). • Accessibility – Unlike superannuation, there are no conditions when making a withdrawal; funds can be accessed at any time. • Capacity to borrow – Clients can access an internal loan facility which allows them to borrow for investment purposes. Unlike super, the balance of an investment bond

Formula Amount withdrawn Surrender value of the policy immediately prior to withdrawal

24 — Money Management July 12, 2012 www.moneymanagement.com.au

[(

Surrender value of the policy immediately prior to withdrawal

)(

Any earlier amounts paid out under the policy

–

Total gross amounts invested to date of withdrawal

Previous amounts included in assessable income

)]

over the income limit and their concessional contributions being subject to the 30 per cent tax rate. Investing into the bond ensures the investment income is taxed within the bond and this will not affect a client’s personal annual income. The ability to use the amount in the bond as security to undertake a gearing strategy further enhances the investment bond as a complementary wealth accumulation strategy to superannuation.

Tax-effective wealth accumulation: especially for high-income earners The 30 per cent tax rate on investment earnings may be further reduced by franking credits and tax offsets, as well as other tax deductions from underlying investments. A bond can be withdrawn with no personal income tax liability after a 10year period, but withdrawals before this time can create a personal tax liability. If the bond is withdrawn before 10 years, any growth is assessable, depending upon when the withdrawal is made, as shown in Table 1. In addition, a tax rebate of 30 per cent applies to the assessable amount. Calculation of the assessable amount is determined by the formula on page 24.

Overcoming the myth: Paul’s withdrawals within 10 years Investment bonds are regularly dismissed as ineffective for clients who may wish to withdraw monies within the 10-year tax window; however, this is often not so. Consider the example of 45-year-old Paul who earns $350,000 per annum and contributes $25,000 in concessional contributions to super. • Paul invests in an investment bond and makes annual contributions of $5,000 • After five years his bond has a value of $31,200 • Paul wishes to withdraw $10,000 in year five • No previous withdrawals have been made • Paul is on the top marginal tax rate of 45 per cent plus Medicare levy.

can be used as security for a loan. • Estate planning – Clients can nominate beneficiaries and upon the client’s death, the proceeds are paid tax-free to the beneficiaries. Unlike super, there are no restrictions on who can receive the taxfree proceeds. Benefits are also paid directly to beneficiaries, outside of the estate. • Flexible ownership structure – Investment bonds can be owned by individuals,

Table 1 Timeframe received Less than 9 years In year 9 In year 10

Assessable amount 100% 2/3rds 1/3rd

Table 2 Assessable amount Gross tax payable Tax offset Tax to be paid by investor

= = = =

$1,987 $924 ($1,987 at 46.5%) $596 ($1,987 at 30%) $328 ($924 - $596)

joint owners, companies or trusts. Ownership can generally be transferred to another person, organisation or into joint names without incurring additional fees, stamp duty, personal income tax or capital gains tax. The start date of the 10-year tax period also remains unchanged. • Regular savings plan – Every year, up to 125 per cent of the previous year’s contributions can be added to the bond without restarting the 10-year investment period for tax purposes. Contributions can be made by periodic payments or by lump sum.

Superannuation for clients earning over $300,000 Due to the Government’s announcement in the 2012 Federal Budget, high-income earning clients could consider investing in an investment bond to avoid increasing their annual income above the income limit. This is based on the client’s investment income pushing their total income

Calculate the assessable amount: = A/B x [(B+C) – (D+E)] = ($10,000/$31,200) x [($31,200+0) – ($25,000+0)] (See Table 2). By directing investable funds to the investment bond, Paul has access to his funds and is only paying 16.5 per cent on the assessable portion. In this example, his tax rate is 3.28 per cent of the withdrawn amount.

CPD Quiz This activity has been preaccredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. Readers are invited to submit their answers online: www.moneymanagement.com.au

1. How is the 30 per cent maximum tax rate of an insurance bond reduced? a) By deductible expenses of the investment options b) As a result of franking credits and tax offsets from the underlying investments c) As a result of franking credits by investing into Australian shares and tax offsets as well as other tax deductions from the underlying investments d) None of the above 2. Withdrawals can be made: a) At any time b) Any time after 10 years from commencement c) Any time after reaching preservation age d) None of the above 3. For taxation purposes, withdrawals from an insurance bond are tax-free to the investor: a) After 6 years from commencing the policy b) After the 10th year from commencing the policy c) At any time after reaching preservation age d) Are always tax-free with no personal income tax implications 4. True or false: The investment income earned within an investment bond is taxed in the hands of the investor?

Conclusion For many years, superannuation has been promoted as the most viable wealth accumulation tool. However, advisers are rediscovering that investment bonds can co-exist with superannuation as a complementary tax-effective wealth accumulation tool, particularly for high net worth clients. Additionally, their flexibility can provide a strategy to assist at every stage of a client’s life. Julie Steed is the technical services manager at IOOF Holdings.

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

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out an intellectual property hub in Singapore”, he added.

Move of the week FOLLOWING the recent expansion of adviser relationship roles, Count Financial recently appointed Judy Clark as senior executive responsible for practice development. Joining Count in April, she said she would be focussing on support and coaching for newly-acquired Count practices. Count recently reorganised its business development team to a region-based support structure, allowing a larger number of business development managers to meet with more members and assist them with their practice management and growth, she said.

CRAIG Jameson has been appointed director, business operations of AMP SMSF.

Andrew Hamilton As the former managing director of ANZ’s SMSF specialist business unit Super Concepts, Jameson will be responsible for setting up AMP SMSF’s business

Judy Clark

operations, including implementing its business architecture and overall strategy. He joins former Cavendish Group managing director Andrew Hamilton on the AMP SMSF senior management team, reporting to AMP SMSF managing director Paul Sainsbury. Prior to his tenure with Super Concepts, Jameson was ING Australia’s head of strategy and transformation, customer solutions.

Mercer Investment Consulting has appointed five new staff to its specialist business unit Sentinel. Former Russell Investments staffer Sally Corbett will lead Sentinel’s transition management services and will be joined by Robert Dixon.

Christopher St. Amand will be responsible for operational risk assessments, while George Takesian will be heavily involved with transactional ser vices, including foreign exchange benchmarking and fee reviews. Ashika Narayan has joined the custody and unit pricing team in Sydney. In addition to the expansion of Sentinel, Jacki Chorazy has been appointed to Mercer’s Sydney-based team. Robin Solomon, leader of Mercer Sentinel in the AsiaPacific, said the restructuring and new appointments had been necessar y in order to effectively run the new areas of specialisation at Mercer. Mercer Sentinel has plans to add further staff to Asia to “build

Opportunities FINANCIAL CONTROLLER Location: Adelaide Company: Terrington Consulting Description: An opportunity has become available to manage the overall management accounting function of a business. Your key responsibilities will include providing financial business advice and support to staff and management; prepare divisional profit and loss performance reports; assist in formulating budgetary and account policies; and establishing and monitoring the implementation and maintenance of accounting control procedures. It is essential that you be CPA/CA qualified and skilled in the use of spreadsheet software. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Victor at Terrington Consulting – 0499 771 827, www.terringtonconsulting.com.au

MORTGAGE BROKER Location: Adelaide Company: Terrington Consulting Description: A leading finance broking firm is seeking a mortgage broker or banking professional with mortgage financing experience.

Specialist insurance provider Beazley has appointed two senior staffers as it continues to grow its Australian presence. Helping to drive the strategic direction of Beazley Australia, Dharmesh Patel has been appointed head of finance (AsiaPacific) and Sydney branch manager. For four years he worked in Beazley’s London office in a number of finance roles and previously worked for insurers including Aviva, Liberty and Promina. Responsible for the strategic management of the claims team, Set Samimi has been appointed claims manager for Australia. Prior to joining Beazley, he held roles at QBE insurance and was most recently DP World Australia’s national workers compensation manager.

Australian Financial Services Group (AFS) has appointed Danielle Nugent as regional manager for V ictor ia and Tasmania. She joins AFS from coaching firm Strategic Thought Consultancy.

AFS acting chief executive Phil Burke said Nugent’s appointment would “build on the depth of the AFS group’s planner facing infrastructure and resources”. Burke has been acting chief executive since the departure of former chief executive and managing director Peter Daly in May.

The board of the Financial Planning Association (FPA) has extended the term of chairman Matthew Rowe to November 2014.

Matthew Rowe Rowe said he decided to extend his term as the association continues its work to raise the professional bar on behalf of FPA members and the public. “Much has been achieved to date, but I agree with Matthew that there is plenty left to do,” FPA chief executive Mark Rantall said.

For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs In this role, you will conduct interviews with prospective customers, manage bank relationships and liaise with internal stakeholders, specifically financial planners. A holistic suite of banking products and services will be available to the successful candidate to ensure a competitive product offering. It is essential that the candidate have extensive experience in mortgage broking or residential/business lending within the banking industry. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact George at Terrington Consulting – 0499 118 147, www.terringtonconsulting.com.au

RELATIONSHIP MANAGER Location: Western Australia Company: Terrington Consulting Description: An Australian-owned bank with plans to expand its business across regional Australia is seeking a senior relationship manager to join its Geraldton team. The role is well suited to an agribusiness or commercial banker who is capable of building a network of referrals. In addition, you may be required to manage an assistant and encourage the drive and flow of business propositions

from existing retail networks. On a day-to-day basis, the relationship manager will be responsible for providing tailored solutions to existing and prospective agribusiness customers. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Emily at Terrington Consulting – 0499 771 742, www.terringtonconsulting.com.au

COMPLIANCE AND TECHNICAL MANAGER Location: Sydney Company: Patron Financial Advice Description: A financial services firm is seeking a compliance and technical specialist to join its Sydney team. Joining two other senior recruits, the successful candidate will work closely with the general manager to manage the AFSL and advice compliance and risk mitigation. You will also be required to review various investment offerings, manage the APL and model portfolio, and coordinate the investment review committee. It is essential that you have had a successful track record with a life company, fund manager or AFSL in a compliance manager, adviser, risk or audit office capacity. Advanced DFS is also an essential requirement.

Knowledge of financial planning software, research houses and a broad knowledge of fund and investment products will be a distinct advantage. To find out more and to apply, visit www.moneymanagement.com.au/jobs

JUNIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial planning firm is seeking a junior paraplanner. In this role you will assist in preparing/amending documentation for statements of advice, build and maintain client relationships, and maintain compliance procedures. Experience in a financial planning is essential, and ideally, the successful candidate will have spent at least 2 years in a client services role in which you have begun to undertake some junior paraplanning duties. You will also have a basic understanding of the elements required to develop a basic financial plan around risk and/or transition to retirement. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0499 771 629, www.terringtonconsulting.com.au

www.moneymanagement.com.au July 12, 2012 Money Management — 27

Outsider

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

“

Attention SuperSeeking Minister caught short OUTSIDER was bemused to hear the Minister for Financial Services and Superannuation, the Hon. Bill Shorten, questioned at a recent Lost Super initiative launched by Westpac at the Overseas Passenger Terminal. Westpac Group head of superannuation Melanie Evans and the Honourable Bill Shorten announced last Wednesday new research conducted by Westpac that found younger Australians are more likely to lose their super. After the formal proceedings, the media gathered to question the Minister, presumably on the Government’s recent work to improve the SuperSeeker website, a government site for

Out of context

locating lost super. Your ever-faithful repor ter Outsider, keen for some more super information, joined the throng of young, hipster media-types gathered around the Minister. But the concept of lost super seemed lost on the media. “What do you think about politicians’ remuneration?” they asked, rather ironically.

“I’ve been in this business since the early ’90s and things were pretty grim back then.”

Bike pants and a good dose of

Friends couldn’t take away the pain of the ’90s for Altius portfolio manager Chris Dickman.

“I would call it green at the moment with amber highlights … don’t think about that as a hair colour.”

Chief executive of REST Super Damien Hill is not headed to the hairdresser, he’s explaining the superannuation funds’ progress with Stronger Super legislation.

When the going gets tough, that’s tough, buy Prada TIMES may be tough in the financial services industry, but Outsider reckons that these challenging times are not always being reflected in the working conditions being endured by bankers, fund managers and the like. Indeed, Outsider wishes to doff his cap to the chaps at J.P. Morgan who have recently moved into new digs above the extensively renovated Westfield Centre at 85 Castlereagh Street in the Sydney CBD. Outsider found himself attending the J.P. Morgan offices late on a Tuesday and noted that staffers had to negotiate a number of obstacles before gaining entry, not least some very up-market designer retail outlets including Prada and Ermenegildo Zegna. Upon entering the J.P. Morgan offices,

Outsider could not help noting the woodgrain and pristine design elements, and was reminded of how many Commonwealth Bank staffers were similarly suffering since their move from Martin Place to Darling Harbour. While your venerable correspondent can see the appropriateness of a brand such as J.P. Morgan sitting in offices just above designer outlets such as Prada and Zegna, he is not sure that the stars have completely aligned for the investment bankers. If Outsider is any judge, the relatively modest size of bonuses currently on offer in the financial services sector suggests many staffers will be confining themselves to window-shopping as they pass the luxury brands.

“I certainly consolidated some of my accounts a couple of years ago but I didn’t have that many.”

Minister for Financial Services and Superannuation Bill Shorten admits he too was once guilty of losing

Hit the road Mac, says taxman IT’s tax time once again, so Outsider dutifully tuned into Tax Commissioner Michael D'Ascenzo’s presentation on the Australian Taxation Office (ATO) website to find out what was new. After hearing the Commissioner cheerfully inform us about the benefits of eTax (apparently the turnaround is 12 days compared to 42 days for a paper return), Outsider was raring to go. But unfortunately for the hapless Outsider, he ditched his bulky PC last year in favour of much more

contoured, aesthetically pleasing MacBook. And sure enough, the ATO has once again failed to provide Mac users with the ability to lodge their tax returns online. Thus, for a second year in a row, Outsider will be spending tax time wading though reams of ATOapproved paperwork rather that lodging his return from the comfort of his local café. “Serves you right for buying an Apple product,” you may well scoff – and you could be right.

28 — Money Management July 12, 2012 www.moneymanagement.com.au

You may also be surprised that a man of Outsider’s ample means doesn’t pay an accountant to do his tax return for him. The problem is that when it comes to Outsider’s salary, there isn’t much to account for.

his super.