Money Management (June 21,2012)

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Vol.26 No.23 | June 21, 2012 | $6.95 INC GST

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FOFA CONCESSIONS FADING: Page 12 | OVER-50s’ BUDGET CHALLENGE: Page 25

Antisocial media policy advice

By Benjamin Levy THE deepening use of social media for member communication is pushing super funds closer to transgressing the legal frameworks set in place to govern general and personal advice to members, industry consultants have warned.

Some consultants have suggested that super funds which lack an Australian financial services licence (AFSL) are not being careful enough in how they word messages to clients, and may be close to communicating in such a way that would constitute personal advice under existing legal frameworks.

They have also warned that online communications are largely untested under existing Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) rules, and super funds may not have the same compliance frameworks in place to govern what they say in social

Russell Mason media as they do for other communication.

Deloitte superannuation practice national leader Russell Mason warned that suggestions or communications by the super fund to a member, if worded in a certain way, could constitute advice.

“We put out written material and printed material that goes through legal review and peer review – as it should – but I think there is the potential for that not to occur with some of the social media [platforms],” Mason said.

Funds have to make sure that how they use social media doesn’t breach their APRA or ASIC licences, he said.

Super funds also have to be careful in the way they word a suggestion to a member so that it can be considered general advice and not personal advice, Mason said.

HLB Mann Judd senior manager for superannuation Neil Howard said there were a lot of grey areas in social media.

“A lot of super funds are still doing their homework on what the ramifications are for social media. I don’t think anyone knows, to be perfectly honest,” he said.

Howard agreed that super funds need to investigate the ramifications of making certain suggestions on social media.

NGS Super manager of marketing and strategy Lisa Samuels said anyone responsible for posting on NGS social media must have the training to distinguish between factual information, general, and personal advice. NGS has an AFSL. NGS Super has a comprehensive social media policy, including an authorisation process for employees seeking to represent the fund on an online platform.

NGS hasn’t had someone post personal financial information on its social media sites, but in such a situation it would respond with a general comment without disclosing personal information and try to contact the member in another way, Samuels said.

Disclaimers should also be put in place to make it clear to the member what kind of information they’re giving and what the employee is authorised to give, she said.

Their social media policy was put in place for transparency and risk management reasons, she added.

Key FOFA ‘concession’ in question ESG can keep

By Mike Taylor

THE Federal Opposition has signaled it remains to be convinced about either introducing or supporting legislation which would restrict the use of the terms ‘financial planner’ or ‘financial adviser’.

While the Minister for Financial Services and Superannuation, Bill Shorten, undertook to legislate to restrict use of the terms as part of the negotiations to secure the passage of the Future of Financial Advice (FOFA) bills, the Opposition spokesman on financial services, Senator Mathias Cormann, has warned the financial services industry that such a move is not a fait accompli.

The Financial Planning Association (FPA) has listed “agreement to table legislation to enshrine in law the term ‘financial planner’” as one of the key concessions won as part of the FOFA negotiations.

However, Cormann has told Money Management he is yet to be convinced of the need for such a course of action.

“We are yet to be persuaded that increasing regulation along those lines is warranted,” he said.

Further, the Opposition spokesman pointed out that legislating to enshrine the terms ‘financial planner’ and ‘financial adviser’ would sit at odds with the status of other designations common in the financial services industry.

“Bear in mind that the term ‘accountant’ is not currently enshrined in legislation,” Cormann said.

However, he made clear that his reluctance to endorse the Government’s undertaking on legislatively enshrining the term ‘financial planner’ in no way diminished his support for the financial planning industry becoming a profession.

However, he said his view was that professionalism in the financial services industry would be better pursued via the setting of higher educational standards objectively and independently administered by educational institutions.

Continued on page 3

clients loyal

By Tim Stewart PAYING close attention to investor concerns about sustainability can help planners retain clients in a low-return environment, says Ethinvest principal Trevor Thomas.

Ethical clients tend to be more “sticky”, he said – particularly when times are tough.

“That’s not why we go into it, but that’s one of the benefits. Our value proposition isn’t ‘we will get you a better return than anyone else’ – it’s ‘we’ll make sure your money’s doing what you want it to do’,” said Thomas.

He added that Ethinvest had retained all of its clients over the

past five years, despite the volatility experienced in the market over the period.

Duncan Paterson, chief executive of environmental, social and governance (ESG) research house CAER, pointed out planners have had a regulatory obligation to discuss ESG issues with their clients since 2003.

Australian Securities and Investments Commission (ASIC) Regulatory Guide 175 states that, as a matter of good practice, “providing entities should seek to ascertain whether ESG considerations are important to the client and, if they Continued on page 3

Editor

Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Journalist: Bela Moore Tel: (02) 9422 2897 Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Senior Account Manager: Jimmy Gupta Tel: (02) 9422 2239 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Graphic Designer/Production Co-ordinator – 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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Last rites of passage

I

t is now three months since the Government secured the passage of its Future of Financial Advice (FOFA) legislation through the House of Representatives and as part of the underlying deal committed to restricting the use of the terms ‘financial planner’ and ‘financial adviser’.

Apart from explaining the Government's position during parliamentary debate around the FOFA bills, the Minister for Financial Services and Superannuation, Bill Shorten, had up to the middle of last week said nothing further on the issue.

Given next week's end of the 2011/12 financial year will also represent the start of a 12 to 14-month countdown to the next federal election, the time available for Shorten to make good on his promise around legislating to enshrine the terms ‘financial planner’ and ‘financial adviser’ is running short.

What is more, the ability of public servants working within the Treasury to deal with the issue would seem very limited in circumstances where they and personnel within the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority are still fleshing out the detail around

the past three years “haveWhile been a period of great uncertainty for financial planners, the next two years are likely to prove even more critical.

”

both FOFA and the Government's Stronger Super legislative agenda.

Given all the controversy which attached to the passage of the FOFA bills, it would be a shame if at the time of the next federal election the financial planning industry had nothing tangible to show for the concessions which were extracted by the Government via its proxy – the Industry Super Network.

Just as the end of the financial year represents one of the milestones on the way to the next federal election, it also represents a pivotal time for a number of the organisations providing representation to the

financial planning industry – the time when they seek to encourage members to renew their memberships by paying their annual subscriptions.

It says something about the policy uncertainty under which financial planners have operated that the 2012/13 financial year will be the first 12-month period in nearly four years which planners will enter having some certainty – albeit, no absolute finality – about the rules under which they will be expected to operate.

ASIC is still working on the intricacies of the regulatory framework around FOFA, but at least planners know they have 12 months to adjust to the new environment (including the two-year opt-in), irrespective of whether they are signatories to particular codes of conduct.

While the past three years have been a period of great uncertainty for financial planners, the next two years are likely to prove even more critical as the FOFA regime becomes fully implemented and the nation moves to a federal election.

Planners will need to look at 1 July 2012 as a time to examine the future and how their interests will best be served.

– Mike Taylor

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News Key FOFA ‘concession’ in question Continued from page 1

He said that this regime could then be allied to professional standards imposed by relevant bodies like the FPA, the Self Managed Super Professionals’ Association, and the AFA themselves.

Cormann’s position on legislating to enshrine the terms ‘financial planner’ and ‘financial adviser’ means that unless legislation is both introduced to the Parliament and passed before the next federal election, the issue is likely to face tough scrutiny by a Coalition government.

Cormann did not stipulate how the Coalition would view such a legislative provision in the event that it had already been made law.

However, Cormann has declared that a Coalition

Mathias Cormann government would legislate to rescind the opt-in provisions of the FOFA legislation, although it is not known the degree to which such a legislative change would then impact the obligations contained within any industry codes of conduct previously approved by the Australian Securities and Investments Commission.

ATO reveals ECT impacts

By Mike Taylor THE Australian Taxation Office (ATO) has confirmed the degree to w h i c h s u p e ra n n u a t i o n f u n d members have been exposed to the harsh realities of the Government’s excess contributions tax (ECT ) regime, claiming 70 per cent of those affected last financial year would have been entitled to a refund under the later changes.

T h e re a l i t y o f h ow t h e E C T regime has impacted the sector was made clear by ATO deputy commissioner for superannuation Neil Olesen earlier this month, when he pointed out to an accountants’ forum that for the 2011-12 year, people who exceed their concessional cap by under

$10,000 will be offered the option to have the excess removed from their fund and taxed at their marginal rate for that year.

“If this measure had been in place in 2010-11, over 70 per cent of people would have qualified for the refund offer,” he said.

However, Olesen said the overwhelming majority of people had managed to stay within their caps, and that of the 11.37 million people who had contributed to super in 2010-11, 11.32 million had managed to stay within the caps and would not receive an assessment.

“This is 99.5 per cent of contributors,” he said.

Olesen said where the caps were e xc e e d e d , t h e ov e r w h e l m i n g

majority of people exceeded the concessional caps only.

“Fo r t h e 2 0 0 9 - 1 0 y e a r, f o r example, where our processing of a s s e s s m e n t s i s n ow a l m o s t c o m p l e t e, w e’v e i s s u e d s o m e 52,000 assessments, over 50,000 for c o n t r i b u t i o n s e xc e e d i n g t h e concessional cap, 1,300 for contributions exceeding the non-concessional cap, and fewer than 400 where both caps have been exceeded,” he said.

“About four per cent (or 2,000) of those people have gone on to ask the Commissioner to exercise his discretion to reallocate or disregard excess contributions. The Commissioner has said ‘yes’ in about 25 per cent (or 500) of those cases,” Olesen said.

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ESG can keep clients loyal Continued from page 1

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are, conduct reasonable inquiries about them”.

Paterson was sceptical about the extent to which the broader planning community was gauging client attitudes about ESG issues.

But it’s probably not an issue that is at the top of ASIC’s agenda, said Thomas.

“I don’t think we’re anywhere near the stage Duncan Paterson where ASIC starts taking people to court because they didn’t ask people if they like tobacco or not. But the fact that it’s even on the radar does give it extra weight,” he said.

Paterson said providers should be asking questions about ESG issues simply as a matter of “good business practice”. “[It’s about] the adviser having a good relationship with the client, and the client feeling valued. The adviser’s having a broader conversation with their client than simply saying ‘hello, here are your financial results today’,” Paterson said.

The integration of ESG factors into the investment process is becoming de rigueur for institutional investors, and financial planners who place their clients into direct equities need to conduct similar research, he added.

The fact that the regulator stipulates ESG issues must be discussed with the client should be seen as an opportunity for planners, said Thomas.

“You end up knowing your client much better. It’s proof that you’re speaking their language and understand them and what they’re after,” he said.

Responsible Investments Association of Australia managing director Louise O’Halloran said building a relationship based on trust and loyalty is “what responsible investing has always been about”.

The sector is not about “a bunch of products”, she said – it is about understanding clients and minimising their risk exposure.

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www.moneymanagement.com.au June 21, 2012 Money Management — 3

News

Auditor-General warns on ATO and SMSFs

By Mike Taylor

THE Australian Taxation Office (ATO) has been guilty of inconsistency in the delivery of its interpretive decisions covering selfmanaged superannuation funds (SMSFs), according to the Australian National Audit Office (ANAO).

At the same time, the ANAO has cautioned that SMSF trustees need to understand that ATO interpretive assistance to SMSFs is “not legally or administratively

binding on the Commissioner”.

“Although the model for delivery of SMSF interpretive assistance closely mirrors the model used for taxation matters, a substantive difference between the two is the level of protection that trustees can expect,” it said.

The ANAO’s cautionary words with respect to ATO interpretive decisions and SMSFs are contained in a report entitled Interpretive Assistance for Self Managed Superannuation Funds.

The auditor-general’s report found that while, overall, the ATO’s management of SMSF interpretive assistance was effective and based on sound processes, one area requiring a stronger focus was the timeliness of delivery “which has been inconsistent over time”.

“Fewer than half of the SMSF public rulings and determinations have been delivered within the ATO’s standard timeframe since 2008,” the ANAO report said.

As well, it suggested that there would be

value in the ATO consulting with the SMSF sector to determine whether its interpretive assistance products met the expectations of the SMSF market.

On the key question of legal and administrative status of interpretive decisions with respect to SMSFs, the ANAO warned that the different status might not be apparent to all trustees.

“It is not certain that trustees fully understand the legal weight of SMSF interpretive assistance,” the report said.

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4 — Money Management June 21, 2012 www.moneymanagement.com.au

Robin Burns

Former FSP chief to head EQT’s new advice division

By Chris Kennedy

EQUITY Trustees (EQT) has recruited former Financial Services Partners chief executive Geoff Rimmer to head up its newly-created Private Wealth Services division, effective from 1 July 2012.

Rimmer will be responsible for the strategy and business development of EQT’s superannuation, trustee, wealth management and aged care units, EQT stated.

The move follows a restructure of the EQT business superannuation, personal estates and trusts, wealth management and philanthropy areas into a single business unit, Private Wealth Services, EQT stated.

In a statement EQT managing director Robin Burns said the move “follows the strengthening, through recent acquisitions, of our superannuation and wealth management areas, and the establishment of the corporate fiduciary and financial services division last year”.

Rimmer said EQT has a unique opportunity to provide the type of personal wealth services that are tailor-made to meet the needs of today’s retirees in particular.

“There is a significant opportunity for EQT to further establish itself as a partner to Australians, and their advisers, in all stages of their life, to provide the specific and niche services that many now need,” he stated.

News

Advisers ready to drop cash

New van Eyk strategy brings three casualties

By Milana Pokrajac

By Milana Pokrajac

VAN Eyk Research has made three redundancies, with another analyst departing voluntarily as the company announces a new strategy.

The three analysts leaving the company were mostly focusing on the administrative, data collection and compilation side of research, which will now be outsourced to offshore firms, according to chief executive officer Mark Thomas. van Eyk will replace the voluntary departure and is advertising for a senior analyst specialising in the alternatives space to reflect the new direction, Thomas added.

The new strategy will see van Eyk boost its research in asset classes the company believes “will add most value to investor portfolios over the coming years”, such as the alternatives sector.

Developed market equities now make up a quarter of its strategic asset allocation (down from 60 per cent in 2007), which Thomas said required a realignment of van Eyk’s resources.

“We were spending seven to eight months a year on two big reviews where we only needed 25 per cent allocation,” he said. “My team was equipped to focus on the workload in equities, so when we made changes [to the strategic asset allocation], we also made some changes to the team.”

Mark Thomas Thomas added the new strategy would focus less on fund managers that are taking small amounts of risk, allowing for a bigger focus on those “willing to give us active risk where we want it”.

“That’s where the clients are going, too – absolute and benchmark-unaware managers,” Thomas added. van Eyk Research will be reviewing fewer managers who “hug the market index”, with Thomas confirming up to 60 funds will be crossed off the list.

A VAST majority of financial advisers surveyed by Zurich are looking to rebalance their clients’ portfolios to hold less cash in the next 12 months.

Almost all would switch to growth assets, predominantly Australian shares, followed by international shares and direct equities.

“A s t h e m a r k e t g o e s through its cycle, it is likely the dependence on cash will eventually diminish,” said Patrick Noble, senior investment strategist at Zurich Investments.

“How long that cycle will be depends on timing, something we all acknowledge is notoriously hard to do,” he added.

Confidence in the market, both their own and their clients’, would be the catalyst to moving out of cash, with almost all advisers

Patrick Noble predicting the Australian market returns will be positive, but in the single digits.

The results of the survey, which included responses f r o m 2 0 0 a d v i s e r s, w e re released to promote Zurich Investments’ Equity Income Fu n d , w h i c h No b l e s a i d gained exposure to shares “without riding the highs a n d l ow s o f t h e m a r k e t sentiment”.

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www.moneymanagement.com.au June 21, 2012 Money Management — 5

News

Retail investors steer clear of mortgage funds

Former CEO sues DST Global Solutions

By Andrew Tsanadis

By Mike Taylor

RETAIL investors remain cautious when it comes to investing in the mortgage fund space, due largely to the impact of the global financial crisis but also the change in the liquidity offer and the implementation of the deposit guarantee, according to Australian Unity Investments head of mortgages Roy Prasad.

“Flows are fairly thin from a retail perspective and it’s only natural older investors – and most mortgage funds are generally supported by retirees – are tending to favour investment options like term deposits rather than mortgage funds,” he said.

“With what has transpired over the last two to three years, there have been some spectacular failures within the sector, more at the high-risk end.

“Unfortunately it tends to weigh down the entire sector and when investors do experience a problem with a particular fund, that deters the rest of them [so that they] are more cautious and stay away.”

Perpetual launched a retail mortgage fund offering, the Perpetual Private Capital Income Fund, in March but made the decision to withdraw it in early April due partly to a lack of investments. Warwick Boys, Perpetual’s

THE former Australian chief executive officer of specialist financial services provider DST Global Solutions, Ian Mathieson, is suing the company over what he alleges is a breach of contract for failing to maintain his income protection insurance and pay out entitlements after he was diagnosed with thyroid cancer.

Mathieson’s claim has been outlined by law firm Maurice Blackburn, which has described DST Global Solutions as being a “very successful company [that] has not honoured its obligations or promises”.

Maurice Blackburn principal Giri Sivaraman said the company had “not treated Mr Mathieson with the respect he deser ved and failed to financially provide for him after he became seriously ill”.

The law firm alleges Mathieson began working for DST Global Solutions in 1993 and that the company had agreed to maintain income protection insurance at 75 per cent of Mathieson’s income

Roy Prasad general manager, institutional business, income and multi sector, said that the structure of the retail mortgage fund market is not currently conducive to opening such a fund.

He said that no funds were raised for the offering, and institutional investors were a more suitable proposition in relation to investing in mortgage funds because they have a greater capability and motivation to participate in what he considers to be an illiquid proposition.

S M S F A Money Management supplement

May 31, 2012

P R O F E S S I O NA L

Comparing apples with apples

when he was first employed.

It also alleges that the company had agreed to maintain Total and Permanent Disability insurance of four times Mathieson’s salary.

The law firm said that in February 2009 Mathieson was diagnosed with advanced thyroid cancer and had been unable to work since 2010, with his employment being terminated in 2011.

Sivaraman said the law firm would be alleging that DST Global Solutions had engaged in misleading and deceptive conduct by breaching an agreement to maintain Mathieson’s income protection insurance at the agreed level.

“The company has also breached the adverse action provisions of the Fair Work Act because it has treated him unfairly after he declared he was unable to work due to serious illness,” he said.

“He has built this company in Australia from zero over an 18year period and now feels like he has been thrown to the wolves,” Sivaraman said.

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News

Europeans adopting apps to Midwinter to make addition to Reasonable Basis service High Net Worths

By Andrew Tsanadis

By Mike Taylor THE Eurozone crisis appears to have prompted high net worth clients to want more contact with their financial advisers around risk management, and many of those advisers are turning to smart phones and tablet applications to keep communications open, according to new research.

The new research, conducted by specialist research and advisory firm Celent, said that on the basis of this increased demand from clients it is expecting accelerated development of applications specifically aimed at high net worth clients.

The Celent analysis says that European wealth managers are facing an extremely challenging environment, with consumers putting less faith in their banks and advisers to manage their wealth, while regulators have been ramping up compliance requirements around the selection of products and transparency of fees and commissions.

“Additionally, the European sovereign debt crisis, subsequent credit downgrades of several European banks and the second Eurozone recession in less than five years has reignited investors’ fears regarding the safe-keeping of their assets,” the analysis said.

“More than ever, customers have been demanding more active communication and risk management,” it said.

The Celent research said firms had responded to the demands by turning to front office technology to improve adviser workflows and communications, and that in the midst of these technology considerations smart phones and tablets continued to dominate technology and business headlines.

It said that although wealth managers might instinctively want to reduce budgets in such challenging times, high net worth investor demand for consistent monitoring of portfolios and continued communication would prevent such belt-tightening.

“Technology, and specifically mobile technology, will empower clients to monitor account performance and their holdings but also to contact advisers,” the Celent research said.

Co-author of the research, Celent research director Isabella Fonesca, said the results suggested mobile app development among wealth managers had not yet reached a strong level of maturity.

However, she said wealth managers were accelerating the development because they realised it was unwise to lag the expectations of

8 — Money Management June 21, 2012 www.moneymanagement.com.au

MIDWINTER will be introducing a new addition to its insurance module which it claims will provide financial advisers with adequate research on legacy insurance products before they make the decision to switch their clients.

A large amount of older insurance product information is either difficult to find or isn’t publicly available, Midwinter managing director Julian Plummer said.

He said in order to meet the reasonable basis for advice rule, it was essential for an adviser to know their client and know the advice they are providing, as well as meeting other product replacement requirements.

“You have to find out what sort of charges are incurred, whether there are any lost benefits or any other significant consequences that are likely to occur – and that’s really difficult to get a hold of,” Plummer said.

Set for release in late July,

Julian Plummer Midwinter’s addition to the insurance module of its Reasonable Basis solution provides a list of expired policies dating as far back as 1991.

“This allows advisers to compare their client’s existing legacy insurance policies against current insurance policies available on the market,” he said.

He added that by having access to the module, advisers are able to properly weigh up the cost of replacing a policy versus whether they are appropriately serving a client’s needs.

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News

ASIC warns about fake financial advice group

Greg Tanzer

By Milana Pokrajac

THE Australian Securities and Investments Commission (ASIC) has urged investors to avoid Connaught Investment Group, an unlicensed business claiming to be a financial services group based in Sydney.

Connaught representatives are cold-calling potential customers and asking them to transfer funds into a bank account in the name of Diversified Strategies Pty Ltd, while claiming to offer general advice on various financial products.

Investors are then issued with a password for www.connaughtfinancialplanning.com.au, which enables them to check the fictional status of their investment, the ASIC investigation has revealed.

The regulator warned that Connaught was not registered as an Australian company and that its representatives had been quoting the Australian Financial Services Licence and company number of a legitimately registered business.

ASIC found the address listed for both Connaught Investment Group and Diversified Strategies is an unrelated dance studio in the Sydney suburb of St Leonards, while calls to their various phone numbers are no longer answered.

Commissioner Greg Tanzer said investors need to be cautious when being offered unsolicited investment advice.

“Making a few basic checks on your investment before you sign away your hard-earned money is critical,” Tanzer said. “I strongly urge potential investors to scrutinise all investment opportunities closely and seek professional, licensed advice before making investment decisions.”

The alert follows a similar one issued last month about Dellingworth Pty Ltd – another unlicensed financial services business.

Earlier this year, unlicensed financial planning business Goldsparrow Pty Ltd was wound up after a large crackdown on investment fraud by the Australian Federal Police in December 2011.

Member super contributions wane

By Bela Moore TOTAL superannuation contributions made in the first quarter of 2012 are up compared to 2011 but member contr ibutions have decreased, according to the Australian Prudential Regulation Authority (APRA).

Total contributions increased from $18.9 billion in 2011 to $20.1 billion in March 2012, although just 15.3 per cent of contributions came from members in 2012.

Members contr ibuted less during the March 2012 quarter despite increased total contribu-

tions. Members invested $3.1 billion into super according to APRA’s latest figures, compared with $3.4 billion in March 2011.

Employers made up the gap, putting 84.1 per cent, or $16.9 billion into superannuation funds over the quarter, slightly up on the $15.3 billion contributed in March 2011.

The contributions were spread between industry funds ($6.6 billion), public sector funds ($6.5 billion), retail funds ($6.3 billion) and corporate funds ($0.9 billion).

Industry, public sector and retail funds have evened the spread

10 — Money Management June 21, 2012 www.moneymanagement.com.au

since last year, slowly closing much of the $0.5 billion gap between industry and retail funds.

Superannuation assets recorded similar figures for both years, increasing 3.6 per cent over the 12 months to the March 2012 quarter, compared with 3.3 per cent to March last year.

Total estimated superannuation assets now sit at $1.38 trillion, with industry funds’ assets increasing by 7.3 per cent, corporate funds by 6.4 per cent, public sector funds by 6.3 per cent, retail funds 5.2 per cent and self-managed super funds by 4.9 per cent.

AllMyFunds targets opt-in, C and D client solutions

By Chris Kennedy ALLMYFUNDS believes a need to economically service C and D clients and potential opt-in requirements will help it gain ground in the competitive financial planning software space.

General manager of AllMyFunds Rober t Manityakul joined the group in November last year and has previously worked at other software providers Iress and Visiplan and online brokerage IWL. Manityakul said the Robert Manityakul AllMyFunds offering was aimed primarily at the simple, low-cost planning space and was able to integrate with all-inclusive planning software products such as Xplan and COIN, as well as accounting software such as MYOB and Xero, rather than looking to compete directly with them.

The software provides an opt-in solution that can be done automatically via SMS, email, online log-in, fax, activated voice response or by adviser agreement where the adviser sights a signed contract or records a phone agreement.

Manityakul said AllMyFunds, by communicating with existing software, offered advisers the option to “print and post” statements to clients via a clearing house for $8 per light statement or $12 per full statement. This allows lowcost engagement with C and D clients, according to Manityakul.

The software also allows clients with a log-in to a member portal to check their details and if necessary print a statement themselves. They can also update their contact details, with a notification of client log-ins being sent to advisers.

Manityakul said key clients for the firm would be midtier dealer groups that have a significant C and D client base, although it is also targeting institutional and boutique planning groups. Financial Services Partners, Elders Financial Planning and Millennium3 are among those already signed up.

AllMyFunds commenced operations in 2007 but was relaunched earlier this year with the new services offering.

News

Former Lonsec managing director charged with insider trading

By Andrew Tsanadis NORMAN John Graham, a former managing director of stockbroking firm Lonsec, has appeared in the Magistrates’ Court of Victoria in Melbourne charged with 14 counts of insider trading.

The charges have come after an Australian Securities and Investments Commission (ASIC) investigation alleged that in the course of advising seafood distributer Clean Seas, Graham received inside information on the company and subsequently disposed of a number of securities invested in the enterprise.

S&P maintains positive view on mortgage funds

According to ASIC, on 1 and 23 February 2010 Graham disposed of a total of 286,407 shares across various related accounts when he had information on the company’s kingfish growth and financial results; 400,000 shares on a client’s account between 12 and 23 February 2010 when he had access to similar knowledge; and a total of 200,000 shares on two client accounts on 26 February 2010 when he had access to information on Clean Seas’ kingfish growth, financial results and the death of its bluefin tuna fingerlings.

“This trading was prior to the release of Clean Seas’ half-year

results on 26 February 2010, after which time, the share price fell substantially,” ASIC’s release read.

At the time the alleged offence was committed, the maximum penalty associated with an insider trading offence was five years imprisonment and/or a fine of $220,000 for each offence.

Graham was not required to enter a plea and the matter has been adjourned for a committal mention in the Melbourne Magistrates’ Court on 6 August 2012.

The Commonwealth Director of Public Prosecutions is prosecuting the matter.

By Chris Kennedy

Ponzi scheme operators plead guilty to fraud charges

T H E St a n d a rd & Po o r ' s Fu n d Services 2012 Mortgage Fund Sector Review has been reduced to just three managers following a number o f w i t h d ra w a l s, b u t t h o s e t h a t remain all earned a rating of three stars or above.

There were no ratings changes among those three, with the Latrobe Australian Mortgage Fund Pooled Mortgage Option holding its four star ratings, while offerings from Tasmanian Perpetual Trustees and Equity Trustees both retained three star ratings.

S&P has experienced a high volume of ratings withdrawals since it announced in February that it would be withdrawing fund ratings services from the Australian market in October this year.

Managers that have withdrawn s i n c e t h e l a s t re v i e w i n c l u d e ANZ/OnePath, Australian Unity, Perpetual, BT, Sandhurst Trustees and Challenger’s Howard Mortgage funds.

“The rating outcomes of three s t a r s a n d a b ov e re f l e c t s S & P ’s c o n v i c t i o n i n e a c h m a n a g e r’s investment capability and their

TWO men have pleaded g u i l t y i n t h e D ow n i n g Centre Local Cour t in S y d n ey to o p e r a t i n g a Ponzi scheme called the Integrity Plus Fund.

On 5 June, Brian Wood pleaded guilty to a total of 10 charges, including six counts of making false statements to investors and four counts of fraudulently misappropriating investors' funds.

Also in cour t, Jimmy Truong pleaded guilty to four charges of making false statements to investors.

Con Koutsoukos – another man involved in the scheme – has not entered a plea to three charges of making false statements to investors.

According to the Australian Securities and Investments Commission (ASIC), both Wood and Truong falsely stated to investors that their investments would earn returns

Peter Ward ability to manage: investment team continuity, liquidity and redemption provisions, lending competition and margins, portfolio credit quality/arrears and defaults, and fees,” said Peter Ward, analyst at S&P Fund Services.

“The rated funds have continued to deliver on their objectives to provide regular income distributions to their investors and have maintained capital stability in an environment where substitute products remain competitive from a risk and return perspective,” he said.

of 4 per cent per month and that the capital amounts of their investments were guaranteed.

B e t we e n D e c e m b e r 2004 and December 2007, the Integrity Plus scheme raised in excess of $30 million from about 270 investors, the regulator stated.

ASIC then obtained i n j u n c t i o n s f ro m t h e Supreme Cour t of NSW against Wood, Truong and

Koutsoukos and others preventing the fund from operating and securing investors' funds. A liquidator was appointed to the fund in June 2008.

Wood and Truong were scheduled to appear in the District Court at Sydney for sentencing on 15 June 2012. Koutsoukos' matter has been adjourned and he will next appear before the Downing Centre Local Court on 3 July 2012.

www.moneymanagement.com.au June 21, 2012 Money Management — 11

InFocus FINANCIAL ADVISER SNAPSHOT

Highly perishable concessions

Which asset class would you move cash to?

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Mike Taylor writes that the Federal Opposition has signalled some of the socalled ‘concessions’ extracted around the passage of the FOFA bills may not have a life beyond the next Federal Election.

Source: Zurich Investment Management

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

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 Wharf, Sydney www.moneymanagement.com.au/ events

T

here are no guarantees that a Coalition government will legislate to restrict the use of the terms ‘financial planner’ and ‘financial adviser’.

The Opposition spokesman on financial services, Senator Mathias Cormann, has made it very clear to Money Management that the Coalition has yet to be persuaded that the increased regulation necessary to achieve such a restriction is warranted.

Further, Cormann pointed out that the ter m ‘accountant’ is not currently "enshrined in legislation".

Given Cormann's comments and the relatively short time between now and the next federal election, one of the key ‘concessions’ to emerge from the deal which saw the passage of the Government's Future of Financial Advice (FOFA) bills through the House of Representatives would seem to have a limited future.

The other key ‘concession’ to emerge from the eleventh hour FOFA deal – "class order relief from opt-in for members of an ASICapproved code-issuing body" – remains of dubious value until such time as the Australian Securities and Investments Commission (ASIC) spells out the precise regulatory detail.

Statements issued by senior executives within ASIC, including commissioner Peter Kell, suggest that the reason adherence to a code of conduct will obviate the need for opt-in is that all approved industry codes of conduct will need to cover off on such an obligation, in any case.

Concessions were, indeed, extracted in the negotiation and consultation processes which led up to the passage of the FOFA bills through the Parliament, but the prizes which seemed to sit at the heart of the more singular eleventh hour deal now appear to

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

be of highly dubious value.

While Australian financial planners will enter a new financial year knowing only a little more about the regulatory environment in which they will be expected to work, they will do so in the knowledge that they will have another 12 months to transition to the new arrangements.

Then, too, they will know that within six months of the new FOFA arrangements being fully in force, the Government will face a federal election which every single poll suggests it is fated to lose, comprehensively.

Given his performance in financial services while in Opposition, it seems highly likely that Cormann would be granted carriage of the portfolio in any Coalition Government – something which would ensure his memory of the events leading up to the passage of the FOFA bills is carried forward into his ministerial oversight of the industry.

Members of the Association of Financial Advisers (AFA) will get some insight into Cormann's view, given that both he and Peter Kell have agreed to be part of the AFA's national roadshow over coming weeks.

Cormann's reluctance to commit to enshrining the terms ‘financial planner’ and ‘financial adviser’ is not borne of any lack of support for financial planning becoming a profession, but rather, a concern that it might give rise to further unnecessary bureaucracy and competitive distortions in the sector.

The Coalition spokesman's view is that professionalism in the financial services industry is better pursued via the setting of higher educational standards objectively and independently administered by educational institutions and professional stan-

dards imposed by relevant bodies like the Financial Planning Association (FPA), the Self Managed Super Professionals’ Association, and the AFA themselves.

Given all that has occurred over the past 12 months and the regulatory and political uncertainties ahead, the next 18 months will represent a testing time for the FPA which has clearly staked out its position with respect to FOFA and the manner in which some of the key concessions were achieved.

The FPA has been a long-time advocate of enshrining the term ‘financial planner’, and will find little comfort in the fact that the Coalition is not committed to such a move, while the Minister for Financial Services and Superannuation, Bill Shorten, has yet to follow through with the necessary legislation.

While the FPA has suggested in some publications that industry commentators have sought to stir up fear surrounding FOFA, such suggestions overlook the long list of unknowns still confronting financial planners amid not only the FOFA-based regulations but the impact of Stronger Super and even the Productivity Commission's review of default funds under modern awards.

If planners doubt the cumulative impact of those changes, they should consult some of the compliance personnel working long hours behind the scenes seeking to piece together both the knowns and the unknowns.

By expressing his doubts about the need to enshrine the terms ‘financial planner and financial adviser’ in legislation, Senator Cormann has reminded planners that the curtain has yet to fall on all the changes to their industry and that, indeed, the fat lady might ultimately sing a different song.

SMSF Weekly CGT rollover relief queried on SMSFs

By Mike Taylor THE Federal Treasury has been queried on why self-managed superannuation funds (SMSFs) merging with those regulated by the Australian Prudential Regulation Authority (APRA) will not be granted Capital Gains Tax (CGT) rollover relief.

In a submission to the Treasury on taxation relief around the implementation of the Government’s Stronger Super regime, the Association of Superannuation Funds of Australia (ASFA) said it questioned the lack of relief for an SMSF merging with an APRA-regulated fund.

Further, it said it wanted confirmation that CGT rollover relief would extend to small APRA funds.

“While recognising that SMSFs are not subject to the MySuper measures, ASFA is concerned that the absence of tax relief may unnecessarily lock SMSF members into arrangements which have become inefficient or where the trustee is no longer able to properly perform their duties,” the submission said.

“In particular, it would not appear to be in everyone’s interests that an SMSF presently sitting on realised and unrealised capital losses (which is a very common situation) is impeded from winding up and transferring to a larger fund whilst their trustee awaits better market conditions so as to first recoup these losses solely due to the absence of rollover relief,” the ASFA submission said.

SMSFs have plenty of compensation options: SPAA

By Tim Stewart

THE SMSF Professionals’ Association of Australia (SPAA) has moved to correct the “misconception” that SMSF trustees have no legal options ahead of them in the event of fraud or theft.

In the wake of the Parliamentary Joint Committee (PJC) inquiry into the collapse of Trio Capital, it has been widely purported that SMSFs have “nowhere to go” because they are not APRA-regulated and therefore do not have access to Part 23A of the Superannuation Industry (Supervision) Act, said SPAA chief executive Andrea Slattery.

“Even some comments by those who gave evidence at the PJC hearing gave the impression that SMSF investors had no prospect of compensation in the event of fraud or theft,” said Slattery.

Slattery pointed to a recent court settlement in which an elderly woman was compensated nearly 100 per cent of her $1 million life savings that was lost in the Trio/Astarra fraud.

SPAA technical manager Peter Burgess said SMSFs could also take legal action against an adviser for losses under section 55(3) of the SIS Act, or alternatively under Corporations Law. Part 23A of the Act gives the Minister discretion to order compensation for members of APRA-regulated funds who have suffered losses due to theft or fraud.

But Part 23A is not always enacted to compensate members of APRA-regulated funds, said Slattery.

“There was a postal fraud a couple of

Peter Burgess years ago, and an overseas Mafia theft of monies out of bank accounts that were from super funds. None of those were instigated under Part 23A, and they’re having to find other avenues,” she said.

Burgess said the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority are clamouring for alerts and disclaimers for SMSFs, and for SMSF trustees to be required to sign a declaration saying they are aware they are not covered under Part 23A. “We think it’s important you get that wording right. Yes it’s true they’re not covered under Part 23A, but they potentially have other options available to them,” Burgess said.

“APRA-regulated funds also have a role to play here in disclosing the limitations of Part 23A to their members,” he added. www.moneymanagement.com.au June 21, 2012 Money Management — 13

Responsible investment

With corporate blow-ups becoming commonplace and ‘short-termism’ dominating investment markets, ESG issues are more relevant than ever.

Tim Stewart reports.

THE notion that the world we live in is completely divorced from reality may be a little disconcerting for some readers.

But for those of us attempting to navigate modern investment markets – which, thanks to Australia's compulsory superannuation system, tends to be just about everyone these days – it could be closer to the truth than we’d like to believe.

The way Responsible Investments Association of Australia managing director Louise O’Halloran tells it, the lack of widespread knowledge about environmental, social and governance (ESG) risks means markets are perpetually mispriced.

14 — Money Management June 21, 2012 www.moneymanagement.com.au

Responsible investment Key points • There appears to be some confusion over the meaning of the term ‘responsible investment’.

• The biggest challenge for advisers is to match their clients up with funds which align with their ethical preferences.

• The involvement of planners in the responsible investment space typically comes from boutiques.

• The debate about whether responsible investment limits or boosts potential return continues.

• Experts claim ignoring ESG risks causes market mispricing.

There are effectively two worlds running parallel to each other, O’Halloran says: the “real world”, where ESG risks are under-researched and ignored; and the “shadow world”, where companies are correctly priced.

“While the real economy and the real world proceed as business as usual, it’s as if the real world is a shadow world and markets are the real world,” she says.

She also points to the endemic ‘shorttermism’ of investment markets as one of the factors that has seen an increase in the number of shocks in global markets – such as the BP oil spill, the Tepco nuclear disaster in Japan, and – most pertinently – the global financial crisis.

According to O’Halloran, if ESG risks were better understood by participants in investment markets there would be fewer “shock drops” in share prices when these events occur.

“Let’s say the markets had known of the background activities with BP. Say they'd known they’d accumulated 751 egregious wilful citations by the Occupational Safety and Health Authority between June 2007 and February 2010,” O'Halloran said.

If that information (which was only obtained after the event via freedom of information requests) had been known by the market, there still would have been a drop in BP's share price following the Deepwater Horizon explosion in the Gulf of Mexico in 2010 – but it wouldn't have fallen from $55 to $27, she says.

Instead, there would be more of an incremental decline – effectively reducing the volatility in the marketplace, O'Halloran says.

The investment industry needs to develop better ESG data in order to accurately determine the long-term value of companies, she says.

“I’m talking three years, five years, 10 years. To the market, those time horizons present massive difficulties. How do you pinpoint a price 10 years out? Yes, it’s hard – but we have to get better at it,” she says.

Fortunately, the quality of research is improving very quickly, says O'Halloran.

Specialist research firms such as CAER are providing investors with quantitative analysis along with a thorough narrative behind the numbers, and there is plenty of sell-side research from companies like CitiGroup and Macquarie that provide stock picks, she said.

She pays particular tribute to the

recent work of Bloomberg, which currently provides investors with 250300 separate ESG data points.

“It's a set of numbers. How many women are on your board? How big is your fleet, is it using more petrol? How much are people flying these days?” she said.

While the quality of information is improving rapidly, O'Halloran says, markets as they currently stand only focus on three things: information in the short term, information that's available to most market participants, and information that is quantifiable.

“When you look at it, you realise how much data falls outside that set,” she says.

Markets need to consider more intangible values, O'Halloran says, like the quality of management, the way companies are dealing with regulatory changes, and how companies treat their workforce.

Getting the facts straight ‘Responsible investment’ tends to be used as a catch-all term for a number of strategies that often have very different starting points.

A strictly ethical approach will limit the universe of stocks a fund manager can invest in, typically screening out “sinful” stocks that profit from things like alcohol, tobacco and gambling.

Socially responsible investments also apply a negative screen, but in addition they look to invest in companies that provide a tangible social benefit.

Finally, there are strategies that operate in the belief that careful attention to environmental, social and governance issues will minimise the long-term risks for companies.

The ESG approach is becoming the standard among institutional investors, and is the subject of a voluntary international reporting regime – the United Nations Principles of Responsible Investment (UN PRI).

ESG factors are beginning to be integrated into most funds run by major institutional players – not just funds that are branded as sustainable or ethical.

Inevitably there is some overlap between funds that take different approaches. The portfolio of a strictly ethical fund may look similar to an ESG fund, but for different reasons.

For example, Australian Ethical cannot invest in gambling companies because they are filtered out by the negative screen in its char ter ; while AMP’s Sustainable Share Fund avoids gambling companies for reasons that are purely related to the bottom line.

“It’s not because we think [gambling] is ethically or morally wrong – it’s because we’re seeing that over time that sector will have to pay for its externalities,” says AMP research analyst Mans Carlsson-Sweeny.

He points out that problem gambling is a big problem in Australia, and the companies which profit from it aren’t paying for the social costs it creates.

“Over time we think the Government will impose more and more regulations, which means an uphill struggle for those companies in terms of earnings growth,” Carlsson-Sweeny says.

“We still align social concerns. But at Continued on page 16

www.moneymanagement.com.au June 21, 2012 Money Management — 15

Responsible investment Continued from page 15 the end of the day it’s about making money. We’re looking at companies’ long-term earnings,” he says.

Mercer Asia Pacific head of responsible investing Helga Birgden is involved in Mercer's global initiative to evaluate investment managers based on their ESG integration.

“We're not about taking an ethical position,” says Birgden.

“It's very much about analysing the full spectr um of r isk that faces an investor,” she says.

As of February, Mercer has assigned ESG ratings to 5,000 investment managers worldwide.

To achieve the highest ranking, ESG1, managers must demonstrate ESG considerations are part of their portfolio construction, and that “they are taking active bets on it”, says Birgden.

Managers who are assigned the lowest rating (ESG4) typically neglect environmental and social issues, and only consider governance issues, she says.

“That's not enough. If you get a tick in governance that doesn't mean that you're integrating ESG,” Birgden says.

Australian Ethical chief executive David Macri says his company takes a different approach to typical ESG funds when it comes to selecting stocks.

“We are best described as ‘positive screeners’,” says Macri.

“Every company we invest in has been determined to have some form of positive associated with it,” he says.

Australian Ethical uses research by CAER to construct its investment framework, along with in-house research, Macri says.

He is apprehensive about the idea that ethical investing is subjective in its approach.

“When you look at the facts and you can clearly see what the benefits are of something and what the negatives could be…you can come to a logical decision,” Macri says.

“Ethics is also studied at universities.

It’s not completely subjective,” he adds.

Trevor Thomas

The ethical investor is “driven by a zero-tolerance approach to what they don’t like. ” - Trevor Thomas

The role of advisers To date, the involvement of planners in the responsible investment sector has typically been limited to boutique practices that cater to ethical investors.

Trevor Thomas, principal of Sydney-

16 — Money Management June 21, 2012 www.moneymanagement.com.au

based boutique Ethinvest, begins the first client interview with a fact-find questionnaire that includes a page on “ethical concerns”.

Thomas and his team then go about constructing a portfolio of direct equities that reflects the client’s financial needs and ethical preferences.

The problem with managed funds is that even a firm like Australian Ethical, which has some of the most rigorous screening methods in the sector, won’t be appropriate for every client, Thomas says.

“The difficult thing for [ethical fund managers] is they have to come up with a rule that fits everybody. We’ve got 400 different clients and 400 different rules,” he says.

“The ethical investor is driven by a zero-tolerance approach to what they don’t like,” says Thomas.

That differs from large institutions, which generally take a risk-minimisation ESG approach, he adds.

“They have a materiality clause, which says: ‘If it’s not 5 per cent or 10 per cent o f c o m p a n y re v e n u e o r c o m p a n y profits, we’re not going to filter it out’,” Thomas says.

In other words, the good stuff outweighs the bad stuff, he says.

While Ethinvest has its own Australian Financial Services Licence, Greenshoots Financial Planning principal Mark Lems operates as an authorised representative of the dealer group Sentry.

Lems admits he has been restricted by authorised product lists in the past, but he has more freedom to recommend ethical funds at his current dealer group.

Like Thomas, his preference is for his clients to be invested in direct equities.

Lems selects blue chip stocks that are either 'best of sector' or have strategies and programs in place to improve their practices.

“If a client is going to be a bit cynical about investing in growth markets, then they have to be a bit cynical about the way we live our lives,” Lems says.

“We're not about to go back to the caves. If we still want our iPods, the best way to go about it is to try and direct the future a bit better by investing in companies that are on the leading edge or have developed their processes to have a less impactful footprint,” he says.

to go direct – how should the various products available in the responsible investment sector be used in portfolios?

The research house Lonsec has published an annual review of the sector for “over a decade”, according to senior investment analyst Steven Sweeney.

The 2011 Lonsec Australian & Global Equity Responsible Investment Sector Review covers 10 funds: five ethical funds, two socially responsible investment funds and three ESG funds.

The challenge for advisers is to match their clients up with a fund that aligns with their ethical preferences.

The BT Wholesale Ethical fund is a good choice for clients who are looking for a mainstream equity fund with an ethical overlay to replace a large-cap Australian equities holding, says Sweeney.

The Australian Ethical Larger Companies Trust is best “for clients who are the most ethically motivated and deep in their moral considerations”, Sweeney says. The Australian Ethical Small Companies fund could be used as a small cap replacement, he adds.

Hunter Hall adopts a lighter ethical screen than Australian Ethical, but its Value Growth Trust and Global Ethical Trust can be used as a satellite alongside a global equities portfolio. “[ The Hunter Hall funds are for investors who are] looking for a bit more of a ‘kick’, are light in terms of their ethical motivation but are concerned about their impact on the environment and society in general,” says Sweeney.

He singled out Australian Ethical for praise because they are “true-to-label”.

“They’ve evolved over the last five years in terms of their investment professionalism,” Sweeney adds.

“Because their large cap fund is investing a lot in healthcare and utilities, it tends to be more defensive than you might think. It's basically an ethical index fund now,” he says.

The returns debate The question of what effect responsible investment strategies have on returns – both in the short term and the long term – has plagued the sector since its inception.

Ethinvest's Trevor Thomas says some of his clients tell him investing ethically is so important to them that they're willing to sacrifice “a few percentage points” if it

Finding the right match But what about planners who don’t want

Continued on page 18

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Responsible investment Continued from page 16 means they can sleep at night.

CAER chief executive Duncan Paterson says the conventional wisdom – taught in “portfolio management 101” – has been that “if you restr ict your universe by x you’ll reduce your potential return by x”.

But Australian Ethical's David Macri argues that restricting the available universe of stocks can have a positive effect on potential returns.

“The sectors/companies that are being avoided should benefit the portfolio by avoiding the potential ‘blow-ups’,” says Macri.

Thomas points out that Hunter Hall has one of the best performing managed funds in Australia over the last 15 years.

According to the 2011 RIAA annual report, the average Australian equities responsible investment fund has outperformed its mainstream counterpart over one, three, five and seven years.

“It’s never been the case that running an ethical/SRI fund necessarily means you’re going to lose money,” says Paterson.

“The argument that ethical investment equals poor returns – something you sacrifice, the bad-tasting medicine – was put to bed some time ago,” he says.

The more pertinent question, he says, is whether or not ESG integration is correlated with positive returns.

According to Helga Birgden, Mercer has undertaken a number of academic meta-studies since 2007 that show there is no penalty for including ESG issues in the investment process.

“Our view is that ESG either can have a neutral effect, [or as] our study review shows it can have a positive effect on returns. You’re not paying for performance if you consider ESG. In fact it’s the other way around,” Birgden says.

“There’s a misconception that there’s a penalty for thinking about ESG. [Mercer] needs to speak more to our retail investors and our financial planners to correct this misconception,” she says.

Australia leads the way The 2011 RIAA report shows that over half of the funds under management in Australia fall under the United Nations

Principles of Responsible Investment (UN PRI).

This means that approximately half of the funds under management by Australian asset managers fall under UN PRI commitments to ESG integration.

folios for mainstream signatories to the PRI – people are ‘integrating’ ESG into their processes, but their portfolios and overall investment decisions aren’t changing,” says Macri.

back 10 years, “I’veLooking been in rooms where you got laughed at when you mentioned environmental issues, or the potential for social issues to constitute investment risk.

”

- Duncan Paterson

Duncan Paterson CAER's Duncan Paterson reckons the UN PRI initiative has been a “tremendously positive influence” in the development of the sector.

“Looking back 10 years, I’ve been in rooms where you got laughed at when you mentioned environmental issues, or the potential for social issues to constitute investment risk,” Paterson says.

“Nowadays it’s a given that environmental and social issues do constitute a risk that investors should be mindful of.

That’s been a massive achievement from the PRI,” he adds.

But Australian Ethical's David Macri is less enthusiastic about the relatively high number of UN PRI signatories in Australia.

“Without sounding cynical, I think it’s a step in the right direction. It’s an absolute bare minimum that everyone should be doing.

“Does it make all funds ethical or sustainable? Absolutely not,” Macri says.

He adds that investors shouldn’t kid themselves into believing that asset managers are changing their asset allocations as a result of the UN reporting regime.

“What the UN PRI standards don’t do is lead to big changes in investment port-

18 — Money Management June 21, 2012 www.moneymanagement.com.au

for,” he says.

CAER’s Duncan Paterson agrees.

“If people are signing up to ESG-integration products thinking that they’re in an ethical product they will get upset, and if they’re paying fees on the way in and out of those funds they’ll get upset about the fees they’re paying,” Paterson says.

Fees are a very sensitive issue in the sector – just as they are in the broader investment industr y, says Lonsec's Steven Sweeney.

The BT fund is “mainstream” in terms of its fees, as is the offering from Challenger-branded boutique manager Alphinity, he says.

Hunter Hall applies a performance fee, Sweeney says.

“Our view is that provided there’s a hurdle and reasonable base fee, that’s fine. Over time they’ve delivered value for investors. The Australian Ethical funds are reasonably priced,” he says.

But the external research employed by many funds in this sector represents an added layer of cost, Sweeney says.

For example, both Perpetual and Australian Ethical outsource their ethical research to CAER. “More impor tantly though: are investors in the sector getting portfolios that are aligned with their choice?

They’re probably willing to pay a bit extra for that assurance,” says Sweeney.

Putting the client first

Branding and fees The perception that investment managers are more “responsible” than they may be in reality can be dangerous for consumers, says Macri.

“It is important that consumers are aware of this. Even though mainstream institutions are signing onto the UN PRI, they will not provide the sorts of products that ethical investors will be looking

According to O’Halloran, the move towards better ESG research and reporting is about “accepting the world is a different place” – something that will admittedly be hard to achieve given that markets are structured based on “the world that was”. “ The Future of Financial Advice [reforms] have been excellent to play into that hand. It gives a lot of credit to advisers who want to really tap into a relationship about trust and loyalty with clients,” says O’Halloran.

“That’s what responsible investment has always been about. It’s not just a bunch of products. It’s a relationship that is truly trying to tap into what people care about and what they’re concerned about, and to try and minimise their risk exposure. It’s a perfect framework,” she says.

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Asset Allocation

The road less travelled Given the slowest share market recovery in years, many investors will wait it out before diving back in. But taking the same approach with asset allocation in superannuation could come at a huge price, according to Stuart Williamson.

I

n what is the most sluggish share market recovery since the 1929 market crash, it is not altogether surprising that recent returns from super have been disappointing many investors. Of course, the fact that a significant proportion of super is invested in shares has been the main reason for these returns looking poor over the last five years.

We are not used to this in Australia. We are used to sharp snapbacks and a quick resumption of normal economic and gross domestic product growth. A recessed economy, apart from the mining sector, has resulted in gloom on the faces of many investors.

As individuals in Australia we have to take personal responsibility for our superannuation. We can outsource part of the decision-making via retail or industry super funds but responsibility for the final outcomes resides with us – the members.

Due to compulsory super and other legislative changes, we do have a role to play as to where to direct employer super guarantee contributions. Most of us can choose where our money is invested.

The Government, being aware of our ageing population, increasing health care costs and changing demographics, also wants those nearing retirement or in retirement to have their money last longer.

Thus, there is pressure on us to ensure that there is a reasonable net return on money invested in super.

According to data relating to historical share market indices, the average return from Australian shares over the past 30 years has been around 11 per cent per annum.

This, combined with the taxation benefits

of holding domestic shares as well as financial theory, explains why advisers and asset consultants have most diversified portfolios skewed in this direction. Doing so has worked well over the longer-term (past 30 years), but not so well over the recent past.

But 30 years of very good performance by the Australian share market, coupled with its poor performance over the past five years, has resulted in a very strong link between share market performance and the propensity to save via superannuation itself. This is unfortunate for the long-term savings of individuals and has made life for those interested in helping people save for and fund their retirements more difficult.

When the share market is up and doing well, people want to invest more. When it is not performing well and growth is anaemic, people unfortunately shy away right at the time when they probably shouldn’t – if history is any guide.

Here are just some of the many reasons that investors have come up with when asked about putting more into super: “I’ll just wait until things pick up a bit” (the best way to ensure you get lower average returns overall).

“I’ll come back to you when Greece and Europe have sorted themselves out.” (Can you call me before Mrs Merkel?)

“I know my mother lived until she was 96, but I can’t afford to lose any more.”

“Even though you explained we can put it in cash in my fund, I just don’t feel right about it now.”

But we know that superannuation and long-term investing is not as simple as this.

So we have to be better at promoting superannuation itself and point out to

20 — Money Management June 21, 2012 www.moneymanagement.com.au

investors that the share market is not superannuation.

Superannuation is simply a structure that allows investors to save – at lower tax rates.

Now let’s consider what else makes superannuation an attractive place to save.

Superannuation: • Has the potential to become your second largest asset.

• Provides tax-free pension payments for those who are aged 60 or over.

• Can be a cheaper way to fund personal risk insurance.

• Can be used for business succession.

• Can receive the proceeds from the sale of a small business to reduce tax.

• Can be used to acquire a business premises.

• Can be used to hold artworks and other collectibles.

• Can be used to obtain more Centrelink benefits than would otherwise be possible.

• Can provide very effective estate planning outcomes.

• Can be protected from business or personal creditors.

• Compares very well with other investment structures.

But most importantly, superannuation is NOT an asset class.

Superannuation is a very important answer to the question of funding a dignified retirement once one is out of the workforce.

It may not ever be the complete answer, but it is designed to help with the income needs of retirees.

Simply put, superannuation is a structure that the whole community needs and as such it will continue to require government incentives, principally via tax concessions.

If the Government decided to reduce those incentives, the propensity to save through superannuation could wane. When the Hawke Government introduced compulsory super it also simultaneously created a regulatory structure around super that encouraged this form of saving. The result was a new branch of financial services called financial planning.

There have been some regulatory changes that have worked and others that have not.

Some have been abandoned and others amended, while all changes have unintended consequences.

So what should we make of all this?

We should understand what superannuation is, why we have it and how we can make best use of it, given our own circumstances.

Be vigilant by taking an active interest in changes when they are made (politicians will make them) and consider what opportunities arise or actions need to be brought forward or delayed.

Understand that we can invest our superannuation contributions into any asset class.

Try your best to block out media noise about share market ups and downs.

Limit your information sources to quality providers, who are respected in the marketplace.

Realise that your retirement income is important and that government support is a safety net in this country.

And finally – pay for advice. It might save you a fortune in what could otherwise be lost opportunities.

Stuart Williamson is a financial planner at Fiducian Financial Services.

Trio Capital

The great expectations Susanna Khouri believes the Trio Capital debacle has highlighted the need for better mechanisms to compensate investors for loss.

W

hile debate among regulators, lawmakers and industry observers continues as to whether Trio Capital losses stemmed from fraud or bad investments, there are deeper issues that emerge from close scrutiny of this case.

Helping victims seek financial redress following civil wrongs is what litigation funders specialise in. However, when it came to Trio Capital even they were stumped. With Trio, it is obvious the system that ought to compensate investors for losses arising from wrongdoing had failed.

Given the heavy losses incurred by investors in the managed investment and superannuation schemes operated by Trio Capital (a burden now also borne in part

by Australian taxpayers), it is apparent that there was wrongdoing. Therefore, it follows there should be avenues to seek financial redress on behalf of the many aggrieved Trio investors.

Unfortunately for the Trio investors who did not invest in funds regulated by the Superannuation Industry (Supervision) Act 1993, there appear to be no viable avenues to pursue redress. This is a poor reflection on a system with many paid participants with various responsibilities designed to protect unsophisticated investors. When tested to the extreme, the system failed those investors.

The report of the Parliamentary Joint Committee into the collapse of Trio Capital reveals a range of shortcomings in the checks and balances which should provide protection to investors from fraud and losses resulting from an Australian Financial Services Licence (AFSL) holder’s misconduct or failures. One particular issue identified by the Committee warrants further analysis, and points to an area requiring urgent reform – namely, the adequacy of professional indemnity (PI) insurance held by AFSL holders.

A review of compensation arrangements for consumers of financial services last year

by Mr Richard St John concluded that PI insurance was not an effective compensation mechanism for loss arising from licensee misconduct.

But if it is not an effective compensation mechanism, why bother to put AFSL licensees to the cost of obtaining such insurance? What purpose does it serve? It was certainly little comfort to the Trio investors. The submissions to the Committee show that Trio investors clearly held an expectation that their financial planner’s PI insurance would assist to make good loss caused by the planner’s conduct. Their bitter frustration and disappointment at learning the truth about these arrangements is understandable.

The three large financial planning groups that channelled clients into Trio are all now

“

If insurance is not an effective method of securing compensation, then we need to establish an alternative so that future investors do not endure the hardship and frustration experienced by the Trio investors.

”

insolvent. In practical terms, recourse to the planner’s PI insurance was therefore the only way the Trio investors could directly pursue compensation for losses arising from their planner’s misconduct and failures. However, the planners’ levels of insurance were extremely low relative to the size of the claims against them.

After factoring the costs and risks of realising any insurance money, it was simply not viable to pursue a claim against the planners and access the insurance.

This PI issue was not identified by the Committee as one of the numerous “expectation gaps” between the roles and functions the various gatekeepers actually performed versus what Trio investors expected them to perform. Nevertheless,

there is clearly a gap between an investor’s expectation that their planner’s PI insurance would be of sufficient size to meet claims against it and the minimal levels of insurance most planners actually have in place.

What is not generally understood is that it is the AFSL licensee who determines the amount of PI insurance, based on what they consider warranted. The Australian Securities and Investments Commission does not get involved or approve the amount of PI insurance. So where is the incentive for AFSL licensees to make a proper risk assessment of their business and to take up appropriate insurance?

How should risks be assessed? How should an “appropriate” or sufficient

amount of insurance be calculated?

These answers are not straightforward, but it is clear the present system has holes.

I write from experience based upon the numerous claims against AFSL holders that IMF has assessed over a number of years. It is very evident that AFSL holders – including financial planners – generally carry very low levels of insurance. When significant claims arise, the insurance coverage is generally inadequate, leaving investors to wear their losses.

The Committee’s report makes for sobering reading. It offers a rare insight into how Australia’s financial and superannuation system actually works, and the roles key market participants play in the protection of investors (or fail to play, as the case may be).

Appropriate avenues of financial redress in the event of professional misconduct or failure are an important part of a properly functioning system. If insurance is not an effective method of securing compensation, then we need to establish an alternative so that future investors do not endure the hardship and frustration experienced by the Trio investors.

Susanna Khouri is the investment manager of IMF (Australia) Ltd.

www.moneymanagement.com.au June 21, 2012 Money Management — 21

ResearchReview

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

This month, PortfolioConstruction Forum asked the research houses: When rating an active fund manager’s equities capability, how does your firm assess whether any alpha achieved was the result of skill or luck?

VAN EYK Determining whether a fund manager’s outperformance is due to skill or luck is certainly possible. van Eyk looks at factors such as how repeatable or consistent a manager’s performance has been, how well their investment performance aligns with their investment process, and whether the manager is producing insights into the market that differ from the consensus view.

When we meet with a manager to evaluate the skills, knowledge, experience and qualifications of the investment team, we not only focus on stock-specific knowledge, but also on how a manager constructs portfolios and conducts their research effort. We look at the breadth of their skills across all sectors of the market, as we believe that for sustained outperformance, a manager needs to be strong in all areas. We also believe in drilling down into a manager’s financial modelling in order to both assess their depth of understanding of an investment, and to query what fundamental research has been performed in order to arrive at the assumptions in the financial models. We rigorously assess valuation discipline and how this is incorporated into a systematic approach to investing.

When we look at a manager’s track record, we first analyse the regularity of their outperformance, or more simply put – the manager’s consistency. We evaluate this for both up and down markets.

Secondly, we consider measures of portfolio efficiency, such as the information ratio and Sharpe ratios. These give us clues as to how the manager has achieved that performance. For example, has the manager achieved the results via taking more active risk than competitors, or achieved alpha at higher or lower volatility levels than peers?

In analysing portfolio attribution, we strip out stock selection and portfolio management to show whether individual analysts or the investment process itself is driving the outperformance. We believe a systematic process and disciplined portfolio management is more likely to outperform consistently over time than one-off stock selection.

The stability of the investment team will also reflect on whether a manager’s per for mance is repeatable. In this respect, continuity in the investment team, a disciplined and systematic process, and a stable and well-run business are important.

We also look at how the manager

22 — Money Management June 21, 2012 www.moneymanagement.com.au

attributes its success when it makes a good investment. Was it due to a clear and well-defined thesis? Was the manager expounding that thesis in last year’s research review? Is it related to a stock which is likely to continue to deliver over the long term, or did that manager’s process merely centre around isolating where the market had formed inaccurate views on the stock’s nearterm earnings performance? We believe investment returns developed from long-term stock thematics and rigorous valuation discipline are more likely to continue to deliver outperformance in the future than one-off successes in predicting the next earnings result.

Finally, we prefer to see managers generating unique insights when developing investment theses, rather than relying on consensus research and forecasts, which really offer the manager little in the way of a differentiated view.

If a manager can achieve all of the above, we are more likely to conclude that their performance is based on skill rather than luck.

LONSEC The question of whether an active equity manager’s returns are delivered through

either skill or luck is as old as the industry itself. Ultimately, the answer to the question depends on which starting point you take – that is, whether you stand in the active or passive camp of the two main warring investment tribes. This issue gathers momentum especially during challenging investment climates where investors look to gain as much control as possible over their investments.

In this context, fee sensitivity is usually heightened.

Proponents of passive investment inevitably believe that active managers are more lucky than they are skilled, and as such don’t wish to pay extra for what in their view is randomness. In contrast, supporters of active management believe that a quality investment team

and process has the potential to deliver returns superior to the broader market.

However, we shouldn’t oversimplify the issue – to paraphrase Warren Buffet, it’s only when the tide goes out that you know who has been swimming naked.

As in all endeavours, some are stronger than others, and averages, by their nature, tend to conceal outliers.

So, back to the question at hand: how does Lonsec distinguish between skill and luck?

Unfortunately there is no silver bullet or universal equation that can be systematically relied upon to definitively answer the question of whether a manager is skilful or just plain lucky. In the absence of such, appraise multiple factors when forming an opinion on an

active manager’s track record. These include, but are not limited to: product structure; investment philosophy and biases; performance attribution analysis; investment style analysis; assessment of the investment team; corporate stability ; questioning a manager’s reasoning for their respective positions; and, testing to see how this has evolved (or not) in light of prevailing market circumstances.

These factors, when considered together, provide a rich tapestry of information that we believe assists in distinguishing between luck and skill. We gather multiple qualitative and quantitative data points, interrogate these, build a picture and form a view. It is also noteworthy that analysis and opinions are debated at a

formal peer review meeting, in order to ensure that ratings are underpinned by rigorous analysis and reflect all known information.

MERCER There are a number of issues to assess whether a manager’s alpha reflects skill or luck. In general, we can form this judgement by identifying if there is a sustainable competitive advantage (ie, skill) possessed by the team and the investment process it uses. The contrasting position would be if the alpha was due to a special situation (ie, luck) that delivered an outcome contrary to these fundamental characteristics.

An Australian equity investment manager should be able to describe the

market inefficiency being targeted and the abilities the team possesses to be able to exploit such an opportunity. The existence of this inefficiency may be s u p p o r t e d by a c a d e m i c e v i d e n c e and/or by the past investigations of the investment team. Even then, while a market inefficiency may be identified, that opportunity may not exist in every stage of the investment market cycle – so the alpha for a particular manager may be prevalent in one stage of the market cycle (ie, during rising or in falling markets).

There are other dimensions of market cycle that need to be considered. Positive relative returns for a manager of a Continued on page 24

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

ResearchReview Continued from page 23 particular type can be generated by above-average exposure to a style of portfolio (growth or value style). There are also secular trends such as smaller companies outperforming large companies. Managers may elect to have greater exposure to such a trend if they feel that they have the relevant skills.

The team’s investment por tfolio should be examined to see whether the construction and end portfolio are consistent with the manager’s claimed skill.

It can also be useful to compare an individual manager’s alpha with a universe of peers that uses a similar approach.

Assets under management can be an important influence on the manager’s alpha. In general, beyond a certain level of assets, diseconomies of scale arise in terms of transaction costs and share price impact. If a manager is able to generate strong alpha with a large level o f a s s e t s, i t i s a m o re i m p re s s i v e achievement than if a manager had low asset levels to manage. A relatively stable level of assets would assist the reliability of judgement of a manager’s performance.

The investment manager may have generated alpha in supportive circumstances. We would consider if the firm in which a manager operates is an organisation to which market participants promote great investment ideas, plentiful corporate contact and access to profitable corporate deals. These issues may provide assistance to alpha.

How clearly an alpha trend has been demonstrated by the same portfolio manager in differing environmental conditions may also provide a guide to whether that alpha comes from skill, or from the environment, or from luck.

Overall, the best way to carry out an analysis of what comprises skilled or lucky alpha depends on considering a large number of objective and subjective factors. The final caveat that can’t be denied as being relevant to such analysis is that past performance is not a guide to future performance.

MORNINGSTAR Over a short time period, and with little to go on other than performance, it’s almost impossible to separate skill from luck. However, with time on your side and the right tools, it becomes much easier to spot the competent from the fortunate. Morningstar avoids being unduly influenced by strong historical returns which could be driven by luck.

Instead, we use performance as a sense check at the end our ratings process, as we are more interested in a fund’s existing characteristics that will affect how it performs in the future.

We therefore spend a lot of time with the fund manager and the wider investment team, assessing their experience and goals to make sure they align with the strategy being run. Key man risk is often a big issue, so it’s nice to have confidence in the underlying team, and

to make sure resources are not spread too thinly. We also focus on remuneration, favouring managers whose incentives are aligned with investors.

We t a k e a n i n - d e p t h l o o k a t t h e process employed by the manager.

This is a great way of ascertaining if past results were a product of luck or skill. Skilful managers who we expect to produce going forward will be able to demonstrate exactly why they invested in specific stocks, sectors or themes when they did. Through detailed analysis of their current and historical portfolios, we can also confirm whether they have followed their stated approach. Those investors whose returns afford more to luck find it harder to define why they invested in the manner they did – their portfolios attribution is also likely to be top heavy with a few ‘blue-sky’ stocks

accounting for the bulk of their outperformance.

We also put a large emphasis on fees, as every additional basis point of cost is another the manager has to make up before the fund achieves even benchmark performance. Managers who are less confident in their long-term abilities may be tempted to cut and run by charging higher fees in the hope of making a nice short-term profit, whereas a lower fee structure gives a better impression that this is a sustainable offering that has the end investor in mind and will be around for the long term.

Finally comes the aforementioned performance sense check. If the assumptions from our research have not played out in performance terms, either positively or negatively, we revisit our position to make sure we haven’t missed anything. This process makes it difficult for a lucky manager without a sustainable operation to get a high rating. As with anything, though, luck will play its part, but we are of the belief that you make your own luck. The more experience you have, and the more thorough your research process, the

24 — Money Management June 21, 2012 www.moneymanagement.com.au

more likely you are to avoid the bad luck stories and pick more winners.

STANDARD & POOR’S Numerous studies have analysed historical fund returns with the aim of distinguishing the skilled from the lucky. S&P’s rating process incorporates a number of quantitative inputs, particularly where a fund’s track record is attributable to the current team and process.

However, rather than relying on past performance, we believe a qualitativelydriven research approach provides a much more robust basis for rating managers. In evaluating the likelihood of a fund delivering upon its objectives (riskadjusted) and against relevant peers, our assessment of a manager’s capability (ie, their skill) and strategy is based primarily on insights gained from ongoing fund manager review meetings rather than

measures of past performance.

At the same time, we recognise that skill ultimately needs to manifest in superior outcomes over time. Consistent, riskadjusted alpha generation is highly prized within the large-cap Australian equity sector for example, with few managers able to consistently meet their excess return objectives over the long term.

However, it’s important to recognise that no single approach or team is likely to maintain superior outperformance over all time periods on a rolling basis. This reflects the multiple dimensions of style and characteristics that managers adopt.

Also, certain market environments are simply more conducive to bottom-up alpha generation than others.

In differentiating skill from luck, it’s critical to understand sources of active return and whether returns generated are commensurate with the identified skill set and style of the manager. While we draw upon performance attribution and style analysis to assist us in this assessment, we spend considerable time quizzing managers on their decisionmaking processes and assessing the overall quality of their research inputs.

This is done with two objectives: first, to

determine whether a manager’s alpha is an outcome of superior ideas and independent decision making (or lack thereof ). We’re also trying to ascertain whether a manager was right or wrong for the right reasons.

We’re particularly wary of managers dependent on narrow sources of return (i.e. hitting a home run or correlated ideas) or who are overly reliant on external research inputs. We’re also conscious of excess returns generated on a mismatched benchmark or very low assets under management, or those managers overly reliant on market conditions being conducive to their style, which can lead to 'feast or famine' outcomes for investors.

A clearly defined investment philosophy and repeatable investment process provides us with greater confidence that alpha generated can be attributed to both

individuals and the investment process, and not just luck. Managers also need to demonstrate that the factors or techniques they are using to identify investment opportunities are capable of adding value in the future.

Our assessment of a manager’s overall capability will always reflect a subjective judgment of a manager’s skill, relative to both objectives and peers. Higher-rated managers tend to differentiate themselves by the quality of their key decisionmakers and the overall depth of their investment personnel. They also generally have well-designed investment processes capable of adding value in a relatively consistent matter, an appropriate emphasis on risk management, remuneration structures that align with investors’ interests, and appropriate objectives and fees.

S&P Fund Services has advised that its business activity will cease as at 1 October but meanwhile it is ‘business as usual’ and PortfolioConstruction Forum is satisfied with the integrity of the analyst opinion provided.

In association with

Toolbox The Federal Budget and the over-50s John Perri explores the effects the pending reduction of the concessional contribution cap will have on people aged 50 and over.

F

ollowing changes to the superannuation system announced as part of the 2012 Federal Budget, people are shining the spotlight on the attractiveness of super compared to other investment vehicles.

For the majority of Australians, the tax concessions afforded to superannuation will ensure that it continues to be the most effective retirement savings vehicle available. The degree of tax-effectiveness, compared to other alternatives, will vary depending on a person’s marginal tax rate.

Unfortunately, with the higher concessional contribution cap of $50,000 for those aged 50 and over ending on 30 June 2012, there will be a minimum two-year period where the concessional contribution cap will be $25,000 for all people, regardless of age and superannuation balance.

With potentially significant penalties for exceeding the concessional contribution cap, it is vital that client strategies be reviewed.

Further, people previously contributing (or planning to contribute) up to the $50,000 concessional cap will need to consider what they do with the amounts over $25,000 that would previously have been diverted to superannuation on a pretax basis.

Introducing the numbers We will now explore the impacts of the pending reduction to the concessional contribution cap for people aged 50 and over. In doing so, we will conduct a numerical analysis of superannuation’s relative tax effectiveness by comparing the results against a range of common non-superannuation alternatives.

In the 10-year lump sum accumulation analysis that follows, we make the

assumption that, at all times, the person is not impacted by the proposed increased contributions tax measure for those earning $300,000 per annum and above.

While the Federal Budget announcement envisages that the additional $25,000 per annum concessional cap for those aged 50 years and over will be restarted from 1 July 2014, the assumption is made that the standard $25,000 contribution cap will continue to apply and will not be restarted for those aged 50-plus. Also

ignored is the indexation of the standard concessional contribution cap.

By making the above assumptions, our analysis shows an arguably worst case superannuation scenario as it limits the tax concessions a person is able to access via superannuation – including the additional benefits when moving investments into the pension environment.

55. From 1 July 2012, Alvin will have to reduce his salary sacrifice concessional contributions by $25,000 in order to remain within his $25,000 concessional cap, as he currently contributes $50,000.

He is interested in exploring different alternatives that have a similar risk profile.

The tables below, after adopting some simplifying assumptions, show the results of a number of alternatives based on the

Case study – Alvin Alvin is in full-time employment and aged

Continued on page 26

Table 1: Summary of results at 46.5% marginal tax rate (MTR) Investment alternatives considered Continued salary sacrifice (Excessive)1

End of 10 years ($)

If MTR is 34.5% at exit ($)3

203,951

Non-concessional contribution

189,583

Outside super – In own name

172,516

Outside super – In spouse’s name (Nil taxpaying spouse) Discretionary trust2

199,222

Private company

167,352

174,042

?

Insurance bond

178,127

Reduction in mortgage from making extra repayments4

193,623

174,889

Source: AMP

Table 2: Summary of results at 38.5% marginal tax rate (MTR) Investment alternatives considered Continued salary sacrifice (Excessive)

End of 10 years ($)

If MTR is 34.5% at exit ($)

203,951

Non-concessional contribution

217,932

Outside super – In own name

203,330

Outside super – In spouse’s name (Nil tax)

229,012

Discretionary trust

?

Private company

198,153

Insurance bond

204,763

Reduction in mortgage from making extra repayments

222,468

203,921

201,041

Source: AMP

www.moneymanagement.com.au June 21, 2012 Money Management — 25

Toolbox Continued from page 25 $25,000 per annum pre-tax income (or its post-tax equivalent) invested in a pool of assets generating the following simplified investment returns: • Income 4.10 per cent per annum (28 per cent franked) • Capital Growth 3.25 per cent per annum.

Alvin is assumed to be on a 46.5 per cent marginal tax rate at all stages, including in the year of withdrawal.

1. At the top marginal tax rate (MTR) there is a potential minor advantage in continuing to contribute the additional $25,000 per annum on a salary sacrifice basis, even though this would attract the additional 31.5 per cent excess contributions tax (where the non-concessional contribution cap is not exceeded). This is because the actual payment of the excess contributions tax is deferred for a time, compared to paying PAYG tax upfront on the salary and investing on a non-concessional after-tax basis.

However, it should be noted that contributions made on an after-tax non-concessional basis will add to the tax-free component of Alvin’s superannuation benefit.

Continuing to make excess concessional contributions will instead add to the taxable component of his superannuation

critical observation “forThe planners is that clients will need advice. ”

benefit, which may impact on the amount ultimately left to his estate when he passes.

2. No figure is shown for the discretionary trust because the tax effectiveness of this vehicle will depend on the tax profile of its beneficiaries. It is noted however, that if the trust distributions could be paid to beneficiaries who would not incur any tax, the best result for the discretionary trust would be $199,222 (identical to the result for a nil tax-paying spouse).

3. If Alvin was on a lower marginal tax rate (34.5 per cent) at time of withdrawal, some of the alternatives would improve as shown.

4. For people who still have an outstanding mortgage on their family home, using some or all of the amounts previously devoted to making pre-tax concessional contributions may now be an option worth revisiting. Here, we’ve assumed that Alvin has a $285,000 mortgage (P & I), payable over 25 years, with an interest rate of 7 per cent per annum and monthly repayments of $2,014.30. He elects to make additional monthly repayments of $1,114.60 (46.5 per cent MTR) or

$1,281.25 (38.5 per cent MTR – see Tables 1 and 2, page 25).

Using the same methodology, Table 2 shows the results assuming that Alvin is instead a 38.5 per cent marginal tax rate taxpayer.

Broad observations At this point the following comments can be made: 1. A non-concessional super contribution strategy remains viable when compared to insurance bonds. However, clients looking to retain ‘access’ to their investment may be attracted to the access and overall simplicity of the insurance bond vehicle.

2. When looking at alternative vehicles, the extent to which the chosen investments will provide returns in the form of income and capital will play a part in influencing the choice of vehicle. Also relevant is the tax profile of the beneficiaries or shareholders, especially on exit. The discretionary trust vehicle, depending on the profile of its beneficiaries, is a viable consideration especially when growth assets are involved.

3. Other than at the top marginal tax rate, excessive concessional contributions are clearly not viable and the relative attractiveness of super reduces as we move from higher to lower marginal tax rates compared to other alternatives. At lower marginal tax rates, any benefits from the Government low income earner contributions and co-contributions should be considered.

4. Paying off the mortgage with the spare cash flow now available by the inability to make the $25,000 concessional contribution is a viable strategy.

However, consideration should be given to the borrowing rates, and likely earnings from the alternative investment vehicles.

5. An alternative that has not been canvassed for Alvin is the often raised question of how superannuation and other alternatives would compare if instead the contributions were used to fund a gearing strategy. Many people are attracted to geared investment strategies but often do not fully appreciate the increased risks attached to borrowing. It is difficult to make rigorous like-with-like comparisons given the different and additional risks involved with gearing.

Conclusion The proposed changes will require some immediate action for clients aged 50 and over who have been advised (currently or previously) to make concessional contributions in excess of the standard concessional cap beyond 1 July 2012.

The above analysis should assist in advising clients undertaking these evaluations, although ultimately an individual case-by-case analysis will be required.

The critical observation for planners is that clients will need advice, and for many people it may be an effective combination of super and non-super alternatives that will provide for their retirement income needs.

John Perri is AMP Technical Services manager.

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

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

1.What will the standard concessional contribution cap be, for people aged 50 and over, in the 2012/13 financial year? a) $50,000 b) $25,000 c) $150,000 d) $450,000 2.The tax rate applicable to discretionary trust distributions is: a) 16.5 per cent b) 31.5 per cent c) 46.5 per cent d) Generally depends on the tax position of the beneficiary 3.True or false: Gearing strategies carry the same level of risk as the other alternatives canvassed.

4. Generally speaking, continuing to salary sacrifice above the concessional contribution cap (ie, making excessive contributions) may be a viable strategy for those on the: a) 46.5 per cent tax rate b) 38.5 per cent tax rate c) Either of the above tax rates d) None of the above 5. From 1 July 2012, the retirement advice needs of people aged 50 and over will: a) Remain unchanged b) Require a review to ensure contributions remain within caps c) Result in superannuation becoming unattractive d) All of the above

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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Appointments

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

Move of the week Equity Trustees (EQT) has appointed Geoff Rimmer as head of its private wealth services division.

With more than 20 years experience in superannuation, financial planning and insurance, Rimmer will lead the strategy and business development of EQT's superannuation, trustee, wealth management and aged care units.

Before joining the firm, he was chief executive of Financial Services Partners.

BL ACKROCK Australia has appointed Ascalon Capital c h i e f e x e c u t i v e A n d re w Landman as head of alternatives in Australia.

Andrew Landman During his time at Ascalon, he helped build a portfolio of nine single-strategy hedge and high conviction funds across Australia and Asia Pacific.

Rick Arney, head of hedge funds for BlackRock Alternat i v e In v e s t o r s, s a i d t h e appointment of Landman reflected the asset manager's desire to expand its position in Australia.

Joseph Pacini, head of BlackRock's alternatives business in Asia excluding Japan, has been selected to lead the Australian alternatives business until Landman commences his new role.

Barclays has appointed Dr Nigel Chalk as managing director and head of emerging Asia research.

He joins the firm from the International Monetary Fund (IMF) where he was most recently the China mission chief and a senior advisor on Greater China and Mongolia. In this role, he helped lead the IMF's annual Article IV consultations with China, governing

obligations around exchange agreements.

Dr Chalk was also responsible for the IMF's biannual regional economic outlook for Asia and the Pacific.

Since joining the fund in 1 9 9 7 , h e h a s w o rk e d i n Argentina, Uruguay, Bolivia and Brazil, and held specialist roles in Russia, Korea and the Philippines.

In his new role, Dr Chalk will be based in Singapore and will lead Barclays' macro-economic, foreign exchange (FX) and interest rate teams across the Asia Pacific region.

He will repor t to Pi e ro Ghezzi, Barclays' head of global economics, emerging markets and FX research, and Jo n Scoffin, head of research, Asia Pacific.

Private Portfolio Managers (PPM) has appointed Andrew Beirne as a portfolio manager.

He has 25 years experience as an investment management and research specialist, having ser ved in various portfolio management positions at UBS, Hartley Poynton, MIR and ING Investment Management.

His previous role was as a portfolio manager of the ING Small Companies Fund.

Beirne joins PPM as it seeks to expand its offering to family offices, charities and high net

Opportunities SENIOR FINANCIAL ADVISER Location: Adelaide Company: Terrington Consulting Description: A full-service financial advisory firm is seeking a talented and proven financial adviser to join its team.

It is critical that the successful candidate has expertise around superannuation, tax and Centrelink, business and individual risk insurance, as well as experience in dealing with HNW clients.

In this role you must also have the skills to acquire new clients via your own professional network.

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

Location: Adelaide Company: Terrington Consulting Description: A large corporate body is looking to hire an experienced financial accountant for a leadership role.

Andrew Beirne His appointment also follows the addition of Ian Hardy, a former IMA specialist from Centric Wealth, in October last year.

Wilson HTM Investment has appointed three executives to its Melbourne offices.

Ivo r R i e s has joined the group as a senior research analyst after 10 years as an equities analyst. He also has 22 years experience as a financial journalist.

Stepping in as a senior institutional adviser, David Permezel recently spent four years as an institutional adviser and equity analyst at E.L. & C Baillieu.

Prior to this, he spent 22 years at JB Were and Goldman Sachs JB Were, where he was an equity partner.

Also based in Melbourne, Robert Ward has been appointed as a senior investment adviser. Like Permezel, Ward previously spent time at E.L. & C Baillieu, serving as an equity partner and director.

Hi s a re a s o f e x p e r t i s e include advising high net worth clients and managing corporate relationships.

Ascalon Asia has appointed Andrew Hutson as investment analyst cover ing business development and investor relations in Asia, Europe and the United States for select Ascalon partner firms.

Working with Ascalon Asia chief operating officer Chuak Chan, he will help source new partnerships with Asian-based asset management businesses.

Hutson was previously investment manager at GAM Ho n g Ko n g where he was involved in the selection, allocation and monitoring of allocations to Asian hedge funds.

Ascalon head of business development Jason Collins said Hutson’s appointment is significant to not only Ascalon's Asian-based partners, but its Australian-based partners as well.

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

The full-time position will require the successful candidate to complete period end closing (Oracle), general ledger reconciliation and compliance procedures.

You will be required to assist in internal and external audit functions and FOREX transaction management.

Your primary focus will to lead an accounting team, therefore demonstrated experience in management and mentoring will be essential.

In addition, it is essential that the successful candidate have tertiary education and be CA/CPA qualified.

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

SENIOR PARAPLANNER SENIOR FINANCIAL ACCOUNTANT

worth clients through its individually managed accounts (IMA) service.

Location: Adelaide Company: Terrington Consulting Description: An accounting and financial services firm is looking to hire an experienced and technically competent senior paraplanner.

The successful candidate will be responsible for the preparation of complex SOAs and provide expert advice on legislative and compliance requirements.

You will need high-level financial planning modeling and portfolio construction skills, as well as the ability to present strategies to clients when required.

It is essential that you hold a DFP qualification – experience with Xplan will be viewed as a distinct advantage in the hiring process.

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

CLIENT SERVICES OFFICER – SMSF Location: Adelaide Company: Kaizen Recruitment Description: A private wealth management firm is seeking a client services officer to perform administrative functions across the SMSF area of the business.

The ideal candidate will have some administration and client service

experience, ideally from a financial services background.

RG 146 qualifications, as well as some expertise in the SMSF space, will be considered highly.

The firm will provide the opportunity for ongoing training and development for the successful applicant.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Kaizen Recruitment – (03) 9013 0308

FINANCIAL ADVISER Location: Adelaide Company: Terrington Consulting Description: A financial planning business is seeking a financial adviser to provide complete and tailored wealth advice solutions to its busy client base.

Successful candidates will have access to an excellent remuneration structure and quality systems.

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 June 21, 2012 Money Management — 27

Outsider

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

A pain in the pointy end ONE of the pleasing things about the financial services industry, in Outsider’s earnest opinion, is the number of high flyers who don’t appear to let their enormous wealth go to their heads.

There are plenty of gentlemen with whom Outsider is able to break bread or swing a club on a regular basis who give no outward indications that their monstrous salaries make a mockery of Outsider’s own humble scribe’s wage.

That said, there is certainly the potential for people who earn too much money for their own good to let those inflated salaries fuel an overinflated sense of self worth (however this certainly doesn’t explain Outsider’s own somewhat inflated sense of self worth).

Outsider doesn’t wish to name names or, heaven forbid, in these straitened times, throw about glib references to certain banks being labelled a “millionaire’s factory”, but it seems one New York-based exec recently made a name for himself in all the wrong ways.

According to Fairfax Media, this well-heeled banker was “offloaded from a Qantas plane in Los Angeles for alleged disruptive behaviour after refusing to turn off his mobile phone”.

It seems to Outsider that disobeying direct requests from flight crews would be a sure-fire way to get oneself ejected from a plane without an ejector seat. But if he ever did find himself in such a predicament, Outsider feels the smartest way to recover from the inconvenience of being

Count your blessings, Mr Bean-counter OUTSIDER was last week left wondering about how many thousands of billable hours it took the chaps over at Deloitte to accumulate $1.1 billion in revenue for the year to the end of May, 2012.

Of course, Outsider could only possibly undertake this exercise if he could draw on the resources of a consultancy and bean-counting firm such as Deloitte, and had intimate knowledge of the hourly rates being charged and the manner in which those rates translate into 20-minute billing intervals.

And if Outsider had called on those resources then, it follows, that Deloitte’s revenues would have been commensurately higher than they actually were.

But he is pleased to note that even in these extremely difficult times for the financial services industry, Deloitte has seen fit to spread its largesse by announcing it will be promoting 45 new partners, effective 1 July 2012.

“

Out of context

This, it said, when “coupled with the 16 experienced lateral hires that Deloitte has recruited during the past year”, would see 61 new Deloitte partners by 1 July.

As if to rub salt into the wounds of all those companies and competitors who had undertaken redundancies in the past 12 months, Deloitte chief executive Giam Swiegers said, “As a firm we have also made the choice to continue to invest in attracting and retaining our people, at a time when others have demonstrated less confidence in the face of tightening economic conditions, and taken a different course”.

Outsider acknowledges that Deloitte does a lot more than count beans and clearly does those things very well, but he is reminded of a column he once wrote suggesting that bean-counters, like cockroaches, were one of the few species likely to survive a nuclear holocaust and, it seems, an economic melt-down.

“I’m not sure what an insurer’s claims philosophy is, but, um, it might be that they prefer not to have them so that they can maximise their profits.”

King & Wood Mallesons senior associate Michael Mathieson hypothesises on the insurance industry’s ethical values.

28 — Money Management June 21, 2012 www.moneymanagement.com.au

turfed from a flight would be a contrite apology in the hope of ensuring passage on the next available service.

Not so for this hardy executive, who was then prevented from boarding a connecting flight to Sydney for allegedly “behaving disruptively and refusing to follow crew instructions”, and was then banned from flying for 24 hours, according to the report.

Outsider wonders whether this chap might have used the intervening period to ponder whether earning an obscene salary actually makes a person more important than an aircraft full of regular folk. Perhaps, though, he simply checked into a five-star hotel and had a bloody good meal.

Little succour for Perpetual

OUTSIDER recognises that these are challenging times for the boards of Australia’s major publicly-listed financial services companies, particularly if their share price has remained in the doldrums for a prolonged period of time.

Thus he has some sympathy for the chaps over at Perpetual Limited when they last week found themselves responding to a price query from the Australian Securities Exchange (ASX) and seeking to deal with a speculative piece published in a national daily newspaper.

When a company has changed chief executives twice in almost as many years, is “conducting an operational review with the assistance of an international consulting firm” and has a

“Portal software by BGL keeps the documents forever ... well, at least for two or three years.”

Three years is a lifetime for BGL managing director Ron Lesh at an executive briefing breakfast in Melbourne.

share price which is nearly half that of 2009, Outsider reckons a certain amount of speculation is inevitable.

In fact, Outsider reckons a few of the shareholders who witnessed the Perpetual board knock back a $38 to $40 bid from private equity outfit KKR in 2010 must be wondering about last week’s price in the low $20 range.

But Outsider urges investors not to become too excited about media speculation about Perpetual or any other company in circumstances where the same edition of the same newspaper was canvassing Bill Shorten jumping into bed with Kevin Rudd to mount a challenge to Julia Gillard.

And Outsider thought the silly season started sometime closer to Christmas.

“None that I’d be willing to proffer to a broader group – and that includes the media!”

Deloitte partner actuaries and consultants James Hickey stands his ground when pushed to guess stats by journos at a Deloitte media briefing.