Money Management (March 15, 2012)

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Vol.26 No.9 | March 15, 2012 | $6.95 INC GST

The publication for the personal investment professional

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ACCOUNTANTS’ CHALLENGE: Page 19 | INCOME PROTECTION BENEFITS: Page 26

Educators not sitting on their heels

By Chris Kennedy FINANCIAL services educators are aiming to be prepared for whatever changes may arise from the Australian Securities and Investments Commission (ASIC)’s CP153 consultation paper into education standards, even though no new details have been provided since submissions closed mid last year.

Kaplan Professional is one of the major trainers with respect to the diploma of financial services – the industry standard designation for RG146 compliance – and the organisation’s vice president Marilyn Hill said Kaplan has recently introduced a range of changes aimed at staying ahead of upcoming legislation.

One of the key CP153 proposals is that an external assessment be conducted separately from the courses offered by registered training organisations (RTOs) which are currently able to assess their own students.

Hill said RTOs are awaiting clarity from

ASIC about whether new standards and requirements for certification will remain consistent – as they have been for the last few years – but regardless, Kaplan has moved to a closed book exam format and focused on ensuring students get repeated practice at developing statements of advice. The changes were partly in response to industry submissions to CP153, Hill said.

ASIC confirmed plans to introduce the national exam had been pushed back from 1 July 2012 to 1 July 2013. Money Management understands ASIC is currently interviewing candidates to form an education committee to assist in instructional design of the exam and help formulate exam questions, and is assessing tenders for companies to conduct the exam – although ASIC is refusing to comment further on the matter.

Kaplan has also introduced a greater focus on advisers’ client engagement skills as a result of feedback from licensee clients, Hill added.

Kaplan is also giving serious considera-

Accountants cautious on planning alignments

By Bela Moore

THE independence of accountants who align their businesses with financial planning dealer groups could be called into question, according to RSM Bird Cameron principal Peter Nicol.

With no word from the Minister for Financial Services, Bill Shorten, on an alternative to the accountants’ exemption which will be removed when the Future of Financial Advice (FOFA) changes are implemented, many accounting firms are reviewing the options that allow them to advise on self-managed super funds (SMSFs).

According to Nicol, aligning with a dealer group had been a possibility, but RSM Bird Cameron would be obtaining its own Australian financial services licence due to an apparent conflict of interest.

“The accountant may feel a bit conflicted because they are supposed to be the trusted adviser and independent, but if you’ve only got a limited licence or product range to advise on, what do you say?” he said.

Nicol acknowledged, however, that small accounting firms might still find it appealing to partner with dealer groups due to a lack of funds, the time spent on licensing procedures or the extra resources dealer groups could offer.

Institute of Public Accountants executive general manager Vicki Stylianou believes the apparent conflict is a misconception. She said independence in SMSF advice would be maintained through the ban on commissions and, in their case, rigorous screening of Continued on page 3

Tim Steele tion to offering undergraduate degrees if that looks to be the way the industry is headed.

“We would put that in place as a natural pathway because we’re a higher education provider as well as a vocational education provider,” Hill said.

At the licensee level, AMP’s Horizons Academy last year introduced the universi-

ty challenge, which is run in conjunction with the Financial Planning Association. This year, Horizons is working with the universities to further integrate the program into university curricula to make it both more appealing and more feasible for students to participate, according to Horizons director Tim Steele.

And MLC – which recently introduced a mobile adviser program aimed at upskilling career changers looking to move into financial planning, and an adviser business school that helps advisers become better business operators – will shortly introduce an accountants’ advice academy.

The Association of Financial Advisers (AFA) at its latest national conference launched Campus AFA, an education initiative AFA vice president and education chair Adam Smith describes as the beginning of another phase for the AFA where it will look to create more education solutions.

For a full report on the state of education in the financial advice sector, turn to page 13.

ESG funds hold their own

By Andrew Tsanadis ENVIRONMENTAL, social and governance (ESG)-based managed funds are holding their own despite the current volatile market conditions – and may emerge at an advantage as a result of the Government’s carbon tax policy.

That is the assessment of a number of analysts and managers in the ESG arena, with Dalton Nicol Reid (DNR) chief investment officer Jamie Nicol saying it is not necessarily a risk for an investor who has previously invested in traditional investment funds to move to an ESGfocused offering.

According to Responsible Investment Association Australasia’s ‘Responsible Investment Annual 2011’

benchmark report, the average returns of 30 dedicated responsible investment (RI) portfolios outperformed the ASX300 accumulation index across Australian shares, international shares and balanced funds over one, three, five and sevenyear periods up to June 2011.

Lonsec senior investment analyst Steven Sweeney believes that most retail fund managers, rather than incorporating a segmented ESG approach, “are not taking a large departure from established investment processes” but simply increasing their focus on environmental and governance issues.

“Given that an ESG assessment may bring heightened risk awareness, those products subscribing to this philosophy could prove a more secure

investment option than one where the concept is less formalised,” he said.

Sweeney was quick to point out however that an ESG assessment is not a magic cure-all.

Investors are still exposed to share price disappointment, macro influences and unforeseen events such as fraudulent practices.

Perpetual responsible investment and sustainability manager Pablo Berrutti said that, based on its own ESG-assessed broadbased managed funds, investor returns tend to be quite volatile.

For instance, some of Perpetual’s ESG-based options do not allocate to resource companies because of a number of environmental concerns.

Continued on page 3

Editor

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Too many moving parts

A

s the clock ticks down to Parliament giving final shape to the legislation which will govern the financial services industry over much of the next decade, politicians need to reflect upon whether they are going to succeed in creating an appropriate and level playing field.

Given that the Government is intent upon pursuing the implementation of its policies both separately and in tranches, there is a danger that the playing field which emerges in the next 18 months will not be level and that one sector of the industry will be advantaged over another.

Specifically, there is a danger that the Government will entrench an inappropriate advantage for superannuation funds with respect to the provision of advice.

This is because the Future of Financial Advice (FOFA) changes are being dealt with separately from those flowing from Stronger Super, and the Government is not waiting for the findings of the Productivity Commission with respect to default funds under modern awards.

It may have been expedient for the Minister for Financial Services and Superannuation, Bill Shorten, to have introduced the FOFA legislation in a series of tranches, but it is something which has given rise to

FOFA right may “beGetting on the industry’s agenda for many years to come. ”

both uncertainty and a lack of confidence in the financial services industry.

Equally, it is hard for financial services companies to make effective commercial decisions when they know that the implementation of the FOFA changes are unlikely to be coordinated with the equally important introduction of the MySuper regime.

The level of uncertainty generated by the Government's approach was last week underscored by a letter written by Financial Planning Association (FPA) chief executive Mark Rantall, when he said the FOFA legislation to be considered by the Parliament in coming weeks "is not the whole reform agenda".

Rantall pointed out to members that the FPA was continuing to advocate around a proposed last resort compensation scheme, the replacement of the

accountants’ exemption, the proposed national competency exam, restricted use of the term 'financial planner' and a tax agents services regime.

In other words, whatever form the FOFA bills may take following their passage through the House of Representatives, financial planning companies will find themselves still operating in a less than certain environment, with fur ther legislative and regulator y changes in prospect.

Then, too, there is the reality that the arrangements around scaled advice remain up in the air, and concerns continue to exist around whether particular industry superannuation funds will continue to have an undue advantage because of the default funds under modern awards regimes.

The bottom line for the financial services industry is that while much is at stake, it seems unlikely there will be any real accounting of the combined impacts of the Government's changes until well after they are introduced.

On that basis, getting FOFA right may be on the industry's agenda for many years to come.

– Mike Taylor

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2 — Money Management March 15, 2012 www.moneymanagement.com.au

News

Futuro brand may survive under AMP

By Milana Pokrajac

THE Futuro Financial Services brand may survive under the ownership of AMP, despite the plan to have its financial planners eventually licensed under Charter Financial Planning.

AMP has invested in Futuro Financial Services, taking an initial 10 per cent minority stake with a plan to take full ownership of the business in five years.

Futuro will continue to operate under its own licence during the initial stages of the

transaction, after which its financial advisers will be offered a transition to Charter Financial Planning.

Futuro director Dennis Bashford said it was very important to the group’s planners that the brand’s culture remains after the acquisition.

“The culture can remain within the group; they will be authorised under Charter, which means the licence will disappear,” Bashford said. “The brand may or may not.”

AMP will make a range of its services avail-

able to Futuro, including its practice management capability, succession solutions, compliance systems and regime, advice documentation, back office support and its technology base.

For Bashford, services offered by a large organisation will become increasingly important in the new regulatory environment.

“It will be very difficult for some of the smaller dealers to keep pace with the regulatory, expertise and IT requirements,” Bashford added.

This move by AMP is the latest in a string of acquisitions the financial services industry has seen last year, with some of the largest non-aligned dealer groups having been purchased by large financial institutions.

The two businesses had already built a close relationship, according to Bashford and AMP’s director of financial advice network Andrew Waddell.

Futuro Financial Services has 80 financial advisers working under its licence, with $2 billion in funds under advice.

Coalition super corporate governance vow

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4 — Money Management March 15, 2012 www.moneymanagement.com.au

By Mike Taylor THE Federal Opposition has pointed to the Financial Services Council’s (FSC) release of new corporate governance standards for superannuation fund trustees as having highlighted a failure on the part of the Federal Government.

The Opposition spokesman on Financial Services, Senator Mathias Cormann, said the FSC’s decision to impose higher standards than those applicable under current laws “exposes Bill Shorten’s failure to act in relation to this important and necessary area for superannuation reform”.

As well, Cormann gave an undertaking that in the event the Coalition gained Government, it would work in consultation with all the relevant stakeholders to develop and impose such standards.

He claimed the Government had failed to pick up on a series of sensible recommendations contained in the Cooper Review on improving superannuation corporate governance.

“Since the report was released Bill Shorten and Labor have either outright opposed or ignored many of the sensible Cooper Review recommendations to improve superannuation fund governance without providing an acceptable explanation of why that is the case,” Cormann said.

“If he continues to ignore the need for these important reforms, Bill Shorten will confirm once more that he is far more interested in protecting the vested interests of his friends in the union movement than protecting the public interest,” he said.

News

Synchron accuses FSC of misrepresenting churn figures

By Milana Pokrajac DEALER group Synchron has accused life insurance companies and the Financial Services Council (FSC) of deeming all discontinued life policies as churn, and of presenting figures as such to the Federal Government.

Synchron director Don Trapnell said the Future of Financial Advice (FOFA) draft legislation presupposed that advisers who

moved clients from one product to the product of another insurance company were “churners” and “out to financially benefit themselves”.

“This presumption is quite simply wrong, and seems to have been predicated on a move from the FSC in its representations to the Minister of Financial Services Bill Shorten,” Trapnell said.

“Over the past few years, life companies have had a very strong

push to try to reduce their lapse rates and increase their rates of retention of the policies on their books,” he added. “To aid them in this cause, the FSC appears to have taken statistics relating to lapse rates to the Government and convinced them they are evidence of adviser churning.”

According to Trapnell, even policies which have “run their course” – and in the case of one life company, death claims – had

been counted as churn by risk companies.

The draft FOFA regulations include level adviser commissions for rewritten policies and a twoyear commission responsibility.

“I don’t think there is a professional adviser out there today who has not reassessed a client’s situation within five years and made some recommendation where it has been appropriate to do so,” Trapnell added.

Don Trapnell

Nicky Richards

Aviva Investors rebrands to Antares

By Andrew Tsanadis

AVIVA Investors Australia has announced that it will be rebranded Antares following its acquisition by MLC in October last year.

The company also announced that MLC Investment Management general manager, product, Sam Hallinan has been appointed Antares managing director.

Hallinan will report to MLC chief investment officer Nicky Richards, who is now responsible for leading all of MLC’s in-house asset management teams.

Along with Hallinan’s additional duties, Antares has also appointed Nick Pashias to the role of head of equities.

Hallinan acknowledged that there had been uncertainty around ownership and leadership, but the chosen team aligned well with MLC’s existing institutional fixed income team.

He added that the investment philosophy and process for the team will remain unchanged under the rebrand.

Antares manages in excess of $4.5 billion of Australian equities across core, concentrated, income, longshort, small cap and property strategies, according to MLC. www.moneymanagement.com.au March 15, 2012 Money Management — 5

News

FSC sets high bar on super corporate governance

Global equities offer more investment opportunities than local market

By Mike Taylor

AUSTRALIA’S two-speed economy is helping to boost the return rate of local equities, but global equities are presenting more opportunities through technology and consumption.

Speaking at the Fidelity ‘Battle of the Asset Classes’ forum, Fidelity’s Australian equities portfolio manager Kate Howitt said she believed Australia’s economy was quite flexible and global growth – particularly in the Chinese market – should support Australia’s mining earnings.

She added that both the externally driven mining sector and internally driven household sector have traded off well over the past two decades, and this has provided stability and growth to Australia’s gross domestic product.

“History has shown us that when growth in mining sector starts to fade we should get an easing of monetary policy and a rebound in the other sectors of the economy,” she said.

The Australian dollar is also strong, with its purchasing power on parity with the US. Howitt said the Australian dollar was looking more attractive to overseas investors because of the

THE Financial Services Council (FSC) has moved ahead of both the Government and the regulators by having its members sign up to a set of corporate governance standards for superannuation funds which effectively preclude multiple fund directorships and other conflicts of interest.

The corporate governance standards, released last week, come at the same time as many financial services commentators remain critical of practices within some industry superannuation funds, particularly multiple directorships and the nondisclosure of executive remuneration.

The new standards will apply to all the major financial services companies belonging to the FSC. Commenting on the standards, FSC chief executive John Brogden said raising the standards of governance and transparency in superannuation was long overdue.

He said the new policy would require member companies of the FSC from the retail and corporate superannuation sectors to meet the highest standards of transparency and governance in the way they operated their superannuation funds.

Brogden said the new standards went above and beyond what was required by law, and that while the FSC supported Australian Prudential Regulation Authority (APRA) proposals to further align corporate governance standards in superannuation with

banking and general insurance, the FSC’s new standards went even further.

“Superannuation funds should meet the same standards they expect of the companies in which they invest,” he said.

The new FSC standards are intended to apply from 1 July next year, the same time at which MySuper and APRA’s new standards are expected to apply.

The new FSC standards demand of member companies that their superannuation funds have an independent chair, that the majority of directors are independent, that remuneration of directors and senior management be disclosed, that multiple directorships not be held, that funds develop environmental, social and governance risk management policies, and that they publicly disclose a proxy voting policy.

6 — Money Management March 15, 2012 www.moneymanagement.com.au

By Andrew Tsanadis

debasing of other world currencies, particularly the euro and the US dollar.

According to Fidelity global equities portfolio manager Amit Lodha, there are many more market opportunities in global economies than the Australian economy currently has on offer to investors.

The US outlook is looking a lot brighter than 18 months ago. The resurgent growth of the US housing market is a particularly strong economic indicator which will provide a stable base for further growth, he said.

He said that while there was some weakness in 2011, the next 30 to 40year period would see emerging markets provide investors with many avenues for growth.

These would include better and more varied opportunities to invest in technological innovation, infrastructure investment and telecommunications.

Consumption would also be a key driver in the growth of global equities, particularly in countries like India.

“The one fly in the ointment that we all need to keep our eyes on is the oil price – if things get worse in the Middle East it is going to be a big tax on consumption growth and a big tax in emerging markets,” Lodha conceded.

Antares, everything Aviva Investors used to be Aviva Investors is changing its name to Antares. Rest assured, our philosophy, our products and most importantly our people, will all remain the same.

Should you have any questions about the change, please contact our Client Services Team on 1800 671 849 or visit us at www.antarescapital.com.au/aviva

From 1 October 2011, Aviva Investors Australia Limited (ABN 85 066 081 114) is a wholly-owned subsidiary of National Australia Bank Limited and is no longer part of the Aviva plc Group.

MLC Limited ABN 90 000 000 402. 105-153 Miller Street North Sydney, NSW 2060. National Australia Group of Companies. MLC0432/MM

News FOFA lobbying intensifies

By Mike Taylor WITH the Future of Financial Advice (FOFA) bills believed likely to return soon for further debate in the House of Representatives, the key independents are viewed as unlikely to deliver on more than a few of the amendments seen as crucial by Australia’s major financial planning groups.

The key groups, including the Association of Financial Advisers and the Financial Planning Association, intensified their lobbying following the realisation they would be gaining few concessions f ro m t h e G ov e r n m e n t f o l l ow i n g t h e tabling of the report of the Parliamentary Joint Committee (PJC) reviewing the FOFA bills.

The PJC ended up producing two separate reports: a Government report, and a dissenting report produced by the Opposition members of the committee. A few days later, the chairman of the PJC, Bernie Ripoll, was appointed Parliamentary Secretary to the Treasurer in the Gillard Government’s latest Cabinet reshuffle.

A number of financial planning industry executives involved in discussions with the Government and in lobbying individual members of Parliament said they had been surprised by the manner in which Labor members of the PJC had effectively deepened their support for the Government’s position.

They said the tenor of the Government members’ PJC report had been more hard-line than had been indicated in discussions last year.

This means that much will depend on the success or failure of the Federal Oppos i t i o n i n m ov i n g a p p r ox i m a t e l y 1 6 amendments outlined in the dissenting PJC report.

At the core of those amendments are opt-in and the prospective nature of annual fee disclosure statements.

In the meantime, the financial planning industry is still awaiting announcements from the Minister for Financial Services, Bill Shorten, on both an appropriate transition period for the FOFA changes, and the regime to replace the accountants’ exemption.

Europe still dragging on investor sentiment AUSTRALIAN chief investment officers (CIOs) are now a little less spooked by events in Europe and the risk of contagion with respect to China and the US, according to the latest Financial Services Council (FSC) Chief Investment Officer Invest Index.

The index, the product of a survey of chief investment officers from comp a n i e s a f f i l i a te d w i t h t h e F S C , showed that even though respondents are a little less concerned by Europe’s debt problems, sentiment fell last quarter.

According to the index, on a scale from minus 100 to 100, chief investment officers rate the investment outlook for the next year as 16, down from 20 in December last year.

Further, they cited the European debt crisis as being the biggest risk factor impacting investment returns in the next 12 months.

Commenting on the index results, FSC chief executive John Brogden said respondents were less concerned about China and the US than they were last quarter.

He said the view on China had improved substantially since 2011, when chief investment officers were concerned about the risk of slower growth.

“They now see China’s resilience in the face of the European crisis as a reason for optimism,” he said.

Further, Brogden said that in terms of the US, there were signs the economy had stabilised, which was helping to drive optimism in Australian and international equities.

“However Europe remains a key concern in both the short and long term,” he said. “Europe’s failure to resolve its debt problems is weighing heavily on confidence among CIOs. As a result,

John Brogden sentiment for international fixed income is dragging down overall sentiment.”

The survey found that while the most pressing immediate concern for chief investment officers was Europe, they viewed the longer-term risk as being the impact of governments unwinding debt in Europe and the US.

Mason Stevens merges with 2020

By Chris Kennedy MASON Stevens has merged with 2020 Funds Management and 2020 DIRECTINVEST,with the combined entity operating as Mason Stevens Group. The merger was effectively completed on 2 March.

Their product capabilities combine under the banner of One Capital Asset Management, headed by 2020’s Vincent Hua in his new role as Mason Stevens Group chief investment officer. The new entity offers equities, derivatives, fixed income, foreign exchange and commodities offerings, the group announced.

Pa t r i c k Ha n d l e y f r o m 2020 is group executive chairman and Thomas Bignill from Mason Stevens has been named chief exec-

utive of the merged entity.

Bignill said the merger was aimed at improving the product offerings and increasing the scale and distribution capability of the group. A key distribution advantage was being able to deliver managed accounts into direct trading option 2020 DIRECTINVEST, which h a s t ra d i t i o n a l l y o n l y offered managed funds.

“We’re a believer in the managed account space and how that will grow in the

next five to 10 years, [and it is] getting real traction with planners,” he said.

A big part of the appeal was the complementary skills the two parties brought to the table, Bignill said, pointing to Hua’s background running big trading books at commercial and investment banks, and his team’s strong credit background. He said Handley would do a terrific job as chair, given his background in banking and wealth

management.

The group is experiencing increased response from financial planning dealer groups who are attracted to the completeness of the group’s offering delivered through a managed account structure, Bignill said.

The vast majority of Ma s o n s St e v e n s G r o u p’s financial planning partners are boutiques rather than l a r g e r d e a l e r g r o u p s, because the product offering is held in-house rather than sitting on a wrap. This often doesn’t fit with the way larger groups do business, Bignill said.

The group also interacts directly with high net worth clients: the planner refers clients to talk to the group as a specialist dealing in fixed income or equities, Bignill said.

FOFA and MySuper cannot be considered in isolation THE Financial Services Council (FSC) has strongly warned against the MySuper legislation and the Productivity Commission’s review of default funds under modern awards being viewed in isolation from the Future of Financial Advice (FOFA) changes.

As well, the FSC has urged against the Australian Prudential Regulation Authority (APRA) having a role in determining commercial tenders under the MySuper regime.

In an opening address to the

Parliamentary Joint Committee (PJC) reviewing the MySuper bills, FSC senior policy manager Andrew Bragg said his organisation was unable to support the legislation giving APRA such involvement.

He said the legislation, as drafted, would remove competition, introduce cost and insert the prudential regulator as a commercial arbiter.

“It requires APRA to approve commercial tenders where the price is determined by the market,” Bragg said. “This is not the role of

8 — Money Management March 15, 2012 www.moneymanagement.com.au

our prudential regulator.”

He said the two MySuper bills being considered by the PJC should not be considered in isolation from either other forthcoming MySuper legislation or the Future of Financial Advice (FOFA) changes.

Bragg also said the bills should not be considered in isolation from the Productivity Commission’s review of default superannuation funds under modern awards.

“Our submission highlights the significant overlapping of the

FOFA reforms and in particular the Productivity Commission review,” he said. “This occurs at a time when just 104 or the 196

regulated ‘public offer’ super funds are listed and therefore permitted as default funds in modern awards.”

SMSF Weekly Concern over super SMSF slowdown due SMSFs move beyond stereotypes and self-employed to Government policy By Damon Taylor “The classic example is in

By Mike Taylor

By Chris Kennedy

THE Government should develop a mechanism under which a range of stakeholders could examine community superannuation issues, including consumer protection issues in self-managed superannuation funds (SMSFs), according to the Association of Superannuation Funds of Australia (ASFA).

In a pre-budget submission released last week, ASFA has also expressed deep concern at the lack of access to superannuation for those who are self-employed.

"ASFA is concerned that the proportion of selfemployed that have no superannuation is increasing," the submission said. "According to data from the Australian Bureau of Statistics, around 30.5 per cent of males and 25.8 per cent of women report having no superannuation at all."

The submission said the self-employed were about twice as likely to have no superannuation compared to wage and salary earners.

"The self-employed also are less likely to have higher or middle range balances compared to wage and salary earners," it said. "A comparison of selfemployed against employees reveals that whereas 50 per cent of employees have less than $20,000, 50 per cent of the self-employed have less than $11,000.

The submission said ASFA considered there was an urgent need to address structural issues that create incentives for self-employed persons not to contribute to superannuation.

THE December quarter saw less new self-managed super funds (SMSFs) established than in any period since mid 2008, which the SMSF Academy said may reflect a lack of direction on behalf of the Government.

This could then be resulting in a loss of consumer confidence in retirement savings policy, said SMSF Academy managing director Aaron Dunn.

However, the recently published Australian Taxation Office figures also showed there were more net and new SMSFs established in 2011 overall than in any previous year, other than 2007. The 33,000 establishments represented a 5 per cent increase on 2010, and with only 2,769 funds wound up during 2011, net percentage growth was 67 per cent.

Just over a third of new SMSF members in the December 2011 quarter were under 45, highlighting an opportunity for advisers who are prepared to “deliver education and advice in an engaged way that resonates with this web-savvy group,” Dunn said.

SELF-MANAGED superannuation funds (SMSFs) have moved beyond the stereotype of conservatism indicated by high allocations to fixed income, property and blue chip shares, according to Multiport technical director Phillip La Greca.

“There’s such a wide spread view of allocations and returns now,” he said. “I’ve seen clients with massively poor returns, some guy who decides that he wants to go and invest in speculative mining stocks, and of course, no income, and then if they don’t go up in value you see huge losses in terms of valuations.

“So you can have a performance that’s quite severely negative, and yet other funds will have much more structured investment strategies that produce a very positive rate of return,” La Greca said.

According to La Greca, that wide range of both strategy

Phillip La Greca and result was part and parcel of SMSF diversity.

“It’s not like when we talk about the larger funds and can identify the balanced fund performance, because every fund has a balanced option,” he said.

Asked whether SMSF stereotypes, justified or otherwise, meant that the sector excelled in bear markets as opposed to bull, La Greca again pointed to funds’ investment strategies as the only possible answer.

“In certain environments, there may be certain opportunities that SMSFs can’t easily get to,” he said. “But I think that’s as far as it goes.

things like infrastructure, which is a long-term investment that might have certain deferred payouts in terms of returns early on, but then have a much steadier stream as it matures,” La Greca said.

The result, according to La Greca, was that SMSFs could quite easily buy in when particular projects were already up and running, but that getting in at the point of establishment was near to impossible.

“So you get the income stream, but you don't get the capital appreciation because you can't get in at the early stages,” he said. “That is certainly a limitation related to [an] investment market environment, but the problem there lies in investment structure rather than allocation.

“Whether SMSFs outperform in bear markets versus bull markets or vice versa, it really comes down to strategy,” La Greca said.

www.moneymanagement.com.au March 15, 2012 Money Management — 11

InFocus ADVICE SNAPSHOT

The clock ticks closer to midnight

45% 42%

Clients who will opt-in for ongoing advice

The financial planning industry understands that time is running out to extract key amendments to the FOFA bills and, as Mike Taylor writes, the industry has distilled its concerns down to five key issues.

27%

Clients likely to recommend their adviser to a friend or colleague

23%

Australian adults not using a financial planner who is confident of achieving their financial goals

15%

Clients who will not opt-in

Australian adults using a financial planner who are confident of achieving their financial goals

Source: Investment Trends November 2011 Advice and Limited Advice Report

T

he financial planning industry was not surprised by the fact the Parliamentary Joint Committee (PJC) reviewing the Future of Financial Advice (FOFA) bills failed to issue a bipartisan report on recommended amendments. What surprised the industry was the vehemence of Government members of the PJC. The report – signed off by the Government members of the PJC – not only failed to recommend any significant amendments to the FOFA bills, it served to negate the possibility of the Minister for Financial Services and Superannuation, Bill Shorten, delivering further concessions.

In contrast, the Opposition members of the Committee issued a dissenting report recommending 16 amendments to the FOFA bills, including the elimination of opt-in. The content of that dissenting report is already forming the basis of the Coalition's approach to the upcoming debate around the FOFA bills in the House of Representatives.

In the wake of the PJC findings and recognising the reality that amendments will not

easily be won, the financial planning industry has focused all efforts on the independents in the House of Representatives, and has distilled its concerns about the FOFA bills to just five key issues.

Those five key issues are: 1. Removal of retrospective fee disclosure requirements.

2. Removal of the opt-in obligation.

3. Improve the clarity and certainty with the best interests duty.

4. Adequately ensure that the ban on conflicted remuneration is not applied retrospectively.

5. Delay commencement until the industry can be prepared.

Those five key issues have been outlined in letters written by the Association of Financial Advisers (AFA) to each of the independents, as well as all Government and Opposition members and Senators.

However, the realists in the industry suggest that of the five issues, only two or three are likely to be achieved – removal or amendment of optin, a delay or phased introduction of FOFA, and perhaps some refinement of the wording

around best interests duty.

The precise arguments put to federal parliamentarians ahead of the FOFA bills debate are outlined in the table below.

Explaining his organisation's approach, AFA chief executive Richard Klipin said that after observing events in Canberra in the week during which the PJC report was tabled, he believed the Government's approach to the FOFA bills had become more entrenched and hard-line.

He said the AFA analysis was that much of the content of the Government's PJC report reflected a misunderstanding of many of the issues raised by the industry during the committee hearings – not least, the need for clarity around best interests duty.

In the final countdown to the House of Representatives debate on the FOFA bills, both the AFA and the Financial Planning Association have exhorted their members to maintain pressure on the independents and local members to achieve the necessary amendments.

However, the tenor of the Government's PJC report has served to dampen their optimism about what can actually be achieved.

Figure 1 Issue

Amendment sought

Rationale for removal

Impact of leaving unchanged

1.Removal of retrospective fee disclosure requirements

• Delete sections 962R and 962S.

• This is a retrospective requirement infringing on existing contractual arrangements.

• This information is already provided by the product providers.

• Due to the inclusion of legacy products and systems this will be extremely costly.

2. Removal of opt-in obligation

• Delete sections 962K, 962L, 962M, 962N, 962P and 962Q. • Remove references to deleted sections, opt-in or renewal in sections 960, 962F and 1317.

• The introduction of the best interests duty and the ban on conflicted remuneration address any factors that may have driven this issue.

• This is an unnecessary red tape requirement that is not reflected in any other industry or country.

• Unintentional failure to opt-in poses a potential risk for clients as they may miss out on the receipt of adviser initiated important advice.

3. Improve the clarity and certainty with the best interests duty

• Delete sections 961B(2)(g) and 961E.

• Whist the AFA supports the best interests duty, we seek improved clarity and certainty for advisers.

• Section 961B(2) defines a set of steps that are comprehensive and designed to provide guidance to advisers, yet then allows in 961B(2)(g) for any other steps that would reasonably be regarded as being in the best interests of the client. If there are further steps, then they should be included in the legislation, not left as point of confusion.

• Improved guidance is required with respect to what is “reasonably apparent” and what is “reasonable investigation”.

• Section 961B(2)(g) creates uncertainty, that will eventually need to be tested in the courts.

• Uncertainty with respect to the best interests duty is likely to result in an increase in professional indemnity premiums.

4.Adequately ensure that the ban on conflicted remuneration is not applied retrospectively

• Delete section 1528(1)(b) and 1528 (2) • In section 1528(3) change “other circumstances in which that Division applies, or does not apply” to the words “other circumstances in which Division does not apply”.

• Addition of a specific clause that states the transitional arrangements will continue in the context of the sale of a financial advice business or book of clients.- -

• The Government has given repeated commitments that the legislation will not be applied retrospectively, however the transitional arrangements fundamentally fail to ensure this.

• Retrospective application of the ban on conflicted remuneration is likely to result in the acquisition of property rights on other than just terms (a breach of the constitution).The onus should not rest with the adviser or financial services business to prove that there has been breach of their property rights (refer Law Council of Australia submission).

• The legislation should allow an adviser to sell their business or a book of clients without triggering a retrospective loss of property rights.--

• Uncertainty in relation to the application of the transitional arrangements will negatively impact upon the value of advice practices.

5.Delay commencement until the industry can be prepared.

• Delay commencement until 1 July 2013.

• FOFA involves significant and expensive changes.This will involve significant system changes and adviser training.

• Rushed implementation will result in mistakes and inefficiency.

• Given the ongoing legislative uncertainty, 1 July 2012 is now impossible.

• Financial services businesses are already spending significant amounts of money in preparing for something that is uncertain. Not enabling a delay will result in significant wastage.

• Without a delay in commencement, the industry will not be prepared and consumer outcomes will be sub-optimal.

Source: AFA Future of Financial Advice Bill

12 — Money Management March 15, 2012 www.moneymanagement.com.au

• Huge cost burden to industry for information consumers already receive.

• The FSC has estimated implementation costs of $700m, and have suggested that the cost per client for fee disclosure will be halved if it only involves new clients and summary information.

Inevitably, these costs will be passed on to consumers.

• Increased costs to consumers (Approx $120 per client per annum).

• Access to advice will reduce as advisers reposition their offer upmarket.

• Clients in the regions will suffer most.

• Better strengthen opt-out provisions.

Education

Back to School Regulatory framework around financial planner education is changing, which means many will have to pull their socks up and hit the books. Chris Kennedy reports.

EDUCATION standards relating to financial practitioners were just one of many facets of the industry caught up in a sweeping range of reforms following the collapse of companies such as Storm Financial and Opes Prime around 2008-09. And much like other Government initiatives such as the Future of Financial Advice and Stronger Super reforms, the industry is still patiently awaiting further clarity on what action it will be required to take.

But that hasn’t stopped many sectors of the financial advice industry – including representative bodies, training organisations and licensees – from taking their own measures to try and ensure those practising financial advice are beyond reproach when it comes to their training and education.

The industr y has in general been proactive in pushing towards attaining its status as a profession rather than a trade, and education standards are a key component of that. The bare minimum requirements from a compliance point of view are seen as less than the minimum by many licensees, and the industry is moving increasingly – if slowly – to a point where degree qualified planners are the rule rather than the exception.

Raising the bar There is virtual unanimity across the industry that the minimum standards outlined in the current compliance hurdle, Regulatory Guide 146 (RG146)

Key points z

Younger generation of planners increasingly viewing university degrees as an entry point into the industry. z Financial planning industry takes own steps to raise education standards and professionalism. z Industry calls for separation of educators and those assessing the national exam proposed by ASIC. z Soft skills to become increasingly important after the introduction of FOFA.

‘Licensing: Training of financial product advisers’, falls well short of what should be required to give full holistic advice.

This is a view that has at various stages been communicated by representatives from industry associations, including the Financial Planning Association (FPA) and Association of Financial Advisers (AFA), key registered training organisations (RTOs) including Kaplan and Pinnacle, larger financial planning licensees including AMP and MLC, and by the Australian Securities and Investments Commission (ASIC) itself.

This is the main concer n ASIC is looking to address with CP153, formally known as Consultation Paper 153, or ‘Licensing: Assessment and professional development framework for financial advisers’. The most concrete short-term changes impacting the educational stan-

dards of financial planners in Australia will be those ar ising from CP153, although it is not yet clear exactly what shape those changes will take: the paper was released for consultation in April 2011 and closed for submissions in June 2011, but further clarity beyond the initial proposals has not yet been forthcoming.

The industry staple qualification for RG146 compliance is the Diploma of Financial Services, and the implications of CP153 are potentially greatest for organisations such as Kaplan Professional – one of the major educators when it comes to the Diploma of Financial Services.

Kaplan vice president Marilyn Hill says many of the CP153 submissions indicated the industry felt it was too easy to gain those initial qualifications and the technical rigour was lacking in some cases, which is something every RTO needs to take note of. However, she says Kaplan – which also offers the Advanced Diploma of Financial Services and a variety of specialist courses – aims to make sure its students are more than prepared for both the current and updated requirements, and would offer programs to help their previous candidates master the knowledge and skills required for certification.

Testing times One of the key proposals contained in CP153 is that of an external assessment for those looking to become financial advisers. According to the paper, a

national exam would be the “most objective and efficient method of ensuring all advisers have the requisite competence to perform their duties to a reasonable minimum standard”.

And perhaps more significantly: “A uniform exam would also provide a benchmark for training organisations to ensure that the individuals they train have the necessary skills, knowledge and competence to pass the exam.” This directly addresses the concerns raised by the industry over the standards required under RG146, as well as the inconsistency in how assessments are conducted by RTOs. If prospective planners are assessed solely under the auspices of the RTO performing the training, there is no guarantee RTOs will apply the same stringent standards to internal applicants as they would if those applicants had to pass an external exam. The director of AMP’s Horizons Academy, Tim Steele, says having the educator assessing the students creates a conflict of interest.

By separating the organisation responsible for delivering the training and the organisation responsible for assessment, you remove the question of whether the training is being delivered in a responsible fashion.

“Because of the inconsistent application of standards by RTOs, we require all Horizons’ applicants to complete a technical assessment,” he says.

Continued on page 14

www.moneymanagement.com.au March 15, 2012 Money Management — 13

Education

One of the expectations we set for anyone considering a “career change to become a financial planner is they need to make a career-long commitment to education and learning, given the profession they’re operating in. ” Steele – Tim

Continued from page 13 While ASIC originally proposed a 1 July 2012 kick-off for the external exam regime, the regulator recently indicated a revised start date of 1 July 2013. According to independent sources, ASIC is also currently assessing tenders for companies to conduct the exam, and is in the process of recr uiting an education committee from within the industry to assist in instructional design of the exam and help formulate exam questions. Both of these were flagged in the initial CP153 release, although ASIC is refusing to comment further on the matter.

FPA chief professional officer Deen Sanders says there is a need for entry level education requirements to be externally validated. “Whilst we recognise the education system bringing people into the industry is trying to do its best, it’s not doing it in a way that consumers, regulators or [the FPA] have confidence in the educational capability of [entry level] participants,” he says.

Steele believes the standard of the test will be critical and says in AMP’s engagement with the various regulatory bodies it has strongly encouraged a central assessment for aspiring planners. He points to the US market where such a model is already in place, which, while not perfect, makes sense from a regulatory point of view.

Another key CP153 component is a proposed requirement for all advisers to complete a knowledge update review every three years to stay on top of rule changes, market issues and new products. It is not clear yet how this will fit with advisers’ continuing professional development (CPD) requirements or if it could even replace CPD requirements, but Sanders anticipates that if it is implemented it will complement those ongoing aspects of adviser education.

Tim Steele “ We don’t expect [the knowledge update review] to be as problematic as what was originally proposed. We expect it to be more fluid, to change with the times based on the issues in the market place and we expect it to link to CPD,” Sanders says.

There is currently no prescr ibed minimum CPD requirement under RG146, but it seems this will change with CP153. The AFA’s CP153 submission proposed a minimum 30 hours of CPD be required per year, the FPA already places a minimum CPD requirement on its members, the Financial Services Council recommended a strengthening of CPD requirements and the Financial Ombudsman Ser vice submission suggested Australia adopt something similar to the UK system, which requires a minimum 35 hours per year.

Holding pattern But the fact remains that although things are beginning to take shape, there is still no certainty around what changes the

14 — Money Management March 15, 2012 www.moneymanagement.com.au

industry will be required to make, which is a particular issue for educators such as Kaplan.

Hill says she has not so far been made aware that new CP153 requirements will be in any way mutually exclusive with existing RG146 requirements, and she also expects the link between the diploma and advanced diploma to remain.

There will be two prongs for Kaplan to address, depending on what the outcome from ASIC is – making sure new candidates meet the requirements to sit and pass an external exam, and providing the capacity for past students to come back and update their knowledge, Hill says.

However, a lack of clarity from the regulator hasn’t stopped Kaplan taking steps to ensure it stays current when changes are announced.

“We’ve adopted some expectations that clients have communicated through market research about academic performance and assessment rigour. In our new qualifications, we’ve made strong stands on academic performance.

We’ve gone to closed book examinations and constructed assessment activities so students get repeated practice in key adviser tasks such as preparing statements of advice or plans,” Hill says. “ We’ve taken a strong stand on a number of things in relation to the qualification that we think will stand students in good stead for an external exam.”

Higher learning The universities are also in something of a holding pattern. Dr Mark Brimble, Associate Professor (Finance) at Griffith University’s Business School, helped the FPA formulate a new curriculum aimed at unifying the FPA’s Certified Financial Planner (CFP) requirements with university programs through his role as a member of the Financial Planning Acad-

emics Forum.

But in his role as an educator, he says universities such as Griffith offering CFPaligned courses need that feedback to formally filter through before they can officially update their curricula.

That clarity should arrive shortly, with the FPA due to launch a public consultation on the Australian curriculum for financial planning for the university community in March, according to Sanders.

There are now more than 500 students studying towards CFP-aligned degrees in the university community, representing both enor mous growth and a great opportunity, Sanders says. He expects that to grow substantially and be a primary source of recruitment for the professional community in the future.

Sanders expects that most universities that want to be involved in financial planning will be on board by the end of this year, which could well be the vast majority of the 38 universities in the country. At the moment that figure is 17, after two more universities have come on board with CFP-aligned programs in past few months.

Brimble says despite a lot of talk from other universities about initiating financial planning courses of study, creating proposals or working on things behind the scenes, he is yet to see a huge increase in courses offered.

Despite the increased alignment with the industry, Brimble says enrolments across both financial planning and other business courses seem to have stalled recently nationwide. He is not anticipating a huge increase in commencing students in the new semester, but says there has been consistent flow through from first year to financial planning majors and second year study.

The slowdown in enrolments could be caused by a combination of the negative coverage of the financial planning industry in the media, the state of the global economy creating uncertainty over employment prospects and uncertainty over regulatory changes such as Future of Financial Advice (FOFA) reforms. The flow-on effect could be creating reluctance from universities to create new programs, he adds.

Fur ther evidence that university degrees are becoming increasingly integrated into the Australian financial planning landscape is provided by the AMPaligned university challenge, which returns for a second year in 2012.

Steele hopes the initiative will be bigger and better this year, after an overwhelming response in its first year, with plans to further align the challenge with university curricula so that students gain credit for their work, which includes an in-depth case study.

There has been no suggestion of moving towards a requirement for all practising planners to be degree qualified, although it has been mooted that a degree will one day be required to enter the industry. The FPA now requires all new CFP applicants to be degree qualified and from 2013 the same will apply to the Associate Financial Planner designation.

AFA vice president and chairperson for education Adam Smith believes that

Education through the natural evolution of the profession, the majority of planners will have a degree within the next 10 years or so.

“Most of the new entrants coming in are degree qualified – it’s a given that this will happen,” he said.

Kaplan has no intention of being left behind, and Hill says the educator is giving serious consideration to offering undergraduate degrees if that’s the way the industry is headed. “We would put that in place as a natural pathway because we’re a higher education provider as well as a vocational education provider,” she says.

“Our Masters of Applied Finance provides a CFP entry point for people that want to do the CFP,” she adds.

Hill doesn’t believe Kaplan is in any danger of being superseded if recent enrolment numbers are anything to go by, and adds the organisation has the flexibility to move quickly to adapt its industry offerings because it is a dual sector provider.

Let’s get professional Regardless of how the regulatory piece pans out, that is still a conversation about the bottom rung – about the entry gate into the industry, Sanders says. “We insist that’s never enough, that’s only the front door.”

Once advisers enter the industry they then need to determine what sort of

“

A higher degree of education both as an entry point and as a continuing education requirement will be significant components to being a successful adviser in the future.

– Dr Mark Brimble

”

Deen Sanders professional they want to be, and there are then a range of hurdles based on the role you might perform in the industry, he says.

The FPA’s decision to require all new CFP applicants to be degree qualified is a key step in this process of evolving into a profession, according to Sanders.

The AFA recently announced that from 1 July this year it would require all new planner members to attain the AFA’s Associate Chartered Financial Planner (AChFP) designation, which for those with a Diploma of Financial Services would involve only doing an extra ethics unit.

Kaplan offers a new subject in its Advanced Diploma called ‘The Professional Adviser’, which looks at interpersonal aspects of giving advice such as emotional intelligence. It allows the students to do an online diagnostic test and identifies areas where the adviser may want to undertake professional development activities to build their skills.

MLC’s head of adviser education Zane Brown says around 85 per cent of MLC’s salaried advisers and advisers in aligned channels are either enrolled in an

Advanced Diploma of Financial Planning, or have completed the advanced diploma or a higher qualification such as a masters degree or CFP. “The entry point is RG146; we’ve taken the Diploma of Financial Services as the entry level with a commitment [advisers] progress on to complete the advanced diploma within 18 months of joining,” he says.

Brown also points to other new or recent initiatives within the group aimed at improving the standards of advisers such as the NAB mobile adviser program which aims to bring career-changers on board and help upskill them to be financial planners, the MLC Business School which aims to provide advisers with the skills to run a successful financial planning business and the soon-to-belaunched accountants advice academy.

Prospective advisers joining AMP’s Horizons must complete a full professional year once they pass AMP’s assessment process and then complete an intensive 10-week training period. Here they are able to learn on the job and focus on adding client engagement skills to their technical knowledge, Steele says.

“One of the expectations we set for anyone considering a career change to become a financial planner is they need to make a career-long commitment to education and learning given the profesContinued on page 16

www.moneymanagement.com.au March 15, 2012 Money Management — 15

Education Continued from page 15

sion they’re operating in,” he says.

Financial planning is at a stage as a profession where it needs to be considering how to raise entry standards, but Steele is conflicted on whether an undergraduate degree should eventually be installed as a minimum requirement due to the number of outstanding planners in the industry who have never completed a degree.

However, to have a majority of universities offering financial planning degrees to provide a clear entr y point is an appealing end state for the profession, he says.

Hill also notes that Kaplan has seen a 20 per cent increase in enrolments in the advanced diploma course as more and more licensees look to upskill their advisers with further qualifications.

The new breed There is no doubt that the younger generation of planners are increasingly viewing university degrees as an entry point into the profession, and a prototype of this new breed of planner is Finn Kelly, the chief executive of Synchronaligned practice Wealth Enhancers. At just 27, Kelly has a Bachelor of Science in maths and physics, a post-graduate degree in education and four diplomas,

Most of the new entrants “coming in are degree qualified – it’s a given that this will happen.

– Adam Smith

”

including a Diploma of Financial Services in financial planning.

Currently on the lookout for planners to join the firm’s Sydney and Melbourne offices, Kelly says he likes to see applicants with an undergraduate degree because it shows they’ve committed to study for a length of time, and shows that level of commitment and focus.

The AFA’s Smith says that almost through default now new entrants are more qualified. The AFA’s GenXt program has been up and running for several years and provides an avenue for younger planners to gain a foothold in the industry and a resource for gradu-

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

ates of the program, such as Kelly, to learn from others in the industry and share their knowledge.

Brimble believes there is a trend of the “emerging planner” that is more highly educated and more aware of the complexities of financial products and services compared to the planner entering the industry several decades ago.

“A higher degree of education both as an entr y point and as a continuing education requirement will be significant components to being a successful adviser in the future purely by virtue of the complexities of products that are out there,” he says.

“That plays out with everything going on in the market with Government policy changes and the increasing standards of professional bodies. One would sense those overtures are attracting a higher educated, more aware planner than what has occurred in the past at the entry level.”

Finding your niche With this increasing complexity comes an increasing trend for planners to specialise in a particular part of the market such as tax, wills and estates, investments or insurance.

Brimble says the “jack of all trades” style planner role is becoming increasingly difficult to fulfil due to those increasing complexities in legislation

and product. As a result, we’re seeing two styles of planner emerge: the holistic planner that engages specialists in relevant areas to provide more detailed advice in those areas, and the specialist model where you have a range of specialists under one roof.

That is flowing through to students who are becoming more interested in specialising, and degrees are starting to cater to that, Brimble says. However, it shows there is still a gap in the education market in terms of a real postgraduate program of financial planning designed for people who already have a financial planning degree and some work experience – a question often raised by planners who want to expand their knowledge, he says.

Hill says Kaplan is seeing increasing momentum in several specialist strands, and particularly the self-managed super fund course. The tier one foreign exchange course is seeing more interest, possibly due to recent currency fluctuations, and there has also been increased interest from those looking to upgrade the Certificate IV in mortgage broking to the diploma.

“Some licensees are making extraordinary efforts to improve the expertise of their adviser workforce, and in many cases looking to provide career development pathways, which sometimes leads to more specialised areas,” she says. MM

Education

Talk the talk After the introduction of the Future of Financial Advice changes, advisers will need to use their soft skills to articulate the value of their advice. Chris Kennedy reports.

With all the focus these days on regulatory innovation and the need to make sure financial advisers have adequate technical knowledge, it’s easy to overlook the fact that this is just one aspect of delivering effective financial advice to clients.

The so-called ‘soft’ or client engagement skills – which some believe can really only be learned on the job or in a client-facing environment – are a major focus for licensees, particularly when dealing with new industry entrants rather than career changers who may have already gained these types of skills in other fields. It is also an increasing area of focus for educators.

AMP Horizons Academy’s Tim Steele says that soft skills education forms the core of the Horizons program, with just over half the initial intensive 10-week training period dedicated to such skills.

“The foundation we see as most critical to ensuring [advisers’] success and the value of advice that they deliver to clients is the ability to be able to engage efficiently with clients, build rapport, trust, and help clients to make decisions to improve their situation,” he says.

“We want to make sure they have the soft skills to understand clients’ needs. You can have people that are technically brilliant, but without the ability to effectively engage with clients they will always struggle.”

Soft skills education hasn’t traditionally been a huge focus for Kaplan Professional in its diploma and advanced diploma of financial planning courses, but Kaplan’s Marilyn Hill says the company has now expanded its business model to incorporate these skills by introducing a range of new programs in personal development, management and business.

Hill says the changes are driven by demand from licensee clients, who are increasingly seeking to complement technical instruction with training that focuses on developing the skills of client engagement, building client trust, running effective businesses – and generally developing the abilities of the advisers who work for them.

“There’s a clear trend of looking at the adviser holistically. It’s not just about the technical training but looking at the whole adviser package, and the way the adviser engages with clients and runs their business and their value proposition,” she says.

Hill says the increased emphasis on client engagement skills in the advanced diploma course doesn’t aim to replace on-the-job training and coaching. However it should help entry-level advisers focus on the things they need to do to be effective, beyond having strong technical knowledge.

“Licensees have identified for us that in the professional development area these are the things that are of most concern to them in the changing advice environment,” she says.

Soft skills will become even more crucial under the proposed Future of Financial Advice changes, according to MLC’s Zane Brown. He says advisers will need to justify their own value proposition to clients and explain the need for clients to ‘opt in’ to advice services every two years.

“That changes the entire face of the type of conversations of some of our advisers, primarily when they’re having conversations with clients they might not have spoken to that often,” he says.

Association of Financial Advisers’ (AFA) Adam Smith says many entrants coming through the AFA’s GenXt program have requested additional soft skills training and

the means to know how to translate these into good outcomes for clients. This is one aspect the AFA is looking to focus on through its new Campus AFA education initiative, which looks to provide more education solutions for advisers and licensees.

need to trust you “andClients they need to like you, because hopefully they’ll be spending a long time with you. Young planners can be so focused on getting the process right they don’t engage with the client. If the client doesn’t open up, it’s useless.

- Finn Kelly

”

As a more recent industry entrant, Wealth Enhancers’ Finn Kelly identifies clientfocused training as a real gap in the education pathway.

“Clients need to trust you and they need to like you, because hopefully they’ll be spending a long time with you,” he says.

“Young planners can be so focused on getting the process right they don’t engage with the client. If the client doesn’t open up, it’s useless.”

Kelly believes the licensees should look to take more of a role in this, rather than the industry just leaving it up to the educators.

He is also a fan of having work placements linked to undergraduate degrees, which

would not only be good for students but also open an avenue of recruitment, allowing employers to get a soft introduction to upcoming advisers before making the decision to hire them.

It is something that some universities, including Griffith, already incorporate. Griffith University’s Dr Mark Brimble says there are three ways the university looks to address soft skills training: through a professional development program that runs alongside the degree and allows students to interact directly with the industry at events; through assessment strategies that incorporate role plays and presentations; and through a work experience or internship arrangement where students can work in a paraplanning capacity alongside practising planners. This allows them to get exposure to the planning process and build their skills while they’re still studying. ipac has an internal program dedicated to soft skills training run by ipac head of advice development John Dani. Dani says that there was a phase shortly following the 2002 introduction of the Financial Services Reform Act where significant emphasis was placed on compliance and regulation.

However, he says we are now seeing a shift towards a greater focus on soft skills and on the need to coach advisers to more deeply and effectively engage with clients.

Dani says this is particularly important in the current environment of increased uncertainty, with suspicion or cynicism generated through media coverage and consumer groups questioning the role of advisers. He says regulatory changes are also drawing attention to and casting suspicion over role of planner, meaning interpersonal skills are more important than ever before. MM

www.moneymanagement.com.au March 15, 2012 Money Management — 17

OpinionRetirees A man’s home is his retirement Australia’s love affair with property is well documented, but many baby boomers are selling up to fund their retirement.

According to Andrew Barnett, this shows the need for better products in this complex area.

H

ome ownership has long been the Australian dream. But for the 4.8 million individuals retiring during the next 20 years, the home has become more than just a man’s castle. It’s also the treasure within – a means of funding the retirement years.

A recent MLC survey of 250 advisers (both aligned and non-aligned) found more than a third of the respondents’ clients will downsize their home, about one-third will sell their investment property, and about one-third will sell an existing business during the next five years to shore up their retirement savings.

While the survey results aren’t precise, they are directionally instructive. They support studies conducted during the mid 2000s, which found a third of baby boomers would be willing or would expect to downsize or sell their family home once they stop work.

Figures from the Australian Bureau of Statistics (ABS) also highlight this heavy reliance on bricks and mortar as the primary nest egg.

According to the ABS, the mean superannuation balance for individuals aged 55 to 64 years old is $183,000 or 20 per cent of net wealth, which is well short of what is needed to fund retirement for this cohort.

The family home, however, represents 47 per cent of net wealth. Investment properties represent another 15 per cent, while an individual’s own business makes up 9 per cent. Other investments such as shares form the remainder of total net wealth. It’s clear to see that the retirement of baby boomers will be funded by consuming the capital represented by non-super assets, such as property, rather than merely drawing down their super balance and spending income from nonsuper assets such as dividends, interest, and rent.

It’s unsurprising that investment properties are reasonably highly represented in this breakdown. They are another staple asset of Australians, courtesy (once again) of the prominent position property ownership commands in our national psyche and the tax deductibility of interest introduced in 1987. However, they’ve been a particular favourite of baby boomers. Statistics from the Reserve Bank of Australia show that 27 per cent of boomers have an investment property, while this same demographic owns one half of Australia’s total number of investment properties.

Property has been a good investment, particularly during the past decade. But in many cases it’s not the optimal ongoing investment by the time retirement rolls around. That’s why people sell their investment properties or downsize.

They may need the money from the sale for liquidity, the low returns from investment properties due to falling rental yields may mean they can’t live off the income of the property, the gap between the rental yield and the mortgage rate might be too much, and then there’s the problem of negative gearing without an income. Of the 27 per cent of boomers who hold an investment property, 40 per cent have a mortgage.

The real estate industry has been an early harbinger of this sell-down dynamic – understandable, as it directly impacts the sector. In January, Head of the Real Estate Institute of WA David Airey was quoted in newspaper Perth Now warning “scared baby boomers” against selling their investment properties.

Putting risk aside for a moment, preretirees and retirees need investments that have opposing traits to property’s markers of illiquidity and low-growth (in comparison to the past decade). They need liquid investments should they face unforeseen costs in retirement and high

18 — Money Management March 15, 2012 www.moneymanagement.com.au

growth assets to mitigate the risk they’ll outlive the money they had upon stopping work.

Let’s take the requirement for highgrowth assets. The rate of growth on assets during retirement has a singular importance in determining income. There is a commonly-held 10-30-60 rule of thumb used in financial services that suggests 10 per cent of pension income is from contributions made during accumulation, 30 per cent is from market growth during accumulation, and 60 per cent is from market growth during decumulation.

The benefit of market growth is particularly applicable to retirees who don’t have sufficient assets (and there are many of those) and who rely on this growth to provide them with the money to live out their retirement. Furthermore, with retirement stretching potentially 35 years, the compounding growth is even more beneficial.

Higher growth brings with it, of course, higher risk. When capital is consumed in retirement, this takes the form of sequence of returns risk. This risk is greatest at the beginning of retirement when people have the most to lose, as opposed to the end of retirement when they have fewer assets that will be impacted. The sequence of returns over a given period is irrelevant to the financial outcome if there are no contributions and no withdrawals. Introduce these cash flows, especially withdrawals, and the outcomes can vary markedly.

Which brings us to a conundrum.

Retirees need growth assets because savings are insufficient and retirement may be long, and they need liquidity because they’ll be drawing down the asset and they will likely face unexpected expenses. But assets that offer both g row t h a n d l i q u i d i t y t e n d t o h a v e higher risk.

So what’s the solution? The market

needs innovative products that have more optimal combinations of growth, liquidity, capital stability, and longevity protection.

The Australian market is quite immature when it comes to these sorts of products but there are plenty of examples if we look abroad. In income products, they include corporate bonds, equity indexed annuities, and deferred lifetime annuities; in asset management: target date, target return, and target volatility funds; in risk management: variable annuities, and funds with nimble glide paths that employ sophisticated capital protection and volatility management techniques.

Services that engage and educate individuals are also crucial given the importance to the individual, their families and the Government of getting retirement funding right. Diversified financial institutions in particular may benefit from the fact that retirement is a ‘whole of wallet’ consideration, and wealth products and banking products will be considered holistically.

Finally, the need for advice will also increase. This will happen naturally as the number of pre-retirees grows, a segment where one in three is currently advised, compared to one in five for individuals in their forties. It will be amplified by the need to consider complex planning needs across assets, and the emerging choice of different product solutions.

Family homes will be downsized and investment properties will be sold in increasing numbers by retirees who view property as an important source of funding for retirement. As the products on offer for this sector of the market evolve, however, retirees will be able to invest the proceeds in solutions that better meet their needs.

Andrew Barnett is general manager, MLC Retirement Solutions.

OpinionAccounting Fitting a square peg into a round hole Many have advocated that accountants simply get licensed if they wish to advise on selfmanaged super. However, Liz Westover claims the current single licensing model poses many difficulties for accountants.

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ince its introduction, the accountants’ exemption has polarised practitioners in the broader financial and accounting industries.

Particularly since the Federal Government’s announcement of its removal as part of the Future of Financial Advice (FOFA) reforms, it has been the source of much angst and discussion. Perhaps it’s timely, therefore, to examine the exemption a little closer.

The accountants’ exemption is the ability of recognised accountants (members of the Institute of Chartered Accountants in Australia, CPA Australia and the Institute of Public Accountants) to recommend the set up and closure of a self-managed superannuation fund (SMSF) without holding an Australian Financial Services License (AFSL). Under the Corporations Act 2001, SMSFs are classified as a financial product. Normally, therefore, any advisor recommending an SMSF would be required to hold or operate under an AFSL. Under section 7.1.29A of the Corporations Regulations, the “accountants’ exemption” quite literally exempts accountants from being licensed where they are advising on SMSF set-up and closure.

When the Government announced as part of the FOFA reforms the removal of the accountants’ exemption, it also committed to finding an appropriate replacement. The professional accounting bodies supported this undertaking due to the shortcomings that the accountants’ exemption posed in its current form, while recognising the importance of accountants being able to advise their clients on SMSFs. This is consistent with the Government’s objectives for the FOFA reforms, to make financial advice more accessible and affordable for the Australian public.

While workable, the exemption is seen to be quite restrictive in its application. It provides the means by which accountants can consider SMSFs in providing advice to their clients, but it doesn’t afford accountants the ability to recommend any alternatives for superannuation savings when an SMSF is deemed to be inappropriate for a client.

Interestingly, it doesn’t give accountants any scope to advise a client not to set up an SMSF if they had already determined to do so. It also doesn’t allow an accountant to talk about a range of other related issues, like consolidation and pensions, which may need to be considered when discussing an SMSF. The accountants’ exemption is often misunderstood, and for many accountants, the lack of clarity around what they can and cannot advise on has been a constant source of frustration.

Many don’t understand why it is important for accountants to be able to continue to talk about SMSFs and why the exemption was originally introduced.

At the time of its implementation, SMSFs were viewed as possessing characteristics of a financial product.

However, it was also recognised they had specific aspects in line with business structuring advice, which was never intended to be included under the AFSL regime. Hence, the accountants’ exemption was the means by which the policy objectives could be achieved. The exemption was seen as necessary because of the type of advice that accountants give their clients, and in fact, without the exemption in place, consumers may not be getting the most appropriate advice from their accountants.

Typically, accountants talk to their clients about their business structuring needs. They will discuss the relative merits of different entities and structures for their clients to manage their business and financial affairs. Often this will involve consideration and comparison of operating as a sole trader, corporate entities, family trusts and superannuation.

Accountants need to be able to talk about SMSFs in this context because they are a viable and useful means to manage financial and business affairs. The reality is

that, when considering where to hold business real property, SMSFs are frequently the best option for a client in terms of asset protection and taxation outcomes.

Accountants are in a unique position to offer advice on business structuring due to their specific skills and training.

Nothing has changed in terms of the structuring advice that accountants give their clients since the exemption was introduced. The rationale for its existence is as relevant as it always has been. While the profession recognises the shortcomings of the accountants’ exemption, the replacement for its removal must ensure that the reasoning behind its existence is still considered and that accountants are able to continue to talk to their clients about SMSFs. Clearly, it is in the public interest to find an alternative for the accountants’ exemption that addresses its shortcomings and ensures that accountants can provide appropriate, broad advice to their clients.

Some have advocated that accountants simply get licensed. Unfortunately, licensing accountants under the current AFSL regime is like fitting a square peg into a round hole. Many aspects of the current single licensing model do not accommodate different types or levels of financial advice.

The current model poses many diffi-

culties for accountants in terms of relevant experience required by ASIC, responsible managers, applications, AFSL audit requirements, costs and professional indemnity insurance. Licensing may also limit the ability of many accountants to maintain their professional independence. Many accountants and their clients value their professional independence, believing they can better advise their clients away from conflicts that have traditionally surrounded the ‘sale’ of financial products.

The solution, it would seem, that would satisfy relevant stakeholders in this debate is a form of conditional licensing for accountants that recognises their (and their clients’) need for professional independence and allows them to talk about a range of non-product related issues.

However, conditional licensing must only be introduced for accountants in a way that appropriately reflects the type of advice they will be giving and takes into consideration the education and experience that accountants possess. If changes are required to the AFSL regime to accommodate accountants, then these should be made to ensure that Australians are able to access advice from their chosen adviser. Product advice in its generally accepted interpretation (for example, specific shares or insurance products) should continue to require a full AFSL. Too much of the debate around the accountants’ exemption has lacked any real assessment of the right outcomes for Australian consumers. We have a real opportunity to make appropriate changes to ensure the deficiencies of the accountants’ exemption are not repeated and the licensing model of the future truly reflects the types and level of financial advice required by consumers. If accountants are to be licensed, the model needs to accommodate accountants to ensure consumers are able to access the advice they seek.

A significant number of Australians seek the services of their accountant on at least an annual basis. At these times, Australians should be able to ask and have answered basic questions around their financial affairs.

Should this not be possible, those questions will too frequently go unasked and unanswered. Surely, this is not the right outcome. The appropriate replacement for the accountants’ exemption must recognise the significant role that accountants can play in ensuring Australians have access to financial advice.

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

www.moneymanagement.com.au March 15, 2012 Money Management — 19

Practice management

Managing change This is a great time to reflect upon the concept of change in itself, and review some truths about effectively managing change, writes Sue Viskovic.

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verywhere you turn in our industry right now, there is change afoot. I’m talking about the significant changes occurring to the business models of most links in the ‘value chain’ of financial advice. From licensees to superannuation products, wrap platforms to advice businesses, there is no doubt that the Future of Financial Advice (FOFA) and Stronger Super reforms have forced most players to reflect upon the way they do business and to amend – and in some cases, completely reinvent – their entire business models.

Whether you work in a financial planning business, licensee, fund manager, association or education provider, you will be experiencing change in some form.

We are no strangers to change in our field – consider the hours spent keeping up-todate with the latest in investment markets, tax laws, Centrelink and superannuation rules. And yet when it comes to fundamental change in the way we deliver our services and in how we do what we do, anxiety seems to play a role, and the process appears to become more challenging.

It is somewhat ironic that for an industry so accustomed to handling change in our daily lives, there has been so much resistance when it comes to changing business models.

What do we know about successful businesses and how they handle change?

1. For a start, they don’t wait for change to be inflicted upon them, they regularly reflect on how they do things and recognise where they can improve.

One of the greatest contributors to successful businesses – in any field – is the ability to evolve and adapt to a new environment.

• Consider the success of Amazon with its Kindle e-reader, while you consider the demise of Borders bookstores.

• Think about how Apple reinvented itself to step out from behind the shadows of Microsoft and emerge as not only the world’s biggest seller of smart phones, but the world’s largest listed company.

It is of vital importance for most financial advice businesses to renew the way they run their business.

To quote an article from the Harvard Business Review, “Many corporations become too comfortable with their existing business models and neglect the necessary work of radically reinventing them”.

One of the simplest methods to do this – and we’ve all heard the saying a million times – is to take time out from working in the business to work on the business.

If you haven’t already, schedule an ‘off-site’ to reflect on your current business model and, importantly, keep regular appointments with your team to discuss the implementation of the ideas you had that will allow you to evolve.

2. They remain committed to the areas of the business they want to change, despite the fact that they don’t always know how to solve the problem.

Rather than holding their business back out of fear of the unknown, they stay completely honest about what they want to improve in their business, and then seek the solution. Just like the owner of a new car suddenly sees an increase in the

20 — Money Management March 15, 2012 www.moneymanagement.com.au

number of those cars on the road, their conscious attention on the outcomes they want for their problem allows them to discover solutions.

3. They implement. Rather than engaging in daydreams and wishful thinking, when they decide they want something, they go out and get it. That’s not to say the business owner is the one who does all the ‘doing’ – they empower their teams to contribute, and ensure that what they say they will do gets done.

4. They don’t let their success hinder further success. Even the best businesses we know don’t think they know it all, or that their way is the best way to do things.

They are respectful when talking to other advisers, they are always open to new ideas, and continually refresh their thinking on possibilities.

5. They’re not afraid of reaching out for support to assist them. Whether they engage in peer groups, have a board of advice, a business coach or all of the above, they are happy to tap into resources to help them learn from the successes of others, and provide an objective viewpoint to mentor them through their challenges.

So what is the most effective way to successfully implement change in any business?

To keep it simple, there are three components: Why. For any change to be successfully implemented,all those involved must understand why the change is taking place.

In an advice firm, hopefully the approach is that change has come about from a recognition that the advice landscape is chang-

ing – clients are becoming more selective about their advice relationships, and expect to see greater value for what they pay.

Hopefully, the ‘why’ is because the team believes the changes will be better for the business, and above all, better for the clients.

This ‘why’ will have a far greater impact on successful change than if it was “because some politician says so”.

Success is always greater when those who are involved in the change understand and agree with why it is being done. Be it the staff who assist with the transition, or clients who are recipients of a new style of engagement, if the ‘why’ comes from a positive place that resonates with the participant, those affected by the change will be more likely to embrace it.

This same principle can be carried across to effective sales and effective leadership.

What. This has two aspects: what specifically needs to change and what will it change to?

In the situation of an advice firm making the change to fee-for-service, the ‘what’ that needs changing may be not only the way that the business is paid for its service, but also how much and when. It’s likely that it will also change its service offering (what gets delivered in return for the payment), its documentation used with clients, and the process by which new clients are engaged with the firm, and so on.

At its simplest, an example of the ‘what’ may be that the pricing model needs to change away from commissions. And the result of the change will be that the firm would charge clients a flat fee for engagement and a flat ongoing annual retainer.

How. The biggest reason that businesses fail to implement change is lack of preparation.

Once you have determined why the change is occurring and then what needs changing, the detail of how the changes will be implemented is the last step in the planning process.

This is where research and external support can have a big impact.

In some cases, the changes may appear so great that the entire project seems just too hard.

If this is the case, treat it like an elephant.

How do you eat an elephant? One bite at a time ... project-manage your change by ‘chunking’ down the list of changes that need to occur, and then specifying action items for the steps required to implement each item on the list. Designate who is responsible for each task and regularly discuss progress of the overall action plan.

It’s important that your whole team is involved in the formulation of your ‘what’ and ‘how’. Once they are on board with your why (and ideally share your why and have added some of their own thoughts), including them in your analysis and planning of the next two steps will assist you to create an action plan that is, in fact, achievable – that the staff engage with and are committed to implementing as they have been involved in its creation.

Along the way, understand that change usually brings with it an emotional impact

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The single largest challenge remains with the adviser being confident with how to position the new pricing and service model to their clients.

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of some kind – perhaps on you or your staff.

Recognise it, acknowledge it, and work through it, and if it gets too much, refer back to step one.

Having just returned to work after six months maternity leave, I’m surprised by how little has changed in what is the entire life span of my twin girls. We are still waiting on getting specific details of some of the finer points of the FOFA reforms; investment markets are still ugly, and we still have a female Prime Minister (albeit, only just).

When it comes to FOFA, advice businesses fall roughly into four categories: • Those who are fiercely resisting any change;

• Those who understand the need and are waiting for the legislation to be finalised before making any changes to their business; • Those who are in the midst of implementing change; and • Those who run businesses that were already compliant with the intent of the reforms long before the term FOFA became a word in the industry vernacular.

What has changed in the past six months is the ratio of advisers in the different categories.

Thankfully, the tide does appear to be turning, in that there are more advisers in the process of updating their business models than there are those lamenting or loudly denying the need for such change.

This anecdotal evidence is supported in the data collected by our FOFA Ready Practice Audit.

Reviewing the responses of those who have participated to date, the majority of participants have started making the changes they need to comply with FOFA, with less than 22 per cent choosing to do nothing until the legislation is confirmed.

While they’re moving in the right direction, there is still a long way to go to be ready for the new regime.

Most firms have yet to determine the right price for their advice, with 49 per cent stating that while they have defined a pricing model, they are not confident that

they have got it ‘right’, and 15 per cent have not yet even worked out how they will charge for their services.

Aside from the fact that we still don’t know the final detail on all of the elements of the legislation, it appears that the largest area in which advisers need help is in clarifying the actual costs of running their business, and therefore creating a robust pricing model that they are convinced is correct – but moreover, how to implement that fee model. The single largest challenge remains with the adviser being confident in how to position the new pricing and service model to their clients, and signing them over to the new model.

Regardless of what transpires in Canberra, there will be significant change in the delivery of financial advice and advice business models in Australia.

With the right reasons behind why the changes are taking place, and a good commitment to determining what needs to change and how, we will witness continued growth of successful financial advice firms around the country, and excitingly, more people will obtain access to advice – which can only be a good thing.

While change in this respect is nothing like a holiday, the outcomes will be refreshing and enjoyable nonetheless.

Sue Viskovic is managing director of Elixir Consulting.

www.moneymanagement.com.au March 15, 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 – given the transparency they expect of those they rate.

This month

PortfolioConstruction Forum asked the research houses: What are the pros and cons of using an Australian Equity separately managed account? Under what circumstances would it be appropriate?

Lonsec Separately managed accounts (SMAs) provide investors with exposure to a professionally managed portfolio of stocks – but unlike a pooled managed fund structure, beneficial ownership of the underlying stocks rests with the investor, and this is one of the key attractions of the SMA structure. SMAs also offer the potential for a better after-tax outcome, as the structure will generally allow for management of tax parcels. An SMA will also provide investors with full transparency of security holdings.

However, it’s important to be aware that the performance of SMAs managed by well-known fund managers may differ from their pooled managed fund vehicle.

This can result from differences in mandates and portfolio composition, timing and the SMA structure not cater-

ing for all corporate actions (such as institutional placements), and these can be a source of value add.

There has been a steady growth in SMA providers of two types. The first can be described as a dedicated SMA manager, while in another group are the fund managers that have extended their offering via a SMA structure. There are currently some well-known fund managers in the second category: of course, a key consideration for them is whether they are giving away their intellectual property and whether they are cannibalising their existing managed fund business.

Ultimately, each investor needs to weigh up the pros and cons of using a SMA for their circumstances. We have found that the take-up of SMAs has generally been by those investors who are seeking a direct

22 — Money Management March 15, 2012 www.moneymanagement.com.au

equity-style solution via a product rather than a service (IMAs, MDAs).

Mercer SMAs have been gaining traction in the Australian market. A number of providers are now in the market, and efficiencies from technology are resulting in lower minimum investment requirements.

The main advantages of investing in a SMA are: • Professional management of an equities portfolio; • Transparency and portability of the portfolio; • Beneficial ownership of the securities is with the investor, who gains tax advantages associated with holding directly; • Where model portfolios are available, investors can customise their portfolio

SMAs are often “misunderstood in the context of how they can potentially improve business efficiency.

- Morningstar

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For the investor, the decision to invest in a SMA should essentially be based on the same considerations as a unit trust – manager quality, investment mandate, investment view, and a range of other factors.

- Standard & Poors

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many fund managers fiercely protective of their intellectual property and unwilling to divulge detailed portfolio holdings to the market. There is a growing legion of more than 50 small- and mid-tier boutique managers who happily embrace transparency, particularly if it provides them with an attractive new distribution channel unencumbered by a complex system of rebates and commissions. A SMA also provides advisers and research providers with a tool to manage any style of bias in a multi-manager SMA portfolio.

The flip side of SMA transparency is that it can also be a disadvantage for those advisers who tend to support the more well-known managers in Australia, rather than the largely boutique managers occupying the SMA space. As SMAs are still a relatively new feature of investment landscape, and still well behind managed funds, there is a current lack of an identifiable track record for many.

SMAs are also typically only available in Australian equities. Our local market has a number of biases (resources and banks) and a lack of diversification in a number of sectors, so investors need to be wary of investing all their money into a domestic equity SMA.

Standard & Poor’s

(however, the variety of equity SMA strategies is still quite limited); and, • Consolidated reporting.

Disadvantages of the structure include: • The investor is unable to direct the manager to customise the securities selection in the portfolio (although some providers may allow an investor to filter certain securities); • The model portfolio is already constructed before investing, hence performance of portfolio may suffer or capital may erode if existing securities have already realised their growth potential; • There is difficulty gaining adequate diversification across good quality managers, especially on smaller SMA platforms; • Execution risk: i.e, delays in manager decisions being implemented on a timely basis within the model portfolios; and • Portfolio drift, causing the portfolio to differ from the model portfolio.

If an investor is looking to gain exposure to Australian shares directly within their portfolio, then a SMA would be a

better approach, particularly in volatile markets. While the investment costs may be higher compared to other options, Mercer would expect a highly rated manager to exceed benchmark returns, compensating for the higher fees and creating greater wealth for the investor.

However, unless an investor has adequate funds to diversify across a number of managers, then other options to implement their Australian shares exposure should be considered.

Morningstar/Ibbotson Assoc SMAs have been available in Australia for more than a decade and their benefits to investors are fairly well known and publicised.

SMAs are often misunderstood in the context of how they can potentially improve business efficiency. Not all SMAs are created equal, and not all purporting to be SMA solutions offer the same level of efficiency and scalability that will improve business work flows, ultimately allowing the adviser to manage and advise on a larger client

base with fewer resources (specifically back-office related).

The advantages of using an Australian equity SMA portfolio over a unitised fund with a comparable investment strategy are numerous. Typically, these relate to tax efficiency and transparency.

However, there is also an argument that SMAs should be a cheaper option than managed funds, although it is still too early to gauge, given a sparse universe of professional fund managers offering both an SMA and fund version of the same investment style. In addition, the fact that SMA portfolios effectively eliminate one layer of costs (i.e, unit trust administration) is in all likelihood counterbalanced by the fact that large, wellestablished fund managers with scale are much more likely to enjoy economies of scale within their own businesses than smaller boutique SMA managers.

Additionally, because investors personally own the shares in their portfolio, they have their own tax history that is not shared with all investors, as is the case in a unitised fund or trust. At the end of the financial year, modern day SMA services typically allow advisers and investors an opportunity to select an appropriate tax accounting methodology to optimise the after-tax outcome to the investor.

A common criticism of managed funds is the fact that they lack transparency, with

A SMA provides an alternative ‘access mechanism’ to the investment decisions of an investment manager. In essence, a SMA has the potential to deliver a superior after-costs and after-tax performance outcome for the investor.

With a SMA, the investor holds beneficial ownership of the underlying equities (compared to owning units as is the case with traditional managed funds), which delivers a number of benefits relative to managed funds: it provides portfolio transparency, real-time reporting, and the ability to forecast and draw down dividend payments from the constituent stocks.

Additionally, SMAs are tax efficient.

When an investor invests in an SMA, the constituent stocks are purchased at that time, compared to a managed fund where the constituent stocks may have been held for a period and may have embedded capital gains that the new investor has not benefited from. Yet the subsequent sale of shares by the manager may crystalise a capital gain, thereby creating an after-tax cost to all investors.

Finally, the fees and transaction costs of a SMA are generally lower than the equivalent mandate in the form of a managed fund.

In S&P’s view, the only material negative risk of an SMA is that the execution of trades may lag the investment decisions of the fund manager. This is only a risk when the SMA mirrors an existing unit trust. However, based on S&P's analysis of SMA performance versus their associated unit trusts, the actual performance differences have generally been negligible.

Further, the SMA universe domesticalContinued on page 24

In association with

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

ResearchReview Continued from page 23 ly is currently restricted and limited. The sector continues to be characterised by concentrated, low turnover portfolios with predominantly large- to midmarket capitalisation stocks. This is partly a reflection of investor preference which in turn partly stems from the visibility of the constituent stocks of an SMA portfolio: investors have a preference for the stocks they know and understand (generally larger market capitalisation stocks) as well as low turnover. This view is based on the perception that the investment manager has a greater degree of conviction in their stock picks.

The limited universe of Australian equity SMAs is reflected in the number reviewed by S&P in its last sector review – less than 20. Nevertheless, the general quality of investment managers in the space is high. Ratings were either three or four stars. Managers can be split into two groups: those that only manage SMAs, and those that offer managed funds and have established SMAs that mirror an existing unit trust. For example, Perennial Investment Partners provides a SMA version of its Perennial Growth Shares unit trust.

For the investor, the decision to invest in a SMA should essentially be based on the same considerations as a unit trust – manager quality, investment mandate, investment view, and a range of other factors. Where there is both a unit trust and SMA version of the same mandate, it makes sense for an investor to consider how important the relative benefits of the SMA structure are to them.

S&P Fund Services has advised that their 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.

is important to select a manager who is experienced in “theItmanagement of SMA portfolios, because it requires a different approach compared to managing a managed fund. ” - Zenith Investment Partners

van Eyk The major benefit of using the SMA structure with an Australian equities portfolio is the ability to access the services of a professional investment manager while retaining beneficial ownership of the underlying securities.

This allows the investor considerably more flexibility in managing the tax effectiveness of the overall portfolio, as well as a greater ability to customise a portfolio to better suit their personal preferences and goals.

The advantage of purpose-built SMA platforms is that there is much more transparency and potential for customisation than a traditional wrap or master trust. Investors are able to view entire portfolio holdings and fine-tune their portfolio holdings.

However, investors also need to consider whether their investment strategy is suited to an SMA. • In general, SMA structures are more suited to low-turnover investment strategies. A higher level of turnover increases the probability of realising short-term capital gains, which is less tax efficient.

Also, high turnover will increase costs, obviously detracting from returns and

potentially leading to underperformance relative to the model portfolio or underlying unit trust.

• Similarly, a SMA is better suited to a concentrated stock portfolio. A smaller number of stocks reduces the potential for stock-specific trades, which also increases transaction costs. A higher concentration of smaller stocks in an SMA portfolio could also increase transaction costs, because of a lack of liquidity at the smaller end of the market.

• SMAs are offered by large investment managers and boutiques, but van Eyk does not favour one sector over the other.

Each has its strengths and weakness.

Boutiques can have a better understanding of the implementation issues around SMAs, whereas large groups are often better resourced and have more robust systems.

• Given that an SMA will generally be based on a model portfolio of stocks, the abilities of the managers of that portfolio will be critical. In its most recent review of SMA providers, van Eyk gave high ratings to those with a highly skilled,

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experienced, well-resourced, nimble investment team. While no provider achieved the top AA rating, six received an A rating, based to a significant extent on the quality of the underlying investment team.

While the ability to easily deviate from a professionally-managed model portfolio when investment opportunities arise is rightly seen as a strength of SMAs, it can also be a weakness if the investor introduces inefficiencies as described above, or simply makes bad investment decisions.

Zenith Investment Partners There are a number of advantages for investors in having a direct equities portfolio managed in an SMA structure: • Professional investment management: An Australian-equity SMA managed by a reputable, experienced investment manager is a much better investment solution than a direct stock portfolio managed by a broker, adviser or investor.

• Direct ownership: The underlying

portfolio of stocks is held directly in the client’s name, meaning the portfolio is portable. If the investor is dissatisfied with the portfolio manager, they can sack the manager and transfer the portfolio of stocks to another manager or manage it themselves.

• Tax: Unlike investing in a managed fund, any taxation consequences resulting from a portfolio transaction are quarantined to the individual investor. In a managed fund, there may be imbedded capital gains within the unit price that an investor buys into when investing in a fund. In addition, the manager may be forced to sell stocks to meet other investors’ redemption requests, again resulting in taxation consequences for the remaining investors.

• Portfolio transparency: In general, portfolio managers of SMAs disclose the full stock names and weightings of the portfolio to investors (sometimes on a delayed basis), so investors have better knowledge of the stocks they own.

• Portfolio characteristics: SMA portfolios tend to be a lot more concentrated in terms of the number of stocks held than managed funds, and as such are more in line with how an individual investor would themselves invest.

However, there are a number of potential drawbacks to be conscious of when considering a SMA structure. These include: • Lower quality managers: The availability and accessibility of a number of SMA portfolio administrators has opened the market to new and/or small, less reputable portfolios managers to manage direct equities portfolios for investors as a way to generate investment management fees based on funds under management. The barriers to entry (especially from a cost perspective) are much lower for a SMA manager than for a managed fund manager. As a result, it is important to select a SMA manager that has a strong track record, a wellresourced and experienced investment team, and a defined and robust investment process. The universe of fund managers managing SMA portfolios is significantly smaller than the universe managing managed funds.

• Inexperienced SMA managers: as an extension of the above point, it is important to select a manager who is experienced in the management of SMA portfolios, because it requires a different approach compared to managing a managed fund. We have seen successful, reputable fund managers manage SMA portfolios in the same way as their managed fund – and this is usually disastrous, as high levels of portfolio turnover can generate high transaction costs and tax implications for investors.

• Cost: transaction costs can be high in some SMA offers where flat (e.g. $25) contract note charges for each transaction can become expensive for investors with smaller portfolios. This can be the case even for relatively low turnover managers.

In association with

Research Why mediocre returns can be worse than a crash While we tend to focus on sharp market crashes, sudden declines that recover quickly within just a year or few are not necessarily problematic. What is far more destructive are extended periods of mediocre returns.

Michael Kitces explains.

W

ith two market ‘crashes’ in the past decade, prospective baby boomer retirees have grown increasingly afraid of the risk that the next market crash could topple their retirement if it comes at the wrong time.

Yet the reality is that failure is dictated not simply by the magnitude of the market decline, but the speed at which it recovers. As a result, while clients are increasingly obsessed about the risk of a sharp decline in the markets (a so-called black swan event), the true danger is actually an extended period of merely mediocre results that are uncommon but not rare.

A misconception has become embedded in the mind of financial planners – and investors – about what really does and does not cause a retirement plan to run out of money.

Impact of ‘crashes’ For instance, assume the client has a balanced portfolio, with a long-term expected return of 8 per cent, and a standard deviation of 15 per cent (shown as the ‘normal’ portfolio). Now look at three potential ‘problem’ scenarios, each representing a two standard deviation event over a one, five and 10-year time horizon, respectively.

1. In a market crash, the portfolio drops 22 per cent in a year, and then rallies almost 50 per cent the following year (albeit from a lower base) to get back to the original growth rate – this is the 1-year dip portfolio in the graph.

2. In an extended bear market, the portfolio falls by 5.4 per year for five years.

Then the portfolio rallies a huge 23.3 per cent per year for the next five years to get back to the original growth trend – this is the 5-year dip portfolio in the graph.

3. In a protracted, difficult market environment, the portfolio declines by only 1.5 per cent per year but for 10 years. As the markets eventually hit a valuation bottom, the portfolio rallies at 18.4 per cent per year for the next 10 years, finally

recovering back to the original growth pace after 20 years – this is the 10-year dip portfolio in the graph.

These would be results that are uncommon but entirely probable in a typical Monte Carlo analysis – although notably clients tend to focus much more on the first scenario (sharp market decline) than the third (protracted slightly-declining market).

Ultimately by year 21, all of the portfolios are back on the track, with an initial $1,000,000 investment turned into $4,500,000, either by a fast decline with a fast recovery or a slower decline with a slower recovery.

But this assumes the client stays invested, with no cash flows in and out of the portfolio. Of course, if the client has no need to take any distributions from the portfolio, there is time to wait.

Impact of withdrawals What happens if these various bear markets strike while the client is taking ongoing withdrawals from the portfolio?

How do the results change?

Taking the same portfolios and assuming that there is an annual withdrawal of $50,000 at the end of the year which increases annually, assuming 3 per cent inflation, the results alter substantially: 1. The steady return portfolio grows to $1,800,000 by year 21.

2. The 1-year dip portfolio grows to around $1,700,000 by year 21.

3. The 5-year dip portfolio falls far lower due to the withdrawals, and even after the recovery, finishes at just over $1,000,000.

4. The 10-year dip portfolio with its tiny decline of only -1.5 per cent per year in returns is the catastrophe. It drops so low with ongoing withdrawals, that by the time

Figure 1 Impact of negative returns and withdrawals $5,000,000.00 Normal $4,500,000.00 $4,000,000.00 $3,500,000.00

1 Yr dip 5 Yr dip 10 Yr dip Normal +wdraw 1-yr dip +wdraw

$3,000,000.00

5-yr dip +wdraw 10-yr dip +wdraw

$2,500,000.00 $2,000,000.00

the good returns return, the portfolio can’t recover. It actually runs out of money completely in year 21. (Refer to Figure 1 below.)

So what does all of this mean?

While we tend to focus on sharp market crashes, sudden declines that recover quickly within just a year or few are not necessarily problematic, whether it’s the crash of 1987 (which recovered all of its losses within about a year) or the financial crisis of 2008 (which recovered nearly all of its losses in just over two years).

Rather than those black swan events that ultimately are just a short-term distraction, what is far more destructive to client portfolios are extended periods of merely mediocre returns, such as the entire decade from 2000 to 2010 (or from 1966 to 1976). And notably, these results are not black swans. The examples here are all simply minus two standard deviation events. These are scenarios that Monte Carlo analysis already models. We just don't tend to focus on them very much.

The bottom line is that when we talk about the impact of adverse markets and return sequencing on retired clients’ portfolios, the point is not the risk of shortterm volatility. It’s the risk of extended periods of time that generate merely mediocre, below-average returns. And as history (and even normal distributions) show, these events may be uncommon but they are not extremely rare, and they are certainly not black swans. They are risks that can be, and should be, planned for.

$1,500,000.00 $1,000,000.00 $500,000.00 $0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 18 19

Source: PortfolioConstruction Forum

Michael Kitces is research director of Washington DC-based Pinnacle Advisory Group and will be a presenter at the PortfolioConstruction Forum Conference in August 2012: www.PortfolioConstruction.com.au

In association with www.moneymanagement.com.au March 15, 2012 Money Management — 25

Appointments

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

Move of the week FOLLOWING a company rebranding, Antares – formerly Aviva Investor Australia – has announced the appointment of MLC Investment Management general manager, product, Sam Hallinan as Antares managing director.

Hallinan will report to MLC chief investment officer Nicky Richards, who is now responsible for leading all of MLC’s in-house asset management teams.

Along with Hallinan’s additional duties, Antares has also appointed Nick Pashias to the role of head of equities.

Hallinan said that the investment philosophy and process for the team will remain unchanged under the rebrand.

ZURICH Financial Services has announced the appointment of Greg Della to the role of chief life actuary for the life and investments business in Australia.

Reporting to chief financial officer Raf Uy, Zurich stated that Della will be a member of the executive team. “Greg was p re v i o u s l y w i t h Zu r i c h f o r more than 25 years, and spent a considerable amount of this time in senior finance and management roles across both l i f e i n s u ra n c e a n d g e n e ra l i n s u ra n c e,” s a i d C o l i n Mo r g a n , C E O o f Zu r i c h’s Australian life and investments business.

He joins Zurich following

nearly a year with CommInsure as chief financial officer and chief actuary, covering both life and general insurance.

E QU I T Y Tr u s t e e s L i m i t e d (EQT ) has appointed Eliza Weaving to the newly-created role of key account manager to its business development team.

Weaving has over 22 years’ experience in financial services, most recently as Vanguard Investments business development manager. She previously worked in business d e v e l o p m e n t r o l e s a t AX A Australia and MLC Corporate Solutions.

Rowena Cole, EQT’s national sales and distribution manager, said the company’s steady growth over the past year facilitated the need to expand its business development team.

Weaving’s appointment is also part of EQT’s strategy to focus on the Western Australian financial planning industry, Cole said.

RICE Warner Actuaries has a p p o i n t e d Ma rk Bl a i r a s a principal to head its superannuation consulting practice.

Blair will be responsible for advising clients and growing the practice.

With more than 20 years’ financial services experience, he has worked with Pillar, Russell and Towers Watson, in roles including client consulting, account management, product management and institutional sales and strategy.

The company stated that Blair’s appointment is part of an overall strategy to expand its consulting services within the financial services space, following the appointment of deputy chief executive Melissa Fuller.

She is now responsible for

Opportunities RISK ADVISER Location: Sydney Company: Principle Edge Financial Services Description: A wealth advisory firm is seeking a risk adviser to build long-term relationships with clients and help them reach their personal goals and objectives.

In this role, you will seek out new clients, maintain and grow this client base from the portfolio, and provide ongoing advice.

You will also provide advice on personal business protection strategies and work with clients to review their current risk insurance needs and ensure that they have appropriate cover.

The minimum qualification requirement is DFP 1-4, so the role would suit a recent graduate or someone of mature age seeking a new profession.

There will be the opportunity for the role to develop into a full adviser position.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Principal Edge Financial Services.

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

strategy, marketing, and operations at Rice Warner, allowing chief executive Michael Rice to focus on expanding the business and public policy.

Furthermore, Rice Warner director Richard Weatherhead has taken on the additional role of building the company’s investment consulting practice.

AS part of the firm’s long-term succession plan, Nikko Asset Management (Nikko AM) has announced the appointment of Charles Beazley as chairman and chief executive officer, effective 1 April 2012.

Beazley will step into the d u a l r o l e f o l l ow i n g t h e announcement that current chairman and CEO Timothy F. McCarthy will retire at the end of the fiscal year.

During McCarthy’s reign at the helm, Nikko AM became the largest regional asset management company based in Asia, with AUM growing from USD50 billion to over USD150 billion, the company stated.

Beazley first joined the firm in London in 2006 as president of its inter national offices before moving to Tokyo in 2010 to manage Asian operations

Charles Beazley and the domestic Japanese institutional business.

Nikko AM exter nal indep e n d e n t d i re c t o r L i m Si m Seng said Beazley is a highly experienced international g e n e ra l m a n a g e r w h o h a s business operations experience in Europe, the US and Japan, and has been integral in the development of the firm’s multi-local strategy in Asia.

Nikko AM also announced that Bill Wilder will remain the president and chief investment o f f i c e r, a n d t h e re m a i n i n g management team will remain unchanged.

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

The paid traineeship begins with a 10week course at the AMP’s academy in Sydney. Graduating as a competent financial planner, you will be provided with a position in your home state and receive additional on-the-job training for nine months in an AMP Horizons practice and be mentored by experienced financial planners throughout the year.

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

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

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact AMP – 1300 307 544

SENIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial planning business is seeking a senior paraplanner to assist its network of financial planners in strategy development and the construction of SOAs. Reporting to the paraplanning manager, you will be responsible for the preparation of SOAs for superannuation, SMSFs, gearing, investments and risk. As a senior member you will also be involved in the

training and development of junior-tointermediate colleagues.

To be successful, you will have excellent technical and interpersonal skills and either have, or be in the process of completing, a DFP or Advanced DFP. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0404 835 895, myra@terringtonconsulting.com.au

environment.

Although this is a full-time position, candidates seeking part-time employment will also be considered.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Jack at Terrington Consulting 0412 690 268, jack@terringtonconsulting.com.au

TECHNICAL PARAPLANNER - SMSF SPECIALITY TAX CONSULTING MANAGER / ASSISTANT MANAGER Location: Adelaide Company: Terrington Consulting Description: A mid-tier firm is seeking a tax consulting manager to provide tax advice and consulting services to a diverse client base.

In this role, you will also provide technical support to staff and identify opportunities to improve tax-related client strategies. You will deal with high-level and complex tax issues, provide technical tax planning advice and resolve issues in accordance with ATO and legislative rulings.

To be successful, you will be CA or CPAqualified, possess a solid grounding in ATO legislation, and have a proven background within a business services or consulting

Location: Adelaide Company: Terrington Consulting Description: A boutique financial planning firm is seeking a senior paraplanner with specialist skills in SMSFs. You will be responsible for producing SOAs using financial planning software, assisting with ASIC and licensee compliance obligations, and researching and reviewing client portfolios.

Experience with XPlan software and a particular interest in (and in-depth knowledge of) SMSFs would be a distinct advantage in securing the position.

For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting 0404 835 895, myra@terringtonconsulting.com.au

www.moneymanagement.com.au March 15, 2012 Money Management — 27

Outsider

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

Outsider – the equal opportunity offender

DESPITE Outsider’s wellearned reputation as an incontrovertible cynic, every once in a while a story crosses his desk that warms the cockles of his icy, jaded heart.

And one more-than-worthy such cause did happen to intrude upon Outsider’s consciousness recently as he

gazed absent-mindedly out the window at a torrential Sydney downpour of truly 2012 proportions.

It seems OneVue boss Connie Mckeage has had some success using the services of 121 Employment, a program run by Disability Services Australia, in recruit-

ing staff for OneVue’s mail and administrative services.

Mckeage said 121 Employment supports people with a disability to become job ready and has provided valuable and ongoing assistance to three OneVue staffers who were recruited through the program, as well as their supervisors and team members.

“While employers in financial services like other industries might shy away from hiring people with a disability,

I think a lack of understanding and awareness about how they can receive the right support to do it successfully has a lot to do with it,” McKeage said.

Outsider couldn’t agree more with that sentiment and would like to state for the public record that he has always been proactive when it comes to equal opportunity. As his colleagues will attest, Outsider goes to great lengths to diligently disparage all his co-workers equally, regardless of race, gender, ethnicity, sexual preference or disability.

“

Out of context

“My job has been to keep time and I have been given a bell to ring…I’ve wanted to ring the bell on lots of people in Australia for the last few decades and now I get the chance.”

Finance reporter Michael Pascoe revels in his role as adjudicator at the Fidelity 'Battle of the Asset Classes'

Catherine the great, meet Ivan the terrible BEING one of the senior journos in the newsroom, Outsider has the luxury of outsourcing coverage of various industry events to younger chaps. After all, they have yet to prove themselves in handling strong spirits while extracting industry gossip from financial services executives.

There is something about a sea of dark suits and corporate presentations that tends to put yours truly right to sleep.

This is not to say that Outsider wouldn’t happily jostle his younger colleagues out of the way to a conference registration desk if the proper incentives were offered.

In fact, Outsider believes financial services companies could find inspiration in the example set by Russian corporate giants.

Just recently, a Russian telecoms operator CBOSS offered “beautiful girls” as an incentive for would-be business partners to come to their briefing at an industr y congress in Barcelona.

The package included champagne, caviar and a ‘romantic dinner’ with women in what Outsider can only describe as midriff-bearing outfits.

These ladies would provide keen executives with a dance, a kiss and a leaflet illustrated with pictures of themselves.

Outsider grew up during the cold war and therefore knows a "honey trap" when he sees one. In any case, and sadly, the strong presence of feminism in Australian financial services industry precludes the use of such advanced marketing techniques – except during hedge fund frivolities.

debate.

“I’m very happy I’m representing global equities and not the Indian cricket team.”

Fidelity global equities portfolio manager Amit Lodha breathes a sigh of relief at the Fidelity equities debate.

“Float has always been their secret sauce.”

Stifel Nicolaus & Co analyst Meyer Shields on Berkshire Hathaway's decision to curb float.

Will ASIC pass around the hat?

WITH the Federal Budget little more than a month away, Outsider has noted numerous stories about Government departments and agencies cutting jobs and services as the Government seeks to deliver on its promise of a surplus.

He has noted cuts within the Department of Resources, Energy and Tourism, as well as within Education and Treasury – all of which must worry the good burghers of Canberra because the Shadow Treasurer, Joe Hockey, has signaled a Coalition Government would also be looking to cut jobs in the Australian Public Service.

Which brings Outsider to the question of the Commonwealth's two financial services regulators – the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

Outsider noted the amount of money the Government directed towards ASIC when it was charged with dealing with the fall-out from the Westpoint and Storm Financial collapses, but he wonders whether the Commonwealth will be similarly generous with respect to the implementation of the Future of Financial Advice (FOFA) changes.

While the Financial Services Council, the Association of Financial Advisers and the Financial Planning Association are all urging at least a 12month transition period for FOFA, Outsider believes they should be more concerned about how well ASIC is funded to handle the implementation.

Given the Government's desire to maintain a surplus at the same time as driving the implementation of its FOFA and Stronger Super agendas,

28 — Money Management March 15, 2012 www.moneymanagement.com.au

Outsider suggests that those running the major financial services institutions closely examine the Budget expenditures directed towards ASIC and APRA, and then keep an eye on the level of the supervisory levy invoices they receive.

The cost of change may well extend beyond the investment necessary to make platforms compliant with the new regime.