money management (april 26, 2012)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Benjamin Levy

THE tendency of independent self-managed super fund (SMSF) clients totreat their financial planner as a consult-ant rather than a trusted adviser andonly seek advice about some issuescould cause planners to fail the bestinterests test.

Concerns have been raised amongSMSF advisers that independent clientswho want total control over their invest-ments and only approach their adviser tosign off on their own ideas could lead toplanners failing the best interests test bybeing unaware of the client’s entire finan-cial situation.

ipac south australia superannuationstrategist Peter Crump warned that amajority of SMSF clients were not treatingtheir planner as a trusted adviser andwere only approaching them to seekcertain investment information, leavingthe adviser incapable of considering otherimportant issues.

“The ‘coach-seeker’ wants only a little

help, they may want to ask for informa-tion and take it on board as they see fit,or ask for affirmation of what they’reproposing. In the current and proposedadvice environment, that’s fairly difficult,”he said.

SMSF advisers cannot engage on asingle unique issue like the industryfunds, and they need to convince theirclients to have a higher level of engage-ment with their planner, Crump said.

Fiducian Financial Services adviserMichael Dale suggested advisers have tomake clear to SMSF clients that answersto investment-specific questions fallunder scaled advice and don’t take intoaccount the client’s wider financialcircumstances.

Financial planners must persuade theirclients to show them their whole finan-cial situation, Dale said.

“We have a duty to give the wholepicture, because very often people arenot aware of the ramifications of death,or estate planning issues for example,”he said.

Seven out of 10 clients wouldn’t evenbe suited to an SMSF, Dale said.

Some clients use their SMSF to holdonly managed investments, in which casethey would be better off using a personal

super provider instead, Dale said. It’s the responsibility of the adviser to

tell clients if they would be better off withanother option, he added.

Hewison Private Wealth directorAndrew Hewison warned that SMSFadvisers needed to document if they wereproviding limited advice to an SMSFclient, to cover themselves in case theyweren’t being fully informed.

“If they specifically state that they onlywant information on a particular area,then the adviser should provide a limitedstatement of advice detailing the fact thatthe advice only related to these areas,”Hewison said.

Principal of Financial Services Partnerspractice Equilibrium Wealth Susan DuChesne said a significant number of herclients preferred to make their own invest-ment decisions while she provided thestrategy behind the investments.

The client should make it clear if theywant to make their own investment deci-sions and only want advice around strat-egy, Du Chesne said.

By Mike Taylor

LIFE insurance and annuitieshave become far bigger partsof the revenue model forfinancial planners, accordingto the latest data compiled byWealth Insights.

The data, the result of sur-veys and focus groups con-ducted over the past monthor so, has confirmed a signifi-cant increase in the numberof planners advising on lifeinsurance.

According to the data, theprovision of advice around lifeinsurance has now becomean integral part of the offeringof almost all planners.

The latest Wealth Insightsresearch points to the contin-uat ion of a t rend whichemerged as traditional rev-enue streams retreated afterthe outset of the global finan-cial crisis.

The data suggests that thechanges to the revenue modelsare unlikely to become embed-ded in practices, particularly as

planners seek to accommodatethe regulatory environmentemerging out of the Govern-ment’s Future of FinancialAdvice changes.

Commenting on the data,Wealth Insights managingdirector Vanessa McMahonsaid almost all advisers nowadvise on l i fe insurance,which typically accounts forover one-quarter (27 per cent)of planner revenue.

McMahon said her com-pany’s research also suggestedthe trend towards providing

advice around life was notabout to end any time soon.

“More than half of all advis-ers (56 per cent) expect lifeinsurance to become moreimportant to their practicesover the next few years,” shesaid.

Commenting on the results,McMahon said she believedthe take-up of advice aroundl i fe insurance was beingdriven by a number of factors,not the least of which was

Life and annuities embeddedin planner revenue

RISK MARKET GROWS: Page 7 | YEAR-END TAX STRATEGIES: 4

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

By Chris Kennedy

THE average financial planningpractice has a lot of room forimprovement in major areassuch as client communicationand succession planning, accord-ing to data from financial plan-ning practice consultancy Busi-ness Health.

Among the key takeouts: sevenout of 10 businesses have notsurveyed their ‘A’ clients at anytime in the past two years, andalmost half contact their ‘A’clients less than 10 times per year.Contact can include not just face-to-face meetings and personalphone calls but emails and clientnewsletters.

Business Health director TerryBell said the fact so few practicessought feedback from clients wasone of the most surprisingaspects of the data.

“You’ve got a minimal commu-nication program matched withthe fact that most practices don’tknow what their clients are think-ing about them – it’s a doublewhammy.”

Bell also said it was surprisingthat 68 per cent of practices didnot have a clearly articulatedclient value proposition.

“Every business owner shouldbe able to say ‘this is what I’mdoing for the client’. That’s theDNA of a business,” he said.“There is a concern around howadvisers are communicating thevalue of their advice.”

More than half of practices stilldon’t have a succession plan inplace – a statistic Bell said hadchanged very little in the past fewyears. “You should be preparedto sell even if you’re not looking atselling soon,” he said.

Bell added that succession wasa big issue because many adviserswere approaching retirement. Hesaid that when one looked at themergers and aggregation in thesector, there were younger adviserswho would come through whomight be more qualified and moreaccepting of a new regime.

The data also showed 35 percent of practices do not segment

Planning practicesnot so healthy

Michael Dale

Best interests put to the test

Continued on page 3 Continued on page 3

Advisers sourcing revenue from life products

Advisers expectinglife productsto become more important

2011

2012

Advisers sourcing revenue from annuities

27%

56%

22%

33%

Source: Wealth Insights

Graph: Adviser revenue breakdown

Wanted: friends in high places

In the wash-up of the Future ofFinancial Advice (FOFA) process-es, the Association of FinancialAdvisers (AFA) is quite right to flag

its intention to remain politically activeright up to and including the nextFederal Election.

If one particular lesson ought to havebeen learned by the financial planningindustry over the past five years, it isthat political lobbying matters, partic-ularly when you already hold the ear ofan incumbent Government.

Indeed, the major financial planningorganisations could do worse thananalyse the tactics adopted by theIndustry Super Network (ISN) and themanner in which that organisationparlayed its influence with the Govern-ment to move beyond being a ‘bitplayer’ to become a ‘stakeholder’ in theFOFA process.

The degree to which FOFA has repre-sented a success story for the ISN needsto be measured against the degree towhich it ought to have ever really beena player in the game. It is, after all, onlya lobby group formed by a group ofindustry superannuation funds which,notwithstanding the billions of dollarsthey hold in funds under management,

are only small players in terms of deliv-ering financial advice.

The success of the ISN was owed tothe entrée it was allowed to the highestlevels of government and to the mannerin which other stakeholders in thefinancial services industry allowed theISN an unquestioned voice at thebargaining table.

It was noted from t ime to t imethrough the FOFA process that the not-for-profit sector had been granted amultiplicity of voices through the likes

of the ISN, the Australian Institute ofSuperannuation Trustees (AIST), andeven through groupings formed by theISN, AIST and consumer group Choice.

The shape and texture of the FOFAlegislation should therefore be meas-ured against the inf luence of thevarious stakeholders; and in manyrespects the financial planning indus-try should congratulate itself on themanner in which it ultimately ensuredsome very necessary concessions.

It is political reality in Australia thatthe major political parties tend to beinfluenced by particular groups. TheAustralian Labor Party grew out of thetrade union movement and its actionstend to reflect those origins. Similarly,the Coalition tends to reflect the viewsof business and industr y. Rarely,however, have the traditional linkagesbeen so influential as during the FOFAdebate.

With this in mind, and with manyplanners still concerned about theimpact of the FOFA legislation, it makesgood sense for groups such as the AFAto continue their political activism intothe future.

– By Mike TaylorABN 80 132 719 861 ACN 000 146 921

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2 — Money Management April 26, 2012 www.moneymanagement.com.au

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“Rarely have thetraditional linkages been soinfluential as during theFOFA debate.”

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Average Net DistributionPeriod ending March '1110,207

By Mike Taylor

THE Australian Prudential Regula-tion Authority (APRA) spent morethan $1.5 million on travel for thecurrent financial year to the end ofJanuary, with more than $900,000of that amount spent on interna-tional travel.

The regulator has provided theinformation as part of an answer to aquestion on notice from TasmanianLiberal Senator David Bushby buthas declined to provide a detailedbreakdown, claiming it does not havethe resources to do so.

The APRA answer comes at thesame time as speculation that theGovernment will move to lift finan-cial services levies in the FederalBudget to cover off the cost of

implementing both its Future ofFinancial Advice legislation andStronger Super.

While declining Bushby’s requestfor detailed information, the regu-lator did acknowledge that i tprovided lounge memberships tostaff and that it used the Govern-ment’s centralised airline bookingservice to secure the best fare ofthe day.

Its formal answer to SenatorBushby stated, “APRA does notrecord travel data in a way thatwould readily allow answers to beprovided to these questions. Toattempt to provide the level ofdetail would involve an unreason-able diversion of APRA’s resources”.

“Qantas and/or Virgin airlinelounge memberships are provided

to APRA staff that regularly travelinterstate and internationally onAPRA business to assist in theirproductivity while out of theoffice.”

It said that for the financial yearto 31 January 2012, the total cost oflounge memberships was $8,763and the average cost of member-ship per employee was $204.

www.moneymanagement.com.au April 26, 2012 Money Management — 3

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Flying high to regulate

Planning practicesnot so healthy

their client base – a factor thatmay change once Future ofFinancial Advice reformscame into place and practicesare less able to subsidise Cand D clients through Aclients. Currently the averagepractice has 1,000 clients andonly two advisers, highlight-ing the need for segmenta-tion, Bell said.

Although nine out of 10clients said they would beprepared to refer their adviser,only five out of 10 did so, suggesting more advisers neededto ask their clients for referrals.

Other findings included: 63 per cent of practices arestill generating more than half of their income viacommission; 43 per cent do not have a business plan;and 42 per cent do not seek any external input onrunning the business, for example from a business coachor business development manager. One third do nothave a website.

Bell said that overall the strong practices have beengetting stronger because they are more prepared, havestrong leadership, have kept their clients throughoutthe global financial crisis and have improved theirservice offering. The reverse was also true for the weakerpractices, he added.

The data was based on Business Health ‘healthchecks’ and ‘cat scans’. The health checks involvedpractice principals completing a 100-question multi-ple-choice questionnaire. Approximately 200 prac-tices over 2.5 years were included in the data. The catscans involved a survey of a practice’s clients. Busi-ness Health has collected data from around 45,000clients over its 12 years, with the latest results based onroughly the last two years of data. Practices surveyedinclude both institutionally-backed and non-alignedpractices.

investor sentiment, withinvestors becomingmore fearful and cau-tious in general terms.

“The increase inhousehold savings (builton the belief that therecould be rocky t imesahead) has also beenevident in increasinglevels of insurance cov-erage,” she said.

McMahon also pointedto a pick-up in thenumber of planners deriv-ing increased revenuebased on advising aroundannuities.

She said the WealthInsights research had

revealed 33 per cent ofplanners now sourcedrevenue from annuities– up from 22 per centlast year.

Life and annuitiesembedded inplanner revenueContinued from page 1

Continued from page 1

Vanessa McMahon

Terry Bell

News

By Tim Stewart

INSTITUTIONALLY backed boutiquefund managers are the best bet in thesmall cap space, despite their inherent‘key person risk’, says Lonsec seniorinvestment analyst Sam Morris.

As part of Lonsec’s annual review of thesmall cap sector, Morris said the “boutiquewith backing” model had a number ofadvantages.

“Key investment staff gain equity in the

business, increasing alignment withinvestors and potentially their motivationfor success,” Morris said.

The outsourcing of compliance, admin-istration and distribution to the support-ing backer also leaves the investment teamfree to do their job, he added.

While the success of the ‘boutique withbacking’ model relies on “the investment skilland experience of key individuals”, Lonsecbelieves it is a risk worth taking, said Morris.

The 2011 year was a challenging one for

small cap companies. The S&P/ASX SmallOrdinaries Accumulation Index returned-23.4 per cent for the year, although theLonsec Small Cap Peer Group outper-formed the index by 8.3 per cent for thecalendar year.

Morris pointed to the outperformanceof the Lonsec peer group as evidence of thebenefits of active management in the smallcap space.

“A well regarded small cap manager islikely to outperform the index through the

cycle,” he said.Three funds were upgraded from ‘recom-

mended’ to ‘highly recommended’ as partof the review: Aviva Investors Small Compa-nies Fund, Celeste Australian Small Compa-nies Fund and Perennial Value SmallerCompanies Trust.

Macquarie Australian Small CompaniesFund was downgraded from ‘fund watch’to ‘redeem’ following a number of depar-tures, including the fund’s portfoliomanager Neil Carter.

Class ordershould includeage pensionBy Mike Taylor

TWO key organisationshave taken issue with anAustralian Securities andInvestments Commission(ASIC) decision not togrant superannuationfunds class order reliefif they include age pen-sion calculations whenproviding superannua-tion forecasts.

Both the Association ofSuperannuation Funds ofAustralia (ASFA) and theInstitute of Actuarieshave written to ASIC argu-ing strongly that the agepension can and shouldbe included in superan-nuation forecasts.

In a letter to ASICsigned by ASFA chiefexecutive Pauline Vamosand Actuaries Institutechief executive MelindaHowes, the two organisa-tions insist that the agepension will be an impor-tant part of superannua-tion fund members’ post-retirement income.

“For these members,any consideration of theadequacy or otherwise oftheir income in retire-ment without havingregard to the age pensionis meaningless,” theletter said.

It said that, accord-ingly, ASIC should care-fully reconsider the issueand amend the classorder to take account ofthe age pension.

The letter said that itshould be up to superan-nuation fund trustees todecide whether the agepension was taken intoaccount in calculations,but it was l ikely to beimportant for a majorityof superannuation fundmembers.

Boutique managers best for small caps: Lonsec

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Some measure their performance by relative returns.



News

By Mike Taylor

DESPITE all the debatearound the impact ofcommissions on superan-nuation fund balances, theAustralian Prudential Regu-lation Authority (APRA) hasadmitted it has nevercollected specific data onthe issue.

Providing an answer to aquestion on notice fromTasmanian Liberal SenatorDavid Bushby, the regulatorsaid, “APRA does not collectdata on commissions paidby superannuation funds aspart of its current statisticalcollection”.

Bushby had used a SenateEstimates Committeehearing to ask APRA officialswhether they knew thedegree to which commis-sions impacted superannu-ation fund balances.

“Do you have a feel for thepercentage of funds thatcome in – particularly theretail funds – that attractcommissions?” he asked.

The degree to whichcommissions affect super-annuation fund balancesrepresented a centralelement of the IndustrySuper Network’s ‘comparethe pair’ advertisingcampaign, but was relianton research from commer-cial ratings houses such asSuperRatings.

No APRAcommissiondata

*The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned February 2011) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria.

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You see smaller companiesWe see hidden gems

FOFA’s true opportunity lies in scaled advice: BrogdenBy Milana Pokrajac

SCALED advice is the most crucial partof the upcoming reforms in getting moreAustralians receiving financial advice inthe near future, according to the Finan-cial Services Council (FSC) chief JohnBrogden.

In a speech at netwealth’s launch ofPathway Financial Services in Sydneylast week, Brogden referred to one ofthe main objectives of the upcoming

Future of Financial Advice (FOFA) regula-tory changes.

“It would be an absolute tragedy if theindustry went through this level of reformand fewer Australians ended up gettingadvice,” Brogden said.

“The really exciting option lies – andthis might not be regarded by small play-ers as relevant, but it is – in scaledadvice,” he added.

Australian retail clients are currentlyoffered either full comprehensive advice at

one end, or intra-fund advice at the other.“But in the middle – scaled advice – is

a missed opportunity now for millions ofAustralians,” Brogden said. “They don’twant to spend thousands of dollars, theydon’t have thousands of dollars to spendand they have a very simple propositionupon which they need advice.”

Brogden conceded there was still sig-nificant regulatory clarity that needed tobe provided, but said that servicing andaccessing a large and untapped market

with affordable advice was the outcomethat “should and must arise out of thesereforms”.

“That’s the way we reach millions ofnew people in our country and providethem with the advice they need,” headded.

Pathway, which provides support serv-ices to those holding or wishing to applyfor an Australian Financial ServicesLicence, was recently acquired from Par-agem by platform provider netwealth.

David Bushby

News

HUB24partners withanother dealerBy Milana Pokrajac

PRIVATE advisory firmLachlan Partners hasselected HUB24 as its pre-ferred platform provider.

This is the 20th agree-ment executed by HUB24since June 2011, bring-ing the total number ofdealer groups contractedsince the platform wasestablished to 31.

“The contract is partic-ularly noteworthy for theparties, as it is structuredalong a par tnershipmodel, with clear mile-stones set for each party,and a particularly excitinginitiative being the abilityfor Lachlan Partners totake more responsibilityin product manufacturingfor i ts cl ients,” saidHUB24 chief executiveofficer Darren Pettiona.

Lachlan Partners pro-vides services such asaccounting, tax, auditing,proper ty advice andwealth management,employing 15 financialadvisers. The f irm ismostly owned by its prin-cipals, in addition to 19per cent ownership by theMacquarie Group.

“The continued strongorganic growth comingfrom [Lachlan Partners]represents a qual itypipeline of growth for theHUB24 business,” statedHUB24’s parent companyInvestorfirst.

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Australia’s streamlined regulatory system an advantage: SherryBy Chris Kennedy

SEVERAL years of financial servicesreform in this country have been part ofa global trend – but Australia is nowahead of the curve, according to formerMinister for Superannuation and Corpo-rate Law Nick Sherry.

Speaking at an industry gathering inSydney last week, Sherry, who instigatedthe Jeremy Cooper-chaired Super SystemReview, said Australia was now benefit-ting from the fact that financial services

was fully regulated at the federal level bythe Australian Securities and InvestmentsCommission (ASIC) and the AustralianPrudential Regulation Authority (APRA).

This was an improvement fromapproximately four years ago, when theindividual states had responsibility foraround 40 per cent of Australian finan-cial markets supervision, he said.

Sherry also lauded the removal of themonopoly of the Australian SecuritiesExchange as a trade jurisdiction in theform of the Singapore Exchange.

While Australia’s overall financialsystem wasn’t threatened as a result ofthe global financial crisis in the way thatsome other markets were, there wassome “poor practice at the edges” – suchas the behaviour of Storm Financial –resulting in significant regulatory over-haul, Sherry said.

“The most comparable countries inthe world with federal structures havean extraordinarily byzantine regulato-ry structure. So Australia at least has thevirtue of a single streamlined national

regulation in financial services, whichis a great advantage in today’s world,”he said.

Although Stronger Super and Future ofFinancial Advice reforms have passed theHouse of Representatives, they have notyet passed the Senate, but Sherry washopeful each piece of legislation wouldbe passed in the May budget week sitting.

“Many of the issues the Brits are nowconsidering, Australia has dealt with or isdealing with, so there’s worldwide inter-est in what’s happening here,” he added.

Darren Pettiona

Important: This information is provided by Alphinity Investment Management Pty Limited (ABN 12 140 833 709 AFSL 356 895) (Alphinity). It should be regarded as general information only rather than advice. It has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, fi nancial situation and needs.

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Find out more about our research and insights by visiting www.alphinity.com.au

It’s personal.

13562/0412

News

Software developers respondto FOFA and GFC in 2011By Bela Moore

INVESTMENT Trends’ 2011Planning Software Report hasfound planning applications in2011 focused on consolidatingand improving functionality ofexisting applications rather thandeveloping innovative features– although the leaders in themarket were among the mostactive in adding new features totheir products.

The Investment Trends 2011Planning Software Report assess-es eight fully-featured planningapplications frequently used byAustralian financial advisers.

IRESS’ XPLAN has topped thesoftware report for the fifth yearin a row for overall planningfunctionality, scoring 89 per cent,ahead of COIN Office with 85 percent and AdviserNETgain with75 per cent.

“With the release of XPLAN2, IRESS has produced animpressive advice platformthat should support their strat-egy to take Australian-devel-oped planning technology tointernational markets,” said Ian

Webster from the InvestmentTrends Advisory Board.

The report concluded thatleading providers are the mostactive in enhancing their prod-ucts with new features.

IRESS XPLAN 2’s point-and-click interface and ‘AdviceContainer’ approach to codify-ing Best Interest compliancereflect the developer’s innova-tion across most aspects of func-tionality, Investment Trends said.

COIN Office includes a newbest practice SOA (statement ofadvice) template, an Open Plat-form Accounts module,improvements to TTR (transitionto retirement), and debt recy-cling strategy reporting features.AdviserNETgain successfullyintegrated with investment plat-form BT Wrap to rank first in thatcategory.

According to InvestmentTrends, FOFA will lead toincreased activity and deploy-ment of new online and Appplanning applications by plan-ners, retail and industry fundmember portals, and call-centre-based advice services, in 2012.


Risk market growsfurther 10 per cent

By Chris Kennedy

MOST managed fundsreviewed by Morningstar gen-erally experienced very posi-tive returns for the Marchquarter, with many equitiesfunds posting double-digitgains and some small com-panies funds climbing morethan 20 per cent.

Funds in the Australianequities large growth categoryaveraged a return of 9.18 percent, ahead of an index returnof 8.58 per cent.

Out of the 46 smaller com-panies funds monitored, 30performed better than theindex return of 14.98 per cent.

In international equities,large growth funds averaged11.23 per cent, but with awider range of returns thanthat seen in Australian equi-ties, and hedged strategiesslightly outperformedunhedged. Emerging mar-kets funds returned 12.23per cent, but did not outper-form the index return of

12.9 per cent.Listed property funds aver-

aged a 6.81 per cent gain forthe quarter, also just behindthe index return of 7.14 percent, but with a wide disparitybetween the best and worstfunds.

Global listed property fundsin the review returned 11.52per cent on average – again,just behind an index return of12.31 per cent.

Global infrastructure fundsreturned 5 per cent for thequarter, and alternative strate-gies comfortably outpacedtheir index yet still onlyreturned 2.58 per cent.

The average Australianfixed interest fund returnedslightly more than the UBSComposite Bond Index's 0.78per cent. “Generally, strate-gies more exposed to creditthan interest rate duration didwell. Overall, gains from inter-national fixed interest fundswere slightly higher than fromtheir Australian counterparts,”Morningstar stated.

Big quarter formanaged funds

By Milana Pokrajac

THE life insurance risk market has again recordeddouble-digit growth, with most risk companiesachieving impressive results over the past year,according to research from Plan for Life.

Total inflows grew by 10.4 per cent in 2011 and allsectors – individual risk lump sum, income and grouprisk – almost equally contributed to the end result.

AMP has retained its top spot in terms of marketshare, though closely followed by MLC, CommIn-sure and TAL.

Suncorp is the only insto in the top 10 to have suf-fered a fall (8.7 per cent) in total premiums, despiteits new risk business growing almost 30 per centover the past year.

MetLife Insurance has recorded a 656 per centgrowth in new business, though off a very low base,according to Plan for Life.

The risk market in Australia now stands at $10.3billion, up from $9.3 in December 2010.


News

SMSF trustees need to know risksBy Mike Taylor

SELF-MANAGED superan-nuation fund (SMSF)trustees should be informedof the additional risks whichexist when they step outsidethe system overseen by theAustralian Prudential Regu-lation Authority (APRA).

That is the bottom line ofan exchange within a parlia-mentary committee review-ing the collapse of the Triosuperannuation funds, inwhich former Labor ministerNick Sherry queried seniorAPRA officials about whySMSF investors in the Triofunds might have beenunaware of the reasons theywould not have been eligibleto access government-backedcompensation arrangements.

Sherr y asked the APRAoff icials whether theythought it would be appro-priate for SMSF investors tobe informed when they werestepping into particular risk

areas. “At least as part oftheir consideration insetting up an SMSF, don’tyou think it is an appropri-ate r isk issue that theyshould be aware of?” Sherry said.

The APRA officialsresponded that there couldbe similar arrangements tothose that apply when peopledealing with banks need to benotified that when they aredealing with finance compa-nies they are not subject to

the depositor protectionprovisions of the Act.

Sherr y said he wassurprised by such a responsebecause of the special statusof superannuation.

“Surely you would believeit appropr iate that i f aperson does move outsidethe prudentially regulatedsector – about which I haveno specific complaint orconcern in relation to APRA’sactivities – and into anothersector (albeit in superannu-ation) . . . and a di f ferentstructure that is not pruden-tially regulated, where thereis no licensing as such andthere is no direct checkingof trustees – that an individ-ual should be informed as tothe level of risk they may betaking if things do not workout?” he said.

“And theft or fraud hasoccurred in this case. Don’tyou think that is a reason-able disclosure to make?”Sherry said.

Shadow shopper workshopswill help plannersBy Bela Moore

FINANCIAL Planning Association(FPA) chief executive Mark Rantall isencouraging all financial plannersto participate in upcoming shadowshopper workshops, irrespective oftheir opinion on the results of theAustralian Securities and Invest-ment Commission’s (ASIC) shadowshopper survey.

The FPA, in conjunction with ASICand the Financial Ombudsman Ser-vice, will address ASIC’s latestshadow shopper results in a seriesof workshops throughout the coun-try in May.

Rantall said that while he under-stood many financial planners werenot happy with the results of the survey, it was important theytook the time to find out what thereport was designed to do, whatcriteria ASIC used in reaching itsfindings and what the specific out-comes were.

“Without taking the time to getthe level of knowledge to under-stand the background behind thereport, it’s a bit difficult to draw aconclusion one way or another, so

we’re encouraging people to comeand see and hear first-hand whatthose requirements were,” he said.

Rantall said the workshop wouldexplore the criteria ASIC used inreaching its findings and the out-comes of the shadow shoppingexercise, and address gaps identi-fied in the financial advice process.

“This is a very rare opportunityfor our own members and all otherfinancial planning professionals togain first-hand insights from the reg-ulator, the ombudsman, the profes-sional body and leading practition-ers,” he said.

Rantall said that while the indus-try has seen improvement since the2006 shadow shopper survey, thepassage of time had shown theneed for further improvement asillustrated in the recent survey.

“The whole idea of this is not tostay static (but) to move forward, sothe objective is really to ensure thatwe continue to grow and learn interms of the advice process suchthat any future shadow shoppingsurveys will have a better resultthan what we’re currently achiev-ing,” he said.

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News

By Mike Taylor

A BATTLE has broken out betweenthe Government and the Coalitionover superannuation reforms, withthe Opposition spokesman onfinancial services, Senator MathiasCormann, accusing Minister forFinancial Services and Superannu-ation Bill Shorten of being “all talkand no action”.

He said that despite Shortenhaving talked about makingchanges to ensure the comparabil-ity of different superannuationfunds as far back as 2010, the Minis-ter had yet to take any action.

Cormann has committed afuture Coalition Government tohaving the Australian PrudentialRegulation Authority provide datasufficient to allow people to

compare superannuation funds,particularly with respect to defaultfunds under modern awards.

However, Shorten responded thatthe Government had committed toa similar policy as early as 2010.

Cormann said that after morethan four years of the Labor Govern-ment, Australians remained unableto compare the performance ofdifferent superannuation funds onan “apples for apples” basis.

The Opposition spokesman saida future Coalition Governmentwould ensure the implementationof a range of Cooper Review recom-mendations, including independ-ent trustee directors on superannu-ation fund boards, an end toconflicts tied to multiple director-ships, and the disclosure of trusteedirector remuneration.

Industry codes need‘radical surgery’By Tim Stewart

THE industry’s existing codes ofconduct will require “pretty radi-cal surgery” before the Aus-tralian Securities and Invest-ments Commission (ASIC) islikely to deem them sufficient,says Mallesons senior associateMichael Mathieson.

Under the amended Future ofFinancial Advice legislation, begin-ning in 2015 advisers will beexempt from the opt-in provisionsif they sign up to an ASIC-approvedcode of conduct.

The codes of conduct will beapproved by ASIC if they aredeemed to obviate (ie, renderunnecessary) the opt-in obligations.

“If you’re asking ‘how can acode make the opt-in require-ment unnecessary?’, you needto ask the question: ‘what’s thepurpose of the requirement?’”Mathieson said.

The original explanatory memo-randum says the purpose of theongoing fee arrangement provi-sions is to ensure that advisersdon’t charge open-ended feeswhere the client is receiving littleor no service, he said.

“How can a code of conductensure that advisers don’t chargeopen-ended fees without also pro-viding a service? That’s going tobe a very difficult question forASIC to answer,” he said.

The easiest solution would befor an industry body to includean opt-in obligation in its code ofconduct, Mathieson said,(tongue-in-cheek).

More realistically, what ASICmight be looking for is “a genuinefee-for-service requirement that’ssomehow imposed on theadviser”, Mathieson said.

But that would be much harderto police than a “black and white”opt-in requirement, he added.

“It imposes a real burden onASIC, both as to whether toapprove codes and what it willrequire in codes. ASIC wouldrequire pretty extensive powersrelating to oversight, compli-ance and enforcement,” Math-ieson said.

Cbus defends industryexpertise on super boardsBIG building industry superannuation fund Cbushas sought to defend the industrial relationsprocesses used in determining default funds undermodern awards, and also to resist claims that allsuch funds should be obliged to have independentdirectors.

The fund has resisted recent calls for more inde-pendent directors by claiming the trustees of suchfunds should have knowledge of the industry thefund covers.

The chief executive of Cbus, David Atkin, said thefund strongly supported such criteria, which hadbeen advanced by the Industry Super Network.

He said the criteria would ensure trustees’ knowl-edge and experience of the characteristics of theconstruction industry would be used in the interest

of Australians working in the relevant industry.“Our trustees’ detailed firsthand knowledge of

the construction industry has ensured that uniquechallenges we have faced have been resolved forthe benefit of our membership,” Atkin said.

He said it was that detailed knowledge whichhad led to the fund’s unique compliance processwhich reflected the working of the industry,together with an insurance product which provid-ed high levels of death and TPD (total permanentdisability) cover.

The Cbus position – outlined in a submission tothe Productivity Commission review of defaultfunds under modern awards – runs counter to argu-ments that such funds need independent directorsto lift their standards of corporate governance.

By Chris Kennedy

BENNELONG Funds Managementboutique Kardinia Capital hasopened its Absolute Return Fundto retail investors, with a minimuminvestment of $20,000.

The fund currently holds around$24 million, predominantly onbehalf of family offices, high networth individuals and charitableorganisations.

Portfolio manager MarkBurgess said the likely capacity ofthe fund was around $500 mil-lion, but it may be closed earlierthan that if the team felt it hadreached an appropriate level.

With the fund already havingattracted a ‘highly recommended’rating from Zenith, Burgess saidhe was hopeful it would be madeavailable on several dealer group-

approved product lists as well ason wraps and platforms. “We’vehad good feedback from adviserssuggesting the demand is there,”he said.

There are not many Australianequity absolute return funds avail-able to the retail market, Burgesssaid. Most such funds tend to bewholesale products targeted at theinstitutional market, and there arevery few opportunities for investors

with smaller amounts of moneyto get exposure to these strate-gies, he said.

Burgess said he was attractedto Bennelong because it had astrong brand and a pedigree inabsolute return investment, withstrong distribution capabilities.“That means as an investmentteam we can focus on managingthe fund and not have to worryabout peripheral issues,” he said.

Mathias Cormann

Michael Mathieson

Shorten and Cormann insuper war of words

Morningstar reduces itsexposure to Australian shares By Andrew Tsanadis

MORNINGSTAR has cut its tactical asset allocation to Australian equi-ties from 24 to 22 per cent following the results of its latest expert assetallocation panel review.

The research provider stated that the panelists were less confidentabout growth assets continuing to outperform defensive investmentsand were concerned that investor sentiment had shifted from “fearingthe worst to being surprised” by the current economic outlook.

In its economic update for the April/May period, Morningstar statedthat the outlook for the Australian economy and share market appearsless positive than was previously the case.

The report stated that one of the main concerns for the panel wasthe ramifications of the nation's “two-speed economy”.

While the resources trade boom had up until recently been quiterobust, it was now “wobbly at the margin”, a panel member said. Inlight of Australia's high exposure to international shocks, therestrained domestic economy and relatively expensive share valua-tions, Morningstar also increased its defensive assets exposure byupping its international fixed interest allocation from 6 per cent inJanuary 2012 to 8 per cent in April.

Furthermore, Morningstar's review said that the panel was “consid-erably warmer to the idea of corporate debt”.

“You are being paid adequate compensation for corporate credit,”a panellist said.

“Yields have come in a long way to something like fair value, they'recertainly not expensive.”

Kardinia targets retail investors

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Australia’s financial services regula-tors are being handed greaterpowers as a result of the Govern-ment’s Future of Financial Advice

(FOFA) and Stronger Super processes, but thisdoes not mean they will, in future, act toprevent a repeat of either Storm Financial orTrio Capital.

Indeed, recent events within Parliamen-tary Committees have raised serious ques-tions about what, precisely, the regulatorsknew about Storm Financial and TrioCapital, and the actions they decided topursue thereafter.

Amid the continuing fallout from thecollapse of Trio Capital, some disturbing factshave been revealed to a ParliamentaryCommittee: in particular, that the AustralianPrudential Regulation Authority (APRA) hadconcerns about the Trio/Astarra superannu-ation funds up to three years before it acted.

APRA officials told a hearing of the SenateCorporations and Financial Services Commit-tee that it had elevated the rating of Trio withits Probability and Risk Rating System (PAIRS)as early as 2006.

However, those same officials made clearthat lifting the status of a superannuationfund or other financial services on the PAIRSsystem was not something that would everbe made public.

Asked whether such a concerning actionwas something that would be made public bythe regulator, APRA’s general manager of actu-arial, market and insurance risk services GregBrunner made it very clear this was some-thing which would not occur.

“The PAIRS ratings for APRA are confiden-tial. They are something that we specificallyuse for our own purposes. We do not go outand specifically make an announcement thatthis has happened, because it informs oursupervision of the entity,” he told committeemembers. “We do not believe that it is helpfulto publish our PAIRS ratings, so we do notpublish them for any entities.”

Asked whether such an elevated ratingwould have been useful to accountants andadvisers “advising vulnerable people to investin those assets”, Brunner said that moving anentity higher in the PAIRS system “does not

in any way suggest we have major concernsabout its financial health”.

“It means we believe that within the entitythere are some elevated risks,” Brunner said.“It could be there for numerous reasons. Itcould be there because of a concern that theboard does not have quite the level of expert-ise that we would have it have. It could bethere because their administration systemsare not working as effectively. It could be therebecause we have concerns about a higherlevel of unlisted assets. There are a wholerange of reasons why an entity could be raisedinto an oversight category. There are severalcategories above that where concern levelsare substantially higher.”

However NSW Labor Senator MattThistlethwaite was not to be deterred, andqueried the APRA officials about whetheraccountants and advisers ought to have beenaware of the elevated risk, in circumstanceswhere they continued to encourage clients toenter into those products.

Brunner responded that the APRA actionwould not have acted as a deterrent becausethe rating it had applied to the Trio products“did not in any way suggest that it is not a safetype of entity”.

“In terms of our risk profile, oversight is nota high risk. It simply means that the risk ishigher than normal and therefore, from ourperspective, it needs greater attention,” hesaid. “The greater attention that we give tothese types of entities is to actually get themto make improvements to bring their riskprofile down, which is one of the main thingswe are trying to achieve from our supervision.

“In an ideal world, you would want to bringrisk profiles down, but there will always beentities that take some higher risks that are

going to have some issues, whether they bemanagement issues or systems issues, thatresult in some higher risk. The rating that wehad placed it on was not something that ringsalarm bells in the sense that we had majorconcerns about its health,” Brunner told thecommittee.

What became very clear from the APRAofficials’ evidence to the committee was thatthe regulator possessed very little knowledgeabout how financial planners or appropriate-ly licensed accountants handled advicearound products like the Trio funds, or thevalue they were likely to place on the intelli-gence possessed by either APRA or ASIC.

Asked whether a prudent adviser mighthave picked up the same intelligence as thatpossessed by APRA, Brunner admitted he wasnot familiar with the information an adviserwould have.

“Presumably they would primarily rely onthe product disclosure statements and theannual accounts of that entity,” he said. “Anadviser would certainly be able to raise somequestions about the nature of those invest-ments – the fact that they were unlisted andoffshore.

“I would imagine that an investmentadviser who was looking at a group of differ-ent funds, and looked at one that was whollydomestically invested in bonds versus onethat is substantially in offshore hedge-fundtype of investments, would be able to make ajudgement that this one potentially has ahigher risk than that one. It does certainlyraise some issues.”

The problem, of course, is that few finan-cial planners have access to the same level ofdata as a regulator, and many do not have thebackground necessary to forensically inter-pret that data.

APRA may have had concerns about theTrio/Astarra products and those managingthem as early as 2006, but those concernswere certainly not reflected in the assessmentprovided by the major ratings houses servic-ing individual planners and dealer groups.

The problem is that there is nothing ineither the FOFA legislation nor the StrongerSuper policy to suggest any of this will changeor that the Trio collapse will not be repeated.

InFocus

The collapse of Storm Financial and Trio Capital are cited as the catalysts forstrengthening the powers of the regulators via FOFA and Stronger Super, but asMike Taylor reports, that does not guarantee that history will not repeat itself.

“The problem, of course, isthat few financial plannershave access to the same level ofdata as a regulator.”

Storm warning met with teacups

Total risk premium inflowsfor the year ended December 2011

$1.76bn

AFA/FSC The Future of AdvicePost FOFA1 MayFSC King Room, Sydneywww.ifsa.com.au/events.aspx

FSC AMP Post-Budget Breakfast9 MayFour Seasons Hotel, Sydneywww.ifsa.com.au/

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SMAs, ETFs and Direct Invest-ing15 MayDockside, Cockle Bay Wharfwww.moneymanagement.com.au/events

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Source: Plan For Life

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SMSF WeeklyAllocation in super debatepromotes SMSF benefitsBy Milana Pokrajac

RECENT debate aroundasset allocation in superand funds’ exposure toequities has promoted theflexibility of self-managedsuper funds (SMSFs),according to the SMSFProfessionals’ Associationof Australia (SPAA).

SPAA chief executiveofficer Andrea Slatterypointed to a report by RiceWarner Actuaries showingSMSFs outperformedbroader superannuationvehicles, adding it was ofcrucial importance forinvestors to be able toactively manage their retire-ment savings.

“There is no ‘one size fitsall’ when it comes to savingfor retirement, so it isimportant that individualshave the flexibility to work

out the optimal weightingfor their portfolio, and anSMSF is the only vehiclewhich gives the investor theautonomy and flexibility todecide when and how toadjust their asset alloca-tions,” Slattery said.

Recent research by SPAAand Russell Investments

found that one-third of SMSFtrustees believed equitieswere too volatile – double thenumber from 2011.

“The investment behav-iour of individuals tends tochange as they approachretirement and become moreconcerned about wealthpreservation and seek moreliquidity in their asset hold-ings,” she said. “With anSMSF, as a trustee you havethe choice of how you struc-ture your asset allocationbased on your personalcircumstances and the retire-ment stage you are in.”

Slattery’s commentsfollowed a report by Multi-port which found alloca-tion to cash in SMSFs is atits highest levels in twoyears, while allocation toAustralian shares shrunkfor the fourth consecutivequarter.

By Mike Taylor

IN a decision with implications for account-ants providing advice with respect to self-managed superannuation funds, theAdministrative Appeals Tribunal (AAT) hasaffirmed a Tax Practitioners Board rejectionof a tax agent’s request for exemption fromthe requirement to hold professionalindemnity (PI) insurance.

The decision – cited by Institute of Char-tered Accountants specialist Paul Meredith– held that the accountant was required tomaintain PI irrespective of his capabilities,the amount of turnover owed to handlingtax matters, and his ability to meet any

claims from his own resources.The AAT held that turnover had nothing

to do with the issue and that complexity ofthe claims involved remained the issue.

The AAT also rejected the considerationsof the accountant’s experience and that hehad had no previous claims against him,arguing that the purpose of holding PI was toguard against unforeseen circumstances.

The AAT’s decision, while acknowledgingthe ability of the accountant to meet anyclaims from his own resources, pointedout that any claims should properly be theresponsibility of the PI insurer who wasmore likely to resolve them expeditiouslywith a disgruntled client.

Fund consolation continuesCONSOLIDATION iscontinuing to impact thebroader superannuationindustry, according to datacontained in the Associa-tion of SuperannuationFunds of Australia (ASFA)submission to the Produc-

tivity Commission.The ASFA submission

said that during calendar2011 the number of fundswith more than $50 millionin assets had fallen from 255to 232, with most of thedrop occurring before

30 June when capital gainstax rollover relief expired.

It said around half of thereduction was in retail fundsand the rest was splitbetween corporate andindustry funds, with aroundfive departures in each.

AAT reinforces need for PI

Andrea Slattery


Tax strategies

Although the proposal is yet to belegislated, the Government hasannounced it intends to proceed withthe change, making it important foradvisers to take the opportunity this yearwhile it is still available.

“SMSFs will need to get a hurry-up andnot leave it to the last minute,” Burgesscautions. “Just before 30 June it can bevery busy when it comes to share trans-fers, so it is best not to leave it to then.”

Guest agrees advisers need to plan fora 1 July start to the new regime and takeaction i f necessar y. However, shecautions the decision needs to considerall the implications.

“There is a need to think about thecapital gains tax implications even thoughit can be beneficial to transfer into avehicle with no brokerage,” she says.

Changing tax ratesLooking ahead, the new 2012/13 financialyear will see the arrival of several changesto existing tax thresholds and the lowincome tax offset.

“We will see the introduction of theCarbon Tax payments and reimburse-ments and changes to the low income taxoffset, so there will be some clients whobenefit,” Guest notes.

“This is not a major strategy area, but

planners need to be aware of it as it willaffect some people.”

While there are some strategies that canbe used to help clients benefit from themovement in the low income thresholdfrom $6,000 to $18,000, she notes this isfor “a specific group of clients only, such asthose with a low income spouse”.

Bridger agrees the changes should bereviewed. “The Carbon Tax changes arenot a great priority as the thresholds arebeing increased substantially, but theimpact on other benefits can be veryimportant to some clients.”

He believes the movement in the taxrates and introduction of the new assis-tance payments will make areas such asaccess to Family Benefi ts and theSeniors Health Card far more important.

“These need to be discussed withclients as there is a lot of change in thetax regime. If you delay these discus-sions until halfway through the nextfinancial year, it is too late as the plan-ning and education needs to be donefrom the start,” Bridger says.

Traditional year-end issuesAlthough clever tax strategies are alwaysof interest, there are some bread andbutter areas that need to be raised everyyear with clients.

“One of the old chestnuts is thatclients need to make sure their supercontributions are paid prior to 1 July if theyare self-employed,” Burgess says.

Getting the paperwork right is also essen-tial. “If they are making a contributionclaim, they need to notify the fund, fill inthe form and get an acknowledgement back

from the fund prior to making the claim.”Paperwork is also important when it

comes to splitting super contributions. “Ifa couple is contribution splitting from theprior financial year, they need to make thenomination prior to this year-end,”Burgess notes.

Bridger believes good recordkeeping isbecoming increasingly important. “TheATO is tightening up in respect to super, soit is important that the paperwork is rightfor both employees and the self-employed,” he says.

“In the future payslips will have detailsof super contributions and if mistakes aremade, in two to three years time it can bedifficult to fix.”

Financial year-end also means severaltime-honoured tax strategies should bereviewed.

“You have always got the traditionalend of financial year tax strategies suchas the timing of income and deductions.For example, payment of insurancepremiums,” Guest notes.

“An oldie but a goodie is the pre-

Continued from page 15

Checklist of tax issues ALTHOUGH clients’ tax issues are the main focus for advis-ers at this time of year, as business owners and employersthey also need to ensure enough time is set aside to tidy upthe practice’s paperwork and tax affairs.

After a difficult year for many planning firms, BDO’sTrevor Bridger believes advisers should be reviewingthe overall position of their business. This includespreparing updated financial statements and cashflowswith comparisons to previous years to enable a clearpicture to emerge of how the business has performed.

Preparation of the budget for the upcoming financialyear is also an important task, Bridger says. “Advisersneed to discuss and prepare their budget, salariesand financial arrangements for the coming year.”

He believes current market conditions mean thesebudgets need to be thought through carefully. “It isimportant not to expect miracles over the next year,so you need to do your budgeting conservatively,”Bridger notes.

“While the financial costs of opt-in will not apply formany advisers, there are likely to be some costsinvolved in the increasing level of disclosure required,and this needs to be included in the budget.”

Planned expenditure such as IT upgrades to meetadditional reporting requirements also needs to befactored in, according to Count Financial’s Kim Guest.

“Where the adviser is an employer, they need tothink about the new requirements for payslips to reportsuper contributions and when they will be paid. Theyneed to get their systems ready,” she notes.

Under the proposed rules, employers will be requiredto report an ‘expected payment on or before’ date forcontributions on an employee’s payslip from 1 July2012. From 1 July 2013, the reporting requirement isexpected to be extended to reporting of the fund nameand actual contributions paid.

For some firms, this can also be a good time to startdiscussing succession planning. “A succession planis quite material for the ageing group of financial plan-

ners and now is an appropriatetime to do something about it,”Bridger says.

“If you are looking at succession inone to two years time, you need to setthe process in motion and year-end is agood time to get started and begin makingappropriate financial plans.”

Other details that need to be checked before 30 June include:

• Record keeping – ensure all business recordsare updated and retained for five years (specialrequirements apply to CGT and substantiation).Ensure records itemising travel expenses, fringe ben-efits, motor vehicles, work related and otherexpenses are current.

• Asset registers – review the practice’s asset regis-ter and write-off any unwanted or obsolete plant andequipment prior to 30 June.

• Bad debts – review debtors and write-off any thatare unlikely to be recovered. Ensure a refund is claimedfor any GST paid to the ATO on the sale (if reportingincome on an accrual basis).

• Bonuses – consider whether bonuses will be paid.(These are only deductible when actually incurred andthe business is committed to paying them and theyare non-discretionary.)

• Company loans –ensure private loans are

either repaid or docu-mented and made subject

to minimum interest andrepayment terms before lodging

the company tax return. Ensure inter-est repayments are made prior to 30 June for

any prior year loans.• Capital gains tax – check if any assets have been

sold during the year and whether capital gains can bematched to any capital losses.

• Dividends – check whether sufficient frankingcredits exist or will exist by 30 June if dividends are tobe paid.

• Entrepreneur tax offset – consider whether thisoffset can be used prior to its abolition on 30 June.

• Odometer readings – take a year-end odometerreading if claiming motor vehicle expenses under theold statutory fraction rate rules.

• Prepay business expenses – consider whetherprepaying business expenses is appropriate and if ade-quate cashflow is available.

• Salary packaging and fringe benefits – reviewstaff salary packaging arrangements (including salarysacrifice agreements, which need to be made prospec-tively for next year).

• Superannuation contributions – to receive adeduction, ensure all employee superannuation entitle-ments are received by the relevant super fund by 30June. Check employees’ concessional contributionlevels, particularly if they are salary sacrificing.

• Trust distributions – trustees of discretionarytrusts need to consider if beneficiaries will be entitledto income or capital on or before 30 June and need tomake a resolution in accordance with the trust deed.

• Write-off assets – small businesses can write-offassets costing less than $1,000 (set to increase to$5,000 for 2012/13).

Trevor Bridger

Aaron Dunn

paying of interest of geared invest-ments. It removes interest rate fluctua-tions and brings forward deductions.However, you need to keep going in thefuture if you decide to start it this year.”

Even the performance of investmentsneeds to be considered in light of possi-ble tax opportunities. “If the client iscarrying forward capital losses, thenthey could be used to offset any gains,”Guest notes.

Bridger agrees: “The CGT positionneeds to be looked at and balancinglosses with gains (if done legitimately)should be addressed.”

Tax – opportunity or headache?While year-end tax discussions areimportant, advisers need to ensure they

are not breaching the tax advice rules.They can provide general factual taxinformation, but require registrationwith the Tax Practitioners Board (TPB)to provide tax advice within the contextof providing financial advice.

From 1 July, the current exemption offinancial planners from the Tax AgentServices regime expires and advisers willneed to be registered through ASIC withthe TPB. Members of either SPAA or theFinancial Planning Association are nowformally recognised by the TPB and thisfulfils the requirements for registrationif they also personal ly meet the additional fit and proper person andexperience requirements.

Despite this, Burgess believes advis-ers still need to work closely with the

client’s accountant. “In the case of a soletrader for example, financial plannersmay not be privy to all their tax andincome information, so they need towork with the client’s accountant –especially where there are multiplesuper accounts.”

He feels the problems around thecontribution caps have made it moreimportant than ever to cooperate. “Thisis especially so given the penaltiesinvolved and because there have beenexamples of practitioners having to paybecause they got it wrong.”

Although advisers need to be careful,Guest believes tax discussions are animportant area for them. “Tax is animportant consideration in any finan-cial plan and financial planners need to

consider the implications of the advicethey provide.”

She believes talking about tax alsohelps strengthen client relationships.“Tax discussions can be a positive tooland clients really appreciate being ableto get advice on structuring their affairsto minimise the tax payable,” Guest says.

“Tax discussions and plans are notsubject to market fluctuations andclients can see the increased benefitsthat it will achieve. This is a very impor-tant area for advisers.”

For Bridger, advisers can also addreal value by discussing cashflow andtax with clients. “Cashflow is an impor-tant issue for financial planners, aspeople’s situations are increasinglycomplex through the wealth that hasbuilt up over the past 20 years, which issignificant.”

He sees advisers as uniquely posi-tioned to help. “Financial planners doa lot of work on cashflows and the wayquarterly PAYG works, you can see largef luctuations in income and taxpayments and tax refunds. So it is animportant area for the individual,”Bridger says.

“You rarely see cashflow worked outfor individuals by accountants, butfinancial planners have a good knowl-edge from their interactions with clientsand this can be an area where it is verybeneficial to work together.” MM


Tax strategies

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SMAs, ETFs, Direct Investing 2012

Research UpdateThe latest SMA and Direct Equities research and findings from Investment Trends.

Managed Accounts - A game changer?How can implementing a managed account service transform an advice business? This session will look at SMAs, IMAs and UMAs.

ETFs - Something bigHow do you implement a client ETF strategy and use them in building a client portfolio?

ETF Synthetic StructuresUnderstanding the differences between physical and synthetic ETF structures, and how to use these structures to gain exposure to difficult to access asset classes.

Direct Fixed InterestA look at the new breed of products appearing in the market and how they can be used in client portfolios.

WH

EN SYDNEY

THURSDAY 17 MAY 2012DOCKSIDE, SYDNEY

SILVER PARTNERSHIP

This CPD accredited one day workshop is an essential event for financial planners who are looking to broaden their skills and knowledge of Managed Accounts, ETFs and Direct Equities, by showing them how to build client portfolios using a direct investing strategy.

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9-10 pointsexpected

Table 1: The new tax scales

Threshold ($) Marginal Rate Threshold ($) Marginal Rate Threshold ($) Marginal Rate

1st Rate 6,001 15% 18,201 19% 19,401 19%

2nd Rate 37,001 30% 37,001 32.5% 37,001 33%

3rd Rate 80,001 37% 80,001 37% 80,001 37%

4th Rate 180,001 45% 180,001 45% 180,001 45%

LITO Up to $1,500 Up to $445 Up to $300

16,000 20,542 20,979

4% withdrawal rate onincome over $30,000

1.5% withdrawal rate onincome over $37,000

1% withdrawal rate onincome over $37,000

Current 2012-13 2015-16

Effective tax-free threshold*

*Includes the effect of the tax-free threshold and the low income tax offset (LITO).

Source: Australian Government Fact Sheet – Modernising and improving the personal tax system.

We’ve collected plenty ofinteresting stories in ourrole as “preventative law”or “compliance law ”

lawyers. We’ve reviewed thousands ofpersonal advice files and assisted withenforceable undertakings, mattersconcerning the Financial OmbudsmanSer vice (FOS), breach reports anddisputes that end up in litigation.

What can go wrong? The Australian Securities and Invest-ments Commission (ASIC) announcesits regulatory action against individualadvisers and licensees on a fairly regularbasis. Regulatory action can includeenforceable undertakings, imposedlicence conditions, civil penalties,licence cancellations and banningorders (to name a few).

With the introduction of Future ofFinancial Advice, ASIC’s powers to banadvisers will be enhanced. In the past,ASIC has needed to have reasons tobelieve an adviser will not comply withthe financial services law to take actionof this nature. Going forward, the bar islowered slightly by requiring ASIC tobelieve an adviser is likely to contravenea financial services law.

Furthermore, breaches of the bestinterests obligations under FOFA cangive rise to civil penalty action againstboth the licensee and the representative.

And of course, many advisers aresubject to disputes with their clients.Many of these disputes go to externaldispute resolution schemes such as FOS,or worse still, result in litigation.

We want to help you avoid these things.But if they do occur, there are steps youcan take to mitigate their effect.

1. Avoid the sausage factory and tailoryour advice to the clientSome years ago, we were conducting atraining session on the advice process.During the session, one life insuranceadviser proudly announced that healways recommended his clientspurchase $350,000 of term life because“everyone’s needs are the same”. That

adviser was on the “350 bus” and wesuppose that what he was really sayingwas that $350,000 was typically affordableto his clients and covered key debts.There’s an obvious problem with thisapproach – it suggests a solution beforeit considers the client’s objectives. Whathappens when the widow calls the adviserto ask about why the insurance payout isonly half the size of her home loan?

Of course you wouldn’t do anythinglike that. Before reaching that conclu-sion, look at the recommendations inyour last four statements of advice(SOAs). Are they the same? Recently, wewere reviewing a number of client filesprepared by one adviser, and everysingle file included a recommendationthat the client borrow money againsttheir home to invest in high-risk finan-cial products. This included clients who,for all appearances, would have had“prudent” or “conservative” risk profiles.


Paul Derham and Sonnie Bailey share a fewmistakes they’ve seen financial planners makeover the years and outline tips for saving timeand money.

“Sausage factoryrecommendations are flagsthat there may not be areasonable basis for theadvice.”

Dispute resolution

Learning a lesson

There was no evidence in the SOA or inthe file to substantiate a reasonable basisof the advice. Little wonder that hisadvising practices were subject to reviewby the regulator.

You will also remember the AMP“super switching” enforceable undertak-ing, in which ASIC said that 93 per centof all new investment or superannuationbusiness resulting from the advice ofAMP planners was invested into AMPplatforms or products. According toASIC, this was in part because of the useof template SOAs and related guidelines.

Sausage factory recommendations areflags that there may not be a reasonablebasis for the advice. So the first lesson isclear – tailored advice is best. Tailoredadvice establishes the client’s needs andobjectives first, and then clearly linkseach need and objective to an appropri-ate recommendation. It’s the first line ofdefence in both a client dispute, or whendealing with ASIC.

2. Know what the scope isThe scope sets the boundaries of yourcontract with your client. It sets out whatyou are going to do for them. It sets theagenda for your advice. It is essentiallythe contract between you and your clientand will define the parameters of theenquiries that must be made, the needsanalysis and recommendations.

Accordingly, it is worth spending timeto ensure that an agreed scope has beenreached and that the client’s expecta-tions of what you are going to do forthem is aligned to your understandingof the task.

Where the agreed scope is a narrowone, industry has tended to label thisas “limited advice”. ASIC sometimesrefers to this as “scalable advice”. Wetend to think of it as “full advice on alimited scope”.

With the coming of FOFA and bestinterests obligations, there is going to bea lot more said about scope and scala-bility, so watch this space.

3. The file needs to tell the whole storyOften when we review a personal advicefile, it’s not clear from the file how theadvice addresses the client’s objectivesand needs. Then, we sit down with theadviser who provided the advice, andthey explain clearly the basis for theiradvice and win us over – there was areasonable basis, after all!

Unfortunately, in a dispute, the fileneeds to tell the whole story. The file isgoing to be the enduring evidence of theadvice you have provided.

Recently, we assisted an adviser whoconvinced their client back in 2008 to takea less aggressive approach to investing.The client was new to investing, cashedup, and asking to gear heavily inAustralian shares. After lengthy discus-sions and consideration of the client’sneeds and circumstances, the adviserprudently recommended a more conser-

vative portfolio, with no gearing. Then,along came the global financial crisis, andthe client made a complaint against theadviser because one of the funds in therecommended portfolio failed. Whenlooking through the file, we noted that theadviser had taken meticulous file noteswith one omission. The discussion aboutadopting a more conservative investmentstrategy and not gearing was not clearlydocumented. This will make it harder forthe adviser to substantiate their roleshould the matter end up in court.

Another reason why the file needs totell the story is because a dispute oftenoccurs years after the advice is given. Inthe meantime, you may have had thou-sands of conversations with clients. Youraggrieved client may have only had oneor two such conversations. A court orombudsman is likely to give more weightto the client’s story, unless you have filenotes to support yours simply becausethe client’s recollection of that particu-lar conversation is likely to be better.

As well as protecting you, keepinggood quality file notes can also be valu-able when it comes time to sell yourpractice or client book. If a potentialpurchaser can make sense of your files,they are more likely to be comfortablewith what they are buying.

4. In the event of a disputeSo far we have focused on ways to avoida dispute. But disputes can happen evento the most diligent, skilful adviser.

In the event of a dispute, it is oftenbetter to be proactive in dealing withthe client’s complaint. Hard as it mightbe, it is usually better to be commercialthan to take a stand on a matter of prin-ciple. We have often heard clients say“it’s a matter of principle” at the outsetof a dispute. Then, as the costs areexplained to them or start to mount,

they change their view. Settling a dispute is often an appro-

priate option. Disputes suck up time,money and peace of mind. Also, everystep in the dispute resolution processwill cost you or your licensee money. Forexample, clients tell us that following acomplaint through FOS can cost up to$12,000 – just in FOS fees. You should befocusing on other things, like providingyour clients with valuable services andbuilding your business.

Remember also that an ombudsmanplays by different rules. The FOS terms ofreference, for example, specifically statethat FOS is not bound by legal rules ofevidence. Nor is FOS restricted to legalprinciples alone when coming to deci-sions. In fact, FOS’s terms of referencestate that it will do what is in its opinionfair in all the circumstances, havingregard to factors such as applicableindustry codes or guidance as to prac-tice, and what it considers to be goodindustry practice.

Often, settling quickly is a big time,money and stress saver.

5. Address compliance issues proactivelyA sure way to turn a compliance molehillinto a mountain is to do nothing aboutit.

In the media release for the 2009 ANZand Opes Prime Enforceable Undertak-ing, ASIC criticised ANZ for having “apoor compliance culture, meaning thatdeficiencies in processes were not iden-tified, escalated or remedied in anappropriate or timely manner.” Similarphrasing is used in the March 2011 UBSWealth Enforceable Undertaking.

The benefits of being proactive inaddressing compliance issues can bestbe explained by comparing the follow-ing two examples:

• One of the first advisers to be pros-ecuted by ASIC under the FSR laws in2005 was prosecuted for fail ing toprovide SOAs on four occasions.

• Around the same time, we reviewedan adviser who failed to provide 19 SOAs.We notified the licensee immediatelywho in turn promptly assessed thebreaches for significance and lodged areport with ASIC, together with numer-ous remedial steps. ASIC took no action.

ConclusionPrevention is better than a cure. If youavoid sausage factory advice, know whatthe scope of your engagement is, andcan proudly demonstrate a reasonablebasis from the file alone, you’re most ofthe way there.

If you are commercial in the way youhandle disputes, and ensure that youremedy compliance issues proactively,you will be saving time and money in thelong run.

Paul Derham is a partner and SonnieBailey is a lawyer at Holley NethercoteCommercial Lawyers.


“In the event of a dispute,it is often better to beproactive in dealing withthe client’s complaint.Hard as it might be, it isusually better to becommercial than to take astand on a matter ofprinciple.”

It’s been a wild ride for investors ingold-related areas recently. Afterpeaking at around $US1925 inSeptember last year, the price has

since gyrated between $US1500 and$US1850. Meanwhile, many gold miningstocks are trading at the same levels theywere several years ago when gold wasaround $US1000. In addition, someprominent investors have declared thegold bull market dead or questionedgold as an investment, with WarrenBuffett the most prominent of these.

This all creates a very confusing envi-ronment for those investors consider-ing gold exposure in their portfolios. Isthe gold bull market really over? Or isthis a good buying opportunity? Why arethe gold mining shares languishing? IsBuffett right?

Buffett’s comments in an article inFortune and his annual shareholderletter have received extensive coverageand, as one of the world’s most success-ful and sensible investors, his viewsshould be taken seriously. But he is farfrom infallible, and a valid question iswhether he has ventured outside hisown ‘circle of competence’ with thesecomments.

Buffett discussed the characteristicsof investments he disliked and those heliked. Specifically, he divided the invest-ment world into three major categories.Firstly “currency based” investments

including cash and various debt instru-ments; secondly “unproductive” invest-ments, with gold supposedly the mostrepresentative; and thirdly his preferredavenue – “productive assets” in busi-nesses, farms or real estate.

Ironically in Buffett’s discussion ofthe first category covering cash andbonds, he seems to totally understandthe damaging impact of currencydebasement by inflation, which is oneof the major factors supporting hardassets like gold.

“Governments determine the ultimatevalue of money, and systematic forceswill sometimes cause them to gravitateto policies that produce inflation. Fromtime to time such policies spin out ofcontrol. Even in the US, where the wishfor a stable currency is strong, the dollarhas fallen a staggering 86 per cent invalue since 1965”. It takes no less than$7 today to buy what $1 did at that time”.

Surprisingly then, Buffett fails toconnect the dots that these are the veryreasons one should have some gold aspart of a diversified portfolio. Interest-ingly, one of Buffett’s least successfulplays over the years has been investingin foreign currencies as a hedge againstconcerns he has had about debasementof the USD. If he had understood goldas money and chosen it as his currencyof choice, he may have a very differentview of gold today.

Instead, he views gold through theprism of conventional investment analy-sis only. Gold isn’t “much use nor is itprocreative”. If you own one ounce ofgold for an eternity, you will still ownone ounce at the end.” Isn’t that thepoint? Gold is unchanging, and itssupply expands only very slowly withannual production. Meanwhile, centralbanks can create unlimited new papermoney at whim.

Ultimately, gold is not really an assetor investment but is a currency ormoney. Gold’s primary attraction centresnot on its own characteristics (althoughthese – scarcity, density, malleability etc

– allow it to be seen and used as money)but in the level of confidence in thevarious forms of paper or fiat money.That confidence is sti l l arguablyentrenched in a multi-year bear market.

James Grant of Grant’s Interest RateObserver probably says it best.

"It is the nature of gold that its valua-tion must forever be a mystery. It earnsnothing. It pays no dividend. No confer-ence call, no management to call up andcomplain to. What I do think is gold issimply the reciprocal of the world's faithin the institution of managed curren-cies. It is one divided by T, where Tstands for trust. And trust is a shrinkingnumber and will continue to shrink.Therefore, I am still bullish on gold."

Buffett equates the interest in gold tothe tulip bubble. This is a terr iblecomparison. The Tulip mania was aparticular irrational bubble (of whichmany have occurred through history)that occurred in a small part of the worldfor an item that one can easily grow andwhich doesn’t last. Gold cannot begrown, basically lasts forever and hasbeen a prominent part of global mone-tary systems for thousands of years.Buffett totally discounts this history.

Buffett says that those investorspurchasing gold need the ranks of thefearful to grow to support it. Perhaps he’sright, but there are strong grounds thatthe fearful will continue to grow in


OpinionGold

Gold vs

Many prominent investors including Warren Buffett have recently questioned gold as aninvestment. Dominic McCormick questions their views.

“Despite Buffett’s talk ofthe gold ‘bandwagon’, it isstill largely ignored by thebulk of the investmentindustry. ”

coming years. The US debt situation isunsustainable. Reigning in central bankballooning balance sheets will be no easytask. The Euro could implode. In this envi-ronment there is plenty to be fearful of,particularly since the likely response tothese challenges is to accelerate currencydebasement via policies that are eventu-ally inflationary. These are legitimatefears. Buffett seems to have that fearhimself. You don’t need Armageddon tojustify seeking ways of protecting yoursavings from debasement.

Buffett brings his thoughts down to adiscussion about two “piles”. Pile Acontains the world’s estimated goldstock valued at around $US9.6 trillion,and Pile B contains all US crop land (400million acres with output of about$US200 billion annually), plus 16 ExxonMobils (each one earning $US40 millionannually). It’s an interesting game butone that has little to do with building aproperly diversified portfolio capable ofpreserving value in a range of macroeco-nomic environments with widelyvarying levels of currency stability.

No sensible investor approachesinvest ing with this concentratedeither/or approach. Most real-worldinvestors could never handle thevolatility and drawdown risk of a farm-land plus Exxon portfolio. And no sensi-ble investor would put all his money ingold. Of course, the productive assetsBuffett describes should be the major-ity core of a sensible portfolio whenthey can be purchased at reasonableprices in areas without excessive polit-ical risk. But why does this preclude anexposure to areas like gold that haveproved themselves throughout historyas a preserver of wealth during periodsof instability and flawed or unconven-tional economic policy.

One shouldn’t hold physical gold toachieve a specific investment yield orreturn. Rather, it should be held becauseone is concerned about the debasementof money and the need to preserve itsvalue. Buffett is concerned about thattoo, but believes other areas are betterdefenders against that debasement.

However, the record of the stockmarket preserving real value in periodsof unexpected inflation is a poor andunpredictable one. And even greatcompanies can produce poor perform-ance – even over the long term – if theprice paid is too high. James Grant high-lights the case of Buffett’s beloved CocaCola, which has dramatically lagged gold– as well as other ‘non-productive’ assetslike sugar – since 1996.

Despite Buffett’s talk of the gold“bandwagon”, it is still largely ignoredby the bulk of the investment industry.In a recent Barons’ survey of 51 of the

US’s best financial advisers, only twohad specific allocations to gold. Nega-tive views like Buffett’s are prominent,and very influential. Even locally, TheAustralian recently (14 April) had anarticle quoting a prominent stockbrokersaying gold would halve and should beavoided. These are not the symptoms ofa bubble just about to bust.

Meanwhile, official holders such as anumber of the world’s central banks are

buying more gold. As holders of acountry’s foreign exchange reservesthey would be crucified if they investedall or even a significant proportion ofassets in volatile oil shares or farmland.Their choices are primarily currenciesand government debt and increasinglythe yields on the latter are approach-ing the zero yields on gold, but withincreasing credit and debasement riskthat gold doesn’t have. Having a modestproportion of their holdings in goldmakes sense.

The bubble is not gold – the bubble iscertain central bank balance sheets,money supply and the miniscule sover-eign bond yields of certain countriesthat cannot possibly pay back their debtwithout serious currency debasement.The line between a “safe haven” and amajor credit risk is a thin one. The US10-year bond is effectively on a PriceEarnings ratio of 50, with no growth andnext to no chance of beating inflationover the short or long term. Shares aremore reasonably priced and have achance of matching or beating inflation.Gold does too. Why shouldn’t investorshave some of both in a diversified port-folio (as well as other diversifying invest-ments such as inflation-linked bondsand alternatives)?

This is not to say that those holdinggold exposure can be complacent. Theendgame for the gold bull market willalmost certainly be some form ofbubble. When the gold rise acceleratedin the middle of 2011 we became

cautious and reduced our exposure togold bullion considerably. However wehave seen the consolidation since as ahealthy development and arguably abuying opportunity.

It is true that gold seems to havebecome more correlated with other riskassets, so its value as a diversifier mayhave reduced somewhat. However, thisis also true of many assets in the riskon/risk off world we live in today.

Meanwhile, the gold mining stockshave struggled in recent years, under-performing the gold price significantlysince 2009. There are a range of reasonsput forward for this – the ease of access-ing gold via other means such as ETFs,cost pressures, operational risks and thelike. These are all valid reasons. However,I suspect a major reason is simply thewidespread scepticism – encouraged byBuffett and others – that gold prices canmaintain current high levels or even gohigher in coming years.

Analysts, and by implication markets,typically have forecast long-term goldprices considerably below current levels.If they are proved wrong, gold stockscould outperform gold dramatically, andproduce very good returns in comingmonths and years. Further, their increas-ingly attractive dividends nullify the “no-yield” criticism of gold by Buffett.

Of course, if the US economy doesrecover strongly, the US dollar becomesstronger and interest rates rise muchearlier than currently expected, thengold may struggle. But this scenario isby no means certain, and does little tosolve the US longer-term debt issuesthat are key factors supporting gold inthe longer term.

Europe’s debt issues certainly are notyet solved. Moreover, even if gold strug-gles in response to an improved globaloutlook, a well-diversified portfolioshould still do well as the majoritybalance of the portfolio – much of itconsisting of Buffett’s “productiveassets” – responds to a better economicand earnings outlook. Holding 5-10 percent gold exposure is simply a hedgethat may or may not be required.

There will be a time and environmentwhere the case for holding gold expo-sure is definitively much weaker. Thatwill be when real interest rates in manycountries are positive and when debase-ment of the currency is not seen as theproper policy response to ease a debtburden and promote growth.

It wil l be when the expansion ofcentral banks’ balance sheets has beenreversed – perhaps in response togrowing inflationary problems.

It will be when the major developedmarkets, that currently can still get awaywith record-low bond yields despiterecord government debts, experiencetheir own sovereign debt crisis.

It will be a time when belief in gold aspart of a portfolio is almost universallyaccepted rather than something manyactively argue against. My guess is thatthis time is still at least a number ofyears away.

Buffett’s comments, in my opinion,are just another brick in the ‘wall ofworry’ for the 11-year gold bull market.It may even have created an excellentbuying opportunity as it contributes toa temporarily lower gold price (and evenmore depressed gold shares) than wouldotherwise have been the case. Takingadvantage of this opportunity in thecurrent climate of volatility as well asscepticism and recent disappointmentin gold is difficult, but that is the natureof contrarian investing.

Dominic McCormick is the chief investmentofficer at Select Asset Management.


Warren Buffett

“It will be a time whenbelief in gold as part of aportfolio is almostuniversally accepted ratherthan something manyactively argue against.”

Iam privileged to lead a companywhich enjoys access to some of thebest and brightest people in theAustralian financial advice sector.

And if I ask any of these trusted advis-ers about their immediate primary chal-lenges in business, the conversationinvariably turns to one – or all – of threepotentially game-changing topics.

These are the lingering effects of the2008 global financial crisis, the Govern-ment-led reforms of advice and super-annuation in Australia via the Future ofFinancial Advice (FOFA) and CooperReview processes and the ongoing chal-lenges of doing business with an evermore savvy, technology-enabledconsumer.

It is interesting to see how our indus-try reacts to these big challenges touncover opportunity. I observe brightprospects for those who take a stepback, strip out the noise and focus onwhat’s really important; on what I callthe fundamental building blocks.

Here’s my top three. For clarity, I haveillustrated my points with a subjectclose to my heart - income protectioninsurance.Why? Because loss of incomethrough accident or illness is not onlyone of those fundamentally importantrisks we all share as individuals – andhence require protection against – but italso works as a general proxy for mycomments about the value of goodadvice and the future for advisers.

1.The value of good advice and whywe need it more than ever All the figures are telling us the samestory. That is, while at a macro level weare in good shape, at a personal level weneed some help. Australia’s nationaldebt ratio, jobs growth and economicfundamentals are terrific relative topretty much all of the rest of the world’sdeveloped economies. Yet, as individu-als, we lack confidence. People areconcerned - even fearful - about thefuture. This is borne out in statisticssuch as record high personal savingsinto cash and term deposits, and recordlow borrowings and retail spending.

It is precisely when people are uncer-tain that they benefit most from wisecounsel.That’s when a steady hand froma quality financial adviser can so oftenmake the difference between good deci-sion-making and bad. And with just onein five Australians receiving financialadvice, there is plenty of upside in thisequation for everyone.

I see evidence every day of the bene-fits that quality advice brings to peoplein very real and tangible ways.

Clearly, advisers have a key role toplay in educating clients and thecommunity about the value of adequateprotection, including protecting theability to earn an income.

2. Selling as education: a vital partof what we doThe adage that risk insurance is aproduct sold, not bought, has a greatdeal of truth and practical experiencebehind it. It’s a situation that makes therole of the expert adviser acting in thebest interest of his or her client evenmore critical. The end result for manyAustralians is that their adviser hasplayed a pivotal part in helping themovercome unexpected circumstancesthat have prevented them from earningan income. Selling (and educating)Australians about the full breadth anddepth of risks and how to effectivelymanage them through the right insur-ance choices is absolutely vital.

It’s against this reality that I expressmy fear that the best intentions of legis-lators in Australia to protect against anyfuture mis-selling by a minority ofpeople, might inadvertently haveyanked the handbrake on a culture ofappropriate selling to meet a verygenuine need.

Again, using my income protectioninsurance lens, here are some figuresthat express that need. Just 31 per centof Australians have income protectioninsurance (source: Lifewise).Yet, we allknow that the ability to earn an incomeis our greatest individual asset.

Further, the required level of incomeprotection cover is assumed to be 85 percent of gross income (source: Lifewise/Rice Warner), and that the averagefamily with children could expect toneed $3,100 per month (source: RiceWarner).

As a nation, these figures equate to a$408 billion income protection underin-surance gap per annum (source: RiceWarner). Advisers who are activelyworking to fill that gap should be proudof the role they play in helping to createa more stable future for their clients.Guidance, education, expert productchoices (otherwise known as selling):all are an honourable and entirelyappropriate part of this good advicelegacy.

3. Secure the future by learningfrom your clientExperience is not a one-way street. Justas clients turn to us for wise counsel anddecision-making, there is much we canlearn from them – such as the way they

prefer to do business in an increasing-ly digital world.

We all know Australian consumers areincreasingly going online to transact.Recent data (source: CBA Equities:Online retail data) shows online retailspending increased by a sizeable 36 percent over the 12 months to October2010. In other words, a $12.3 billionspend during that year.The trend showslittle sign of abating.

The figures help to underscore theimportance that Australians increasing-ly place on their online experiences. Tomy mind, we must meet our customeron their terms, in their time, and expectincreasing demands for fast, transpar-ent information, sharp product pricingand clear product benefits.

It’s a must for anyone doing businessin the ‘digital economy’.

Jim Minto is managing director, TALLimited (formerly TOWER Australia).

Taking a step back

OpinionRisk


From his conversations with financial advisers,Jim Minto identified three game-changing topics.

As the end of financial yearapproaches, the opportunityfor astute tax planning arises.In addition to the common

30 June strategies such as spouse contri-butions and co-contributions, the newpersonal tax rates from 1 July 2012require a re-think of traditional strate-gies such as salary sacrifice. As the lowermarginal tax rates rise, superannuationbecomes relatively more attractive. Thenew Government low-income supercontribution from 1 July 2012 alsoprovides some new opportunities forsalary sacrificing on low incomes. Herewe consider key end-of- year strategies.

1. SMSF double deduction An SMSF may use a contribution reservefor the purpose of making contributionsin excess of the concessional caps for aparticular year. Under this strategy, partof the contributions made in June of thefinancial year are credited to a reserve andthen allocated to the member’s accountin the next financial year by 28 July. Theamount counts towards the member’s capfor the financial year when it is allocated,not the year in which the contribution ismade to the fund. This practice wasrecently confirmed in ATO InterpretativeDecision 2012/16.

Case StudyMatthew, age 45, is a self-employedmining consultant and eligible to make apersonal deductible super contribution

into his SMSF. This year has been a goodyear and he wishes to maximise hisconcessional contributions. Althoughhis concessional contributions cap is$25,000, Matthew makes a contributionof $50,000 in June 2012 and claims adeduction of $50,000 in his tax return.The SMSF trustee allocated $25,000 ofMatthew’s contribution to his accountand the remaining $25,000 is credited toa reserve. Between 1 July and 28 July2012 (inclusive), the trustee allocates the$25,000 in the reserve to Matthew’saccount.

Matthew has fully utilised his conces-sional contributions cap for 2011/12 and2012/13 years. This strategy allows moreto be contributed at an earlier stage andeffectively allows a bring-forward of nextyear’s concessional contributions cap if aclient’s taxable income warrants a largerdeduction this year.

Matthew has two options for his2012/13 tax position:

(i) Make a $25,000 personal deductiblecontribution in June 2013 – claim thededuction for 2012/13 and allocate theamount between 1 July and 28 July 2013so it becomes a concessional contribu-tion in the 2013/14 financial year.

(ii) Make no personal deductible contri-butions in 2012/13 and use the doublededuction strategy from 2013/14, or returnto the standard annual deduction.

Alternatively, if Matthew was anemployee of his own company (ratherthan a sole-trader), the same strategy

could be used to allow the company toclaim the double deduction.

2. Avoid the traps for personaldeductible contributionsClients eligible for personal deductiblecontributions generally include the self-employed, employees who satisfy the 10per cent rule and individuals under age65 with investment/pension incomeonly. This strategy is particularly usefulfor 2011/12 as it is the last time the$50,000 concessional contributions cap

is available for all individuals age 50 ormore. The Government is still yet topass legislation to retain the cap at$50,000 for individuals age 50 or morewith less than $500,000 in super.

A key trap for advisers is not giving thenotice of intention to claim a tax deduc-tion to the super fund within the correcttimeframe. The notice must be givenbefore the earlier of:

• The lodging of the tax return• 30 June of the next financial year.Furthermore, if clients wish to start an


A new broombefore June

Toolbox

Mark Gleeson outlines seven key taxplanning strategies for 30 June, 2012.

Situation The client is certain they areeligible to make personaldeductible contributions: thatis, the 10 per cent rule willbe satisfied or there is noemployment income.

The client is uncertain theyare eligible to make personaldeductible contributions: thatis, the 10 per cent rule mayor may not be satisfied.

What to do1. Provide a notice of intent to claima tax deduction to the super fund2. Use balance to start an incomestream

1. Delay starting the income streamuntil the end of the financial year toassess tax position2. If eligible, they should:

i. Provide a notice of intent to claimii. Use balance to start an incomestreamiii. Lodge their personal incometax return

AlertIf the client does not subsequentlysatisfy the 10 per cent test, theycannot claim a deduction.As theincome stream has started, avariation notice to reduce theamount of the deduction cannotbe submitted. Therefore, the 15 percent contributions tax cannot berefunded.This approach allows for changingcircumstances and claiming thecorrect amount as a tax deduction.

Table 1

income stream or roll out of the fund, thenotice must be given to the super fundbefore doing so, otherwise the notice isinvalid. A partial rollover from the fundreduces the amount of personal contri-butions that can be claimed as a taxdeduction.

Table 1 (opposite page) outlines theplanning process when you wish to makea personal deductible contribution andthen start an income stream for a client.

Case studyDean, age 57, is a sole trader earning$100,000 p.a. gross income. He makes a$50,000 personal deductible contributionand submits the notice of intention toclaim a tax deduction in January 2012. Hethen starts a Transition to Retirement(TTR) pension with the accumulatedbalance of $400,000. To top-up hisincome, Dean accepts an employmentrole for the last four months of the yearand earns $25,000 in this period.

As Dean fails to meet the 10 per centrule (regardless of the TTR incomereceived), he is ineligible to make person-al deductible contributions. Furthermore,he cannot submit a variation notice to thesuper fund to reduce the amount claimedunder the notice. Consequently, the 15per cent contributions tax on $50,000($7,500) cannot be refunded.

To prevent the unnecessary paymentof contributions tax, Dean could have:

• Not submitted the notice in Januaryand waited until the end of the financial

year when his tax position is clearer.• Submitted the notice in January, but

not started the income stream. Once heidentified he was ineligible for personaldeductible contributions, Dean couldhave submitted a variation notice andhave the contributions tax refunded.

• Made the contribution into a sepa-rate fund. A variation notice can then besubmitted to reduce the amount claimed.

3. Direct a transitional terminationpayment into superIf your client is made redundant orleaves their employer, they may receivean employment termination payment.An employment termination paymentis considered ‘transitional’ if the enti-tlement existed as at 9 May 2006 withspecific terms and conditions outlinedin a written contract, workplace agree-ment or law. Transitional terminationpayments can be directed, that is, rolledover, into super by 30 June 2012. If thepayment is directed into super, therecan be many benefits:

• Tax savings on the payment, particu-larly where your client is

– Under preservation age (at 30 Junein the financial year)

– Preservation age or older (at 30June in the financial year) and thepayment exceeds the lower cap of$165,000 (this threshold may be reducedif they have received previous employ-ment termination payments).

• The income maintenance periodapplying for certain Centrelink paymentscan be reduced, as a directed terminationpayment is disregarded for this purpose.

• The amount can be directed intosuper without using your client’s contri-bution caps (providing the total taxablecomponent of all transitional terminationpayments cashed or rolled over does notexceed $1million).

The amount is preserved within superand cannot be accessed until a conditionof release is met.

It is important to check with theemployer that a payment qualifies as atransitional termination payment. Insome cases, an employer may not initial-ly identify that an employee is eligible fora transitional payment, so it is worthchecking the relevant industrial relationsinstrument.

Case studyGreg, age 51, receives a $120,000 termi-nation payment upon leaving his employ-er. Greg joined the company in 1990. Hewould incur a 31.5 per cent maximumrate of tax (excluding Medicare levysurcharge and flood levy). Therefore, thetotal tax paid would be $37,800.

However, Greg checks with his employ-er and they discover that the paymentqualifies as a transitional terminationpayment. If Greg cashed the transitionaltermination payment, he would incur thesame tax rate as before, that is, 31.5 percent on $120,000 ($37,800). However, asit is a transitional termination payment,Greg has the option of directing thepayment into super. Greg directs hisemployer to make the payment into hissuper fund and incurs only 15 per cent

tax (all taxable component). Therefore,the total tax paid is $18,000.

Greg saves $19,800 in tax by discov-ering that the termination payment istransitional and directing it into super(see Table 2).

Tip Transitional termination paymentscomponents can be isolatedCarol, age 53, receives a transitionaltermination payment of $100,000upon leaving her employer. As Carolhas pre-83 service with the employer,there is a tax-free component of$15,000. The taxable component is$85,000. Carol has $10,000 in creditcard debt. Carol takes her tax-freecomponent as cash and directs hertaxable component into her superfund.

4. Split contributions to keep superbelow $500,000Contribution-splitting allows a memberto transfer their concessional contribu-tions to their spouse’s super account,subject to certain limits. You shouldconsider a splitting strategy for couplesin respect of last financial year’s (2010/11)contributions. The strategy becomesparticularly relevant when consideringthe proposal to retain the concessionalcontributions cap at $50,000 for individ-uals aged 50 or more with less than$500,000 from 1 July 2012. Although theproposal is not yet law, splitting contri-butions may help a member of a couple tokeep their super below the $500,000 limitand receive the higher cap. Additionalbenefits of contribution-splitting mayinclude:

• Earlier access to super benefits• Access to two low-rate caps for super

withdrawals between preservation ageand 60

• Tax-effective funding of insurancepremiums for the receiving spouse

• Hedge against legislative risk.An individual can split 85 per cent of

concessional contributions, but theamount cannot exceed their cap for thatfinancial year. The receiving spouse mustbe below preservation age (currently 55)or if between preservation age and 65,have not permanently retired from theworkforce.

The concessional contributions areassessed against the cap of the originalspouse who made (or received) the contri-butions, not the receiving spouse. Therollover to the receiving spouse does notcount against the receiving spouse’scontributions caps.

5. Get a 100 per cent co-contribution Review your client’s (and their spouse’s)income situation to identify opportuni-ties for the co-contribution. It is proposedto be the last financial year where eligi-ble clients can receive $1 for every $1 of

non-concessional contributions up to$1,000. The Government intends to reducethe co-contribution to 50 cents for every$1 up to a maximum co-contribution of$500 from 1 July 2012. The upper thresh-old would reduce to $46,920 (down from$61,920). Despite the proposed reductionfrom next year, the co-contribution is stilla useful long-term accumulation strategyand represents a guaranteed 50 per centreturn on investment for eligible clients.

TipIn estimating the client’s assessableincome for the financial year, considerthe assessable portions of any:

• capital gains• termination payments• super death benefits received as a

non-tax dependant• lump sum super withdrawals

under age 60

6. Building the spouse’s superIn financial markets where investors strug-gle to obtain positive returns, a spousecontribution provides a guaranteed 18 percent return on amounts up to $3,000.

Where a spouse is a low-income earner,the taxpayer may be entitled to a non-refundable tax offset of up to $540 whenmaking a minimum spouse contributionof $3,000. To be eligible for the maximumspouse contribution tax offset, the receiv-ing spouse’s assessable income (plusreportable fringe benefits and reportableemployer super contributions) must beless than $10,800. The tax offset reducesabove this threshold and phases out onceincome reaches $13,800.

Spouse contributions help build up thesuper savings of the receiving spouse andmay also assist the contributing spouseto stay below $500,000 for the proposedhigher concessional contributions capafter age 50 from 1 July 2012.

Case studyBill, age 53, is married to Jenny, age 48.Bill has $450,000 in super and has alreadymaximised his concessional contribu-tions cap for 2011/12. Jenny works part-time at the local library and earns $10,000pa. Jenny’s super balance is $100,000.

As Jenny qualifies for the co-contri-bution, she makes a $1,000 personalcontribution to receive a $1,000 co-contribution. Furthermore, Bill makes a$3,000 spouse contribution into Jenny’saccount to qualify for the $540 tax offset.Bill also decides to split 85 per cent ofhis concessional contributions intoJenny’s super account.

This strategy allows the couple tobuild Jenny’s super, reduce Bill’s taxliability and keep Bill’s total superbalance below $500,000 to receive theproposed higher concessional contribu-tions cap from 1 July 2012.


Continued on page 26

If paid as cash to Greg If directed into superGross amount $120,000 $120,000Tax $37,800 $18,000Net amount $82,200 $102,000

Table 2

Appointments


Please send your appointments to: [email protected]

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

JUNIOR PARAPLANNERLocation: BrisbaneCompany: MW RecruitmentDescription: A professional services firm inBrisbane is looking to hire a juniorparaplanner.

In this role, you will compile SOAs,undertake portfolio research and adhere tothe high standards of the planningpractice.

You will have at least 12 months’experience as an established paraplannerand will be DFP qualified or equivalent.

You will also be confident in dealing withclients and all other external parties.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Hugh at MW Recruitment – (07) 3009 6400,[email protected]

SENIOR/TECHNICAL PARAPLANNERLocation: AdelaideCompany: Terrington ConsultingDescription: Due to rapidly growingbusiness, a financial planning andstockbroking firm is currently seeking asenior/technical paraplanner.

You will be responsible for the

development and coding of SOA and ROAdocuments, financial planning preparationand implementation, coordination of clientreviews and in depth research anddevelopment of technical strategies.

To be successful, the candidate willneed to be RG146 compliant and hold aminimum DFS qualification.

You will have a detailed understandingof the financial services and stockbrokingindustry, particularly in relation to gearing,superannuation, SMSF, retirement, taxminimisation, risk and estate planning.

A working knowledge of AdviserNETgainand/or XPlan software will be a distinctadvantage.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0499 771 629

RISK ADVISERLocation: AdelaideCompany: Terrington ConsultingDescription: A business advisory firm isseeking a financial adviser / risk specialist tojoin its wealth management team in Adelaide.

In this role you will be predominantlyresponsible for the detailed delivery of risk

insurance advice for the firm’s businessclients.

It is therefore essential that you possessa working knowledge of tax structure,entities, estate planning and SMSFs.

While reviewing the risk insurance needsof clients, you will also identify andcapitalise upon business growthopportunities.

To be successful in the position you willhave a proven record in a similar financialplanning role.

In return you will have access to modernfacilities and a competitive remunerationpackage.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0499 771 629

ADMINISTRATION OFFICERFINANCIAL PLANNINGLocation: AdelaideCompany: Terrington ConsultingDescription: A wealth management practiceis currently looking for an administrationofficer financial planning.

Along with excellent written and verbalcommunication, you will have at least

12-24 months’ experience in a clientservices/junior paraplanning capacity.

You will also require solid practiceknowledge in the creation andimplementation of SOAs. Expertise in XPlansoftware will be highly regarded.


WEALTH PROTECTION SPECIALISTLocation: AdelaideCompany: Terrington ConsultingDescription: A number of wealthmanagement firms are seeking experiencedfinancial advisers to step into a wealthprotection specialist role.

Relevant experience is essential,particularly in the provision of bothpersonal and business risk advice.

Business and relationship developmentwill be an integral part of your skill set.

The successful candidate must have aDFP/CFP qualification.


PROFESSIONAL InvestmentServices (PIS) has announcedthe appointment of Len Sandersas chief information officer.

Sanders has over 15 years’experience in a number of seniorinformation technology leader-ship roles and has a broadknowledge in infrastructure andtechnology management, strate-gic business planning, projectmanagement, software develop-ment and process improvement.

He was most recently CIO atThe Rock Building Society, aposition in which he led thesuccessful replacement of thebusiness’ core banking technol-ogy system.

Before his tenure at The Rock,

Sanders spent 14 years at theBank of Queensland where heworked in a number of rolesincluding senior informationspecialist.

Sanders will commence hisnew role on 30 April.

AIA Australia has announcedthe appointment of 14 new teammembers to its retail division.

The life insurer stated that thenew hires are part of the lifeinsurer’s effort to strengthen itsposition in the market andprovide support to advisers ingrowing their businesses amidregulatory change.

The appointees include Amy

Mitchell as national develop-ment manager and four newclient development managers –Rachael Makhoul (New SouthWales), Sophie Chudnovskaya(Victoria), Guy Savage (WesternAustralia) and Ron Pimm(Queensland).

Kirianne Hall has beenappointed adviser contact teammanager and Tom Gordon willstep into the technical salesmanager position.

Four senior client developmentsupport staff have also been hired– Carmen Chong (NSW), JamesWingate (VIC), Tarryn Anderson(QLD) and Cassie Handke (SouthAustralia).

In addition, Tim Barnes ,

Garry Pellant and Warren Pagehave been appointed underwrit-ing development consultants.

AIA head of retail distributionPina Sciarrone said the insurerwas also in the process of recruit-ing a new head of dealerships tosupport the new recruits.

IN an effort to boost its consul-tancy services for trustees,advisers and accountants,Multiport has appointedMarjon Muizer as a technicalservices consultant.

Multiport technical servicesdirector Philip LaGreca saidMuizer’s appointment wasconsistent with the demand forMultiport’s services amid thegrowth of the self-managedsuperannuation fund sector.

Muizer previously worked atPKF Chartered Accountantsand was also a manager insuperannuation for Dixon Advi-sory and SuperannuationServices.

“Marjon’s background workingwith accountants is essential inunderstanding advisers’ andaccountants’ needs,” LaGrecasaid.

LaGreca added that Marjon’sbackground working withaccountants will be essential infacilitating the needs of Multi-port’s adviser and accountantbase, which has grown signifi-

cantly over the past six years.

TAL Life has appointed DanielBarnes to the newly-created roleof national key account manager.

Before his appointment,Barnes was a key member withinthe Victoria/Tasmania sales, andprior to joining TAL in 2008worked at AXA in a similarcapacity.

In his new role, Barnes will

focus on industry leading riskpractices where he will share hisexpertise in practice develop-ment, high quality service andstrategic thinking.

TAL said Barnes is a relation-ship lead individual who under-stands the importance ofworking together in a successfulteam.

Move of the weekHYPERION Asset Management has announced that Tim Samwaywill succeed Dr Emmanuel Pohl as managing director.

Pohl is stepping down from his role to set up a new private equitybusiness at Hyperion, as well as focus on Hyperion Flagship Invest-ments and the individually managed accounts.

Samway is currently Hyperion’s institutional business director andhas been with the company since its inception. In his new role, Hype-rion stated that he will ensure the continuity of the firm’s strategy,investment process and team.

His previous experience includes senior management and boardexperience at Hyperion Wilson HTM, Burrows and Deloitte.

Hyperion stated that the current investment team would remainintact amid Samway’s appointment, although Hyperion chief invest-ment officer Mark Arnold will now chair the monthly investmentcommittee meetings in addition to his duties as CIO. Tim Samway

Daniel Barnes

AS a long-term resident of the Emerald City,Outsider is quite familiar with the friendlyjostling between Sydney and Melbourne –and it’s a rivalry that is most certainlyplayed out just as vigorously within financialservices as it is elsewhere.

It’s a well-trodden path – Sydney hasthe beaches and the landmarks, Mel-bourne has the laneways and the “cul-ture”, and back and forth it goes. ButOutsider is at least accustomed toSydney having the bragging rights whenit comes to the weather.

As are most people, it seems, with therecent turnaround in the meteorologicalfortunes of the respective capitals turninginto a major talking point at netwealth’srecent relaunch of Paragem Dealer Ser-vices as Pathway Licensee Services.

First up, Pathway Licensee Services gen-eral manager Kate Humphries, a countryNSW girl and now-reformed former Mel-bournite, bemoaned the terrible weatherher home state was displaying (raising hervoice slightly to compete with the torren-tial rain crashing onto the roof and againstthe windows at Sydney’s Cruise Bar in Cir-cular Quay).

Long-time Melbournian Netwealthdirector Michael Heine certainly didn’tmiss his opportunity when he got his

turn to speak,referring to theweather as “the worst weather weekseen in Sydney since last week”.

Then it was Tasmania’s turn to get in onthe act, as recently retired Senator NickSherry first blamed a tickle in his throat onthe weather, then lamented a hole in hisshoe that had filled with Sydney rainwater,before proudly boasting of the “magnifi-cent” weather Taswegians had recentlybeen enjoying.

It’s a sad state of affairs when the Tas-manians are scoring points on Sydney inthe weather stakes. And the best retortthat local boy, Financial Services Councilchief executive John Brogden, couldmanage was to deflect the ridicule else-where – “imagine all those Poms whocame out expecting a nice summer inSydney! It makes me feel a little bit betterthat we can always pick on the Poms”.

Always except for when the cricket’son, John.

Outsider


“As I was standing next to myson, who as all those withchildren will understand is apain in the arse, he just pointedout to me they said ‘briefly’ – heknows ‘briefly’ is not a word Iunderstand.”

Although invited to speak briefly,netwealth managing director Michael

Heine apparently plans to take histime at netwealth’s launch of

Pathway Dealer Services.

“Kate introduced me as the‘current’ CEO of the FinancialServices Council – maybe I mightneed someone to wish me the bestin case there’s something I don’tknow when I get back to theoffice.”

FSC chief executive John Brogden ishoping Pathway general manager

Kate Humphries doesn’t know something he doesn’t.

“We don’t love you personally, butwe love the relationship we havewith you.”

Brogden again, expressing a veryplatonic affection for netwealth.

Out ofcontext

Grizzling…all the way to the bank

Liquid assetsOUTSIDER recentlyheard of a bar and grill inCalifornia that has comeup with a novel way togive your weekenddrinker the chance oftrading on the stockexchange.

Instead of buying andselling shares andcommodities, however,punters can buy alco-holic drinks based onreal-time pricing.

Each bar is fitted outwith television sets thatdisplay a drink priceindex. The more a partic-ular drink sells, thehigher the price ispushed up.

Like an actual stockexchange monitor, theTV sets even display thedaily highs and lows ofeach drink.

Outsider is sure thatthere can be no betterway to learn the veryscience of supply anddemand than over a few

rounds with somefriends.

After all, a fixed-pricedrinks list is price fixing,which is illegal in anycountry.

Ironically, it may bethe only market in whichdiversifying would havea disastrous effect onyour price-to-earningsratio.

Although you maybeat the benchmark bycontinuously buying low,you may ultimately paya higher price later in theevening when yousuddenly realise yourportfolio may be a littlemore liquid than yourstomach can handle.

WHILE the Occupy Wall Street debatehas often swayed from the ignorant tothe absurd, Outsider can understandthe everyday chap's frustration withthe fact that some (guilty) bankers havegotten away with sinking world finan-cial markets, seemingly scot-free.

For ageing Br it ish progressiverockers Jethro Tull, enough is enough,with their latest record featuring theinterestingly-named Banker Bets,Banker Wins.

A long-time fan of the Bedfordshire-

bred musos, Outsider never expectedto hear the legendary British bandespouse the evils of "hedge funds,wraps and equities wins".

Outsider especially liked the swingthat the band takes at the market itself,describing the inability of governmentsto take action against corruption:

Draconian calls for regulationare drowned in latte with Starbucks muffinMortgage melt-down: non est mea culpaThreatened exit, stage left, laughing…

Although Outsider admires theband's romanticised effort to battlethe forces of corporate greed with amicrophone, guitar and flute in hand,he questions the effect that the globalfinancial crisis has had on frontmanIan Anderson's own hip pocket.

In fact, along with the millions ofrecords the band has sold since theirinception in 1967, Jethro Tull's latesteffort is sure to put them even furtherahead of the proverbial eight-ball.

"…Exit, stage left, laughing", indeed.

A L I G H T - H E A R T E D L O O K A T T H E O T H E R S I D E O F M A K I N G M O N E Y

Weather retort

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money management (april 26, 2012)

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