money management (april 28, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

THE Federal Government is expected toannounce a number of key changes in theMay Budget aimed at overcoming what areregarded as unintended consequencesaround the so-called ‘Simpler Super’ regimeand the excess contributions tax (ECT).

If the Government delivers on the expect-ed changes it will be consistent with lobby-ing from virtually every major financial serv-ices group in circumstances where someclients have inadvertently found themselvesin breach of the excess contributions rules –with the result that the amount was taxedat an accumulative rate of 93 per cent.

The changes will also reflect concernsexpressed by the Commissioner for Taxa-tion, Michael D’Ascenzo, who made clear tothe industry that the ability of the Australian

Taxation Office (ATO) to exercise full discre-tion on inadvertent breaches was limited.

“The law places strict limits on the appli-cation of the discretion which may only beapplied where there are special circum-stances and the decision is consistent withthe objectives of the relevant tax laws,” D’As-cenzo told an industry conference.

While the Government is not expected toaccede to calls by organisations such as theSelf-Managed Superannuation Fund Profes-sionals’ Association of Australia (SPAA) toreturn contribution caps to pre-2009 levels,it is expected to tidy up some of the issuesidentified by D’Ascenzo and the ATO.

The Assistant Treasurer and Minister forFinancial Services, Bill Shorten, has re-statedthe Government’s intention to restore the$50,000-a-year contribution cap for thoseaged over 50 and with less than $500,000 in

super assets, starting from the middle of nextyear, but the SPAA and a number of otherorganisations have asked the Government togo further.

However, in circumstances where theTreasurer, Wayne Swan, has spent most ofthe past month signalling a tight Budget,most industry lobbyists believe that what-ever superannuation-related concessionsare delivered on 10 May will be at the margin.

They said they would count it as anachievement if the Government tied up theunintended consequences around ECT andperhaps extended the concessional contri-bution cap arrangements for those over 50to include people with up to $750,000 insuper savings.

For a full report, see the SMSF feature onpage 12.

By Caroline Munro

CARE needs to be taken in man-dating a ‘best interest’ or fiduci-ary-like duty, because it would implythat one did not already exist,according to Argyle Lawyers princi-pal Peter Bobbin.

“To introduce a best interest orfiduciary duty as a new standardimplies that it didn’t exist before.This would be a surprise to the manyprofessional financial planners whoalways considered it to be the stan-dard that applied to them, and thestandard that they applied to clientservicing,” said Bobbin.

“And to the extent that it is anew standard, there will be twoclient/planner relationships preand post implementation. How isthe cross over of the new standardto be applied?”

The Treasury and the Future ofFinancial Advice Peak ConsultationGroup is currently mulling over twopossible approaches to a proposed

best interests duty: one that is out-comes based and considered bysome to be closer to a fiduciary-likeduty, and another that is process-based. Bobbin said that whicheverroute Treasury and the consulta-tion group took, considerationneeded to be taken regarding whatstandards financial planners werecurrently operating under and whatkind of relationship already existedbetween planners and their clients.

Argyle Lawyers associate andmember of its financial servicesteam, Lisa Chambers, said Trea-sury’s fiduciary-like duty option wasproblematic in the financial plan-ning context because it would“almost certainly be subject tocaveats and qualifications”.

“This would dilute the impactand undermine what should be thetrue intent of facilitating better advi-sory outcomes for clients, aslicensees and advisers grapple with

May Budget to ring in super changes

Continued on page 3

Fiduciary duty nothing new

FOFA COULD MAGNIFY UNDERINSURANCE: Page 5 | CONCERNS OVER EXCESS CONTRIBUTIONS: 2

Vol.25 No.15 | April 28, 2011 | $6.95 INC GST

By Milana Pokrajac

WHILE many financial planning practices havemoved to the fee-for-service remuneration model inpreparation for the introduction of the Future ofFinancial Advice (FOFA) reforms, most risk-focusedadvisory businesses are not shying away fromcommissions as yet.

The Association of Financial Advisers (AFA) vicepresident and risk specialist, Adam Smith, said mostrisk specialists hadn’t moved to the fee model, whichwas mostly due to the general optimism within theindustry around the government’s reconsiderationof insurance products.

Australian Securities and Investments Commis-sion (ASIC) commissioner Dr Peter Boxall recentlysaid that the Treasury had acknowledged that insur-ance was different from investment products andthat it was looking to explore concerns about afford-ability and the potential for underinsurance.

“The feel is that risk commissions will remain,”Smith said. “And a lot of that basis is on consumerresearch conducted by the likes of Zurich aroundconsumer preferences on how they’d rather remu-

nerate advisers for insurance advice.”Both Smith and Synchron director Don Trapnell

also believe the Australian government would notwish to follow in the footsteps of the United Kingdom.

“They [United Kingdom] have now reintroducedcommissions on the risk side because they werefinding that the penetration of protection for familiesdropped dramatically,” Trapnell said.

He added that Synchron, as a risk-focused dealergroup, had not moved away from the commission-based remuneration model.

“Certainly, we’ll have some contingency planned,

Risk advisersdefiant of FOFA

Michael D’Ascenzo

Dr Peter Boxall

Continued on page 3

Longing for stabilityF

inancial planners could be forgiv-en for suffering reform fatigue –and the release, last week, ofRichard St John’s consultation

paper, Review of compensation arrange-ments for consumers of financial services,will only serve to magnify it.

While St John has done a thorough jobin traversing all the issues, there is little inhis consultation paper that planners don’talready know: that the existing compensa-tion arrangements are less than perfect,that professional indemnity insurance isexpensive and often impractical, and thatthe Financial Ombudsman Servicearrangements are less than ideal.

However, given the importance of theissues raised by St John it is disturbing thatthe Assistant Treasurer and Minister forFinancial Services, Bill Shorten, appearsready to outline the first draft of the Futureof Financial Advice (FOFA) changes inadvance of industry responses beingreceived with respect to the review ofcompensation arrangements.

While it may be arguable that theresponses to the St John consultationpaper can be considered with industryresponses to the initial FOFA outline, theGovernment is in danger of unnecessar-ily complicating an already highly

complex legislative exercise.St John was originally handed his task by

the former Minister for Financial Services,Chris Bowen, and the wide-ranging natureof his brief always meant that it was a taskthat could not, and should not, be rushed.As well as assessing the effectiveness orotherwise of the existing Australian regime,his consultation paper has examined the

systems that exist in other countries andjurisdictions.

If the Government is to introduce legis-lation around the FOFA changes then it isimperative that it encompasses not onlythe recommendations that flow from StJohn’s comprehensive and well-researchedconsultation process, but also the short-comings his analysis has already identified.

Indeed, rather than getting too focusedon FOFA as an end in itself, the Govern-ment needs to reflect upon the fact that itis actually embarking on a substantialupdate of the Financial Services Reform Act– and that it is an exercise that must ulti-mately not only be equitable, but durable.

The financial planning sector and,indeed, the entire financial services sectoris being put through a good deal of painand cost by the Government’s FOFA exer-cise, and it behoves Shorten to make surehe achieves an appropriate outcome.

The minister will not achieve a sustain-able outcome by rushing to impose legisla-tion with the consultative processes leftincomplete.

The minister would be wise not to leavea rushed patchwork as his legislative legacyto financial services.

– Mike TaylorAverage Net DistributionPeriod ending Sept '1010,183 ABN 80 132 719 861 ACN 000 146 921

Money Management is the leading weekly independent

financial services newspaper providing accurate, informative

and insightful editorial coverage of the Australian Financial

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By Mike Taylor

AUSTRALIAN financial advisers appear tohave shrugged off at least some of the gloomthat saw sentiment descend to lower levelsbetween April and August this year.

The latest Wealth Insights adviser sentimentsnapshot for September has seen sentimentreturning to levels similar to those recordedat the close of last year, but still well below thepeak achieved in late January and early Febru-ary and less than half that recorded at the peakof the market in February 2008.

The new Wealth Insights data, releasedexclusively to Money Management, appearsto reflect planners’ acceptance of the reali-ties flowing from the Federal Election and agrowing confidence in their ability to adaptto a new fee-for-service environment.

The degree to which planners are accept-ing the inevitability of the move to fee-for-service has also been reflected in datacompiled by Colonial First State (CFS) fromflows into its FirstChoice platform.

Announcing last week that FirstChoicehad grown to become the largest platform inthe space, CFS chief executive Brian Bissak-er also pointed to data indicating that fewerplanners were utilising those elements ofthe platform delivering commissions.

He said the flow to what was regarded asthe fee-for-service options now stood ataround 60 per cent.

Wealth Insights managing directorVanessa McMahon said the data around theflows on the FirstChoice platform tended to

confirm the feedback provided by plannersduring focus groups conducted by WealthInsights.

She said planners had accepted theinevitability of the need to shift to a fee-for-service model and were adjusting theircommercial models accordingly.

McMahon said the focus groups had alsorevealed the degree to which planners wereconscious of the pressure on fees and wereacting to keep them contained.

“But they recognise that there are only twoareas they can act on fees – platforms andthe member expense ratio [MER],” she said.

“There has not been a lot of relief withrespect to platform costs, so the focus hasbeen on MER,” McMahon said. “Thatexplains recent adviser preference forindexed funds, exchange traded funds anddirect shares.

“Putting aside the performance ofindexed funds, the recent preference exhib-ited by planners has also had a lot to do withfees,” she said.

By Caroline Munro

IMPROVING online capability is only the start

of technological innovation in the financial

services sector, with the next milestone being

mobile capacity, according to technology lead-

ers in the industry.

The financial services industry is nearing a

mature phase in terms of online capability

and the next big mountain to climb is mobil-

ity, according to AXA Australia’s general man-

ager for digital business, Cam Cimino.

“For our industry, mobility is in its infancy,”

he said. “I haven’t seen many applications

that I think are of great value to the user at

this point. I think there are great opportuni-

ties in that space and as the devices

become easier to use in a business format

rather than in an end-user format, we expect

Continued on page 3

Mobility the nexttechnology frontier

National Australia Bank declines stake in PIS: Page 4 | Technology driving industry innovation: Page 18

Vol.24 No.37 | October 7, 2010 | $6.95 INC GST

THE financial planning software market is headed for some

major adjustments, with product innovation and

simplification the likely results of recent market upheaval.

Following a sustained period of regulatory review and market

uncertainty as a result of the global financial crisis (GFC),

the financial planning software sector is now in a state of

transition, according to market players.

While the market remains dominated by larger players

such as Coin and Iress, smaller players are keen to seize

their share of the market and address the growing needs of

planners looking to transform their businesses.

However, with many practices reluctant to change their

planning software because of legacy and business planning

issues, gaining ground may not be that simple.

Full report page 18

161515

38

24 22

-3

-36

53

31

-31

-19-9

-60

Feb 08

Apr 08

Oct 08

Dec 08

Feb 09

May 09Ju

l 09

Oct 09

Dec 09

Feb 10

May 10Ju

l 10

Sep 10

-40

-20

0

20

40

60

Source: Wealth Insights

Graph: Adviser Sentiment

Software sectorheaded for change

FINANCIAL PLANNING SOFTWARE

Planners accept the inevitable

Offer Code MO11OP01

*All savings are based on the cover price of Money Management and

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2 — Money Management April 28, 2011 www.moneymanagement.com.au

[email protected]

“ The minister will notachieve a sustainableoutcome by rushing toimpose legislation with theconsultative processes leftincomplete. ”

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By Caroline Munro

THERE is a massive disconnect between thedemand for financial advice among super fundmembers and their willingness to pay for it,according to Investment Trends research.

“One of the key themes that came out of theresearch was that people recognise that theycould do with some advice, but they have noreal understanding of either the value of theadvice or its cost,” said Investment Trends chiefoperating officer Tim Cobb.

The survey covered 1,090 Australians from allsectors of the population, and revealed that whilethere was an appetite for advice, both compre-hensive and limited, there was a lack of under-standing as to what it actually cost. And asubstantial proportion expected super adviceto be free, Cobb noted.

“On the retail side there seems to be more of

an awareness that advice is something that youneed to pay for, whereas on the industry fundside there is a much higher proportion sayingthat they should get it for nothing,” he said,adding that this attitude was likely a result of themessages coming out of industry super fundadvertisements over the years.

The research revealed that 60 per of investorswanted to know about the sort of advice theirsuper fund could offer.

“The challenge is that they would only bewilling to pay about $270 for a comprehensiveconsultation on average,” Cobb said.

About 60 per cent of respondents were alsokeen on limited advice, although they were onlywilling to pay about $100, he added.

Cobb said there was also a trend across themarket of people moving away from payingcommissions deducted from their super fund, topaying a fee or hourly rate, also likely due to the

industry fund advertising campaigns. However,he said, it was interesting to note that somecomments from respondents revealedconcerns as to whether super fund adviserswere the right people to be giving them adviceregarding their super fund account in the firstplace. A few stated that they would rather payfor advice from an adviser completely discon-nected from the super fund to give them confi-dence that the advice would be completelyindependent, said Cobb.

Over half of respondents felt it was appro-priate for financial planners, accountants andsome bank advisers to provide limited scopedadvice. Respondents also felt it would beappropriate to broaden the scope of limitedadvice to include transition-to-retirement,specific investments within super funds,nominating beneficiaries, Centrelink, andretirement planning in general.

www.moneymanagement.com.au April 28, 2011 Money Management — 3

News

Super members expect cheaper advice

Risk advisers defiant of FOFA

but until such time as the legislation comes out, we are notmaking any changes to our processes on our risk side,” Trap-nell said.

However, RI Advice had been developing a fee model forinsurance advice since late last year, which it said would makeadvisers ready for alternative outcomes.

RI Advice national manager for risk insurance, Col Fulla-gar, said the dealer group had almost completed the devel-opment of its new remuneration model – the introduction ofwhich would depend upon both the government’s and advis-ers’ decision.

“If we have to [remove commissions], we want to be ready,”Fullagar said.

“If we don’t have to, but the adviser wants to [move towardsfee-for-service] – we want to be ready. If advisers want to stayon commission, then the work we’ve done on the potentialfee side would enhance what they do on the commissionside anyway,” Fullagar added.

AFA’s Smith, who had taken part in government consul-tation in recent months, said the general feel the industryhad received from Treasury was that commissions wouldremain on insurance at this stage.

implementing processesand policy frameworks toensure they can safely navi-gate the obligation,” shesaid.

“Imposing a best inter-est standard and thenwatering it down seemssomewhat redundant.”

Chambers felt that thesecond option was moreclient-focused, facilitated aquality of advice approach,could be effectively imple-mented at the practicelevel, and recognised thesubjectivity of financialadvice and the complexitiesimposed by the advisory

relationship. Bobbin said his own frus-

tration with reform in thisarea lay in the fact that thecourts had only just come togrips with the financial plan-ning standards imposed bythe Financial ServicesReform legislation,and wouldnow have to reassess themall over again.

“By necessity, courts willalways be four to six yearsbehind new legislationbecause it takes that lengthof time before an issue isbrought before a court to bedealt with under the new Gov-ernment views expressed in new legislation,” heexplained.

Fiduciary duty nothing newContinued from page 1

Continued from page 1

Tim Cobb

News

By Chris Kennedy

THE National Institute of Accoun-tants (NIA) has opposed movesfrom financial planning bodies tohave the use of the terms ‘financialplanner’ and ‘financial adviser’restricted by law.

Last week the Financial Plan-ning Association (FPA) proposedthat only those belonging to aprofessional body would be able

to call themselves ‘financial plan-ners’ while the Association ofFinancial Advisers (AFA) said‘financial planner/adviser’ shouldbe restricted to those who operateunder an Australian FinancialServices Licence (AFSL).

These moves are nothing morethan a cover to exclude otherequally qualified advisers such asaccountants and lawyers fromproviding financial advice services,

said NIA chief executive AndrewConway.

“Enshrining ‘financial planner’in legislation will not improve thestandards of advice to everydayAustralians, nor will it bring backthe millions of dollars lost to Stormor Westpoint,” Conway said.

Representatives from both theFPA and AFA say that the NIA mayhave misinterpreted the intentionsof last week’s announcements,

saying that there had been noattempt to exclude other profes-sions such as accountants andlawyers.

The FPA’s general manager ofpolicy and government relations,Dante De Gori, said the FPA is notsaying the use of the term shouldbe restricted to any one profession-al body, just that the use of the term‘financial planner’ should onlyopen to members of a Govern-

ment-approved industry body,which could also include account-ants belonging to bodies such asthe NIA.

The regulators would then decidewhich bodies qualified, he added.

AFA national president Brad Foxsaid that the AFA’s view remainedthat a person should operate underan AFSL to provide financial advice,which could include people of multidisciplines, including accountants.

MDS acquiresMINC assetsMike Taylor

PUBLICLY listed MDSFinancial Group hasacquired the online tradingbusiness, national clientlists, private client businessand advisory assets of thecollapsed MINC FinancialServices.

MDS announced theacquisition to theAustralian SecuritiesExchange last week, con-firming that under theterms of the deal with theMINC Financial Servicesadministrator, it would beaccommodating MINC’sadvisers in Townsville, Bun-bury, the Gold Coast andMelbourne.

MINC moved into volun-tary administration nearlya month ago, and MDCFinancial chief executiveDamian Isbister made clearthe acquisition did notinclude MINC’s debts, lia-bilities or infrastructure.

“We believe the assetswe are taking on will quicklyyield revenue exceeding thecosts of the acquisition,”he said.

He said MDS Financialwas working closely withPenson Financial ServicesAustralia to ensure minimaldisruption to clients duringthe transition period.

The MDS announcementsaid clients’ securities hold-ings and cash accountsremained unaffectedbecause they were main-tained by the relevantCHESS sponsor, PensonFinancial Services Aus-tralia, and bank cash man-agement accounts.

NIA opposes legislation of the term ‘financial planner’

For more information contact Heather Lawson on (02) 9422 2791 or email [email protected]

��

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The annual Money Management Fund Manager of the Year Awards recognises excellence in the funds

management industry. This year’s awards will also incorporate the Business Development Manager

of the Year Awards as well as three new categories - Best Advertisement; Marketing Team and Young

Achiever. Go to www.moneymanagement.com.au/FMOTY to view the full entry criteria.

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News

By Mike Taylor

THE Association of FinancialAdvisers (AFA) has used newresearch results to urge theFederal Government not toabolish commission-basedarrangements around advicerelating to insurance products.

The research, released last week,found that many Australianswould not seek life insurance

advice if they were forced to payfor it via an upfront fee rather thanby commissions.

The research also suggested theGovernment’s proposed opt-inarrangements would act as animpediment.

The research, conducted byCoreData and sponsored bymajor insurer, AIA Australia, wasbased on a survey of corporatesuperannuation and life insur-

ance clients and revealed that acommission paid by the insur-ance provider was the mostcommon and preferred methodof payment with respect to lifeinsurance.

It found that strong evidenceexisted to support the contentionthat many people receiving lifeinsurance advice in today’s envi-ronment would exit the market ifforced to pay a fee for service.

Commenting on the results,AFA chief executive RichardKlipin said it had revealed thatpeople who used a financialadviser for their life insuranceneeds were more likely to haveappropriate cover and be confi-dent they understood what typeof cover they had.

“Disturbingly, however, manywould not pay for it if commis-sions are abolished,” he said.

Treasury reviewscompensationBy Milana Pokrajac

CURRENT default compen-sation arrangements forretail clients rely largely onprofessional indemnity (PI)insurance, and provide noguarantee that retail clientswill be able to recover com-pensation to which they maybe entitled.

That is one of the obser-vations made by financialservices expert Richard StJohn in the Government’snewly launched consultationpaper on compensationarrangements for retailinvestors.

St John said the problemfor consumers arose whena provider did not haverecourse to professionalindemnity insurance coverand did not have the finan-cial capacity to pay compen-sation – which may be thecase if the provider hasceased to trade or hasbecome insolvent.

The consultation drewattention to a number ofways existing compensationarrangements could bestrengthened, including theintroduction of a moreproactive administration ofthe requirements for PIinsurance.

The paper acknowledgedthe shrinkage of the PI insur-ance sector, and had soughtcomment from the industryabout current conditionsand competitiveness of thePI insurance market, includ-ing access and price.

St John also suggestedgiving more attention to thefinancial resources held by aprovider, as well as creatinga ‘scheme of last resort’that would provide compen-sation when a provider wasunable to do so.

The Treasury has invitedconsumers, licensees andinsurers to participate in theconsultation process, whichwill close on 1 June, 2011.

FOFA reforms could lead to underinsurance: AFA

Richard Klipin

News

By Milana Pokrajac

THE predicted rise in voluntarysavings and superannuation inAustralian households will comeat the expense of life insurancepolicies, according to IBISWorldchairman Phil Ruthven.

Ruthven said that if investorsthought their superannuationbalances were sufficient to fundthem through retirement, they

would be less inclined to take outlife insurance policies to bolsterthat.

“People will put more moneyinto savings [and will not] contin-ue to get more life insurance assuch,” Ruthven said.

His comments followed therelease of the latest IBISWorldreport, which examined theaverage household’s expenditureand how much Australians were

spending on particular servicesover the years. The report foundthat almost 9 per cent of the totalhousehold income went towardsfinancial and insurance services,which included investment adviceand tax planning.

This figure had been growing ata steady pace from 2 per cent inthe 1950s, but Ruthven said he didnot believe further significantgrowth would occur in this field.

“Most of the growth has comethrough already, particularly overthe last 20 years,” he said. “It mayedge up a little bit further, but Idon’t see it going beyond 10 percent of household incomes anytime in the foreseeable future.”

But savings, which currently holda smaller percentage of total house-hold income than in the 1950s,were predicted to grow significant-ly, according to IBISWorld.

ASIC winsinjunctionagainst HubbBy Caroline Munro

PERMANENT injunctions havebeen secured against TheHubb Organisation’s Safety inthe Market training coursesand trading software,prevent-ing it from making mislead-ing or deceptive representa-tions about its tradingmethodology.

Investigations by theAustralian Securities andInvestments Commission(ASIC) have revealed thatdespite Safety in theMarket’s claims, there wasno evidence that its SmarterStarter Pack, which is soldwithin its Active Trader Pro-gram, taught or otherwiseprovided a proven method-ology for profitable trading infinancial products.

“Licensees who offerfinancial products need toensure that in making state-ments about performance orreturns they do not misleador deceive financial con-sumers,” said ASIC commis-sioner Peter Boxall. “ASICwill continue to actively mon-itor the marketing materialfor these products and willtake action where it believesthe law has been breached.”

ASIC obtained orders inthe Federal Court of Aus-tralia in Sydney preventingThe Hubb Organisation frommaking or publishing mis-leading or deceptive repre-sentations about its Safetyin the Market tradingmethodology. The Courtorder required that Safety inthe Market send notices toall those who purchased theActive Trader Program,informing them of the basisof the court orders and theoption available to themshould they believe that theyhave suffered a financialloss as a result of the com-pany’s representations.

Higher super balances will hinder life policies

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News

Potential debt funding role for superBy Ashleigh McIntyre

SUPERANNUATION funds could soonbe seen as an alternative source of insti-tutional-grade debt funding, followingthe decision by UniSuper to invest inAustralian commercial mortgage-backedsecurities (CMBS).

The first investment of UniSuper’s newCMBS portfolio, which is managed byColonial First State Global Asset Manage-ment, will be committing $250 million tothe Charter Hall Retail Real Estate Invest-ment Trust (REIT).

UniSuper’s chief investment officerJohn Pearce said the transaction wouldoffer significant benefits for members.

“Given our experience, investmentstrategy and horizon, UniSuper is well

placed to capitalise on investment oppor-tunities such as this, and we remain opento investing in similar opportunities infuture,” he said.

The existing Charter Hall Retail REITCMBS facility will be refinanced by aplacement of notes for a four-year term,ending in September 2015.

The AAA-rated note includes a marginof 1.8 per cent over the benchmark inter-est rate.

It will be backed by a large collateralpool of sub-regional shopping centresand freestanding supermarkets valued atover $737 million and representing aloan-to-value ratio of 33.9 per cent.

The transaction remains subject tocompleting documentation and ratingagency confirmation.

Plan B forms SMSFalliance with HeffronBy Chris Kennedy

PLAN B Group Holdings has entered into apartnership with self-managed super fund(SMSF) service provider Heffron, enabling PlanB to provide SMSF services to its clients andadvisers.

Plan B executive chairman Bryan Taylor saidthe partnership was a strategic fit for Plan Band its clients, as well as Heffron.

The service would provide clients with greaterdiversity and flexibility of investments, he said.

Heffron managing director Martin Heffronsaid both businesses shared the same fun-damental values and client-focused philoso-phies, and added that the partnership wouldprovide additional opportunities.

Software vendors vie for super marketBy Mike Taylor

COMPETITION is heating up between financial planning soft-ware vendors in a bid to gain mandates from superannuationfunds.

The level of competition has been evidenced by softwarefirm Decimal, which has issued a statement warning fundtrustees to be cautious in selecting outsource partners andsoftware vendors.

Commenting on his company’s success in delivering afinancial advice solution to AvSuper, Decimal chief executive

Jan Kolbusz claimed the financial planning software arena was“littered with any number of potential outsource partners andsoftware vendors promising great expertise in certain areas”.

Among the points made by Kolbusz was that superannuationfunds would need to make decisions about their future involve-ment in financial advice and whether they would simply offerlimited advice or become “the central financial ‘hub’ for theirmembers’ lives”.

“Superannuation lives in a fluid, post-Cooper, post-GFC,post-Ripoll world,” the Decimal statement said. “So what hap-pens when these worlds collide?”

Diversificationvital in SMSFsBy Caroline Munro

THE severe problems caused by the Trio Capitalcollapse shows why diversification in self-managed super funds (SMSFs) is so important,according to head of wealth management atEquity Trustees Limited, Phil Galagher.

The Government’s recent announcement thatexcluded SMSF trustees from compensation wasfurther evidence why SMSF trustees needed tobe careful of where they invested their money,he added.

“No SMSF should be so exposed to any onecollective investment or asset manager that acollapse or complete lack of performance willcause major financial problems for the trustees,such as the loss of the major part of their savings,”he said.

Galagher said there was little anyone coulddo to prevent a major collapse of a total assetclass, but no SMSF or investor should havehugely significant amounts with one fundmanager or any one investment unless they fullyunderstood all the risks.

Galagher felt that any SMSF trustee recom-mended to invest more than 10 per cent of totalcapital with any one asset manager or managedfund should get a second opinion.

“This doesn’t mean that an SMSF shouldn’thave a large amount invested in a particular assetclass such as equities, but it shouldn’t be all inone fund or tied up in one stock,” he said

“Diversification is still the best protection againstmajor losses of retirement savings,” he said.

Challenger posts strong AUM growthCHALLENGER’S assets under manage-ment grew by more than one-fifth over thepast 12 months, to $27 billion at 31 March2011, boosted by strong boutique inflowsand retail life sales, the group hasannounced.

Retail life sales for the previous quarterof $740 million were more than doublethe previous corresponding period, andincorporated the impact of the conver-sion of the High Yield Fund in February2011, Challenger stated.

Institutional life sales of $31 millionbrought total life sales to $771 million forthe quarter, while total life AUM was up24 per cent for the past 12 months, to $8.3billion.

Boutique funds under managementincreased by $1.1 billion for the quarter to$13.8 billion due to both inflows andmarket performance, Challenger stated.

Net funds management flows of $85million for the quarter were negativelyimpacted by the High Yield Fund

conversion, but inflows across otherfunds were strong.

“We have seen a continuation of trendsacross our business with strong flows toour boutique partnerships and record lifesales,” Challenger chief executive DominicStevens said.

The group remains on track to meet itsfinancial year retail life sales guidance,which has been upgraded to in excess of$1.8 billion following the conversion ofthe High Yield Fund, he said.

Financial hub tendering process beginsTHE Federal Government’selection promise to turnAustralia into a financialservices hub is starting totake shape, with the tenderprocess beginning for theCentre for InternationalFinance and Regulation.

Assistant Treasurer BillShorten is inviting Australianuniversities to tender for$12.1 million in fundingfrom the Commonwealth tohost the centre.

“The creation of theCentre for InternationalFinance and Regulation is akey part of the Gillard Gov-ernment’s work to promoteAustralia as a financial

ser vices hub in Asia,”Shorten said.

The centre was proposedas part of the Rudd Govern-ment’s 2010 budget, withpromises of $25 millionover the next four years tobe put towards funding.

A working group, whichwill be chaired by PaulCostello, has been estab-lished to oversee the tenderprocess and select the hostuniversity.

The group includes pri-vate sector participants withsignificant financial servicesexperience, as well as repre-sentatives from the depart-ments of Treasury, Prime

Minister and Cabinet, aswell as Employment andWorkplace Relations.

“The Centre will focus onregional engagement, innova-tion and regulation. It willimprove understanding ofglobal financial markets, theirinterconnectedness, and theirinfluence on nationaleconomies,” Shorten said.

“It will represent a strate-gic link between academia,financial regulators, Govern-ment and the f inanceindustry.”

Shor ten said it wasexpected that the workwould be completed by midto late 2011.

John Pearce

Bill Shorten

Phil Galagher

News

Natural disasters cause skills shortageBy Chris Kennedy

AUSTRALIAN financial services profes-sionals are reluctant to explore job oppor-tunities following a series of local andoverseas natural disasters, leading to skills-tightening in the sector.

This is according to the latest ClariusSkills Index, which found that employeesfrom the wealth management, insuranceand retail banking sectors are increasing-ly hesitant to re-enter the employmentmarket due to renewed uncertainty in thisindustry since the beginning of the year.

This has led to a supply shortage ofaround 10 to 15 per cent in the financial serv-ices industry, according to the executive

general manager of Alliance Recruitment,Paul Barbaro.

“In uncertain global times, candidateswithin the Financial Services sector are

more inclined to stay with their existingemployer and ride it out beforecommencing a job search,” he said.

“There is a high level of job dissatisfac-tion, but many will wait until globalmarkets show sustained improvementsbefore jumping ship.”

The institutional sector is also experi-encing a shortage of skilled workers due toglobal pressures with demand increasingby up to 15 per cent, he said. Barbaroadded that wage pressures remained inthose positions, and were likely to increasein the long term. The Queensland floodshave also made employers cautious aboutrecruiting staff, doubling the average lead-time from six to 12 weeks, he said.

Tower shareholders approve Dai-Ichi takeoverTOWER Australia’s non-Dai-Ichi Life shareholders have votedoverwhelmingly in favour of a scheme of arrangement wherebyDai-Ichi would acquire all ordinary shares in Tower Australia thatit does not already own.

In a statement to the Australian Securities Exchange (ASX),Tower stated that it would apply to the Federal Court forapproval of the scheme.

Subject to that approval, non-Dai-Ichi Life shareholders wouldthen be entitled to $4 cash per share, expected to be paid on11 May, Tower stated.

This represents a premium of 46.5 per cent to the ASX clos-ing price of Tower Australia shares on 24 December 2010, the

last day of trading before the Dai-Ichi Life offer was announced,according to Tower.

More than 97 per cent of non-Dai-Ichi Life shareholdersand 99.78 per cent of total shareholders voted in favour of theresolution, according to Tower.

The proposed ownership change would add to the strengthof the company, expanding services to customers and providingmore opportunities for the business and its staff, said Towerchairman Rob Thomas.

Dai-Ichi Life intends that the Tower board remain unchanged,although Dai-Ichi Life may add one of its own directors to theboard, he said.

FirstChoice partnerswith XPLANBy Milana Pokrajac

COLONIAL First State’s FirstChoice platform hasembarked on a joint development with IRESS’ XPLANsoftware, which the two companies said would reduceapplication turnaround time for advisers.

With the new deal between IRESS and CFS, finan-cial planners can automate the production ofFirstChoice applications which, when submitted toCFS, will generate real-time account numbers linkedimmediately to clients in XPLAN.

Following adviser demands in recent years, majorfinancial planning software developers have beenfocusing on speeding up application processes andreducing paperwork for financial advisers when itcomes to servicing clients.

“This solution provides advisers with a more effi-cient process that removes duplication of data entryand can significantly reduce the risks associated withmanual handling of paperwork,” CFS general managerproduct and investment services, Alan Kenny said.

According to IRESS managing director, AndrewWalsh, the main benefit of this integration was theability to open investment and superannuationaccounts much faster.

“This integration with Colonial First State allowsadvisers to speed up the investment applicationprocess by supporting real-time submission of pre-validated application data,” Walsh said.

“The loop is closed in the advice platform by auto-matically linking the account number to the clientrecord,” he added.


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News

Fundies uncertain about fee structuresBy Milana Pokrajac

CERTAIN fund managersappear to be unclear about allthe intricacies of their own feestructures, making it difficult forboth advisers and investors toensure they are in line withinvestment goals, according toMorningstar.

The researcher assessed 82investment strategies during itsrecent review of large-capAustralian share funds, 18 ofwhich employed some form ofadditional performance-related charge. Only two ofthese 18 funds employ thesame formula for measuringperformance fees.

According to Morningstar’sBest Practice in Managed FundPerformance Fees report, thelack of consistency in perform-ance fee structures stems fromthe corresponding lack of “any

clear regulatory guidelines as tohow the complex componentsof the performance fee struc-ture should be displayed”.

This, in turn, made it muchmore difficult for investors tocompare funds, the researcherstated.

Morningstar broke down atypical performance fee into itsessential components and

calculated the impact of differ-ent fee structures on investors’funds over a decade.

“One of the highest impactswas the benchmark used. So ifyou’re using an absolute bench-mark, if you’re saying ‘any posi-tive performance – we will takea performance fee’, that is obvi-ously the biggest performancefee,” said investment analyst

Tom Whitelaw. If the performance fee of 20

per cent was used on $100,000over the decade, the differencebetween absolute and index-linked benchmarks could be upto $46,000 over 10 years.

“A number of fund managersalso appear not to fully under-stand all the implications oftheir performance fee struc-tures,” the report stated.

In order to avoid being over-charged, advisers and investorsneed to ensure that any perform-ance fee is benchmarked to anappropriate index, and look fora low base fee – as it is a constantcost regardless of performance,according to Morningstar’sreport.

“Ensure that the fundmanager has to beat a reason-able hurdle before starting toaccumulate performance fees,”the researcher suggested.

By Chris Kennedy

THE average time for complaints at theSuperannuation Complaints Tribunal tobe resolved has risen to 302 days in thecurrent financial year, underminingconfidence in the nation’s superannua-tion system, according to the OppositionSpokesman for Financial Services,Mathias Cormann.

This is up from an average of 256 days ittook to resolve complaints in 2009-2010 and235 days in 2008-2009, according to infor-mation provided by Assistant Treasurer BillShorten in response to a question on noticein the Senate.

The increase comes despite the totalnumber of complaints lodged with the

Tribunal decreasing during the same timeperiod, Cormann stated.

Cormann called on Shorten to fix thedelays, as well as the issue with Australiansbeing overtaxed for unintentionally breach-ing contributions caps.

“Superannuation is the cornerstone ofAustralia’s retirement income policy.Australians must have timely access to anyprocess to resolve their complaints whenproblems arise. Otherwise they will losefaith in the system,” he said.

“These delays in getting a decision areimpacting on people’s capacity to plan fortheir retirement. It is time Bill Shortenstarted to focus on doing the job he’s gotrather than spend all his time chasing thejob he wants,” Cormann said.

Insurance salesremain subduedBy Caroline Munro

INFLOWS into the life insurance riskmarket grew 12.5 per cent in 2010, althoughnew premium sales continued a pattern ofmarginal growth, according to Plan for Liferesearch.

All companies surveyed experiencedincreased inflows in 2010 from $8.3 billionto $9.4 billion, with Tower (31.5 per cent),AMP (26.4 per cent), AIA Australia (19.1 percent), BT/ Westpac (9.7 per cent), OnePathAustralia (9.4 per cent) and NationalAustralia Bank/MLC (8.8 per cent) achiev-ing the highest growth rates. However, newpremium sales were up just 0.4 per centover the period, although Tower’s sales wereup 30.5 per cent, followed by AMP (13.8 percent) and AXA Australia (7.7 per cent).

The individual risk lump sum marketcontinued to experience steady and solidgrowth due to unabated growth in thehousing market, Plan for Life stated. Thissector saw premiums increase by 10.2 percent year on year, with AIA experiencinggrowth of 19.9 per cent, followed by Zurich(13.1 per cent), Tower (11.1 per cent) andOnePath (11.0 per cent). However, salesincreased by only 3.2 per cent over 2010,with AIA (22.9 per cent), AMP (16.6 percent), OnePath (11.2 per cent), Suncorp (9.6per cent) and AXA (8.6 per cent) reportingthe highest growth.

Inflows for the individual risk incomemarket grew 10 per cent over the year, withBT/Westpac (21.3 per cent), AIA (19.2 percent), OnePath (15.3 per cent), Zurich (11.5per cent) and CommInsure (10.6 per cent)the best performers. New risk incomepremium sales were up slightly by 2.2 percent year-on-year. AIA (39.5 per cent),Macquarie Life (26.7 per cent), OnePath(13.6 per cent) and AXA (13.0 per cent)reported significant increases, Plan for Lifestated. However, it noted that AMP andNational Australia Bank/MLC saw a declinein sales of 14.1 per cent and 11.5 per centrespectively.Mathias Cormann

Super complaints taking too long

Self-managed superannuation funds(SMSFs) represent the fastest-growingsegment of the Australian financial serv-ices industry, largely because they are

perceived as offering their trustees a greatermeasure of control over their destinies thanwould be the case if they remained membersof an industry fund or a retail master trust.

Among the attractions in establishing SMSFs isthat they are allowed to operate under a numberof different rules. In addition, SMSFs are regulat-ed by the Australian Taxation Office (ATO),whereas all other funds answer to the AustralianPrudential Regulation Authority (APRA).

All Australian superannuation funds arecovered in broad terms by the SuperannuationIndustry (Supervision) Act (SIS Act), but as thismonth’s Federal Government decision withrespect to compensation relating to the collapseof Trio Capital has made clear, SMSFs do notenjoy the same standing as APRA-regulatedfunds where Part 23 of the SIS Act is concerned.

The key element separating SMSFs fromconventional superannuation funds is thatAPRA-regulated funds are ‘equitably’ levied topay for the compensation that will ultimatelybe delivered as part of the Government’s deci-sion regarding the Trio Capital collapses.

Of the 690 direct investors in Trio Capital, 285are understood to have been SMSFs. However,SMSFs fall outside the compensation schemebecause, by their very nature, they are notsubject to the annual levies imposed on conven-tional superannuation funds to cover the like-lihood of fund collapses.

Indeed, the explanatory documentation relat-ing to the Commonwealth legislation is quitespecific. It states: “The Levy Act allows theCommonwealth to set a maximum andminimum levy amount. The minimum andmaximum levy amounts were introduced todistribute the levy burden in an equitablemanner, whilst ensuring that it is administra-tively efficient to collect.”

It goes without saying, therefore, that in the

absence of SMSFs being appropriately levied,APRA-regulated funds would strongly object tothe Assistant Treasurer and Minister for Finance,Bill Shorten, extending the Trio/Astarracompensation arrangements to SMSF trustees.

The likely objections of the APRA-regulatedfunds become more understandable when theamounts levied by the Government are under-stood.

According to the explanatory documentationattaching to the legislation, in the 2002-03 finan-cial year, the Minister for Revenue and Assis-tant Treasurer, Helen Coonan, made 543 deter-minations to grant financial assistance underPart 23 of the SIS Act.

The documentation said the total amount offinancial assistance granted was $22,580,281, witha further 79 determinations, granting $6,419,568being made in the 2003-04 financial year.

It said the Superannuation (Financial Assis-tance Funding) Levy and Collection Regulations2005 would recoup these amounts, as well as$3,505,549 of financial assistance granted in2001-02 but not recouped under the Superan-nuation (Financial Assistance Funding) LevyRegulations 2003.

Thus, if SMSF trustees wished to be compen-sated in the same manner as those within affect-ed APRA-regulated funds, it is clear that theSMSF sector would be required to embrace theimposition of a levy.

In the absence of a levy and consequentinclusion in Part 23 arrangements, SMSFtrustees and their advisers were told by Shortentheir best course of action would be via theFinancial Ombudsman Service.

One media outlet quoted Shorten as saying:“If people wish not to operate under those SMSFregulations, they’re free to become members ofthe APRA funds.”

This, however, did not dissuade the Self-Managed Superannuation Professionals’ Asso-ciation of Australia (SPAA) from calling forSMSFs to be accommodated.

Commenting to Money Management last

week, SPAA chairman Sharyn Long acknowl-edged that SMSF investors had more controlthan those in large super funds, but argued thatshould not mean they were forced to “turn to apotentially protracted and expensive courtprocess to seek redress in cases of fraud”.

Similarly, Small Independent Superannua-tion Funds Association (SISFA) director AndrewCullinan said he felt disappointed by the deci-sion to exclude SMSFs from compensation.

“The basis for exclusion seems to be becausethey have a direct control over their investmentbase,” he said.

“It’s splitting hairs. People have to invest theirsuperannuation somewhere, whether it is amainstream fund or a SMSF, so that’s the choiceyou have to make.”

He said that if the Government made a deci-sion to compensate, it should cover all thoseinvolved, regardless of the vehicle they wereinvesting through.

However, in the absence of SMSFs trusteesagreeing to be subjected to the same levies asAPRA-regulated funds, the Government seemshighly unlikely to be moved by pleas for equaltreatment.

Long said that the SPAA had used its submis-sion to the Cooper Review to argue for SMSFtrustees to be subject to the same industry-funded financial assistance available to APRA-regulated super funds.

The SPAA submission acknowledged that ifSMSFs were going to participate in such ascheme, SMSFs would need to participate in anappropriate portion of the funding.

While neither the Cooper Review findingsnor the Government have seen fit to specifical-ly respond to the SPAA proposal, it seems thatthe price of accessing Part 23 compensationarrangements might add significantly to thefixed costs of running an SMSF.

The anecdotal evidence suggests that manySMSF trustees would back themselves as beingsmart enough to avoid the likes of Trio andAstarra.

InFocus


Some trustees have called for SMSFs to be included in the compensationarrangements relating to the Trio Capital/Astarra collapse but, as Mike Taylorwrites, a high price will have to be paid.

Australian householdexpenditure:

Source: IBISWorld

Taxes and socialcontribution

6.6%Savings

14.4%Capital related

What’s on

HOUSEHOLDSNAPSHOT

Successfully Selling Fee forService9 May190-200 George St, Sydneywww.fpa.asn.au

Investor Roadshow – SMSFs10 May–8 JuneNationalwww.asx.com.au/resources/calendar.htm

Money Management FundManager of the Year Awards26 MaySheraton on the Park, Sydneywww.moneymanagement.com.au/FMOTY

Financial Ombudsman ServiceNational Conference2 JuneMelbourne Convention andExhibition Centrewww.fosconference.org/fos/

FINSIA – A blueprint for ESG 17 MayBlake DawsonLevel 36, Grosvenor Place225 George Street, Sydneywww.finsia.com

13.2%

8.9%Financial and insurance

services

12.4%Rent

16.8%Non-durables

27.7%Other

Be careful what you wish for…


SMSFs

SELF-MANAGED superannuationfund (SMSF) advisers are facedwith a number of concerning

issues, but the excess contributionstax (ECT) has been causing the worstheadaches for a couple of years now.

The issue has become more prominentin the media in recent months, as thenumber of breaches has dramaticallyjumped since the lowering of the contri-butions caps and the 46.5 per cent taxpenalty has become more commonplace.While the ECT potentially affects all supermembers as well as SMSF trustees, it hasbeen argued that SMSFs are more at riskbecause trustees and members are moreengaged with their super and are morelikely to take advantage of opportunitiesto boost their retirement savings throughcontributing.

National technical director of the Self-Managed Super Funds Professionals’Association of Australia (SPAA), PeterBurgess, says the ECT is the most signifi-cant issue faced by the super and SMSFsector, exacerbated by the halving last yearof the contributions caps. He says theSPAA believes that not only are the contri-butions caps too low, but the complexityof the contributions rules are leading tomany people inadvertently breaching thecaps and incurring significant ECT bills.Burgess adds that the severity of the taxpenalties do not fit the crime.

Cavendish Superannuation SMSFspecialist executive David Busoli thinks thatthe ECT penalties are targeting the wrongpeople, and describes the penalty regimeand its implementation as “appalling”.Busoli says the Treasury is trying to dimin-ish the significance of the issue when in factthe strict ECT penalties are affectingmembers and trustees across the superan-nuation and SMSF sector.

“And for those that are hit, many ofthem are hit unbelievably hard for what isa relatively minor transgression,” he says.

BT Financial Group senior manager oftechnical consulting, Bryan Ashenden,says the number of excess contributionsnotices sent out by the Australian Taxa-tion Office (ATO) in the 2009-2010 finan-cial year was 65,733 – up from 28,291 in

the previous financial year. However,Ashenden says it is interesting to note thatthe average amount by which people hadbreached their caps had actually fallen.

“The quantum of each breach is about40-45 per cent lower,” he says, assumingthat the reason may be because thebreaches are more likely inadvertent orbeyond the trustee or super member’scontrol. He suggests that it may simply

come down to timing issues whereby theemployers may contribute at differenttimes in the year, perhaps triggering abreach by making two contributions inone financial year.

Burgess says the sheer number ofbreaches is concerning, and yet the ATOis very limited in its ability to showdiscretion. While there are no availablestatistics to quantify how much people

have actually been taxed as a result ofECT, he says a conservative guess wouldbe about $20 million.

“It’s just the sheer number of assess-ments that we’re seeing,” he says. “And inmost cases we’re not talking about a fewdollars – the amount of tax concern runsinto thousands of dollars.”

Aside from the loss of retirementsavings through the ECT, the lowered

Continuous tinkering with the rules relating to self-managed super funds (SMSFs) andsuperannuation in general is causing serious concerns for advisers and inflicting draconianpenalties on investors, writes Caroline Munro.

Going to excess

• Many clients are being caught out by theexcess contributions tax (ECT).

• Industry figures believe the ECT targetsthe wrong people and is unnecessarilypunitive.

• Those who breach their caps are advisedto appeal to the ATO for discretion.

• The industry is urging the Government toreview the legislation around the ECT.

Key points


SMSFs

contributions caps alone have resulted inan incredible loss of money to the SMSFsector, according to the Russell Invest-ments/SPAA inaugural annual SMSFstudy, conducted by CoreData/brand-management. The survey found that thelowered concessional contributions capshave resulted in a loss of $15.1 billion, asaround half of SMSF trustees surveyedstated they would have contributed onaverage $72,704 each to their SMSF if thecontributions caps were raised.

Lack of discretionBurgess says although those that inadver-tently breach their caps have the avenueto apply to the ATO for discretion, in themajority of cases the ATO is not able todo so. Tax Commissioner Michael D’As-cenzo, speaking at SPAA’s recent annualconference, admitted that the gap for theATO showing discretion was very narrow.He said the ATO’s hands were tied and itwas now an issue for Treasury.

Ashenden says as a general rule theATO will show discretion if the excesscontribution results in something that thesuper member or trustee does not haveany control over. However, Busoli felt thatthe ATO actually did so in a very smallnumber of cases.

In certain cases where it was obviousthe contributions breaches were beyondthe trustee or super member’s control, theATO was adamant that it would not showdiscretion, says Busoli. One of the exam-ples he gives is that of a doctor who worksfor three hospitals and gets $100,000 fromeach employer and a superannuationguarantee contribution of $9,000 fromeach hospital. In this case, the employercontributions would be $2,000 over thecurrent cap. Busoli explains that neitherthe doctor nor the hospitals can contractout of that agreement, and yet the ATOmade it clear they would not be able toexercise discretion in this instance.

“Pretty much the only situation whereI’ve seen the ATO exercise discretion iswhere you have an account being rolledover from the UK, which is subject to thenon-concessional caps and there hasbeen a currency fluctuation in theprocess,” he says.

D’Ascenzo noted at the SPAA confer-ence that only 8 per cent of trustees whohad breached the caps and received anassessment notice had applied to thecommissioner for discretion. Ashendensays it may be because when people got atax bill they simply paid it because theythought they had no choice and did notrealise they could apply for discretion.

“A large part of it is because peoplearen’t advised,” he says.

However, Busoli believes that the low

numbers are a result of the general reali-sation that most applications would beunsuccessful.

Macquarie Adviser Services technicalmanager and SPAA director, DavidShirlow, says the small number of appli-cations for discretion is surprising consid-ering that a high number of breaches weredue to incorrect reporting.

“You would expect that in those sortsof cases people would be applying,because it’s not so much a matter ofapplying for discretion as making surethat the records are corrected,” he says.

He adds that although the ATO’s abilityto show discretion is very limited, somecases where it has been able to do so havebeen surprising and he urged people totake a chance and apply anyway.

Shirlow and Burgess say that thenumber of excess contributions assess-ments issued by the ATO is likely toincrease in coming years, especiallygiven that the 2012-2013 financial yearwill involve a halving of the caps forpeople aged 50 or more, and for othersaged 50 or more there will be a $500,000threshold.

“That in itself is extremely complicat-ed,” says Shirlow. “It will really increasethe number of circumstances wherepeople get it wrong.”

Lobbying for changeThe SPAA – along with other organisationslike the Tax Institute and the NationalInstitute of Accountants – has been activein not only lobbying the Government toincrease the contributions caps but tointroduce a fair solution to the ECT issue.Burgess says the limited cases in whichthe ATO can show discretion point to theneed for legislative change. The SPAA hasput forward submissions to Treasurysuggesting a refunding solution that willallow clients, as soon as they’ve realisedthey’ve gone over the cap, to go to theirfund and ask for a refund of the excess,he says.

“We’re not suggesting that they get offscot-free – we are suggesting that therewill be an interest or penalty rate chargedon that excess for the period that it wasin the fund. But that penalty rate wouldbe significantly less than what we’vecurrently got, which is the 46.5 per centtax rate,” Burgess explains.

He says the suggested penalty wouldbe much more suited to the crime and thepenalty would be sufficiently high to deterpeople from deliberately exceeding thecap. Burgess says there is no way ofknowing whether the SPAA’s refundingsuggestion is palatable to Government,because the SPAA has not yet received aresponse from Treasury.

Busoli is pleased that the industry isfinally getting traction in the media on anissue that has been of concern for the lastcouple of years.

“Now it is getting some attention andit is time for the politicians, who are nolonger in election mode and are gettingdown to work, to listen to this,” he says.

“The Government is always talkingabout how it wants to increase the savingsof retirees, yet they are hitting them withthis horrendous tax over relatively smallsituations. This is a straight tax grab andthis hasn’t received the right attentionbecause there have been so many otherthings that the Government has been

focused on – it deserves their attentionand furthermore it should be looked atretrospectively.”

Client understanding of the issueFund managers and super providers haveattempted to help advisers deal with thisissue by developing super contributionstrackers and other simple tools to helpthem compile all the available informa-tion needed from clients. But what theycan provide in terms of trackers is limitedto individual funds, and in most cases theadviser is reliant on the informationprovided by their clients.

Busoli says things like super trackersare essential, even if they only trackcontributions to a single fund. However,it is also a matter of bringing a client’sthinking in line with the severe reality ofthe situation, he asserts. Clients may beunder the misapprehension that smallbreaches of a few dollars are insignificant,says Busoli.

“If you were a client, how could youthink that a $10 mistake could incur a$140,000 tax bill?” he says. “You wouldn’tthink that was reasonable and you would-n’t give it any credence.”

Busoli says communication becomeseven more difficult between advisers andclients when clients do not realise thatcertain things even constitute contribu-tions, such as paying an expense of thefund or improving an asset that the fundowns.

The Russell survey revealed a knowl-edge gap in terms of what SMSF trusteescould and could not do, and yet 90 percent of trustees rated their own knowl-edge highly, according to Russell Invest-ments managing director for retail, Patri-cia Curtin.

“We do have a segment that is very welleducated, but there is a knowledge gap interms of regulatory change,” she says.“Some of the mismatch relates to whatare their greatest challenges – advisers seethat compliance and adhering to regula-tory change are the greatest challenges,whereas trustees would see sourcing goodadvice as their greatest challenge.”

Considering 42 per cent of respondentswere unsure of their investment goals, “weneed to ensure that there is more scienceand less art in SMSFs”, she says.

Professional indemnity claimsRelationship building and communica-tion between clients and advisers istherefore essential. But even then, asAshenden points out, excess contribu-tions may just be a result of timingissues with employers’ contributions

Continued on page 15

“The Government is alwaystalking about how it wants to increase the savings ofretirees, yet they are hittingthem with this horrendoustax over relatively smallsituations.” - David Busoli

Peter Burgess

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SMSFs

and it may be a good idea for advisersto recommend leaving a buffer if thereis some uncertainty.

“If you leave a buffer you reduce thepossibility of the client breaching theircaps, but they also lose out on oppor-tunity,” he says. “ That’s real ly acost/benefit analysis, and it is some-thing that advisers should discuss withtheir clients.”

Burgess acknowledged that individ-uals are increasingly leaving a buffer,but this practice is problematic.

“What we are seeing at the momentis that individuals, practitioners as wellas clients, are so nervous about breach-ing the caps and the severity of thepenalty that applies that they are delib-erately underfunding and staying wellbelow the cap,” he says. “That is aproblem because we’ve got people whoare underfunding, and the caps are lowenough as they are.”

Burgess suggests that advisers takethe time to make sure they are awareof the contributions their clients havemade in the current financial year aswell as the two previous years, goingeven further back should there beconcer ns about the br ing for wardrules.

The whole point of making contribu-tions is to maximise savings, and somehave questioned whether leaving a

buffer exposed advisers to the risk ofclaims if the buffer were ultimatelyunnecessar y. Ashenden says thereshould be no grounds for claims as longas leaving a buffer was discussed prop-erly between an adviser and client, andagreed upon by the client.

In any case, excess contributions haveresulted in claims and are an issue thatthe professional indemnity insurers arepaying more attention to, says Busoli.

“The professional indemnity insurerswill be looking at this one very careful-ly, because they weren’t expecting this– they’re used to dealing with producttype claims,” he says.

Busoli adds that this different type ofclaim was unexpected and significantfrom a professional indemnity insurer’sperspective.

“Some of the claims are huge,” hesays, referring to a recent case where acl ient incurred a $130,000 tax bi l lbecause of a $300 error.

“And that’s the sort of thing thatpeople are being hit with – I find itextraordinary,” says Busoli.

Burgess agrees that there has been anincrease of claims regarding excesscontr ibutions and he knows ofinstances where advisers have compen-sated the client. He says it is thereforecritical that advisers find out as muchas they can about what contributionshave been made, adding that advisersshould not rely on the information from

the ATO. ATO records are not always up-to-date due to delays between the timefunds have to lodge their contributionsinformation to the ATO, and when theATO records it, he explains.

“The adviser either has to seek thatinformation from the client’s fund orthey have to re-create and keep thoserecords themselves for their clients,”says Burgess.

Confidence in SMSFsCurtin says advisers are mostly opti-mistic about the future demand foradvice around SMSFs and expecteddemand to increase – 35 per cent of

advisers in the Russell survey felt thatdemand would increase dramatically.However, she says, there are severalconcerns that advisers have aroundexcess contributions as well as the rulesaround borrowing within super.

Tinkering with super by the Govern-ment has impacted investor confidencein the retirement savings system, saysBurgess.

“We know consumers don’t like to seefurther tinkering of the rules, becauseit takes away from their confidence inthe system,” he says.

The Russell research revealed thatthree in four SMSF trustees were confi-dent in the superannuation system as avehicle for retirement savings. However,advisers and trustees were equallyfearful of legislative change and theprospect of Government tinkering withsuper – advisers were concerned aboutcompliance obligations and regulatorychange, while trustee apprehension wasleading them to hold assets outside ofsuper.

Curtin says that some of the regula-tor y change may sti f le growth andimpact on consumer trust.

“ To ensure that we provide foradequacy in retirement, we do need toensure that we keep canvassing – fromthe regulatory point of view – to ensurethat people save within the superannu-ation environment, rather than lookingto save outside,” she says. MM


Bryan Ashenden


SMSFs

A recent Russell Invest-ments self-managed super-

annuation fund (SMSF)survey has revealed there is a lowappetite for borrowing within super.

The survey revealed that three-quarters of trustees (75.6 per cent)have not used the new borrowingrules and do not intend to do so. Thesurvey report noted that it was possi-ble there was a low appetite forborrowing via an SMSF due to strictenforcement of the new borrowingrules.

There is also some confusion as towhat actually constitutes an improve-ment to a property held within superthat is geared, says Macquarie AdviserServices technical manager, DavidShirlow. Shirlow says that in theexplanatory memorandum thataccompanied the legislation there wasa strong indication that the intentionof the legislation was to preventtrustees from spending fund moneyto improve a property.

“On the one hand you have policythat seems to allow borrowing toacquire real estate in super funds, buton the other hand you have thisrestriction that, for practical purpos-es, is making things difficult,” Shirlowexplains. “We need clarity about

whether improvements can be made,or we need a change of legislation.”

Shirlow assumes that the intentionis to stop trustees from increasing thevalue of the property, which is subjectto a loan. He explains that the otherparty involved is obviously the lender.

National technical director of theSelf-Managed Super Funds Profes-sionals’ Association of Australia(SPAA), Peter Burgess, agreed it is diffi-cult to follow the rationale behindsome of these borrowing within superrules when it came to property.

“I think what they were trying to getat is that the lender then has moreequity to call on in the case of adefault,” he says. “But it’s very diffi-cult to follow that argument, andcertainly the industry has been veryoutspoken on this point. It just doesnot make sense that you cannotimprove an asset once it’s in one ofthese [borrowing] arrangements. It’scounter to what people should betrying to do with these assets.”

Burgess notes that the AustralianTaxation Office’s (ATO’s) viewpoint isthat it doesn’t matter what the sourceof the money is when it came tomaking improvements – it was simplynot allowed.

“The end result is that you’ve

improved the asset, you thereforehave a new asset, and that’s notallowed under these provisions,” he adds.

Burgess suggests that trustees andtheir advisers think carefully beforeentering into a borrowing arrange-ment, especially when it came to aproperty that may need repairs atsome point over the life of the loan.

Cavendish Superannuation SMSFspecialist executive, David Busoli, saysthe ATO’s guidelines around theborrowing rules are proof enough thatthe restrictions are “ridiculous”. Forexample, if a house were burnt down,the rebuilding of that house wasconsidered an improvement andtherefore was not allowed under therules, he explains.

Burgess agrees that the rules are sostrict as to be ridiculous, although inthe case of properties affected by anatural disaster the ATO recentlystated it would be flexible.

Busoli says that compared to theexcess contributions issue, the ATOwas more willing to be flexible whenit came to breaches of the borrowingrules, adding that in fact its limitedability to show discretion in the caseof excess contributions was “out of character”. MM

Low appetite forborrowingNext to the excess contributions tax, borrowing within super isone of the most concerning issues currently faced by self-managed super fund (SMSF) advisers, writes Caroline Munro.

The hedge fund investment model isnot broken, and it did not fail inthe market turmoil of 2007 and2008. Yet many investors have

exposure to products that might leave themwith the distinct impression that their hedgefund investments did fail.

There are two issues that need to beconsidered. One is the investment model,and the other is the product model. In otherwords, how did the underlying investmentsperform through the global financial crisis(GFC), and how was this affected by the waythe investments were delivered?

The performance of the investmentmodel can be assessed by looking at thebroad aggregates that are provided by differ-ent firms. In this case I have chosen the DowJones Credit Suisse Hedge Fund Indexes.This is not about individual managers, it isabout the investment model – so looking ataggregate level data is appropriate.

If we can conclude that the investmentmodel did not fail, then a conviction tonever invest in hedge funds again shouldbe replaced by a determination to set higherproduct design standards next time.

Assessing the investment modelFigure 1 shows the performance of the DowJones Credit Suisse Hedge Fund Index(Hedge Fund Index) relative to the S&P 500Total Return and the All Ordinaries Accu-mulation Index (AOI). The Hedge FundIndex and the S&P 500 are in USD while theAOI is in AUD. Figure 2 shows the same data

OpinionHedgeFunds


Source: www.hedgeindex.com. (1 Dec 1993 = 100)

Figure 1 Hedge Funds, S&P500, AOI – Dec 93 to Aug 2010

If it ain’t broken…Having sustainedenormous criticismfollowing the GFC,hedge funds are stillstruggling to garnerfavour amonginvestors. RichardKeary explains whythe sector did not fail.

Continued on page 18

Figure 2 Hedge Funds, S&P500, AOI – Dec 06 to Feb 2011

Source: www.hedgeindex.com (1 Dec 2006 = 100)

for the period starting December 2006 tocapture the GFC and recovery. Notwith-standing the resilience of the Australianshare market, the Dow Jones World IndexHedge Fund Index has produced similarreturn at observably lower volatility in bothcases. One can also observe that the lossesin 2008 were smaller for hedge funds andthe recovery faster. Neither the S&P500 northe AOI have recovered their 2007 peaks.

Given that equity markets are the maindriver of risk and return in securities port-folios for most Australians, it is worthwhilelooking at the performance of equity hedgefunds compared to the equity indices.

Figures 3 and 4 show the cumulativeperformance of the S&P 500 Total ReturnIndex and the Equity Long/Short hedgefund index. Given the high correlationbetween equity markets, the S&P500 TR canbe used a proxy for equities in general. Overboth time frames it is hard to argue that theS&P500 TR is a better investment thanEquity Long/Short hedge funds, which havedelivered better return at much lowervolatility.

Managed futures is a hedge fund strate-gy that is probably the standout for itssuccess over the past three years – includingthe depths of the GFC. Managed futuresmanagers (also called commodity tradingadvisers) follow a systematic approach toinvesting that is a pure distillation of themomentum factor. That is, they look fortrends and are indifferent to whether thosetrends are up or down.

In 2008 when the trend in most assetprices was down, Commodity Trading Advi-sors (CTAs) generally identified that trendand positioned themselves accordingly. Asa result, CTAs as a group posted positivereturns. This is not a failed investmentmodel; if anything, it is a validation of whyinvestors need to incorporate hedge fundsinto their investment universe.

Product failuresSo if hedge funds did so well why are theremany investors feeling rather let down bythe whole experience? I believe that thehedge fund product model was the sourceof problems and therefore should be thefocus of learning. But firstly, what do I mean

by the product model?The way the investment is delivered is

referred to as the product model. Productfailure can mean many things but oneexample is when the product itself causes anotherwise temporary loss to becomepermanent. If we investigate this line ofthought we come to the intersection if lever-age and liquidity.

Asset liability mismatchThe Australian market and its platformprocessing paradigm demands frequenttransactions (product liquidity). Productvendors took a punt that they could offerproduct liquidity that was better than theliquidity in the underlying investment. Theyrelied on using cash inflows to satisfy theliquidity requirements of a small number ofinvestors. When things were good thissystem worked well. When investorspanicked and redemption orders piled up,the redemption orders could not be satis-fied from inflows – and the underlying assetwas not liquid enough to sell in an orderlyfashion. As soon as investors realise this theyknow they have to be at the head of thequeue, so a flood of redemption orders comein and it becomes impossible to satisfyinvestors. This results in one of twooutcomes: the fund is frozen until the under-lying assets are liquid enough, or the fundis liquidated. There is nothing in thisscenario that says the underlying investment

was bad. Yet the investor would have thedistinct impression that something hadreally gone wrong – and it did, in the productstructure.

Using leverage to increase assets undermanagement One must applaud the business merit of thisstrategy. Take $100 of assets and turn theminto $200 of assets by borrowing. Chargingfees on $200 of assets is a good deal for themanager (I am being facetious, if it was notobvious). The problem is that the lendertakes a charge over the equity capital in thestructure provided by the investors. If theunderlying assets are falling in value andthey are not liquid enough to be used todeleverage the structure, then the lender canrefuse to return the equity to investors untilall the assets are sold and the loan repaid.In the case of some of the assets that cantake years. There is nothing in this scenariothat says the underlying investment was bad.This is leverage at work.

Having pointed out some product flaws,I would like to return to a more optimisticnote and identify what investors should lookfor in a product.

• Simplicity – The value proposition of afund has to make sense and one needs tobe able to see how that value propositionflows through to the investor.

• Liquidity – Liquidity at the fund level(ie, the liquidity offered to you the investor)and the liquidity of the underlying invest-ment should be consistent. Investors shouldaccept that not all investments can be deliv-ered on a daily basis.

• Transparency – The ability to ask fordetail about the underlying investments isan important monitoring tool to managethe potential agency risks of using fundmanagers. This does not mean you need tosee holdings every day, it does mean thatyou need to ask the manager if they willshow you holdings (even on a delayed basis)if you asked to see them (ie, you are testingif the product provider themselves hasnegotiated the right level of transparency).

• Value for money – Understand howmuch of the performance is being takenaway in fees.

I firmly believe the hedge fund invest-ment model is intact. However, over the pastdecade of being involved in the hedge fund

industry in Australia, I have said many timesthat just because it is called a hedge funddoes not mean it is hedged. There is nodoubt people have made investments in so-called hedge funds where the investmentsdid not perform as expected. This is not thesame as saying that the hedge fund invest-ment model is broken.

Why is this important now?Are you asking yourself, ‘why would Ibother?’ We don’t often witness secularchanges in investment markets. Seculartrends are by definition long and there-fore turning points are infrequent. Thereis little consensus about the path of infla-tion or deflation from here over thecoming five or more years. There arecogent arguments that support an infla-tionary world. After all, inflation is andalways is a monetary phenomenon. Withthe amount of money that has beencreated, inflation must be certain. Or is it?The Federal Reserve, through its quanti-tative easing programs, seems to be moreconcerned about fighting deflation. Eitherway, neither deflation nor inflation is goodfor equities. Look at Japan since 1990 forthe deflationary experience.

The 1960-1980 period in the US showsthe ravages of inflation on equity marketmultiples. As expectations for higher infla-tion and higher interest rates becomeimpounded in people’s beliefs, the multi-ple they will pay for future earnings falls.Even if earnings rise in a nominal sense themultiple is crushed and a broad index canbe trapped in a sideways range for years.There are some business models that willbe able to weather a higher cost of capital.There are business models that won’t. Goodinvestors will be able to distinguish betweenwinners and losers, whereas the benchmarkindex by definition contains all the winnersand losers.

The arithmetic of a static allocation toequity market beta may not make sense ifindeed we are facing either an inflationaryor deflationary future. This is a good timeto think about hedge funds but it is not thetime to ignore the product lessons learnedover the last few years.

Richard Keary is the CEO of FRM AustraliaPty Ltd.


OpinionHedgeFunds


Figure 4 Long/Short, S&P500 – Dec 06 to Feb 2011

“ The arithmetic of a staticallocation to equity marketbeta may not make sense if indeed we are facing either an inflationary ordeflationary future. ”



Figure 3 Long/Short, S&P500 – Dec 93 to Dec 2010

Some investment professionals feelit is speculative or guesswork toattempt to identify bubbles. I haveheard it argued that one can’t time

markets, so it follows that one can’t knowwhether markets are expensive or cheap.But this does not follow.

Timing is a question of when an eventwill occur (eg, when a bubble will burst).Generally this cannot be known. But thatany bubble will burst at some time issomewhere between highly probable andcertain.

For example, most people today wouldaccept that the American and world stockmarkets became over-valued in thedotcom period, peaking in 2000. Technol-ogy stocks traded with price/earning (PE)ratios in the hundreds (and in some cases,in the thousands), stocks with no profitwere being valued as a multiple ofrevenue, and companies that changedtheir name to include ‘.com’ experiencedstrong growth in share prices even if theyhad nothing to do with the Internet.

It is utterly implausible to suggest thatthis period was not a bubble. Yet, eventhose who recognised it at the time hadno idea how long the bubble would last.Indeed, the market rose for several yearsbeyond the point where it could first bedescribed as excessive before the marketcollapsed.

We can therefore conclude that theinability to time markets is not inconsis-tent with being able to determine whenthey are dangerously over-valued.

Priority number oneIt is often said, and experience confirms,that asset allocation is more importantthan fund/security selection in determin-ing overall returns.

Consistent with this, I believe thatrecognising bubbles and taking defensiveaction is the single most importantelement in achieving superior long-terminvestment returns.

Very few financial planners are able toconsistently produce an equity return 2per cent per annum above index. Those

who could would deliver a valuableenhancement to clients’ portfolios.However an adviser who produced onlyindex-like returns on the equity portionof portfolios, but who had recognisedover-valuation and, say, halved normalequity exposure before the popping of thedotcom and global financial crisis (GFC)bubbles, would have achieved a strongerlong-term return than the adviser whoachieved 2 per cent excess, but was notdefensive at market peaks.

Surely it follows that more time shouldbe devoted to market valuation than tostock/fund manager selection.

Fair valuePresumably when one buys at ‘fair value’,it implies that one has reasonableprospects of not looking back and feelingone paid too much. Of course, no guar-antees are possible as markets can moveaway from fair value, but surely this is theessence of the concept of fair value (forcompleteness, we should add that fairvalue also implies ‘not outstandinglycheap’).

Can fair value fall by 85 per cent in 16months, and then rise by 543 per cent inthe next 15 months? If fair value could fall

by 85 per cent in a year-and-a-third, itcould be dangerous to pay fair price.Surely this would undermine any sensethat fair value is a useful concept.

This introduces the principle that fairvalue must not be volatile. As John Hussmandescribes it, valuation must be based onsmooth, low variability fundamentals.

Valuation toolsThe most commonly used tool invaluing markets is PE. Figure 1 showsthe earnings and price over the lastcentury. Price is unambiguous, but earn-ings are not. Should a robust valuationtool use actual/historical or forecastearnings?

Any valuation tool should be back-tested over very long periods, whichrequires historical data. There is a hugevolume of data for past actual earnings,whereas there is no way of knowingconsensus earnings forecasts 50 or 100years ago, hence there is no capacity toadequately test the veracity of forecastsusing them.

Further, market earnings forecasts arenotoriously unreliable, generally erringon the optimistic side. Thus, only histor-ical earnings should be used in valuationtools for whole markets (the situation isquite different with individual stocks).

Yet, even recognising that we are inter-ested in historical earnings, which of thevarious measures of earnings should weuse?

The latest historical earnings data onthe S&P 500 index website is for 30 June,2009. Standards & Poor’s (S&P) reportsthat the PE of the market on that day wasboth 23.1 and 122.4 – depending whichmethod of measuring earnings is used. Asthe higher number is more than five timesthe lower, each gives a very differentimpression of the level of the market. At aPE of 122 the US market would have beenits most expensive ever, which is surpris-ing, as this was far below the market peakin 2007.

S&P publishes ‘as reported’ earnings(ARE) and ‘operating’ earnings (OE). As

the name implies, ARE is the bottom linein companies’ published accounts – theirreported profits.

Intradaytips.com describes OE as:“Earnings without considering certainexpenses such as inventory write downs,severance pay, depreciation and amorti-sation charges, or just about anything elsethe company feels like excluding to makeits earnings look better.” While this maybe a little harsh, it contains an element oftruth. Let’s just say OE excludes certainexpenses.

OE have averaged 19 per cent higherthan ARE from 1988 through 2009. Theamount by which OE exceeds ARE followsa strongly growing trend line. Directorsare excluding more and more from theirpurported operating profits. It is difficultto suggest an explanation for this withoutreflecting poorly on the character ofcorporate America – still, readers are freeto draw their own conclusions.

Valuation models should use ARE,especially if historical back testing isdesired.

NormalisingNow we must come to the fundamentalflaw in PE as a valuation tool. Earningsare highly volatile (from here on, ‘earn-ings’ refers to ARE). S&P 500 earnings fell85 per cent from September 2007 to


TheMessenger

Avoiding ashipwreck

The bursting of equity bubbles damages investors’ portfolios, butRobert Keavney argues that with robust valuation tools, bubblescan be identified in advance – and in time to take defensive action.

“ Market earningsforecasts are notoriouslyunreliable, generally erringon the optimistic side. ”

January 2009, then grew – I mean explod-ed – by 543 per cent to October 2010.

This alone should undermine anyconfidence in PE using one year’s earn-ings as a valuation tool.

Normalising (smoothing) is theprocess used to overcome the problemsjust described. Professor Robert Shiller,author of the prescient IrrationalExuberance, used the average of the last10 years earnings in his PE model. Thissmoothed out the wild swings in earn-ings just described, resulting in a morestable and meaningful sense of fair valuefor the market.

An even smoother result is producedby using average 20-year earnings. Thesmoothest line is a trend line, but thisrequires decisions about which period touse for the trend line. Using one or twodecades of average earnings in PE modelswill produce reasonably sound estimatesof market value.

Figure 2 shows Shiller’s PE for the S&P500 over time. He calculates the currentmultiple to be approximately 23. If yourun your eye across the chart you see thatonly the market peaks of 1901, 1929, 1966and the recent period have ever exceededthis level. Using this tool and others witha demonstrable track record, suggests USshares have again become dangerouslyover-valued.

The ‘X trap’Earnings are cyclical. When they are abovenormal they will subsequently decline –and vice versa. It would seem sensible ifinvestors were only willing to pay a lowerPE multiple to buy shares when profitsare abnormally high. If, say, profits weretwice their norm, a PE of half its normwould keep prices stable and around fairvalue.

Conversely, when profits are belowaverage a higher than average multiplewould be sensible. If investors actuallyoperated this way there would be nobubbles and no busts. Equities wouldgrow steadily and profitably.

However, instead of this we fall into the‘X trap’ – extrapolation. When conditionshave been favourable and profits strong,investors extrapolate current favourableconditions into the future and are willingto pay a higher PE, justified in their mindby the future of unending profitabilitywhich they imagine.

Figure 2 shows that, in 2000 when profitmargins were unsustainably fat, investorschose to pay higher PEs than ever inhistory. Conversely, when profits were lowin the 1982 recession, investors onlyoffered the lowest PEs since the 1930s.

Hence we have bubbles, and busts. Thisis exactly what a bubble is: high multiplesof temporarily high profits.

InflationIt is often said that lower inflation justi-fies higher PE multiples. As matter of factthere is a tendency for multiples to beabove average when inflation is low.However, does not mean this is justified.

Inflation is not stable, so it fails our low-volatility test for valuation metrics.

History has confirmed this. An exami-nation of all low inflation periods whenPEs were high, shows that subsequentmarket returns were disappointing as PEseventually reverted. Low inflation doesnot justify high PEs.

The value of valuationIt is not hard to make money in risingmarkets. It would be hard not to. The bigthreat is losing it again in falling markets.

One benefit of looking for over-valu-ation is that it allows reasonable expo-sure to growth assets when valuationsare in the fair value range. One is notforced to sit in conservative portfoliosthrough the whole cycle, to defendagainst bubbles. The good news is thatbubbles are measurable, as is seen infigures 1 and 2.

However, it must be acknowledged thatdangerously expensive markets cancontinue for an inconveniently long time.The S&P 500 peaked in the dotcom era in2000, then fell until 2003. From then to

2007 the market rose, and was danger-ously over-priced for at least two yearsof that time.

Jeremy Grantham called this periodthe “greatest sucker rally in history”.That it was over-valued was ultimatelyconfirmed by the collapse during theGFC. However, two years is a long timeto maintain faith in your valuationmodels, when it is costing your clientsmoney, and competitors (and some-times even colleagues) are criticisingyou. It also requires an ability to sustainclients’ comfort with your strategyduring this extended phase.

It requires a certain patience andstrength of character to adhere to a strat-egy based on valuation for several years,while markets rise inexorably.

But then, no matter what strategy onefollows, there will be multi-year periodswhere it is not producing optimal results.The real test is long-term returns.

Looking at figure 2 makes clear that itcould easily have been recognised, beforethe peaks of 2000 and 2007, that marketswere dangerous. Identifying bubbles isthe main purpose of valuation tools. Thiscan make a considerable difference toyour clients’ returns and their satisfactionwith you as an adviser.

Robert Keavney is an industry commentator.


0

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1870 1890 1910 1930 1950 1970 1990 2010

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Source: Professor Robert Shiller, Yale University

Figure 1 Price and earnings – historical comparison

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Source: Professor Robert Shiller, Yale University

Figure 2 Shiller price/earnings ratio

Australian fund managers havebeen pioneers in the develop-ment of infrastructure as anasset class. As a result, there is a

bias among Australian investors investingin Australian infrastructure assets. Unfor-tunately, this means missing out on some98 per cent of the opportunities that worldinfrastructure markets have to offer. More-over, sticking to Australia may be a riskierstrategy than going global.

The lucky country?As with most markets – and share marketsin general – Australia accounts for a smallpercentage of the world opportunity set.Based on listed market estimates,investors who stick to investing inAustralia alone are potentially missing 98 per cent of global opportunities.

In fact, based on a broad market portfo-lio of 133 global infrastructure securitiesheld in the AMP Capital Global Infrastruc-ture and Utilities Index (a proxy for theglobal infrastructure market), in the fiveyears to February 2011, Australia demon-strated the highest annualised volatility inreturns across the countries and regions inwhich AMP invests.

There was a significantly lower level ofvolatility in the United Kingdom, Japan,the United States and Canada. Thesecountries all have fairly developed infra-structure markets – some of which arelarger than Australia’s. This is in part dueto the relatively small size of Australianmarkets. Though we have been investingin infrastructure longer than most othernations, we are still a small andconstrained market when compared withthe developed markets of the UK, Europeand North America.

When comparing volatility across coun-tries, the listed airport sector provides aninteresting example. Table 2 summarisesthe annualised volatility of eight listedairport investments in the AMP CapitalGlobal Infrastructure and Utilities Indexover five years.

Holding only Australian airport securi-ties would have exposed investors to avolatility of 33.87 per cent over the five-year period, while adding European andNew Zealand airport exposures could havehelped reduce overall volatility for an allo-cation to listed airport securities.

Investing solely in Australia exposesinvestors to more volatility based on therelative concentration in the Australianinfrastructure market. Global diversifica-tion by adding global sectors and geogra-phies with lower volatility potentially will

lower an investor’s overall portfoliovolatility.

Diversification benefitsTo achieve portfolio diversification,gaining exposure to a mix of sectors ofgeographies with low correlations amongthem generally means that returns do notmove all at once, which moderates thehighs and lows in a portfolio.

By sticking to an Australian-only infra-structure investment strategy, investors willmiss out on the diversification benefits aglobal infrastructure portfolio can provide.For example, figure 1 demonstrates thecorrelations between Australian infrastruc-ture returns and those across other coun-tries and regions in the AMP Capital GlobalInfrastructure and Utilities Index.

The data shows that for the last 10 years,Australia was correlated to the Index port-folio to a factor of 0.62, and similarly 0.60for the MSCI World index. However, lowercorrelations to the UK (0.36), New Zealand(0.35), Canada (0.18), and Japan (0.11)highlight relatively low correlations available to investors whose strategyencompasses a global portfolio of infra-structure securities.


OpinionInfrastructure

The world’s your oysterGoing global with your infrastructureinvestments can yield a more defensiveportfolio, with more stable returns and lower volatility, writes Perry Lucas.

Country/Region Annualised volatility

Australia 23.12%

New Zealand 21.96%

Europe 17.81%

UK 14.88%

Japan 14.36%

US 13.14%

Canada 13.05%

Asia ex Japan 11.70%

Source: AMP Capital Investors, based on holdings in the AMP Capital

Global Infrastructure and Utilities Index over the analysis period.

Note: Japan data is prior to market volatility from the March 2011

earthquakes.

Table 1 Annualised infrastructurevolatility – Dec 2005 to Feb 2011

Source: AMP Capital Investors, based on holdings in the AMP Capital Global Infrastructure and Utilities Index over the analysis period.

Figure 1 Infrastructure returns and geography – Dec 2000 to Dec 2010


Figure 2 Australian listed infrastructure and investment sectors – Dec 2000 to Dec 2010


Figure 3 Australian unlisted infrastructure and investment sectors – Dec 2000 to Dec 2010

Volatility Stocks held

Australia 33.87% 2

European Airports 23.95% 5

New Zealand Airports 22.73% 1

Source: AMP Capital Investors, based on holdings in the AMP Capital

Global Infrastructure and Utilities Index over the analysis period.

Table 2 Comparing volatility forlisted airport assets – Dec2005 to Feb 2011

As senior Australian executivestrooped home from Davos,there was a sense they werereturning with a far more opti-

mistic attitude than when they left for theannual talkfest at the Swiss resort. Quiteclearly there was a positive note soundedat Davos about global growth in 2011 thatwould have seemed misplaced even latelast year. Even Europe is offering a silverlining.

If that optimism proves prophetic, thencommodities – of the soft and hard variety– could enjoy one of its strongest yearssince World War II. In short, the coalesc-ing of a recovering US, rising demand forcoal, iron ore, base metals and oil, andtightening demand and supply balancesin agricultural commodities all suggest acommodities bull market in 2011.

The US Federal Reserve kicked off theyear with its Beige Book report, taking itscue from business leaders across thecountry. It’s an increasingly bright, ifcautious, picture. Critically, for acommodities-based economy such asAustralia, the Fed’s manufacturingcontacts were the most optimistic abouta US recovery in 2011.

A re-emerging US economy, which isstill the largest economy, will also be theantidote to the measures Beijing andother Asian economies may take this yearto slow their economies because of infla-tion fears – although compared with

developed economies, a ‘slow’ 8.7 per centgrowth rate for China, as predicted by theWorld Bank, remains quite respectable.

A recent article in The Economist put itbluntly – commodities are “partying likeit is 2008”. Oil prices are now tradingaround US$100 a barrel and are thehighest since October of that year. Worldfood prices are back to their peak of July2008, as is copper.

And the story is the same for iron ore –predictions of prices setting an all-timehigh in 2011, beating the 2008 record.According to a recent report, the averageannual spot market price for iron ore thisyear will rise to US$153-154 a tonne ofiron ore finds with 62 per cent ironcontent, delivered to China – exceedingthe average US$150 price in 2008. The risein commodities prices is in line with andconfirming the increase in globaleconomic growth and is not just confinedto energy and agriculture.

About US$100 a barrel now, oil hasbeen predicted by Goldman Sachs, JPMorgan and other investment banks tokeep on rising through 2011, simplybecause demand is greater than supplyas the global economy recovers. Someforecasters are predicting oil reachingUS$150 a barrel by October. One impor-tant factor that could deflate the figureover the year is if the US dollar makes astrong recovery and keeps the price ofcrude at its current level.

If the oil price does make its expectedrecovery, then supply and demand pres-sures will flow on to alternative fuelsources, such as ethanol, leading to risingprices in sugar, corn and other ethanolsources.

Then there is food and other soft andagricultural commodities, such as cotton,

which is reportedly hitting prices notreached since the American Civil War. Inrecent months, agricultural commodityprices have risen sharply in everythingfrom coffee to natural rubber. Thesehigher prices have had an impact on themargins of producers, who in turn will bepassing them on to consumers.

Indeed, food – and food security – hasbecome a hot issue in the past few weeks,starkly illustrated by the riots in Egypt andthe annual food price rises of 14 per centin India and reported shortages of staplessuch as onions and lentils there.

Recent floods in Australia and Brazil,as well as droughts during 2010 in Russiaand Argentina, only add to the scenariothat demand for food from a tighteningsupply line will cause hefty rises in agri-cultural commodity prices. It will now bea key topic at the upcoming G20 meeting.

Weather – and commodity – watcherswill be keenly scouring the northernhemisphere ahead of its spring plantingseason and looking for any unseasonalweather patterns that could disrupt foodand mineral production akin to whatAustralia has suffered in the past couple ofmonths.

Like a perfect storm, it appears the starsare in alignment for a bumper year forcommodity investors.

George Lucas is the managing director ofInstreet Investment.


OpinionCommodities

A commodities boom?

George Lucas takes a look at thecommodities market and asks if2011 will see the sector flourish.

“ If the oil price does makeits expected recovery, thensupply and demandpressures will flow on toalternative fuel sources. ”

Since Christmas, Australia hasexperienced a number of naturaldisasters such as floods andcyclones. Unfortunately, not all of

the people affected had appropriate coverin place, sparking widespread calls for areview of general insurance policies toaddress the need for greater understand-ing from consumers.

The Government has noted that differ-ent insurers take different approaches tocoverage, and that recent events highlighta lack of consumer understanding aboutwhat their insurance policy covers. Inresponse, the Government has proposeda single, standard definition of flood coveracross the insurance industry. AssistantTreasurer and Minister for FinancialServices Bill Shorten recently announced:

“In future, if the term ‘flood’ is stan-dardised across insurance policies anddefined in plain English terms, they willbe more easily understood upfront, soconsumers aren’t surprised when they tryto make a claim. These changes will helpmake sure this kind of unnecessary confu-sion and heartache about insurance poli-cies doesn’t occur following the nextnatural disaster.”

A one-page, key facts statement willalso be included in policies to allowconsumers to see, at a glance, the keyelements they are covered for. The resultof this review will undoubtedly provide

confidence for consumers as to the leveland type of cover they have in place.

Following this development for thegeneral insurance market it would bequite understandable that the same ques-tions may be asked of life insurance. Thatis, should we have standard definitionsfor income protection, trauma and totaland permanent disability products?

Over recent years there has been aproliferation of definitions in these typesof cover with innovation and competitionbringing more than 60 different defini-tions for trauma products alone. In fact,every life insurer in Australia has its ownunique trauma insurance definition.However, it could be asked whether thiscomplexity is necessary when you consid-er that more than 80 per cent of all claimsconcern four critical illness (trauma)conditions – heart attack, stroke, cancer,and bypass surgery.

The situation was similar in the UKuntil 1992 when insurers sought to simpli-fy matters by defining the 12 mostcommon conditions. Since then, the saleof trauma insurance policies hasincreased significantly year-on-year, andnow more than nine million adults in theUK (one in four) have trauma cover. Todaythe UK has 37 standard trauma defini-tions that are consistent across all lifeinsurance providers.

We should view Australia in this context

where just one in every 26 working-agepeople has trauma cover. Of our 22million population, there are less than600,000 trauma policies in force. Theunderinsurance issue in Australia is suchthat we rank as one of the most underin-sured nations in the developed world, andparents with dependants are underin-sured by $1.37 trillion, according toresearch from the Financial ServicesCouncil.

Standardising definitions in Australiais becoming a hot topic, and a popularissue for many. Riskinfo conducted anadviser poll in March 2010, where theyasked: ‘Do you support the concept ofstandardising key definitions in traumainsurance products?’ More than 63 percent of respondents wanted standardised

definitions. CommInsure, in collabora-tion with Beaton Research and Consult-ing, surveyed more than 500 advisers thismonth, with a similar amount, 56.1 percent, stating that product definitions as awhole should be standardised.

We need to ask ourselves if implement-ing clear and concise minimum benefitsthrough standard definitions, consistentwith general insurance, would improvethe understanding and confidence ofconsumers for life insurance.

There are certainly numerous poten-tial advantages of standardising traumadefinitions within Australia. Clientsreceive certainty at claim time that,regardless of what company they choseto purchase their trauma insurance policyfrom, they know the minimum definitionthey need to meet in order to be eligibleto receive a claim payment.

If the standardised definitions arereadily communicated to the public, thenwe can hope for greater understanding ofthe need for trauma insurance, andthereby increased uptake of policiesacross the board. Ultimately, this will helpreduce underinsurance.

The distribution footprint for life insur-ance in Australia is such that, of theapproximate 18,000 financial advisers inoperation nationally, just 3,000 activelyprovide life insurance solutions to theirclients. Simplifying the industry’s offer-ing to consumers through standard defi-nitions might also encourage plannerswho normally shy away from advising ontrauma insurance, and perhaps life coverin general, to discuss these products withclients.

While standardising trauma definitionshas worked extremely well in the UK, weneed to carefully examine if this is appro-priate for Australia and importantly, if itwould benefit all parties by ultimatelygenerating greater clarity and confidencefor consumers.

In order to consider the issue of stan-dardising trauma definitions we can lookto the UK example where an effectiveconsultation process to determine stan-dardised trauma definitions has takenplace. Various stakeholders are involved,with a full public consultation process,including regulators, charities, consumergroups, insurers, medical professionals,and the media.

One of the common concerns that hasbeen raised is that standard definitionscould stifle innovation. Issues such as thismust also be addressed. To counter thisview – again looking to the UK example –the industry upgrades its trauma defini-tions every three years. The Australianmarket would again need to consider itsown appropriate review cycle, particularlyto keep pace with medical advancements.

The overarching principle should begreater transparency, understanding andaccessibility for the consumer. If standar-dising product definitions, particularlyfor trauma (critical illness) policies,achieves these principles then we have aduty to take action and look to its benefitsin the future.

Tim Browne is the general manager ofretail advice at CommInsure.

OpinionInsurance


Setting appropriatestandards

Amid the heated debate about standard definitions for general insurance, Tim Browne asks whether the sameapproach should be used in the life insurance arena.

“While standardisingtrauma definitions hasworked extremely well in the UK, we need to carefully examine if this isappropriate for Australia. ”

It is no surprise that most discussionscentred on account-based pensions aretaxation driven. Predominantly the focusis on tax-free investment returns, tax-

free pensions for those at least age 60 (froma taxed source) and the salary sacrifice/tran-sition-to-retirement strategy.

Equally important are the Social Securityimplications. By understanding these impli-cations, decisions can be made and strate-gies can be implemented that could meanthe difference between thousands of dollarsof Social Security entitlements and access toa range of benefits provided through Govern-ment concession cards.

Social Security assessment of account-based pensionsMost Social Security income supportpayments are subject to an income and assetstest. The asset test assessment of an account-based pension is simple: the account balanceis assessed as an asset (regardless of age). Thisis particularly important for Social Securityrecipients under pension age, where assetsare being moved from an exempt superan-nuation accumulation interest into an asset-tested account-based pension.

The income test is a little more complicat-ed. Only account-based pension paymentsexceeding a certain amount (the Centrelink

deductible amount) are assessed under theincome test. The Centrelink deductibleamount is shown in figure 1.

Nominating a reversionary beneficiaryIf you nominate a valid reversionary benefi-ciary the account-based pension will contin-ue to be paid to the nominated reversionarybeneficiary on the death of the original owner.Under this nomination the superannuationfund trustee has no discretion as to who orhow the benefit will be paid upon death ofthe original owner.

Before you nominate a reversionary bene-ficiary on an account-based pension youneed to consider the Social Security implica-tions. As a general rule, the Centrelinkdeductible amount of an account-basedpension will be reduced where:

• The original owner is male and they havenominated a female as a reversionary benefi-ciary and the female is not considerably older;

• If the original owner is female and theyhave nominated a male as a reversionarybeneficiary and the male is considerablyyounger; and

• The original owner nominates someoneof the same sex as a reversionary beneficiary(who is younger).

A reduced Centrelink deductible amountis a particular concern for an income testedSocial Security recipient – or one that is likelyto become an income-tested client in thefuture.

Case study oneCallum (68) and Sarah (65) are about tocommence account-based pensions. Callum

has $350,000 in superannuation and Sarahhas $100,000. Their age pension entitlementis currently reduced under the income test.Callum’s life expectancy is 16.24. Sarah’s lifeexpectancy is 21.62.

The impact of nominating Sarah as a rever-sionary beneficiary on Callum’s account-based pension is illustrated in table 1.

Callum draws a pension payment of$21,000 for the year. If Callum nominatesSarah as a reversionary beneficiary theircombined age pension entitlements willreduce by $2,406.

Given Sarah’s life expectancy is greater thanCallum’s, the Centrelink deductible amountof Sarah’s account-based pension will remainthe same regardless of whether Callum isnominated as a reversionary beneficiary.

Commuting an account-based pension,allo-cated annuity or allocated pension to reset theCentrelink deductible amountNaturally, as someone gets older their lifeexpectancy decreases. If the balance of anaccount-based income stream remains thesame or relatively high, the Centrelinkdeductible amount may be increased bycommuting the account-based pension andstarting a new one.

Case study twoBrayden (65) commences an account-basedincome stream with $500,000. His Centrelinkdeductible amount is:

($500,000 – 0) / 18.54 = $26,968The result after five years, if Brayden

commutes his account-based pension andcommences a new one (assuming new lifeexpectancy is 14.76), is shown in table 2.

Any costs involved (eg, buy/sell spreads,entry/exit fees in relation to the accountbased pension) would have to be taken intoconsideration against any potential SocialSecurity benefits gained.

Using nominated beneficiaries to maintain aSocial Security entitlement for the partnerThe death of one member of a couple canhave a significant impact on the survivingmember’s Social Security entitlements. Theincome and assets required to receive apart age pension, comparing couplehomeowners to single homeowners, is

shown in table 3.If the surviving member of the couple loses

their entitlement to age pension, they alsolose their entitlement to the PensionerConcession Card. They may become entitledto another concession card, but it won’t havethe same level of benefits.

To minimise the Social Security impactwhere one member of a couple dies, all orpart of the account-based pension could bedirected to someone other than the partnerupon the death of the original owner. Thiscould be achieved either by the Will or bynominating a child, financial dependant oran interdependent as a beneficiary.

Case study threeHolly and Michael are asset tested and receivea combined age pension of $11,346. Theircombined assets are $700,000. Both Holly andMichael have an account-based pension of$200,000 each. If either Holly or Michaelpassed away and the surviving partner main-tained ownership of all combined assets, theywould lose entitlement to the age pensionand the Pensioner Concession Card (allow-able assets for a single age pensioner is$668,000).

Alternatively, if Holly and Michael eachnominated their children to receive half oftheir account-based pensions upon death,the surviving partner’s assets would reduceto $600,000. This would generate an agepension of $2,650 and maintain access to thePensioner Concession Card.

SummaryUnderstanding the Social Security implica-tions of an account-based pension isextremely important. Right from thecommencement of the income stream toestate planning, important decisions need tobe made and/or opportunities to maximiseSocial Security entitlements may presentthemselves.

Failure to make the right decisions or torecognise opportunities could result in theloss of thousands of dollars of Social Securi-ty benefits and/or the loss of valuable conces-sions on offer to the holder of a Governmentconcession card.

Where there are competing interests, theimportance of each must be taken intoconsideration.

Scott Quinn is technical services manager atOnePath.


More than meets the eye

Toolbox

Scott Quinn explains that there is moreto account-based pensions than tax –Social Security must also be considered.

Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of interests in FirstChoice Wholesale Personal Super offered through the Colonial First StateFirstChoice Superannuation Trust ABN 26 458 298 557. Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (Avanteos) is the issuer of interests in FirstWrap Plus and FirstWrap offered through the Avanteos Superannuation Trust ABN 38 876 896 681. This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider thePDS available from Colonial First State before making an investment decision. Colonial First State and Avanteos are owned ultimately by Commonwealth Bank of Australia ABN 48 123 123 124 through theColonial First State group of companies. Commonwealth Bank of Australia and its subsidiaries do not guarantee performance or the repayment of capital of Colonial First State or Avanteos. CFS2001/STRIP

We’ve lowered the minimum investments for FirstChoice Wholesale Personal Super and FirstWrap, giving more of your clients the ability to benefit from lower fees and great features which may have previously been out of reach. Contact your Business Development Manager, call 13 18 36 or visit colonialfirststate.com.au/lowerfees

Great value for More of your clients.

Reversionary beneficiary Not a reversionary

$16,188 $21,551

($350,000 - 0) / 21.62 ($350,000 - 0) / 16.24

Table 1 Case study 1

Centrelinkdeductibleamount

Account based pension balance Centrelink deductible amount Maximum increase in age pension

$525,000 $35,569 $4,300

$500,000 $33,875 $3,453

$475,000 $32,181 $2,606

$450,000 $30,487 $1,759


Purchase price – total commutations

Life expectancy at commencement*

Figure 1 Deductible amount

*Where a reversionary beneficiary is nominated, use the longer life

expectancy of the original owner and the reversionary beneficiary.

Family situation Income must be less than: Assets must be less than:

Single $41,719 $668,000

Couple $63,824 $991,000


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

ASSOCIATE ADVISERLocation: MelbourneCompany: WHKDescription: An opportunity has arisen for anassociate adviser to join the WHK wealthmanagement team on a full-time permanentbasis. The successful candidate will besupporting two dynamic advisers.

In this role you will be responsible for projectmanaging the client review process on behalf ofthe advisers, including preparing agendas,portfolio updates and performance reportsusing COIN software. You will also prepareadvice documents on behalf of advisers,including delegating the preparation of adviceto a centralised advice team.

A tertiary qualification is preferable, but notessential. Successful candidates will be workingtowards or will have completed a financialplanner qualification. You will also have workedin a financial planning environment, withexperience in client service, administration andbasic advice preparation.

For further information or a confidentialdiscussion please contact Graeme Quinlan or Josh Pennell or visitwww.moneymanagement.com.au/jobs

CLIENT REPORTING – ASSET MANAGE-MENTLocation: MelbourneCompany: Kaizen Recruitment

Description: Our client is a leading assetmanagement firm that currently has an excitingopportunity in its middle office team.

The successful candidate will beresponsible for the oversight of daily, monthlyand quarterly client performance, attributionand investment reports in a timely andaccurate manner. It is essential that youpossess exceptional organisationalmanagement skills to manage reportingdeadlines for multiple clients. The idealcandidate will have over five years of fundsmanagement experience – ideally from aclient reporting background – and will becomfortable engaging with front officeportfolio managers. The additional focus ofthe team is expanding across the APACregion, which will lead to long-term careerdevelopment opportunities.

If you are interested in learning more aboutthis position please contact Matt McGilton atKaizen Recruitment on (03) 9095 7157 or visitwww.moneymanagement.com.au/jobs

FINANCIAL PLANNERLocation: Canberra, ACTCompany: Hays RecruitmentDescription: An Australian financial servicesinstitution is currently undergoing significantexpansion. As a result, there is now anopportunity for a financial adviser with aproactive, professional and client-focused

approach to join its team.The opportunity offers an excellent chance to

be part of a larger yet still boutique structure,an attractive salary, highly appealing bonusstructure and the opportunity to purchaseequity.

The scope of the role will see you providingcomprehensive calculated financial advice andbeing able to implement strategies coveringsuperannuation, wealth creation, retirementplanning and risk.

Ideally you will have previous experience as afinancial planner, a minimum ADFP, an extensivedatabase and a desire to own and grow yourown business.

For more information and to apply, visitwww.moneymanagement.com.au/jobs

FINANCIAL PLANNING CLIENT SERVICEMANAGERLocation: SydneyCompany: Hays RecruitmentDescription: There is an exceptionalopportunity currently available to join a wellestablished financial planning firm located inSydney’s eastern suburbs. As a client servicesmanager you will be actively involved in thefull financial planning process includingliaising with clients, developing strategies,undertaking research, preparingcomprehensive Statements of Advice andimplementing recommendations.

Successful applicants will have a provenbackground of working within the financialplanning industry, ideally in a client service role. RG146 qualified, you will be seeking anopportunity to take ownership for a portfolio ofclients, ensuring the ongoing success of thebusiness.


PARAPLANNERLocation: MelbourneCompany: WHKDescription: As a paraplanner, you will play akey role in the WHK advice team by providingtechnical support to principals and adviserswithin the wealth management division.Specifically, you will be responsible forconstructing complex advice documents andassisting with professional and operationalsupport through research and modelling tosupport the provision of advice to clients.

You will have at least two years of experiencewith high-net-worth clients across a broadspectrum of advice, including SMSFs, wealthaccumulation, retirement planning and estateplanning. Successful candidates will possessRG146 qualifications and ideally be on theirway to completing their Certified FinancialPlanning designation.


MANUEL Damianakis has beenappointed to the new role of AMPCapital national key accountmanager, dealer groups in AMPCapital’s retail distribution team.

Damianakis has joined thecompany from Vanguard wherehe was the northern regional salesmanager. He has 13 years of expe-rience, starting his career as afinancial adviser before movinginto funds management.

He will have responsibility forthe delivery and co-ordination ofthe product, platform and salesstrategy across AMP Capital’s keynational accounts.

Damianakis will report to AMPCapital’s head of retail distribu-tion, Ben Harrop.

DEALER group Matrix PlanningSolutions has recently recruitedElias Serhan to the role of compli-ance development specialist. In this role, Serhan will workclosely with the Matrix compli-ance team assisting with complaintshandling and adviser audits.

Prior to joining Matrix, Serhanwas with Count Financial forthree years in a number of roles,including compliance officer.

“I look forward to workingclosely with the Matrix practicesand getting to know individualbusinesses,” he said.

Matrix is also taking the

opportunity to enhance itscompliance team, with a newlycreated role focusing on paraplan-ning support for its practices.

THE Association of FinancialAdvisers (AFA) has appointedWealth Enhancers financialadviser Sarah Riegelhuth to chairits 2011-2012 GenXt Committee.

Riegelhuth was a finalist in theAFA’s Rising Star of the YearAwards in 2008 and 2009. AFAchief executive Richard Klipinsaid her knowledge and passionfor the advice industry make hera great choice for the program,which was designed to ‘bridge thegap’ between the current and nextgeneration of advisers.

The committee’s role is toorganise events and forums tofacilitate the transfer of knowl-edge, experience, skills andnetworks between the genera-tions.

“It’s no secret that, with [theFuture of Financial Advice]reforms about to move fromtheory into practice, we havesome challenging times ahead,”said Riegelhuth. “I look forwardto helping our younger advisersnavigate those changes.”

RUSSELL Investments’ globalconsulting division is continuing

to strengthen its presence in Asia-Pacific with the announcementof two key appointments inAustralia and Asia.

Frank Russo has beenappointed senior consultant atRussell Consulting in Australiaand will be based in Melbourne.He joins from independent assetconsultant Access Capital Advis-ers, where he served on theboard of the AMP InfrastructureFund of India and as theinvestor representative onseveral investment advisorycommittees. Russo previouslyheld senior positions at Equip-super and Westpac BankingCorporation.

In a second move, Trevor

Persaud has been appointed as apractice leader for consultingand advisory services in ASEAN,India, Hong Kong and Taiwan. Inhis role, Persaud will lead thestrategic development and deliv-ery of investment consultingservices for Russell’s clients in theregion, encompassing invest-ment advisory, asset allocation,strategic asset tilting, riskmanagement and portfolioconstruction. He will be based in Singapore.

ST ANDREW’S Insurance hasrelaunched its growth strategyand appointed Peter Thomas toa newly created role of senior

manager, strategic allianceAustralia.

Thomas has spent almost 40years in banking and finance,most previously working forWespac as director of corporatebanking. Prior to this, he workedin corporate and institutionalbanking, transactional banking,and product and operations.

Thomas will be based inSydney and will report to SeanStraney, general manager fordistribution.

St Andrew’s chief executive,Renato Mazza, said Thomas’appointment brought “not onlyextensive business developmentexperience, but in-depth bankingexperience to the team”.

Move of the weekCOMMINSURE has appointed its Queensland state managerTony Smith to the position of head of national accounts, whichwas vacated by Simon Harris in December when he moved to Guardian.

Tim Browne, CommInsure’s general manager for retail advice,said the internal appointment reflected the high calibre of peoplewithin CommInsure.

Smith has held positions as an adviser and in management overhis 18 years in the insurance industry, according to CommInsure.

Smith’s team will work very closely with the head of adviserdistribution and all CommInsure state-based teams in executinga strategy aimed at selected national dealer groups, and theirrespective authorised representatives, to secure CommInsure asthe insurer of choice, according to Browne. Tony Smith

OUTSIDER can remember a time when theAustralian dollar was known variously as ‘the PacificPeso’ and ‘the little Aussie bleeder’.

Those days are a distant memory now. Havingjust returned from a trans-Tasman visit, Outsiderwas delighted at just how much his Aussie dollarscould buy in Wellington, Auckland and a couple ofprovincial ports in-between – although he didnotice a few Kiwi financial institutions trying to geta healthy clip of the ticket on the exchange ratearbitrage.

Outsider likes to think of the strength of theAussie dollar as presaging the strength of theAustralian Rugby Union team, who will travel toNew Zealand later this year to contest the WorldCup and attempt to regain the William Webb Ellistrophy.

While New Zealand’s insurance industry strug-

gles to handle the fallout from successive naturaldisasters, Outsider gained the distinct impressionthat losing the World Cup on home soil might becounted by many Kiwis as an even greater disaster.

Perhaps this explains the pre-emptive strikeinflicted by a particular provincial Air New Zealandcheck-in operative who, when told Mr and Mrs Owere Australians returning to Sydney, demonstrat-ed a bureaucratic haka and laid down the law whenit turned out one suitcase was a smidgeon over-weight (despite a second suitcase being three kilosunder).

Outsider knows of at least half a dozen financialservices types who will be travelling to the ‘ShakyIsles’ to support the Wallabies. Given they are hardlyshy and retiring people (two of them are BDMs,after all), he suggests they either watch their weightor utilise the services of the flying kangaroo.

Outsider


A literary master

The carry on trade

WHILE Outsider may not be agreat admirer of Assistant Treasur-er Bill Shorten’s policy peregrina-tions, he is becoming an increas-ing admirer of the minister’sspeeches, which are nothing if notcolourful – not to say unique.

It doesn’t seem to matter whichcity the good minister is visiting,he seems to have a ready referenceto its historic importance accom-panied by some interesting liter-ary flourishes. Were he not quiteso cynical, Outsider would thinkthat Shorten has visions ofgrandeur.

And so for those of Outsider’sreaders who have not had thegood fortune to hear Shorten atwork, here is an introduction theminister gave at a recent addressto a Committee for the EconomicDevelopment of Australia (CEDA)conference in Melbourne:

“‘The Iceman Cometh’, wroteEugene O’Neill back in 1939.

“One stands here 71 years laterwondering a little whether theAmerican Nobel laureate wasgiving some sort of prescientwarning of the Aussie summerwe’ve just had.

“O’Neill’s classic play of coursedidn’t in practice deal with ragingrivers and flooding waters – and inlarge part alludes to anarchy, andsociety’s attempts to deal with it.

“But events that seem likenatural anarchy come to this widebrown land from time to time; andwe do our best as a society to dealwith it and hope for a bettertomorrow.

“And some ice-hearted crea-ture riding rude and wicked skiescertainly came to us in Januaryand so now we await, hopefullyfor a weather god of a very differ-

ent disposition, in the earlyautumn sun.

“Knowing Melbourne’s capri-cious climate well, as I do,perhaps we shouldn’t be toooptimistic. Although O’Neill didalso write in ‘39:

“‘The lie of a pipe dream is whatgives life to the whole misbegot-ten mad lot of us, drunk or sober.’

“Anyway, we’ll see.”Outsider eagerly awaits

Shorten’s rhetoric accompanyingthe FOFA changes.

OUTSIDER has always foundthat one of the grandest thingsabout being a financial serviceshack is that it allows one tomaintain some semblance ofnormality in one’s daily routineand personal life.

Imagine working for a 24-hournews service, being forced towork all kinds of graveyardshifts, coming in on public holi-days and weekends – Outsidershudders at the very thought.Friday afternoon early marks tohit the golf course would be athing of the past.

That’s why a peculiarity of thelunar cycle or some such thathad the Easter weekend pushedback to coincide with ANZAC dayhad Outsider licking his chopsat the prospect of a five-dayweekend.

With only one issue of thisesteemed publication due overthe two-week period, Outsiderhad penned in all manner of roadtrips and golf days and possiblyeven some extra days off. His

financial services journo chumsall had exactly the same idea,with plenty putting in for extraleave over the Easter break.

Thus Outsider was stunned tolearn that his employer had infact planned on cramming intwo issues in this period, and arelaxing fortnight was turninginto a barrage of deadlines.

Luckily Outsider has plenty offinancial services contacts hecan call on at short notice tohelp him fill all those newspages.

What’s that? Out-of-officeauto-reply? Returning on May 2?It turns out these financial serv-ices types are cannier than Out-sider gave them credit for. AgainOutsider is reminded that theperks of covering financial serv-ices fall short of the perks ofactually being there.

So while his chums are allout on their yachts, Outsider willbe back at his desk, doing whathe does best – making up stories.

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

An unpleasantsurprise

““Out ofcontext

“China has more engineers thanlawyers, so it can make big projectshappen. American and Australia havemore lawyers. They prevent anythingfrom happening.”

Premium China Funds Managementsupremo Simon Wu laments the West's legal

red-tape.

“It will be interesting for meto hear what I say too.”

Guest speaker at the Associationof Superannuation Funds of

Australia luncheon Dave Marvinlet the audience in on his secret: he

doesn’t write speeches.

“Put your hands up if you thinkmanagement really cares... putyour hands up if you’ve had afight with product providers.”

ASFA chief executive Pauline Vamosopens the ASFA national super compli-

ance summit on a cynical note.

money management (april 28, 2011)

Documents

government togo

excess contributions

number of key changes

industry lobbyists

industry conference

orfiduciary duty

ed changes

excess contributions