money management (august 25, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

LONSEC has been named MoneyManagement’s Ratings House of the Yearfor the second year in succession, on theback of strong support from both thefund managers it rates and the dealergroups it services.

The Ratings House of the Year Award isthe result of Money Management’s two-stage Rate the Raters survey process, inwhich both fund managers and dealergroups are interrogated on their views ofthe major ratings houses on issuesranging from the quality of theirresearch, value for money, personnel,customer service and model portfolios.

The runner-up for 2011 was van EykResearch, which managed to regainmuch of the ground lost due to seniordepartures in the previous 18 months,including that of its founder, Stephenvan Eyk.

Lonsec emerged as a winner, becauseit topped the scores across both the fundmanager and dealer group elements ofthe survey, but it was the fund managersurvey which proved crucial to its win.

Where the dealer group survey wasconcerned, Lonsec’s overall result wastied with that of smaller ratings house,Zenith.

Subsequent to the two Rate the Raterssurveys being held, Zurich announcedthe sale of Lonsec to the Mark Carnegielinked Financial Research Holdings,which also houses specialist superannu-ation ratings house, SuperRatings. Thiswas later followed by the departure ofhead of research, Grant Kennaway –

events which may alter perceptions ofthe ratings house in the 2012 survey.

In determining the Ratings House ofthe Year, Money Management tookaccount of the number of clients serviced by each ratings house andprovided a higher weighting to somecriteria such as quality of research andcustomer satisfaction.

While Lonsec was a clear winner in2011, its margin over the other ratingshouses was narrower than had been thecase a year earlier – with van Eyk, Stan-

dard & Poor’s, and Mercer each receiv-ing a higher ranking.

According to Lonsec’s head ofresearch, Amanda Gillespie, thecompany’s business model was at thecore of its back-to-back success.

Gillespie said there had been a lot ofdebate around business models in theresearch industry, but added that“Lonsec would not have a successfulresearch business if we compromised onthe quality or objectivity of our research”.

What was acknowledged by both Gille-spie and van Eyk chief executive, MarkThomas, was the importance of person-nel with Gillespie crediting the stabilityof Lonsec’s research team as a key ingre-dient for success.

Commenting on van Eyk’s runner-upstatus, Thomas paid tribute to a success-ful rebuilding effort, and the recruitmentof quality people into key roles.

“We continue to keep investing in thebusiness,” he said.

“It is true that we went through aperiod that challenged the culture of ourbusiness, but the culture has won,”Thomas said.

By Chris Kennedy

THE probability of launching a financial prod-uct and having it be unsuccessful is higherthan it has been in the past, meaningproviders need to shift their focus moretowards the end user.

That is the outcome of a panel sessionorganised by financial services recruitmentagency Vantage Recruitment – featuringspeakers from Colonial First State (CFS),Bendigo Wealth, and Macquarie.

“Product providers are currently at a tip-ping point whereby they need to shift theirfocus from being product-centric to focusmore on the experiences of the end user,”said CFS general manager of marketingand distribution, Linda Elkins.

“Product manufacturers may be victimsof their own past successes, where it usedto be possible to simply release a productand know it would sell – that won’t be thecase going forward,” she said. “We arealready seeing that new financial productsbeing launched are less likely to be suc-cessful than in the past,” she added.

“We need to move from being product-centric to customer-centric – that penny hasnow dropped. Now we’re on the tipping pointof saying ‘how do we do this’,” she said.

Many financial services institutionssuch as IAG, NAB, Challenger, Macquarie,AMP and Westpac (including BT and StGeorge) have now engaged specialist cus-tomer experience consultants, Different, tohelp define product and service strate-gies by engaging customers throughoutthe design process.

Creative director of Different, AnthonyColfelt, said companies can benefit from acustomer-centric design (CCD) focus byknowing more about how their customersthink and interact with a product or serviceup-front, which can save expenses in termsof restructuring offerings down the track.

“But CCD is an ongoing commitmentrather than a one-off expense, and oftensenior management in financial serviceswant to know up-front exactly how muchproject cost outlay will be involved – whichcreates reticence in terms of committing toCCD,” Colfelt said.

Bendigo Wealth senior manager, techni-cal and research, Julie McKay said thismeans a client-focused approach canrequire a compromise with senior manage-ment, who often want to be able to seeresults straight away, therefore a balance

Lonsec reprises top rating

Continued on page 3

Product providers need toshift focus to users

ANZ’S NEW LOAN FACILITY: 1 | RATE THE RATERS: Page 19

Vol.25 No.32 | August 25, 2011 | $6.95 INC GST

“Lonsec would not have asuccessful researchbusiness if we compromisedon the quality or objectivityof our research. ”

– Amanda Gillespie

Amanda Gliiespie

By Andrew Tsanadis

A trend towards lowperformance hurdles andhigh outperformance feesamong fund managers hasdrawn criticism fromratings houses amidsuggestions there shouldbe an industry standardfor performance criteria.

In Lonsec’s ‘AustralianEquity Long/ShortSector Review’ releasedin July, researchers foundsome fund managers set“inappropriate lowperformance hurdles” intheir performance feestructures.

Lonsec stated, “To someextent, this is justified,given the relatively lowcapacity limit of theseproducts and the addition-al costs associated withemploying shorting skills”.

Typical performancefees for the 14 managed

funds reviewed werefound to be between 15and 20 per cent of anyreturns greater than a fundmanager’s hurdle.

The EQT/SGH AbsoluteReturn Trust was the onlymanaged fund that didnot charge a perform-ance fee, hurdle rate, or awatermark.

SG Hiscock managingdirector Steve Hiscocksaid he does not believeinvestors should becharged a full base fee aswell as a full perform-ance fee.

“What I find interestingabout the report is that anumber of funds have thesame base fee (MER) asAbsolute, yet still charge afull performance fee,”Hiscock said.

The funds Hiscockrefers to are SmallcoInvestment Fund andWavestone Australian

Equity Long Short Fund,which have a base fee of1.4 per cent and 1.5 percent, and a performancefee of 18.64 per cent and15 per cent, respectively.

Hiscock said managersshould either charge a fullbase fee or a full perform-ance fee in order to avoid“double dipping” on aninvestment that haslimited capacity.

Hiscock said this stan-dard should be incorpo-rated across all manage-ment classes to avoid thesetting of low hurdles.

In justifying theperformance fee of INGExtended Alpha AustralianShare Fund, Jim McKayfrom ING InvestmentManagement said thefund’s 20 per centperformance fee was inline with that of other

Standard performancecriteria needed

Continued on page 3

Legislation covering super needs renovation

It will not emerge as an item high on thecurrent Federal Government’s agenda,but at some point, the Commonwealthwill need to revisit legislation covering

the operation of superannuation funds inAustralia, with a view to ensuring it betterreflects current fact and practice.

A revision of the legislation is necessaryin circumstances where there is now clearevidence that the underlying structures havenot kept pace with the evolution of adynamic industry, and where some organ-isations have sought to manipulate theresulting inconsistencies for their owncommercial and political advantage.

The Government has undertaken thatnext year it will refer the issue of defaultfunds under modern awards for considera-tion by the Productivity Commission. Itshould go further by extending that referralto examine issues such as the structure oftrustee boards and the application of thesole purpose test.

A few weeks ago, Tasmanian Liberal PartySenator David Bushby took the extraordi-nary step of writing a column for MoneyManagement in which he pointed out thathe had asked questions of the AustralianPrudential Regulation Authority (APRA)regarding events surrounding MTAA Super.

In that column, Bushby reported thathaving asked what were “hardly earth-shat-

tering or market bursting” questions, he wasconfronted by the regulator utilising thesecrecy provisions of its parent Act to avoidproviding answers.

What APRA was essentially telling anelected member of the Australian Parliamentwas that information relating to the activitiesof a major superannuation fund fallingunder the jurisdiction of a key financial regu-lator could not only be kept out of the publicdomain, but kept away from the scrutiny ofthe Parliament.

It seemed to not matter to those runningAPRA that the trustee board of MTAA Supercontrols billions of dollars in funds belong-ing to literally thousands of individualmembers in the automotive industry. Nordoes it seem to have mattered that many of

those individual members might have beeninterested in reading the answers to theSenator’s questions.

While it is important for regulators toavoid taking any action which would under-mine the security and value of members’assets within a superannuation fund, thatobjective should not be pursued to the exclu-sion of necessary transparency.

Under Australia’s current superannuationlegislation substantial power and discretionis vested in the members of trustee boards,while individual members are denied a voicebeyond indicating or specifying the broadinvestment allocation of their money.

Superannuation funds enjoy a specialstatus in Australia, owed to the compulsorynature of the superannuation guarantee andthe consequent tax advantages which apply.This should result in greater transparencythan is currently the case.

In short, the activities of the trustee boardof MTAA Super should be just as transparentas those of the board of any publicly-listedfinancial institution, and there should be noreason for the regulator to find reasons toinvoke secrecy provisions when dealing withMembers of Parliament.

Change is not only necessary – it will ulti-mately prove unavoidable.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

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2 — Money Management August 25, 2011 www.moneymanagement.com.au

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“Superannuation fundsenjoy a special status inAustralia ... This shouldresult in greatertransparency than iscurrently the case. ”

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Average Net DistributionPeriod ending March '1110,207

By Chris Kennedy

AUSTRALIAN women are significantly moreconcerned than their male counterparts overAustralia’s economic outlook, research fromMillion Dollar Woman has found.

Only 30 per cent of working women areconfident that Australia will avoid anothereconomic downturn, compared to 47 percent of working men, Million DollarWoman’s Financial Confidence Reportfound.

And 29 per cent of working Australianwomen believe they are worse off in 2011than they were in 2010, compared to 25 per cent for men.

“The depressed levels of Australianwomen’s financial confidence could gosome way to explaining the reasons forAustralian households’ diminished

levels of spending, coupled with therecent natural disasters and general‘two-speed’ economic uncertainty,”Million Dollar Woman chief executiveLynette Argent said.

A potential reason for the more negativesentiment among females is that theyexperience higher debt; for every dollar awoman earns they owe $2.60, comparedto $2.10 for men, according to MillionDollar Woman.

The report also found males were moreconfident in their financial knowledge,with 63 per cent reporting they were confi-dent in financial matters, against 53 percent for females.

“Financial confidence directly relates toknowledge and understanding, and itcomes as no surprise that these results arealso poor for Aussie women,” Argent said.

www.moneymanagement.com.au August 25, 2011 Money Management — 3

News

Women more concerned over nation’s finances

Standard performancecriteria needed

funds under review.Lonsec’s sector review also found certain fund managers

are ambiguous when it comes to setting hurdles.For example, Smallco employs a hurdle of zero per cent,

which means Smallco is eligible to receive a performancefee simply by generating any positive return, according tothe review.

A spokesperson from Smallco said the reason the hurdle isset to zero is because the company’s portfolio is a lot smallerthan it was before the global financial crisis, and setting anoutperformance hurdle would be “unreasonable”.

Lonsec’s review reflects Morningstar’s ‘Best Practice inManaged Fund Performance Fees’ report released in April,which reviewed 82 funds and found only 18 had some formof additional performance related charge.

There was little consistency among these funds, with 17different fee charging criteria within the group.

Morningstar suggested a fund manager should set areasonable hurdle before starting to accumulate perform-ance fees, at the very least a hurdle that covers the base fee.

“Financial confidencedirectly relates toknowledge andunderstanding, and itcomes as no surprise thatthese results are also poorfor Aussie women. ”

– Lynette Argent

between cost and long-termresults is required.

“Accountants will alwaysbe measuring the bottomline, but there is a largeburning platform nowsaying we can’t keep doingthings the same way”,McKay said.

She added, “thosefinancial considerationswon’t go away, but arestarting to take a backseat to the customerfocus”.

“Another challenge to anongoing customer-centreddesign approach is therapid pace of change within

the industry”, she said.“You put all these

resources into customerresearch, then in sixmonths the market hasmoved and the opportunityhas gone. It’s a balancingact,” McKay said.

The pull of factors suchas IT and legacy systemscan be insurmountable,but you have to trust thedepth of the customers’relationship with the bank,she said.

“If you listen, customerswill tell you want theyexpect. But with the sheeramount of change andnew regulations, it’s verydifficult,” McKay said.

Product providers needto shift focus to usersContinued from page 1

Continued from page 1

Lynette Argent


News

By Mike Taylor

AMP Limited has experienced astrong boost in revenue as a result ofits merger with AXA Asia Pacific, butnonetheless experienced an 18 percent decline in first half net profitafter tax attributable to shareholdersto $349 million.

However, the company chose topoint to the 3 per cent increase inunderlying profit to $455 million asbeing a more reliable measure, andreinforced the fact that AMP had thelargest adviser and planner networkacross Australia and New Zealand.

It said the merged business had

4,020 planners and advisers at 30 June,with the merged group having 4,048planners, representing a fall of sixadvisers from 31 December, last year.

“Ongoing strong growth in AMPplanner numbers was offset by lowerrecruitment for AXA advisers, partic-ularly in the first quarter of 2011,against a background of heighteneduncertainty for AXA advisers ahead ofthe final merger outcome,” AMPchief executive, Craig Dunn, said in astatement released to the AustralianSecurities Exchange (ASX).

“We are very pleased with AXAadviser retention post the merger,”he said. “As of today, around 97 per

cent of the value of the advisernetwork in AXA and Charter Finan-cial Planning has been retained.”

The AMP release to the ASXrevealed that AMP Financial Servicesoperating earnings increased 2 percent to $329 million for the half,which the company said reflectedstrong results from AMP Bank,Contemporary Wealth Protectionand higher net cash flows into AMPFlexible Super.

It said that its ContemporaryWealth Management division, whichincludes financial planning, super-annuation, pensions and bankingbusinesses, operating earnings had

increased by 5 per cent to $157million.

The announcement said AMPCapital Investors’ operating earningswere down slightly to $41 million.

Discussing the outlook for thecompany, Dunn said the Europeandebt crisis and uncertainty over theUS recovery was likely to remain asource of investment market volatil-ity for some time to come, whilecloser to home, Australian house-holds remained cautious and contin-ued to prefer increasing their savingsthrough bank deposits over increas-ing discretionary contributions tosuperannuation.

Choice has questions to answer, says FSCBy Milana Pokrajac

THE integrity of consumer groupChoice over its potentially conflict-ed partnership with One Big Switchhas been questioned yet again,with Financial Services Councilchief John Brogden urging thegroup to come clean about i tsremuneration arrangements withOne Big Switch.

Brogden’s call came after it wasreported Choice would receive acommission for its role as an inter-mediary in the “Big Bank Switch”campaign.

The FSC chief quest ionedwhether the consumer group back-flipped on its position outlined inits submission to the ParliamentaryJoint Committee inquir y into

financial products and services inAustral ia , where i t s tated that“commissions created an unac-ceptable conflict of interest”.

Brogden said Choice had anumber of questions to answer,particularly about its remunerationarrangements with One Big Switch.

He further questioned whetherthe group rebated all or any fees itreceived back to consumers,

“ When Choice says i t wi l ldisc lose any remunerat ion i treceives for its role in the Big BankSwitch, has it changed its positionfrom its submission to the PJCwhere it stated that it ‘does notbelieve that conflicts of the magni-tude presented by commissionscan be addressed through disclo-sure’,” Brogden said.

Practices movingfrom revenue toearnings basisBy Chris Kennedy

THE industry is clearly moving away fromvaluing financial planning practices,based on multiples of revenue towardsvaluing on an earnings basis, accordingto Hunts’ Group principal Anthony Hunt.

The method of valuing based on rev-enue does have some logical basis interms of the traditional financial planningbusiness model, but virtually all otherbusinesses in the world are valued basedon multiples of earnings, he said.

The revenue model drives some inter-esting behaviours and characteristics, hesaid, and if you think your business willbe valued based on revenue, you strive toimprove that without necessarily lookingto improve revenue through factors suchas improved efficiency, he said. “You’vegot to improve not just the top line butthe bottom line,” he said.

Factors such as streamlining backoffice and administration processes willbecome more important, as will ensur-ing you get the best deal from your plat-form provider – which benefits both thebusiness and its clients, he said.

The shift to an earnings based valuationmodel is being accelerated by proposedFuture of Financial Advice (FOFA) reforms,but it is a process that would have hap-pened eventually anyway, he said.

Whether or not FOFA gets in practices willbe valued for intrinsic practices such astheir quality of customer relations, and anability to demonstrate they have a valueproposition that the customer likes and isprepared to come back for, he said.

The shift in valuation methods will alsoimpact the decisions of banks in lendingto planning practices, he said.

“It’s taken years to get specialistteams in banks to understand the princi-ple of revenue multiple, but they under-stand earnings and are prepared to lendon an earnings basis. It will be the pri-mary driver, if not the exclusive driver,going forward.”

SUPERANNUATION funds, includingself-managed superannuation funds(SMSFs), are facing further adminis-trative requirements as a result of theGovernment’s changes to superannu-ation excess contributions arrange-m e n t s a n n o u n c e d i n t h e Fe d e ra lBudget.

The arrangements – outlined in adiscussion paper released by the Assis-tant Treasurer, Bill Shorten – impose anumber of requirements on superan-nuation providers, including comply-ing with compulsory release authori-ties issued by the Australian TaxationO f f i c e a n d a c t i n g t o p a y re l e va n tamounts within 30 days.

Individual superannuation fundm e m b e r s a f f e c t e d by t h e Exc e s sContributions Tax (ECT) regime willface a number of key choices, includ-ing whether or not to accept the one-o f f re f u n d o f f e r f ro m t h e ATO o rwhether to appeal the issue, in whichplace the refund would be placed onhold until the matter is determined.

The increased burden on superannu-

ation funds and members comes despitethe Government saying the majority ofthe administrative processes were beinghandled by the ATO.

The changes were announced in theFederal Budget, amid complaints thatpeople were being unfairly penalisedunder the ECT regime for inadvertentand sometimes unavoidable errors intheir superannuation contributions.

In announcing the release of thediscussion paper, Shorten said theGovernment believed the changesmade the superannuation systemfairer by giving individuals the optionto take excess contributions out oftheir superannuation fund and havethem assessed at their marginal rateof tax.

“While the Government believes thehigh rate of excess contribution tax isimportant to encourage compliancewith the contribution caps, individu-als who breach their concessionalcontribution caps for the first timeshould be given a second chance,”Shorten said.

ECT changes add to super paperwork

Craig Dunn

John Brogden

Bill Shorten

AMP upbeat despite 18% profit decline


News

By Milana Pokrajac

ALMOST 1,700 individuals and compa-nies have been convicted on tax andsuperannuation offences in the 2010-11financial year, according to an announce-ment released by the Australian TaxationOffice (ATO).

Those include eight Project Wickenbyrelated convictions over the past financialyear, according to the ATO.

Tax commissioner Michael D’Ascenzosaid over 450 individuals and 140 compa-nies were convicted between 1 April and

30 June this year alone for tax and superoffences equating to over $9.5 million.

D’Ascenzo said the most serious offencesthis quarter resulted in custodial sentencesranging from 6 months to over 9 years.

“Offences this quarter ranged from a$3,000 fine for failure to lodge tax returns to21 years combined jail time for three menfor their role in an illegal investmentscheme that would have allowed partici-pants to claim over $46 million in fraudu-lent deductions,” he said.

The ATO reported using data-matchingtechnology and collaboration with govern-ment – including law enforcement agen-cies and overseas networks – as part of itscompliance approach, warning that forthose who deliberately break the law thelikelihood of being brought to justice is veryhigh.

In its announcement, the ATO has alsourged those unsure about their tax orsuperannuation offences to contact theoffice for information.

VicSuperadoptsnew techVICSUPER has partneredwith Provisio Technologiesto deliver ‘single issue’advice on a more wide-spread scale.

Provisio’s Rapid Advicewill be integrated intoVicSuper’s existing memberadministration and workflow systems in order tooffer advice in person andby phone, as well as printand web-based channels.

“Integrated solutionswill continue to providevalue as a fund expands itsuse of rapid advicethrough mobile, web,phone and printedcommunications – unlikethe old web-based calcu-lators that cater for onlinemembers only,” said Provi-sio director CameronO’Sullivan.

“Funds who are seriousabout rapid advice don’twant to cut corners.”

VicSuper’s chief execu-tive Michael Dundon saidhe acknowledges thatcomprehensive advice isnot for everyone andbelieves that this initiativewill provide superannua-tion planning to memberswho may not otherwiseseek expert advice.

“Single issue advice willbenefit many more of ourmembers,” Dundon said.

Almost 1,700 convicted on tax and super offences

��

�� Cameron O’Sullivan

Michael D’Ascenzo


News

Corporate fund members could lose advice under opt-inBy Chris Kennedy

IF opt-in requirements are brought in aspart of the Government’s Future ofFinancial Advice (FOFA), it could meanevery corporate super fund memberwould be required to opt in to advice feesindividually, costing members access toadvice and other valuable services,according to the Corporate SuperSpecialist Alliance (CSSA).

This possible outcome of the currentround of regulatory changes would resultin two types of corporate fund – MySuperfunds and Choice funds, and althoughmost employers currently charge a feerather than a trail commission, it’s notclear how this will be affected by opt-inproposals, according to CSSA presidentDouglas Latto.

“Currently, collective fees are agreedbetween employers and advisers, and applyequally across all members,” Latto said.

Under opt-in, it’s possible only individ-ual members would be able to agree tosuch fees. This would mean adviserswould have to collect the signatures ofhundreds of thousands of employeesevery two years, which would be imprac-ticable, if not impossible, he said.

Latto added, it is not clear how theseproposals would affect corporate supermembers, and it is an area that hasn’treally been addressed.

“Other proposed remuneration solu-tions include a ‘user pays’ system, whichhas been shown to not work,” Latto said.

“Under the current system, all usersequally share the cost of additional serv-ices such as site visits, but a user-payssystem is completely reactive ratherthan proactive, and services such as thiscould disappear altogether. Membersalways have the option to opt outthrough fund choice.

“One of the biggest services the CSSA

performs is an advocacy role, includingnegotiating better terms for members withinsurers, benefitting all members on anongoing basis – another service that wouldbe compromised under opt-in,” he said.

Latto believes a proposed ban on grouprisk commissions within super seems towrongly assume that group risk is unad-vised simply because it is a default orgroup contract.

But, he said, corporate specialistsprovide a range of ongoing advice servic-es which are available to all members ofthe corporate super plan at all times,including ongoing reviews, monitoring,seminars and underwriting assistance.

“If corporate super specialists cannotbe fairly rewarded for their services thenthose services will have to be withdrawn,and ordinary Australians will lose access toexperienced financial advice profession-als, leaving them in the hands of inexpe-rienced call centre staff,” Latto said.

Super pool helped buffer financial crisis - ASFABy Mike Taylor

AUSTRALIA’s large pool of super-annuation savings helped keepthe local economy on coursethrough the global financial crisisby becoming the main source ofequity finance when debt financ-ing became unaffordable, accord-ing to new research released bythe Association of Superannua-tion Funds of Australia (ASFA).

The release of the research wastimed to coincide with celebra-

tions around the 20th anniversaryof the Superannuation Guaran-tee, with ASFA chief executive,Pauline Vamos, claiming it wasproof that the superannuationsavings pool was the ballast of theAustralian economy.

The research, conducted byAllen Consulting Group, notonly claimed that the superan-nuation savings pool hadprovided stability through theGFC, but said it would continueto do so through the current

period of market uncertainty.Vamos also pointed to the

research findings as confirmingthe value of lifting the superannu-ation guarantee from its currentlevel of 9 per cent to 12 per cent.

“The Allen research providesstrong support that a move from9 to 12 per cent would be not onlygood for the retirement futures ofcurrent workers, but would alsohave no adverse effect on employ-ers,” she said.

Vamos said the modelling

shows such a reform would leadto a 0.33 per cent increase in realgross domestic product by 2025,compared to a ‘no reform’scenario.

She acknowledged the reportalso indicated that employer costswould be increased in the short-term, but added that the impactin any given year would be, atmost, 0.25 or 0.5 per cent of wages– equating to $250 to $500 for asmall employer with a wages billof $100,000.

DouglasLatto

PaulineVamos

By Angela Welsh

THE growing number of financial planners under-taking the Certified Financial Planning (CFP)accreditation will lift the standard of the adviceindustry as a whole, according to the Financial Plan-ning Association (FPA).

FPA chief executive Mark Rantall said the greater thedemand for the CFP accreditation and the morenumbers going through, the higher the entry require-ments and pass rates become. This pushes up the valueand standard of the accreditation, he said.

To enter the program, candidates now requirean undergraduate degree, and to complete therequirements they must have 3 years of supervisedexperience in the industry and pass a comprehen-sive exam.

“We have been lifting standards for a numberof years now,” Rantall told Money Management.“And the training needs to be considered inconjunction with the professional frameworkthat’s in place. This framework houses the FPA’seducational standards, ethics, practice standards,as well as our rules and regulations,” he explained.

“It is a combination of those four factors that reallydetermines the quality of the professional member-ship of the Financial Planning Association,” he said.

“The CFP is not an easyprogram to pass,” Rantallnoted. “And we track thatwith considerable interest.Together with the five unitsof the CFP cer t i f icat ion,which is conducted – andstat ist ical ly tested – byDeakin University, we canactually monitor the qualityand the pass rate of theprogram,” he said.

Some 5,600 of the FPA’smembers already have theCFP designation. As the FPAis the only Australian organ-isat ion with a l icence toissue the qualification, it isestimated that around 8,000non-FPA member plannersare operating without thatlicence.

Rantall described this as“a line in the sand issue”.

“Moves had to be made to lift planners’ standingand to assure clients that they can trust the adviceand ethics of their planner. The natural place to

go with this is with themost recognised inter-national qualification –a n d t h a t i s t h e C F Pqualification,” he said.

The qualification isl icensed through theFi n a n c i a l P l a n n i n gStandards Board (FPSB)– an international bodythat publishes the abil-ities, skills and knowl-edge of financial plan-ning in the FinancialPlanning CompetencyProfile. Rantall said theF P S B a l s o h a s a noverview of the contentand curriculum of theC F P p r o g ra m , a n dworks to ensure thosestandards are met.

“It’s all about not onlytaking responsibility for

putting clients first, but demonstrating that [plan-ners] have the training and expertise to do so effec-tively,” he said.

Strict requirements of CFP qualification to raise industry standard: FPA

MarkRantall


News

By Mike Taylor

The financial performance ofAustralian small business ownerswill be negatively impacted by theintroduction of a carbon tax,according to the results of a surveyof accountants.

The survey, conducted by theInstitute of Public Accountants,revealed that 70 per cent ofrespondents believed small busi-

ness would be negatively affect-ed, with 63 per cent of respon-dents believing those same smallbusinesses would not beadequately compensated.

Commenting on the survey, IPAchief executive Andrew Conwaysaid his organisation’s memberswere trusted advisers to theAustralian small business commu-nity and he believed it was alarm-ing that so many of them perceived

a bleak outlook for the small andmedium business sector over thenext 12 months.

“We are not talking about oneindustry, we are talking about apessimistic outlook across theentire small business communityin Australia,” he said.

“Despite the Governmentstating that only the top polluterswill be impacted with the introduc-tion of the carbon tax, it seems the

interests of small business have notbeen considered,” Conway said.

The IPA survey revealed 66 percent of respondents believed therehad not been enough considera-tion given to how the carbon taxwould impact small business,while 67 per cent believed therehad been insufficient informationprovided to small business overhow the carbon tax might affect them.

Wealth cross-sell helpsWestpacbottom lineWESTPAC has reported asolid third quar terdespite subdued marketconditions, with cashearnings down 2 per centto $1.55 billion, but oper-ating income up 1.5 percent on firmer margins.

The quarterly update,released to the AustralianSecurities Exchange, alsorevealed that BT FinancialGroup had put in a goodquarter, with solid flowsinto both corporate andretail superannuationhelping offset weakermarkets.

It said BT Super forLife flows had continuedto grow, with record flowsrecorded in June.

Commenting on theresult, Westpac chiefexecutive Gail Kellyacknowledged that theJune quarter had seenthe operating environ-ment become more sub-dued, with consumersincreasingly cautious andlarger businesses contin-uing to ‘de-leverage’.

She said this had beenreflected in slowingsystem credit growth inthe quarter and weakermarkets.

“Notwithstandingthese trends, momentumacross the group hasbeen sound, with solidflows in lending, depositsand funds under adminis-tration, underpinned by afurther deepening of rela-tionships,” Kelly said.

She said sales ofwealth and insuranceproducts had been par-ticularly pleasing, andthat over the past 12months Westpac hadexperienced the biggestincrease in cross-sell ofthe major banks.

AndrewConway

Accountants alarmed by carbon tax impacts

^Gross performance excludes fees and charges and assumes the reinvestment of all distributions. *Net performance of Class D units (min investment $5,000) since inception to 30/06/2011 and assumesthe reinvestment of distributions. It does not take into account the effect of taxes. Inception date is 4/7/05. # MSCI World ex-Aust (hedged) is not the benchmark for this Fund but is used to indicate theperformance of broader global equity markets (hedged in AUD). The Benchmark for the Fund consists of a weighted average of returns for a composite of 36% S&P 500 Composite Total Return), 24%Financial Times/S&P Actuaries World Index ex-US (Total Return), 24% Merrill Lynch Government Index GA05 (5 year Treasury Bond) and 16% Citigroup Non-USD World Government Debt Index. Issued byBlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230523 (BlackRock). BlackRock is the responsible entity of the Fund. A PDS for the Fund is available from BlackRock.You should consider the PDS in deciding whether to acquire, or to continue to hold, the product. This is general information only and does not constitute financial product advice. The information doesn’ttake into account an individual’s financial circumstances. An assessment should be made as to whether this information is appropriate for an individual and consideration should be given to talking to afinancial adviser before making an investment decision.

Markets goup and down.

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News

By Mike Taylor

A new insurance offering has come tomarket specifically aimed at helpingself-managed superannuation fund(SMSF) trustees challenge the Aus-tralian Taxation Office (ATO) on excesscontributions.

The offering is being promoted bySelf Super Insurance, which says it isoffering a new level of cover to help

trustees in the event a fund memberreceives an excess contribution taxassessment notice.

Self Super managing director JohnKelly said his company had always pro-vided cover to a trustee who was suedfor an error in relation to excess contri-butions, but this had been extended toprovide $25,000 toward the legalcosts of a member who successfullychallenges an assessment on the

basis the ATO has applied the lawincorrectly.

“There will be occasions whensomeone will wish to legitimately chal-lenge the ATO regarding an excesscontribution tax assessment notice,but won’t because the costs of doingso potentially outweigh the benefits,”he said.

Kelly said his company’s new offer-ing gave such people an option.

Insurance offering on excess contributions

FinancialPlanner of the

Year 2011


Foreigninvestment taxto be alignedwith OS mark

By Milana Pokrajac

AUSTRALIA’s taxation offoreign managed funds willsoon be aligned with coun-tries including the US, theUK, Hong Kong and Singa-pore, as the Federal Govern-ment rolls out its draftamendments to the Invest-ment Manager Regime.

The amendments toincome tax law will clarifyhow certain income offoreign funds for 2010-11and prior income years, aretaxed. It would also clarifythe treatment of certaininvestments of foreign funds,where the returns or gainsare treated as being attribut-able to a permanent estab-lishment in Australia, theGovernment said.

The Assistant Treasurerand Financial ServicesMinister, Bill Shorten, saidthe proposed changes in taxtreatment would providecertainty for businessesinvesting through Australianintermediaries.

“These new measures willhelp Australia retain $57billion already invested hereby foreign managed funds;the proposed amendmentswill support Australia’smanaged funds industry,which stood at around $1.8trillion at the end of March2011,” Shorten said.

The newly released draftwas supported by the Finan-cial Services Council (FSC),which recommended theInvestment ManagementRegime to the FinancialCentre Taskforce (JohnsonReview) in late 2009.

“It will remove uncertain-ty for Australian fundmanagers and encourageforeign investors to invest inAustralian-based fundmanagers,” FSC chief JohnBrogden said.


News

By Mike Taylor

PERPETUAL Limited has abandoned in-house manufacturing of its internationalshare funds in Ireland and transferred thefunction to Boston-based specialist, Welling-ton Management Company.

At the same time, the company has exitedthe self-managed superannuation fundsadministration business, selling its Smart-super offering to a Sydney-based profession-al services company.

The company also flagged that its full-year results would be in line with earlierguidance, and broadly in line with last year.

Announcing the moves overnight and onthe Australian Securities Exchange today,the company said the move on its interna-tional equities manufacturing had followed

a review of its Dublin-based in-house inter-national investment capabilities based onmarket demand, profitability and alignmentto its equities business strategy.

Commenting on the move, Perpetual chiefexecutive Chris Ryan said at an organisation-al level it represented a constructive changeaimed at delivering value to stakeholders.

Perpetual group executive, equities, CathyDoyle said the company had come to theview that the current manufacturing ofPerpetual’s international share funds had

not met its business expectations.“We have taken the decision to close the

in-house manufacturing of the funds – thishas also resulted in the closure of our Dublin-based international equities business, PIInvestment Management Limited,” she said.

The company’s moves on its internation-al share funds follows on from tough ratingshouse scrutiny of Perpetual’s domestic equi-ties options in the context of the future inten-tions of its equities head, John Sevoir, who iscurrently on 6 months leave.

Perpetual closes in-house international equities manufacture

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Prepare forthe upswing,Lachlan says By Tim Stewart

RATHER than panicking andselling their shares, investorsshould be watching the mar-kets for signs of the expectedrecovery, according to wealthmanagement firm LachlanPartners.

Historical evidence fromrecent recessions shows thatthe Australian sharemarkettends to bottom out 12 to 18months before corporateearnings begin rising again,suggesting that excellentbuying opportunities could bejust around the corner,accord-ing to Lachlan.

“Markets tend to risethrough the latter parts of arecession,” Lachlan Parnerschief investment officer PaulSaliba said. “We need toidentify when they start on anupswing – a difficult proposi-tion as there is no historicalparallel for the current situa-tion,” he said.

Saliba added that therewas a “crisis of confidence”among investors at themoment, which he put downto market volatility and theplanned introduction of thecarbon tax.

Lachlan Par tners co-founder and managingdirector Philip Pezzi saidthe lack of confidence wasleading to many Lachlanclients “freezing theirinvestment activities”.

“We suggest that investorsseek a health check on theirfinancial position with awealth management adviserto put their minds at ease,or develop a plan to dealwith current market down-turn and the expected recov-ery,” Pezzi said.

“There will be excellentbuying opportunities in prop-erty and shares in the nearfuture and investors shouldbe seeking to take advantageof them,” he said.


News

S&P holdsAviva ratingssteadyBy Tim Stewart

STANDARD & Poors Funds Services(S&P) has announced its ratings on allAviva Investors Australia productsremain unchanged, following the saleof the business to nabInvest – the directasset management arm of NationalAustralia Bank (NAB).

Aviva Investors Australia stated thatthe ownership change would not affectthe management of i ts Austral ianequity capabil i t ies, including thecurrent make-up of its investmentteam.

The transaction is expected to closethis quarter, and is subject to regulato-ry approval.

Aviva Investors Australia has approx-imately $5.5 billion in funds undermanagement, and nabInvest managesapproximately $51 billion via in-housemanagement teams and external part-ners, according to NAB.

By Chris Kennedy

THE two and a half year jailsentence handed down toShawn Richard – the master-mind behind the Trio Capitalfraud – is an “effective deter-rent”, according to AustralianSecurities and InvestmentsCommission (ASIC) chairmanGreg Medcraft.

Former Astarra AssetManagement investmentmanager Shawn Richard wassentenced to a total of 3 yearsand 9 months imprisonment,with a minimum term of 2years and 6 months for his rolein the Trio Capital fraud.

Medcraft welcomed thesentence as an effective deter-rent against dishonest conduct

by those in positions of trust.“Mr Richard was a critical

gatekeeper in the financialservices system, responsiblefor making decisions in theinterests of investors. Hisdishonesty resulted in signifi-cant detriment to thoseinvestors,” Medcraft said.

“ASIC has recently increasedits focus on the responsibili-ties of gatekeepers and, as thiscase demonstrates, will ensurethat those who dishonestly failin those responsibilities arebrought to account in criminalproceedings,” he said.

Richard was potentiallyfacing a sentence of up to 10years for his part in the largesttheft of superannuation fundsin Australian history, which

saw Australian investorsstripped of more than $100million.

In sentencing, NSWSupreme Court Justice Garlingsaid: “Mr Richard is guilty ofserious crimes of a high order.They were carefully consideredand planned, they were wellconcealed, they continuedover a period of nearly 4 yearsand they led to significantfinancial losses in excess of$26.6 million.”

Richard has previouslypleaded guilty to two chargesof dishonest conduct relatedto making false statementsand taking more than $6.4mill ion in undisclosedpayments, while he personal-ly received around $1.3 million

in secret payments.Last year, Richard entered

into an enforceable undertak-ing with ASIC which saw himbanned for l i fe from theAustralian financial servicesindustry.

Following an investigationinto Astarra Asset Manage-ment and its responsibleentity, Trio Capital , ASICalleged Richard was involvedin causing Astarra funds (theAstarra Superannuation Fundand the Astarra Superannua-tion Plan) to place investormoney into overseas hedgefunds, and that he and Astarrareceived in excess of $6.4mill ion in undisclosedpayments for making theseinvestments.

ASIC’s guide for CFD issuersBy Andrew Tsanadis

ASIC has released a regulatoryguide for contracts for differ-ence (CFD) issuers in order toprovide greater disclosure toinvestors.

The guide, Over-the-countercontracts for difference:Improving disclosure for retailinvestors, provides sevenbenchmarks for which CFDissuers are to adhere.

The benchmarks includeclient qualification, openingcollateral, hedging, financialresources, client money,suspended or halted underly-ing costs, and margin calls.

As part of addressing eachof the benchmarks stipulatedin the guide, issuers mustprovide a detailed explanationof their policies and practiceswhen trading.

For example, one of the

standards requires the issuerto disclose whether they holdsufficient liquid funds to with-stand significant adversemarket movements.

ASIC said most CFDs areissued as over-the-counter(OTC) products, making themincreasingly accessible to retailinvestors.

The regulatory body warnsthat because of this, manyinvestors may not be aware ofthe high-risk nature of CFDs.

“Most investors don’t under-stand the complexity of CFDs,and they don’t get independ-ent financial advice,” said ASICchairman Greg Medcraft.

“That means we need CFDissuers to do a much better jobof spelling out to investors therisks, as well as the rewards ofthese complex products.

“We want issuers to workharder to ensure people

investing in CFDs betterunderstand what they aregetting into – before they starttrading,” he said.

The guide requires CFDissuers to either address eachof the seven benchmarks orprovide an ‘if not, why not’explanation in their productsdisclosure statements.

According to InvestmentTrends’ 2010 Australian CFDReport, there are currently39,000 active CFD investors inAustralia.

ASIC said the CFD markethas seen growth of over 300per cent in the past 5 years,and it is reasonable to assumethat this growth will continue.

Greg Metcraft

Astarra sentence an ‘effective deterrent’

More deductibility sought on own occupation TPDBy Mike Taylor

SUPERANNUATION funds want theFederal Government to accept higherlevels of deductibility with respect to Totaland Permanent Disability (TPD) insur-ance provided through superannuation.

In a submission filed with the FederalTreasury, the Association of Superannu-ation Funds of Australia (ASFA) hassupported a government proposal toenable superannuation funds to claimdeductions for a portion of the cost ofcertain TPD policies, but argues thosedeductions should be higher.

“We are supportive of the removal of

the requirement for funds to obtain anactuarial certificate, whilst still givingfunds the option of doing so where theyare of the view the prescribed percent-ages do not appropriately reflect theirparticular circumstances,” the submis-sion said.

However, it said it believed the 67 percent applied to “own occupation” wastoo low.

“Discussions ASFA has had withinsurers indicate that for most TPD-onlypolicies the loading for an own occupa-tion definition is between 25 per centand 40 per cent, with the actual figuredepending on the occupations of the

members covered by the policy,” thesubmission said.

“This suggests that an appropriatedeductible portion of the premium for aTPD own occupation policy should besomewhere in the range of 70 per cent to80 per cent,” it said.

“That said, we do not support thecreation of a range of occupationallybased percentages, as this would runcounter to the aims of the measure, beingsimplicity and ease of administration,particularly as the industry consolidatesand the range of occupations of fundmanagers within a single fund increas-es,” the ASFA submission said.

ANZ announces new loan facilityBy Tim Stewart

AT a time when planners arestruggling to source businessloans, ANZ has provided i tsadvisers with some rel ief bylaunching a new f inancialplanner loan facility.

The ANZ Practice FundingFacility was created to help thebank’s advice businesses grow

their client bases and prepare forthe Future of Financial Advicereforms, according to ANZ generalmanager for advice and distribu-tion, Paul Barrett.

“Our advisers need the flexibil-ity to adapt to the new businessmodels required to succeed in afee-for-service environment,” saidBarrett.

The funding facility can be

sourced through more than 20accredited ANZ business bankingrelationship managers, accordingto the bank.

ANZ claimed that the newfunding facility would help advis-ers grow their businesses byacquiring practices, purchasingclient books from retiring plan-ners and refinancing existing busi-ness loans.

“Teams across ANZ from indus-try specialisation, commercial,and OnePath’s advice and distri-bution all collaborated to developand launch the ANZ PracticeFunding Facility,” said Barrett.

“It will also form an importantpart of a broader integratedrecruitment and succession strat-egy in development with ouraligned dealer groups,” he added.

ETF trading onthe up amidvolatile markets

By Milana Pokrajac

EXCHANGE traded fund(ETF) sector activity hassignificantly increasedover recent weeks,according to ETF traderiShares, which the com-pany attributed to marketvolatility.

iShares reported a 300per cent increase in trad-ing volumes in ear lyAugust, compared to its20-day average for itsbroad market iSharesMSCI Australia 200 andS&P/ASX High Dividend.

The company has seenthe surge in activity in theAsia-Pacific region, too,where two of its productsexperienced three to fourtimes their 20-day aver-age trading volumes.

Similar results could beseen in the northern hemi-sphere, according to man-aging director of iShares inAustralia, Mark Oliver.

Oliver said the increasedETF trading volumesdemonstrated that thissector was a ‘go-to’ liquid-ity source during times ofmarket uncertainty.

BlackRock’s recenthalf -year ly ETF Land-scape Industry Highlightsrepor t found that theglobal industr y had2,875 ETFs and assetsof US$1.4 trillion from146 providers at the endof first half of 2011.


News

Prepare your clients for whatever awaits them in life.Call 1800 005 057 or visit macquarielife.com.au/lifeactive

This information is provided for the use of licensed financial advisers only and is current as at 1 August 2011. Macquarie Life Active is offered by Macquarie Life Limited (MLL) ABN 56 003 963 773 AFSL 237 497. The information in this document is general information only. It does not take into account an individual’s objectives, financial situations or needs. Please refer to the Product Disclosure Statement jointly issued by: Macquarie Life Limited ABN 56 003 963 773 AFSL 237 497 and Macquarie Investment Management Limited ABN 66 002 867 003 AFSL 237 492. RSE No. R10044496 RSE Licence No. L0001281, dated 21 May 2011. Macquarie Bank Limited (MBL) ABN 46 008 583 542 does not guarantee or otherwise provide assurance in respect of the obligations of MLL and MIML. App Store is a service mark of Apple Inc.

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Fixated by price fluctuations, the online obsessive reaches for

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By Mike Taylor

RECENT market turbulence has seen anincrease in interest in gold bullion fromself-managed superannuation fund(SMSF) trustees.

The uptick in interest in physical goldhas been flagged by Taurus FundsManagement director, MohendraMoodley.

Taurus has recently developed a retailproduct offering exposure to gold, silver,

platinum, palladium and some goldequities.

He said that while Australian investorshad previously exhibited a reluctance tobuild significant exposures to physicalcommodities, there seemed to be a changein attitude flowing from the most recentmarket volatility.

Moodley said he believed a part of theincreased interest in physical gold wasbased on a realisation that gold equitiesdid not deliver the same outcome.

As well, Moodley said the reluctance ofAustralian investors to garner exposuresto gold and other physical commoditieswas not replicated in the US or Europe,where reasonable exposures werecommon – particularly among institution-al and family investors.

He said that there had also beenincreased interest in US and Europe inexposures to physical commodities, atleast some of which was based on debtand currency concerns.

Russell launchesVolatility ToolkitRUSSELL Investments hasproduced a toolkit it says isaimed at both advisers andinvestors to help them ride outthe current market volatility.

The product, appropriatelytitled “Volatility Toolkit”, offersdaily perspectives on changesin capital markets drawn from500 global investment profes-sionals.

Commenting on the newproduct, Russell Investmentschief execut ive of f icer forAustralasia, Chris Corneil, saidgiven market movements it wasnot surprising investors wereexperiencing some anxiety anduncertainty.

“We have a responsibility togive investors as much guid-ance as possible so they can

make more informed decisionsabout their investments nowand in the future,” he said.

Russell’s chief investmentstrategist for the Asia Pacific,Andrew Pease, said Russel lbel ieved the US and globaleconomies would continue ona path of gradual recovery, eventhough that recover y wasfragile and sub-par.

“We think market sentimentis fluctuating more dramatical-ly than changes in the underly-ing economic fundamentals,”he said. “For this reason, wedon’t recommend investorsreposition their portfolios tocash at this time.”

Pease claimed well diversi-fied portfolios would cushionthe effects of market volatility.

BGL announces new SMSF servicesBy Damon Taylor

ON the back of SuperStream’s data automa-tion focus, self-managed super fund (SMSF)software vendor, BGL, has announced anumber of new services which it believes willrevolutionise SMSF data processing.

Commenting on the automated SMSFsolution, Ron Lesh, Managing Director ofBGL, said the new service would destroythe myth that SMSF work could not be fullyautomated.

“Just imagine the efficiencies created ifwhen you opened your SMSF software, allbank account transactions from all Australianbanks and all broker transactions from allAustralian brokers were automatically loadedinto all of your funds,” he said. “And, at theend of the financial year, you could reconcileall your holding balances with the registries,receive all your dividend and distribution state-ments and process all tax components of

transactions automatically.”Lesh said that BGL’s new processes were

designed specifically for SMSF administra-tors, so that instead of having to log into eachfund to check for unallocated data, a multi-fund processing system would allow them toallocate any unallocated transactions for allfunds from a single screen.

“As industry leaders and automationexperts, it is easy for BGL to provide ourclients with unique functionality that provideshuge efficiencies and time savings,” he said.“And BGL will also introduce a new system tomake it easier for administrators to controldata feeds.”

“This new system will allow administratorsto view and sign up for some or all of thesenew data services through a single screen,and will provide automated status updatesfor each service,” Lesh continued. “We wantto ensure the administrator is always kept inthe loop,” he said.

SMSFs show interest in gold

Anumber of financial services lumi-naries gathered in Canberra lastweek to celebrate the 20th anniver-sary of the Superannuation Guar-

antee (SG) amid plenty of back-slapping andmutual congratulation.

And with 20/20 hindsight, that back-slap-ping and mutual congratulation was more thanjustified given the manner in which one ofAustralia’s most significant industries was bornout of what was really a politically-expedientmeans of bringing Australian wages growthunder control.

No one should forget that the Superannua-tion Guarantee was borne out of the need fora relatively new Labor Government with feweconomic runs on the board to place a brake onwages growth. It did so by way of negotiating anaccommodation with the Australian Councilof Trade Unions (ACTU) via the so-called Pricesand Incomes Accord.

In short, the Superannuation Guaranteecould only have been created because anAustralian Labor Party (ALP) Government wasin power and because the then leadership ofthe nation’s peak union body, the ACTU, waspragmatic enough to see the mutual benefitswhich would flow from such an arrangement.

In political terms it represented an absolutetriumph. The Prices and Incomes Accord, viathe SG, succeeded in containing wages growthat the same time as laying the foundations forwhat, 20 years later, became an almost $2 tril-lion savings pool.

Much was owed to the fact that Australia hadan ALP Government but it was equally impor-tant that the then, Prime Minister, Bob Hawke,had been a former secretary of the ACTU andintimately understood both the personalitiesand the issues.

Just as important was that the then Treasur-er, Paul Keating, developed a pragmaticworking relationship with the then secretaryof the ACTU, Bill Kelty.

The Prices and Incomes Accord survived thelife of both the Hawke and Keating Govern-ments and moved beyond the developmentof the SG to also alter the face of Australian

industrial relations and to pave the way for theHoward Government’s radical Workchoices.

Two decades later, only a few of the cast of1991 are still on the stage or standing in thewings. Most influential among those, however,is former ACTU official and industry funds stal-wart, Garry Weaven.

Where superannuation policy has beenconcerned since 2007 the Rudd and GillardGovernments have not had cause to consultdeeply with the ACTU. Instead, the touch pointhas been the industry superannuation fundswhich grew in strength on the back of the SG.

Much is made of the level of ALP and tradeunion influence on the trustee boards of indus-try superannuation funds but, in reality, themake up of those boards is little changed fromthe early days of award-based superannuationwhen equal representation was provided toemployers and employees.

But it is not at the individual industry super-annuation fund level that most change hasoccurred. Instead, most change has occurred asa result of a number of industry superannua-tion funds joining together to fund the creationof a commercial entity – Industry FundServices.

It is worth noting that the evolution of thatindustry fund commercial entity mostly tookplace during the period of the Howard CoalitionGovernment and that those responsible,including Garry Weaven, made little secret of

their intentions with building what has nowemerged as a vertically-integrated financialservices conglomerate offering banking servic-es, funds management, asset allocation, finan-cial planning and lobbying services.

As well, what placed the industry funds clearlyat odds with the financial planning industry wasthe Howard Government’s introduction ofchoice of superannuation fund legislation.

It was the choice of fund legislation whichprompted the commissioning of the so-called“Compare the Pair” advertising campaign –something which proved so successful thatlater surveys clearly showed that industry fundshad emerged the net winners in attractingmembers in early years of choice of superannu-ation fund.

While there were those that argued the“Compare the Pair” advertising campaignrepresented a breach of the sole purpose testapplying to superannuation funds, theAustralian Prudential Regulation Authority(APRA) allowed it to continue (with somedisclaimers) on the basis that the industryfunds were ultimately acting to benefitmembers.

Nearly a half decade since the regulator gavethose advertisements the nod, it is not clearwhether it has seriously revisited the issue inthe context of choice of fund no longer beingfront and centre, or the advertisements havingbeen changed.

With the Future of Financial Advice (FOFA)changes about to be released in the form of legis-lation, and with the Government moving toimplement its “Stronger Super” policy, the Super-annuation Guarantee looks likely to be lifted to12 per cent in time for its 21st anniversary.

What is also certain is that irrespective ofwhether the Government succeeds in havingall its FOFA changes turned into legislation, theindustry funds will continue to grow their pres-ence in the financial advice space, particular-ly with respect to scaled advice.

In fact, the degree to which the rise and riseof the industry funds continues will depend inlarge part on future Government policy andwhich particular party is in Government.

InFocus


The financial services industry has celebrated the 20th anniversary of theSuperannuation Guarantee and, as Mike Taylor reports, the industry fundshave more to celebrate than most.

“The Prices and IncomesAccord, via the SG, succeededin containing wages growth atthe same time as laying thefoundations for what, 20 yearslater, became an almost $2 trillion savings pool. ”

Exchange traded fundson the rise

FSC Political Series: PrimeMinister’s Breakfast31 August 2011The Westin, Sydney www.ifsa.com.au/events/calen-dar.aspx

FEAL September Luncheon:Climate Risk – what canfunds do?Canberra – 7 SeptemberAdelaide – 12 SeptemberMelbourne – 15 SeptemberBrisbane – 19 SeptemberSydney – 20 SeptemberCheck website for locationswww.feal.asn.au/events

FPA Event: Breakfast withSenator Mathias Cormann,Shadow Assistant Treasurer,Shadow Minister for FinancialServices and Superannuation8 September 2011RACV Club, Melbournewww.fpa.asn.au/events

ASFA National Conference &Super Expo9-11 October 2011Brisbane Convention & Exhibi-tion Centrewww.superannuation.asn.au/conference-2011/default.aspx

FPA Certified Financial Plan-ning (CFP) Dinner 2011 11 October 2011Newcastle Club, 40 NewcomenSt, Newcastlewww.fpa.asn.au/events

Source: Blackrock

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The Eurozone debt crisis is stillunfolding - no one knows howor when i t wi l l end. Butalready economic lessons have

been learned. The first is that economic (monetary)

integration without political (fiscal) inte-gration is a flawed union. A commoncurrency for Europe was a commend-able idea, especially as it was an attemptto enmesh countries whose rivalries hadtriggered two world wars. But to work itneeded to be done under a federal polit-ical system like Australia’s, because thisallows seamless fiscal transfers acrossthe unified region.

Like Greece and Ireland, Californiahas struck serious debt and economicproblems, but Washington’s largesse(health and welfare payments, federalwages, etc.) supports the state. No suchnon-repayable money automaticallyflows into Greece, Ireland, Spain orPortugal from Brussels. Many of thesolutions to the Eurozone debt crisis arethus, in theory, political.

The second lesson is that countriesthat use a stateless currency such as theeuro have limited ability to respond toeconomic troubles. They have no inde-pendent monetary policy, nor a curren-cy that can plunge to make theireconomies more competitive. Theirgovernments’ only levers are fiscal policyand any powers that can help deflatetheir economies – the recourse knownas ‘internal devaluation’. That’s whengovernments impose deflation by suchmeasures as cutting public-sector wagesand lopping social security benefits atthe same time as they are imposingausterity measures.

As Greece, Ireland, Spain and Portugalshow, people protest loudly when theirwages and benefits are slashed or retire-ment ages are boosted. A f loatingnational currency offers government amuch more politically viable option for

making a country competitive. For what-ever reason, people don’t see a plum-meting currency for what it is – a cut innational income.

Austerity programs killAnother lesson, and one that should

surprise no one, is that austerityprograms kill sick, and even not-so-sick,economies. They thereby worsen, ratherthan fix government finances, render-ing International Monetary Fund (IMF)-style rescue pointless.

The fiscal cuts Athens imposed as partof its 2010 bailout have torpedoed theGreek economy and consequently, as taxpayments dropped and welfare expendi-ture soared, widened its budget deficitto about 10 per cent of its gross domes-tic product (GDP), beyond the 7.5 percent target set for 2011 in last year’sbailout package. That is why Greece’sbond yields are double what they werewhen it accepted a European Union-IMF bailout in May last year, and theratio of government debt to GDP issoaring towards 160 per cent this yearfrom 110 per cent last year.

The austerity package Greece justpassed has been slammed as an ‘econom-ic suicide pill’ by many economistsbecause it is likely to make things worse.The UK is discovering this economic truthafter its government imposed an auster-ity program in 2010 to rein in its budgetdeficit and debt, even though it faced nocrisis. Yet many in the US are calling forausterity to fix the country’s governmentfinancial woes even though the econom-ic recovery there is feeble.

Private poison Another lesson from the Eurozone is thatexcessive private debt can be as poison-ous as too much government debt.Greece floundered because its govern-ment ran (and hid) unsustainable fiscaldeficits, as did Portugal. But authorities

in Spain and Ireland were f iscallyprudent – Ireland ran budget surplusesuntil 2007 and had reduced governmentdebt to 30 per cent of GDP by the mid-2000s. But Irish and Spanish banks werereckless. They lent too much for prop-erty development and created propertybubbles that burst and, in exploding,crippled their banks, economies andgovernment finances.

This is a warning to Australians. Weare smug that our net government debtwill only peak at 7.2 per cent of GDP thisfinancial year. Yet most are oblivious tothe fact that our net foreign debt – whichis largely bank debt – stood at $677billion, equal to 52.4 per cent of GDP, atthe end of March. Australia’s financialsystem would’ve been at risk, if evercircumstances arose where foreigninvestors didn’t want to roll over matur-ing net private foreign debt worth $529billion at the end of March (of which$358 billion was net bank debt).

Debt guarantees dangerousThen there’s the lesson that it’s okay forgovernments to guarantee bank deposits,but dangerous to guarantee bank debt.Australia was one of many countries thatin 2008 guaranteed bank deposits sopeople would think their savings weresafe. Around the same time, Australia wasone of many countries to stand behindbank debt so financial institutions couldaccess money on global financial marketsat a turbulent time. So far so good formost. But Ireland showed how haywiresuch pledges for bank debt can go.

On 29 September 2008, when Irishbank debt was selling for half its facevalue, the Irish government decided tosupport its tottering banks by guaran-teeing bank debt. All this private debtthen became public debt. With one deci-sion, that has been slammed as‘economic treason’ and likened to usingthe Irish people as collateral, Dublin

wrecked the Irish economy for – let’s beoptimistic – at least a generation.

The last, and most contentious, lessonoffered here – and one that is yet to fullyplay out – is that it can be better for trou-bled economies to default rather thanaccept emergency help that is condi-tional on punishing their populationswith austerity programs. (Remember,too, that ‘restructuring’ is just a niceword for a partial default.)

Default an optionIceland serves as one example of howthis option can help resolve a financialcrisis. The country’s banks were 10 timesbigger than Iceland’s economy whenthey collapsed in 2008, so vast that thegovernment refused to take responsibil-ity for these private debts. So creditorslost money. After contracting 7 per centin 2009, with IMF loans and a 50 per centdrop in the krone, Iceland’s economy isrecovering now.

Argentina’s experience, which was asovereign default, is similar. At the endof 2001, the South American countrydefaulted on debt and snapped thepeso’s currency peg (a similar constraintas belonging to the euro) to escape anIMF-imposed recessionary spiral. It dulydid thanks to the lower currency helpingcommodity exports. Some conditionsneed to be met for a government to bebetter off defaulting, such as its budgetneeds to be at least in balance beforeallowing for interest payments - Greeceisn’t there yet.

The Eurozone debt crisis was largelycaused by French and German banksunderestimating the risks of lending toperipheral European economies. So, inprincipal, why shouldn’t they be punishedfor their recklessness? Surely, thesebankers need to learn some lessons too.

Michael Collins is the investmentcommentator at Fidelity.


OpinionDebtCrisis

Lessons from the Eurozone debt crisisCountries around the world have much to learn from the current Eurozone debt crisis. Michael Collins explains what has gone wrong in Europe over the past couple of years.


Thinking about the woods AND the trees

For a long time, practitionerscould devote themselves tocompany financials and valua-tions, with ‘set and forget’ asset

al location models. But then alongcame the biggest macro economicshock in more than a generation –suddenly, macro mattered and thechallenge was to position portfoliosaround the world’s macro economicrisks and opportunities.

Now the challenge (and opportunity)is to combine these two ways of think-ing – to position portfolios to benefit

from positive long-term macro oppor-tunities while avoiding the macro risksthat might derai l portfol ios in theshorter term AND then carefully selectsecurities in which to invest.

PortfolioConstruction Forum Confer-ence 2011 is focused on better under-standing the key macro AND microissues and what they mean for investorportfolios – and successfully navigatethrough the woods AND the trees.

Conference facilitates debate on thethree pillars of portfolio construction –markets, strategies and investing. The

2011 program is another jam-packed,marathon three-day, 25-hour programfeaturing 40 intensive, objective, inter-active sessions and more than 35 care-fully selected local and internationalportfolio construction experts.

It begins with an optional one-day,workshop-style Masterclass, followedby the main two Conference daysfeaturing the 10-hour, plenary style Crit-ical Issues Forum featuring 18 leadinginvestment thinkers from around theworld, and 4-hour Due Diligence Forumelectives program featuring another 20

international and local investmentexperts.

This issue of Money Managementprovides a quick reference guide to the 20Due Diligence Forum electives. The presen-tations and podcasts are available onlineat www.PortfolioConstruction.com.au.Future issues of Money Management willfeature the ‘best of’ research papers behindthese presentations.

DAY 1 Wednesday 24 August 2011 - Due Diligence Forum 1 - 11:00am-11.50am

Stream

Partner

Topic

Presenter

Research Paper Summary

Room 1

Property

Abacus Property Group

The prophecy of property

Dr Frank WolfAbacus Property Group

This research paper builds onearlier analysis of each sub-sectorof the commercial propertymarket, and extends thatknowledge by analysing thevarious methods and strategieswhich can be used to deliveroutperformance in any commercialproperty. The analysis providesevidence by way of case studies tosupport the argument thatoutperformance is best served byan active value-adding approachthat can extract greater value thanmarket movements alone willproduce.

Room 2

Australian Equities

Colonial First State

The equities piece of the post-retirement puzzle

Rudi MinbatiwalaColonial First State Global AssetManagement

What are the key considerationswhen addressing equities in aretiree’s portfolio? How importantare dividends and frankingcredits? How do you reducevolatility without sacrificing incomeand returns? This research paperexplores the three most commonpost-retirement issues - incomegeneration, capital preservationand longevity - and argues that anequities allocation can bemodified to provide a betterbalance than alternative strategiesthat just focus on high yieldingstocks to arrive at a strategybetter-suited to today’s retirees.

Room 3

Global Equities

T.Rowe Price

How to capture the full potential ofemerging market growth

Scott BergT. Rowe Price

Emerging markets are a significantsource of earnings growth for manydeveloped world companies –raising the question ‘why doinvestors need to hold EM equitiesif indirect exposure to EM growthcan be obtained via developedmarkets?’ Outside of near-terminflation concerns, sceptics citepolitical, exchange rate, andcorporate risks associated with EMequities. This research paper arguesthese concerns may be excessiveand that investors must considerthe merits of a “pure” directexposure to EM in their globalopportunity set.

Room 4

Alternatives

AQR Capital Management

It’s not all alpha - whatidentification of hedge fund riskpremia means for investors

Dr Gregor AndradeAQR Capital Management

Alpha is shrinking – that’s goodnews.Alpha is simply the portionof a portfolio’s returns unexplainedby exposure to common riskfactors.As these are identified,alpha shrinks. This research paperargues that risk factorsunderpinning classic hedge fundtrading strategies – hedge fund riskpremia – are investable and canenhance portfolio construction andrisk management, leading not onlyto a reclassification of hedge fundalpha, but also to better diversifiedportfolios with greatertransparency, improved risk controland higher returns.

Room 5

Strategies

MLC

A scenarios approach to assetallocation

Dr Susan GoslingMLC

Different approaches to assetallocation are available topractitioners. But reliance onselection of parametric returndistributions, summary measuresof risk and historical data as anindicator of the future remainwidespread. This research paperproposes an approach that makesmore complete use of informationavailable about the future, forcingconsideration of different timeframes, alternate outcomes, andtail risk. It does this not byforecasting the future but bydescribing what has the potentialto make a significant difference tolong-term investment outcomes.

DAY 1 Wednesday 24 August 2011 - Due Diligence Forum 2 - 12:00pm-12.50pm


PortfolioConstruction Forum Conference

Stream

Partner

Topic

Presenter


Room 1

Debt

PIMCO

Deep in the woods? How willclients deal with ‘new normal’returns?

Rob MeadPIMCO

Three years ago, PIMCO introducedthe concept of the ‘new normal’and it is now widely acknowledgedthat investing has changedsignificantly due to uncertainty ineconomic outlook reflectingdeleveraging, reregulation, globalhigh unemployment and setbacksin developed economies. The newnormal has already begun toimpact Australia’s economy andbond market. This research paperargues that the Australian bondmarket continues to provide areliable real return with relativelylow volatility, and asks ‘are wedeep in the woods or is there away out?’

Room 2

Australian Equities

Hyperion Asset Management

The economic costs of short-termism

Dr Emmanuel ‘Manny’ PohlHyperion Asset Management

Short-termism is a pandemic thatcontinues to flourish uncheckedwithin financial markets, resultingin significant long-term economiccosts to investors. This researchpaper examines the economiccosts of excessive short-termismby corporate management, activefund managers, asset consultants,super fund trustees – and by theirprincipals, ‘mum and dad’investors. Despite repeatedwarnings on short-termspeculation from investmentluminaries, factors such asbehavioural biases and increasingspecialisation ensure the costsassociated with myopic behaviourcontinue to adversely affect long-term investor returns.

Room 3

Global Equities

Five Oceans Asset Management

International investing: Improvingreturns by managing risk

Christopher SelthFive Oceans Asset Management

Investment opportunities existbetween values given by themarket to companies based onimmediate business outcomesthat may not be replicable overtime, and strategies that cansustain profit generation over thelonger term. This research paperexamines the internal (micro) andexternal (macro) factorsinfluencing a company’s valuation,the drivers and the risks. It looks atvarious portfolio risk strategies,such as stock-specific riskmanagement and hedgingtechniques, and whetherdiversification is still an effectiverisk management tool.

Room 4

Alternatives

RARE Infrastructure

Infrastructure investing through themacroeconomic cycle

Nick LangleyRARE Infrastructure

Infrastructure assets areincreasingly forming part ofinvestor asset allocations. Thisresearch paper argues that keyattributes of infrastructure assetshave led to its inclusion withinportfolios and, that whileinfrastructure can be consideredseparate asset class, there is aclear link to the economy. It askswhy infrastructure assets haveperformed differently to otherinvestable assets (and can weexpect this to continue), how isthis performance linked to theunderlying asset characteristics,and how the unique infrastructureattributes can improve returns.

Room 5

Strategies

BT Investment Management

What to do when good beta goesbad

Joe BrackenBT Investment Management

The active vs passive debate ispointless if broad beta returns arebarely positive or worse. Thisresearch paper looks at betaacross bond and equity marketsover time, arguing that while the‘100 years of growth’ story isalluring, the reality is moredisappointing. It examines how toboost returns on portfolios usingliquid strategies available toAustralian investors, and concludeswith a take on asset allocationthat is radically different from thatpracticed currently.

Due Diligence Forum programEach of the 20 Due Diligence Forum sessions is focused on a contemporary portfolio issue and is firmlygrounded in a pre-approved research paper. These are available at www.portfolioconstruction.com.au.Slides and podcasts of each session will also be available in the online Resources Kit after the conference.

DAY 2 Thursday 25 August 2011 - Due Diligence Forum 4 - 12:00pm-12.50pm

DAY 2 Thursday 25 August 2011 - Due Diligence Forum 3 - 11:00am-11.50am



Stream

Partner

Topic

Presenter


Room 1

Debt

Perpetual

Global vs domestic fixed income –does it really pay to go overseas?

Vivek PrabhuPerpetual

The prevailing view is that globalfixed income is a better investmentthan domestic fixed income. Asmarkets prove time and again, theprevailing view is often wrong. Doinvestors who go offshore actuallyget a better result? This researchpaper looks at a number of factorsthat must be considered whenlooking at offshore credit and fixedincome investing includingdistinguishing between defensiveand yield driven strategies,currency risks and the cost ofhedging, offshore vs domesticyield equivalency, asset quality anddiversity.

Room 2

Australian Equities

Ellerston Capital / Zurich

Investing in small caps – why themacro view is important and howit influences decisions

Michael BesleyEllerston Capital

The world has changed – no longercan you generate big returns insmall caps from simple bottom upstock picking.With the index beingdominated by resources andglobal macro factors just asimportant as bottom upfundamentals, small capmanagers must address today’sissues to generate tomorrow’sgrowth. This research paperexplores the issues impactingsmall companies, and how theyare an essential and valuable partof an overall portfolio.

Room 3

Global Equities

Magellan Asset Management

Rising inflation will impact yourportfolio – what are you doingabout it?

Hamish DouglassMagellan Financial Group

For years, the developed worldhas been a major beneficiaryof imported deflation for apercentage of its core CPI asglobalisation movedmanufacturing capabilities tolower-cost / lower wageemerging markets. Thisresearch paper argues thatthis dynamic is running out ofsteam. As emerging marketswages increase significantly,the core CPI of manydeveloped world economieswill rise and potentially forcesome central banks to revisitinterest rate settings.Positioning portfolios for theprospect of rising inflation istherefore critical.

Room 4

Alternatives

Barclays Capital

Commodities – a diverse andcomplex asset class

Ajay JainBarclays Capital Fund Solutions

Demand for commoditiesexposure is soaring asinvestors seek to capitalise onlong-term trends and diversifyportfolios. However, it is adifficult asset class to master.The investment community isstill getting to grips with thefundamental drivers ofcommodity prices. Thisresearch paper highlights theknowledge needed to approachthis asset class. It examinesmacroeconomic and long-termdrivers of prices within thesector, and sets out a numberof considerations to take intoaccount when tradingcommodities in the short term.

Room 5

Strategies

Schroders

Turning the dial - how to sensiblymake the move away from thecash crutch

Greg CooperSchroder Investment ManagementAustralia

In an investment environment thatreeks of uncertainty, the allure ofhigh cash deposit rates againstcurrent low inflation is strong.However, on a longer-term view,cash is unlikely to meet clientrequirements. This research paperdiscusses how to actively managethe trade-off between the risk andreturn of different asset classes inan uncertain economicenvironment.

Stream

Partner

Topic

Presenter


Room 1

Debt

Principal Global Investors

Interest rates rising – make sureyou get the credit

Robert da Silva Principal Global Investors

Investors often overlook a crucialpart of the fixed income market– short-duration bonds. Thisresearch paper argues thesebonds are attractive during risinginterest rate periods, offering thepotential for both inflationprotection and a yield advantageover cash and other low durationassets. It shows that since1994, there have been twoperiods when US Treasury yieldsincreased by more than 200basis points and, in both, returnson short-duration high yieldbonds were positive. The paperdiscusses factors contributing totheir outperformance.

Room 2

Australian Equities

SG Hiscock / Equity Trustees

Concentrated funds – are they tooactive and risky?

Robert Tucker & Robert HookSG Hiscock / Equity Trustees

This research paper looks at howto define a concentrated fund,and how to identify whether it isreally active or not, and thusjustifies active managementfees. It shows that concentratedfunds with higher active sharesoutperform more their broadlydiversified counterparts, andlooks at how to define riskmeasures to assess the inherentriskiness of a fund. Finally, thepaper examines whether volatilityis bad and explains why thefocus of risk should be heavilyweighted to idiosyncratic risk.

Room 3

Global Equities

Pengana Capital / nabInvest

China’s transformation – theRazor’s edge for Australianinvestors

Diane LinPengana Capital

Over the past decade, fixedasset investment accounted fornearly 50% of China’s GDPgrowth, driving global demandfor materials and resources. Thisresearch paper argues this pathto growth is unsustainable. Itconsiders the impact of China’sdemographic trends and itscurrent Five Year Plan on thelevel and drivers of growth, andresultant policy changes, beforearguing which economies,sectors and industries in the AsiaPacific region will benefit mostfrom China’s transformation andwhich will be most at risk.

Room 4

Alternatives

AMP Capital Investors

Downside protection: usinghybrid infrastructure portfolios

Greg MacleanAMP Capital Investors

With markets going sideways,it is not surprising thatinvestors are placingincreasing emphasis onabsolute rather than relativereturns, questioning therelevance of traditionalportfolio allocation rules andlooking for more innovativeapproaches – particularlyfocusing on effectivedownside protection coupledwith reliable returns. Thisresearch paper argues thatgiven the limitations of listedequities in this capacity,consideration should be givento adding downsideprotection qualities to aportfolio via an investment ina hybrid of listed and unlistedinfrastructure.

Room 5

Strategies

Russell Investments

Constructing an alternativesportfolio

Nicole ConnollyRussell Investments

Investors are constantly on thewatch for new market segmentsor strategies in the search forenhanced portfolio returns andreduced risk. Attention hasfocused increasingly onalternative investments and theirbenefits to a diversified portfolio.This research paper provides adefinition of the category andthe types of strategies andsectors that are typicallyincluded. A logical framework isprovided in which investors canappreciate the characteristics ofthese investments, and guidanceas to appropriate theirweightings in a diversifiedportfolio.



The Great Depression – parallels for todayAs one of eight PortfolioConstruction Forum Academy members who recently attended a four-dayHarvard Business School short course on the global economy led by Professor Niall Ferguson,Charles Creswick summarises one of the key course topics.

The ‘Black Tuesday’ stock marketcrash on 29 October 1929 set inmotion a series of events thateventually led to the worldwide

Great Depression. Irving Fisher, a notedUS economist of the time, argued that thepredominant factor leading to the GreatDepression was ‘over-indebtedness’ anddeflation. He tied loose credit to over-indebtedness, which fuelled speculationand asset bubbles. Sounds familiar?

CatalystsA false sense of prosperity In the 1920s, the US was over depend-ent on production – automobile manu-facturing was the leading industry. Itwas a lso a t ime of great dispar i tybetween rich and poor. More than 60per cent of the population was livingbelow poverty levels, while a mere 5 percent of the wealthiest US ci t izensaccounted for 33 per cent of income –the richest 1 per cent owned 40 per centof the nation’s wealth. This unevendistribution of wealth was mirrored inthe unequal distr ibution of r ichesbetween industry and agriculture.

Global crisis While the US prospered during the 1920s,most of Europe was still reeling from thedevastation of World War I, and fell intoeconomic decline. The US became theworld’s banker and, as Europe starteddefaulting on loans and buying less USproducts, the Great Depression spread.

Speculation and over leverageDue to a distinct lack of stock market regu-lation, US investors were able to specu-late wildly and buy stocks on margin,needing only 10 per cent of the price of astock to be able to complete the purchase.Rampant speculation led to falsely highstock prices. When the stock market beganto tumble in the months leading up to the29 October 1929 crash, speculativeinvestors couldn’t make their margin calls,and a massive sell-off began.

Bank failuresOnce the US stock market crashed,millions of Americans began withdrawingtheir money from banks; fearful theywould fail. The more money they with-drew, the more banks failed, and the morebanks failed, the more money they with-drew. By 1933, more than 11,000 of thenation’s 25,000 banks had collapsed, andpeople simply lost their savings.

Lack of available creditWith the massive withdrawal of funds bydepositors, US banks had no more moneyto lend. The surviving banks – unsure ofthe economic situation and concerned fortheir own survival – stopped being aswilling to loan money, exacerbating thesituation and leading to less and lessspending.

People stopped savingAfter the stock market crashed, banksfailed, and unemployment levels rosehigher and higher, people understandablystopped spending money. This also deep-ened the economic crisis, as demand forproducts and services ground to a halt.Economist John Keynes referred to thishoarding of money and lack of desire tospend as the “paradox of thrift”.

Preserving the gold standardSome economists believe that the USFederal Reserve allowed or caused thehuge declines in US money supply, inpart, to preserve the gold standard. Underthis, each country set a value of itscurrency in terms of gold, and tookmonetary actions to defend the fixedprice. It is possible that had the USFederal Reserve expanded monetarysupply greatly in response to thecountry’s banking crisis, foreigners couldhave lost confidence in the US’ commit-ment to the gold standard – which wouldhave led to large gold outflows and forcedthe US to devalue its currency. Likewise,had the Federal Reserve not tightened inthe fall of 1931, it is possible that therewould have been a speculative attack onthe dollar, forcing the US to abandon thegold standard along with Great Britain.

High unemploymentDuring the Great Depression, unemploy-ment in the US reached its highest level.

In 1933, 25 per cent of the US workforcewas idle.

Dust bowl A drought from 1930 to 1936, known asthe Dust Bowl, aggravated the problemsof the Great Depression. More than 1 million acres of farmland were rendereduseless because of severe drought andyears of over farming, and hundreds ofthousands of farmers further swelled theranks of the unemployed.

US economic policy in EuropeAs businesses began failing, the USGovernment created the Smoot-HawleyTariff in 1930 to help protect US compa-nies, charging a high tax for imports andthereby leading to less trade between theUS and foreign countries, along with someeconomic retaliation.

Parallels for todayThe above has some very unpleasantparallels in current times.

Some of US President Obama’s policieshave similarities to those of FranklinRoosevelt, including massive budgetdeficits, huge stimulus packages and inter-ventions in financial markets, an anaemicemployment outlook and a lack of effectivefinancial regulation.

Globally, countries remain over indebt-ed – often as a result of bailing out theirdomestic banks, global trade remainsunbalanced, and there continues to be a

lack of effective financial regulation, withexcessive risk as a result. Income and wealthinequality continues to grow and, mostimportantly, political leaders of all stripesonly plan for the next electoral cycle, asopposed to the next 10 years – China beinga notable exception.

As the world’s largest economy, the USneeds to take the lead for a global solution.Ongoing Keynesian stimulus measurescannot be applied indefinitely but, on theother hand, severe austerity measures in theUS will push up unemployment, reduce taxreceipts, and act as a continuing drag on thecurrent account deficit of the US. Measuresthat must be considered include taxamnesties for US companies bringingoffshore earnings home, a national value-added tax, specific tax incentives for smallbusinesses to hire staff, tax incentives for UScitizens to save for their retirement (anAustralian-style superannuation system), thewithdrawal of foreign troops aboard, reduc-tion on militarily spending, tax increases onwealthier Americans, cuts to overly generousretirement entitlements for certain unionisedindustries, social security and Medicareadjustments, et cetera. Once all of theseoptions are considered, the US may start togradually get its economic house in order.

Charles Creswick is a financial plannerwith Logical Financial ManagementAustralia. Professor Niall Ferguson willaddress the PortfolioConstruction ForumConference on 25 August 2011.


Rate the raters

20Lonsec maintainsits lead

21Sprinting thefinal leg

22The blamegame

23Movers andshakers

RATE THERATERS 2011


Rate the raters

LONSEC has been named Money Manage-ment’s Ratings House of the Year for 2011.

It is the second successive win by Lonsec,based on responses from both fundmanagers and financial planning dealergroups as part of Money Management’s two-stage Rate the Raters survey.

While Lonsec again emerged as a clear-cut winner across both dealer groups andfund managers, the 2011 survey processrevealed what appeared to be the beginningof a recovery by van Eyk after nearly a yearof negativity based around key personneldepartures, including that of founder,Stephen van Eyk.

Since Money Management conducted thetwo surveys it has been announced that theownership of Lonsec has changed hands,with the ratings house now a part of the MarkCarnegie backed Financial Research Hold-ings which also houses superannuationratings house, SuperRatings.

The 2011 process also highlighted aserious divergence in attitudes between fundmanagers and dealer groups with respect toparticular ratings houses, with the mostextreme case being that of Zenith which –while struggling to gain support among fundmanagers – was strongly regarded by finan-cial planning dealer groups.

In a closely fought battle for runner-up asRatings House of the Year, Money Manage-ment handed the prize to van Eyk, based onthe comeback it recorded in the eyes of bothfund managers and dealer groups.

Indeed, there was much for van Eyk to feelpleased about from this year’s Rate the Ratersprocess, with dealer groups in particularstrongly supporting its processes whilemarking the company down with respect tostaff and client service.

The Money Management survey processrevealed that van Eyk was particularly poorlyregarded with respect to client service andstaff – something which clearly draggeddown its overall score with respect to becom-ing Ratings House of the Year.

Two of the companies to improve marked-ly in the 2011 Rate the Raters process wereStandard & Poor’s and Mercer, with the lattergaining particularly strong support amongthe dealer groups, based on the quality of itsresearch and client service.

Morningstar was better regarded byrespondents to this year’s Rate the Raterssurvey process, notching up improvementsin terms of staff and client service, butappeared to still struggle with respect to theoverall quality of its research when comparedto the industry front-runners.

Zenith – the smallest of the ratings houses– struggled in the fund manager segment ofthe Rate the Raters process, with the resultswell down on those of last year. However, inthe dealer group segment it ran neck andneck with Lonsec on almost every criteria.

What’s more, Zenith was the only ratingshouse in the dealer group survey not torecord a negative vote, with its clients ratingit as either “good” or “excellent”.

Lonsec head of research Amanda Gille-spie attributed the company’s back-to-backtitles as Ratings House of the Year to its busi-ness model.

“It is extremely pleasing that the hard workand focus of Lonsec’s research team over thepast year has been acknowledged. Mostimportantly, our focus has remained ondelivering timely, quality and objectiveresearch to our clients, while at the same timeensuring that the research product andservice is specifically tailored to meet theirneeds,” she said.

Gillespie said there had been a lot ofdebate around business models in theresearch industry but added that “Lonsec

would not have a successful research busi-ness if we compromised on the quality orobjectivity of our research”.

“Emphasising the objectiveness of theresearch process is important because, at theend of the day, our clients would not toleratebiased research,” she said.

Gillespie also attributed the success toLonsec maintaining a large and stableresearch team.

She said this enabled the company todeliver in-depth research on a broad spec-trum of products, proactively respond togrowth in certain segments of the productmarket (ETFs, emerging market and incomefund coverage, for example) and important-ly, help to meet the different needs of adiverse advisory client base.

Commenting on his company’s runner-upstatus in the 2011 Ratings House of the Year,van Eyk chief executive, Mark Thomas, paidtribute to a successful rebuilding effort and therecruitment of quality people into key roles.

“We continue to keep investing in thebusiness,” he said.

“It is true that we went through a periodthat challenged the culture of our business,but the culture has won,” Thomas said.

Looking at events over the past 12 months,he said there had been a number of turningpoints, and amongst those had been theretention of the Genesys mandate and thecompany’s solid performance in the fundmanagement element of Money Manage-ment’s Rate the Raters series. MM

Lonsec maintains its leadLonsec has yet again emerged as a favourite among dealer groups with its back-to-backvictory in Money Management’s Rate the Raters survey, while van Eyk Research grabbed thesecond spot, writes Mike Taylor.

Amanda Gillespie


Rate the raters

Lonsec sprints the final leg

LONSEC has emerged as the best-regardedresearch house among financial planning

dealer groups, according to new MoneyManagement research.

A survey of dealer groups undertaken by MoneyManagement as part of its Rate the Raters process,saw Lonsec confirmed as the best-regarded researchhouse among dealer groups as measured across arange of criteria from client service through to modelportfolios and value for money.

It is the second year in succession that Lonsec hasemerged at the top of the Rate the Raters dealer groupleague table. This follows on from the ratings househaving topped the league table with respect to theperceptions of the fund managers they rate.

The second-ranked ratings house in the dealergroup survey was Zenith which, while dealing with arelatively small number of dealer groups within theoverall survey sample, rated highly across virtuallyall criteria and managed the extraordinary achieve-ment of never being rated at less than “good” or“excellent” by its clients.

The other stand-out performer in the dealer groupsurvey was Mercer, with both Standard & Poor’s andMorningstar both being better regarded in 2011 thanduring the previous survey period.

The survey outcome suggested that while van Eykis still paying the price for some senior personnelchanges in recent years, the underlying quality of itswork remains highly regarded by dealer groups.

While Lonsec ranked well across all the surveycriteria, consequently securing its leadership, it wasoutranked by both van Eyk and Zenith with respectto model portfolios, with van Eyk’s web tools the mosthighly regarded in the industry.

The ratings company to move up most markedlyin the survey was Mercer, with clients particularlypleased by its asset allocation research, its fund andcompany research, as well as its model portfolios.

Where value for money was concerned, big globalbrands Standard & Poor’s and Morningstar faredworst among dealer group respondents, while Mercerand Zenith emerged as best regarded.

The distinctive van Eyk model appeared to be wellreceived by dealer groups while that of Lonsecappeared to garner a mixed response.

The dealer group element of the Rate the Raterssurvey revealed the degree to which key personneland client relationships are crucial to the overall rankof ratings houses.

Lonsec emerged as strongest with respect to overallperceptions of its client service, closely followed byZenith, Mercer and Morningstar. MM

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1 – Awful

2 – Poor 3 – Good

4 – Excellent

Lonsec

Mercer

Morningstar

Standard & Poor's

van Eyk Research

Zenith

Value for Money compared to just low costAverage Score

3.3

3.1

2.7

2.7

2.9

2.9

Table: Value for money compared to just low cost

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1 – Awful


4 – Excellent

Lonsec

Mercer

Morningstar

Standard & Poor's

van Eyk Research

Zenith

Asset Allocation research

Average Score

2.8

3.0

3.0

2.8

3.6

3.1

Table: Asset Allocation research

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1 – Awful


4 – Excellent

Lonsec

Mercer

Morningstar

Standard & Poor's

van Eyk Research

Zenith

Model portfolios

Average Score

3.4

3.3

2.7

3.0

2.9

3.1

Table: Model portfolios

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1 – Awful


4 – Excellent

Lonsec

Mercer

Morningstar

Standard & Poor's

van Eyk Research

Zenith

Fund and fund company research

Average Score

3.6

3.4

2.9

3.2

3.1

3.2

Table: Fund and Fund Company Research

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1 – Awful


4 – Excellent

Lonsec

Mercer

Morningstar

Standard & Poor's

van Eyk Research

Zenith

Client Service

Average Score

3.3

2.7

3.0

3.2

3.3

3.4

Table: Client Service

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Lonsec

Mercer

Morningstar

Standard & Poor's

van Eyk Research

Zenith

Overall Rating

1 – Awful


4 – Excellent

Average Score

3.1

2.8

2.9

2.9

3.0

3.1

Table: Overall RatingA Money Managementsurvey has seen Lonseccome out on top as thebest-regarded researchhouse in the country. Mike Taylor reports.


Rate the raters

RESEARCH houses are currentlynot included in investigations

following product failures, despitebeing regulated and having a licence toparticipate in the system, according to theFinancial Planning Association (FPA)deputy chief, Deen Sanders.

Sanders, along with the rest of the finan-cial planning community, has long advo-cated a “more proportionate” retailinvestor compensation system, whichwould see all industry participants, includ-ing research houses, appropriately liable.

He claimed dealer groups and smallfinancial planning practices should notcarry all the responsibility on their own,especially not in circumstances where aproduct or a managed investmentscheme fails.

BackgroundEarlier this year, the Treasury released itsreview of compensation arrangementsfor consumers of financial services,compiled by lawyer, Richard St John. StJohn found that the current system wasinadequate, as licensees relied heavilyon professional indemnity insurance.

The review therefore recommendedthe creation of a last resort compensa-tion scheme which would be funded bylicensees; the pooled money would bedrawn upon when a professional indem-nity insurer fails to compensate a clientfor their loss.

The FPA had initially come out insupport of the scheme, but soughtfurther discussion about the extent towhich failed investments should beblamed on financial advice given to theclient, and the extent to which theproposed scheme should be funded bylicensees alone.

In its submission to the Treasury’sreview, the association has put the viewthat a consumer protection systemwould not be effective or complete

unless the responsibilities of all partici-pants in the ‘pooled investment chain’are “appropriately recognised and aremade accountable for their failings toretail consumers”.

These include product issuers, ratingsagencies, research houses, auditors, andregulators – among others, according tothe FPA.

“An investor relies on a financialplanner to know and understand prod-ucts that exist in the market place; afinancial planner in turn should be ableto rely on the experts that guide them inrelation to the qualifications and appli-cation of products,” Sanders said.

Sanders further stated that there wascurrently no capacity within the systemfor those parties to be called upon forcompensation, other than a civil suitundertaken by the planner or the client– whoever may have relied on theiradvice – which he claims is neither sensi-ble nor effective.

“We’re not suggesting that the researchhouses should take all the responsibilityeither – it’s a question of proportionali-ty in terms of what pieces of informationand evidence do people rely on to informthemselves over a decision,” he added.

Mixed opinionsZenith Investment Partners directorDavid Wright and van Eyk Research chiefexecutive officer Mark Thomas haveagreed that seeking researcher account-ability was fair and reasonable.

“If it was found that a research group hadbeen negligent or lacked detail in their duediligence approach in rating a product thatultimately failed, then sure, that researchgroup should bear some of the responsibil-ity for the future,” Wright said, addingresearchers should probably be included inthe proposed compensation scheme.

“Anything that builds consumer confi-dence in the financial advice industry needs

to be shown in a positive light,” he added.However, while noting it was impor-

tant that everyone played a role, Morn-ingstar’s co-head of managed fundresearch, Chris Douglas, arguedresearchers are not able to know the indi-vidual needs and objectives of clients.

“What we’re providing is a broad classservice to the market, so financial advis-ers can be more acute and aware ofwhich fund is more suitable for theirclients,” Douglas said.

This argument was supported by Stan-dard & Poor’s (S&P) chief Leanne Milton,who added it has never been S&P’s roleto conduct “due diligence” on informa-tion provided by fund managers.

“It is fund managers that verify thedata provided to research houses;research houses are not auditors orinvestigators,” Milton said.

Thomas said his company had anongoing dialogue with the regulators,and had assisted them in inquiriesaround certain questions; adding thatthis was the role which should be playedby research providers.

“In dealer group land, they’ve got

suggested models, and there’s compli-ance around that – but ultimately it’s upto the adviser to implement thosethings,” Thomas said.

Remuneration model still a concernLiability should not be an issue as long asall participants create, recommend orenter the investment with eyes wideopen, according to van Eyk chief.

The research provider remunerationdebate has long been running in theindustry, but Thomas said there stillneeded to be greater disclosure aroundthe pay for ratings model.

“If you’re giving advice to someonebased on research which is funded by apromoter – the client should be madeaware,” he added.

However, FPA’s Sanders said the asso-ciation was less concerned about whopays for the research, but rather aboutconflicts that arise from that.

“If you buy the material, but you can’trely on it for purposes of protection, youhave to ask ‘why is it so expensive?’,” he said.

Conflicts could be eliminated byreducing the “shopping mentality ofproduct manufacturers where they justkeep shopping until they f ind aresearcher that’s prepared to say positivethings,” according to Sanders.

“There is no requirement for multiplevalidation of data that is in the hands ofconsumers and advisers; three agencies outof four might have rated the product poorly,but the only one that gets reported is theone that rates it high,” Sanders said.

Thomas added the Treasur y hadrecently stated that conflicts did existwithin pay for ratings models.

“I don’t know whether that’ll make itthrough to regulation or letter of law; Ihave no issue with people charging forratings, provided those who are relyingon them are made aware that that is thecase,” he said. MM

Deen Sanders

The blame gameClaims by the financial planning industry that all industry participants, including researchproviders, should be liable for some client losses has been met with a mixed response from theresearch side, writes Milana Pokrajac.


THE funds research industry hascertainly experienced major

changes over the past 18 months,with the past few weeks proving to be partic-ularly exciting for the sector. The industryhas witnessed changes of ownership, andmajor executive appointments, as well asdepartures. For some, the impacts of suchevents – if any – are yet to be seen.

Zurich Financial Services started theavalanche in early June, with the companyannouncing it would sell Lonsec to Finan-cial Research Holdings (FRH) – a companysubstantially led by private equity specialistMark Carnegie and superannuation ratingshouse SuperRatings.

Just days after FRH managing directorJason Clarke said he expected little changefor clients and staff of Lonsec, the thengeneral manager of research, Grant Kenn-away, departed the company – with hiscolleague Amanda Gillespie stepping intohis former role. However, Kennaway quicklyfound a new home at Morningstar, where he

will head fund research for the Asia Pacificregion, starting in November.

Not long after Lonsec announcements,Standard & Poor's Funds Research (S&P)chief Mark Hoven announced he was leavinghis role as managing director, and is yet toannounce his next move. It is understoodthat Leanne Milton and José Ordonez will fillHoven’s role.

Similar events occurred two years agowithin another research house, whenStephen van Eyk resigned from the companythat bears his name – van Eyk Research. Hisdeparture was followed by others, with NigelDouglas (who replaced van Eyk as head ofresearch) also leaving the company.

Stephen van Eyk's 25 per cent stake in thecompany was then purchased by NewZealand's Pyne Gould Corporation througha private equity deal last year, while MarkThomas continued to manage the company,along with other newly appointed directors.

Thomas had experienced the aftermathof these events first hand, with van Eyk

Research losing a couple of high profilecontracts such as Westpac and Count Finan-cial, which was then followed by job cuts.

Since then, the company has recruitedseveral analysts and appointed new heads ofresearch and ratings. Thomas said the impactof such high profile changes could be enor-mous, but it also came down to the culture ofthe organisation, noting that his company hada 20-year succession plan in place.

“In the situation when you’re talking abouta funds management organisation wherethere is a portfolio manager who the organ-isation has built the process around and thatperson leaves – that’s pretty significant,”Thomas said.

“But if you’re talking about an organisa-tion which has a number of senior peoplelike Lonsec, Morningstar and ourselves – andthen you’ve got a change at the top – well, it’smore of a cultural issue in the medium termthat you need to be monitoring.

“That is because the person that’s left isn’tresponsible for the entire performance of anoffer,” Thomas added.

The claim that every organisation isgreater than one individual was supportedby Morningstar’s co-head of managed fundsresearch, Chris Douglas.

Douglas said companies need to ensurethere are people who will be able to quicklytake over from those departing the company.

“But there is no doubt that it shakesthings up a bit. It can impact morale and

people’s view of where the business isheading…it creates a degree of uncertain-ty,” Douglas said.

However, he said that clients usually didnot make decisions overnight.

“For a dealer group to change theirresearch house is quite a long process, and anintensive process at that,” he said.

“In the short term, you don’t really seemuch impact, but longer term – it’s all abouthow these organisations react,” Douglasadded.

Nonetheless, if past events are anythingto go by, the coming 12 months and nextyear’s Money Management Rate the Raterssurvey results should prove interesting. MM

Rate the raters

Some of the key players in the funds researchsector have recently undergone major executiveand ownership changes. Milana Pokrajacexamines how much impact – if any – such highprofile moves could have on a research house.

Company Name Date CEO Number of analysts Number of products Number of sectors Number of clients Own products Remuneration method Commenced Senior Junior researched researched

van Eyk Research 1989 Mark Thomas 7 9 436 strategies/ 5000 funds 42 250 Blueprint funds Licensee subscription

Zenith Investment Partners 2002 David Wright & David Smythe 8 4 575 14 40 n/a Licensee & fund manager subscription

S&P 2005 in Australia Leanne Milton & Jose Ordonez 13 4 606 strategies/ 2002 funds 17 104 n/a Pay for ratings and subscription

Morningstar 1999 in Australia Anthony Serhan 6 4 333 strategies/ 4400 funds 14 n/a n/a Subscription

Mercer 1945 David Anderson n/a n/a 4684 retail funds 365 (globally) 138 (incl. institutional) Multi-manager funds Subscription (software)/

for insto investors fee-for-service (consulting)

Lonsec 1985 Craig Semmens 23 9 596 60 (incl. sub-sectors) 320 (Licensees) n/a Pay for research and subscription

Table: Researcher profiles

Source: Money Management

Grant Kennaway

Movers and shakers

With less than 12 months untilproposed Future of Finan-cial Advice (FOFA) reformscome into effect, there isn’t

a great deal of time to adapt and fine-tuneyour business processes for the new regime.While many questions regarding future legis-lation remain unanswered, there is no doubtthat financial planning businesses need toevolve and quickly adopt new technologiesand the solutions they provide in order tosurvive and prosper under this new regime.

Part of the solution is undoubtedly foundin software – which is the centrepiece forcommunication and interaction with clients.Efficient, cost effective and most important-ly user friendly software should be para-mount. Starting the evolution with softwaresolutions, which cater to both back and frontoffice operations, is the ideal process.

When purchasing a new software solutionin preparation for FOFA, some decidingfactors would be considering your businessrequirements now and in the future, how thesoftware would be used, and who would useit specifically within your business.

How can software assist before andafter FOFA?One of the major changes in the FOFAreforms is the switch to a fee for serviceremuneration model from commissionbased payments. Adapting your practice tothe new model may not be an easy task.

With more emphasis being placed on thefees clients pay and the service they receivein return, the importance of tracking theservices provided to the client, as well as thetime spent providing these services, hasnever been higher. Fortunately, intelligentsoftware can assist in a number of ways:

1. Establish the time and costs involved inservicing existing and new clients.With many advisers facing the question ofhow much to charge for advice, implemen-tation of a software solution to help trackthe time spent on each client by the adviser,as well as the support staff, may providesome answers. This process may take sometime getting used to but should over timeprovide you with a realistic and accuratepricing model for your services.

2.Standardise processes and service offeringsfor your client base.Your initial efforts of timing and pricingyour services will consequently allow youto standardise your processes and helpestablish service offerings for your clientbase. Having established a clear under-standing of time and costs involved inproviding a service to a client, a businesscan realistically plan for future expansionas maximum capacity to service clientswith current resources will be known.

Business requirementsBefore committing to any software solutionit is important to factor in your current busi-ness size, its location, and future expansionplans. For example, if a practice plans toexpand into multiple offices then softwarewith a centralised database and internetaccess may be exactly what is required toallow easy flow of information between loca-tions, regardless of geographical position.

Software useGenerally every business is likely to have anumber of users with varying needs. Broadly,depending on how hands-on an adviser is,they may prefer simple to use calculatorsand modelling tools to help illustrate a strat-egy or concept being conveyed to the client.An adviser may also be interested in thebusiness management aspects and, as such,would prefer a variety of practice manage-ment tools.

A paraplanner, however, would prefermore in-depth modelling capabilities whichproduce detailed illustrations of outcomesof recommended strategies. Last but notleast are support staff who would most likelyprefer simple data entry, reporting and easyaccess to client information.

When analysing the spectrum of userrequirements, it can be seen that one contra-dicts the other. On the one hand, a simplestandalone calculator for a client meetingmay be required and, on the other, an in-depth modelling tool which will allow illus-trations of multiple scenarios and strategies.

Software, just like financial planningadvice, needs to be suitable to a client’sneeds and objectives. It is imperative thatthe right solution is chosen for the business.For example ,a sole practitioner will benefitfrom software with a strong emphasis onClient Relationship Management (CRM)functionality and less detailed modellingfeatures. An adviser working alone may nothave sufficient time to completely model allof the possible scenarios, but may use standalone calculators, models and templatedriven tools to formulate an overall strategy.

Bigger practices employing paraplannersand multiple support staff will find a singlesystem, covering both customer relation-ship management and modelling function-ality, more suitable to their needs. In the pastit has been argued that as financial planningsoftware becomes more comprehensive,complexity of its use also increases. This maybe true in certain aspects, however the effi-ciencies achieved through a single softwaresolution for the entire business cannot beoverlooked. For example, a good all encom-passing system will only require a single dataentry point, with entered information thenused throughout the entire system whetherfor database segmentation, modelling orfinal advice document preparation. This

means that every staff member is at all timesusing the latest information available for theclient and is constantly aware of all interac-tions with the client. A single system will alsolikely reduce time spent on data entry,human errors and omissions prevalent inmaintaining multiple systems.

Task automationThe more complete systems will allowautomation of routine tasks like marketingcampaigns, templates for advice documentsand regular client reviews thus greatly reduc-ing the daily burden. Any improvements inefficiency, provided by investment in soft-ware, will likely lead to higher capacity totake on and service new clients.

It should be noted that simply buying afinancial planning application and installing

it on the computer may not be enough.Some initial investment of time and resourcesmay be required to either adjust the systemto your business process, or adjust some ofyour business processes to the system.

There will always be debate around thebest financial planning software solutionsas it is evident that the “one size fits all”approach does not apply to all businessmodels.

When looking to create efficiencies withinyour business in preparation for the newregime, it is important to acquire softwarewhich will suit your business needs now andin the future and not just because it hashundreds of features.

Alexei Piltiaev is a software trainer atFiducian Portfolio Services.


OpinionSoftwareSoftware offers the soluton

Alexei Piltiaev explains how implementing the right software solution can help financialplanning businesses tackle the compliance and administration issues flowing from theproposed Future of Financial Advice changes.

There’s no doubt emergingeconomies have createdsignificant investment oppor-tunities over the last decade

and despite suggestions that capitalis-ing on this growth will become increas-ingly challenging, there is one way totap into emerging markets which haslargely been overlooked – hard and softcommodity equities. Demand for theseitems is primarily being generated bythe developing world, but meeting therequired level of demand requires aglobal supply effort.

Urbanisation drives demand The ongoing urbanisation of China andmany other emerging economies is thekey driver of demand for food, metalsand energy. Today, the urban popula-tion represents more than 50 per centof total population and according to theUnited Nations, 70 million people willbe urbanised annually over the next 25years. This is the equivalent of morethan three times Australia’s populationimproving their living standards eachyear via better housing and transport.

A key reason for relocation to urbanenvironments is the quest for improvedliving standards – which includes higherincomes – and the difference between thetwo is significant. As at 31 December 2010China’s National Bureau of Statisticsreported the average Chinese urbanincome was Renminbi (RMB) 21,000 –almost three times the income earned inthe country (refer to figure 1).

As personal wealth increases, metalintensity per person rises. In mostdeveloped countries steel consump-tion tends to peak at around 1,100 kilo-grams per person per annum, buttoday in China steel intensity stands atless than half that figure. However,unl ike some of the metals whereconsumption reaches a natural peak,energy consumption continues to riseas wealth increases. This rise correlateswith increased use of heating, coolingand electronic equipment purchases

such as computers and televisions,which we use every day.

Don’t underestimate ChineseaspirationsThe aspirations of urbanised Chineseto improve living standards shouldn’tbe underestimated and is particularlyevident in the shift towards largerapartments for families. In 2001, just33 per cent of urban homes had morethan two rooms. However, there’s beena push to upgrade the urban housingstock over the past decade.

Furthermore, despite home owner-ship being high in first-tier cities suchas Beijing and Shanghai, in second-tiercities (characterised by Knight Frank ashaving a population greater than threemillion and GDP per capita of morethan US$2,000 per person) and below,where 92 per cent of China’s populationresides, home ownership remainsbelow 25 per cent. In fact, China has 93cities with a population of one millionor more and 20 cities with a populationin excess of five million.

There’s also a very low level of penetra-tion in consumer items that require rawmaterials in production, such as air-conditioners, washing machines, plasmatelevisions, vacuum cleaners and refrig-erators. In addition, modes of transportare changing, with bicycles being upgrad-ed to motorbikes and eventually cars. In2010 new car sales in China reachedalmost 14 million vehicles, making it theworld’s largest car market, yet penetra-tion is three cars per 100 peoplecompared to 80 cars per 100 people in theUS. Furthermore, China has become thesecond largest importer of oil in the world,consuming as much energy as the UnitedStates, but its current oil demand intensi-ty is only 2.5 barrels per person perannum relative to 22 barrels per personper annum in the US.

Rising wealth improves nutrition From an agricultural perspective, risingwealth is resulting in improved nutrition,

via the consumption of more food andthe introduction of protein. This increasein demand for protein has an importantmultiplier effect on grain consumptionbecause it generally takes two kilogramsof grain to produce one kilogram ofchicken, four kilograms of grain for onekilogram of pork, and seven kilograms ofgrain for one kilogram of beef.

Protein demand in China has risendramatically over the last 20 years. Theaverage growth rate for pork is 4.3 percent per annum, beef is 9.2 percent andchicken is 7.2 percent. Despite thisgrowth, protein consumption, at 53kilograms per person per annum, issignificantly less than the 125 kilo-grams per person currently consumedin Hong Kong.

Demand remains robustThe drivers behind demand for hardand soft commodity equities remainvery robust. China, India, and otherpopulous nations such as Brazil andIndonesia, account for 43 per cent ofthe global population. However, theyall have a GDP per person of less thanUS$9,000 per annum. Consequently,there is still significant demand growthfor food, metals and energy.

While movements in commodityprices capture the attention of markets

and drive sentiment in the short-term,what’s more interest ing f rom aninvestor’s perspective is understand-ing how to access the underly ingvolume of growth for these raw mate-rials. By investing in companies thatare increasing their production to meetdemand – whether it’s in metals, energyor agricultural products – good invest-ment returns can be achieved in thelong term.

Structural drivers lead to superiorreturnsThere are two key reasons why hardand soft commodity equities havedelivered superior returns to globalequities:

• The significant demand for under-lying commodities from emergingmarkets, and

• The asset or resource owners havetended to make larger margins and deliv-ered greater return on equity over time.

Also, hard and soft commodity equi-ties provide other benefits to investorsrelative to emerging markets equities.Firstly, commodity equities are listedon exchanges a l l over the world,providing investors with greatergeographic diversification. Secondly,while many of the companies in thehard and soft commodity equity sectorsupply the raw materials to emergingcountries, many are listed on Westernexchanges. These exchanges havestringent standards regarding the treat-ment of minority shareholders andcorporate governance, including therequirements for continuous disclo-sure and dissemination of informationto all shareholders, tighter rules oninsider trading and market manipula-tion, and more transparent corporateownership structures. For an equityinvestor this provides a way of gainingexposure to emerging market growthwithin the governance structures andregulatory environment of the devel-oped world.

Emerging markets are behind thestructural shift we are experiencing inthe demand for food, metals andenergy. By investing in hard and softcommodity equities, investors areafforded an alternative exposure to theongoing growth that is anticipatedfrom emerging markets. Investors whowant to gain exposure to this trendshould seek out companies that areproducing hard and soft commoditiesand who are growing their productivevolumes to meet demand.

Skye Macpherson is a portfoliomanager for Colonial First StateGlobal Asset Management’s globalresources fund.

Chinese aspirations signal growth

OpinionChina


Emerging market growth opportunities still exist if investors know where to look, writes Skye Macpherson.

“The aspirations ofurbanised Chinese toimprove living standardsshouldn’t beunderestimated and isparticularly evident in theshift towards largerapartments for families. ”

Source: CEIC, NBS

Figure 1: Chinese urban versus rural income in RMB

0 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Income per Capita: Urban Household (RMB)

Income per Capita: Rural Household (RMB)


OpinionInsurance

The first trauma insurance policiesappeared on the Australianmarket in the late 1980s. While considered state-of-the-art

at the time, in comparison to the contractsavailable today, they could either bedescribed as “basic” or “focussed”,depending on the view taken.

The number of insured events was muchfewer than today, with cover typically beingprovided for conditions such as:

• Heart attack;• Stroke;• Cancer;• Coronary artery bypass surgery;• Kidney failure;• Major organ transplant;• Paralysis;• Multiple sclerosis;• Blindness;• Major head trauma;• Severe burns; and• Parkinson’s and Alzheimer’s disease.Policies were only available as riders to

other insurances such as term life. Thetrauma insurance benefit amount had tobe equal to, or less than, the term insur-ance. When a trauma insurance benefitwas paid, the term insurance was reducedby the amount of the payment.

It was not long, however, before advis-ers identified a problem associated withthis structure.

Case studyJohn’s adviser identifies that John needs:

• $600,000 of term insurance in order toprovide John’s wife with sufficient funds toinvest and replace his income if he died; and

• $200,000 of trauma insurance, beingmade up of $150,000 medical reserve,$25,000 to fund the children’s school fees,and a $25,000 contingency reserve.

Two years later, John has a severe strokewhich leaves him almost totally incapac-itated. He receives a payment of $200,000under his trauma insurance; however,because of the severity of his stroke, the

full amount goes towards funding theimmediate and ongoing medical costs.

In line with the policy terms and condi-tions, John’s term insurance has beenreduced to $600,000 – ie, by the amountof the trauma payout.

Unfortunately, John never recovers fromthe effects of the stroke and he dies justover a year later.

The term insurance of $600,000 is paid;however, unfortunately this amount is wellshort of what John’s widow required toinvest and replace his income.

The trauma insurance payment, whileassisting John at the time of his stroke, hadthe effect of exposing his family to finan-cial risk when he died.

The problem arises because the terminsurance and the trauma insuranceneeds are quite separate and distinct fromeach other.

Term insurance is protecting in areassuch as:

• Final expenses;

• Income replacement;• Estate equalisation;• Charitable bequests; and• Funding of school fees, etc.Trauma insurance is protecting in areas

such as:• Ability to obtain optimal medical care;• Financial access to rehabilitation; and• Lifestyle needs such as pre-funding

school fees, funds to enable a reductionin working hours, a superannuation boostto fund early retirement, etc.

To overcome this problem, by the early1990s a facility was incorporated withintrauma insurance policies that enabled theterm insurance lost when a traumapayment was made to be reinstated orbought back subsequent to the payment.

This was, and continues to be, referredto as the term insurance buy-back benefit.

Buy-back designInitially, the buy-back facility provided forthe reduced death cover to be reinstated

While the buy-back structure within trauma insurance policies exists to benefit clients,Col Fullagar identifies a series of inconsistencies in how the facility is represented within thevarious insurers’ policies.

Testing the buy-back line in trauma

insurance fault


in equal instalments on the first, secondand third anniversary of the trauma insur-ance claim payment.

The logic (ignoring whether or not thelogic held true to reality) was that if atrauma insurance payment was made, thelife insured would indicatively put thatmoney in the bank. If the life insured diedthe next day, the full trauma insurancepayment would still be intact.

As the trauma insurance paymentequalled the reduction in death cover, themoney in the bank plus the subsequentreduced death cover payment would equalthe original amount of term insurancerequired.

If, on the other hand, the life insuredsurvived for a period of time after thetrauma insurance payment was made, thefunds in the bank would gradually beused. Again, the original logic was thatthese funds would be expended equallyover a three-year period.

Therefore, to compensate for this, thefacility to repurchase the reduced deathcover was also spread evenly over a three-year period.

Product designers driven in part by arealisation that there would be a front-end

load to the expenditure of the traumainsurance payment and driven in part byrisk research competitive pressure, eventu-ally amended the buy-back design suchthat two-thirds of the reduced term insur-ance cover could be repurchased after oneyear and the remaining third after thesecond year.

Eventually, this evolved to the currentposition where generally 100 per cent ofthe reduced term insurance cover can berepurchased after one year.

Basis of buy-backWhile the logic underpinning the buy-backfacility is consistent, even if sometimesviewed as consistently flawed (as is oftenthe case with product design), how thefacility is represented within the variousinsurers’ policies is far from consistentacross the market.

The inconsistencies fall into a numberof areas:

When can the buy-back be exercised?The majority of contracts indicate that theterm insurance can be bought back on thefirst anniversary of the drawing of thetrauma claim cheque or the crediting of theinsured’s account with the claim proceeds.

Typical wording is:“The option to restore the sum insured

for death cover becomes available one yearafter we pay the full trauma cover claim.”

Other contracts, however, have a differ-ent option date, for example:

“The (buy-back) option can only betaken up 12 months after the later of:

• The date we receive your fully complet-ed claim form; and

• The date when you satisfy the criteriaunder (the insured event definition).”

The advantage of the above wording isthat both these dates would generally pre-date a claim payment, resulting in an earlieravailability of the buy-back option to theclient.

Finally, at least one policy has the follow-ing wording:

“12 months after a valid claim form islodged with (the insurer).”

A “valid claim form” is subsequentlydescribed as: “one which resulted in a claimpayment … and where (the insurer) deter-mines the … definition of the traumacondition suffered was met within 30 daysof the claim form being lodged. If there isno valid claim form, the relevant date forreinstatement is 12 months from the date

the trauma sum insured was paid in full.”The reasons behind the inclusion of an

arbitrary 30-day time limit are difficult tounderstand for two reasons. Firstly, controlover the timeframe is in part with theinsurer which calls for and assesses therequirements, and secondly, the conse-quences of failing to meet this timeframeare potentially dire – ie, the substituting ofan early trigger date with a much later one.

Whatever the reason, the position isfurther exacerbated by the fact that themeaning of the wording is unclear. Mustthe insurer make the assessment within 30days? Or is it that the definition must bemet within 30 days and the insurer canmake their assessment subsequently?

What are the terms of buy-back?The repurchased term insurance is gener-ally subject to equivalent underwritingadditional premiums and exclusions as theoriginal term insurance, although oneinsurer – not quite logically – carries overany loadings and exclusions that appliedto the original trauma insurance, ratherthan the term insurance.

While it should be unnecessary for theclient to provide any information concern-ing their health, finances, occupation or

pursuits when applying for the buy-back, anumber of policies simply refer to health,and remain silent on the other three. Atleast one insurer appeared to reserve theright to reassess smoking status.

The buy-back facility will have an expirydate which – depending on the insurer –might be age 65, 70, 75 or the policyanniversary after age 74, or potentiallysome other date.

The repurchased term insurance may ormay not be eligible for subsequent index-ation increases, again, depending on theinsurer.

A potential disadvantage can occur ifthe buy-back does not apply to partialtrauma insurance payments. For example,if the buy-back wording for a full traumainsurance payment is: “The policy ownercan affect a new policy … for a suminsured equal to the trauma insurancepayment”, it could be that the life insuredis only able to buy-back the reducedamount of insurance that applied subse-quent to a partial trauma payment, as setout in the example below:

Original trauma insurance benefitamount = $500,000

Partial trauma payment = $125,000

Subsequent full trauma payment =$375,000

Buy-back only applies to the $375,000.

Is buy-back pro-active or re-active?Some insurers state, “We will write to thepolicy owner within 30 days (of the optiondate)”; whereas others indicate, “You mustnotify us in writing of your intention toexercise the (buy-back option)”.

Still, others are silent as to who will dowhat, simply stating that the buy-back facil-ity will become available at a particulartime.

As one adviser reports:“Our firm has had about 100 claims over

the past 4 years and the issue of buy-backsis a real concern. We have only found onecompany that has a process that ensuresthe buy-back offer goes to the client. Wehave lost count of the number of times wehave had to make sure the offer is made.It’s ordinary when insurers make offers andthen [do] not deliver on them.”

It is important for the adviser and clientto know who will do what, because if theresponsibility to activate the process lieswith the client, this responsibility may wellbe deemed to pass through to the adviser.Were a buy-back option to be missedbecause the adviser did not remind theclient, this could result in liability alsopassing through to the adviser.

Commission payable?The insurer’s commission schedules areoften silent as to whether or not commis-sion is payable on the term insurance putin place as a result of the buy-back facility.

The attitude of some insurers appears tobe that there is little or no work involved ineffecting a buy-back facility, possibly dueto the mistaken belief that commission is tocompensate advisers for the effort involvedin “making the sale” which – in the case ofa buy-back – would generally be small.

If commission is not payable, the clientand adviser may logically feel that the ‘nocommission’ premium discount shouldapply, although this is unlikely to be thecase.

Further, if the adviser knows thatcommission is not payable, the advisermay feel that it would be appropriate tocharge a fee for the work involved in assist-ing with the implementation of the buy-back facility.

While it is important for contracts toallow for different terms to apply betweeninsurers so that normal competitive forcescan exist, a number of aspects of the buy-back facility would benefit from consisten-cy within the industry – eg, the basis of theoption date.

Consistency in areas such as this wouldreduce the chances of an adviser or a clientmisunderstanding the position and missingout on what would otherwise have been agenuine risk insurance opportunity.

The catalyst for this article was a veryrecent real life example of a terminally illclient who almost missed their buy-backopportunity because of confusion anduncertainty as to when the buy-backshould apply.

Col Fullagar is the national manager, riskinsurance, at RI Advice Group.

“While it is important for contracts to allow for differentterms to apply between insurers so that normalcompetitive forces can exist, a number of aspects of thebuy-back facility would benefit from consistency withinthe industry.”

What happened to the collat-eralised debt obligationsand other toxic assets,which were the focus of so

much attention during the global finan-cial crisis (GFC)?

Were they repaid? Broadly no. Have theyincreased in quality? No – the United Stateshousing has continued to fall. So wherehave all these toxic assets gone?

Some losses have been borne byinvestors, for example, Basis Capital. Somehave been written off by the institutionsthat owned them. But a significant volumehas been taken by the Federal Reserve anda large sum remains with banks – in bothcases being carried on the books at valueswhich are illusory.

Part of the measures introduced toameliorate the GFC was to allow thebanks to pretend their toxic assets wereworth more than they are. The Fed isdoing likewise. This is a strategy ofsolving a problem by pretending its not

there - like a frightened child who closeshis eyes so he can’t see what frightenshim.

The crisis was materially a result of over-indebtedness. Has this reduced?

During the Great Depression, totalAmerican debt as a percentage of grossdomestic product (GDP) reached 300 percent, unprecedented and notapproached again for half a century.However, since 1980 debt has inexorablyrisen to a peak in the recent – I meancurrent – financial crisis, above 370 percent. It has since inched down to around350 per cent, but it is still stratospheric.

In no sense has the debt problem beenaddressed. Yet, as markets have risen overthe last few years, the confidence ofinvestors has followed. There has been atendency to think that the crisis is over andthat we have entered an enduring recov-ery phase.

The thesis of this article is that the GFCnever ended and is still ongoing.

The John Wayne School of EconomicManagementThe generation now running America grewup watching cowboy movies in which,unfailingly, the US Cavalry - with JohnWayne in the lead - rode over the hill to therescue just when the peril was the greatest.

During the GFC it was governments andtheir central banks - led by Captain BenBernanke - that rode to the rescue. Hooray!

The authorities engaged in a flurry of

extreme action, for example guaranteeingbanks, initiating stimulatory programs(cash for clunkers, etc), quantitative easing(QE) and so on. Unfortunately, the effec-tiveness of the ‘rescue’ can be seen in thestate of the economy today.

Most of the strategies implementedlacked any historical evidence suggest-ing they would be effective. Yet, similarpolicies were applied in Europe, Chinaand Australia.


OpinionMarkets

“It is well known by anyone who reads a newspaper thatAmerica is weak, Europe is wounded, and Australia isslowing down, though hanging by a thread. ”

Where are we now?The GFC never ended, and the bill fora quarter century of profligacy may bedue, Robert Keavney argues.


It is well known by anyone who readsa newspaper that America is weak,Europe is wounded, and Australia isslowing down, though hanging by aresources thread.

Meanwhile, China’s economy – seen bymany as Australia’s saviour – is artificiallyinflated by excessive investment.

In aggregate, these represent a mostserious situation, not improved - andperhaps made worse - by the various‘rescues’ administered so far.

Since I began writing this, the stockmarkets fell sharply on August 7 and S&Pdowngraded US debt. Events are movingso fast that, by the time this is published,it may be clear to everyone that the situa-tion is deeply serious.

However, the recovery of markets fromthe depths of the GFC implied a wide-spread, but quite illusory, view that theworld’s economic problems were beingovercome. It is therefore worthwhile high-lighting how grave the situation is.

Comfort Uber AllesMuch of the developed world is over-indebted. Deleveraging is a pre-conditionfor a sustainably healthy economic envi-ronment. But deleveraging is painful.

The modern Western world is obsessedwith comfort, and this has been reflectedin the economic arena in an obsession withavoiding downturns - at any price.

As the Economist’s Buttonwood column(July 30, 2011) put it:

“Economic policy…over the last 25 yearshas followed one overriding principle: theavoidance of recessions at all costs. Formuch of this period, monetary policy wasthe weapon of choice. When marketswobbled, central banks slashed interestrates. A by-product of this policy was aseries of debt financed asset bubbles. Whenthe last of those bubbles burst in 2007 and2008, the authorities had to add fiscal stim-ulus and QE to the mix.”

During this period of extraordinary stim-ulus real median household income has

continued to decline to a level 5 per centbelow a decade earlier. (One result of QEwas to pump up equity markets, at leasttemporarily. Federal Reserve chairman BenBernanke claimed credit for this as a benefitof Fed policy - as if it is a role of centralbanks to manipulate markets.) Theeconomy has remained anaemic. Thedeficit has remained horrific, indeedindebtedness increased to pay for the stim-ulus. Over each of the last three years, theUnited States government borrowed 36-40per cent of everything it spent. The endresult of this, if continued too long, isunthinkable.

The dilemma America faces today canbe described as follows: the deficit needsto be addressed for growth to be sustained,but growth is too weak to address thedeficit. In other words, in the short term,ever more debt seems unavoidable.

Buttonwood concludes, “In a sense thebill has come due for the past 25 years.”

He speaks of Britain but it aptly describesAmerica and parts of Europe.

How Did It Happen?In my youth there was a great caution aboutdebt – it could lose you your house. Thiswas a result of the influence of the lastgeneration with living memory of the GreatDepression. In those days, loans were prin-cipal and interest, and monthly reductionsof principal, were monitored with satisfac-tion by mortgagees because to be debt-freewas to be secure. Debt was to be gotten ridof as fast as possible.Governments ransurpluses as often as deficits.

How Did These Attitudes Change? Howard Marks of Oaktree Capital (memofrom the chairman, July 21, 2011) traces itback to 1967, with the creation of the firstcredit cards that did not require the fullbalance repaid every month. This meantthe debt need not be repaid, so long as theinterest was paid.

Previously consumers could only buywhat they could afford, defined as havingthe money to pay for it. Credit meantconsumers could buy things they would beable to pay for later. However, as the prac-tice of permanent outstanding balanceswas adopted, credit has come to meanconsumers can buy things they can affordto pay the interest on.

Marks comments: “One of the moststriking aspects of debt in the modern erais that little if any attention is paid torepayment of principal. No one pays offtheir debt. They merely roll it over - andadd to it. In other words, repayment ofprincipal [is] absolutely unimaginable.”

Simultaneously, governments haveadopted the same policy, spending morethan they earn most years and incurringcompounding debts. Since 1980, the UShas run a deficit every year except four.

Once borrowers owe more than they canafford to repay, they lose control of theirfate, which then relies on the willingnessof borrowers to roll over their debt. This istrue for individuals, businesses andnations. All three would be under threat ifwe return to credit crunch conditions.

So far, Greece is the only nation tohave come face to face with the threat ofa lenders’ strike. But, eventually, anyone

who can’t repay their debts could sufferthis. Many great nations, including theno-longer triple A rated US, cannot payoff their debts (ie. repay the principal).

At this moment there is no question oflenders abandoning America, and long mayit remain so. We are just exploring extremepossibilities should US debt compoundinexorably, and lenders take fright.

American Political ZealotryThe US default deadline crisis underlinedthe lack of balance of the political class,whose role it should be to chart a path to astronger future. Australia’s politicians may(with a couple of exceptions) be bland andstand for no more than getting elected, butat least they wouldn’t knowingly bring thecountry to its knees in pursuit of ideologi-cal purity.

If you had to select someone to leadAmerica out of its difficulties, you wouldnot pick many of the people who current-ly populate the legislature.

The European ProblemAll that really needs to be said aboutEurope is that it faces the same problemsas America, compounded by the absurd-ity of a common currency for Germanyand Greece, and everything between. Inaggregate, Europe seems riskier thanAmerica.

Like the Federal Reserve, the EuropeanCentral Bank has acquired toxic loans,valued unrealistically, and is continuing todo so. (If anyone invents a way to short theseinstitutions, I would love to get set.)

Europe is terrified about Greece beingthe first domino, due to the extent of loansby their banks to Greece and its banks. Thenadd Portugal, Ireland, Spain and Italy asdanger points and there is a possibility of afull-blown banking crisis. Already there arereports of interbank lending in Spainbecoming frozen.

But the banking system is integrated world-wide. The GFC has demonstrated that whenbanks don’t function, nothing functions.

Earlier in the GFC, governments steppedin to guarantee their banks but a governmentguarantee is only as good as the governmentthat gives it. We have a new game now,unknown in the modern world and govern-ments are becoming the weak link.

Turning JapaneseSo far America, Britain and much of Europehas followed the Japanese precedent -lengthen the wick, and hope that somethingturns up. This precedent is not inspiring.

The Japanese introduced ineffectivestimulus package after ineffective stimu-lus package at their economy. Will the Westdo likewise? I fear so.

The world faces the possibility of aninternational banking and sovereign crisis.

I acknowledge that history teaches thatextrapolating existing conditions into thefuture is fraught. It is also possible that wemay somehow find a way to muddlethrough. We may also enter another falsedawn, such as we experienced in the twoyears since March 2009.

Nonetheless, the current situation isgrave.

Robert Keavney is an industry commentator.

They say there are two certaintiesin life: death and taxes. With therelease of draft ruling 2011/D3,the Australian Taxation Office

(ATO) is signalling that it has firmed itsview that one certainty will trigger theother in relation to super pensions.

The draft ruling is part of the ATO’sprocess of formalising its views on whensuper income streams start and finish fortax purposes. It has given rise to somecontentious technical issues, which seeminevitable given some underlying defi-ciencies in the 2007 superannuation taxreform legislation. While the rulingconsiders account-based pensions only,the principles discussed will typicallyapply to other pension types payableunder the SIS Regulations.

The problem with death: broadly, theruling indicates that, if a super pension-er dies and the pension does not revertautomatically to the deceased's spouseor other dependant, then the pensionceases immediately upon death. Thismeans that, from the time of death, tax ispayable on income derived in relation toassets supporting the deceasedmember’s account, including capitalgains arising on sale of the assets in orderto pay out a lump sum death benefit.Thus the benefit is depleted not only byany benefits tax payable (and typicallybenefits tax will be payable where thebenefit is paid to an adult child of thedeceased), but also by the capital gaintax (CGT) and other tax liabilities.

Some have suggested there is nothingnew in this view, as it is in line with aninterpretive decision the ATO had issuedas early as 2004 (ID 2004/688). However,that interpretive decision dealt with aspecific set of circumstances and wasbased on the law prior to the 2007 reformamendments. The release of the ruling isa more comprehensive indication of theATO’s approach to the current law. Itopens the way to debate the validity oftaxing pension accounts post-death notonly on a technical basis, but also at thepolicy level.

The ATO and industry have beenengaged in debate for an extended periodof time via the National Tax Liaison Group

Superannuation Technical Sub-group,and a number of industry and profession-al bodies are likely to challenge the ATO’sviews on technical grounds.

There isn’t space in this article to outlinethe carefully considered arguments forand against the ATO’s position but, in anycase, perhaps it’s time to focus not just onwhat the law does say, but on what itshould say. If it’s not saying what it oughtto say then the solution is to have itamended. A number of submissions arealso likely to be made to governmentadvocating amendment of the law toremove uncertainty and ensure reason-able taxation outcomes. Many wouldargue that, if the ATO’s view of the currentlaw prevails, then the relevant tax provi-sions create two layers of tax and anunreasonable tax burden on affecteddeath benefit recipients. This includesbeneficiaries not only of self-managedsuper funds (SMSFs), but also many largefunds. Further, if the tax treatment of allrelevant income stream accounts were tochange immediately upon death, therewould be administrative complicationsfor many large funds. Typically, funds arenotified of the death of a pensioner somedays (or weeks, in some cases) after thedate of death. Funds cannot retrospec-tively re-engineer the appropriate taxtreatment of relevant accounts for theperiod from death until notificationwithout extensive and expensive manualintervention.

From a planning perspective, if theATO’s view prevails then advisers and theirclients will need to continue to considerusing reversionary pensions where possi-ble and reconsider buy and hold invest-ment strategies. For SMSFs, considera-tion also needs to be given to whether ornot pension assets should be segregatedand the role of anti-detriment benefitdeductions in neutralising the impact ofpost-death fund tax.

Cessation of pensions in other circum-stances: the ATO also considers that anincome stream ceases in either of thefollowing circumstances:

- Where there is a failure to comply withthe pension rules and the payment stan-dards in the SIS Regulations. For example,

if the minimum annual pension paymentrequirement is not met in an income year,the income stream is considered to haveceased. Indeed, the trustee is taken not tohave been paying a superannuationincome stream at any time during theincome year in which the relevant require-ments are not met, which presumablymeans that the pension has ceased at theend of the previous income year (or wasnever an income stream, if the minimumpayment requirement was not met in thefirst income year).

• Upon receipt of a valid request fromthe member to fully commute the incomestream. One question is whether this viewholds even if the request is expressed tobe to commute the income stream at afuture date. Another is whether the viewholds even if there is still a final pensionpayment to be made. (Note that anincome stream is not considered to haveceased upon receipt of a request topartially commute the income stream.)

As with death, one of the tax implica-tions of cessation of income streams inthese circumstances is that any subse-quent income or capital gains realised inrespect of the assets that were supportingthe income stream will be subject to tax.

Lump sum benefits: further, if anincome stream ceases in the circum-stances described above then in effect theATO also considers any subsequentpayment from the relevant account is asuperannuation lump sum. The ATO alsoindicates that a payment made uponpartial commutation from an interest (inpractical terms, an account) that supportsa super income stream is always a super-annuation lump sum (never an incomestream benefit). These views may havesignificant tax implications for clientsunder the age of 60, since the tax treat-ment of lump sum benefits differs fromincome stream benefits for them.

Thus the draft ruling reinforces theneed not only to ensure pension paymentstandards are met annually, but also toplan carefully well before a direction ismade to commute a pension.

David Shirlow is the executive director atMacquarie Adviser Services.


ToolboxBriefsRUSSELL Investments has launched anonline volatility toolkit intended to help advis-ers, institutions and investors navigate theirway through the economic downturn.

The toolkit includes perspectives onchanges to capital markets, as well as arti-cles about investment strategies for thosewho are worried or confused, behavioursthat threaten financial security, and howinvestors can learn from volatility. The arti-cles also include historical overviews of pre-vious market cycles.

ASTERON has announced a range of prod-uct upgrades as part of a plan to help advis-ers navigate through upcoming Future ofFinancial Advice (FOFA) reforms.

The enhancements include a 10 per centdiscount to its income protection productover the life of the policy for all new busi-ness from 15 August in an attempt to makethe comprehensive policy more affordablefor new clients. In an effort to incentiviseadvisers to use the platform, the life insureris also offering an additional 5 per centcommission until 18 October for advisersusing the technology solution, Lifeguard EQ.

HERSCHEL Asset Management (Her-schel) has transferred the trusteeshipand management of the HerschelAbsolute Return Fund to BennelongFunds Management (Bennelong).

Bennelong has appointed Kardinia Capi-tal, a new boutique created in partnershipwith Mark Burgess and Kristiaan Rehder, tomanage the fund on its behalf.

Mark Burgess is now Portfolio Managerof the fund, while Kristiaan Rehder will com-mence with Kardinia Capital on 1 Septem-ber 2011.

Herschel has transferred the manage-ment of the Herschel Absolute Return toBennelong, who will take over trusteeresponsibilities and management of thefund immediately.

This is the second boutique Bennelonghas brought on board in three months, withtwo former UBS small cap asset managersjoining the firm in May to form Avoca Invest-ment Partners.

Certainty about life’s two certaintiesThe Australian Taxation Office has indicated the twocertainties in life – death and taxes – will become closelyintertwined when it comes to super pensions. DavidShirlow addresses some of the technical issues whichmight arise.

APOSTLE Asset Management has pickedup another key mandate for its London-based associate global bond manager,H2OAsset Management.

It said Mercer had awarded H2O a $100million sovereign and currency mandatefollowing a manager review.

Apostle said the mandate from Mercerhad followed on from a $270 million alloca-tion from Colonial First State’s First Choicemulti-manager funds in May.

Apostle director of sales, RichardBorysiewicz said the H2O investmentapproach was well-regarded by Australianinstitutional investors and represented agood fit with their investment objectives inthe current environment..

“This is the third H2O mandate we havesecured in Australia this year,” he said.

“This is an extremely important devel-opment for us and one that we believeestablishes the firm’s position in the localmarket.”

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

SENIOR FINANCIAL ADVISER – PRIVATE CLIENTSLocation: AdelaideCompany: Terrington ConsultingDescription: A national financial services firm isseeking an experienced financial adviser toprovide specialist solutions to a high-net-worthclient base while promoting portfolio growth.

As a self-licensed entity, this firm is able toprovide the right applicant with access to theflexibility and credibility to offer diversestrategies, while remaining supported throughresearch and administrative support.

The successful applicant will possess apassion for providing needs-based solutionsthat will translate into sales growth and financialsuccess. He/she will ideally be working towardsthe CFP or a relevant tertiary qualification.Strong technical and analytical skills areessential as well as the ability to communicateeffectively with clients.

To find out more, visitwww.moneymanagement.com.au/jobs orcontact Emily on 0422 918 177,[email protected].

PARAPLANNERLocation: MelbourneCompany: FS Recruitment SolutionsDescription: As a paraplanner in thisorganisation, you will be presented with a variety

of tasks that will challenge your ability toresearch and learn different strategies, alongwith the ability to make a difference to theclient.

The key to success in this role will comedown to the pride you take in your work,diligence in keeping up with legislative andcompliance issues, attention to client goals andefforts to make statements of advice morepersonalised.

To be considered for this role you will have aminimum of 6-12 months experience working ina financial planning business supportingadvisers, along with a positive attitude and aminimum of DFP 1-4.

In return, you will be provided withprofessional support and resources, investmentresearch, and a regularly updated careerdevelopment plan.

For more information and to apply, pleasevisit www.moneymanagement.com.au/jobs orcontact Kiera Brown at FS RecruitmentSolutions – 0409 598 111,[email protected].

FINANCIAL PLANNERSLocation: Hong KongCompany: ipac AsiaDescription: ipac Asia has a presence in HongKong, Singapore and Taiwan and is a member ofthe Global AXA Group. The firm is now seeking

entrepreneurial candidates to join its Hong Kongteam to offer all-round financial solutions.

ipac Asia offers a competitive base salaryand an attractive bonus/commission package,as well as a marketing allowance, incentivetrips/overseas conventions, a comprehensiveprofessional training program, and sponsorshipof your work visa if needed.

You must be tertiary educated or above witha minimum of three years financial planning orrelevant experience, and have a stable workhistory.

To express your interest in theseopportunities, please visitwww.moneymanagement.com.au/jobs orforward your resume [email protected].

FINANCIAL PLANNING OPPORTUNITIESLocation: South Australia, Northern Territory andWestern AustraliaCompany: Terrington ConsultingDescription: Terrington Consulting is interested inreceiving applications from qualified financialplanners who are ready to make their next moveor are interested in being alerted to equityopportunities.

Current positions include:paraplanner/review planner, Adelaide; financialplanner, large chartered accountancy firm,Adelaide; financial planner, Darwin; senior

financial planner (business start-up); seniorfinancial planner (equity option), Adelaide; aswell as financial planners in Iron Triangle, MtGambier, Clare Valley, Alice Springs andMetropolitian Perth.

For more information and to apply, visitwww.moneymanagement.com.au/jobs orcontact Emily on 0422918177 [email protected].

OFFSHORE FINANCIAL PLANNERS Location: Hong Kong, Singapore, Malaysia,Spain, Cyprus, France, UK, UAE, EuropeCompany: Sterling Associates Description: This financial services recruitmentcompany is looking for self-motivated individualsto fill a number of financial planning roles withits clients across the globe.

After some initial training your role will be toprovide a comprehensive range of well-knownand internationally acclaimed tax-free productsto the expatriate community.

These roles are predominately commissiononly with full back office support provided.However there are also a number of salariedplus bonus positions available in certaincountries.

For more information and to apply, pleasevisit www.moneymanagement.com.au/jobs andwww.sterlingassociates.net, or send your CV to:[email protected].

EQUITI Capital Limited hasnamed the economist andformer politician, Dr JohnHewson, as the firm’s new Chair-man of the Board.

Renowned for his work as aneconomist for the AustralianTreasury, the Reserve Bank ofAustralia, the InternationalMonetary Fund and the UnitedNations, Hewson is also wellknown for his political career asLeader of the Liberal Party andthe Coalition in opposition, andbefore that as Shadow Treasurerunder Andrew Peacock.

Dr Hewson was a foundingexecutive director of Macquar-ie Bank, a trustee of the IBM

Superannuation Fund, Chair-man of ABN AMRO Australia andmember of its Advisory Council.

Equiti Capital executivedirector Lindon Toll said theappointment was an importantstep and one that will help thecompany grow its long-termbusiness strategy.

“Dr Hewson is a very highlyexperienced economic, businessand finance specialist, and we aredelighted to have him join us asChairman,” Toll said.

WB Financial Management hasannounced that Paul Bonneyand his business, Plan B Finan-cial Solutions, will be joining thefirm as a sub authorised rep andcorporate authorised rep.

Plan B Financial Solutionshas no relation to the publicly-listed company Plan B WealthManagement.

Bonney is originally from theUnited Kingdom, where hegained two decades of experiencein stockbroking, investmentbanking, investment trading andfinancial planning. He moved toAustralia in 2005 and has heldfinancial planning posts withTupicoffs, Credit UnionAustralia and CommonwealthFinancial Planning.

Bonney holds an AdvancedDiploma of Financial Services,

and started his own planningpractice, Plan B, in Brisbane inSeptember 2009.

Plan B is one of 18 adviser busi-nesses in WB Financial Manage-ment, a boutique adviser-ownedfinancial services company.

CROWE Horwath has appointedgoods and services tax (GST)practitioner, Jonathan Doy, as aprincipal in the Sydney Tax Advi-sory group.

Doy has 26 years experience asa senior indirect tax adviser in the

big four accounting firms, with hislast eight years spent at PwC. Hewas the first equity GST partner ata big four firm following the intro-duction of the GST in 2000.

Most recently, Doy was a majorcontributor to the AustralianTaxation Office’s (ATO’s) 2010GST Governance and RiskManagement Guide.

Crowe Horwath chief execu-tive officer Darren O’Brien saidthat Doy’s appointment wouldbenefit the accounting firm’sclients due to his strong GSTtechnical expertise combined

with his tax governance and riskmanagement experience.

GLOBAL financial services firmRussell Investments hasappointed Thomas Gillespie asdirector, risk advisory. Dr Gille-spie will be based in Russell’sSydney office, working with exist-ing and new clients to establishand implement industry bestpractice risk management.

Dr Gillespie brings over 20years experience in risk strategy,and joins Russell from theAustralian Reward InvestmentAlliance (ARIA), where his mostrecent role was head of risk. Hehas also held senior positions atCitigroup and JB Were.

THIRD Link InvestmentManagers (TLIM) has appointedVinnie Wadhera to the new roleof head of distribution.

Based in Sydney, Wadhera willbe responsible for managing rela-tionships with both financial inter-mediary channels and institution-al investors for the firm’s existingand proposed fund offerings. Hewill report to TLIM director andportfolio manager Chris Cuffe.

Cuffe said he was pleased towelcome Wadhera to TLIM toassist the firm grow its fundsunder management.

Move of the weekFORMER Association of Financial Advisers (AFA) president DrJames Taggart, OAM, has been elected to represent Australia onthe board of Asia Pacific Financial Services Association (APFinSA).

Dr Taggart's financial planning career spans 24 years, since heestablished and grew his own financial planning practice in 1987.He holds a Doctor of Business Administration and a Masters Degreein Commerce, majoring in Financial Planning. In 2010 he wasawarded the Medal of the Order of Australia.

Dr Taggart said he was honoured to have been nominated andaccepted to the Board, which represents the interests of advisersacross the Asia Pacific region.

In congratulating Dr Taggart, AFA chief executive officer RichardKlipin said AFA members, including Rod Scurrah and John Craik,have served with distinction in the region in previous years, andDr Taggart’s election would continue this tradition.

“We are very pleased that as we enter the Asian century the AFAand its members are represented by someone of Jim's calibre,”Klipin said.

John Hewson

““Outsider


“You’re going to have riots – allthese irate planners wavingflags and throwing firebombs.It’d be like London.”

Planners will be less than amused if

the Government refuses to grandfa-

ther commissions, says Radar Results

principal John Birt.

“The FEAL board certainly hadtheir finger on the pulse whenthey chose the theme for thisconference: catastrophe, chaos,confusion.”

Hostplus CEO David Elia comments

on the unusual (or perhaps not so

unusual, considering recent market

events) theme name of the Fund Exec-

utive Association conference in

Melbourne.

“Save your money: turn tofraud and look young forever.”

Director of KPMG Forensic Peter

Morris urges delegates at the FEAL

conference to save money on anti-

ageing cream and become the eternal

38-year-old average perpetrator of

superannuation fraud.

Out ofcontext

Virtually trading

A sweeter ordure

Where there’s smoke, there’s super

OUTSIDER has neither pretendednor aspired to be a trader. There issomething about their mode ofattire – all suspenders, button-down collars and bow-ties – thathas always served to put him offsuch a career change.

Bow-ties are to traders whatFrench cuffs are to funds manage-ment BDMs.

However, he was last week review-ing both his prejudices and hisoptions after receiving word thatfinancial media outlet CNBC wasoffering up to US$1 million in prizesfor budding traders from Australia,the UK and the United States.

The company was offering partic-ipants the opportunity to take fivefictitious trading accounts contain-ing one million virtual dollars to seewhat they can build between 12September and 18 November bytrading on the New York StockExchange, the NASDAQ, AMEX, LSEand our local ASX.

Apparently, at the end of everyweek the participant with the highestpercentage gain will be deemed theweekly winner and receive a weeklyprize. However, the real objective hasto be aiming to finish first or secondover the whole contest when aMaserati is on offer for the runner-

up, with US$1 million going to thewinner.

Mrs O has never let Outsider playwith the family budget but he is sureshe would not object to him playingwith fictitious money if it meantadding a lazy million to the bankaccounts just before Christmas.However, she would not be all thatimpressed by a Maserati havingalways believed that four doors onany conveyance are better than two.

Outsider shall spend the weekendshopping for bow-ties and button-down collars. His girth meanssuspenders would be a superfluousadornment.

OUTSIDER is a pragmatic chap who has livedlong enough to witness a range of economicand financial phenomena - from the woolboom through to the ‘87 crash, the “techwreck” and, more recently, the Global Finan-cial Crisis.

He also notes that while Australianshave labelled the period between 2007/08and 2008/09 the GFC, there are thoseon Wall Street who have chosen to label itthe “Great Recession”. But what’s in aname, a financial dung-heap by any othername would be as noisome.

It is with this in mind that Outsider notesthe most recent Roy Morgan Research con-cerning member satisfaction with superannu-ation funds and the fact that those whobelong to industry superannuation funds arelikely to be happier than those who are mem-bers of the so-called “Big six retail funds”.

Putting aside his natural cynicism withrespect to relative exposures to infrequently

valued unlisted assets, it all seemed tomake perfect sense to Outsider. That wasuntil he turned to a table in which the var-ious funds were ranked according tomember satisfaction and noted that thetrouble-plagued MTAA Super was rankedat 15 ahead of the likes of AXA, AMP, Sun-super, St George and Mercer.

Looking at the relative performance ofthose funds ranked behind MTAA Super, Out-sider can only conclude that their membersare either far more exacting in their expecta-tions or that MTAA Super members are justhappy to see their fund has resumed return-ing some positive numbers.

According to all the data Outsider hasseen, the thing most likely to influencemember attitudes to their superannuationfund is the rate of return they are receiving.Self-managed superannuation funds are, ofcourse, the great exception because fewpeople feel comfortable blaming themselves.

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

AS a one-time two pack a day man (nowreformed), Outsider can certainly under-stand the difficulties some people face intrying to give up the smokes.

Before he is accused of getting up on his highhorse, Outsider is prepared to confess that theextra exercise involved in walking up and downa flight of steps every time he felt like a quickpuff was a key motivator in his decision toabandon the cancer sticks. However for thosewho can face the extra exertion Outsidercompletely understands the appeal of duckingout for some ‘fresh air’ occasionally.

Outsider is purely talking about individualshere, because it’s less common to hear abouta financial entity having trouble shaking itsnicotine addiction.

But that appears to be the case for the New

Zealand Superannuation Fund, which wasrecently sprung by the country’s Greensparty for holding shares in Shanghai Indus-trial Holdings, whose subsidiary NanyangBrothers Tobacco manufacturers - amaz-ingly – tobacco.

It’s certainly not illegal to hold shares in atobacco manufacturer, but if you’re a state-runfund, a member of the Responsible InvestmentAssociation Australasia and have a publicallystated policy of not investing in ‘unethical’stocks such as tobacco, then it’s not exactly agreat look.

It leads Outsider to wonder if perhaps nico-tine is as tough a habit to shake for a $19 billionsuperannuation fund as it is for a hardworkingjournalist – and if so is there a nicotine patchbig enough to help?

money management (august 25, 2011)

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