money management (august 4, 2011)

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THE Federal Treasury hasadmitted it has not done acomplex international compar-ison of the Government’sproposed Future of FinancialAdvice (FOFA) changes andexperience in major overseasjurisdictions.

The absence of any suchcomparison has been revealedin the Treasury’s answer to aquestion on notice duringBudget Estimates by TasmanianLiberal Senator, David Bushby,and reveals that while the Trea-sury has monitored events over-seas, its observations have fallenshort of definitive point-by-point comparisons.

Bushby has told MoneyManagement he is disappoint-ed in the Treasury’s answer andwill be pursuing the matterfurther when Parliamentresumes after the winter recess.

For his part, Financial Plan-ning Association (FPA) chief

executive Mark Rantall ques-tioned whether objective judge-ments could be made aboutFOFA in the absence of interna-tional comparisons.

“Reforms of this magnitudethat impact on both clients andfinancial planners should beviewed in a global context to seewhat works and what doesn’t,”Rantall said.

“As an example, opt-in is notbeing introduced anywhere inthe world because it is an inap-propriate law,” he said.

Rantall pointed to the factthat examinations had beenintroduced in South Africa andwere having a major impact onfinancial planners.

“The UK is looking atenshrining financial planning inlegislation and banningcommissions on insurance isnot being implemented to myknowledge,” he said.

“What global legislators aredoing is important to givecontext to the extent of the

wide ranging changes here and should be considered,”Rantall said.

Senator Bushby had asked theTreasury whether, in the contextof its work on the FOFA changes,it had performed research onoverseas regulation regardingpayment for advice.

He asked whether, if this werethe case, Treasury couldcomplete a “matrix” based on

whether countries had bannedpayments to financial plannersin relation to superannuationproducts, managed investmentsand life insurance.

Taking the question on notice,the Treasury later said it had“monitored developments incomparable overseas jurisdic-tions” and in particular theUnited Kingdom. However, itsaid it had not undertaken any

“matrix” of jurisdictions onfinancial advice issues.

“Different regulatoryapproaches make a directcomparison between jurisdic-tions on the basis of superannu-ation, managed investment andlife insurance through such amatrix difficult and possiblymisleading,” the Treasuryresponse said.

It cited, as an example of thedifficulty in completing such amatrix, the “unique” nature ofthe Australian superannuationsystem.

Senator Bushby told MoneyManagement he did not acceptthat Australia was particularlyunique or that the Treasurycould not provide an appropri-ate comparison and that hewould be pursuing the issuefurther when Parliamentresumed.

“FOFA has caused deepconcern in the industry andthese issues need to bepursued,” he said.

FUND managers with digitisedshort-form Product DisclosureStatements (PDSs) are alter-ing the online accessory docu-ments so often that they arein danger of accidentallyincluding links to obsoleteaccessory documents whenselling a product.

An increasing number offund managers and superfunds are placing short formPDSs online, with a link toaccessory documents withinthe PDSs as a method ofreducing paperwork.

However, financial softwarefirms are raising concernsthat fund managers are tin-kering with the ‘incorporationby reference’ documents sooften it is exposing them tothe danger of including out-dated accessory documentson PDSs that are providedto clients.

By law, fund managers areallowed to include ‘incorpo-ration by reference’ acces-sory documents in theirshort form PDSs.

IQ Business Group chiefexecutive Graham Sammellssaid the risk of including obso-lete accessory documentswas much higher with onlinematerial in recent PDSs.

“The issue is more at riskand pervasive in just theonline world, and in the digitalworld there is a higher poten-tial that changes will getmade because it seems tobe easier,” Sammells said.

Digitised documents werebecoming increasingly perva-sive and more of an issue tomanage, he said.

Fund managers need toensure that changes to acces-sory material are managed

and coordinated properly,Sammells warned.

Senior consultant for super-annuation communicationscompany Transform Consult-ing, Ian Taylor, said that somefunds were almost totallyunaware of the issuesinvolved in short form PDSand had to be walked throughthe legislation.

Transform offers a shortform PDS for super funds.

“They’re really not awareof a lot of the issues, par-ticularly around the incorpo-ration by reference stuff,”Taylor said.

Although easily updatedonline short form PDSswere “a beauty”, fund man-agers needed to maintainan ‘order trail’ to ensurethat clients were accessingthe current suppor ting documents, Taylor said.

Aon Hewitt changed itsexisting governance proce-dures for their short formPDSs to ensure that any incor-poration by reference changes

Lack of comparison undermines FOFA

Continued on page 3

Online tinkering tainting PDSs

OPT-IN WILL INCREASE UNDERINSURANCE: Page 5 | ADDRESSING LONGEVITY RISK: 4

Vol.25 No.29 | August 4, 2011 | $6.95 INC GST

“ FOFA has causeddeep concern in theindustry and theseissues need to bepursued. ”- David Bushby

SOME lenders have beentaking advantage of regu-latory loopholes to eitherrecommend clients startup a self-managed superfund (SMSF) or obtain adeclaration of businesspurposes to circumventthe National ConsumerCredit Protection (NCCP)Act, according to industrysources.

CPA Australia hasformally advised itsmembers that somelenders are seeking decla-rations from accountantsthat the purpose of a loanor lease will be predomi-nately for business use,which helps a lender forma view that the loan isoutside the requirementsof the NCCP Act.

CPA Australia hasadvised all its members

not to provide such adeclaration, and if they dothey should make rigorousenquiries beforehand.

“You can assist yourclient in the lendingprocess by providing themupon request, a statementon their financial positionor other factual informa-tion about your client’sfinances which you canverify,” the guidance states.

CPA Australia financialplanning technical adviserKeddie Waller said therequests for false declara-tions were most likely tocome from smaller lendersand pertain to vehicleloans.

A false declaration mayhave legal ramificationsand in turn affect amember’s professionalindemnity insurance, CPAAustralia stated.

Mortgage and Finance

Association of Australiachief executive Phil Naylorsaid a false declarationwould represent a straightbreach of the Act, and hewould be horrified if suchthings were happening.

“One of the things theNCCP Act was designed todo was to overcome thosefalse business declarationsthat were made to indicatethat the loan was for business purposes whenit wasn’t,” he said.

SMSF Loans directorCraig Morgan said therewas absolutely no questionthat some brokers and‘property spruikers’ werecrossing the line and advis-ing people to establish anSMSF to invest in property.

To make people awarethat it can be done is fine,but when someone

Unethical lendingpractices flagged

Continued on page 3

By Chris Kennedy

By Benjamin Levy

By Mike Taylor

Mark Rantall

Grahem Sammells

A wolf in cheap clothing

Federal ministers overseeing thedevelopment of new legislation atthe same time as selling a carbontax and counting numbers in

caucus are very busy people, so it is unlike-ly the Assistant Treasurer and Minister forFinancial Services, Bill Shorten, has everwalked through a shopping centre andspied bored young men in cheap suitsspruiking real estate investments.

If, in fact, the minister had fallen intoconversation with these bored young menin their cheap suits, he might have beengiven pause to consider whether they wereselling a product or giving advice or,perhaps, doing both.

Superannuation specialist within theInstitute of Chartered Accountants, LizWestover, last week expressed concernabout real estate agents promoting thevirtues of purchasing real estate within aself-managed superannuation fund (SMSF)and, in doing so, clearly pointed to the factthat such people fell outside the regulato-ry strictures which guide both accountantsand financial planners.

She might have added that a significantportion of the Australian population doesnot understand what constitutes financialadvice and that it remains far too easy forpeople operating well outside the scope of

the Financial Services Reform Act to givewhat amounts to financial advice.

The proposed Future of Financial Advice(FOFA) changes will not alter this reality.Notwithstanding the fact that bored youngmen in cheap suits ought not be in the busi-ness of ‘advising’ shoppers on how to investin real estate, the practice is likely to contin-ue and many gullible consumers will benone-the-wiser.

More galling for the financial planningindustry is that some of those gullibleconsumers may later blame any lossesthey incur on the ‘adviser’ they met in the

shopping centre.The Parliamentary Joint Committee into

the financial services industry (the RipollInquiry), which gave rise to the FOFArecommendations, did a reasonable job oftraversing the issues that evolved out of thecollapse of Westpoint and Storm Financial.However, it did not in any meaningful wayaddress “advice” given outside of the formaladvice industry and nor did it do more thanpay passing heed to the development of so-called “industrialised advice”.

The Australian Securities and Invest-ments Commission (ASIC) will soon deliverits report on the provision of scaled advice– something which has the potential to giverise to further questions touching upon theutilisation of industrialised advice mecha-nisms as companies and superannuationfunds seek to gain the scale and efficien-cies necessary to remain competitive.

While the Government is this monthexpected to release the first draft of the legis-lation resulting from its FOFA proposals, itis clear that a great deal more work remainsto be done and that the bored young men incheap suits will not soon be vacating a shop-ping centre near you.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

2 — Money Management August 4, 2011 www.moneymanagement.com.au

[email protected]

“More galling for thefinancial planning industryis that some of thosegullible consumers maylater blame any losses theyincur on the ‘adviser’ theymet in the shoppingcentre.”

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Average Net DistributionPeriod ending March '1110,207

SUPER funds providing scaled advice totheir members may soon be required to playby the same rules as the rest of the financialplanning sector, as the corporate regulatorproposes to revoke their class order relieffrom the so-called ‘suitability rule’.

Superannuation trustees and theirauthorised representatives currently haveclass order relief from the requirementsin s945A of the Corporations Act where afinancial planner is required to know theirclient, know their product and ensureadvice is appropriate.

The proposal to revoke the class orderexemption for superannuation funds wasincluded in the ’Australian Securities andInvestments Commissions (ASIC’s) newlyreleased consultation paper 164 (CP164).

ASIC said there were indications that veryfew funds are currently relying on the relief.

“In addition, the Australian Governmenthas announced that s945A will be amended

to clarify that AFS licensees can scale adviceand still comply with s945A, making ourrelief less necessary,” the regulator stated inits consultation paper.

CP164 Additional guidance on how toscale advice provides expanded guidanceon provision of scaled financial advice,describing the difference between factualinformation, general advice and person-al advice.

However, in providing scaled advice serv-ices, financial planners would still need tocomply with obligations under Chapter 7 inthe Corporations Act and to the so-called‘suitability rule’.

When ASIC initiated its push for the intro-duction of scaled advice, the financial plan-ning industry expressed concerns aboutliability and compliance issues.

“The new guidance CP164 explains howyou can scale advice in a way that complieswith [these rules],” the regulator stated.

CP164 includes eight examples of givinginformation and advice to clients about carinsurance, purchasing shares, investing ininheritance, adopting a transition-to-retire-ment strategy, superannuation pensionproducts and retirement planning issues.

The Financial Planning Association (FPA)welcomed CP164, but cautioned thatwithout the consideration of how this inter-acted with ‘best-interest duty’, the guidanceremained incomplete.

“The FPA had provided clear feedback toASIC on this issue, and we strongly recom-mended that ASIC not release the consulta-tion guidance paper until the best interestduty had been formulated and incorporat-ed as part of this guide,” FPA chief executiveofficer Mark Rantall stated.

Rantall said the regulator might causefurther confusion rather than guidanceor clarification for consumers and the profession.

ASIC pointed out in its consultation paperthat it was not yet clear whether theproposed Future of Financial Advice (FOFA)reforms would be introduced in their currentform, declining to further comment on theirimplications on scaled advice.

However, if and when the FOFAreforms are implemented, ASIC willreview the updated guidance, whilesubmissions to CP164 will close onThursday, 8 September 2011.

www.moneymanagement.com.au August 4, 2011 Money Management — 3

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Online tinkering tainting PDSs

went through a sign-offprocess before going on theInternet, Aon principal andactuary Jenny Dean said.

Aon was one of the earlyfund managers to institutethe short form PDSs.

Any changes to Aon’sPDSs have to be signed offby legal counsel and theoffice trustee. Dean is theoffice trustee at Aon Hewitt.

“I know that I will bereviewing the documentbefore it replaces what’s onthe web. So therefore

there’s version control, andwe also keep copies of theversions,” Dean said.

Fund managers musthave version control for theiraccessory documents, shesaid.

However, Dean said acci-dentally including an out-dated document wouldn’tlead to legal action againstthe fund manager.

“It would have to be apretty major error, and thereusually is a clause in mostPDSs that they will bechanged from time to time,”she said.

“ The regulator mightcause further confusionrather than guidance orclarification for consumersand the profession. ”

without an Australian Finan-cial Services Licence (AFSL)suggests an SMSF or explainshow to establish one in orderto help someone afford aproperty, that is completelyinappropriate, Morgan said.

He added that it was aninteresting grey area, becauseunder the Corporations Act anSMSF is not a financialproduct. But to set one up andbuy a property, the clientwould have to roll over their superannuation, which entersinto financial advice territory, he said.

“If not wholly illegal, and certainly [the Australian Secu-rity and Investments Commission] is taking a dim view ofit, it’s inappropriate that an unqualified person starts tellingpeople what they should be doing with their superannua-tion,” he said.

Naylor said the MFAA had asked brokers to exercisecaution in these areas, because they involve differentrisks and risk appetites – and unless brokers have anAFSL, they are treading in very dangerous territory. Herecommended those without an AFSL steer clear ofdiscussing SMSFs altogether.

Unethical lendingpractices flaggedContinued from page 1

Continued from page 1

Phil Naylor

Klipin encourages planners to continue their lobbyingBy Chris Kennedy

NOW is no time for advisers to ease up interms of lobbying local members of parlia-ment (MPs) around Future of Financial Advice(FOFA) issues, according to Association ofFinancial Advisers (AFA) chief executiveRichard Klipin.

In a speech to the national AFA roadshow,Klipin was again critical of two key elementsof FOFA: opt-in provisions, and the banning ofrisk commissions within superannuation.

Klipin said an alternative to opt-in wasstrengthening opt-out provisions and makingthem easier to understand, rather than opt-in,which he said would drive up costs.

Opt-in could drive up costs by around $100per client between adviser time and staffpreparation time, as well as increase costsfrom product providers, he said.

Klipin also asked: why would you set up apayment system for insurance where you canget essentially the same product inside oroutside a tax structure where one way the

adviser gets paid and one way they don’t,unless it was a political decision or designedto drive consumers into industry super funds?

The AFA has now shifted from policy topolitics and now is the time for advisers tocontinue going to see their local politiciansand speak to them, Klipin said.

MPs may toe the party line in person but ifthey all go back to the party room and relaythat they are getting angst from their con-stituents then this will still influence the FOFAdebate, Klipin said.

The AFA has a FOFA pack that will outline toadvisers how they go about contacting theirlocal member as well as other relevant infor-mation, he said.

“We’re in the third quarter, this is not thetime to drop the ball and think that anydebate is now over,” he said.

“We’re expecting draft regulation some-time in August. Once we get them, then we’llget a sense of how successful we’ve been asa profession in arguing the toss – and thenit’s our right to continue arguing,” he said.

News

By Ashleigh McIntyre

FRESH from expanding itsboutique offering with theaddition of two former UBSsmall cap asset managers inMay, Bennelong FundsManagement is againlooking to add to itsmanager line-up, with theaddition of an Australianequity long-short absolutereturn fund.

Bennelong has confirmedrumours that two hedgefund managers fromHerschel Asset Managementhave agreed to move to theboutique fund manager,which currently managesalmost $1.8 billion.

Bennelong chief execu-tive Jarrod Brown toldMoney Management thetwo portfolio managers whohead the Herschel AbsoluteReturn Fund, Mark Burgessand Kristiaan Rehder, planto move to Bennelong on 1September. The pair willform a yet-to-be-namedinvestment business ofwhich they will be majorityshareholders.

“They have tremendouspast performance, a robustinvestment process and arevery highly regarded in theabsolute return space,”Brown said.

Earlier in the year, Zenithgave the Herschel AbsoluteReturn Fund a ‘recommend-ed’ rating for its unblem-ished record of outperfor-mance in a falling market,labelling it the “undiscov-ered gem” of hedge funds.

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News

By Chris Kennedy

A MOVE towards opt-in and ashift to fee-for-service remuner-ation may force manyconsumers to walk away fromadvice about life insurance,according to AIA head ofadviser services Pina Sciarrone.

Referring to recent CoreDataresearch commissioned by theAssociation of Financial Advisers

called Risking Everything, Sciar-rone said the results clearlyshowed consumers were reluc-tant to pay up-front fees.

Two in five respondents in thesurvey said they would not beprepared to pay fees on lifeinsurance advice, and almosthalf said the reason they had notsought advice was an aversion topaying fees, Sciarrone said.

“It’s telling us that consumers

don’t have a problem withcommission at all – they wantchoice,” Sciarrone said.

“A ban on commissions mayforce consumers to pay up frontfees, and it may see consumersexit the market – that will exac-erbate underinsurance,” shesaid.

Members of corporate superfunds valued the range of adviceservices they had access to,

according to the survey, partic-ularly the ongoing interactionwith their adviser, and theservice was also valuable toemployers, Sciarrone said.

If opt-in is introduced thesepeople will not opt-in to payadvice, and many will walk awayfrom their corporate super fund.Many of these people will notseek advice after leaving thatcorporate fund, she added.

Opt-in and fee-for-service will worsen underinsurance

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ISN talks upinfrastructureand unlistedassetsBy Ashleigh McIntyre

THE Industry Super Net-work (ISN) has claimedexposure to infrastructureand unlisted assets hasbeen a vital performancedifferentiator betweenindustry and retail superan-nuation funds.

Amid continuing discus-sion about the role of superfund investment in infra-structure, ISN chief econo-mist Dr Sacha Vidler saidthe outperformance andreduced volatility of unlistedassets has been an impor-tant source of competitivedifference for industryfunds.

He added it was a vitalfactor in their impressiveinvestment performance.

ISN used figures fromChant West on growthfunds from 2009 to indi-cate that retail funds onlyallocated 9 per cent of theirportfolio to unlisted assetswhile industry funds allo-cated 28 per cent.

“This different approachto asset allocation hasproved to be a vital perform-ance differentiator for indus-try super funds as unlistedassets have both outper-formed most other assetclasses and also been lessvolatile,” Vidler said.

Vidler said that duringthe global financial crisis,unlisted property andunlisted infrastructure expe-rienced a shorter and shal-lower downturn than theprecipitous crash thatoccurred in listed markets.

However, one industryfund, MTAA Super, had ahigh exposure to unlistedassets and has recentlybeen the subject ofscrutiny over investmentperformance.

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News

Good job prospects for Adelaide and Perth planners

FINANCIAL planners based in Adelaide,Melbourne and Perth will be among themost sought-after professionals withinthe financial services sector in the thirdquarter of 2011, according to recruit-ment specialist Robert Walters.

Robert Walters’ quarterly marketupdate report found non-bank lendingand wealth management sectors willsee the highest levels of hiring thisquarter due to growth and the re-emer-gence of consumer interest in person-al investment.

Robert Walters manager of bankingand financial services in Brisbane,Samantha Campbell, said there will bestrong demand for financial plannersand relationship managers acrossmost markets.

“In particular, the Brisbane and

Melbourne markets will face a shortageof senior financial planners, and short-ages of experienced relationshipmanagers will also continue in Adelaideand Perth,” Campbell said.

“These professionals can expect toreceive the biggest salary increases andface multiple and counter-offers.”

Business development managers andrelationship managers in Adelaide andPerth will also see an increase indemand, according to the report.

The Sydney banking operationsmarket is also tipped to see increasedhiring activity within selected segments,most notably investment markets anddomestic banks.

The report found that hiring withinthe banking and financial servicessector would generally increase in thisquarter, as the new financial year bringsnew budgets and headcount approvals.

Sovereign debt issues will linger onRESOLUTION of thecurrent European debtcrisis will not necessari-ly serve to reduce the riskattaching to developedcountr y sovereignbonds, according toBlackrock Australia headof fixed income SteveMiller.

He said that even ifGreece, Spain and otherEuropean countr ies

managed their waythrough the current debtcrisis, the uncomfortablefact remained that mostwestern countries faceddemographic deficits.

“It is likely public sectorbudgets face even morestrain in the years ahead,”Miller said. “Retireenumbers are also likely torise and the numbers oftaxpayers is likely to fallon a relative basis.

“ We now know that

sovereign debt is notrisk-free and traditionalissuer-weighted fixedincome benchmarkshave not caught up tothe new reality,” he said.

Mil ler said that toavoid the threat ofsudden and hosti lemarket events, investorswould have to considerreconfiguring their fixedincome allocations in afar more r isk-awaremanner.

Mixed results for S&P international property review

STANDARD & Poor’s Fund Services (S&P) has releasedits ratings on 21 funds in theInternational Property – Listedsector review. Most ratingshave remained stable: 15 have been affirmed, withthree downgraded and twoupgraded. One fund managedby Advance remains ‘on hold’.

In the review, S&P notedthat performance of funds inthis sector is still constrainedby global economic events,despite signs of improvement.

“We affirmed our five-starratings, retaining our highestlevel of conviction in twofunds managed by CBRE Clar-ion Securities (formerly INGClarion Real Estate Securities)and AMP Capital Brookfield,which remain the standout managers in the rated peergroup,” S&P analyst Peter Ward said.

Ward said the upgrade of two funds managed byRREEF matched the reviewers’ increased conviction inthese funds since the previous ratings review. He citedchanges within the global portfolio management team

and improvement to the continu-ity of stock coverage as the rea-sons for the upgrade.

The three funds downgradedin the ratings review, two man-aged by Invesco and one by Res-olution Capital, dropped fromfour stars to three stars.

“Our conviction in the Invescofunds’ ability to consistentlyexceed their performance objec-tive has been tempered some-what due to the managers’ rela-tively conservative por tfoliopositioning,” Ward explained.“This follows a period of under-performance over several years,”he added.

For Resolution Capital, Wardalluded to a number of signifi-cant team changes over the past18 months. “In our view,” hesaid, “despite our high regard forthe senior portfolio managers,

the team is unlikely to be at full strength for a period.”He emphasised that the ratings agency retains convic-

tion that Invesco and Resolution Capital can achieve theirrespective performance objectives.

S&P will soon publish a sector report, which will includethe key findings and sector themes from the review.

Premium putsreturns back on track

FOLLOWING a major off-market buybackduring the global financial crisis, PremiumInvestors has proved its returns are backon track by providing investors with a finaldividend of 3.5 cents fully franked.

Chairman Tom Collins said providing astrong dividend stream over the past yearhad been particularly gratifying given thebuyback in 2009, which resulted in a 60 percent reduction in the size of the company.

“During the past two years your boardhas focused on restructuring the portfolioto a smaller, cost-efficient structure andenhancing the investment process toprovide superior benefits to its sharehold-ers,” Collins said in a statement to investors.

Premium Investors is currently tradingat around 76 cents compared to its nettangible asset value of 91.6 cents as at 30 June.

Collins said the present unique structureof the company’s investments should assistthe maintenance of a sound stream of fullyfranked dividends in coming years, provid-ed no major deterioration of domestic orglobal financial markets is experienced.

The dividend record date is 12 August2011, with a payment date of 9 Septem-ber 2011.

ANZ introduces new over-50scoverANZ has launched a new life insuranceproduct for over-50s that it claims will filla gap in the market.

The ANZ 50+ Life Cover has beendesigned to meet immediate post-deathfinancial expenses up to $15,000including funeral costs, credit card billsand utility bills.

The product has a level premium planwhere costs do not increase with age,with the option to cap premiums so themaximum a policyholder pays will neverexceed the total benefit.

There is also no requirement for med-ical tests or health questions, and coveris for life.

Other features include up to $30,000for accidental death after one year, avail-ability of a premium payment pause ofup to three months, and payment of thebenefit within two business days.

OnePath general manager of insur-ance, Gavin Pearce, said the productfills a gap in the market by providingaffordable funeral and immediate post-death expense cover, where premiumsdo not go up year-on-year.

“Our research found a strong appealfor insurance cover that allowed con-sumers to avoid burdening their lovedones. Specifically, an insurance prod-uct that had no premium surprises,”Pearce said.

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By Mike Taylor

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Peter Ward

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by MLC Investments Limited, ABN 30 002 641 661 or MLC Nominees, ABN 93 002 814 959 before deciding whether to acquire or hold the product. A copy of the PDS is available by phoning MLC on

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News

After death pension tax unfair: LongBy Mike Taylor

AN Australian Taxation Office (ATO) draft tax ruling onthe taxation of pensions after death has been describedas “unfair, inequitable and against the spirit of the taxlaw”.

The Self-Managed Super Fund Professionals Associationof Australia (SPAA) chair, Sharyn Long, criticised the ATOapproach. She said the retrospective nature of the draft taxrulings on pensions from a super fund following the deathof a retired member was not only inequitable, but would beapplied retrospectively to 1 July, 2007.

“The SPAA believes the retrospective nature of this drafttax ruling is unfair and inequitable and against the spiritof the tax law,” she said.

“Take an example of a property that has been held in a

fund for many years. The capital gains tax bill could be asubstantial part of the superannuation fund balance,” Longsaid. “If the trustees were not expecting to have to paycapital gains tax because the member is in pension phase,typically no tax contingencies will have been made by thefund for this purpose.”

She said this posed questions for trustees and auditorssigning off on annual accounts, since they had todetermine the likelihood of the tax payments being duebased on future events.

“Rulings like this should be forward-looking so peoplecan plan ahead for their retirement with confidence andnot be afraid of leaving crippling tax bills for their grievingfamilies when a member has died,” Long said.

She said the SPAA hoped the ATO would seriously recon-sider its position.

Investmentpropertiesreplace firstdream homes

By Milana Pokrajac

ALMOST half of Generation Y buyerswill buy an investment property astheir first purchase, putting aside thetraditional ‘Australian Dream’ of ahome, according to a survey conduct-ed by Mortgage Choice.

The Mortgage Choice 2011 First TimeProperty Investors Survey also found thatGen Y would not only ignore the firsthome owner grant and first home buyerconcessions, but 77 per cent are current-ly making lifestyle sacrifices to achievetheir goal.

This compares to 66 per cent of Gener-ation X and 66 per cent of baby boomers.

Mortgage Choice spokesperson KristySheppard said the findings called intoquestion the concept of the ‘GreatAustralian Dream’ for people aged 30years and younger.

“Is it still a home, is it property ingeneral – whichever type they can afford– or is it simply about investing in an assetthey expect to bring in income and/orappreciate in value?” Sheppard said.

“While it is clear that every generationis focused on profiting from their invest-ment over the long term, many Gen Yrespondents recognise building a nest eggrather than building a nest may better suittheir income and needs at this early stageof their lives,” she added.

A SPECIALIST self-managed superannu-ation fund (SMSF) company in whichCount Financial took an early strategicshareholding, Class Super, is the latestentity to enter into a strategic partnershipto bring a new range of tools to SMSFtrustees.

The company has entered into a strategic par tnership with CCHAustralia with an offering specificallytargeted at accountants, administratorsand auditors.

The partnership will see the integra-tion of Class Financial’s products withCCH’s engagement platform, which itis claimed will improve audit workflow.The partnership also sees the integra-tion of CCH’s content on SMSF and

broader taxation legislation.Commenting on the partnership, Class

Super chairman Barry Lambert said itwould allow both parties to simplify andautomate many of the manual androutine tasks which currently dominatethe cost structures of accountants andadministrators dealing with SMSFs.

“Count is pleased to have been an earlystage investor in Class which allowsaccountants and SMSF administrators toadminister SMSFs much more efficiently,”he said.

Lambert said Class had enjoyed strongsupport from the Count network, and inparticular CountPlus where after limitedexposure over 50 per cent of the firms nowused Class to administer their SMSFs.


INFLOWS into the life insurance risk market have grown 10.4per cent over the year to March 2011, reaching $9.5 billion.

New data from Plan For Life has found both inflows andsales in the life insurance risk market to be strong, withalmost all of the major players recording double-digit percent-age growth.

Overall, AIA recorded the biggest jump in sales at 45 percent, followed closely by AMP (29 per cent) and Tower (18 percent).

But it was Tower that experienced the largest increasein premium inflows with 28 per cent growth, followed byAIA (16 per cent) and OnePath (10 per cent).

Inflows to the individual risk lump sum market grew byalmost 10 per cent, with all companies reporting higherinflows. These were led by AIA (19 per cent), Zurich (13 per

cent) and OnePath (11 per cent). The individual risk income market also experienced inflow

growth of 9.5 per cent, with BT leading the way at 23 percent, followed by AIA (19 per cent) and OnePath (16 percent).

Premium inflows into the group risk market experiencedthe highest growth of any sub-market at 12 per cent, with sig-nificant percentage increases experienced by both Tower (53per cent) and AIA (15 per cent).

Sales in this sub-market jumped by almost 20 per cent,although the report stated this was likely to be somewhatfuelled by the cyclical remarketing nature of the business.

AMP led the way in sales with 219 per cent growth – butit must be noted that this was off a relatively low base, anddue to a change in their reporting method.

Market leaders AIA also experienced strong growth of 62per cent, followed by Tower with 34 per cent.

Sharyn Long

AIA leads life insurance risk market jump

Count SMSF partnership offers new tools

BRITONS are tending to ‘livefor the day’ rather than savefor their retirements, accordingto research released by marketintelligence company Mintel.

The new research, last week,found that those living in theUnited Kingdom were morefocused on what their money‘can do in the here-and-now’,with only 34 per cent of non-retired adults having someform of pensions savings.

The Mintel research sug-

gested that while the UK Gov-ernment might hold concernsabout retirement incomes ade-quacy, it was something thatwas being pushed to the backof the consumer mindset.

It said its research hadfound the most common rea-sons Britons were not savingfor a pension was that they“would rather live for todaythan worry about what willhappen in 20 or 30 yearstime”.

It said this laissez-faire atti-tude was more prevalentamong younger adults, particu-larly those aged 18 to 24 (40per cent), with 19 per cent ofthose not retired focusing ongetting onto the propertyladder.

Commenting on the data,Mintel senior financial analystGeorge Zaborowski said onlyone-third of UK consumers whohad yet to retire had a pension– but more worrying still was

that some of those peoplewere not contributing to thatpension.

“Many people only have apension because one wasmade available to themthrough their place of work andbecause their employer alsomakes contributions,” he said.“Yet, as the cost of pensionprovision has risen, employersupport for pensions over thepast two decades has gener-ally declined.”

Britons seize the day, not their retirement savingsBarry Lambert

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The FirstRate Investment Deposits product is a deposit product of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank) offered through the superannuation and pension investment options provided by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State), the issuer of interests (including all investment options) in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, and FirstChoice Wholesale Pension from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Interests (including all investment options) in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, and FirstChoice Wholesale Pension from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 are not covered by the Australian Government Guarantee scheme. The First Rate Investment Deposits product is administered by Colonial First State. This is general information only and does not take into account any person’s individual needs, fi nancial circumstances or objectives. Investors should read the relevant PDS available from advisers before deciding whether to invest in FirstRate Investment Deposits. ^ Rate does not include a deduction for the tax payable by your super fund on earnings, currently up to 15%. CFS2030/MM/FPC/R

Advisersready tore-investBy Chris Kennedy

ADVISERS are increasinglyready to rebalance clientportfolios away from cash toreinvest in growth assets,according to a survey fromZurich’s investment busi-ness in Australia.

Over half the 300 adviserssurveyed indicated a poten-tial swing back to equities inthe next six to 12 months,according to Zurich.

Of those looking to rebal-ance clients’ cash holdings,more than three-quartersindicated a move to growthassets – with Australian sharesthe most preferred, followedby international equities, thenlisted property.

“Investors want to be surethat markets have found afloor before reinvesting cashfunds into the sharemarket,which is understandable butmay be harmful in the longterm,” said Zurich Invest-ments executive generalmanager Matthew Drennan.

Drennan highlighted theimportance of the right mixof defensive and growthallocations, and advocatedZurich’s low-volatility equityincome fund for risk-averseinvestors who also needsome growth exposure.

The 41 per cent of advis-ers who were not looking torebalance away from cashsaid they were looking formore sharemarket stabilityand improved economicconditions, Zurich stated.

News


By Milana Pokrajac

ANZ Wealth has poached Greg Hansenfrom Colonial First State (CFS) to head upits distribution business transformationdivision, and appointed Bettina Pidcock ashead of wealth marketing.

Hansen held a number of roles at CFS,most recently the head of strategy andplanning where he was responsible for thecompilation of CFS Advice strategy, andestablishing a plan to navigate the advice

business through regulatory reform.The company stated he would assist

general manager for advice and distribu-tion, Paul Barrett, in leading the transforma-tion of the advice and distribution busi-ness “as the financial services industryenters an environment of unprecedentedchange”.

ANZ Wealth has also recruited Pid-cock as its new head of wealth market-ing, who will be responsible for the pro-motion of all ANZ Wealth brands

including OnePath, ANZ Private Bank andSuper Concepts.

The new appointments come a monthafter Barrett announced a major recruit-ment campaign as ANZ Wealth restruc-tures its senior executive ranks.

Pidcock will commence her new role on2 August 2011, reporting to general man-ager for strategy and marketing at ANZWealth, Steve Sheppard.

She made the move to ANZ from Insur-anceLine, where she was general manager

for marketing. She has also held variousmarketing leadership positions at Asgard/St George, MLC and Westpac.

In welcoming Pidcock to the team, Shep-pard said the newly created position wouldhelp ANZ grow its wealth business.

“Bettina’s experience and insights fromworking with merged businesses atAsgard and BT Financial Group will alsobe an asset as we move to fully integratemarketing across all ANZ Wealth brands,”Sheppard said.

ANZ Wealth appoints two more senior executives

Matthew Drennan

By Mike Taylor

WITH the Government’sproposed Future of FinancialAdvice (FOFA) changes weigh-ing heavily on many planners,the Association of FinancialAdvisers (AFA) has entered intoan arrangement with the nation-al depression and anxiety initia-tive Beyond Blue.

The arrangement, confirmed

by AFA chief executive RichardKlipin, follows on from hisorganisation’s concerns aboutthe level of anxiety and depres-sion emerging in the financialadvice profession.

“The environment ourmembers operate in is changing,highlighted most recently by theFOFA reforms,” he said. “Thesechanges have the potential toimpact profoundly on the way

our members operate.”Klipin said the AFA recognised

the relationship betweenchanges in the workplace andpeople’s mental health, andwould like to take a proactivestep towards helping membersbecome more aware of depres-sion and anxiety.

Beyond Blue deputy chief exec-utive Clare Shann said periods ofsubstantial change and stress

could put people at risk of devel-oping depression and anxiety.

“It is critical that employerstake a proactive approach tomanaging mental health in theworkplace,” she said.

Shann aid the AFA and BeyondBlue recognised that small tomedium business owners, whomake up the majority of the AFAmembers and their client base,might be particularly at risk.Richard Klipin

Beyond Blue and AFA concerned about FOFA fallout


News

Age pensionshortfall By Ashleigh McIntyre

WHILE it is widely knownthat the expenses of retireesaged 70 are well above thefull age pension, expensesfor those aged over 90 still farexceed allowances from theGovernment, according to astudy from the Associationof Superannuation Funds ofAustralia (ASFA).

In a new report on thespending patterns of olderretirees, ASFA found thatcosts for 90-year-old retireeswere, in some instances,substantially less than thosefor retirees aged 70.

ASFA compared the newfigures to its RetirementStandard to find that acouple leading a comfort-able retirement will spend$54,562 at age 70 and$48,900 at age 90 – a differ-ence of 11.6 per cent.

A single person living acomfortable lifestyle willalso spend $39,852 at age 70and $36,770 at age 90 – adifference of 8.4 per cent.

The differences were lessnoticeable for those living amodest lifestyle, with littledifference between a 70 and90-year-old couple, andonly 4.6 per cent differencebetween a 70 and 90-year-old single.

The cost of transport andleisure were highlighted asthe major contrasts betweenthe two age groups, as rela-tively few retirees aged 90drive motor vehicles or goon overseas holidays.

But this is somewhatbalanced out by the fact thatthose aged 90 have addition-al expenses in householdservices and healthcare.

ASFA said another impli-cation to be drawn from itsfigures was that in planningfor the future, retireesshould not assume that it isnecessary to maintain aconstant level of expendi-ture over retirement.


SMSF WeeklyReal estate agents on dangerous groundBy Mike Taylor

THE Institute of Chartered Accountants ofAustralia (ICAA) superannuation specialist,Liz Westover has warned against real estateagents promoting the virtues of purchasingreal estate within a self-managed superan-nuation fund (SMSF).

Westover has referred to recent promo-tional efforts on the part of real estate agentssuggesting that the process is straightfor-ward, but warns that this is not the case.

“These issues are never straightforwardand there are a range of factors that need tobe given due consideration, not only before

entering these borrowing arrangements butalso before setting up an SMSF,” she said.

Westover said SMSFs were not the bestsuperannuation option for everyone, andshould not be established simply as a vehicleto borrow to buy real estate.

“Borrowing can be a valuable tool withinan SMSF to bolster retirement savings, butit must be used appropriately and in fullknowledge of the facts and all the associat-ed risks,” she said.

Westover urged people looking to borrowwithin an SMSF for the purchase of realestate to seek advice from a professionalrather than a real estate agent.

Advice certificate a roadblock to SMSF propertyBy Chris Kennedy

A CERTIFICATE of advice from a finan-cial adviser or accountant has been iden-tified as a potential major sticking pointfor clients looking to borrow to invest in aproperty within a self-managed superfund (SMSF).

Often major lenders will look for a sign-off from a financial adviser or account-ant, but in many cases the adviser’sdealer group won’t allow its advisers tosign off on more onerous certificates,even when the adviser is comfortablewith it, according to Multiport servicedevelopment manager Ben Thomas.

The major difficulty with this is thatthe problem won’t emerge until very latein the purchase process, often just two or three weeks beforesettlement and once most of the other paperwork is done,Thomas said.

SMSF loans director Craig Morgan said that when peopleencountered this problem in the final week before settle-ment, advisers and accountants were signing the advice

certificates against their better judge-ment because their clients were beingthreatened with penalty interest if thedeal didn’t go through.

But with the licensee carrying the risk,they are effectively the one signing off onthe document, and now that they’re becom-ing aware of what the advisers are signingthere is some discomfort, Morgan said.

“We’re seeing a bit of a collision coursebetween the banks and the AFSLs [Aus-tralian Financial Services Licensees]because the AFSLs won’t have the samecomfort levels as a suburban planner inlooking after the client,” he said.

“The way some of the banks havedrafted [the advice certificates], they’reexposing themselves horrifically. They’re

being asked to go outside the boundaries of what their [profes-sional indemnity insurance] would cover,” he said.

Thomas pointed out that there is no standard advice form.Each bank will generate its own and, while some are fairlyinnocuous, it creates a potential sting in the tail and is a pointfor advisers to be aware of early in the process.

Strong currencyhurting super GROWTH superannuation returnsranged from a low of 6.6 per cent toas high as 12.5 per cent last finan-cial year, according to new datareleased by researcher Chant West.

The research revealed the mediangrowth super return was 9.2 per cent.

Chant West principal Warren Chantsaid the main drivers for perform-ance had been the global and inter-national share markets, with thefinancial year capable of being splitinto two distinct periods.

“The first nine months saw strongdomestic and global share markets,which were the main drivers forgrowth fund performance, push therunning return for the year up to 10per cent,” he said.

“In the June quarter, however, wesaw share markets falter on theback of ongoing concerns about aslowdown in China, negative eco-nomic data coming out of the USand a resurfacing of the Europeandebt crisis.”

Chant said another factor to stiflereturns had been the appreciation ofthe Australian dollar.

“We estimate that the currencyeffect detracted about 3 per centfrom the typical growth fund perform-ance over the year,” Chant said.

ATO death benefitinterpretation

SELF-managed superannuation fund(SMSF) specialist Cavendish Superan-nuation has pointed out the AustralianTaxation Office’s (ATO’s) continuing inter-pretation regarding the handling ofsuperannuation pension accounts uponthe death of a member.

According to Cavendish, the ATO hasconfirmed that in the absence of acontinuing pension beneficiar y, asuperannuation pension accountbecomes an accumulation account onthe death of a member.

It said this then caused the accountto pay tax on both income and capitalgains from the date of death – some-thing that “may create significant taxliabilities in the fund in addition to anythat many be incurred when paymentsare made from the fund”.

Cavendish said the ATO had firststated such an interpretation in 2004,but submissions relating to possiblechanges to the interpretation could bemade until 26 August.

ASFA extends SMSF education offering

By Damon Taylor

ONE of the key acknowledgements forself-managed super funds (SMSFs) withinJeremy Cooper’s Super System Review wasthat they were a successful and well-func-tioning sector of Australia’s superannua-tion industry.

In fact, the review’s panel was confidentenough in SMSF trustees and their levelsof knowledge that it stated:

“The panel does not accept sugges-tions that the levels of SMSF trusteeknowledge are deficient and thatcompulsory education or other forms ofaccreditation are required.”

Instead, the panel pointed to raising theminimum competency and knowledgelevels of SMSF service providers as itspreferred method of trustee education.However, according to the Association ofSuperannuation Funds of Australia(ASFA), that is not to say that trusteeeducation is unavailable or discouraged.

“ASFA has offered training for SMSFtrustees and service providers since2006, which includes guidance oncompliance obligations, taxation, invest-ment, benefits and retirement incomestreams,” an ASFA spokesperson said.“And any further developments will bereviewed in light of the outcomes of theStronger Super process.

“However, insofar as SMSFs continueto grow in popularity, one could say that itstill is a developing market,” the

spokesperson continued. “And theStronger Super focus to concentrate onthe quality of service provider, and inparticular the approved auditor, appearsto be the favoured approach to increasingtrustee knowledge.”

Asked whether ASFA was confident thatwell-trained and accredited SMSF serviceproviders would lead to well-educatedtrustees, ASFA’s spokesperson indicatedthat this, as always, would be reliant uponthe individual service provider’s commit-ment to the professional standards thatwere in place.

“SMSFs form an important part of theAustralian superannuation architecture,and a majority of SMSFs are, in fact, runwell,” the spokesperson said. “In the caseof the SMSFs advised and/or administeredby service providers that are members ofASFA, we are particularly confident thatthis is the case.

“Involvement in ASFA is, among otherthings, an indicator of a commitment toprofessional standards.”

Ben Thomas

Arecent guidance paper produced bythe Financial Services Authority(FSA), the United Kingdom’s equiva-lent of the Australian Securities and

Investments Commission (ASIC), outlines theprocess that advisers must undertake to provethe suitability of their investment recommen-dation with regard to the investor’s willingnessand ability to take risk.

The FSA’s approach is to promote thepersonalisation of advice consistent withthe practices adopted by high-end financial advisers.

• This generally entails a solid emphasis oncash flow analysis and planning;

• It sees the demise of simplistic ‘PortfolioPicker’ risk questionnaires as impersonalshortcuts to a portfolio;

• It recognises the separate roles of risk toler-ance and risk capacity in the advising processand the requirement for the adviser to showreconciliation of any differences betweenthem; and

• One issue that is not resolved is how advis-ers who have used inappropriate tools for riskprofiling in the past (nine of the 11 toolsreviewed by the FSA did not pass muster)should deal with clients who have been poten-tially misadvised.

High-end independent financial advisers inparticular are significantly more optimisticabout their future than most others. A goodnumber of the better advisers are orientedtowards detailed cash flow planning for theirclients and construct passive or semi-passiveportfolios. Most felt the banks and life compa-nies were at a disadvantage in terms ofmomentum to the new standard, and had lostthe regulator’s and community’s confidenceand trust.

To give you a sense of the FSA’s ‘take no pris-oner’ approach to regulation just listen toMargaret Cole. In her role as interim manag-ing director of the Conduct Business Unit, Colehas detailed her experiences with the majorbanks.

“I am not in the business of banker bashing,but if you look at the evidence, it was really thebig retail banks who were the major players,”Cole said.

She said various miss-selling issues haveemerged over the past 20 years costingconsumers £24 billion. She added: “It is partic-ularly striking to me that when we have donebusiness model analysis we have seen howmuch of the business models of major insti-tutions are being driven by aggressive productsales. We have to be prepared, to be more inter-ventionist to head off those issues before theyreally get going.”

To the best of my understanding two of themajor UK banks have withdrawn from thegeneral advice market in the past six months.

Here are ten of the other major themesdeveloping in the UK:

1. The number of advisers is expected toreduce from around 30,000 by as much as 25per cent over the next three years.

2. There looks to be an over-supply of wrapplatforms. Currently there are 29 in the marketand several more in the wings. It’s difficult tosee how they can all be adequately resourced,built and distributed. Fewer than six platformsare currently profitable.

3. There is an ever increasing recognitionthat the investment decision is the last compo-nent of the planning process. The amount ofinvestment risk taken on is decided after allthe other lifestyle options available to the clienthave been explored.

4. Growing recognition that, on average,portfolios have not adequately rewardedclients for taking equity risk over the last 40years. Rolling 10 year average returns for 50/50growth and defensive portfolios are similar toAustralia. They delivered around 2.1 per centa year before fees and taxes, above a purelydefensive portfolio. The extra risk and returnfor moving to 100 per cent growth assets (1.1per cent per annum in the UK, 1.7 per cent perannum in Australia) is also a surprise to manyadvisers.

5. An understanding that the sustainableinvestment proposition for clients promoteswealth preservation rather than wealthcreation.

6. There is a very visible move to model port-folios away from customised portfolios. Thisis accompanied by a continuing shift fromactive to passive asset management. Both are

widely recognised as necessary to increasebusiness efficiency and to improve the consis-tency and add quality to returns.

7. Investment products are expected tobecome simpler, guarantees and product‘tricks’ to diminish, and fees come closer tothose offered by index funds.

8. Growing recognition of the cost toconsumer confidence caused by the failure toappropriately and consistently label funds,explain risk and to frame investors’ expecta-tions.

9. Business processes will move from adviserknows best to informed client consent.

10. A growing acceptance of the need to addto the advisory business’ client propositionnon-investment related services and benefits.

There is a broad recognition now that allparticipants in the value chain must play a rolein bringing consistency and integrity to theadvising process. This methodology is the inte-gration of five fundamental building blocksthat enable a client to make a properlyinformed commitment to his or her plan.

They are:• A reliable personal risk tolerance assess-

ment tool;• A consistent, realistic and understandable

method for both financial advisers and fundmanagers to explain risk and return;

• A cash flow planning tool to illustrate theclient’s spending against available assets takinginto account the asset mix consistent with risktolerance, risk required and testable for theclient’s risk capacity;

• A proven methodology to make futurecapital market assumptions to be used in thecash flow planning process; and

• A proven capability to deliver portfoliooutcomes consistent with pre-agreed bench-marks with the client.

Consequently, almost all product andservice suppliers engaged in reframing theirbusiness proposition to take account of theimpending regulatory changes, or building totake advantage of the opportunities createdby the failure of competitors.

Paul Resnik is director and co-founder ofFinaMetrica.

InFocus


As Australian planners seek to come to terms with the Government’s Future ofFinancial Advice changes, Paul Resnik outlines events in the United Kingdomand their impact on planners.

Back in ol’ Blighty

FINSIA: Young Finance Professionals Event – Trendsin Technology & Investing inInnovation10 August 2011Corrs Chambers Westgarth,Melbournewww.finsia.com

FPA Workshop: the Referable Planner16 August – Sydney18 August – Melbourne23 August – BrisbaneCBD venues to be announcedwww.fpa.asn.autinyurl.com/3p7otna

FSC Political Series: Prime Minister’s Breakfast31 August 2011The Westin, Sydneywww.ifsa.com.au

MFAA Event: NSW BrokerSymposium31 August 2011The Sebel, Parramatta www.mfaa.com.au

SPAA State Technical Conference23 August 2011 – QldSee website for other states.Victoria Park Golf Complex,Herston, Qld www.spaa.asn.au

Source: Chant West

15.6%

Median Returns for growthfunds 2007 - 2011

2009Lowestmediangrowth

What’s on

SUPERSNAPSHOT

-15

-10

-5

0

5

10

15

2015.6

-6.9

-12.9

10.49.2

2007 2008 2009 2010 2011

(%)

Superannuation GrowthFund Performance

2007Peakmediangrowth

-12.9%


Retirement products

THE Treasury’s 2010 Intergenera-tional Report highlighted the

extent to which an ageing popu-lation would affect government spendingover the next 40 years, and the measurestaken by the Federal Government to minimise that impact. They includeincreasing the age pension eligibility, andintroducing policies to lift productivity andreduce barriers to work participation.

But it’s clear the writing is on the wallthat more responsibility will fall on theshoulders of individuals to fund theirown retirement, and the review ofAustralia’s retirement savings system isan obvious indicator.

Unlike other retirement savings systemsoverseas, Australian retirees do not haveto take an income stream. However, somesort of soft compulsion is not out of thequestion as pressure on Budget mountsand as super account balances grow. Thespotlight is also widening to include assets

held outside of super, like the family home.The financial services industry may still

be holding back on product innovationuntil the details of the Government’s super-annuation and financial advice reformsbecome clear. But there is no doubt thatgreat challenge and opportunity lie aheadfor super funds, insurers, and fundmanagers and advisers as the need for post-retirement products continues to grow.

Australia falling behindAlthough the retail sector has shown anincreased interest in innovating aroundretirement products over the last few yearsand more industry funds have looked toprovide post-retirement solutions,Australia is falling behind other countries.According to the second MelbourneMercer Global Pensions Index 2010,Australia fell from second to fourth place,partly due to a lack of retirement incomeproducts that dealt with longevity risk.

Countingevery last

cent

The writing is on the wall that more responsibilitywill fall on individuals to fund their own retirement.The need for better post-retirement solutions to dealwith longevity risk is a key concern and challengefacing the Government and the financial servicesindustry, writes Caroline Munro.

“ Holistic post-retirementplanning software andsystems will have to takemore into account thansuper assets. ”

Key points

•Australia is falling behind other countries in terms of post-retirement solutions,partly due to a lack of products that deal with longevity risk.

•The ASFA Spotlight on Super Policy Issuespaper revealed that there is some appetite among super members for compulsory provision of post-retirement solution for members.

•Investor attitudes to risk changed following the global financial crisis,resulting in the introduction of products toaddress investment market risk and provide some capital security.

•Most industry super funds have been slowto innovate, sticking to account-based pensions if they offer a post-retirement option at all. Yet account-based pensions reveal their true weakness in a downturn.


Retirement products

A number of research reports over thelast six months have revealed thatAustralians are feeling increasingly unpre-pared for retirement. A survey conductedby the Australian Institute of Superannu-ation Trustees (AIST) in conjunction withRussell Investments revealed that morethan half of members in each of the agegroups over 46 years felt their superbalance was low and that time wasrunning out.

Some 31 per cent were not confidenttheir retirement income goals were ontrack. According to the Association ofSuperannuation Funds of Australia (ASFA)report, Spotlight on Super Policy Issues(December 2010), 67.3 per cent of supermembers indicated they were concernedthat their superannuation savings wouldrun out before they die.

The challenge of managing fundsincreases in retirement due to risingfood, fuel and pharmaceutical costs.

Further data released by ASFA recentlyrevealed that compared to the previousquarter, retirees will need more than$600 extra each year to live comfortablyin retirement.

Government reform and tentativeinnovationAs part of the Stronger Super agenda, theGovernment considered mandating thatMySuper products provide a post-retire-ment solution for members. It wasdecided as part of the consultation processthat it would not be in the interests ofmembers due to low balances, the impo-sition of significant costs, and increasingcomplexity for those funds that currentlydid not have an offering. However, theMySuper consultation working groupissues paper released in May stated thatmandating that MySuper products offerpost-retirement solutions “at some timein the future” may encourage the devel-

opment of products when the superannu-ation system matures and post-retirementassets become substantial.

The ASFA Spotlight on Super Policy Issuespaper revealed that there is some appetiteamong super members for compulsion.Some 39.3 per cent agreed with the propo-sition that upon retirement people shouldbe required to purchase an income streamthat lasts until death. One-third of respon-dents did not have an opinion, and theremaining 28.6 per cent disagreed.

Graeme Mather, Mercer’s head of super-annuation investments Australia & NewZealand, does not believe a compulsoryapproach is the right way to go, althoughhe supports some sort of soft compulsionwhere members can opt out of going intoa default post-retirement product.

“If we don’t have some sort of compul-sion, taxpayers 20 years from now will befunding the age pension, and the cost ofthat age pension could be significant,” hesays. “It’s up to the industry to create bettersolutions and choices for members.”

Wade Matterson, senior consultant andleader of Milliman’s Australian FinancialRisk Management practice, says thatinnovation is happening, but it is beingdriven in spite of the Government’sagenda at this point.

“Obviously the retail sector sees theopportunity to satisfy the needs of theirclient base as well as retain that clientbase, while the industry fund market isfaced with the massive challenge of retain-ing their members, who will become moreactive in their decision making. So they’relooking at post retirement solutions,” hesays. “But there have been so manyreviews that organisations haven’t beencomfortable to innovate; when you don’tknow what the legislative framework isgoing to look like going forward, you carrymassive risk.”

A lack of innovation in the superannu-ation sector has more to do with the rela-tively small size of account balances thanwith the number of Government reviewsover the last few years, says AIST chiefexecutive Fiona Reynolds. She says needdrives innovation, and yet the averageaccount balance is currently $19,000 acrossindustry as well as retail funds.

“People with those modest amounts willtend to take a lump sum,” she says.

Nonetheless, post-retirement solutionsare high on super funds’ agendas as thefirst lot of baby boomers start enteringretirement, Reynolds says. She adds thattheir approach to product will depend onthe demographic of their membership.

The innovatorsWade Matterson believes that as thereform picture becomes clearer, productdevelopers have felt more confident indeveloping solutions. Organisations arealready taking different approaches to thepost-retirement problem and a real mix ofproducts will emerge, he says.

“I think it’s a fascinating time. Therewon’t necessarily be one single solutionthat really dominates, and we’ll seethrough the evolution of the market whatworks and what doesn’t.”

Investor attitudes to risk clearly changedfollowing the global financial crisis (GFC),resulting in the introduction of productsto address investment market risk andprovide some capital security. Productproviders have attempted to utilise thebenefits of both account-based pensionsand annuities to develop variable annuity-like products. The current leaders in thatarea are arguably AXA (North), Macquarie(Lifetime Income Guarantee) and OnePath(Money for Life). Another innovator isChallenger, which sought to addressAustralia’s traditional aversion to annuitiesby providing some access to capitalthrough its Liquid Lifetime product.

The fascinating thing about productinnovation at the moment is that twodistinct universes – funds managementand insurance – are starting to merge,says Matterson.

“There’s a lot of work going on at thisstage to start to redesign the traditionalstructures around variable annuities, guar-anteed products or protected products,”he says.

Innovation was also happening in thebackground in terms of dynamic asset allo-cation approaches, which may not seek toprovide a guarantee but attempt to betterinsulate investors’ returns from marketdownside, Matterson adds.

Innovation will only speed up as anumber of groups build up their internalexpertise. MLC and NAB Wealth is one thatformed a dedicated retirement solutionsteam earlier in the year. That team is stillgrowing and has attracted much of itstalent from AXA.

Yet innovation is not just about product.The need to change advice pricing modelsin light of the proposed Future of Finan-cial Advice reforms will also drive innova-tion in how advice is given.

Matterson says increasing complexityin the post-retirement area will requireadvice businesses to rethink the way theygive guidance and make sure that riskprofiling is more specific to the individual.Ultimately, advice has to come first, saysMatterson, as that is where one will get abetter sense of what people can and can’taccept. From there advisers can look tonewer products to tailor the types ofoutcomes clients expect, he adds.

There is also a greater need for moresophisticated post-retirement advice tools,says James Hickey, a partner at DeloitteActuaries and Consultants. He says holis-tic post-retirement planning software andsystems will have to take more intoaccount than super assets.

“They will need to incorporate the homeand various other things, like social secu-rity, tax and all those other issues impor-tant to retirees,” he says.

Continued on page 16

Fiona Reynolds


Retirement products

Product revivalProduct innovation is good forensuring greater choice, but someclaim older products that can beused as part of a retirementincome strategy are experiencinga revival of interest.

The former chair of the review ofthe superannuation system andcurrent chairman of ChallengerRetirement Income, JeremyCooper, says having more choice is

good and asserts that Challengerdoes not advocate a 100 per centallocation to annuities. However,more options add to the complex-ity of decision-making in a popula-tion where only one-fifth seeks outfinancial advice, he says.

“Retirement is not a good timeto be making choices between verycomplicated products. A lifetimeannuity puts forward a very clearand simple promise,” Cooper says,adding that investors want simplic-ity and transparency.

Deferred annuities often comeup in discussions around longevi-ty risk, although in Australia theyare currently buried under a pile ofconflicting regulations.

“That makes us a real outlierglobally,” says Cooper. “If you lookat all the comparable retirementsystems, deferred annuities inter-estingly play a role in them becausethey are actually a very powerfulproduct with a powerful financialproposition at the end for a rela-tively modest amount.”

Even if those regulatory hurdlesare removed, Matterson questionswhether deferred annuities willever be popular.

“It comes down to investorpsychology – people are very goodat making decisions around short-term outcomes, but they strugglewith making decisions that affectthem over a longer term horizon,”he explains.

Mather says that while he likesthe concept of annuities, heworries about the lack of consumer

protections in Australia.“I think for the annuity

market to be successful inAustralia we need somesort of consumer protec-tion,” he says, referring tocompensation schemeslike those available in theUK.

Equity release productsare another area some inthe industry claim is seeinga revival of interest. Thereverse mortgage marketsaw 11 per cent growth in2010, according to a studycommissioned by theSenior Australians EquityRelease Association(SEQUAL) and conductedby Deloitte.

James Hickey says thatin the past advisers havenot considered propertyto be part of their discus-sions with their clients.This is changing as theylook to downsizing orother forms of earlyequity release, like reversemortgages and reversionproducts, he says.

Government is certainlynot ignoring the high ratesof homeownership inAustralia. Following theIntergenerational Report,the Productivity Commis-sion recommended agovernment-backed agedcare equity releasescheme. Hickey says thereverse mortgage sectorexperienced fundingconstraints through theGFC and, while bankshave stayed active in thearea, non-bank lendershave been lobbying theGovernment to find a wayof promoting greater avail-ability of funding.

“From a public policyperspective, that may bebeneficial to the Govern-ment because it mayreduce the strain on thefuture financial system,”he says.

Industry funds slow onthe uptakeMost industry super fundshave not been quick toinnovate, sticking toaccount-based pensions ifthey offer a post-retire-ment option at all. Yetaccount-based pensionsreveal their true weaknessin a downturn.

Cooper says it is bizarrethat some super funds stilldo not have a post-retire-ment solution. But, forthose that do he feels it isfair that Governmentrequire specific dutiesaround inflation, longevityand market risk, proposedas part of MySuper.

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Continued from page 15


Retirement products

“The industry is waiting to see what thatactually means,” he says. “There’s a fork inthe road there. I think a lot may just fiddlearound with the allocated pension toaddress those risks, but there are othersthat may feel that real annuity style incomein retirement deals with those risks. Sothat’s a bit of a question at the moment.”

Regardless of what Governmentmandates, the whole-of-life approach toretirement savings is out there. On theretail side, BT Super for Life is perhaps anearly innovator as members graduallymove from a savings account, to a transi-tion to retirement account, and finally intoa retirement account.

Matterson says the industry fund sectorfaces the greatest change as it was built outof a wholesale model where members arepooled together to enable low cost invest-ment solutions.

“But as people retire it is no longer awholesale discussion,” he explains. “Youneed to talk to each member individuallybecause retirement is a very personalthing. The model has to change to a moreretail-like model and the funds that wakeup to that are the ones who will be in thebest position.”

The needs of the individualProduct providers need to understand thedynamics of the pre-retiree and retireemarket when innovating, says Matterson.

“We need to consider the compositionof the market where certain solutions areapplicable – for people with low accountbalances, for example, it may be moreabout trying to inflate their income over afive, 10 or 15 year period before they moveon to the age pension.”

Mather agrees that innovation shouldbe driven by what investors are lookingfor, which Mercer has termed the ‘trilem-ma’ – good returns, protection from risksand access to capital. Although it is impos-sible to develop products that address allthree issues entirely, he says, the impor-tant thing is that the approach would seekto address investor needs.

Mather says the problem withMySuper’s approach is that it has

unintentionally focused on costs.“A lot of super funds are looking to

minimise costs. That’s wrong – they shouldbe focusing on value,” he says, adding thatthe whole reform agenda could be coun-terproductive when it comes to productand service innovation.

Those super funds focused on addingreal value for members will look to betterrisk profiling, says Mather.

“One of the biggest innovations we’ll seein the future is individual dynamic de-risking strategies for members, where thereis some sort of financial engine that willautomatically change the risk of membersto help them achieve the ultimate objec-tive, which is defined at the outset,” he says.

“I get annoyed when people in themarket say that balanced funds are alrightfor everybody, when clearly they are not.”

Mather conceded that a lifecycleapproach is too late for those with lowbalances now nearing retirement. He saysMercer is currently collating data to discov-er the impact on low account balancesshould investors stick to higher allocationsof growth assets.

The crux of the matter is that solutionswill have to address the myriad needs of avaried group of individuals.

Hickey says the advice and distributionnetworks are the key to product develop-ers gaining a better understanding of pre-

retiree and retiree needs.“Far too often they design a great

product that makes imminent sense to thefinancial literate people in the organisa-tion. But unless they tap into the needs oftheir customer base, it’s not successful,”he explains. “I think innovation will bemore driven by members’ and advisers’needs, and the product providers willadapt their offerings to suit.”

Deloitte partner, Stephen Huppert, sayswhile variable annuities, for example, havenot been the sales success that someproviders had hoped for, they could be aviable option in the future.

“Sometimes it just takes time for advis-ers and consumers to understand theproduct, and for the product providers tounderstand the needs of consumers andtailor the product better,” he explains.

The advice sector was also a key tosuccess from a distribution perspective,according to Matterson.

“As people get to retirement, the prob-lems are so sophisticated that they aregenerally going to seek out advice. Organ-isations can be a bit slower bringingproduct to market as long as they have astrong distribution network.”

Matterson says it will be very interest-ing from the perspective of industryfunds. They traditionally haven’t haddistribution or advice capabilities, yet

they are starting to tap into the independ-ent adviser network.

“I think that will be a key to funds beingable to retain their members and get theright services to them,” he says.

A shift of thinking requiredCooper says the shift of mindset from anaccumulation to decumulation mindset ishappening across sectors.

“There’s a fair degree of acceptance thatwe’ve built a fairly good accumulationsystem but perhaps the retirement piecehas still got quite a lot of work to be done,”he says.

Mather says the industry needs to stepback and challenge the status quo nowand again.

“We’re here to help members to achievebetter outcomes, save for retirement and,more specifically, to help retirees replacetheir working income with an incomestream in retirement,” he explains. “We’renot here to maximise return, create fundsthat are compatible with each other, andincrease funds under management. I thinkthe industry sometimes forgets that.”

A change of attitude is also requiredamong investors, Cooper says.

“We do appear to be culturally wired uptowards taking equity risk in retirement. Ifyou look at a scale of risk in retirementaround the planet, we would be at theextreme risky end,” he says.

Looking at the years since 2000,Australian retirees have had an unhappyfour years out of 10, he says.

“Retirement is not about averages butabout actuals. It points to the number onedefect of using just one style of product inretirement.”

Again, Reynolds points to demand asthe real drivers of change. She feels thatthe shift in mindset from accumulation todecumulation thinking will follow natu-rally as people have more money accumu-lated to warrant a decumulation strategy.

“That’s why the funds with oldermembers with larger balances are doing alot more in this space than those that haveyoung members with low accountbalances,” says Reynolds. MM

“We do appear to beculturally wired up towardstaking equity risk inretirement. ”- Jeremy Cooper

Jeremy Cooper

Ten years ago, Jim O’Neill ofGoldman Sachs came up with theidea of throwing together thelarge and fast-growing

economies of Brazil, Russia, India andChina into one investable block called theBRICs. In essence, the key commonadvantage among these countries wastheir size: very high populations (morethan 40 per cent of the global total) andvery big land masses (over 25 per cent ofthe global expanse), which in turnsupported major economic growthprospects.

What are the emerging market opportu-nities a layer down from the BRICs thatare not as well appreciated but havesimilar long-term investment potential?

Using the broad criteria of large andgrowing populations and strong long-termeconomic growth potential, we take acloser look at the following five countries:Turkey, Indonesia, Nigeria, Mexico and thePhilippines.

Of all the contenders, Indonesia isperhaps the most similar to the BRICs,owing to its very high population (biggerthan Brazil or Russia), comprised of a largeand increasingly wealthy young workingclass producing strong average real grossdomestic product (GDP) growth of 5.7 percent in the last five years.

Even during the global financial crisis,the Indonesian economy proved impres-sively resilient, with few of the problemsseen in developed markets. The bankingsector is well capitalised, with decliningnon-performing loan ratios and low anddeclining public and external debt levels.Apart from its favourable demographics,Indonesia also benefits from a degree ofeconomic diversification owing to signif-

icant commodity exports, includingoil, gas and coal.

In December 2010, the govern-ment articulated an economic visionin which Indonesia grows tobecome one of the world’s 10 largesteconomies by 2025. If it succeedsin this objective, investing in

Indonesian assets early on couldprove to be rewarding. However,

there are risks. Political risk is relative-ly high, with concerns about whether

the government can stick to its reformistagenda owing to pressure from vestedinterest groups. Corruption is also preva-lent, adding to a high risk business envi-ronment that falls short of Western stan-dards.

Although not as resilient to the globalcrisis as some of the other countriesprofiled here, the Turkish economy hasnonetheless bounced back very strongly,growing around 8 per cent in 2010. Turkeyis now reaping the benefits of reforms andgenerally prudent policies it pursued afterits own crisis of 2001. The banking systemsurvived the global crisis in relatively good

condition, and the government’s budget-ary and public debt position (around 40per cent of GDP) is significantly betterthan many countries in the Eurozone.

An important driver of political reformshas been the hope of the European Unionaccession. Unfortunately, strong opposi-tion from Germany and France makes thisa difficult objective to achieve in the nearterm; however, it is more likely in the longrun, and is a positive risk factor thatdeserves to be factored in by investors.Over the last decade, the moderateIslamist Justice and Development Party(AKP) consolidated its political position.Nevertheless, political risk remains highby European standards owing to long-standing tensions between the AKP andthe secularist military.

Already the richest in per capita termsof the countries profiled here, Mexico’sgrowth prospects are not as strong assome of the others. Both a potentialstrength and weakness of the country isits very high economic exposure to thedominant US economy. Around 80 percent of Mexico’s exports go to the UnitedStates and, as well as receiving substan-tial amounts of US investment, Mexicoalso benefits from the remittances of astrong Mexican-American communitythat resides in the US.

Apart from benefiting directly from USdemand, Mexico also has the potential toact as a relatively low-cost gateway to theUS for third countries. For example, therehas been some evidence recently ofChinese firms setting up factories inMexico for export to the US, as well assome companies choosing Mexico overChina, owing to transport cost advantages.On the negative side, Mexico’s notoriousdrug violence and associated securitycosts are becoming a growing concern forbusinesses, adding to other weaknessesin the commercial environment.

Following recession in 2008-09, thePhilippines economy has reboundedimpressively, growing by 7.3 per cent in2010 – the fastest pace in over threedecades. The country benefits from a fairlylarge population, a growing middle class,and rising average incomes. The economy


OpinionMarkets

Building BRICsBrazil, Russia, India and Chinaformed a block of countries thatreturned well to their investors overthe past decade. Tom Stevenson triesto predict which countries couldmake up the next BRIC.

“Investors in the BRICgroup of countries haveenjoyed excellent returnsover the past 10 years.”


has also seen some signifi-cant structural improve-ments in recent years.Although a balancedbudget remains an unlike-ly prospect in the nearterm, the government hasmade significant strides inits fiscal management,owing to reforms andreduced tax evasion. Lowerfiscal deficits (averagingless than 3 per cent of GDPin the last five years) havehelped to push the debt-to-GDP ratio below 60 percent in recent years.

The economy also bene-fits greatly from a substan-tial number of overseasworkers (around 20 percent of the population),whose remittances helpsupport domestic privateconsumption, as well askeep the overall currentaccount consistently insurplus.

In terms of risks, thePhilippines is susceptibleto a high level of politicalunrest, with a history ofmilitary coups, politicalviolence and civil unrest. Italso has significant weak-nesses in its business envi-ronment owing to securityrisks, corruption and inad-equate infrastructure.

Some other high-potential emergingmarketsThe countries profiledmerely give a flavour of arange of high-growthemerging markets thatcould provide attractivelong-term investmentopportunities. There aremany others. For example,despite its Communistgovernment, Vietnam (acountry of more than 90million people) hasachieved impressivegrowth rates in recentyears. With wages begin-ning to rise steadily inChina, Vietnam is increas-ingly seen as a low-costalternative for globalmanufacturers.

South Africa (with 49million people) is alreadythe most developedcountry in Africa, and hassignificantly higher percapita GDP than its region-al peers. However, otherAfrican countries are keento catch up, and with itsmore developed character-istics, South Africa isuniquely placed to bothfacilitate and take advan-tage of Africa’s growthpotential and aspirations.

With a population of around 29million, Malaysia is relatively smallin comparison to some of the othercountries mentioned, but its long-term record of development isimpressive. Its economy is struc-turally quite diverse and benefitsfrom a significant electronicsexports industry, as well ascommodity exports, a vibranttourism industry and increasingdomestic consumption.

Investors in the BRIC group ofcountries have enjoyed excellentreturns over the past 10 years, andmany will want to know who mightrepeat their success in the future.While outright replacements forthe BRICs are impossible to find,there are a number of less appre-ciated (but well-populated) emerg-ing markets with attractive long-term economic fundamentals.

For all emerging markets,

investors need to consider theassociated risk factors. Recentinstability in the Middle East andNorth Africa has highlighted ahigher susceptibility to politicalrisk, in particular. Therefore, thetask is to find assets within thosecountries that offer sufficientlyhigh returns that adequatelycompensate for the level of riskbeing taken. This can be a researchintensive and time-consuming

process that, in the case of manyinvestors, is probably better left tospecialist investment managersthat have in-depth regional invest-ment experience and successfultrack records. Spreading invest-ments across a range of countriesor multi-country funds can alsohelp to control risk.

Tom Stevenson is an investmentdirector at Fidelity.

Many of us are in a constantbattle to simplify our lives.We return duplicatewedding presents, cancel

our gym membership once we’ve takenup a sport, and even consolidate our debtto make it cheaper and easier to manage.So why do so many Australians avoidconsolidating their super, especially whenthe benefits are far greater than creatingmore cupboard space?

According to the latest report from RiceWarner Actuaries on super fees, Australianshave three superannuation accounts onaverage, and it is estimated that this resultsin a loss of $1.1 billion a year in extra fees,lost payments and missed earnings.

This is an industry-wide issue. Somepeople have super accounts they are noteven aware of, which means they couldbe paying too much in fees when theydon't need to, and this can have a bigimpact on their retirement savings in thelong-term.

So how can financial planners help morecustomers consolidate their super toimprove their retirement nest eggs? Andhow can the process be simplified to ensurea positive experience for planners and theirclients?

Why should clients consolidate theirsuper?From a client’s perspective, it’s importantto be able to easily articulate why it isbeneficial to consolidate numerous super accounts.

Some of the benefits of consolidatingsuper include:

• Savings on fees – if clients have multi-ple super accounts, they are probablypaying more fees than they need.

• Super balance growth – withcompounding returns, combining superbalances and saving on fees could helpclients maximise their super balance overthe long-term.

• Lower chance of lost super – theprocess of consolidation usually ‘mops up’any lost super and makes clients moreaware of keeping track when they movejobs.

However, even with knowledge of thesebenefits, many people still put off consoli-dating their super because it can be aconfusing and time-consuming task, andin many cases they simply don’t knowwhere to start.

So this is an opportunity for a financial

planner to help guide clients through theconsolidation process. It is an opportunity(for planners who are willing and qualified)to provide piece-by-piece or scaled advice.Let’s look at who is most suited to this approach.

Super consolidation and scaled adviceMany Australians still don’t understandthe value of financial advice, with onlyabout 20 per cent actually seeking theadvice of a financial planner – this isdespite Australia’s ageing population andthe escalating need for people to fundtheir own retirement.

There is no doubt that good qualityfinancial advice delivers results. Researchcommissioned by the Financial ServicesCouncil reveals that someone who startssaving with the help of a qualified financialplanner at age 30 could be more than$91,000 better off at retirement.

Even those who receive financial advicelater in life can benefit, with an average 45year-old gaining a potential $80,000 moreor at age 60 a potential $29,000 more, byage 65.

So why do so many Australians overlookfinancial advice, especially when it comesto super and saving for their retirement? Itcould be that, as revealed by ASIC’s 2010research, many Australians (particularlythose that have never engaged a financialplanner) want simple, scaled advice ratherthan a comprehensive financial plan.

Scaled advice can help those unsureabout seeking financial advice feel morecomfortable as it’s less overwhelming thancompleting a comprehensive plan. It is alsoa cost-effective option.

Planners who are qualified to do so couldoffer piece-by-piece advice, beginning withsuper consolidation, to highlight the valuethey can provide to new clients. Superconsolidation is a good first place to start asit’s relevant to people at all life stages, andmaximising a person’s retirement nest eggis important for most people.

Tips for smooth super consolidationEven if a financial planner is using thescaled advice model to offer super consol-idation, they must still begin with a thor-ough fact-finding consultation with theclient. It’s important to discuss areasoutside of the scope of advice that need tobe addressed at some point in the future.

While the process of advising on superconsolidation is relatively straightforward,

there are some things that may be worthconsidering for different age groups:

18-34 year-olds:• Explain the value of considering

retirement income, which may seem along way away and not a priority for this group.

• Ensure the individual’s risk profile isconsidered when choosing an investmentoption. Options with a greater growthfocus may be more appropriate in an indi-vidual’s early years.

35-54 year-olds:• Explain how super fits into a more long-

term financial plan, in addition to payingoff the mortgage and keeping up withmonthly bills, as these are usually thisgroup’s immediate priority.

• Explain the options for the individual orcouple. Again, risk profiling is an impor-tant part of the process.

• In conjunction with super consolida-tion, this is a good time to look at the client’sretirement nest egg and their transition toretirement strategy.

55-64 year-olds (pre-retirees):• Ensure you don’t make this group feel

guilty about where they’re at or the choicesthey’ve already made. Regardless of wherethe client is at, consolidating their super willsimplify their funds, reduce their fees andensure they have the right level of insurance.

• Look at how you can make the most ofthe time they have left in employment togrow their super balance and ensure theyare in a product that will allow for a smoothtransition to retirement.

Super consolidation and beyondOffering to consolidate a new customer’ssuper, including finding lost super andinsurance within the super, is a goodfirst touch point with any client. Helpingthem with this task is a great way tobuild trust and demonstrate the valueof financial advice.

Chris Jansen is AMP acting director ofwealth management products.


OpinionSuperannuation

“Offering to consolidate anew customer’s super,including finding lost superand insurance within thesuper, is a good first touchpoint with any client. ”

Simplifying the super nestChris Jansen explains how providing standalonesuper advice could be a win-win.

Much has been said aboutchange within the financialplanning industry of late,particularly in relation to the

changes proposed in the Future of Finan-cial Advice (FOFA) reforms. Advice hascome under the spotlight, with the reformsaiming to improve the quality and acces-sibility of financial advice in Australia.

Clearly any professional adviser wouldsupport the concept of these aims, butwhat will these changes in the industrymean for advisers in practice? What sortof impact will these reforms have ontheir businesses? Perhaps most impor-tantly, how will they manage theproposed changes?

For the third consecutive year, articula-tion of value to clients was seen as thenumber one attribute of good practicemanagement among those who took partin the Macquarie Practice Consulting2011 Financial Planning Practices Bench-marking Study (carried out in March2011). Further to that, relationships areseen as the primary foundation of theirclient value proposition. Advisers believea good relationship counts for around halfof the value they provide to their clients.Technical specialisation and investmentselection are ranked second and thirdrespectively, with price a distant fourth.This is particularly interesting given thecurrent industry focus on pricing and fees.

What this clearly indicates is thatwhen it comes to value for money, it isthe quality of advice which counts. Whilethe client is paying for financial advice,what they are really paying for, andwhere they find the greatest return ontheir investment, is in the strength of therelationship they have with theiradviser. Advisers therefore need toask themselves, what are they doingto get to know their clients, theirneeds and their long-term goals? Itis an understanding of these needs,

and knowing how to respond to them,that makes an adviser an effective clientrelationship manager.

Advice and value are both intangible– what some clients deem as good adviceand good value will be completely differ-ent to the measures another client uses– but what all clients want to know isthat they are at the centre of the advicebeing provided.

The strength of client relationships willno doubt have kept many businessesafloat during the global financial crisisand will continue to offer the most poten-tial for further growth as businesses planahead for the future.

Adding value to clients can be achievedthrough a variety of ways, for example, byadvisers taking a more active manage-ment of their client base and re-connect-ing with their clients by offering morediverse wealth management and invest-ment solutions.

Looking at the client base of most firms,more than half are 55 or older, so theseclients are in, or approaching, the draw-down phase of their financial planningstrategy. This highlights the need foradvisers and their broader practices tohave the skills set needed to advise onestate planning, aged care and intergen-erational wealth transfers. A good placeto start is by talking to older clients abouttheir changing needs and

discussing aged care and estate planningwith these clients. Asking to be introducedto the adult children of older clients andeducating them on how their parents’needs will change and how to prepare canalso be a worthwhile conversation.

At the same time, it is important tofocus on growing other client segmentsin the accumulation and retirement plan-ning phases to offset the impact of anaging client base. If they are focused ongrowth, practice owners need to beasking themselves what strategies theycan develop to attract younger clients.Expanding advice services into areas suchas insurance, mortgages and cash flowmanagement are all options that moreand more practices are offering to diver-sify their revenue sources.

It’s not only relationships with clientsthat offer potential for growth; it is alsorelationships with third parties, such asreferral sources. Most client referrals comefrom existing clients and accountants. Use

of accountants as a referral sourceincreased to eight out of every 10 prac-tices in this year’s study. This relationshipwith accountants may also become moresignificant due to an increased focus onself-managed super fund investments.

Industry peers can be invaluable interms of opening up new networks ofprospects, so it is important for practicesto manage these relationships effectivelyand ensure they can add real value to theclients that are being passed to them.

What is clear is that the financial plan-ning industry and adviser businessmodels are evolving to keep up with thesechanges. The fallout from the globalfinancial crisis has changed client expec-tations, led to more reviews of the regula-tory framework surrounding the indus-try and ultimately led advisers to focusmore on what they need to do to achievesuccess.

More than ever before, relationshipsare the key; knowing your client, buildinga sense of trust and ensuring that throughthe advice offered, clients feel they aregetting value for money. It is throughgreater communication and understand-ing between clients and their advisers thatthe industry can add real value.

Fiona Mackenzie is the associate directorat Macquarie Practice Consulting.

Building lasting client relationships

OpinionPlanning


A recent study has shown that advisers see their client relationship as the primary foundation of their value proposition. Fiona Mackenziedescribes the importance of a good client relationship manager.

It seems fairly clear to me that the layperson and finance analysts use theterm volatility to characterise differ-ent concepts. From my reading, the

popular definition of volatility is to dowith bad things happening and themarket not going up. Analysts, on theother hand, typically use a statistic calleda ‘standard deviation’ that weights goodand bad share price movements to thesame extent. This measure allows analyststo put some notional range on what mighthappen to a stock price over a year due tothe random nature of news affecting thestock. For this reason, we usually use theexpression annualised volatility todemonstrate that a one-year period isbeing analysed.

For example, a volatility of 10 per centin a flat market is taken to mean there isa one in three chance of the price in ayear’s time being more than 10 per centhigher or less than 10 per cent lower. Two‘standard deviations’, or 20 per cent in thisexample, implies that there is a one intwenty chance of the price at the end ofthe year being outside ± 20 per cent.Understanding volatility and what drivesit is important in both constructing andmonitoring the performance of an equityportfolio.

The volatility of the ASX 200 index was13 per cent in 2010-11. That is normal byhistorical standards. The average for 1985– 2011 is about 12.5 per cent. Interesting-ly, this is the average volatility for the S&P500 over the last 50 years. I suspect non-

specialists find it hard to believe that2010-11 was normal because the marketdidn’t seem to go anywhere and therewere a number of modest corrections.That happens to be life. Indeed, the totalreturn (including dividends) on the ASX200 was 11.7 per cent – again about theaverage for the last quarter of a century.Furthermore, the return in 2009-10 was13.1 per cent – a little higher than average– and volatility too was just above average.Two normal years on the run – but few arehappy or confident.

To put volatility into context I calculat-ed the return for 2010-11 but starting atany day two weeks before or after 30 June2010 and finishing any day in the twoweeks leading up to 30 June 2011. The best(approximate one year) return from thisset was 13.8 per cent and the worst was0.7 per cent – a huge range in returns byadding or subtracting a few days. That iswhy I think it is important to measurethings properly because our memoriescan easily distort our impressions of whathas been going on.

Of course the ASX 200 is made up of 200stocks – from 11 major sectors – and thesestocks do not move in unison. However,there is some degree of market volatilityshared across the 200 stocks. In chart 1, Ishow in blue, the market volatility on theright and the volatility of the 11 compo-nent sectors to the left of it. The IT sectorhad the highest volatility at 21 per centbut even Materials – including BHP, RIOand the little miners – had a volatility of

only 18 per cent. That is,because BHP and RIO havesuch a large weight in the Materials indexthat they swamp the little miners. BHPand RIO happened not to be that volatilelast financial year.

Investors possibly think more in termsof the volatility of the individual stocksthey hold, rather than of some sectorindex. I have added the red bars in chart1 to show the median (middle) value ofthe component stock volatilities fromeach sector and the broader index.

The diversification within each indexand weighting towards the larger capstocks tends to produce a lower volatilityfor the index than the average compo-nent. For the ASX 200, half of stocks hadvolatility above 26 per cent – double thatof the index – and half below 26 per cent.There is not much difference between thevolatilities of the median stock and theindex for IT and Telco because there areonly a few stocks in each of those twoindexes.

This difference between the volatilityof individual stocks and indexes high-lights the importance of not only holdingan adequate number of stocks overall –but a sufficient number of stocks in eachsector.

In chart 2 I show the volatility of eachstock in the ASX 200 plotted against themarket capitalisation of the company -with colour and shape coding to identifyto which sector the company is classified.The vertical dotted line separates the

stocks in the top 100 (to the right) fromthe rest.

There is much more variation in thevolatilities of smaller cap stocks thanlarger. The red diamond at the bottomright represents BHP and the four greentriangles next to BHP represent the fourmajor banks. Although the chart is toobusy to track each individual stock, I hopethat chart 2 clearly shows that lots of thehigh volatility stocks are typically red andblue diamonds (materials and energy). Itjust so happens that BHP is a relativelylow volatility stock.

The implication of chart 2 is thatinvestors should be prepared to holdmore small cap stocks for diversificationpurposes than if they were to confinethemselves to larger cap stocks.

But not all volatility is bad. The high reddiamond just to the right of the dottedline represents Lynas – one of last year’s‘market darlings’. Bathurst Resources –with the highest return for the year – isanother high red diamond but to the leftof the dotted line. To separate the goodfrom the bad volatility, I have plottedstock volatility against the returns over2010-11 in chart 3. The vast majority ofhigh volatility stocks also had highreturns. This trade-off is the standard risk-return trade-off. Of course, not all highvolatility stocks had high returns, but allof the high returns stocks had high volatil-ity. Managing a ‘high octane’ portfolio of


OpinionVolatilityDefining the upsand downs

Dr Ron Bewely explains what volatilitymeans, and whether reports of ‘volatilemarkets’ in the past couple of years havebeen accurate.

Source: Woodhall Investment Research

Chart 1 Volatility by sector – 2010-11


Chart 2 Stock volatility by market capitalisation


high return stocks is difficult. Stock pricesdo not go up in a straight line so how doesa manager differentiate between a tempo-rary dip in price from a serious downturn?With difficulty is the only honest answer.

But is volatility predictable? TheAustralian Securities and InvestmentsCommission implores us all to say pastperformance is not a reliable indicator offuture performance, but Rob Engle got the2003 Nobel Prize for his work on volatility.His ‘elevator speech’ version of his lifetimecontribution was along the lines of “I foundsome averages of past volatility to be usefulpredictors of future volatility”. I show ahighly simplified presentation of thisinertia in volatility in chart 4.

I calculated the volatility for each stockin each of two years: 2009-10 and 2010-11. Since the composition of the indexchanges over time, and some stocks areoffered or delist in a given period, I haveonly included the stocks that were in theASX 200 on 30 June 2011. I excluded allstocks that did not have prices for the two-year period. The red line in the scatterdiagram is a line of best fit.

Since 2010-11 was slightly less volatile

than the previous year, the red line is alittle flatter than a ‘450 line’ that would bethe case if volatility was the same in bothyears. From my perspective, the blue dotsare reasonably clustered around the redline for low-volatility stocks but less so forhigher volatility stocks. That is, other thanfor major market movements as we sawin the GFC, low volatility stocks arereasonably likely to stay that way.

Importantly, no high volatility stocksuddenly became low volatility – thatwould require blue dots in the bottomright hand corner. Some moderatelyvolatile stocks got a whole lot more volatilein 2010-11.

The take-away from this analysis forinvestors constructing and monitoringtheir own portfolios is:

1. Stocks are a lot more volatile thanindexes and so stock selection (and thenumber of them) within a sector isextremely important.

2. Small resource stocks tend to be alot more volatile than other stocks. Aportfolio with just a couple of small ormid-cap miners representing the materi-als sector could produce a wild ride.

Including BHP and/or RIO or a largernumber of other juniors might be neededto slow down volatility in that sector ofan investor’s portfolio.

3. Large cap stocks are typically a lot lessvolatile than small caps.

4. Stocks with a volatile past are notparticularly l ikely to become low volatility stocks.

Technical noteWhen analysts calculate volatility orreturns they usually use what is known asthe ‘log (1+r) return’. Certain problemscould arise without this transformation.A simple return, r, cannot be less than 100per cent but it can be 1,000 per cent ormore. Also, if a stock price goes down by 50per cent then up by 50 per cent it doesn’tfinish up from where it started. The logreturn approach is necessary for propercalculations of annualised volatilities, butfor small variations there is little differ-ence between the two measures.

Dr Ron Bewley is the investmentconsultant at Infocus MoneyManagement.


Chart 3 Stock volatility by returns


Chart 4 Predictability of stock volatility

“ Other than for majormarket movements as wesaw in the GFC, lowvolatility stocks arereasonably likely to staythat way. ”

As the financial services industryevolves toward the provision ofholistic and ongoing advice, thesmall-to-medium enterprise

(SME) market represents a valuableopportunity for advisers who understandits unique needs.

Regulation and SMEsFor years business coach and financialservices guru, Dan Sullivan, has beenwarning against the ‘commoditisation’ ofour industry. He believes that havingadvisers’ remuneration linked to the saleof product is a short-term business model– one which has, in fact, hindered the‘unique processes’ required for a qualityadvice proposition.

This argument is particularly relevantin the light of the proposed legislationaimed squarely at commissions. Theseproposed reforms are forcing advisers toconsider their current business modelsand, in particular, how they get paid forwhat they do.

The challengeThe first challenge facing advisers is torestructure their business to focus on fee-for-service and reduce the reliance oncommissions.

The second challenge facing advisers isaround broadening the scope of theiradvice to extend beyond the sale of aproduct. ‘Set and forget’ type business,which drives a high level of passive adviserincome, is likely to be a thing of the past.

The opportunityOne of the best opportunities for advisers to build professional advicebusinesses and charge a fee-for-serviceis through the small-to-medium enter-prise business sector.

Not only does the financial adviserbecome an important strategic businesspartner, they are very well positioned to

take care of the SME’s overall long-termwealth creation, protection and distribu-tion strategies. This is an area well suitedfor charging a fee for service, especiallywhen SME needs in this space changefrequently and rapidly and thereforerequire constant attention and review.

Small business, big prospectsThe provision of business insurance,buy/sell cover or key person cover to theirSME clients has always been a hot topicfor financial advisers, and is oftenperceived as being a complex but prof-itable part of the market.

Considering there are over 1.8 millionSMEs in Australia - with an estimated totalvalue of nearly double the total marketcapitalisation of the Australian SecuritiesExchange - it is imperative that advisersgrasp the unique needs of SME owners inorder to provide succession solutions.

Most importantly, advisers must appre-ciate and intimately understand:

• How business insurance fits withintheir SME clients’ overall business succes-sion planning needs (as well as their retire-ment and estate planning needs); and

• The importance of explaining toclients what business insurance doesrather than what it is. Too often advisersgo into solution mode and use industryjargon. They tell their clients they need“buy/sell cover” or “key person insurance”without explaining, in simple terms, whatthe cover is meant to achieve - bothpersonally and in the context of theirgreater wealth protection plans.

Why plan for succession?Business insurance is part of an overallsuccession strategy for SMEs. A robust exitplan ensures the realisation of a businessowner’s equity in an orderly fashion andcaters for all possible circumstances.

The majority of SMEs go into businessnot only to earn an income, but also to

build the value of their equity. Most ofthese SMEs plan to realise this wealth tofund their retirement (we have all heardSMEs utter the words “my business is mysuper” at some stage).

Research shows that 40 per cent of allSME clients are totally reliant on theproceeds of their business sale to fundtheir retirement. However, 85 per cent ofthese owners do not have an exit plan.SMEs, therefore, generally appear to hopefor the best but fail to plan for the worst.

On average, New South Wales-based

business owners are around 56 years ofage. Further, 68 per cent plan to retire inthe next 10 years. In light of this, it is notsurprising that business succession is a keyadvice opportunity for financial advisers.

Voluntary and forced exitsSME clients mostly exit from their busi-nesses voluntarily, selling their interest intheir business when the time is right orjust before retiring. Recent studies haveshown that between 40 and 50 per centof business owners surveyed were likelyto exit their business within the next fiveyears. However, most SMEs do notconsider how they may exit their businessdown the track.

Shareholder or partnership agreementsoften only contain a ‘right of first refusal’clause. This effectively states that if one ofthe shareholders wants to sell their inter-est in the business, they must first offer itto the other shareholders or partners. As aresult, most business owners automati-cally think that their succession arrange-ments are adequate, but fail to think whatmight happen if the remaining sharehold-ers do not want to purchase their interest.

Any equity sale to an outsider (someonenot already a shareholder in the business)


OpinionInsurance

A take onbusiness insurance

Advisers are well placed to managebusiness succession strategies forsmall-to-medium enterpriseclients, writes Ted Voges.

“40 per cent of all SMEclients are totally reliant on the proceeds of theirbusiness sale to fund theirretirement. ”


is completely subject to whether theremaining shareholder(s) agree to accom-modate them – and surely no personwants to buy into a business where thecurrent shareholders don’t want them as abusiness partner.

Even in the unlikely event that thishurdle is somehow overcome, there is agood chance that an outsider will not havethe same appreciation of the value of thebusiness as the current shareholders.Further, it is very likely the sale price willbe far less compared to an internal sale.

Current best practice is for SMEs toamend their shareholders agreements orto enter into separate exit agreements thatstipulate, in detail, the potential voluntaryand forced exit events that may take place.These exit agreements should alsoaccount for how the internal sale of theseshares will be funded among the businesspartners (often from future profits). Solic-itors should be engaged to modify theshareholder agreements or draw up sepa-rate exit agreements.

It is easy to think of these agreementsas business pre-nuptial agreements thatdeal with business break-ups, in a verysimilar way that a marriage pre-nupdeals with marriage breakdown. After all,businesses fail roughly at the same rate as marriages.

Involuntary exits from the businessBeyond focusing on an orderly exit fromtheir business through voluntary succes-sion, the realisation of a businessowner’s equity through involuntarysuccession creates probably the mostangst for SMEs (as often a lifetime ofeffort is severely compromised).

Serious disability or sudden deathoften has grave implications for SME

clients’ ability to successfully extract thevalue of their equity. This is mainlybecause, unlike voluntary succession,they are not capable of supervising orpartaking in the negotiations.

Even in multiple-owner operationswhere the business will probably contin-ue in their absence, the value of thedeceased or disabled partner’s equity inthe business will almost certainly becompromised. This is because therevenue of the business is bound tosuffer as a result of their absence as busi-ness valuations for ‘going concerns’ arealmost always based on the profits.Therefore, if profits suffer, the value ofthe shares will suffer.

This, coupled with the uncertainties forthe remaining owners around thedeceased or disabled owner’s share in thebusiness, means that planning for invol-untary succession is just as vital as plan-ning for voluntary succession.

Which exposures and why insurance?From any SME’s perspective, insurancecan provide a very cost-effective fundingsolution for addressing the consequencesof involuntary succession, especially whencompared to the alternatives available(additional debt funding or vendorfinance, selling surplus assets or selling astake in the business). Most of the time,such alternatives are not accessible ortheir cost is prohibitive.

For instance, the bank’s appetite forproviding further funding at the momenta key person suddenly exits the businessmay be limited, and even if the fundingcould be obtained, the first year interestexpense on the additional debt couldoften fund multiple years’ worth of premi-ums for a similar level of cover.

Furthermore, exhausting the business’borrowing capacity to fund an equity buy-out may significantly limit the business’future growth prospects if any further debtwas needed to finance the expansion.

A summary of the various types of busi-ness insurance solutions is set out below.

When advisers discuss an SME’s invol-untary succession needs, it is important toaddress all three exposures as they relateto very different personal outcomes.Emphasis should be placed on what eachof the components does for SMEs person-ally, rather than what they are called.

Buy/sell cover Funding the buy-out of a deceased or

disabled partner or shareholder:• Creates certainty for the departing

owner around obtaining a pre-agreedprice for their equity in the business. Itmeans their estate and dependants willreceive fair compensation for their life-time of effort invested in the business;

• The transfer of the shares is handledthrough a separate legal agreement withtrigger events that coincide with insurableevents. These agreements are drawn upby solicitors;

• Remaining shareholders retain controlof their business and avoid having toincrease their personal or business’ debtlevels to fund a buy-out; and

• It is much cheaper than funding thebuy-out through borrowings (even if it is

possible to obtain bank funding at such acrucial stage considering the business hasjust lost one of its key people).

Key person capital purpose coverTo ensure all business debt is repaid uponthe death or disablement of a partner orshareholder:

• Often the bank has secured the busi-ness debt with personal guarantees overthe personal assets of the owners. Ordi-narily, these guarantees will only bereleased once the entire debt is repaid,thus ensuring that the debt does notoutlive the borrower(s) (which makespractical sense);

• It is common for loan agreements tostate that the death or long-term disabil-ity of a key person in the business will bea trigger for the repayment of the entireloan;

• Until the guarantees are released, thedeceased partner’s estate cannot befinalised, and hence surviving familymembers cannot access their inheritance;and

• Often the buy-out value of the equityin the buy/sell agreement is negotiated onthe value of the business without debt.Therefore, ensuring that the debt is repaidsupports the buy-out value of the equity.

Key person revenue coverTo mitigate the impact of a key person’sdeath or disablement on the profitabilityand productivity of the business:

• In addition to some key employees,most business owners are key people andtheir sudden departure will surely impacton the bottom line;

• Valuations of businesses operating as‘going concerns’ are mostly based on amultiple of the ongoing profits the busi-ness is predicted to generate in future; and

• This cover indirectly protects theequity of the remaining business owner(s)by replacing lost revenue and funding theadditional costs of obtaining a replace-ment if necessary. This keeps the bottomline, and hence the valuation of the busi-ness, intact.

Of course, there is a further raft of issuesaround the implementation of the aboveconcepts which need to be addressed,including the sharing of the funding costsbetween business owners, ownership ofthe various policies and tax considerationsaround the premiums and the proceedsof policies.

ConclusionSuccession planning is not an event, butrather a process. With their overall end-to-end wealth creation, protection anddistribution focus, advisers are well placedto become the project managers of anoverall business succession strategy forSME clients.

This strategy will create certainty forbusiness owners around the realisationand protection of their equity in their busi-ness - often their largest asset and themain source of funding for their retire-ment - rather than leaving it to chance inan uncertain world.

Ted Voges is the forensic services managerat OnePath.

“Advisers are well placedto become the projectmanagers of an overallbusiness successionstrategy for SME clients. ”

Since 2002, superannuation inter-ests have been able to be includedwith other property when deter-mining “who gets what” in the

event of the breakdown of a marriage. Thistreatment has also applied to many sepa-rating de facto spouses since 2008.

Due to the specific treatment of super-annuation, it is therefore important tounderstand the process for dividing andtransferring superannuation when such arelationship ends.

Two common ways of deciding how thesuperannuation of a separating couple willbe split are:

• Superannuation agreements; and• Court orders.

Superannuation agreements/bindingfinancial agreementsA superannuation agreement forms partof a binding financial agreement. Bindingfinancial agreements were introduced toallow separating couples who could reachagreement on a property split to do sowithout the delay, cost and the emotionaltoll of going to court. These agreementscan be made before, during or after a rela-tionship, and set out how the property ofa couple, including their respective super-annuation interests, will be divided in theevent that the couple separate.

Binding financial agreements will belegally binding on a couple if bothmembers have a copy, have received inde-pendent legal advice and have signed theagreement. These agreements cannot(except in rare circumstances) be over-turned by a court.

Court ordersWhere a binding financial agreementdoes not exist, a court order from theFamily Court will generally be required to

allow property (including superannua-tion) to be divided. There are two typesof court order.

Consent orders – where a separatingcouple have come to an agreement onhow their property should be divided (butthey do not have a binding financialagreement) they can apply to the court toissue a consent order. This ratifies theagreement between the two parties andmakes it binding.

Financial orders – where a separatingcouple cannot come to an agreement onhow their property should be split, thecourt can issue a financial order to dividethe couples’ assets based on the circum-stances of the case.

Splitting superannuation uponrelationship breakdownWhen transferring the superannuation ofone member of a separating couple (themember spouse) to the other member (thenon-member spouse), one of two methodsmay be used.

Splitting the member’s interestWhere the member spouse’s super balanceis in an accumulation account or in anaccount-based or term-allocated pension,there is the opportunity to immediatelyallocate the non-member spouse’s entitle-ment to them. This may include:

• Opening a new account within thefund for the non-member spouse;

• Rolling over their entitlement toanother complying fund of theirchoosing; or

• Paying the entitlement to them direct-ly (if a relevant condition of release hasbeen met).

The non-member spouse is able tochoose which option will apply to them,and the fund must comply with their

choice, except where this is not possible(for example, their chosen fund cannotaccept rollovers).

Where the non-member spouse has notmade a choice, the fund trustee generallyhas the option of:

• Creating a new interest within the fundon their behalf;

• Rolling the non-member spouse’s enti-tlement to an eligible rollover fund; or

• Taking no action until benefits becomepayable.

Splitting payments from the fundWhere the member spouse’s super balanceis a defined benefit interest, it is generallynot able to be split until benefits becomepayable from the fund. This may, forexample, occur when the member spousereaches retirement and a lump sum orpension becomes payable.

Lump sums (including commutationsof a defined benefit pension) that becomepayable can then be:

• Directed to a new account within thefund for the non-member spouse;

• Rolled over to another complying fund;or

• Cashed out (subject to a condition ofrelease being met).

Pension payments, however, must bepaid directly to the non-member spouse.

Process required for splitting superinterest The procedure that must be followed andthe evidence required by a super fund inorder to instigate the splitting of a super-annuation interest or payments dependson a number of factors and is shown intable 1.

Once the super fund has received therequired evidence, it is then required tonotify both members of the separating

couple within 28 days. The non-memberspouse then has a further period of 28 days(or longer if allowed by the fund) to nomi-nate whether they wish to retain, rollover,or cash out their entitlement.

Flagging super interest prior to a splitA separating couple can agree on, or acourt can order, a payment flag to beplaced on a member’s superannuationinterest. This does not trigger a splittingof benefits, but instead prevents thetrustee from allowing most withdrawalsfrom the interest.

A payment flag might be an appropri-ate precautionary measure where:

• The couple have separated but a prop-erty settlement has not yet beenreached; or

• The superannuation interest cannotbe split until retirement (for example,where the member’s interest is in adefined benefit fund).

An existing payment flag can be liftedby agreement of the separating couple orby the court, then allowing a superannua-tion interest or payment split to occur.

A payment flag cannot be placed on aninterest already being used to pay apension (for example, an account basedpension or a defined benefit pension).

Tax components and preservationAny superannuation interest transferredto a spouse upon relationship breakdownmust be made proportionally from taxcomponents and preservation status.

For example, John has a super balance of$300,000 and is required to split 30 per centof his balance to Sarah. John’s balancewould be split as shown in table 2.

Tim Sanderson is Colonial First State’ssenior technical manager.


Toolbox

Requirement

- Copy of superannuation agreement

- Copy of divorce order

- Copy of superannuation agreement

- Copy of separation declaration (if member spouse’s total superannuation

interests exceed the low rate cap [currently $165,000], must have been

separated for at least 12 months with no likelihood of co-habitation

being resumed)

- Copy of splitting order from Court

Client situation

Divorced

Married or de facto but separated

Divorced or separated

Splitting by:

Superannuation

agreement

Court order

Table 1 Splitting superannuationTable 2 Case study

Tax components John (existing) Sarah (new) John(new)

Tax free component $100,000 $33,333 $66,667

Taxable component $200,000 $66,667 $133,333

Preservation status

Unrestricted non-preserved $20,000 $6,667 $13,333

Restricted non-preserved $5,000 $1,667 $3,333

Preserved $275,000 $91,667 $183,333

Separationand super

Tim Sanderson explains thedivision of superannuation whenrelationships end and financialinterests go their separate ways.

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

FINANCIAL PLANNERLocation: SydneyCompany: St GeorgeDescription: St George is seeking a financialplanner to join its wealth business. Thebenefits of this role include a structured careerpath, an established client base, referrals, andpractice management support with access tocoaching, tools and business planning supportservices. St George also offers training anddevelopment, including an induction program,development days and mentorship programs.

To be considered for this role you will requirean ADFP (modules 1-6 minimum), at least twoto three years’ experience as a financialplanner, strong negotiating skills, a proven trackrecord of achieving high sales targets, excellenttechnical knowledge, along with professionalpresentation and communication skills.

For a confidential discussion, please callLiz Giltaine on (02) 8219 8963 and to apply,visit www.moneymanagement.com.au/jobs

BUSINESS DEVELOPMENT ASSOCIATE– FUNDS MANAGEMENTLocation: MelbourneCompany: Kaizen RecruitmentDescription: An outstanding opportunity existsfor an up-and-coming business developmentprofessional to join this global fundsmanagement business. Key aspects of the

position include working in a team-basedenvironment, making outbound calls tofinancial advisers, identifying salesopportunities and building long-term clientrelationships.

The ideal candidate will have previous salesexperience within funds management orfinancial services. You will have a relevantbusiness degree, and possess outstandingcommunication skills, a demonstrated workingknowledge of the investment managementindustry, as well as the ability to multi-taskand work to a deadline.

To learn more about this position and to apply, please visitwww.moneymanagement.com.au/jobs orcontact Matt McGilton at Kaizen Recruitmenton (03) 9095 7157.

FINANCIAL PLANNER – RUN YOUROWN BUSINESSLocation: SydneyCompany: iPro ConsultingDescription: Are you an experienced financialplanner looking to go out on your own? Areyou apprehensive about starting your ownfinancial planning practice because of adminheadaches and start up costs?

This recruitment company is looking torecommend professional planners with aminimum of three years experience and the

motivation to prospect for their own business.Their clients can offer: no start up costs, on-site admin and paraplanning services, an on-site compliance manager, and a supportiveenvironment where you will be surrounded bylike-minded self-employed planners.

Ideally you will have a minimum of DFP1-6,an established referral network, or beconfident that you can win enough businesswithin 12 months to support yourself.

Opportunities are also on offer for self-employed planners who may be looking atbuying a book of business, or even selling theirexisting book.

For more information please visitwww.moneymanagement.com.au/jobs, anddon’t hesitate to contact Matt Grech on 0408299 888 or email: [email protected]

FINANCIAL PLANNERLocation: PerthCompany: ANZDescription: ANZ Financial Planning (ANZFP) isa key area of ANZ’s wealth business, and isnow seeking a financial planner who will beresponsible for the provision of comprehensivefinancial planning services and advice.Reporting to the practice manager, you willassist clients to plan for their financial goalsby providing strategies, access to a diversifiedproduct range and ongoing services.

You will have completed, or made asignificant attempt towards completing atertiary qualification in a business relatedfield. In addition you will require an ADFS, andmust be progressing towards your CFPqualification.

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

BUSINESS DEVELOPMENT ASSOCIATE– WEALTH MANGEMENTLocation: SydneyCompany: Kaizen RecruitmentDescription: Due to continued growth in theirAustralian operations, this global wealthmanagement business requires a businessdevelopment associate to support their wealthmanagement team.

To be successful in this role you will haveexperience within the financial servicesindustry, and will demonstrate proficiency inusing retail platforms.

You will have a relevant bachelor’s degree,and possess finely tuned communicationskills. Genuine career developmentopportunities are available to the rightcandidate.

To express interest in this position, pleasevisit www.moneymanagement.com.au/jobs orcontact Kaizen Recruitment on (03) 90957157.

ANZ Wealth has announced theappointment of Luke Symons tothe role of head of ANZ FinancialPlanning. Symons will be respon-sible for driving the growth ofANZ Financial Planning, ensur-ing the delivery of quality adviceto customers, and enhancingrelationships with key stakehold-ers including the ANZ retail andcommercial divisions.

Symons has worked for ANZsince 1999, and has held anumber of roles in small businessand within the business bankingdivision. He was most recentlygeneral manager of businessbanking for WA and SA.

As head of ANZ Financial Plan-ning, Symons will report to PaulBarrett, general manager adviceand distribution. He will be basedin Melbourne, where he will

commence the position on 25 August.

THE Commonwealth Bank hasnamed the man who will succeedRalph Norris as chief executive:Ian Narev.

Narev, the current head of thebanking group’s Business andPrivate Banking division and aformer head of strategy, waslargely responsible for theCommonwealth’s acquisition ofBankwest and its investment inAussie Home Loans.

Narev joined the Common-wealth Bank in 2007 after headingMcKinsey & Co’s New Zealandoffice, prior to which he was alawyer specialising in mergersand acquisitions.

Commonwealth Bank chair-man David Turner said Narevwould take over from Norris on 1 December, 2011.

COLONIAL First State (CFS) hasannounced the appointment ofLinda Elkins to a newly createdposition, general manager ofmarketing and distribution.

CFS chief executive BrianBissaker said bringing togetherthe distribution and marketingdivisions would enable the busi-ness to more effectively deliveradvice and product offerings to

its clients.Elkins joined Colonial Group

in April 2010 as general managerof marketing. Prior to that, sheworked for Russell Investmentsas managing director of superan-nuation.

She will continue to report toCFS chief executive Brian Bissak-er, and her appointment is effec-tive immediately.

PLATFORM provider Netwealthhas made two senior appoint-ments to support the continuedgrowth of the business. KarenByrne has been appointed to therole of senior distributionmanager in Victoria after two

years in the UK, and Aaron Fergu-son will move from the positionof senior account manager inQueensland to the role of statemanager for Queensland and theNorthern Territory.

Prior to moving overseas, Byrneheld senior distribution roles atChallenger and Colonial GearedInvestments, where Fergusonwas also previously Queenslandstate manager.

WESTERN Asset Managementhas announced the appointmentof Damon Shinnick as portfoliomanager/senior credit analyst inthe firm’s Australian fixed incometeam.

In his new role, Shinnick willhelp formulate portfolio strategyand supplement credit researchin Australian and New Zealandmarkets.

He will also contribute to thedevelopment of new productsand structured credit.

Shinnick has recently returnedto Melbourne from the UK, wherehe spent two years as a partner atPension Corporation, a pensionbenefit administrator specialisingin buy-out deals.

Prior to that, he was a portfoliomanager at Lehman BrothersAsset Management Australiaand portfolio manager/senioranalyst at Challenger FinancialServices.

Move of the weekLONSEC’s former general manager of research, Grant Kenn-away, will join Morningstar in the newly created position ofhead of fund research, Asia-Pacific, from November.

Kennaway will be responsible for developing Morn-ingstar’s fund research business in the Asia-Pacific region,including Australia and New Zealand, working closely withMorningstar’s global fund research organisation in Chicago,Toronto, London, and other European markets.

Kennaway will report jointly to Morningstar’s presidentof fund research, Don Phillips, and Morningstar Australa-sia chief executive Anthony Serhan. Morningstar Australa-sia co-heads of fund research Chris Douglas and TimMurphy will continue in their current roles, reporting toKennaway.

Luke Symons Grant

Kennaway

““OUTSIDER has been toenough financial servicesevents in his time to havepretty much seen and heardit all. As such, it takes some-thing from deep left field toreally stand out, but at arecent Association of Finan-cial Advisers (AFA) roadshowthe AFA’s 2010 adviser of theyear, Steve Salvia, managed it.

In a motivational presenta-tion to those assembled, oneof Salvia’s key themes was foradvisers to put a value on theadvice they provided – anddenoted that advice as ‘thecookie’.

“I’ve got the cookie,” heannounced, before getting hisinitially reluctant breakfast-time audience involved.

“Repeat after me. I’ve got thecookie. Say it again. I’ve got thecookie. Turn to the person nextto you and say ‘I’ve got thecookie’,” he continued.

With the barriers broken

down, Salvia soon had mostof the room in fits of laughter.

“We’ve all got the cookie.Everyone wants our cookie.Ok? I let my clients touch,taste and feel the cookie, but

if they want the cookie theyhave to pay. Stop giving freefinancial advice away becausewe’ve got the cookie. They allwant our cookie and every-one’s prepared to pay becausethey need our cookie.”

Outsider is prepared tosuggest that this was themost number of times he’sever heard a single personuse the word ‘cookie’ in a 90-second period. He is alsoprepared to concede thatSalvia’s efforts to stand outwere a rousing success – inwhat was a packed full-dayprogram it is likely that everyadviser present went homethat day remembering thathaving the cookie really tookthe biscuit.

Outsider


“After all, businesses failroughly at the same rate asmarriages.”

In his opinion column in this week’s

Money Management, OnePath’s Ted

Voges advises planners to arrange so-

called ‘business pre-nups’, due to the

overwhelming business failure rates.

“Imagine a situation where afuture government had tochoose between meetingcreditors’ obligations or those oftheir citizens. The contractbetween governments andcitizens may mean thatcreditors come off second best.”

Blackrock’s Steve Miller may be

foretelling an uncomfortable

future reality.

“If you don’t know where you’regoing, any road will take youthere.”

Finance Minister Bill Shorten

quotes Lewis Caroll, author of Alice in

Wonderland, to explain the impor-

tance of forward thinking and plan-

ning sessions at the Financial Sector

Union’s national conference.

Out ofcontext

Swimming against the tide

Keeping up with the kids

One smart cookie

IT has recently come toOutsider’s attention that,unlike most of the world’sworking population,sportsmen have the luxuryof retiring fairly early.

Most athletes retire at anearlier age than publicservants in Communistcountries, who startplaying chess in the parkon their 40th birthday. Butwhat irks Outsider is thatalthough sporting sponsor-ships and prize moneymeans these athletes canfill their basements with

stacks of $100 bills by theage of 30, they are thenoften offered lucrativesecond careers.

A certain young athletewho retired at the tenderage of 28, has not onlydecided to choose a secondcareer, but that career is infinancial planning.

Champion swimmerGrant Hackett has workedat Westpac ever since hehung up his Speedos andhas targeted erstwhileteammates as providing aready pool (forgive the

pun) of investment talent.According to a recent

interview with Hackett he’salways had a passion forfinance.

In Outsider’s jaundicedview, this simply explainswhy he was prepared torise in the wee small hoursof the morning and swimendlessly up and downswimming pools pursuingnothing but a white line.

Still, it is not the whiteline some others in thefinance industry have beenseen to pursue.

WHILE it is true that Outsider’s own embraceof technology has not advanced much furtherthan the gramophone (and dammit, needlesare becoming hard to find), the nature of hiswork ensures he must stay abreast of technol-ogy in financial services.

He is therefore intrigued by proposals beingsupported by the Financial Services Councilfor insurance sales to be connected to mobile phones.

According to a report released by Telstra,“mobile applications provide insurers with anew opportunity to create a more interactiveand ongoing relationship with their customers”.

“The use of mobile technology can alsoassist in the underwriting and claimsprocesses and thereby make the process ofarranging life insurance cover and claimingon a policy easier, simpler and less time consuming.”

All very compelling stuff, Outsider thought,

and then he recalled that insurance saleshave been linked to telephones almost sincethe time of Alexander Graham Bell. Indeed, hewell remembers Mrs O using the phone toensure young Master O was appropriatelyinsured while driving the family Studebakeron his Ps.

However, Outsider’s young colleagues sug-gest that he misunderstands the whole con-cept and that the FSC and Telstra are talkingabout telephonic technologies well in advanceof the highly-polished, black, pulse-diallingBakelite handset that has pride of place in theOutsider lounge room.

These young things suggest that it is allabout ‘apps’ and ‘twits’ and ‘GPS’, buthaving watched events unfold in the UK, Out-sider comforts himself that while his technol-ogy remains very 20th century, Mrs O’s Bake-lite may have been dropped – but it’s neverbeen hacked.

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

money management (august 4, 2011)

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