money management (january 26, 2012)

www.moneymanagement.com.au

The publication for the personal investment professional

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EMERGING MARKETS

The road not takenLAST year was a tough one for emerging markets, asinvestors shunned anything viewed as vaguely risky.Falling investor sentiment and continuing volatility inEurope and the US saw global fund flows intoemerging markets equities decline over the secondhalf of 2011.

Europe, in particular, remains the problem, asthe uncertainty around the continent’s economicoutlook is clearly having an impact.

However, the news is not all bad, with manyinvestors staying positive on emerging markets, andparticularly China. The International Monetary Fundpredicts growth in this sector for 2012 and the nextfive years.

Furthermore, the potential for a rapid rebound isa key factor in the current appeal of emerging mar-kets, as investors want to catch the upswing.

But while Europe attempts to resolve its crises,investors seem to be Asia-bound, with Indonesiaattracting the most attention.

For more trends on emerging markets, turn topage 10.

By Mike Taylor

THE servicing of A and B clients willdominate and financial planners willbe kidding themselves if they believethey can adequately service undulylarge client books in the new Futureof Financial Advice (FOFA) environ-ment.

That is the assessment of a numberof industry players, including Adelaide-based consultant, Max Franchitto, whobelieves planners will face significantdifficulty in convincingly arguing theycan appropriately service more than300 or 400 clients in any one year.

He said the advent of FOFA meantplanners were facing a new paradigmin which the fees charged would needto more closely reflect the expectationsof clients.

“The reality is that there are only somany clients you can look after effi-ciently and effectively," he said.

Franchitto also believes that in anenvironment where the industry fundscontinue to agitate with respect to thevalue of advice delivered by planners,i t wil l be important that plannersdeliver on client expectations.

“We are dealing with consumers whohave been told some superannuationfunds cost more because of commis-sions paid to advisers, so planners needto deliver," he said.

Sydney-based Austral ian Unityplanner Andrew McKee agreed that theFOFA requirements would serve toimpose physical limits on the numberof full-service clients a planner couldreasonably expect to handle in a 12-month period, but said insurance-related and other clients should not beoverlooked.

“FOFA possibly will serve to reduceclient loads a little, but it will depend onthe type of client," he said. “Certainly,you're going to find planners focusing

more closely on A and B clients.”Pre m i u m We a l t h Ma n a g e m e n t

general manager Paul Harding-Davissaid that despite the Government's

FOFA objective of making advice morereadily available and affordable, one ofits consequences was likely to be takingfull-service advice out of the reach ofmany people.

“You might almost say the FOFAchanges are making full-service advicea little more elitist," he said.

Harding-Davis said overly large clientlists were not common amongst plan-ners within Premium Wealth Manage-ment, with most focused on maintain-ing longstanding relationships withtheir clients.

Franchitto said planners with a largenumber of fee-for-service clients wouldnot be unduly impacted by the changes,but those who had large numbers of Cand D clients would need to thinkabout “getting rid of people at thebottom of the food chain”.

“And realistically, they only haveabout five and a half months to get theiract together,” he said.

By Chris Kennedy

DESPITE ongoing concerns from the Financial Sector Union (FSU)about job cuts and offshoring at the major banks, most of the bankseither deny there are set plans to cut jobs, or say they have noplans to reduce numbers in their wealth management divisions.

ANZ recently announced plans to cut around 130 jobs, mostly inthe area of retail banking, and there has been ongoing concernfrom the FSU about Suncorp moving a number of commercialinsurance jobs offshore. In early November Westpac announcedclose to 200 mostly IT-related roles would go, while NAB signalled135 jobs would disappear.

An ANZ spokesperson said it was possible there would be furtherjob cuts in the future, but that there were currently no plans toreduce the number of roles in wealth management. The spokesper-son added that the staff who lost their jobs would be able to applyfor other roles within the company.

In September, ANZ’s general manager advice and distributionPaul Barrett spoke of growing the group’s advice network by about50 planners per year. In December, he highlighted growth in thegroup’s phone advice service, My Advice.

Suncorp Life said in a statement that market conditionsremained challenging but it was too early to predict what impactthis might have on jobs.

“There will be efficiencies gained from the simplification of thebusiness through the 31 December 2011 merging of our two lifecompanies, Asteron Life and Suncorp Life & Superannuation. Howthis will impact employees will be better understood in due course,”Suncorp stated.

Quality will need to trump quantity after FOFA

Continued on page 3

Wealth managementjobs mostly safedespite banking cuts

GOVERNMENT’S FOFA DISCONNECT: Page 8 | INCOME PROTECTION COVER: 4

Vol.26 No.2 | January 26, 2012 | $6.95 INC GST

Paul Harding-Davis

Savvy independents will weather storm

An almost inevitable conse-quence of the CommonwealthBank's acquisition of CountFinancial is that some Count

planners have signalled they feel uncom-fortable operating under the umbrella ofa major institution and will be seeking towork in a different environment.

There is nothing unique about this even-tuality. Recent history in the Australianfinancial planning industry confirms thatalmost every time an acquisition or buy-out occurs, planners choose to changecamps. Most recently there were changeswhen AMP Limited acquired AXA AsiaPacific.

It is no secret that whenever an acquisi-tion or some other transaction occurs,competitor groups seek to lure away goodplanners who they believe may havebecome disaffected by their changedcircumstances. This was certainly the casewith respect to MLC in the immediate after-math of AMP Limited's acquisition of AXA.

Retention payments and other incen-tives can only go so far in overcoming themisgivings of some planners about theirnew arrangements, and even the uncer-tainties created by the Government'sFuture of Financial Advice (FOFA) changeshave failed to dampen their continued

enthusiasm for a non-institutionalapproach.

Indeed, an increasing number of advis-ers are dismissing the assertion that theFOFA changes will solely play into thehands of the major institutions and indus-try funds and give rise to a return of the oldtied-agent approach.

Notwithstanding a broad recognitionthat factors such as ‘opt-in’ will add signif-icantly to their administrative requirementsand cost structures, there is a growing beliefamong experienced planners thatconsumers will continue to recognise thevalue of quality, independent advice clearlyunaffected by links to banks, insurancecompanies or unions.

Indeed, there is a view that given the size

and make-up of their client lists and theirexisting business models, FOFA, whileundoubtedly vexatious, will not have anunduly dramatic impact on smaller, inde-pendent practices.

While FOFA and factors such as opt-inwill represent a challenge for some plan-ners, it will be less problematic for thosewho have regular contact with their clientsthroughout the year and who deal with fee-related issues on an ongoing basis.

This seems to have been reflected, inpart, in recent research conducted byspecialist firms such as Wealth Insights,which has revealed that the pessimismbeing shown by financial planners in theclosing months of 2011 had far more to dowith the state of the markets than theirconcerns about the ultimate state of theGovernment's legislation.

This reality has also been revealed in thediversity of submissions filed with theParliamentary Joint Committee reviewingthe FOFA bills, and the divergence in atti-tude around the role of volume rebates.

FOFA will almost certainly lead to thefurther dominance of the major institutions– but that does not mean independents willnot only survive but very likely thrive.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

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

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Average Net DistributionPeriod ending March '1110,207

By Chris Kennedy

ONE year on from the floods that devastat-ed south-east Queensland, confusion overflood definitions means a huge numberof disputes over denied flood claims is stillclogging up the resources of the FinancialOmbudsman Service (FOS).

FOS had received 482 disputes directlyrelating to the January 2011 floods by 30 June 2011, which had reached almost1,000 by the end of the year. FOS expect-ed new disputes to continue being lodgedinto 2012.

FOS said it had given priority to final-ising claims relating to the January floodsbecause of the devastating impacts onthose affected, but had still only resolvedaround 45 per cent of claims.

FOS said many of the disputes had been

found in favour of consumers or settledbetween the consumer and the industry, insome cases with a partial payment becauseof initial damage from inundation orstormwater run-off before further damagewas caused by floodwaters. In these cases,the onus fell on the financial servicesprovider (FSP) to prove the damage hadbeen caused by an excluded event (such as‘flooding’) rather than a covered event (suchas stormwater run-off).

Many of the disputes being raised aredue to consumer confusion about theextent of coverage, as well as by the varioususe of wordings, including ‘flash flooding’and ‘capped cover’, and the distinctionbetween flood and storm water run-off,FOS stated.

FOS said it is strongly in favour ofproposals for a single simplified definition

for flood, and the use of a key fact state-ment, to help eliminate the miscommu-nications sometimes encountered byconsumers at policy inception.

In many of the disputes, it was contend-ed that the FSP did not adequately informthe consumer as to the extent of the floodcoverage. If the consumer claimed to have

been led to believe they were covered forflood, FOS had to establish whether anadequate product disclosure statement wasprovided. If one was not, it then fell to theFSP to prove that the client had beenadequately informed – for example, by wayof recorded phone conversation. Otherwise,the FSP would be liable for the claim.

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

News

FOS still inundated with flood claims

A BT Financial Groupstatement said BT antici-pated a decrease in staffnumbers this year, but didnot have a specific targeton jobs reductions.

NAB did not commenton the wealth manage-ment division specifically,but said that in a companyof its size “staffing num-bers will fluctuate in vari-ous parts of the businessat times due to the com-pletion of programs, out-sourcing of some projectsand continuing focus onefficiency”.

The CommonwealthBank said a continuousdrive to increase ef f i -c iency may result inredundancies from timeto time in some areas,while in other areas morestaff may be needed, butthat “there is no target orshort-term plan for majorstaff reductions”.

Bendigo and AdelaideBank managing directorMike Hirst said the bankcurrently had no plans toshed jobs and tried towork with staff to find waysof reducing costs.

“There is no doubt theindustry is under pressureto maintain profit levels,but we believe our bankhas good growth opportu-nities which continue to berealised,” he said.

NAB, ANZ and BT allindicated attempts wouldbe made to find otherroles within the businessfor staff that had been cut.

FSU national secretaryLeon Carter said althoughnone of the major bankshad directly indicatedwealth managementwould be affected, the FSUexpected it would comeunder a fairly high level ofscrutiny because thecapacity to make money inwealth management isnow more difficult than ithas been in the past.

Carter was highly criticalof the tendency to look atstaff cutbacks as a firstresort when it came tocost cutting, which he saidresulted from banks beingdetermined to maintainrecord profit levels.

“No-one is saying ‘if wedon’t do this somethingbad will happen’ – it’ssimply about maintaininga profit line,” he said.

“It’s a ridiculous expec-tation that bank profitshave to continue at recordlevels when the world isclearly in dire financial cir-cumstances.”

Wealth management jobs mostlysafe despite banking cutsContinued from page 1

Leon Carter

News

By Milana Pokrajac

AN average UK consumer is willingto pay no more than £155(AUD$230) for financial advice,according to a survey carried outby CoreData in the UK.

This low figure excluded the factthat approximately a fifth of thosewho would consider enlisting theservices of an adviser would paynothing at all for advice, the reportsaid.

The analysis revealed thataround 2.1 million households inthe UK have a full-time dedicatedfinancial adviser, but only half areaware of the adviser’s remunera-tion model.

More than a third of respondentsbelieve they did not pay for advice.

“On a positive note, consumerswould expect to pay an average of£39.9 (AUD$59) per hour to engagean adviser, so perhaps the chal-lenge is for advisers to articulate

that a thorough financial review ofa would-be client’s situationrequires more work that the latteranticipates,” said Craig Phillips,head of UK and Europe at CoreDa-ta Research.

The most popular method ofremuneration is a flat annual fee,while other methods include anadmin fee paid out of the product(16 per cent), an hourly fee (11 percent), an upfront fee paid by theproduct manufacturer (less than 3

per cent), and other ways.The average UK consumer

believes four hours is sufficienttime for an adviser to conduct athorough review of their financialsituation, the report found.

“A key challenge for advisers isin gently articulating the cost ofdelivering a full financial plan –clients need to appreciate adviceis much more than just the face-to-face time spent with an adviser,”Phillips said.

Investorsentiment fallsto a record lowINVESTOR sentiment hasfallen to a record low, withinvestors now less confi-dent about the marketsthan they were during theglobal financial crisis(GFC).

CoreData’s InvestorSentiment Index for thelast quarter of 2011revealed a confidencerating of -22.4 – slightlylower than in the first quar-ter of 2009, when confi-dence sat at -22.3.

This is also the lowestpoint for investor senti-ment in the history of theindex, which was estab-lished in 2005.

“The continued slide insentiment we’ve seensince the beginning of2011 is reflective of theturmoil in Europe andconcerns about how thismight impact the invest-ment landscape in Aus-tralia,” said CoreData’shead of advice, wealthand super Kristen Turn-bull.

However, for the firsttime since the GFC, thereare more investors whothought cash would per-form worse (29 per centversus 25 per cent).

Despite this, cashremains the most popularasset class for investors torebalance to.

Sentiment towards equi-ties has improved in thelast quarter, but remainsin negative territory, thereport has found.

The Sentiment Index alsorevealed two in five Aus-tralian households werefinancially worse off thanthey were 12 months ago.

CoreData’s survey had843 respondents andwas carried out between19 November and 5 December 2011.

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News

FOFA compliance to cost millions warns FSCBy Mike Taylor

THE Financial Services Council (FSC)has added its weight to calls for theFederal Government to provide anappropriate transition time for theimplementation of the Future ofFinancial Advice (FOFA) legislation.

The FSC has also providedresearch adding to that which refutesthe Government’s position that thecost of opt-in would be $11 per clientper year and, instead, suggests thatwhen the fee disclosure elements areincluded, costs wil l range frombetween nearly $54 and $98 perclient, per year.

In a submission to the Parliamen-tary Joint Committee reviewing theFOFA bills, the FSC has warned that ifthe existing legislative timetableremains in place, the financial serv-ices industry will have less than sixmonths to implement highly complexand expensive changes.

“On the current drafting of the legis-lation, the majority of measures withinthe FOFA package (excluding the provi-sions relating to life risk insurance) aredue to commence from 1 July 2012,” itsaid. “The FSC is concerned that it isunlikely that the legislation will bepassed before the first quarter of2012. This gives the industry less than

six months to develop and implementcomplex IT systems, compliance frame-works and monitoring processes, edu-cation and training programs to ensurethat financial services licensees,employees and advisers are aware ofand able to meet their statutory obli-gations.

“Additionally, the implementationof these reforms will require signifi-cant investment and impose costsupon financial services providers ofall sizes including small businessesthroughout Australia,” the submissionsaid. “These costs should only beincurred once the final form of thelegislation and obligations areknown.”

The submission pointed to the par-ticular cost of the two-year opt-in, andthe results of a survey within whichFSC members had indicated that thecost to build the systems (complianceand information technology) tocomply with the FOFA opt-in reforms“will range from $1 million – $60 mil-lion, depending on the size of the rel-evant organisation and the nature oftheir business activities”.

“Ongoing costs range from$10,000 to $9 mil l ion, again,depending on the size and relevantnature of their business activities,”it said. “The total implementing and

ongoing costs of the opt-in reform dif-fers significantly, depending on therequirements on the business.”

The submission said that if theinformation on the Fee DisclosureStatement was summary only andonly applied prospectively, the costof compliance would be 50 per cent(for the client), compared with thealternative that is currently requiredby the bill tabled by the Government.

It said that based on a survey ofrepresentative advice providers, theaverage cost per client with respectto a Summary Fee Disclosure State-ment would be $53.97 (summary feedisclosure) and $97.86 for a retro-spective application.

The FSC said it was also importantto recognise that the FOFA reformswere being introduced at or aroundthe same time as a number of othersignificant financial services regula-tory changes, including the Basel IIIreforms, G-20 reforms (financial serv-ices and markets regulation),stronger superannuation reforms,consumer credit reforms, bankingcompetition reforms, insurance capi-tal regime changes, tax agent serv-ices reforms, and the US foreignaccount tax compliance law. The FSCsuggested a coordinated approachbetween FOFA and MySuper.

Job outlooksgood: HudsonBy Milana Pokrajac

DESPITE widespread negative sentiment, employ-ment expectations within the financial servicesindustry remain positive, according to recruitmentexpert, Hudson.

Hudson’s Employment Expectations report wasreleased days after eFinancialCareers claimed 2012could be a year of fear for financial services.

However, Hudson predicts a positive year for allindustries, with 20 per cent of employers in the finan-cial services and insurance sectors planning to increasetheir permanent headcount over the next year.

“In the financial services/insurance sector, special-ist skills are highly sought after with financial plan-ning, underwriting, mortgage lending, retail bankingand sales skills remaining in demand,” said DeanDavidson, national practice director for Hudson –accounting and finance.

“The banking sector is booting employment expec-tations as they look to increase permanent headcountin retail branches on the back of enhanced customerservice offerings,” Davidson said.

Despite a largely positive outlook, employer senti-ment has slipped by 5.4 percentage points since theDecember 2011 quarter.

The most significant drop in financialservices/insurance employer sentiment occurred inVictoria, where sentiment slipped 10.7 percentagepoints over the quarter and 18 percentage points overthe year.


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By Chris Kennedy

THERE is too much crossover betweenMySuper legislation and Future of FinancialAdvice (FOFA) legislation for the two to beconsidered separately, according to theCorporate Super Specialist Alliance (CSSA).

One area where the two are linked is theinsurance service fee. As part of its submis-sion to the Parliamentary Joint Committeeon the MySuper bill, the CSSA said the

removal of commissions for group insur-ances inside superannuation effectivelyprohibits payments to advisers for the serv-ices they provide to employers and theiremployees.

“Removal of commissions will create anunlevel playing field and could result inadvice to a consumer that sees them using aless appropriate insurance solution," theCSSA stated.

The CSSA proposed to allow an insurance

service fee on a "dial-up" basis where insur-ance services are provided to a MySuperemployer group.

The CSSA also said that member accountsshould only be transitioned to MySuperaccounts with the consent of the member.The transition should not occur automati-cally because this could result in changes toinvestments or insurance coverage.

The CSSA said the intra-fund advice feeneeded to be explicit and transparent. It

should be negotiated at the workplace levelin response to the amount of servicesrequired by the members of the MySuperfund, while personal advice should contin-ue to be paid for by the individual receivingthe advice.

The legislation currently states MySuperfunds can't be tailored for individual employ-ers making contributions for less than 500staff, but the CSSA argued that if there mustbe a limit then 50 is a fairer number.

MySuper must be considered with FOFA: CSSA

By Milana Pokrajac

DESPITE widespread nega-tive sentiment, employmentexpectations within the finan-cial services industry remainpositive, according to recruit-ment expert, Hudson.

Hudson's EmploymentExpectations report wasreleased days after eFinan-cialCareers claimed 2012could be a year of fear forfinancial services.

However, Hudson predictsa positive year for all indus-tries, with 20 per cent ofemployers in the financialservices and insurance sec-tors planning to increasetheir permanent headcountover the next year.

"In the financialservices/insurance sector,specialist skills are highlysought after, with financialplanning, underwriting, mort-gage lending, retail bankingand sales skills remaining indemand," said Dean David-son, national practice direc-tor for Hudson - accountingand finance.

"The banking sector isbooting employment expec-tations as they look toincrease permanent head-count in retail branches onthe back of enhanced cus-tomer service offerings,"Davidson said.

Despite a largely positiveoutlook, employer sentimenthas slipped by 5.4 percent-age points since the Decem-ber 2011 quarter.

The most significant dropin financial services/insur-ance employer sentimentoccurred in Victoria, wheresentiment slipped 10.7 per-centage points over the quar-ter and 18 percentage pointsover the year.

Employmentoutlook good:Hudson


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By Mike Taylor

PREDICTIONS of significantreductions in the number offinancial advisers containedin the Government's Futureof Financial Advice (FOFA)bills, combined with thegeneral drift around thelegislative package, haveserved to create anxiety anduncertainty among financialadvisers.

That is the assessment ofthe Association of FinancialAdvisers (AFA) contained inits submission to the Parlia-mentary Joint Committeereviewing the FOFA bills.

The AFA submission hasalso warned that if thereduction of over 40 per centof financial advisers were to eventuate, it would "deci-mate" the industry.

"Such an outcome would result in a significantreduction in the number of consumers receivingfinancial advice, which would have seriously detri-mental impacts upon the country as a whole," it said.

The submission said that in addition, the down-stream impact of a reduction of 6,800 financial advis-ers "has a multiplier effect of at least five, given thestaff the average practice employs and other relatedsuppliers".

The AFA submission saidthe FOFA changes had lostdirection. This was clearlyindicated by the manner inwhich the changes haddrifted away from the origi-nal recommendations of theParliamentary Joint Commit-tee and towards factors suchas opt-in, annual fee disclo-sure and the changes toarrangements on insurancecommissions inside super-annuation.

The AFA said the Govern-ment had also failed toprovide an explanation of whythe introduction of the FOFAlegislation had been split intoseparate tranches – somethingwhich had served to under-mine faith in the process.

The submission also claimed that consumers hademerged as the missing piece and the real issue, withthe focus of FOFA having become mired in a rangeof technical issues.

It said the debate needed to be re-centered on thekey issues facing consumers:• How do we ensure more people seek financialadvice?

• How do we ensure that the financial advice pro-vided is transparent, robust and in the best inter-ests of the clients?

End FOFA carve-outs, sayconsumer groups CONSUMER groups including Choice and the Australian Share-holders Association (ASA) have welcomed the Government's Futureof Financial Advice (FOFA) bills but argue they need to be madeeven tougher.

In a joint submission filed with the Parliamentary Joint Commit-tee reviewing the legislation, the consumer groups said theybelieved changes were needed with respect to best interests andfinancial advice around basic banking and insurance products,conflicted remuneration, shelf-space fees and asset-based fees.

In particular, the submission has called for the removal of thecarve-out for general banking and insurance advice, which itargues lowers the standard of financial advice.

The submission argues the legislation needs to be clarified toensure it meets its overall objectives.

It cited the particular changes required as being:• The provisions limiting the scope of the best interests obli-gation when financial advice relates solely to basic bankingproducts or general insurance must be amended. Withoutamendment the bill will actually set a lower standard ofadvice than the current law.

• The carve-outs from the definition of 'conflicted remu-neration' need to be amended to ensure that consumersactually receive financial advice that is untainted by con-flicted remuneration.

• The ban on shelf-space fees to platform operators should bewidened to prevent all payments by product issuers that maydistort the financial advice given to retail clients.

• The ban on asset-based fees should be widened to limit thedeleterious effects of such fees for consumers.

FOFA will 'decimate' industry, warns AFA

Important Note: AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital) is the responsible entity of the AMP Capital Multi-Asset Fund (the Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, nor any company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. While every care has been taken in the preparation of this material, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document and seek professional advice, having regard to the investor’s objectives, financial situation and needs. ACI0037/MM/FPC

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EVERYBODY knows the storyabout emerging market invest-

ments – huge natural resources,expanding populations, youthful demo-graphics and strong economic growth.

But just as everyone knows the story,they also know that investing in emerg-ing markets takes a strong stomachprepared to endure the seemingly eternalboom/bust cycle characterising theirperformance.

It’s a cycle that saw emerging marketsboom in 2009, only to slump again in2011 as investors shunned anythingviewed as vaguely risky. The so-called‘risk-on/risk-off’ pattern saw global fundflows into emerging market equitiesdecline 4.2 per cent in the third quarterof the year after dropping 1.4 per cent inthe previous quarter, according toHSBC’s Fund Managers’ Survey of 13 ofthe world’s leading investment manage-ment houses.

“The survey results are no surprise asthere is very high market risk aversion

due to European and US concerns. It isno surprise that quarter-to-quartermanagers are changing positions,”explains Geoffrey Pidgeon, head of globalinvestments for HSBC in Australia.

However, the recent fund outflows donot paint the whole picture, with manyinvestors staying positive on emergingmarkets and particularly China, accord-ing to Michael Collins, an investmentcommentator with Fidelity Australia.

“The world economy is not in greatshape, but emerging markets are in quitegood shape. They will be affected by a

recession in Europe, but the past decadeof growth has set them up for the nextdecade of growth,” he explains.

This view is supported by the IMF’sWorld Economic Outlook September2011, which predicts emerging anddeveloping markets will grow 6.1 percent in 2012 (compared to 1.9 per centfor the advanced economies). Collinsalso notes the IMF is predicting growth of5 per cent plus for the next five years.

“Emerging markets have a goodeconomic outlook and over time peoplewill gain greater confidence in theperformance of their stock markets,”he says.

“The outlook is reasonably optimisticover the next five years and robust overthe next 12-18 months, but they will stillhave challenges.”

Europe remains the problemAlthough many experts believe theoutlook for both emerging market equi-ties and bonds is good, they all caution

this is dependent on what happens inEurope, as the per for mance of these economies remains linked toglobal growth.

“All the demographic reasons andissues such as developed market debt-to-GDP [gross domestic product] beinghigher and the greater accommodativeposition of emerging market banks bodewell for emerging markets – if there is noglobal slowdown,” Pidgeon says.

The uncertainty about Europe isclearly having an impact, he notes. “Themarket is trading for two differentoutcomes at the moment. The first is theworld economy surprises on the down-side and there is a synchronised Euro-pean recession – which we don’t buy. Thesecond is there is no synchronised globalrecession and growth starts to improveand there is no recession in Europe. Thisis the HSBC view.”

The European uncertainty means theperformance of the US economy and theapproach of the Chinese Government are


Emerging markets

Although experts predict a good year for emerging markets, some regions – like Europe – shouldbe avoided. However, it is always important to stay ahead of the curve, writes Janine Mace.

The success of emerging marketequities depends largely on theevents in Europe.Investors are turning to Asia for goodinvestment opportunities.Hot debate about asset alloction.

Key points

vital, according to Diane Lin, senior port-folio manager for Pengana Capital’sAsian Equities Fund.

“Europe is the biggest risk and it isunlikely to have strong growth as thegovernments there are unable to stimu-late their economies. If they do nothandle things well, we could see a sharpdownturn in the first six months. For thewhole year, Europe remains likely toexperience low growth,” she explains.

“In the US, the economy has overcomethe worst problems but we will not seesubstantial growth. We will see stable,but not strong, growth of around 2 percent.

“All this leads to China being veryimportant in the whole picture. China isa very export-directed economy, but itsbiggest markets are likely to experienceslow growth, so the role of the ChineseGovernment is incredibly important.”

Pidgeon agrees, but believes there ismuch to be positive about. “It is not allbad economic news and the US reces-sion risk seems lower. In China, the fearof a hard landing is overrated and policy-makers are reacting positively,” he says.

“A lot of developed markets have anaccommodative monetary policy and

when this happens, you typically seeemerging markets rebound.”

Catching the upswingThe potential for a rapid rebound is a keyfactor in the current appeal of emergingmarkets.

Lonsec senior investment analystSteven Sweeney points to the dramaticmovements in these markets wheninvestor sentiment changes. “Emergingmarket history is that when sentiment isclouded, they are seen as a risk-oninvestment,” he explains.

“You need to be cautious, but if we seeimproving global conditions, then senti-ment can turn quickly.”

The prospects for global growth arecritical to the performance of emergingmarkets, as most of these economies areclosely tied to resources.

“We have seen how they can turn veryquickly. While 2008 was disappointingfor emerging market investors as capitalflowed out quickly, in 2009 Asia was thefastest market to rebound – so you don’twant to be trying to time it,” Sweeneycautions.

“We believe it is prudent to maintain acautious view on emerging markets at the

moment; however, it is worthwhile main-taining some exposure. But now is not thetime for a rapid rise in portfolio exposure.”

Pidgeon believes emerging markets willrebound again this year. “In 2012 we believewe will see double-digit returns in thesecond half of the year based on a reversalof European concerns and a realisation themarket is oversold and developed marketconcerns are overplayed.”

He believes investors need to considerthe fundamentals and look beyond currentmarket concerns.

“Emerging markets remain hostage toEuropean turbulence and China, so theywill have a tough six months. However, asmedium-term investors, we find pockets ofvalue and continued growth despite theoutlook at the moment,” Pidgeon says.

“It is fair bet that in 2012 people will thinkthe worst is over and all the bad news isfactored in. That is when money will bemade, as emerging markets will rebound.”

Another factor supporting a positiveview towards emerging markets is somevery attractive valuations. “Emergingmarket valuations are at a historic low,with forward PEs of 9.5 times, which is a15 per cent discount to developedmarkets,” Pidgeon notes.

Sweeney agrees valuations are good.“The sell-off over the past year presentsan opportunity if you can block out themacro and focus on the fundamentals.Valuations are very attractive at themoment with less than 10 times PE whenthe long-term average is 13 times. So itcan be seen as a great long-term oppor-tunity; however, it could fall further ifEuropean concerns continue,” he says.

Cheap valuations aside, many emerg-ing market companies are also attractiveinvestments. “These are good stocks andthey are companies that are worthowning,” Collins notes.

Despite the opportunities, Sweeneybelieves advisers need to tread carefully.“It is very difficult to weigh up the risksand returns, but you need to look at theway the global economy is moving andlook at which markets you want expo-sure to over 20-plus years. GEMs [globalequity markets] have delivered betterreturns, but the trade-off is highervolatility,” he says.

To support his point, Sweeney cites the2011 performance of emerging markets(which were down 18 per cent),compared to developed markets (down12 per cent). “The rewards are greater,but there will be years where you will feelmore pain. If you have the stomach forthe volatility, then you should haveemerging markets exposure.”

Although this volatility has alwaysbeen an issue for emerging marketinvestors, the increasing inflow of insti-tutional money is expected to dampenthis trend. “As institutional investorsnow have to have emerging marketsexposure in their portfolio for bench-mark purposes, we should see lessvolatility,” Sweeney argues.

Investors are Asia-boundWhile China has been the most popularemerging market in recent times, othercountries are starting to win admirers.

“Russia, South Korea and Turkey arethe most attractive at the moment. SouthKorea has a 12.5 per cent forward ROE[return on equity] and Turkey’s is 16.2per cent,” Pidgeon says.

“In Russia we are overweight cyclicals– especially energy. This is our largestoverweight relative to benchmark as ithas a forward ROE of 17 per cent. Russiausually trades at a discount to otheremerging markets, but despite that webelieve this discount is too high.”

Collins agrees there are interestingopportunities outside China and is also afan of South Korea, although he is attract-ed to some of the Southern Asian nations.

“Within Asia, Indonesia is an interest-ing case as it has had the best-perform-ing stock market. Indonesia is now ademocracy with a local demand-driveneconomy, not an export-driven economylike China. It has good economic funda-mentals and has regular debt ratingupgrades versus Europe’s downgrades,”he notes.

Sweeney agrees: “Indonesia can be seenas a strong 10-year story. It is a smallcomponent of the index, but it is expectedto grow.”

In Lin’s view, several Asian markets areappealing, particularly those with


Continued on page 12

“Emerging marketsremain hostage toEuropean turbulence andChina, so they will have atough six months. However,as medium-term investors,we find pockets of value andcontinued growth despitethe outlook at themoment. ”- Geoffrey Pidgeon

Emerging markets

Guidelines foremerging marketinvestingAccording to Lonsec’s StevenSweeney, there are several ‘rulesof thumb’ for advisers when itcomes to emerging markets:

1. You definitely need some expo-sure to emerging markets;2. Think about specialist emergingmarket managers;3. Consider the client’s risk tolerance;4. Be mindful of the exposure theclient has through global equitymanagers;5. Consider a broader globalemerging market manager, then anAsia ex-Japan mandate managerand finally, for aggressive investors,a single country fund;6. Consider active management,as emerging market countries havesmaller, less efficient markets.


Emerging markets

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governments in a position to stimulatetheir local economy. “You need to lookat whether policymakers have room toimplement stimulatory policy in theirlocal economy,” she says.

Stock values are also important.“Generally we are positive on Asia(particularly China and Japan) due totheir valuations, but not so much theASEAN [Association of Southeast AsianNations] markets. Indonesia andMalaysia have been good performers,but currently are quite expensive andovervalued, we believe.”

When it comes to the BRIC (Brazil,Russia, India and China) economies, itseems interest is on the wane.

“BRIC was really the flavour of themonth five years ago, but there has beena 23 per cent drop in the BRIC index thisyear,” Sweeney says.

He sees problems with the economiesof several BRIC countries. “Russia is tiedto the oil price, the rouble is correctingand the political situation is making theoutlook cloudy. The BRIC story is reallyChina and India and with that you aregetting Asian exposure, but not exposureto emerging Asia, which has the goodperformers such as Indonesia.”

Enthusiasm for the BRIC theme is alsolukewarm over at HSBC. “The BRICeconomies have struggled in 2011 due tofears about growth slowing and concerns

about high inflation,” Pidgeon says.“We are underweight Brazil and India

due to their expensive valuations and theuncertainties due to the high and stub-born inflation in India.”

Essential part of the portfolioAlthough there is debate over the mostattractive emerging markets and whethernow is the right time to take advantage ofcheap valuations, one point is not incontention – whether these assets belongin an Australian investor’s portfolio.

“Most people should have an alloca-tion to emerging markets to take advan-tage of the long-term growth story andthis has not changed despite the recentdeclines,” Pidgeon argues.

“Emerging markets to us represent

great value and advisers should belooking to the medium-term and beincluding them in the asset allocation.”

Collins agrees: “ With emergingmarkets it is well worth including someexposure in a diversified portfolio.”

According to Sweeney, this debate isfinished among institutional investors,and the retail market is only now catch-ing up. “There is good institutional inter-est, but retail is trailing that trend. Mostinstitutional investors have a 5-10 percent asset allocation, while for retailinvestors it is less than 5 per cent. Asinstitutional investment increases, itbecomes more compelling for retail tokeep up,” he explains.

Pidgeon believes retail investors needto make a meaningful allocation to gain

exposure to the growth potential of thesecountries. “We believe 15-25 per cent ofthe total global equities basket shouldbe in emerging markets, which leads to5-10 per cent of the total allocation.”

According to Sweeney, the right allo-cation depends on the particularinvestor and their other investments.“Lonsec believes you need to have someexposure to emerging markets (10-20 percent of the global equities allocation),but investors need to be aware that theymay already have exposure through theirglobal managers, so they need to checkthe investment mandate.”

Collins believes the right allocationdepends on the risk tolerance of the indi-vidual investor. “I believe emergingmarkets have a great long-term outlookand that will not be torpedoed by whathappens in Europe. These economieshave enough local demand to drive long-term growth.”

He points out emerging marketsproduce 40 per cent of the world’sexports, but currently represent less than15 per cent of the world’s market cap.“This will only increase, so you need toget in ahead of that, as that is where youmake money – being ahead of the curve.”

In the future, Sweeney expects emerg-ing market investments to become main-stream, with the action shifting furtherafield. “Frontier markets may be thething when you want to add some spiceto the portfolio,” he predicts. MM

Continued from page 11

“I believe emerging markets have a great long-term outlook and that will not be torpedoed bywhat happens in Europe. ” - Michael Collins

WHEN it comes to emergingmarkets, investors the world over

have been fixated by the stunninggrowth in the Chinese economy, and thishas fuelled the expansion of many othereconomies.

Australia in particular, has been a bene-ficiary, and this has translated into goodperformances by many local stocks.However, the key question for Australianinvestors now is what the future holds forthe Chinese economy and what this meansfor both emerging markets and Australianequity investments.

According to Pengana Capital, emergingmarket investors will need to take more carewith their stock selection in the future, withmany Australian stocks also likely to face atougher time going forward.

“Over the next three years the structuralshifts in China will be very important,”explains Diane Lin, senior portfoliomanager for Pengana’s Asian Equities Fund.

“In the past decade, growth has beendriven by capital investment, exports,housing and infrastructure. However, thisis changing and has now shifted to thedomestic economy and new industries.These changes in China are not necessari-ly good for Australia.”

Lin points out the Chinese Government’s12th Five-Year Plan for 2011-15 has rein-forced its target to restructure the economyfrom a manufacturing to a service-drivenemphasis. In 2012, the Government willimplement an aggressive fiscal policydesigned to encourage development of aservice industry in China. This includes newtax benefits designed to encourage entre-preneurship and small businesses in theservice industry.

“We believe the development of theservice industry will help China grow itseconomy without over-reliance on naturalresources and energy,” Lin says.

She believes it is important for emergingmarket investors seeking to capture thegrowth potential of China to keep thisrestructuring in mind when selecting invest-ment funds.

“Now the key word is diversification andhow much of the mining, financials andservice sectors you have exposure to. Theservice sectors are going to be more impor-tant going forward, and we believe this willbe increasingly recognised in 2012 as we seethe result of the policy shifts in China. Thesewill reduce demand for building materialsand this will eventually be reflected incompany earnings,” Lin says.

“We expect small and mid-cap compa-nies – typically from the new industries suchas retailing, IT services and industrials – tooutperform large caps, which are moreprevalent in the old industries such asbanking, property, building materials andcoal.”

This means advisers will need to careful-ly select their investment benchmark andemerging market fund to ensure they gain

exposure to service industries, rather thanthe traditional sectors of the Chineseeconomy.

Lonsec senior investment analyst, StevenSweeney, agrees investors need to keep thechanges in the Chinese economy in mindwhen investing – both in emerging marketsand local equities.

“Australian equities have done very wellover the long-term and can be seen asalmost an emerging market, as the index isdominated by resources. However, asemerging Asia becomes more consumer-driven, performance will shift away frombeing resources-driven,” he says.

“Investors definitely need both Australianequities and emerging markets, and overtime they need to increase their exposureto emerging markets. We have had a greatrun in Australian equities, but the futureperformance may be different.”

Lin agrees times are changing: “Goingforward, the Australian market’s concentra-tion on the mining industry will be lessbeneficial.”

This means looking to sectors of theequity market outside resources. “Investingin Asian equities with a tilt towards struc-turally growing industries that Australianequities do not provide exposure to – suchas IT, healthcare and consumer – is essen-tial for Australian investors,” she says.

“A lot of Australian investors have notrecognised the impact of these changes [inChina] as they have not happened yet.”

Landing: soft or hard?While shifts in the Chinese economy areimportant in the medium-term, over thenext few months questions about theappeal of Chinese stocks turn more onwhether the economy is in for a soft orhard landing.

Lin believes the Chinese Government hasconsiderable room to loosen its monetarypolicy and stimulate domestic demand. “Interms of fiscal policy, China is taking a verydifferent approach to developed marketsthrough structural tax change,” she says.

“China is almost going in the oppositedirection to the Western world, and thismeans there is a good investment environ-ment for emerging market equities.”

Sweeney remains cautious: “Asianmanagers have been bearish on China for18 months to two years. However, this couldbe changing as Chinese inflation is coming

off and the Government appears to be engi-neering a soft landing, so managers havegone back to a neutral weighting as valua-tions are attractive.”

He believes a key point for investors toremember is that “GDP growth in Asia – andespecially in China – is not necessarilyreflected in sharemarket performance”.

Despite the concerns, Chinese invest-ments retain their fans.

HSBC head of global investments inAustralia, Geoffrey Pidgeon is positive.“China will have a challenging six months,but valuations are good,” he says.

According to HSBC data, the Chinesemarket is currently trading on about eighttimes 2012 earnings, making it an attractiveprospect.

Fidelity Australia investment commen-tator, Michael Collins, agrees theoutlook is good, particularlygiven the level ofgovernmentsupport.

“China has some problems, as local author-ities are pushing for reflation versus thecentral authority wanting to slow, but theoutlook is sound and the opportunities areenormous,” he notes.

“It has a good outlook, with growth forthe next few years expected to be in the highsingle digits. This will come down in timeas it rebalances to domestic demand, but itwill still be good.”

Collins believes another factor forinvestors to consider is that most China-based investment funds are largely centredon Hong Kong companies – many of whichhave been hit by the uncertainty over Euro-pean debt. “However, they have great poten-tial to bounce back when concerns overEurope dissipate,” he says. MM


Emerging markets

Investors should probably keep changes in the Chinese economy in mind, despite its incrediblegrowth over the years, Janine Mace reports.

Anabolic markets

“Now the key word isdiversification and howmuch of the mining,financials and service sectorsyou have exposure to.”- Diane Lin

When it comes to risk insur-ance, great attention is paidboth by insurers and advis-ers to the various core defi-

nitions that exist within the contract.This attention is well warranted

because it is these definitions that playsuch a significant part in establishingbenefit eligibility: for example, the defi-nitions of the various trauma insuredevents, total and permanent disability andtotal and partial disability are vital towhether or not a benefit is paid and howmuch is paid.

Advisers who are involved with riskinsurance will be well aware of thedramatic changes these and other defini-tions have undergone in the past andcontinue to undergo.

There is one definition, however, thathas, for many years, largely slipped underthe radar, which is surprising when itsimpact is considered.

Whilst of lesser relevance for the otherrisk insurance types, this definition is atthe very heart of income protectioninsurance:

- Dictating what can be insured at thetime of application;

- Dictating what can be paid underindemnity contracts;

- Proof of which is required on virtual-ly all claims; and

- Anecdotally, has been the focus ofmore disputes, legal and otherwise, overthe years than any other aspect of thistype of insurance.

The definition is of course that ofearnings or income and its subsequent

manifestation as pre and post-disabili-ty earnings.

A review of a policy issued in the 1980sfound the following definition applied:

“If you own any portion of a business orprofessional practice, ‘monthly earnings’means income earned by that businessor practice due to your personal activi-ties, less your share of business expenseswhich are necessarily incurred in earningthat income.

“From any other source of employment‘monthly earnings’ means your salary,fees, commissions and bonuses and anyother income earned for servicesperformed.” (Source: Associated Nation-al Life, Income Reserve Plan.)

A policy available at the time this articlewas written has the following definition:

“If you are self-employed, a workingdirector or partner in a partnership, yourmonthly income is the monthly incomegenerated by the business or practicedirectly due to your personal exertion oractivities excluding superannuationcontributions, less your monthly share ofbusiness expenses.

“If you are not self-employed, a workingdirector or partner in a partnership, yourmonthly income is the total monthlyvalue of remuneration paid by youremployer including salary, fees, commis-sion, bonuses, regular overtime and fringebenefits, excluding superannuationcontributions.” (Source: CommInsure,Income Care Plus.)

Unlike other aspects of income protec-tion insurance, the above indicativelyshows that the definition of ‘earnings’ has

not altered materially over the years inthat it was, and still is, linked to theemployment status of the life insured.

In turn, the employment status of thelife insured tends to be linked to a crudecriterion: ie, whether the life insured doesor does not have any direct or indirectownership of the business.

In much the same way that Henry Fordsaid about his Model T in 1906, “You canhave any colour provided it’s black”, insur-ers still only offer the choice of twoemployment status options – employedor self-employed.

It would seem, however, that life is notas black and white as Ford or the insur-ers would like, particularly when thereality of employment and remunerationare considered.

The range and conjugations of varia-tions is vast, for example:

(i) Simplistically, people can either beemployed or unemployed;

(ii) Those who are unemployed oremployed without the intention of beingremunerated, ie, non-gainful employ-ment, theoretically do not require nor canthey obtain income protection insurance.

(iii) Those who are employed can beemployed in one or more than one of avariety of different ways:

- As an employee;- As a contractor;- Self-employed; or - As the owner or part-owner of a

corporation.(iv) Employment can be full-time, part-

time, casual or seasonal;(v) People may have one or more than

one ‘employment’, which may be on thesame or a different basis;

(vi) Irrespective of the basis of employ-ment, in general terms those who areemployed may:

- Have no financial interest in theemploying entity;

- Have a private financial interest in theemploying entity, ie, own shares notpublicly listed;

- Have a public financial interest inthe employing entity, ie, own publiclylisted shares; or

- Be a separate legal entity to theemploying entity or the same legal entity.

(vii) An employed person may receiveremuneration by way of one, or more thanone, of the following:

- Wages;- Salary;- A retainer fee while working on a

commission basis;- Commission;- Fees;- Tips;- Payment in kind; - Superannuation;- Performance bonus;- Share distributions and option enti-

tlements; - Fringe benefits; - Profit share;- Overtime;- Loadings;- Allowances;- Increase in goodwill;- Cash; and- Tax minimisation, for example,

income splitting.


OpinionInsurance

Get with the times

Many definitions within life insurance have been subject to drastic changes as timerolled past. However, Col Fullagar notes income-protection cover definition is one ofthe most outdated.

(viii) Remuneration can be receivedimmediately, received in advance or deferred.

No doubt there are other variations inaddition to the above, but the point is thatthe range of variables when it comes toemployment and earnings is clearlyconsiderable, which means that theforcing of these into two categories ofemployed and self-employed on the basisof business ownership has the potentialto complicate and confuse the advice andunderwriting process.

Because there is a relatively lower levelof scrutiny by insurers at the time of appli-cation, it may be that everything appearsto be OK. The reality could in fact be thatproblems exist but they are deferred, withwell-intentioned advice foundering at thetime of claim.

The likelihood of claims complicationsalso increases if the insurer wants to applywhat is often an arbitrary restriction: ie,the basis of calculating earnings at thetime of claim must be consistent with thatwhich applied at the time of application.

While this may sound fair, it is notnecessarily the case because:

- The basis of employment and earn-ings may alter between the date the policystarts and the claim starts, particularly ifthe policy has been in force for a numberof years;

- The basis of earnings may alterbetween the date the claim starts and laterin the claim; and

- The manner of treating a particulartype of earnings may alter simply becausea claim occurs. The most topical exampleof this is adviser renewal commission,which contractually alters from generat-ed to non-generated when the adviser istotally disabled.

And at the risk of complicating thingseven further, it is also possible the insurerwould not seek to enforce the need forconsistency, if by doing so they disadvan-taged their own position.

There may be a temptation to brushthis off as earnings being the poor second

cousin of the client’s medical conditionwhen it comes to claims’ critical issues. Areview of several case studies might helpprovide perspective.

Case study 1Ron is the 50 per cent shareholder,managing director and sole revenuegenerator of a private company employ-ing two other people.

In this situation, the claims assessorwould look to identify ‘the income of thebusiness or practice generated by thepersonal efforts of (Ron) after the deduc-tion of (his) appropriate share of busi-ness or practice expenses in generatingthat income’.

In the above situation, the currenttime-tested approach may be practicaland appropriate.

The position, however, might be viewedquite differently if Ron’s company had alarger number of employees – forexample, 20 – and there was also morethan one revenue generator.

In this situation, trying to identify theincome of the business generated by Ronand his share of the business expensesmay be all but impossible if the currentapproach was used.

Case study 2Brian purchases a start-up franchise. Thefranchisee recognises that it will take timefor the business to reach profitability, soit makes provision within the remunera-tion arrangement for Brian to receive amodest retainer so that he can supporthis lifestyle.

The franchisee also requires thatBrian has income protection insurance.He applies and is granted an indemnitycontract due to the start-up nature ofthe business.

Five sales staff are hired and the doorsare opened.

Nine months later Brian is disabled ina car accident. Whilst considerable andsteady progress has been made, the busi-ness is still not trading at a profit: ie,

revenue less expenses is negative.Under his indemnity income protec-

tion insurance policy no benefit entitle-ment would exist, even though Brian wasbasing his lifestyle on the retainer hedraws and he appropriately was lookingto have that lifestyle protected.

Case study 3Jessica runs a successful small businesswhich employs her husband as a means ofminimising tax.

Jessica is totally disabled for a periodof time but then returns to work part-time.

She reads her income protection insur-ance policy and realises that if she reducesthe earnings she receives by transferringmost of them into her husband’s nameand classifying them as expenses, she canincrease the partial disability paymentsto her.

Thus, even though Jessica’s business isonly suffering a 40 per cent drop in profits,she is able to receive a partial benefit at arate considerably higher than that.

In case study 3, it is the insurer that isbeing disadvantaged, and while somemay say “Good on you Jessica”, this isnot the point. Insurance should be aboutequity, and inflated benefit paymentswill eventually lead to higher premiumsbeing charged.

It is clear there are potential issuesassociated with the current definition ofearnings, with those issues also poten-tially impacting the insured, insurersand advisers.

Whilst it may be frustrating for some toread an article that purports to identify aproblem without proposing a solution,there remains merit in proposing someactions that can be taken:

- Insurance applications might bedesigned such that a more accurate reflec-tion of the client’s financial position canbe presented;

- Underwriting guidelines might bereviewed to ensure the insured haveaccess to appropriate protection;

- If the current basis of defining earn-ings within income protection insurancepolicies is outdated, insurers could beencouraged to look at alternatives; and

- Claims management protocols andparticularly claim forms, both initial andongoing, may need to better appreciatethe true financial position, rather thansimply forcing claimants intoemployed/self-employed boxes.

The reality is that the difficulty ofbalancing contractual certainty, flexibil-ity and equity means that arriving at andagreeing on a way forward will not neces-sarily be easy.

For advisersThe more important reality is, however,that advice and protection must go on.Thus, even if none of the above changesoccur, advisers can still ensure that:

- Fact finds and advice documents facil-itate the obtaining of a clear picture inregards to the client’s earnings, such thatappropriate advice can be provided;

- Field underwriting skills can clearlyrepresent the actual position of the clientso as to facilitate an optimal assessmentby the insurer;

- Regular reviews will ensure that anymaterial changes in a client’s financialsituation are identified at an early date;and

- Assistance is provided at the time ofa claim so that any misunderstandingsor over-simplifications are avoided,such that the appropriate benefitpayment is made.

A client left to their own devices caneasily be inadvertently caught up in a casestudy situation.

A core component of the value ofadvice is that advisers are forewarned andtherefore forearmed. Having access to thisprofessional financial advice will unques-tionably mitigate the risk of clients beingshort-changed by their earnings.

Col Fullagar is the national manager forrisk insurance at RI Advice Group.


OpinionScaled advice


As an industr y, we wantAustralians to take more inter-est in their retirement savings.Yet it seems that despite our

best efforts, the population’s apathy is atough nut to crack. Every major fund hasteams dedicated to educating andinforming members, and many fundsalready provide great online membertools and resources.

So why aren’t more Australians gettinginvolved with their super earlier in life,when they have more power to improvetheir retirement?

The answer lies within basic humanpsychology. We prefer immediate gainsover long-term benefits – even if long-term benefits are greater. Although mostpeople know that contributing to superis a good thing for the long-term, wehaven’t provided enough short-termfeedback to make retirement savingactivities interactive and immediatelyrewarding. The result is most Australiansdon’t become active with their superuntil their retirement truly becomesimmediate – which is unfortunatelywhen they have minimal power to influ-ence their future lifestyle.

But every now and then, the rules ofthe game change. Scaled advice and itsaccompanying technology have givenus the tools to make super advice freeand personal, and to provide instantgratification around strategy benefits.We can now use technology to showpeople what kind of lifestyle they canexpect in retirement, which gives thema basis for comparison to their lifestyletoday. The combination of financialadvice and its supporting technologyallows better engagement with membersand immediate feedback on the activi-

ties they do today.To do this, we can use technology to

change member engagement in threekey ways.

Replace general education withpersonalised projectionsHistorically, it has been impossible togive hundreds of thousands of memberspersonal reasons to engage with theirsuper. The industry has instead sentmembers statements and communica-tions that attempt to educate themgenerally on superannuation, tax lawand investment strategy, hoping theymake a connection between thesecomplex rules and a nebulous financialgain that is many years away.

Now, we can motivate members bygiving them immediate quantifiablefeedback on how a strategy will benefitthem personally. Instead of telling themwhy super is a “good investment,” wecan tell them how much they need tocontribute each fortnight to achieve acomfortable retirement lifestyle throughtheir life expectancy. Also, we can tellthem what kind of lifestyle they canexpect if they take no action. Then, theycan make an informed decision as towhether that fortnightly sacrifice isworth it.

We can tell a 35 year-old thatcontributing just $150 per fortnightcould give her a comfortable retirementlifestyle through to age 89 rather than adependence on the Age Pension start-ing at age 75. We can tell a 55 year-oldthat a transition-to-retirement strategycould net him an extra $10,000 per yearthrough to age 86 at no cost except thetime it takes to fill out a few forms.

Make scaled advice toolsaccessible to membersNo fund is geared to support phone consul-tations with every one of its members. If wewant to reach them all, we have to make thefirst move with technology.

As the current working population ages,the expectation for self-service onlinetools will continue to increase. If amember can log on and run ‘what-if ’scenarios, they are more likely to pursuethe strategy. Members who wish to pursuea simple strategy should be able to imple-ment it online. Members whose situationsare more complex should be led to afinancial adviser or call centre team.

Give members instant gratificationWhen a member implements a strategysuch as consolidating funds orcontributing more to super, scaledadvice technology can now give themimmediate positive feedback. We nowhave the tools to give each member aninteractive living retirement plan toshow them how they are trackingcompared to their desired retirementlifestyle.

For example, if they implement astrategy that gets them an expectedretirement income of 75 per cent of theircurrent income, we can tell them thatthey are likely to have a disposableincome similar to what they had whilstworking. If they implement a strategy toget an expected retirement income atthe ASFA-comfortable level, then we cantell them that they should be able toenjoy a broad range of activities in retire-ment. A comparison of lifestyles is muchmore tangible than a balance or incomeprojection – it allows them to translatetheir dollars to their future happiness.

Wheneach member

can see, in termsof lifestyle, how much

a strategy could help them, they have suffi-cient information to decide whether a strat-egy is worth it. A lifestyle is somethingeveryone has now, and most of us want toeither keep it the same or improve it. Byshowing members how their actions todaycan translate to tomorrow’s lifestyle, we givethem the motivation to contribute more tosuper earlier in life, take advantage of tran-sition to retirement as soon as they reachpreservation age, or think twice abouttaking their entire super as a lump sum.

The impact of sensationalist headlinesaround market downturns will be soft-ened if we can effectively communicatehow little impact they have on eachmember’s retirement lifestyle. Technol-ogy now allows us to give workingAustralians the information they needto make informed decisions about theirsuper, no matter what their age.

In the 1990s, the internet created newways to interact with members anddrove the super industry to provideonline access. In 2012, maturing scaledadvice technology lets us deliver person-al motivation to millions. Instead oftrying to make financial experts out ofthe entire working population, let’s giveeach of them a personal incentive tointeract with their super now.

Jye Tucker is a director of ProvisioTechnologies.

Thegamechanger

Scaled advice will be the drivingforce for member engagement in2012, writes Jye Tucker.


OpinionPractice

Sooner or later, in your financialadvice or credit business, you willneed the help of lawyers. Despitethe litany of jokes about lawyers

(not many of them flattering), lawyers canbe quite useful to you. They can do arange of tasks – from drafting your finan-cial services guide (FSG) to preparing acontract between you and your marketingfirm. In fact, legislation dictates that someservices can only be provided by lawyersand not by other consultants. So what canyou expect when you deal with lawyers,what is negotiable, how do you keep costsdown and how do you achieve the bestresults?

Finding a firmThe first thing to do is to find a firm oflawyers experienced in dealing with thefinancial services industry. You could dothis by:

• Getting a referral from someone elsein the industry;

• Asking for a referral from your local lawsociety – for example, the Law Institute ofVictoria;

• Using web searches;• Asking people in your organisation if

they have dealt with particular firms in theirprevious employment.

The right firm of lawyers can be a one-

stop shop for a range of tasks, in some casessaving you separate calls to your account-ants and compliance service providers.

Depending on the firm of lawyers, theymight be able to:

• Respond to everyday Australian Finan-cial Services Licence (AFSL) and creditcompliance questions – for example, “Canmy credit guide and FSG be combined inone document?”;

• Draft or review disclosure documentsor templates – for example, your Statementof Advice templates;

• Draft or review contracts between youand your service providers – for example,between you and your website designer;

• Respond to your queries about employ-ment law – for example, “What is myemployee’s entitlement to the discretionarybonus mentioned in their employmentcontract?”;

• Work with you to protect your brand –for example, by registering trademarks;

• Help you resolve disputes – forexample, by negotiations with the otherparty without going as far as court;

• Help you with your lease – for example,by advising on its terms and negotiatingwith the landlord;

• Assist you with the sale or purchase ofyour business – for example, by preparingcontracts.

CostsBefore you obtain any services from alawyer, you need to know how theycharge. Most lawyers charge based on thetime they take to complete tasks. Typical-ly, they quote an hourly rate. This rate isgenerally based on the particular lawyer’sskills and experience.

Typically, although an hourly rate isquoted, the time is actually measured insix minute units. Usually, part of one unitspent on a task (say, three minutes) is stillcharged as though it were a full unit. So,for example, if your lawyer spends 15minutes on one task, this will be chargedas three units of work.

In cases where lawyers charge hourlyrates, you should seek an estimate of thecost of any task before you instruct themto start. In some cases, this is difficult. Forexample, if you wish to consult yourlawyers on an ongoing basis with basiccompliance questions it will be difficult topredict the costs in advance. In this case,you might ask your lawyer to notify youwhen the costs for a particular month havereached a certain threshold. Alternatively,you can keep your own records of the timespent in consultation with the lawyer.

You are not a prisoner to the hourly rate.Many firms will be happy instead to nego-tiate a set ‘project fee’ with you for a task or

“There are opportunitiesfor you to save the lawfirm’s time and, accordingly,your organisation’s money. ”

Living with lawyersFinancial planning practices often need to use the services of legalprofessionals. Samantha Hills gives tips on how to find lawyers and workwith them to achieve the best results.

to cap their costs for a particular project.This might work well for something like thepreparation of a licence variation applica-tion. Again, this needs to be discussed inadvance of instructing lawyers to start a taskfor you.

Never be shy to talk costs with a lawyer.For example, many lawyers will provide thefirst meeting with you (which may includesome legal advice) for free, but some willcharge for this. Others will charge for theirtime at the first meeting after the expirationof, say, an hour. Ask up front what yourlawyer is charging you.

Conflicts of interestIf you are looking for lawyers to assist youwith a project that involves another party,it may be useful to disclose the name ofthe other party early on. Lawyers havestrict obligations concerning conflicts ofinterest. If you are looking at entering intoan agreement to become an authorisedrepresentative of ABC licensee, a lawyerwill generally not be able to act for you ifthey already do work for that licensee. Thisis because they have a duty to act in theirclient’s best interests and this is a little diffi-cult if you have two clients with interestswhich directly conflict with one another.Potential conflicts of interest can often beadequately managed in large firms where

separate teams and “Chinese walls” exist.In smaller firms, the only option may befor the firm to tell you they can’t help youon this matter. It is useful to have thisdiscussion early rather than get a long wayinto discussions with the firm only to findout that they have a conflict of interest andcan’t help you after all.

Disclosures and terms of engagementAs an AFS or credit licensee, you know allabout disclosure documents. Instead of anFSG or a credit guide, a law firm mustgenerally give a new client a documentcontaining various pieces of information,including:

• The basis on which costs will be calcu-lated;

• The client’s right to negotiate a costsagreement with the firm;

• The client’s right to request an itemisedbill (a bill showing each individual item ortime entry contributing to the total);

• An estimate of costs;• Various pieces of information relating

to litigation matters;• How the client can make a complaint.The catch is that there are certain situ-

ations in which a firm does not have toprovide these disclosures. One of them iswhere the client is an AFS licensee.

Nevertheless, many firms will make

these disclosures to you anyway. Whetheror not they do, you can expect that a goodfirm of lawyers will carefully set out theterms of their engagement with you inwriting. You may be asked to sign a copyof the terms as evidence you agree to them,or you may be told that by continuing toengage the firm you are effectively agree-ing to the terms.

When you have appointed a law firmand have an idea of the costs you will bepaying, you can go ahead and instructthe firm.

Instructing lawyersThere are opportunities for you to save thelaw firm’s time and, accordingly, yourorganisation’s money, if you brief yourlawyers well. You can also ensure that youreceive the kind of outcomes you are after.Some useful tips are:

1. Set out the scope of the task. You willbe familiar with this from the daily activi-ties of the advisers in your own practice.Are you asking, for example, for a reviewof your entire Statement of Advicetemplate, or just the disclosure section?

2. If you are seeking advice on a matter,distil your request into specific questions.For example, you might feel confusedabout the new credit guide requirements.But what is it you really want to know?Formulate a question and make it to thepoint – for example, “When do I need to agive a credit guide to a client?”.

3. If you are asking your lawyers toprepare a document for you, give themquality information. For example, if youare asking them to prepare a FSG for you,tell them all the things you think couldpossibly require disclosure – your relation-ships with product issuers, any paymentarrangements, any other benefits youreceive. If you are asking your lawyers toprepare a submission for you in relationto an Australian Securities and InvestmentsCommission (ASIC) consultation paper,make sure the points you ask them to raiserelate specifically to areas on which ASIChas invited feedback in the paper itself. Ifyou don’t, you will incur additional timeon the part of your lawyers and detractfrom a good end result.

4. Tell your lawyers what you are hopingfor commercially. For example, do youwant to know whether the law is open tointerpretation in this area so you canchoose whether to ‘push the boundaries’ alittle compliance-wise? Or would yourather that your lawyers take a clear posi-tion so that you can easily decide what todo next? Either way, remember that youcannot instruct your lawyers to provideyou with the particular answer you want.

Do you want your lawyers to tell you, inpractical terms, what you need to do next?Say so.

If you are asking your lawyers to reviewa document, do you want them to use‘track changes’ and ‘comments’ in thedocument itself, or would you prefer aletter of advice letting you know whatchanges should be made?

5. Share your knowledge of the law.This avoids the risk of your lawyerscharging you to tell you something youalready know. It is also really useful if youare briefing your lawyers in an area in

which they have limited experience butyou have a little knowledge yourself. Forexample, your organisation might havebeen relying on a particular ASIC ClassOrder for relief. If this is relevant to thetask, tell your lawyers the number andnature of the Class Order. By way ofanother example, you might have aquery that relates to cold calling. If youknow a little about the Do Not Call Regis-ter requirements and you suspect thatyour lawyers are not so familiar withthem, share what you know. Even thoughyour lawyer will double-check what theyare told, this will still save them time.

Retaining the valueWhen your lawyers have reviewed andamended documents for you, keep goodtrack of version numbers and dates atyour end. Your lawyers should be doingthe same at their end. If you don’t, yourisk using outdated versions in your busi-ness and losing the value of having thelawyers’ input in the first place. This isparticularly important with things likeyour compliance manual which aren’toften read cover to cover, but which aregenerally subject to detailed scrutinywhen you have a licensee review.

CommunicationCommunication plays an important rolein your relationship with your lawyers.Many lawyers prefer email and letters as aform of communication but you are enti-tled to pick up the phone and call them.Verbal discussion is often the best way foryou to explain exactly what you want fromyour lawyers. It can also help you get moreprecise and practical answers. On the otherhand, don’t be surprised if your lawyer tellsyou they have to go away and think aboutthe issues, or research them, and preparea written response. Some areas of law arecomplex or uncertain so that the only wayto arrive at an answer is for your lawyer tofollow the law through many twists andturns and document each one as they go.Although this may result in a lengthy letterof advice to you, there may still be value inyou having a quick chat with them whenthey have reached their conclusion.

Legal professional privilegeMost of your communications with yourlawyers will be confidential because of thenature of your relationship with yourlawyers. More importantly, many of yourcommunications will be protected by legalprofessional privilege. This means thatcommunications with your lawyers madefor the dominant purpose of you receivinglegal advice (including the advice itself) orin anticipation of litigation are givenspecial protection. Not only can they notbe disclosed to third parties without yourconsent, but if a third party gets hold ofthem, they cannot be used in proceedingsagainst you.

When you find the right lawyers anddeal with them effectively, they can helpyour business both manage risk and grow.Lawyers need not be a necessary evil. Letthem be an opportunity.

Samantha Hills is a lawyer at HolleyNethercote Commercial Lawyers.

“Lawyers need not be a necessary evil.Let them be an opportunity. ”


This article will provide a briefcomparison of direct fixedincome with the provision of anannuity from an annuity

provider, which focuses on the followingareas of comparison: return, risk, diver-sification, liquidity, flexibility, and ongoingfees. The article will then compare twoformats for holding fixed income – directownership compared with ownershipthrough a fund. Here, the following areasof comparison are made: fees, diversifi-cation, liquidity, and other issues.

Direct fixed income versus annuitiesIn general, the benefits of direct fixedincome can be summarised in the follow-ing brief comparison:

ReturnAnnuity providers offer returns ofaround swap plus 100 basis points (bps).However, it is difficult to estimate exactpricing as annuity pricing is not publi-cally available. In contrast, one caneasily derive pricing information ondirect bonds. Currently, direct bondportfolios can generate over 200 bps toswap. Typically, the direct bond portfo-lio should yield at least 100 bps morethan an annuity.

RiskThe direct bond portfolio is also likely tohave a higher weighted average creditrating than the securities purchased bythe annuity provider (assuming most ofthe securities in an annuity portfolio arein the BBB range). In terms of an annuity,the single provider guarantees theinvestor repayment. By contrast, thedirect bond portfolio has a variety ofissuer exposures, and each issuer isresponsible for meeting interest andcapital repayments. In other words, it islogical, from a risk perspective, to expectthat one would prefer to receive a varietyof issuer guarantees from a diverse rangeof companies, as opposed to relying onone company for the annuity payment.

Diversification Allied with considerations of risk is theconsideration of diversification. Invest-ing in annuities exposes an investor to thestrength of the company, and thatcompany alone. A direct investor enjoysdirect control of their portfolio, which

would have a variety of issuers, not justone as supplied by the annuity provider.Also, investors can choose which sectorsthey prefer and how many issuers consti-tute their portfolio.

Liquidity A direct bond portfolio is comprised ofrelatively actively traded bonds, wherelarge institutional investors trade on aregular basis, so that liquidity is possiblein most cases – although liquidity varieswith market conditions. While liquiditymay be available in various formats fromthe annuity provider, it is usually costly,with exact details of these costs hard toobtain in most cases.

Flexibility Direct portfolios offer complete flexibili-ty to change the portfolio at any time,since the underlying securities can betraded if risk preferences change, or ifchanges to the term of the portfolio arerequired. While variation to an annuity ispossible, the variation comes at a costwhich can be higher than the costs oftrading a direct portfolio, although detailsof exact annuity charges are difficult toobtain in most cases.

Ongoing fees While the annuity provider pays fees to‘up-front’ distributors, some ongoing feesapply. In addition, the annuity providerkeeps the difference between the invest-ment portfolio of around 200bps and thepayout level, or around 100 bps over the

swap curve. In other words, the annuityprovider keeps roughly half the invest-ment return, so as to fund regulatorycosts, management costs, and advertis-ing budgets. In comparison, the directportfolio has no ongoing fees and is betteraligned to the direct investment needs ofthe self-managed super fund (SMSF)sector.

In other words, the direct portfolio hashigher return, higher credit quality, and arange of other benefits that give controlback to the investor, while costing theinvestor much less. Direct portfolios can,therefore, compete well with annuityproviders, and further investigation is wellworth the time.

Direct fixed income versus fundsDirect ownership, in many ways, providesa much better way to access bonds whencompared to managed funds. Directownership allows a degree of investmenttailoring which cannot be providedthrough the use of managed funds. Sincebonds have very different correlationcharacteristics to equities and are typi-cally, although not universally, of highcredit quality, the case for direct owner-ship remains compelling. Key advantagesof direct ownership include:

FeesBoth direct ownership and managedfunds incur bid/offer spread fees takenby the broker on the purchase or sale of abond. The fees vary according to creditquality, liquidity and parcel size. Highquality credit will have a low bid/offerspread, while low credit quality will havea higher bid/offer spread.

In the case of a fund, or unit trust, thesebid/offer spreads effectively translate towhat is known as an ‘in-out’ spread or atransaction spread. A unit trust with agovernment benchmark will have a lowerin-out spread than a unit trust that has alow credit quality corporate benchmark.Also, the higher the alpha target or theamount targeted above the benchmark, thehigher the in-out spread. These transactioncosts are common to both managed fundsand to direct ownership of fixed income.

Direct bond owners pay no ongoingmanagement fees, while funds have feesthat can be substantial. Funds with eitherlower quality benchmarks, or higher alphatargets, or both, will have higher manage-

ment fees. In a low return environment,management fees are important, and feesof more than 50 bps might representroughly 10 per cent of return if the bondsearn roughly 5 per cent per year.

DiversificationDiversification in investment manage-ment refers to reducing risk throughselecting a diversity of assets. Typically,diversification is applied to assets that arehigher risk, such as equities, or thosesecurities with perpetual dividendsstreams. These assets are also highlyvolatile, while debt is much less volatile.If equities are less than perfectly correlat-ed, which they typically are, then the‘diversified’ portfolio will have less riskthan the weighted average risk of itsconstituent assets.

On the other hand, where securities aremore correlated the issue of diversificationreally becomes important when the creditquality of the issuer is low, and when theissuer is not regulated by institutions suchas the Australian Prudential RegulationAuthority. In other words, the issue of diver-sification is much less important in the caseof fixed income when compared with equi-ties, since the debt holder is typically in a farsuperior position on a bankruptcy (whencompared with an equity holder) and thecredit quality of the vast majority of fixedincome securities is sound.

In many cases, ongoing fund manage-ment fees may outweigh the benefits ofdiversification. In addition, adequate creditresearch, as provided by FIIG Securities,


OpinionFixed income

“Direct ownership allows adegree of investmenttailoring which cannot beprovided through the use ofmanaged funds. ”

Elizabeth Moran makes a comparison between direct fixed incomeinvestment and annuities, and then with funds.

Fixed income versusannuities and funds

can really assist investors in the areas wherediversification is relevant, since some riskneeds to be taken to obtain return.

The arguments for diversification reallybecome relevant in a limited number ofcases where investors have no guidance oncredit and are at the riskier end of the creditspectrum, especially below investmentgrade. Moreover, the ability to break downbonds into smaller parcels effectively solvesmost of the diversification problem formany investors. Historically, bonds wereonly available in $500,000 face value parcels(see Figure 1).

LiquidityThe liquidity of most investment-gradeAustralian direct bonds is excellent. In thecase of the credit sub-component, theliquidity of individual securities variesgreatly, and is more than adequate in mostcases, as these securities are investmentgrade and are actively traded betweencompeting institutional fund managerson a daily basis.

By way of contrast, there is no activesecondary market in the units of a fund.Also, it needs to be emphasised that fundsaccess the same liquidity as the directbond holder, although the direct bond

holder knows what security is held, whilea unit holder in a fixed income fund doesnot know what underlying instrumentsare held.

In some cases, the investment mandatemay have permitted the purchase of illiq-uid, or sub-investment grade debt, whichwill cause liquidity issues for the fund in atime of stress. In other words, liquidity incredit is not an issue in the majority of casesin the Australian fixed income market, andthe liquidity of the security can be careful-ly calibrated in the case of a direct bond,while the unit holder in a fixed income fundloses control over liquidity.

As liquidity falls, investors are typicallyrewarded with extra yield in the form of anilliquidity premium, yet the direct holderhas control over what he buys and sells,while the fund investors do not. Some infla-tion-linked securities, such as the semi-governments, the major banks, and otherissuers reflect this premium. In other words,rewards for liquidity are apparent, anddirect ownership can assist with the effec-tive targeting of these premiums, with a fullytransparent approach.

While liquidity is generally thought to behigher in a managed fund, the reality isthere is no liquidity advantage in the under-

lying fund when compared to the directinvestment. Moreover, the mixture of assettypes in managed funds can impede liquid-ity in the case of a crisis situation, wherethe manager can only liquidate certainparts of the portfolios and not others,leading to fund liquidity freezes. Directownership avoids these problems, asliquidity attaches to individual securities,not to the total portfolio.

Other issuesSeveral other issues require consideration,such as the degree to which portfolios aretransparent. One of the main benefits ofdirect ownership is that investors canbuild a portfolio that suits individual risk,liquidity, maturity, and return preferences.These issues are summarised in Figure 2.

ConclusionThis article looked at the benefits of directfixed income in two main contexts.

First, direct fixed income was comparedwith annuity products where a fixed incomeportfolio effectively replicates an annuity-style cashflow. While using an annuityprovider remains a valid form of invest-

ment, the use of a direct portfolio of bondshas many advantages. Bearing in mind thatself-managed superannuation fund (SMSF)portfolios are typically designed to avoidongoing fees, yet annuity providers areoffering products that have large feesembedded in the product, a bond portfo-lio is better aligned to direct investing.Annuity providers keep most of the invest-ment return of around 100 bps, or more(200bps total return less the investmentpayout of 100bps). Part of the proceeds keptby the annuity providers are used to pay foradvertising and part are kept to pay for thecosts of regulatory compliance, apart fromother things. By analysing the annuityproduct, investors can then attempt to repli-cate the characteristics by using bonds.Generating the same outcomes by usingdirect securities enables:

• Direct control over risk;• Greater diversification;• Avoidance of fees;• A higher return.Second, this article compared direct fixed

income with holding fixed income via amanaged fund. Importantly, fixed incomefunds may suit some investors and there isno fundamental problem with fixed incomefunds. Rather, this article highlights thebenefits of direct fixed income. They allowthe investor to control their own risk rewardtargets, as well as liquidity and maturity, ata lower cost with no ongoing fees.

Elizabeth Moran is director of educationand fixed income research at FIIGSecurities.

Investment Size Historical Now$1,000,000 2 bonds Up to 20 bonds$500,000 1 bond Up to 10 bonds$250,000 0 - not available Up to 5 bonds

Figure 1

Limited flexibilityUnknown income stream

Managed Index-basedFund Underlying liquidity issues

No defined maturityNo control

Figure 2


Source: FIIG Securities

Source: FIIG Securities

With just under six monthsto 30 June and a sombreeconomic outlook,anyone who is made

redundant and wishes to direct theirtransitional termination payment tosuper will need to act quickly if they areto gain attractive tax savings.

To quali fy for the transit ionalarrangements, an employment termi-nation payment (ETP) must be madebefore 1 July 2012 according to a writtenemployment contract, law or workplaceagreement which existed on 9 May2006. The amount of the ETP musteither be specif ied or worked outaccording to a formula contained inthat contract, law or agreement.

Transitional termination paymentsoffer benefits not available to otherETPs. Generally, transitional termina-tion payments receive greater taxconcessions to ETPs and the employeehas the option to direct the amount toa superannuation fund or purchase asuperannuation annuity.

For example, the taxable componentof a transitional termination paymentwhich exceeds the ETP cap of $165,000(2011/12) up to $1,000,000 is taxed at amaximum rate of 30 per cent for anindividual who is preservation age orolder. If the payment did not qualifyunder the transitional rules, the amountwould be taxed at 45 per cent. Medicarelevy, Medicare levy surcharge and floodlevy may apply in addition to theserates. Tax may be further reduced bydirecting all or part of the taxablecomponent to a superannuation fund,where the tax (in this case 30 per cent,if taken as cash) is greater than the taxwithin the fund of 15 per cent.

Another benefit of qualifying transi-tional termination payments is that theamount directed to a superannuationfund is technically a ‘contribution’,however, it does not count towards anycontribution cap. This is provided thetotal transitional termination paymentstaken as cash and directed to a superan-nuation fund do not exceed $1,000,000.It’s also possible to take the tax-freecomponent of a transitional termina-tion payment as cash and direct thetaxable component to a superannua-tion fund. This is because the propor-tioning rule only applies to superannu-ation benefits, not ETPs, which are paidby an employer. A ‘directed terminationpayment’ does not count under theincome maintenance period (effective-ly a waiting period) for some govern-

ment payments, including NewStartAllowance. Checking whether the tran-sitional arrangements apply can there-fore be a worthwhile exercise.

Renewal or changes to employmentcontracts and agreements after 9 May2006 may result in the employee losingthe opportunity to the concessions fora redundancy payment to qualify as atransitional termination payment. Thisis the case, even if the new contract oragreement includes the same termsunder which the payment is made asthose which existed before 10 May 2006.It is the employer who determineswhether the payment qualifies as a‘transitional termination payment’.Advisers should check that the client’semployer has correctly classified thepayment. If the payment qualifies as atransitional termination payment, theemployer should issue the employeewith a transitional termination pre-payment statement to give them theopportunity to direct the relevantamount to super.

Not every employee who is maderedundant will receive a transitionaltermination payment. However, thereare a number of payments made onredundancy that most employees arelikely to receive. These may include a‘genuine redundancy payment’,employment termination payment, andunused annual and long service leave.Excluding payments of unused annualand long service leave which are taxedunder separate legislation, a genuineredundancy payment is the balance ofthe payment which exceeds the amountthe employee would receive if theyvoluntarily resigned. Genuine redun-dancy payments may include accruedsick leave, ex-gratia payments or sever-ance payments and payments in lieu ofnotice (provided that they would notnormally be paid on resignation).

Genuine redundancy payments aretax-free up to a certain limit, wherecertain conditions are satisfied. Theseinclude the employee being aged lessthan 65 years old at the time of beingmade redundant. Although a youngerage may apply if employment wouldnormally terminate at a younger age. Inaddition, there must be no arrangementfor the dismissed employee to be re-employed, and the amount is not greaterthan an arm’s length amount. The tax-free limit of a genuine redundancypayment provides significant tax benefitsfor the employee and recognises theinvoluntary nature of the dismissal.

The tax-free limit is calculated byusing a formula which has a baseamount of $8,435 plus a service amountof $4,218 for ever y whole year ofemployment. These figures apply in the2011/12 financial year and are indexedannually to average weekly ordinarytime earnings. Any amount whichexceeds the tax-free limit is taxed as anemployment termination payment(ETP). Deferring the payment to thenext financial year can increase the tax-free limit due to the new indexed baseand service amounts. However, be waryof deferring the payment after 30 June2012, where the ETP qualifies for thetransitional arrangements. Deferringthe termination date to complete anadditional year of employment can alsoincrease the tax-free limit. Both thesestrategies may significantly improve theemployee’s financial position by savingthem tax.

An ETP is the portion of the payment(excluding unused annual and longservice leave) which the employeewould expect to receive if they resigned,plus the genuine redundancy paymentin excess of the tax-free amount. The taxrates which apply depend on whetherthe employee has reached their preser-vation age as at 30 June of the year inwhich the payment is received, theamount of the payment and whether itsatisfies the transitional arrangements.Tax on an ETP that does not satisfy thetransitional arrangements may bereduced by deferring the payment to thenext financial year.

This applies to employees who reachpreservation age in that next year and/orwhere the indexed ETP cap ($165,000 for2011/12) reduces the tax on the taxablecomponent. Be aware, however, that theyear in which the payment is receivedmay affect the ability of the employee toclaim a deduction for personal superan-nuation contributions, certain taxoffsets, or government benefits such asFamily Tax Benefit and the Governmentco-contribution.

It’s important to remember that anamount that qualifies as a transitionaltermination payment must be paid tothe employee or superannuation fundby 30 June 2012. Delays in the employ-er directing the payment to the super-annuation fund may result in the bene-fits of the transitional arrangementsbeing lost.

Claudine Siou is OnePath’s technicalspecialist.


Redundancy and transitionaltermination payments

Toolbox

Claudine Siou explains the process and implications ofdirecting transitional termination payments to super.

CPD QuizThis activity has been pre-accredit-ed by the Financial Planning Asso-ciation for 0.25 CPD credit, whichmay be used by financial plannersas supporting evidence of ongoingprofessional development. Readerscan submit their answers online atwww.moneymanagement.com.au inMarch 2012.

For more information about the CPDQuiz, please contact Milana Pokrajacon (02) 9422 2080 or [email protected].

1. W hen does an employmenttermination payment qualify as atransitional termination payment?

2. How does a transitional termina-tion payment that is directed intosuperannuation (ie, a directedtermination payment) impact thesuperannuation contribution caps?

3. Can an employee elect to receivethe tax-free component of a transi-tional termination payment anddirect the taxable component to asuperannuation fund or does thetax-free and taxable componentneed to be taken proportionately?

4. How does an employee knowwhether their employer termina-tion payment is a transitionaltermination payment?

5. How do you calculate themaximum tax-free portion of agenuine redundancy payment?

S H A N E Ha w k e has beenappointed research manager,licensee and platforms withinMLC’s ThreeSixty Research.

Hawke will be responsiblefor research into the approvedinvestment l ist for MLC’slicensees, platform investmentmenus and the continuousdevelopment of researchstrategies, portfolio construc-tion and model portfolios.

Having ser ved as MLCInvestment Managementsenior investment specialistand as a research manager forING and RetireInvest, Hawkehas significant experience indealer group research, invest-ment platforms, investmentmanagement and financial.

Leading the 18-strong Three-Sixty, Hawke will report to MLCThreeSixty head of researchLisa Boyce.

Ibbotson Associates Australiahas announced the appoint-ment of James Foot as invest-ment consultant.

Reporting to Ibbotson headof investment advisory ChrisGalloway, Foot will be respon-sible for investment analysisand advisory services to retailand institutional clients.

Before his appointment, Footworked with Centric Wealth as

head of portfolio construction,head of managed fundsresearch and investmentresearch analyst.

“He has a demonstrated trackrecord in quantitative and qual-itative research, and his assetallocation experience, particu-larly with Centric Wealth’s modelportfolios and direct equitiesframework, will enable him toactively consult and add realvalue for Ibbotson’s clients,”Ibbotson managing directorDaniel Needham said.

Australian Ethical Investmenthas appointed current directorSteve Newnham as its execu-tive director of business devel-opment.

Newnham has previouslyheld distr ibution roles atZurich Financial Ser vices ,L o n s e c and BT Fi n a n c i a lGroup, and has more than 20years expertise in marketingand distribution in the finan-cial industr y, according toAustralian Ethical.

“Steve has been a director ofAustralian Ethical for the past 12months and has made an enor-mous contribution to the busi-ness,” said Australian Ethical’smanaging director Phil Vernon.

“He has an extraordinary trackrecord in our industry and his

greater involvement with us willbe invaluable as we look tocontinue growing our advisorand wholesale client base,” hesaid.

Newnham also has significantexperience with community and

social justice activities, havingworked on homeless sheltersupport schemes, indigenousfellowship programs, environ-mental and drought relief proj-ects and mental health aware-ness initiatives, Australian Ethicalstated.

Vernon said the appointmentreflects the group’s commitmentto growth, expansion and devel-opment. “Despite the significantchallenges of an uncertainmarket and rapidly changingregulatory environment, we seemore and more investors andadvisers demanding ethical andsustainable investment options,”he said.

Financial Planning StandardsB o a rd (FPSB) has namedMichael Snowdon as its direc-

tor of certification.Snowdon is a former practic-

ing f inancial planner andfinancial planning educatorwith more than 25 years ofexperience in the profession.

At FPSB (the owner of Certi-fied Financial Planner logotrademarks in and outside theUnited States) Snowdon willoversee the organisat ion’sinternational certifications andrelated programs, support theFPSB Standards Committeeand develop training andeducation programs andresources for FPSB memberorganisations.

Snowdon previously owneda Colorado-based investmentadvisory firm WealthRidge andserved as a professor at theColorado-based College forFinancial Planning.

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 ADVISERLocation: BrisbaneCompany: Independent FundAdministrators and Advisers (IFAA)Description: A Queensland-based boutiquedealer group is currently looking to hire afinancial adviser for its newly createdfinancial planning department.

The company provides management,administration and consulting services toindustry superannuation and eligiblerollover funds.

The position allows for training, supportfor ongoing study and professionaldevelopment.

The successful candidate will reportdirectly to the manager – financial planningservices as you provide clients with highquality investment and strategic financialplanning advice. You will also provideongoing advice services to clients,including ongoing portfolio monitoringservices.

Ideally, you will have a Diploma ofFinancial Services with a minimum of threeyears as a financial planner.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact the manager – human resources atIFAA – [email protected].

INTERNAL AUDIT OFFICERLocation: South AfricaCompany: Australian Red CrossDescription: The South African Red Cross islooking an Australian financial professional toensure that financial management systemsare consistent, transparent and effectiveacross all branches of the organisation.

As part of your role as a volunteer, youwill assist in undertaking audits inbranches to ensure that financialobjectives are achieved, assets areprotected, financial data is reliable andlaws and regulations are complied with.

Working with branch administrators andvolunteers, the successful applicant willpossess experience of internal auditprocesses, and an understanding offinancial and risk management.

You will be CA or CPA qualified, or haveexperience in accounting or bookkeeping.

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

SENIOR FINANCIAL ADVISERLocation: AdelaideCompany: Terrington ConsultingDescription: A leading financial institution isseeking an experienced financial adviser to work

with a portfolio of high net worth clients.In this role, you will have the opportunity

to develop your own referral networks andportfolio. You will also have access to anunlimited product and platform range.

The successful candidate will haveseveral years experience as an adviser, withproven sales and networking capabilities.

The successful applicant will be offereda competitive salary package and careerdevelopment opportunities.

To find out more visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting,0404 853 895/(08) 8423 4466,[email protected].

FINANCIAL ADVISER – RISK SPECIALISTLocation: PerthCompany: Terrington ConsultingDescription: A Western Australian businessadvisory firm is seeking a highly-trainedindividual to join its wealth managementteam as a risk specialist.

In this role, you will deliver detailed riskinsurance advice for the firm’s businessclients. Knowledge of tax structures, entities,estate planning and SMSFs is essential.

To be successful in this role, you will possessthe skills to identify and capitalise uponbusiness growth opportunities for the firm.

You will have the opportunity to utilisestate-of-the-art facilities and be offered anattractive salary package.

To find out more, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting,0404 853 895/(08) 8423 4466,[email protected].

BUSINESS DEVELOPMENT MANAGERLocation: MelbourneCompany: Terrington ConsultingDescription: A commercial firm is currentlylooking for a business development officerto drive growth, build brand equity, andprovide holistic and tailored solutions to adiverse client base.

Reporting to the regional manager, yourresponsibilities will include developing andmanaging key relationships.

The successful candidate will possess asolid understanding of credit risk, theability to manage long-term relationships,and have experience in the SME market.

For more information visitwww.moneymanagement.com.au/jobs.

Move of the weekCLEARVIEW Wealth has appointed formerCMC Markets Australia and New Zealandmanaging director Barry Odes to the newlycreated role of chief operating officer.

The move wil l see the group’s head ofmarketing and human resources, S c o t tAlomes, depart ClearView having held the rolesince mid 2010.

Odes will be accountable for distribution,marketing, financial planning, operations,

human resources and information technology,Clearview stated. Before his role at CMC, Odesheld senior executive positions at GoldmanSachs JB Were, the last of which was chief oper-ating officer of their private wealth division.

Clear view managing director Si m o nSwanson said Odes has the proven trackrecord of quality service delivery and leader-ship capability to assist in the significantgrowth opportunities facing ClearView.

Steve Newnham

““AS an avid golfer, Outsiderknows the value of ‘an ace’ – ahole-in-one – probablybecause he's never personal-ly scored one.

But, of course, as all equallyavid golfers would know, ‘anace’ only officially counts if itis achieved in formal compe-tition, meaning that similarfeats while hacking aroundwith your mates will, at best,result in bragging rights andmaybe a shout or two, but nota great deal more.

While accepting that acesonly count when you're incompetition, Outsidernonetheless believes that thescoring of a hole-in-one is asingular achievement, partic-

ularly for those with whom hegolfs occasionally in the finan-cial services community.

Thus, he offers his congrat-ulations, a round of applauseand the promise of a round of

drinks to Paragem chief IanKnox for having scored an acewhile holidaying at Noosa.

In fact, Knox's feat is suchthat it has promptedOutsider to ask who else in

the financial services indus-try has had a hole-in-one?Readers can nominate thesegolfing maestros by e-mailing [email protected]

Outsider


“Walt Disney couldn’t have

dreamed that one up.”

Minister for Financial Services Bill

Shorten believes opposition

spokesman Andrew Robb is telling

tall tales on the rise in government

debt.

“The only thing we have in

common with Iceland is that

we’re both an island.”

Shorten again on the comparisons

Robb made between Iceland and

Australia’s debt rise.

“Our global team calls this the

‘arithmetic of doom’ and have

set it out in our recent global

quarterly report, ‘When the

wheels fall off ’.”

HSBC chief economist Paul

Bloxham puts the current outlook in

context.

Out ofcontext

Witch adviser?

Not our spam of Choice

Top hole! Join the school of hard Knox

HAVING written for the finan-cial services industry for longerthan he’d wish to admit,Outsider likes to think he knowsa thing or two about the invest-ment markets.

But when it comes to movinghis pocket change around, hetends to leave all the technicali-ties and hard thinking to hisfinancial adviser. After all, they’rethe ones who know what’s goingon, right?

Well, certain commercialbreakfast radio hosts don’t seemto think so.

Outsider accidentally tuned

in to an FM breakfast programwhich featured an economicforecast so accurate that itseemed that the economist washolding a crystal ball in theirhands. Literally.

A psychic named Georgina,who regularly appears on theshow, predicted a markets crashin March and the fall of theAussie dollar to 87 cents later thisyear. That is a very specific fore-cast, if one was to ask Outsider.

Upon hearing this, however,one of the hosts exclaimed“That’s it! I’m selling my shares!”– which was then followed by a

segment inundated with celebri-ty gossip.

Now, as much as Outsidertries to respect psychicGeorgina’s prediction (after all,predictions are nothing morethan educated guesses), he wasbold enough to assume thatlisteners would like to hear anactual “educated guess” froma…well, an economist, forexample.

But if Georgina’s predictionproves to be correct, Outsiderwill be the first one to turn topalm-reading for financialdecisions.

OUTSIDER is hardly the most technologi-cally literate or ‘web savvy’ chappy you'llmeet. In fact, he still resents having had togive up his Remington typewriter.Nonetheless, he has grown to understandthe manner in which people seek tomanipulate the internet for their own pur-poses.

So far as Outsider can discern, it is notunusual for people to try to use responsesto Money Management's comments sec-tion to push people to their own websitesfor commercial purposes. This probablyexplains why Indian-based companiesflogging erectile dysfunction pills havebeen known to comment on stories aboutthe size of an Australian PDS.

Outsider's colleagues thought they hadbecome somewhat inured to such com-

ments, until they received a ‘comment’which seemed to originate from consumergroup Choice, which Outsider publishes byway of providing a public service:

"I love Choice. But you know – everyday I forget how to find the Choice web-site. So I need to Google ‘choice’ and clickon their ad at the top of the page. Choicehave to pay google every time it is clicked.I wonder how much that costs them? Butthanks for the ad choice – myself, andmy colleagues now no (sic) how to findyour website over and over and overagain. Of course people should not dothis unnecessarily as that could costchoice a bit of money."

The Money Management website mod-erator, having made his choice, appar-ently designated the comment as spam.

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 (january 26, 2012)

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