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JUNE 2008 JUNE 2008 PROFESSIONAL PLANNER PLANNER Bear Essentials HOW TO SAVE YOUR BUSINESS FROM A MARKET MAULING Lessons from the rugby field WHY SIMPLE IS BEST Self-managed super WHY THE FPA WANTS ONE LAW FOR ALL Why Gen Y TAP INTO A LUCRATIVE NEW MARKET Regulator revamp ASIC’S NEW APPROACH TO PLANNERS The view from here GOLDEN OPPORTUNITY IN PROPERTY MARKETS

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JUNE 2008

JUN

E 2008

PR

OF

ES

SIO

NA

L P

LA

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ER PLANNER

Bear Essentials

how to savE your BusinEss from a markEt mauling

lessons from the rugby field

why simplE is BEst

self-managed superwhy thE fpa wants onE law for all

why gen ytap into a lucrativE

nEw markEt

regulator revamp

asic’s nEw approach to plannErs

the view from here goldEn opportunity in propErty markEts

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cONtENtS

Private banking29 Lifestyles of the rich and

anonymous

Practice management30 You’reafirewall31 PeterSwitzer32 Awiseinvestmentoftime

Practiceprofit33 Compliance headache? Take one ASIC report

Client relationships34 Lessonsfromtherugbyfield:

Keep it simple, stupid

Property36 Investorshaveagolden

opportunity to get set

Good advice38 Bear market? What bear

market? It’s all bull

Philanthropy39 Groups piloting pro bono

planningservices

The marketplace40 Runningtheruleroverfive

equityfundnewcomers

The Final Word42 Gameon:Wesleyrelishes

battlingtheNewTony

June 2008 Round up10 RetireInvesttargetsGenY;

Budgetboostformarkets; Plannerdemandslowing; SMSFsboostETFgrowth; Riskinvogue;Macquarie gearing tools

Opinion07 Alan Kohler08 Practitionerperspective08 Letters11 GarryWeaven

Regulators17 Accessibilityandflexibility

ASIC’snewbywords

Plannerprofile18 Dennis Bashford in the

driver’sseat

Consumer insight21 Accentuatingthepositiveas

investorsentimentdives Client case study22 The art of juggling different

riskprofiles New markets25 Adviserstoldtotap

Generation Y

Self-managed super28 FPAcallsforonelawtorule

them all

Kristen Paech reports on how to save your business from a market mauling

page 12

on the coverBear essentials

wealth

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FROM tHE EDItOR

In this month’s edition of Professional Planner Peter Switzer explains (on page 31) why self-

promotion is such a valuable activity for financial planning firms.

On the basis that Peter knows what he’s talking about, and in the belief that it’s also a valuable ac-tivity for a magazine, allow me to take a leaf from Peter’s book.

From time to time, independent research firms carry out surveys of financial planners to gauge your opinions of and reactions to the various publications you read. This publication is still only eight editions old - the inaugural edition was published in October last year - but we seem to be making some reason-able headway.

We now find Professional Planner being rated strongly for reader recognition and for how useful it is in the day-to-day running of your business. It’s clearly early days yet, but the indication seems to be that we’re on the right track.

A key reason for this is the engagement we have achieved with readers - that is, if e-mails, respons-es to our own surveys and spontaneous feedback are anything to go by. But as Peter also writes this month, there are always - always - things that every business can do better, and we’re no exception.

For some time now we’ve been developing a website to support the print version of the maga-

zine. Simply reproducing the print version online is of little practical use to anyone (except, perhaps, for an archive of past articles), so we’re focusing on features and content to extend the range and scope of what we do for you.

A key to the usefulness of the website will be interaction and support from planners such as your-

self and, consequently, how relevant the information on the website is to you and your business.

We aim to build on the engagement and rapport the print edition is already developing, so we’ll be asking for your input on several fronts. Some time in the next few weeks, I’ll be in touch by e-mail to describe further the plans we have, and outline how you can get involved. I urge you to take the oppor-tunity - the better the input, the better the result will be.

Speaking of reader input, this month we fea-ture a new section, which we’ve called Practitioner perspective. This is designed to give you, as an in-dividual at the coalface of the industry a chance to write about your business, your industry, your col-leagues, regulators - in fact, any subject that tickles your fancy.

The first article has been penned by Ross Car-dillo, who initially contacted Professional Planner in response to something he’d read and disagreed with. After some discussion, we decided to give Ross the space to air his view. If you, likewise, have got some-thing to say, drop us a line. Details of how to do so are at the bottom of Ross’s article, on page 8.

Simon [email protected]

A leaf out of Peter’s book

Reader’s survey competition winnerWereceivedanoverwhelmingresponsetoourrecentreader’ssurvey.Thankyoutoeveryonewhotookthetimetoparticipate,eitheron-lineorbysendingbacktheprintversion.Wehadmorethan500completed,andwe’reintheprocessofcollating,auditingandanalysingtheinformationandfeedbackwe’vereceived.Icanannouncethatthewinnerofthesurveycompetition-whichincludestwonights’accommodationatHaymanIslandResort-is Michael crowley, of RetireInvest in Wollongong. CongratulationsMichael,andwe’llbeintouchshortlytogothroughthedetailsofyourprizewithyou. - SH

Become your own licensee.With Paragem it’s not as hard or expensive as you might think.

Contact us on 1300 722 100 www.paragem.com.au or email [email protected]

KOHLE

Ralan

Stamp out double-dipping

cOLUMN

The Australian Securities and Investments Commission

(ASIC) has now banned 13 financial planners as a result of the collapse of Westpoint, and finally got a conviction against one of Westpoint’s principals, Neil Burnard.

It’s to be hoped the firms affected have had a good hard look at themselves and make sure it doesn’t happen again.

Westpoint should at the very least be a reminder about the importance of sticking to approved product lists.

It should also have led to funda-mental reforms of the financial planning industry, but it didn’t – and won’t. The new Minister for Superannuation and Corporate Law, Senator Nick Sherry, has no plans to do anything about the conflicts inherent in the payment struc-tures for planners.

And now another shocker has popped up: Lift Capital, a margin lender that pooled its clients’ collateral and has now gone broke with great loss of wealth.

Financial planners who were not only paid trailing commissions, but also often received cheap margin loans themselves, marketed its margin loan products.

Are these exceptions, rather than the rule? Of course. The real problem with financial planning is not the depar-tures from approved product lists and platforms, and the small corruptions of the few.

The real problem is that most

financial advisers need their clients to invest in managed investment products in order to get paid.

The vast majority of the products are fine, or at least they’re not toxic. Well, they’re not very toxic. But it’s not so much the products that are the problem – it’s the fact that most advisers only get paid by selling them.

But there may be some reform coming, even if the Government is not interested in the subject.

ASIC’s chairman, Tony D’Aloisio, has just celebrated his first 12 months on the job by announcing the first major restructuring of the organisation in 10 years. He plans to replace the four “silos” into which it used to be divided with 17 smaller units – one of which will be devoted to financial advice.

Having mopped up after the West-point disaster, and now Lift Capital and Chartwell in Geelong (which was not promoted by financial planners), we can probably expect ASIC to become more proactive in supervising the industry.

A good place to start would be to clean up the practice of using margin loans to double dip, which has been exposed by the collapse of Lift.

Lift had 1600 individual clients through 80 financial planning groups. As with all margin lenders, the advisers were the real clients, and Lift paid them a trailing commission of 0.55 per cent.

The market leaders in margin lend-ing usually pay a trail of 0.5 per cent. But that difference in fees wasn’t the only

reason Lift managed to carve a niche away from the big margin lenders.

It was also because Lift offered higher loan-to-valuation ratios (LVRs) on listed investment companies (LICs) than the others. LICs often trade infre-quently so their liquidity is low.

That was important for financial planners because many of them put a high proportion of LICs into their cli-ents’ portfolios. A higher LVR produces bigger portfolios and bigger loans, and therefore more commissions. That’s because the advisers not only get a com-mission on the loan from the lender, but also a percentage fee for managing the larger portfolio.

All shares put up as security for Lift loans were transferred to a company called Lift Capital Nominees No. 1, which is the beneficial owner of all of the shares as trustee for all of the borrowers.

Part of the official wash-up of this crash should be an examination by ASIC’s new financial advice team of double dipping by financial planners. How much of it is going on?

And to what extent do the banks profit from triple- and quadruple-dip-ping: charging advice fees plus lending fees plus investment management fees plus interest margins on the loans?

Alan Kohler has been a financial journalist for 37 years and is currently the publisher of The Eureka Report, an online, independent publi-cation for investors.

PRActItIONER PERSPEctIVE

There is a common misconception that professionalism in financial planning

means advisers should only charge a fee for service. But in my opinion nothing could be further from the truth.

It should be an adviser’s aim to act in the best interests of the client - always putting the client’s financial well-being first and foremost in all recom-mendations. In light of this, a planner’s remunera-tion can and should be a combination of both fees and commissions.

If we take commissions out of the equation, it is the clients who may ultimately suffer, as there is a risk that a percentage of the population could be denied access to a financial planner due to their economic situation.

If a client requires a specific service but can’t afford the out-of-pocket costs associated with a fee-for-service model, what are their options for accessing financial advice?

I do not think I should be expected to work for nothing, and it does take a considerable amount of time to prepare a Statement of Advice (SoA), but when people do not have the money to pay upfront fees, should they miss out on getting good advice?

Remuneration is one issue; the other is the professionalism of the adviser.

In my opinion there are, generally speaking, two types of advisers: strategic planners, who offer true advice that may result in a product sale; and then there are “sales people”, who disguise themselves as professional planners.

A strategic planner does not focus on product. They focus on what the client is trying to achieve.

A strategic planner has the training, educa-tion and experience to be able to recognise clients’ situations, and to define strategies that fit those situations.

If a strategy results in a product sale, so be it. If it doesn’t, then it doesn’t. Often there’s no product

sale. In these cases I am compensated for my time, experience and education by charging a fee.

A strategic planner, such as myself, works for the client and is paid directly by the client/investor for the services that I provide. I purchase research and other information that enables me to make an informed decision about what is best for my client. I can choose from a range of potential product so-lutions, including risk insurance products, managed funds and direct equities.

I choose to be paid by a mixture of fees and commissions. Many articles I read, and fee-for-ser-vice practice models that I have studied, promote the idea that a client would be better off being charged only a fee, implying that commissions are necessarily exorbitant.

However, on every occasion (and there have been many) that I have dug deeper into these fee models, I find that commissions are rebated and then the client is charged at least the same, and in most cases more, than the original commission cost.

In the end, however, the matter is simple: if the planner is professional and ethical, and the fees and commissions are clearly communicated, then the method of remuneration ceases to be an issue. The client’s best interests will be put first and the remuneration will be fair and reasonable based on knowledge, experience and time required.

Remuneration is not a black-and-white issueprofessionalism is about how you treat the client, says ross cardillo

Ross Cardillo is a director and senior adviser with Ross Cardillo Financial Services, Mareeba, Queensland. The views expressed in this column are his own.

Submissions to Practitioner Perspective are welcomed. Please e-mail them to [email protected]. Submissions should be between 600 and 650 words in length. Please include a high-resolution photograph, if possible.

08

ChOiCe OR CONFuSiON?I refer to Claude Santucci’s letter (Professional Planner, May 2008).His letter reads: “The key point is that clients should have the choice of how they pay for the advice they receive”.I agree with the statement, but not his meaning of the word ‘choice’. I read Mr Santucci’s letter to imply that choice refers to whether a client would like to pay a fixed fee, an hourly rate or a commission. Why should they have a choice?If I have created a fair and equitable fee structure, which is provided to clients before our meeting, why should they have a choice?In any event, this is the wrong kind of choice.In my opinion advisers are far better served to select a pricing model they believe offers value to all parties, and then stick to it.No wonder clients have to “think about it”. They come to us with heightened anxiety and uncer-tainty, and are bamboozled with pages of jargon, drawn-out fact-finding questionnaires and are then offered a choice of how to pay.Clients should be asked if they would like to pay their fee by direct debit, credit card or cheque.This is choice, not confusion. Darren JohnsPrincipal Adviser, Align FinancialNorth Narrabeen

iT’S NOT uS veRSuS ThemI refer to the article titled “Change the Rules to Improve the Advice” by Alan Kohler (Professional Planner, May 2008).In his article Kohler refers to a statement made by the Minister for Superannuation and Corporate Law, Senator Nick Sherry.I am glad we have such a minister but I am heartily sick and tired of the totally out-of-reality comments he makes, the latest being “however, unlicensed accountants should not provide advice on the relative merits of establishing a [self-man-aged superannuation fund] compared with other products, nor can they advise the trustees of the

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Executive Directors: Colin Tate, Debbie Wilkes, Greg Bright

June 2008 - Issue 08

LettersSMSF on what to invest in”.I have absolutely no issue with the latter part of his comments: most accountants I know do not give any financial advice. I have an associate to whom I refer the clients. It is the first part of the statement which really gets me going.By the way, I would like to know how the Minis-ter knows that unlicensed accountants are giving financial advice. It seems that the financial planning industry is still lobbying hard and fast to go back to the old days when they had superannuation all to themselves. They seem to be willing to tell the Minister any-thing in order for him to keep attacking accoun-tants. Yes, it is true we can advise on setting up an SMSF but if we can’t base that advice on “relative merits” what can we use to give the advice? Do we simply say that the taxation implications are such-and-such, and leave it at that? I think not. And I hope that, if that is all I can say, my profes-sional indemnity insurer will stand by me.I was in Parliament House on a cold evening in June 2005 when I was invited to address the Joint Committee looking at the Financial Services Reform (FSR) Act, and the wording of “financial advice”.It is true that we accountants managed to get a reprieve and were allowed to do what we have always done (that is, advise on setting up funds), but it seems that the financial planning industry is not satisfied with that and are doing everything they can to undermine the status quo. Perhaps they should ask themselves why people

want to manage their own superannuation?Could it have something to do with exorbitant fees, small (and in some cases negative) returns - not to mention the financial planning industry’s reputation after the likes of Westpoint.I really don’t know why the financial planning in-dustry keeps fighting accountants. I don’t want to give financial advice; I am happy to refer my clients to my associate.But I will say this, as I have said many times: if the financial planning industry keeps pushing accountants, we might all just do whatever it takes to obtain a licence and the proper authority - at which time the financial planning industry would simply disappear.

George LawrenceChartered AccountantBowral NSW

Round UpReTiReiNveST TaRGeTS GeN YRetireInvest has revamped its advisory offering and introduced a new sub-brand as it attempts to appeal more broadly to a younger client base.RI Advice is one of four key strategic initiatives in the firm’s 2008 business plan which includes growing adviser numbers, broadening estate planning, tapping into generations X and Y, and honing the business’s financial focus.“A lot of people see RetireInvest as only retire-ment planning, so we’ve set up a sub-brand which is RI Advice,” says Greg Dunger, managing direc-tor of RetireInvest. “We’re concentrating on how we can [apply] the knowledge and client relationships we currently have [to] that next generation.”RetireInvest set up the pilot program in March, which involves 12 of its franchises and 20 offices around the country, in response to its ageing client base. The average age of the firm’s clients is 68. Dunger hopes to shift the proportion of pre- and post-retiree clients from 95 per cent to 75 per cent, and risk and wealth accumulator clients from 5 per cent to 25 per cent, by 2017.“I see the evolution of RetireInvest over the next 15 years as going from working with just retir-ees to working with Generation X, doing more around wealth creation and the estate planning side of the market,” he says. RI Advice will be reviewed at the end of June. Under its growth plans, RetireInvest aims to boost its financial planners from 223 to 258 by year-end. For more on the Generation Y phenomenon, turn to page 25

budGeT bOOST FOR maRKeTS The Budget will have little impact on financial planning businesses but changes to withhold-ing tax for Australian managed funds have been heralded as a boon for the competitiveness of the Australian capital markets. Julian McLaren, principal at The Money Manag-ers, says changes around the treatment of salary sacrifice will affect some clients but won’t have a large bearing. “[The government] will now count superannua-

tion as income where previously it was taxable income, so there may be less people eligible for the Commonwealth Seniors Health Card,” he says. “Salary sacrifice contributions are now going to be included in any assessments for a range of govern-ment benefits including the age pension, family tax benefit and the super co-contribution, effective July 2009. It will affect a small portion but won’t have a dramatic effect overall.”The government announced a progressive reduc-tion in the withholding tax rate – tax levied on income from securities owned by non-residents – from 30 per cent to 7.5 per cent from July 1, 2010. The tax cut is expected to boost investment in the listed property trust sector and put Australia on a more level playing field with countries such as Japan, Hong Kong and Singapore. “It will deepen investments in large [real estate investment trusts] and obviously a liquid, diverse and deep listed property trust sector is critical to the development of an effective plan for Austra-lians,” says Richard Gilbert, chief executive officer of the Investment and Financial Services Associa-tion (IFSA). “More importantly from the point of view of financial planners, the message the Government sends by addressing this issue indicates their commitment to having a strong financial services centre. For [planners], that might not have a dollar value on it but in the medium to long term it has important implications.”Tony Bates, CFP at Blue Point Consulting, says clients are “not terribly concerned” by the Budget. “I’ve spoken to a few clients this morning but it’s more that I’ve called them rather than the other way around,” he says.

PlaNNeR demaNd SlOWiNGThe red hot market for financial planners might have reached its peak, according to the latest figures on job vacancies from eJobs Recruitment Specialists. Job numbers across the country fell by 4.6 per cent in April compared to the same period last year, marking the first decrease since eJobs’ financial planning division began collecting data in August 2004. Vacancies in Sydney, regional NSW and the ACT

decreased by 1.6 per cent.“Although this represents only a slight decrease…this may now signify a drop in job growth and a shift away from the long period of ‘excessive candi-date demand’ that we have experienced to one of just ‘high demand’, ” says Trevor Punnett, manag-ing director and financial planning recruitment manager at eJobs. Punnett says the region is still experiencing a respectable 16.4 per cent quarter-on-quarter increase in job numbers – nationally these figures were 10.8 per cent.The slight drop in advertisements in April appears to be a result of Australia’s tightening economic conditions and market volatility, which have led to a dampening of investor enthusiasm, Punnett notes. “We may start to see some practices reconsider their staffing situations,” Punnett says. “Certainly excessive salaries for non-essential and/or non-revenue producing staff may now be considered more closely.”

SmSFS bOOST eTF GROWThSelf managed super fund (SMSF) investors are ploughing their cash into global exchange-traded funds (ETFs) as strategists predict Australia will lag the global rebound in equity markets. Average daily trading volumes worldwide increased by 53.5 per cent to US$91.6bn in the four months from December 2007 to April 2008, according to Morgan Stanley. Almost half the investors in Barclays Global Investors’ iShares locally (around 45 per cent) are SMSF investors, according to recent analysis by the firm. Tim Bradbury, co-head of iShares Australia, says it is difficult to gauge the percentage of SMSF inflows that is advised versus self-directed. “Private wealth, private banks and independent fi-nancial planners are likely to be the early adopters because there is already that mindset around buy-ing and selling listed securities on an exchange,” he says. “There is a move away from heavy allocations to Aussie equities and people are thinking more about asset allocation and what they are paying to get these [global] exposures.”

10

Real professionals love bears

WEA

VEN

garry

We hear a lot of talk about how difficult it is in the

current market to advise or manage funds for clients. But the truth is that market downturns, while equally as irrational as extreme bull markets, do ultimately simplify matters. Firstly, the absence of heady absolute returns means that rela-tive underperformance can no longer be disguised. Secondly, the true costs of ad-vice and funds management are exposed. The completion of a cycle means that clients can fairly reflect on the net value they have received – whether they have a strategically crafted portfolio matched to their time horizons and appetite for risk or whether they have a mish-mash of assets assembled to suit the purposes of their adviser or fund manager.

The other truly positive feature of the current environment, at least for those investors who have cash flow, is that they can sit on their hands and earn very strong real returns from cash while searching for the opportunities that these sorts of markets invariably flush out, often in the form of forced sales.

If professional advisers do not like that strategy because it does not generate sufficient fees then maybe they have a problem with their remuneration model.

cOLUMN

Garry Weaven is chair of Industry Funds Management, an investment service provider to the superannuation industry; a director of Members Equity Bank, which is owned by 40 superannuation funds; and a director of Pacific Hydro.

Some 14 iShares ETFs are listed on the Australian Securities Exchange (ASX).

RiSK iN vOGueAdvisers are expected to write more risk insurance in 2008 as market vola-tility and spiralling living costs shift the focus away from investment and onto insurance. Investment Trends’ prediction comes on the back of its inaugural Planner Risk and Risk Technology Report, which found more advisers are offering advice on life insurance and income protec-tion, yet for many it accounts for only a small part of their total business. The number of planners advising on risk rose from 81 per cent in 2006 to 84 per cent in 2007; however, 61 per cent were writing less than $50,000 in an-nual premiums, according to the report. On average, risk advice contributed 21 per cent to practice revenue last year. Andrew Knox, analyst at Investment Trends, says a heavy focus by planners on investment probably contributed to the low levels of annualised premiums written. “Perhaps this year that might change,” he says. “We’d expect to see an increase in the amounts of risk written. There seems to be more focus around risk this year, more enhancements being announced by the risk providers, and market vola-tility has people more concerned about insurance cover, particularly life risk.”Another key finding was an intention by planners over the next three years to shift risk transactions away from direct interaction with product providers towards platforms and software providers. However, Mark Johnston, principal at Investment Trends, says most platforms reviewed provided limited functionality outside of “cleanskin super risk busi-ness”.

“Maybe those limitations are some of the reasons why planners are writing smaller amounts of risk,” Knox says. “A number of platforms have an-nounced enhancements this year to what they’re doing with life risk, so I think some of those gaps identified in the report will be filled this year.”

maCquaRie GeaRiNG TOOlSAt a time when gearing has come under increased scrutiny, Macquarie Invest-ment Lending has launched a new information portal for advisers and personal investors. The website provides product informa-tion and educational resources tailored to the different audiences, with inves-tors and advisers each having their own colour-coded sections.Market volatility and an increase in margin calls have prompted some plan-ners to reassess their clients’ appetite for risk. The public can browse information on the firm’s products and services, includ-ing current interest rates, loan-to-value ratios (LVRs) and approved securities while Macquarie investors can obtain their most current loan and portfolio positions and access GearUp, the firm’s secure client-service site.“Our new website provides back-to-basics gearing information for investors who might be new to the concept of investment lending, along with more detailed product information, tools and resources specifically for advisers,” says Peter van der Westhuyzen, Macquarie’s investment lending division director. The site also offers self-service capabili-ties, letting advisers order product dis-closure statements, flyers and brochures and access educational materials for use with their clients.

essentialsThe sudden arrival of the bear market has

shone a blinding spotlight on financial ad-vice models, exposing the flaws of linking business revenues to market performance.

Anecdotal evidence suggests some financial planning practices have suffered falls in revenue of up to 20 per cent since the Australian sharemarket took a hammering in January.

The colossal 26 per cent plunge in the stock-market, a knock-on effect from the subprime crisis and the consequence of Australia’s heavy weighting towards financials, dealt a heavy blow to practices whose revenues are directly linked to market per-formance via product sales and volume bonuses.

And in a double whammy, as markets fell, so too did investor confidence.

New clients, who not too long ago were clam-bering to hand over their cash, are today opting for the safety of the bank, where they are reaping the benefits of a tidy cash rate.

“As a US investor, your alternative to being in the market is a 2 per cent cash rate – in Australia the alternative to being in the market is a 7 or 8

per cent cash rate,” says Andrew Pease, investment strategist at Russell Investment Group.

But for those planning firms that are charging a flat dollar fee for advice, the market’s fall from grace has had little bearing on business revenues.

Income is derived from the fees charged for the initial statement of advice and the ongoing reviews – neither of which is affected by market move-ments.

Alex Cook, principal at Arcadian Private Wealth, believes the value of fee-for-service finan-cial planning comes to the fore in a bear market.

“A flat dollar fee in this market is not impacted at all by a drop in assets,” he says. “There is no downturn in revenue, and every time you bring on a new client you’re adding straight to the bottom line. [This model] has a lot of merit in the current environment.”

NAB Financial Planning is in the process of transitioning all new clients to a fee-for-service approach, having adopted a business model focused on advice five years ago.

The bank’s decision in January to phase out trail

commissions by the end of 2008 will put NAB in good standing in the face of future market volatility.

In fact Geoff Rogers, general manager of NAB Financial Planning, says the bank is already attract-ing new clients – and interest from planners – as a result of the change in strategy.

“A fee-for-advice model is a better long-term model,” Rogers says.

“Day-to-day market movements become less relevant, and what becomes more relevant is the long-term strategy and the advice, and that’s what clients are interested in. For our planners it means they’re operating in a licensee that isn’t dependent on shelf space fees, but is focusing on how it builds a business that is transparent to clients and a good environment for our planners to operate in.”

The market downturn could well be the trigger for practices that rely on commissions to review their business models and move to fee-based advice.

Brett Walker, director of FSI Consulting in Brisbane, says practices have two options: “You are probably faced with the need to grin and bear it, or construct a different business model. It’s a great op-

the market downturn is forcing firms to find better long-term revenue models.

kristen paech reports on how to protect your business from a market mauling

cOVER StORY

Bear

13

portunity to attempt to cut the umbilical cord.”Cutting the umbilical cord, or halting the reli-

ance on commission-based income, is significantly easier today than it was 10 years ago, Walker adds.

Practices and dealer groups are increasingly selling the value of advice, as opposed to their abil-ity to outperform the markets, and basing advice models around this value proposition.

“The industry is slowly moving into an arena where advisers are confident to sell the quality of advice,” Walker says.

“Now that people are focusing on advice as the unique selling proposition (USP), the quality of the advice and the ongoing service, all they need do now is start to consider ways to make that mature and de-link from remuneration models that are based on portfolio value, even partially.”

Wayne Wilson, general manager, distribu-tion and sales, Asgard Wealth Solutions, says few practices have been spared by the bear, regardless of remuneration models.

The majority of so-called fee-based planners still have an inherent link to funds under advice, he argues.

“Most of the fee-for-service models are actually funds under advice-based models that are applied against either master trusts or wrap accounts, or some underlying fund value-based approach, so their practices have lost between 10 and 20 per cent of their revenue compared with six months ago,” he says.

According to Walker, the key benefit of direct remuneration via a flat dollar fee is that you’re no longer reliant on that portfolio value.

“[Fee-based planners] have certainty of income, subject to them being able to offer a reliable service to their clients,” he says.

But consistency of income is not the only ben-efit of fee-based advice in a bear market.

Charging a fee gives clients extra reassurance in volatile times that the advice they are receiving is tailored to their specific needs, heightening the degree of trust in the relationship.

“If my client is 100 per cent cash or 100 per cent shares there is no difference in what I earn and that’s usually attractive to the client because they know that the advice that I’m giving them is based on what I genuinely believe,” Cook says.

This fee structure leads to a natural conversa-tion around the strategic advice needs of the client, says Greg Miller, general manager of MLC Advice Solutions.

“They can have a clear and open discussion with the client about what’s happening, why it’s happening and what it means for them,” he says.

“Their remuneration’s not affected and the client can see that they’re being given objective advice around what is the right strategy for them, advice which is not linked to what’s going on in the market.”

Without a high level of trust in a market downturn, there is a risk that clients will be unable to see past the falling value of their portfolios and inevitably choose to take their business elsewhere.

Walker believes people will look more closely at their ongoing costs to decipher whether they can find a lower-cost alternative.

“That will create more pressure for advisers whose books are built around trails where there is no reciprocal service,” Walker says.

“This move to more cost-conscious consumers will raise people’s awareness of that and drive them to look for other service relationships where they might get something in return for that payment.”

According to The Financial Industry Com-plaints Service (FICS), clients have indeed been scrutinising the advice they’re receiving and the aggrieved are taking action.

FICS received 269 complaints against stock-brokers, financial planners and fund managers in the first four months of the year - double the number received in the same period last year.

Excluding the Westpoint collapse, 140 com-plaints were made against financial planners during the volatile months of January to April, while only 72 were made in the first four months of 2007.

Of the financial planning complaints lodged in 2008, about 70 per cent relate to inappropriate advice, and a further 20 per cent concern standard of service.

Ross Curulli, director financial planning at Hall Chadwick, says clients are more likely to switch advisers during this period.

“In a bear market clients start to become more aware of fees and they will dig deeper to identify what fee is actually coming out of their account, and may question that,” he says.

“Most commission-based models don’t articu-late what they’re doing or how they’re doing things with their clients, so it puts at risk the relationship between the client and the adviser and the ques-tioning of that client may [result in them] leaving that adviser.”

But while this is a risk for poorly-run practices, Curulli believes it equally provides a chance for robust firms to poach disgruntled clients.

“There is a potential for well-run businesses to identify and seek out new clients by promoting a better value proposition to these clients; so as a business we see it as a great opportunity to poten-tially take on new clients,” he says.

Walker says the onus is on advisers to nurture client relationships to ensure they endure through the good times and bad.

“I would assume that when markets fall it be-comes extremely important for advisers to illustrate to their clients that there’s more to life than simply producing consistent double digit returns,” he says.

“Fostering that long-term relationship with the client is never as difficult as it becomes in a bear market.”

Recognising this threat to their client bases, dealer groups are working hard to provide their advisers with the support they need to instil confi-dence in clients and help them ride out the market turbulence.

Most of this licensee support involves supplying advisers with educational information, research and compliance to put the current market turmoil into a historical perspective for clients and keep both clients and advisers abreast of changing market conditions.

“We’re encouraging our practices to continue to grow their new business, to make sure their existing

cOVER StORY

14

‘It’s a great opportunity to attempt to cut the umbilical cord.’

clients are getting that reassurance they need about the normality of what’s happening in the market, and that it’s not time to panic, and largely from what we can see that’s what’s going on,” Wilson says.

Robert Thomas, head of research and techni-cal at Axa, says more advisers are seeking advice themselves as the markets continue their volatile ride in 2008.

“Periods of market volatility can be unsettling for clients as well as advisers, so it is especially cru-cial that research teams are experienced and, more importantly, accessible to advisers,” he says.

AMP Financial Planning provides full access to a dedicated research team as part of its core offering to planners.

The team’s role is to work with external re-search houses in reviewing market conditions, the various products available and the underlying fund managers.

“We make a lot of that information available to our planners so they can be regularly kept informed of what’s going on and the views of the various research houses in terms of the markets,” says Mi-chael Guggenheimer, managing director of AMP Financial Planning.

“In the short term, whilst there is some volatil-ity, the planners have engaged with their clients over the strategic objectives, not short-term asset al-location. If a client is concerned about the volatility I would suspect that their risk profile will indicate that they want certain classes of assets, rather than those that may be subject to volatility.”

Robbie Bennetts, group chief executive officer at Professional Investment Services (PIS), believes advisers must place more focus on clients’ risk ap-petite in a bear market.

“It becomes increasingly important to make sure we’re looking at the cash flow of a client versus their debt levels – the whole risk profiling exercise

goes up to an even higher priority,” he says.PIS will also run more than 1500 client

updates in the six-month period from January 1 to June 30.

“We provide a lot of our own speakers, as well as fund manager speakers, and we work vigorously at getting our advisers to get their clients in to keep them informed and up-to-date with everything that’s happening,” Bennetts says.

Much of the support MLC is providing for planners within its network is par for the course. However, Miller says lately the group has been digging deeper to identify the value drivers behind clients’ goals.

Recent workshops have aimed to help advis-ers understand those value drivers and therefore prioritise the clients’ financial goals.

“One of the value drivers could be that [a cli-ent’s] parents passed away and never had a chance for retirement; therefore if you’ve gone through all of the goals and said ‘I don’t think I can achieve them all’, you can see that retirement goal is very strong because of the driver behind it,” Miller explains.

“They’re the type of things we’re going through now to make sure that advisers in their conversa-tions are engaging the client in what’s important to them.”

While those conversations continue to focus on the long-term strategic goals of the client, the bear market does have implications for asset allocation, particularly for new money being deployed.

Dealer group heads point to rising interest in cash vehicles, such as term deposits and cash man-agement funds, as clients reassess their investment options.

cOVER StORY

15

Practices that are struggling in the

bear market are failing to put their

clientsfirst,accordingtoDavid

Fox,principalofAdviceCentre

Consulting(ACC).

Foxsayssomefinancialplanning

practices are too highly dependent

on placement of assets and are not

putting enough focus on the prior-

ityadviceneedsoftheirclients.

“Inmyviewthereasonstheir

revenuegrowthwouldstop,slow

or decline in this market is they are

veryproduct-focused,theirpricing

is linked to the market, perfor-

manceorassetsunderadvice,

andtheyhaven’tgotanofferthat’s

goingtoattractnewclientsinthis

market,”hesays.

“Yet really, clients need more ad-

viceinthisenvironmentthanthey

doinabullmarketenvironment.

Businesseswhohaveahighlevel

of client centricity and make their

decisions from the client up instead

ofthebusinessdowndonothave

anynegativeimpactontheirbusi-

nessinthistypeofmarket.”

AccordingtoFox,mostbusinesses

genuinelybelievetheyareclient-

centric,howeverthemajorityare

not.

Aclient-centricbusinessunder-

standstheadviceneedsofits

clients, designs an offering around

thespecificneedsofeachofits

target markets and then positions

theoffersoitdetailshowtheclient

willbenefitfromwhatthepractice

does,hesays.

“Assoonasanadvicebusiness

getsanoffertogetherthatshows

thattheyunderstandwhatthe

adviceneedsoftheclientare

and is centred around the client,

theywon’tbeabletoservicethe

number of clients knocking on their

door,”Foxsays.

“Most of them are positioning their

offer like they’re selling minestrone

soup in the middle of the Sahara

Desert;it’snotveryattractiveand

they’vegottomovethatminestro-

neintoareallycolddrink.”

Although businesses promote a

rangeofservices,includingnews-

letters and seminars, as part of

theirserviceoffering,Foxbelieves

itistheadviceitselfthatprovides

truevaluefortheclient.

“There’snotagreatdealofservice

otherthanadvicethatclientsare

lookingfor,”hesays.

“In most cases, all the other

servicesarepromotedtotryto

justify the fee that’s being charged

onanongoingbasis.Clientsdon’t

valuethemagreatdeal,butthey

dovaluesomeonelookingafter

theirbestinterestsandproviding

theongoingadvicetothem.The

adviceinthisenvironmentthatis

mostvaluabletoaclientisshow-

ingthemwheretheyareandwhat

impactthisenvironmentwillhave

onthemachievingwhat’simpor-

tanttotheminthefuture.”

Box 1: Is your business client-centric? ‘The client can see that they’re being given objective advice around what is the right strategy’

cOVER StORY

“Some clients are holding their investments in cash whilst they’re determining when they may change their asset allocation,” says Guggenheimer.

“But for those that have already put their plan in place, we’re not seeing a lot of movement in the short term.”

Securitor recently introduced term deposits to its master trust and eWRAP platform in response to the trend.

“While the advisers have been watching this volatile market movement which is trending up and down 100 points week in and week out, they’re moving to cash and fixed interest investments, so we’ve seen a significant increase in the use of term deposits,” Wilson says.

He says advisers need to ask themselves whether their client’s risk profile and investment time horizon has changed, and if neither has, then there’s no need to change investment profile.

“What often happens in periods of bear mar-kets is that people follow a flight to conservative and known investments, so in terms of fund man-ager selection, although we won’t be changing our directions, it wouldn’t surprise me if advisers take a more conservative approach over the next 12 to 18 months and tend to select fund managers that have a long track record within them, and certainly try to seek out fund managers with consistency of performance and consistency of sticking to their style,” he adds.

Pease says the big issue now for advisers when structuring portfolios is Australia versus global.

While Australia was the best performer of the developed sharemarkets between 2003 and 2007, the subprime crisis has moved the goal posts.

“The problem for advisers, and what’s left cli-ents scratching their heads, is why when Australia

is so far away from the centre of the subprime storm, did our sharemarket get smacked so hard? If you can understand that then it tells you a bit about what the outlook might be going forward,” Pease says.

Going forward, he says it’s hard to be pessimis-tic about the Australian sharemarket.

For one, the Australian market’s price/earnings ratio is the lowest it’s been since the mid-1990s, so in absolute terms it appears to be good value.

Secondly, with about $30 billion pouring into the equity market annually from superannuation, and the Future Fund building up its equities expo-sure, there is a decent supply/demand imbalance, Pease says, not to mention the continuing com-modities boom.

However, when compared with global markets, particularly the US, the picture is not so rosy.

“The US has a lot of pessimism priced in, an exchange rate that’s fallen 25 per cent from its peak, and a Fed that’s committed to boosting growth,” Pease says.

“The Australian market is still trading rela-tively high compared to global markets, it’s got an exchange rate at 20-year highs and a central bank that’s committed to slowing down the domestic economy, so you’d have to think that in the next equity market upswing, having been one of the best performers, Australia could lag the global rebound.”

He adds: “Advisers should be looking at their clients’ portfolios and saying ‘Have they got too much exposure to local shares and not enough to global?’ and if the answer is yes, if they don’t think their portfolios are properly diversified, this is a very good valuation entry point to restructure their portfolios to be more diversified and to build up a good long-term global equity market exposure.”

16

‘Advisers in their conversations are engaging the client in what’s important to them’

REGULAtORS

A strategic review by the Australian Securities and Investments Commission

(ASIC) has sparked a significant overhaul of the in-vestments regulator at a structural level and better positioned it to work closely with industry on the challenges facing the financial services sector.

Among the key changes, ASIC will abolish the four current “silo” directorates and replace them with 17 outwardly-focused stakeholder teams, one focusing on financial advisers.

The commission will also appoint an external advisory panel to advise it on market developments and potential systemic issues.

Jo-Anne Bloch, chief executive officer of the Financial Planning Association of Australia (FPA), hopes the reforms will help ASIC to get to the root of the problems within financial planning more quickly.

“We’re hoping this much closer interaction with the financial planning community will enable us to collectively define what the problems are, prioritise them and make sure ASIC’s focus is at the high end of the risk parameter where there are some real problems rather than focus on things that might be a problem but are not as high up in the order of things,” she says.

Bloch highlights “inconsistent policy and direc-tion” as one of the issues that’s dogged ASIC in the past.

“One of the criticisms we’ve had about ASIC is they tend to put out a consultation paper and only then consult the industry, which means they don’t always get the nature of the problem right,” she adds.

She believes the UK’s Financial Services Au-thority (FSA) has been better at working with the industry to identify challenges and then consulting on possible action.

ASIC has come under heavy scrutiny over the

way it has dealt with the collapse of margin lenders such as Opes Prime and property giant Westpoint.

Bloch says the focus should be on prevention, rather than cure.

“Westpoint has been significant, yet it seems to be dragging on forever and it seems that the very people who were perpetrating the problems are not necessarily being dealt with, as complex as that may be,” she says.

“I think we need a better prevention radar, which is clearly what [ASIC] is looking to do; so making sure we’re getting involved before the crisis rather than after.”

Announcing the outcome of the review in early May, chairman Tony D’Aloisio said it would bring ASIC closer to the market.

“We will be more accessible and flexible, and we will be able to take emerging trends into account more quickly,” he said.

“For ASIC to move from good to really good or superior, we need clearer priorities and credentials and skills which are as good or better than the pro-fessionals who advise the so-called big end of town.”

Other reforms include additional investment in market research and analysis; more resources directed to the supervision of brokers and interme-

diaries; and a better balance between national and regional initiatives.

ASIC’s review has been broadly welcomed by both industry and government.

Nick Sherry, Minister for Superannuation and Corporate Law, heralds the changes as better plac-ing the regulator to deal with the challenges thrown its way.

“I believe the important operational reforms… will bring its activities closer to the market, making it more flexible and better positioned to manage current and emerging issues and to robustly enforce the law,” he says.

The Investment and Financial Services Associa-tion (IFSA) expressed a similar sentiment.

“IFSA is supportive of the changes which over-all will lead to greater understanding of industry stakeholders,” says John O’Shaughnessy, deputy chief executive officer.

“We believe that these measures will produce better outcomes for both industry and consumers.”

A spokesperson for ASIC says consultation has commenced with industry groups to decide the composition of the external advisory panel.

Bloch says the FPA plans to talk to D’Aloisio about what representation the commission is look-ing for.

“Obviously we would put ourselves forward but it’s a question of whether they’re looking for asso-ciation and broad input or individual and business input, and that’s not clear at this point,” she says.

The new arrangements took effect from early May, and will be fully implemented during the next four months.

Accessibility and flexibility ASIC’s new bywordsthe regulator wants to get closer to the industry so it can govern it more effectively, writes kristen paech

17

‘The important operational reforms will bring its activities closer to the market’

PLANNER PROFILE

In 1977 Rod Stewart, Abba and The Electric Light Orchestra were atop the

music charts. The big movies of the day in-cluded Star Wars, Saturday Night Fever and The Spy Who Loved Me. And a financial planning firm called KAR Investments opened for busi-ness in Sydney.

Dennis Bashford traces his involvement in the financial planning industry back more than 30 years, to the establishment of KAR. Since then, he’s seen a few changes in the industry around him.

He says the biggest change has been “in the level of professionalism - it has moved from being a sales- and product-driven industry into a profession”.

Today Bashford is at the helm of the Brisbane-based Futuro Financial Services. It’s been through two distinct phases of develop-ment. The first, two-year phase saw it grow to 14 planners with $85 million of funds under advice (FUA). But in the two years or so since then, it’s grown to now have 70 planners in 40 offices, and FUA nudging $1.5 billion.

Bashford says that what has changed, and underpinned its more recent rapid growth, is the ability to attract “big hitters” to the group – planners who started their careers and found success with institutional financial planning groups, but who want to strike out on their own.

Integral to this success has been the devel-opment of a system of generating referrals. It’s not uncommon for financial planning firms to have informal links with other professional firms, but Bashford says Futuro has developed a system that puts the relationship on a formal, business-based footing.

Bashford says that when Futuro embarked on its expansion plans, it surveyed planners in-side institutions to learn what their three main concerns were about.

“The first was where they are going to get their clients from,” Bashford says.

“The second thing, they want to have a good idea of how much money they are going to make in that first, pretty difficult two-year period.

“And the third one was the amount of money it was going to cost them to set them-selves up in private practice.”

Being able to accurately answer all three questions meant the recruiting task became easier. Bashford expects to have 85 planners in place by the end of the year.

Recruiting planners from institutions isn’t difficult, now that Futuro can answer their main concerns and has a track record. While an institution might be an ideal place to learn the ropes, he says many planners eventually come to regard the working environment as dissatisfy-ing.

In the driver’s seatthirty years in the business has helped dennis Bashford learn what

works, and what doesn’t. simon hoyle reports

18

PLANNER PROFILE

19

Pho

togr

aph

of D

enni

s B

ashf

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by

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r.

“I think there’s a great conflict involved in institutionally-owned financial planning firms, because their focus is on product,” Bashford says.

“As soon as they have got the client or got their money, there’s not that much interest any more.

“For a financial planner, the fiscal value is in looking after the clients year on year; the fiscal value is what you make year on year. And you only make money by looking after the people you have got.”

It seemed obvious to Bashford and his co-founding partner, Paul Kelly, that the institutions might be fertile recruiting grounds. But it wasn’t until they knew what the institutional planners’ concerns were, and how to address them, that things started to move.

“But just to preface what I’m about to say, one of the problems with an institution is, because of the way things are structured, and the way employed planners are managed, they have very little opportunity to actually look after and [give] ongoing care to the client.

“So when we started out five years ago we had a hard look at where we were going to recruit from. When you are building a new business, with a clean sheet of paper, you are not going to get the big hitters. The institutional planners who you want to recruit are the big ones, and they’re earning $150,000 to $200,000 a year.

“But at the end of the day they put their lunch-box in their briefcase and they go home. A number of planners in that situation are very dissatisfied with their lot. A lot of that relates to the fact that they want to look after their clients.”

Bashford says it has been critical that the rela-tionship Futuro planners have with other profes-sional firms be placed on a firm business footing. So before any deal is struck, the potential relationship is analysed very carefully.

“When it’s done like that, everyone knows what the deal is,” he says. “We go into a relationship with specific objectives, in terms of the dollars we want to make.

“Some of the planners [we recruit] from insti-tutions have relationships with accountants. We survey [those relationships] and we say, this is what has to be done to maximise the value. It puts your relationship on a much more professional basis. One of the problems with a casual relationship is you end up walking into their office, cap in hand, and say: ‘Jeez, mate, there must be someone you can

refer me to’.“The business has gone very well. Where we are

now is where we intended to be if you’d looked at our strategic plan before the business kicked off.”

In fact, Bashford says not much has taken place in the past five years or so that has been unex-pected.

“We’re probably one of the few financial plan-ning practices that’s run by professional busi-nessmen – and not too much has happened by accident,” he says.

“The infrastructure for referral business isn’t rocket science, but it’s not something that many of our competitors have done.”

Although Bashford was licensed as an adviser up until 1999, he had already stepped back from face-to-face dealings with clients, settling instead into a business management role, honing his abil-ity to creating an environment where practising planners can flourish, and building the support structures they need to do their jobs efficiently.

“We’ve chosen to make sure we maximise the value for the people involved in the business,” he says. “That means we all do the stuff we’re good at. If you put me in charge of paying the planners, it would be the biggest shitfight of all time, instantly.”

Bashford says a reliable referral model and a tightly managed business have meant the group has begun to attract to its ranks some larger and profit-able firms. He says there has also been significant investment in practice development. Between 2005-06 and 2006-7, Futuro advisers increased revenue by between 50 and 100 per cent.

Most Futuro practices charge clients based on funds under advice. While it’s not quite as pure a model as some would like to see planners adopt, Bashford says “there’s no fiscal value in using [say]

BT against AMP”.Another aspect of the business that Bashford

says was very closely researched was which plat-forms to use.

“Almost exactly this time a year ago we under-took a very extensive survey, which had a look at some of the platforms that were around,” he says.

“The information we collected was in much greater depth than is available from normal re-search houses.

“We drew up a short-list of six [and] sent a team of planners into the various offices, and they picked three.

“They spent a day in each of the six offices. The survey they were undertaking then wasn’t just related to the obvious and hard data, but [was also] looking at administration, morale, the way people were promoted, the longevity of employment of the key people.”

From that process, Futuro settled on three platform providers: NetWealth, Aviva and BT. However, Futuro advisers are not precluded from using other platforms – for example, if they already have a relationship with a platform provider.

“One platform cannot properly cover the requirements of all investors, and while [selecting] three goes a significant way towards doing so, there are still gaps,” Bashford says.

“This is the reason why the other platforms have not been culled and why disincentives are not in place to discourage planners from using them. It also reinforces our market positioning as an inde-pendently owned licensee who is more interested in providing clients with strategic advice rather than promoting a particular brand.”

Bashford says the management of Futuro is focused on helping planners grow their businesses – “We are not interested in having anyone on board who doesn’t have aggressive aspirations for the growth of their business,” he says – and making sure the management team remains close to its planners.

“We have an impressive track record of growing our planners’ businesses,” he says.

“Our recruiting is very selective so we have a network of like-minded individuals who actually like each other. It means that our planners operate in an environment that sees us with the closest, happiest and most interactive network in the country.”

PLANNER PROFILE

Name: Dennis Bashford

Position: Managing director, Futuro Financial Services, Brisbane (since 2002)

Yearsinfinancialservices:31

Qualifications:Accountant

experience: Involved in financial planning industry since the late 70s; on management side of the industry since 1987. Built and sold three financial planning businesses over the past 20 years

20

Consumer confidence in the financial markets has taken a battering in recent

months, and deservedly so. Bad US economic news; extreme sharemarket

volatility; the collapse of high-profile margin lend-ers, such as Opes Prime and Lift Capital; and seven consecutive interest rate rises since May 2006 have together pushed confidence levels to their lowest since 1993.

The Roy Morgan Consumer Confidence Rating was down 9.4 points in April to 100.1, a massive 24.2 points below the April 2007 rating of 124.3.

According to the research, only 25 per cent of Australians (down 7 per cent from March and 22 per cent from December) expect “good” domestic economic conditions in the next year – the lowest since March 2003.

Some 37 per cent (up 7 per cent) expect “bad” economic conditions in the next 12 months, while 26 per cent expect “some good, some bad” and 12 per cent are undecided.

In addition, brandmanagement’s first quarter Investor Sentiment Index shows investors are negative in their views about the domestic economy, international and local equities and property.

It is the first time attitudes towards global equi-ties have gone into negative territory since the index began, while the reading for domestic equities is the lowest of the series.

Waning confidence and concern over short-term portfolio movements is to be expected during these turbulent times.

However, the difference between this bear mar-ket and previous bear markets, according to Wayne Wilson, general manager, distribution and sales at Asgard, is investors’ response to the turmoil.

“In previous bear markets, a number of advisers’ clients withdrew their money, and that had a lot to do with the fact that people tended to sell on the performance of the underlying fund managers

rather than the inherent strategy of the financial advice,” he says.

“Thankfully in the last five or six years clients have become more persuaded by the quality of the advice they’re getting and less compelled by the underlying performance of managers.

“Importantly, they understand it’s the tax impli-cations of both entry and exit into superannuation that are the key in helping them in their long-term

savings strategy and, as such, the conversations that planners are having at the moment are not about trying to stop people from exiting, because they are not asking to exit, they are just seeking reassur-ance that this is a normal part of market behaviour, which it is.”

A recent internal survey of the planners in Securitor’s network listed the financial market outlook and portfolio volatility among the top con-

cerns of clients in the six months to March. Based on feedback from their clients, planners

ranked the impact of market volatility on their investments (79.5 per cent), uncertainty about the future direction of market movements (60.2 per cent), and concern about the reduction in value of their investment portfolio (58.5 per cent) as the issues most raised by clients.

Clients also expressed concern about the adequacy of their investments to fund their retire-ment (49.9 per cent), adequacy of their investment strategy (39 per cent), fees and charges (36.3 per cent) and adviser accessibility (26.2 per cent).

But despite their concerns over the markets, they appear to remain confident in their planners’ ability to help them reach their financial goals.

According to the survey, 70 per cent of client portfolios are unchanged in the face of volatility, and where changes have been made, 80 per cent were initiated by the planners themselves.

“Advisers are also telling us that more than 30 per cent of their clients remain positive about their financial situation and another 30 per cent or so are not so worried,” says Geoff Lloyd, chief executive officer of Asgard.

Marianne Perkovic, chief executive officer of Count Financial, agrees clients are sticking to their long-term strategy.

And Australia’s compulsory superannuation system will continue to drive investment in the industry, she adds.

“Being an accounting-based financial planning firm, a lot of our clients have gone through a bear market before, so they’ve been educated about market cycles and more consumers understand the dynamics of the market,” Perkovic says.

“What we’re seeing is not people pulling out but perhaps just being a little more cautious and reverting to dollar cost averaging to stay in the market.”

Accentuating the positive kristen paech writes that investor confidence is waning, but they’re hanging in there

cONSUMER INSIGHt

21

cLIENt cASE StUDY

cLIENt cASE StUDY

A middle groundplanning a couple’s investment strategy often means taking two very different

risk tolerances and profiles into account, as mark story reports

When it comes to financial matters, Sydneysiders James and Jenny Pittar

are the quintessential odd couple. While Jenny has a moderate appetite for risk, James - who works for the tax office - would prefer to shove their savings under the mattress. When they met, Jenny, who’d dabbled in equities and property investments, owned her own apartment. Meanwhile, James was sitting on a mountain of dormant UK-based direct equities that had done little since he inherited them 10 years earlier.

While Jenny knew a thing or two about invest-ing, she lacked the discipline to do anything about it. That’s one of many reasons why she approached friend, and financial adviser, Lisa Faddy to find an investment middle ground comprising capital protection and growth upside.

LIFE-cHANGING DEcISIONS

Armed with a balance sheet and no specific idea of what the couple wanted to achieve, Jenny gave Faddy an open-ended brief to improve their financial situation. What also drove Jenny to seek financial advice was her growing dissatisfaction with their financial set-up.

It seemed incongruous to Jenny that selling her apartment to fund an $800,000 house should leave them $600,000 in debt when they had this languishing war chest in the UK.

“We always knew that we could bail ourselves out using the UK shares, but we had little idea of when or how it should be done,” Jenny says.

The decision to start a family, relatively late in

life (at 41), also meant they would have to reassess their income while Jenny took 12 months’ mater-nity leave from her job in IT consulting and James became the sole bread-winner.

Jenny was also keen to ensure that if anything happened to her, James - who’d been blind since his teens - would have sufficient income to look after himself and their daughter, Annica, who’s now a year old. She also wanted to ensure James would be able to continue his charity work as a marathon swimmer.

REFINANcE AND DIVERSIFY

Having assessed their financial situation, Faddy’s first mission was to bring the UK-based shares into Australia. Not only would that address their high debt level, it would also remove the risk of negative foreign exchange volatility.

“Given market and exchange rate movements, they would have lost a lot of money over the last year had they not made the change,” Faddy says.

But instead of bringing the shares down in one lump sum, Faddy recommended that the Pittars spread the CGT hit over two years. This meant selling shares with the least capital gains tax (CGT) late June and those with the most CGT early in the new tax year.

Funds from the shares were put aside to pay tax bills, and reduce the non-tax-deductible debt on the mortgage to $50,000. Some of the proceeds from the shares were also paid to the Pittars to top up cash flow while Jenny was on maternity leave. Faddy managed to achieve an annual tax saving

Photograph of James and Jenny Pittar by Marco Palmero. 23

of around $16,000 for the Pittars and, overall, $25,000 and $65,000 were redeemed for income needs in late 2007 and 2008 respectively.

MORE DEBt

To maximise the Pittars’ earning power, Faddy recommended taking out an investment loan to establish a diversified investment portfolio. Interest on the loan would be tax-deductible, as the loan was being used to produce taxable income via divi-dends and managed fund distributions.

While the Pittars had the capacity to borrow up to $550,000, they only felt comfortable drawing down around $350,000.

“Lisa recommended drawing down more, but

we didn’t want to be too close to the edge on repay-ments,” Jenny says. “With interest rates up around 7.5 per cent, we were keen to use extra cash flow to reduce the size of our overall loan.”

Having substantially reduced the debt on the home loan, Faddy proceeded over a few months to establish a $335,000 diversified investment portfo-lio of wholesale managed funds using BT Wrap as the administrators. Faddy recommended managed funds over direct shares for the diversification they provide. While index funds are a core part of the portfolio, active funds also provide greater growth upside.

Meanwhile, the $100,000 that Jenny held across six super funds was consolidated into her company fund with Colonial First State’s FirstChoice.

“Had Jenny and James been 20 years older, tipping proceeds from shares into super may have been an option. But I wanted to provide a vehicle that would maximise their gearing potential, and still provide the flexibility to use those funds prior to retirement,” Faddy says.

Given the Pittars’ limited appetite for risk and their ongoing cash-flow requirements, Faddy also recommended two $200,000, 100 per cent capital protected investments: Macquarie Fusion, and HFA Octane Asia.

Faddy also steered the Pittars into two, five-year direct property syndicates that would pay tax-deferred income while providing longer-term capital growth.

PROtEctION

The next step was to review the Pittars’ insurance requirements and ongoing super fund contributions. As Jenny had always been the family’s primary bread-winner, it was decided to increase her life insurance cover to $600,000 within her company super fund, and to take out trauma insurance (with MLC) that would pay $4800 per month if anything happened to her. They also took out an income protection policy for James (also with MLC) that would pay $3000 per month, if needed. His life insurance cover was also increased through his PSS staff super fund. Both James and Jenny also increased their super fund contributions to maximise co-contribution benefits.

PERFORMANcE

Since joining forces with Faddy, the Pittars’ portfolio is up around 8 per cent (less dividends) - and considering the 25 per cent equity market fall

cLIENt cASE StUDY

24

PORTFOliO SNaPShOT JameS aNd JeNNY PiTTaR

managed fundsBT Wrap: Now valued at $265,000. Diversi-fied investment portfolio of wholesale man-aged funds. Distributions taken in cash.

Capital protected investmentsMacquarie Fusion: Total annual cost, $18,700HFA Octane Asia: Total annual cost, $16,000

Personal superJenny: Colonial First State. Increased con-tributions to capitalise on government co-contribution scheme. Around $100,000.James: A defined benefit, PSS Fund. In-creased salary sacrifice by 3 per cent.

direct property syndicatesCentro MCS: $40,000.Trilogy Medilink Property Income Syndi-cate: $25,000.

PropertyRental: Part share in a Jindabyne unit deliv-ering nominal income.

insurance coverJenny: Life insurance: Increased within su-per fund to $600,000.Jenny: Life insurance and trauma policy ($4800 per month), MLC.James: Income protection policy ($3000 per month), MLC. Payable for five years (after 30-day waiting period).James: Also increased life cover within his PSS super.

The PlaNNeRlisa Faddy

Majella Wealth AdvisersNeutral Bay, NSW

Faddy holds a Bachelor of Commerce and Law from the University of NSW, a Graduate Diploma of Applied Finance from the Securities Institute, an MBA (Executive) from the Australian Graduate School of Management, and is a Certified Financial Planner. A former authorised representative of Godfrey Pembroke, she co-founded Majella Wealth Advisers in 2002 with business partner Joanna McCreery.

advice structure Majella charges a percentage of funds under advice (on the Pittars’ BT Wrap portfolio) based on the amount of work undertaken. By rebating back to the Pittars as many of the entry fees as possible on the property syndicates and capital protected funds, they paid no entry fees or were given additional units.

history Faddy was a long-standing friend of the Pittars who had known James since her school days. Their decision to seek financial advice for the first time was triggered by plans to implement several life-altering events – notably plans to start a family. Temporarily going from two salaries to one also raised income protection issues. Reduced income also placed closer scrutiny on a sizable offshore share inheritance that had been treading water for almost a decade.

Strategy Faddy’s recommendations revolved around restructuring and diversifying a significant basket of under-utilised assets to deliver the best, tax-efficient outcome, and improving insurance protection to ensure they could maintain their lifestyle in the event of injury or death. “I also wanted them to maintain tax- effectiveness through use of some index-based funds, tax-deferred distributions from property syndicates, and tax deductions from interest used to purchase income-earning investments,” says Faddy.

Typically considered overconfident and overpaid, Generation Y has a reputation

for asking for the world and offering little in return. They aspire to run their own business – but

balk at the thought of a 40-hour week. They expect training, cash bonuses and other

perks as part of their employment package, yet wouldn’t hesitate to leave a job after as little as one year.

But while their attitudes and values might be at odds with their Baby Boomer parents, Generation Y is the future of the workforce and is soon to be the lifeblood of financial planning firms.

Bernard Salt, partner at KPMG and com-mentator on consumer, cultural and demographic trends, says financial planners must establish a connection with the Baby Boomers’ Gen Y kids or risk being left behind.

Gen Y – broadly defined as those born between 1978 and 1994 – will inherit Baby Boomer wealth and should be a major focus of the planning indus-try over the next five years, he adds.

“You have a relationship established over 30 years with Baby Boomers as parents, you need to establish a relationship with Generation Y,” Salt told planners at the Securitor convention in Auck-land in late April.

“The financial services industry is starting to wake up to the fact that the Baby Boomer opportu-nity ends at the end of the decade and if you don’t move now as a financial planner or business you’ll be wrong-footed and out of sync with the market in five to 10 years.”

Salt says while the bulk of funds under advice belongs to Baby Boomers, this will change immi-nently as this older generation moves into retire-ment and eventually dies off.

He also quoted unpublished data from the

2006 Census, which revealed the average income per person aged 15 to 100 typically rises through their 20s and 30s and peaks between the age of 45 and 49.

Contrast this with the 1986 Census, which found wealth peaked at between 39 and 44 years

over the first quarter of 2008, they aren’t complain-ing.

Having successfully restructured their finances and provided the needed cash-flow to see them through Jenny’s maternity leave, Faddy is now tak-ing a watching brief on their investment strategy going forward.

While the fall-out from the subprime melt-down has dragged down overall portfolio per-formance, Faddy says there’s no need for a major strategic re-think. As long-term investors, she says it’s more important that their investment strategy is sufficiently flexible to cater for any planned or unexpected lifestyle changes.

While the Pittars are contemplating having another child, self-employment for Jenny is also on the horizon. Over the next two months she’s plan-ning to transition from her current role into her own book-keeping business. “I’m currently doing a Masters in Accounting and eventually plan to have book-keepers working under me,” Jenny says.

“I will no doubt be calling on Lisa’s expertise to work out how much I should be paying myself, and increase super contributions to reduce tax.”

HINDSIGHt

To Jenny, the decision to pay a fee for financial advice - rather than commissions - was fashioned somewhat by her parents. They’d successfully convinced her that people who paid a fee were better off.

She was also attracted to the range of products that Faddy was able to offer. “I was also encouraged by Majella’s client-base, as many of them weren’t too dissimilar to James and me,” says Jenny.

In hindsight Jenny wishes she and James had sought professional advice years earlier - especially when it came to the festering UK-based stocks. What she regrets most is not having more specific investment goals when they first engaged Faddy. “I realise now how useful it is to have a well defined idea of what you want your money to do for you, before you engage professional advice,” Jenny says.

“The more you know, the more an adviser can gear their advice to you.”

Why not Gen Y?

NEW MARKEtS

they can be a pain, but gen y could also prove to be lucrative clients,

writes kristen paech

25

NEIL YOUNGER

‘Gen Y will inherit Baby Boomer wealth, and should be a focus of the planning industry over the next five years’

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of age, and it’s clear that the wealth accumulation phase is broadening.

“The peak average income age is migrating slowly to the right,” Salt says.

“At this age, you should have surplus funds which you invest and then later draw down. This is important information if you’re trying to sell finan-cial services product to people at their peak wealth.”

Data from Morningstar also supports the need for a shift in focus from boomers to their children.

According to Morningstar’s Market Share Report for December 2007, more than $1.4 billion went into BT’s SuperWrap pension product in the December quarter - double the flows into the investment wrap option ($600 million).

“Pension application volumes doubled in the second half of 2007 to a high of 1400 in Septem-ber while internal transfers from accumulation to pension products quadrupled from around 400 to 1800 in August 2007,” says Chris Freeman, BT’s head of wrap solutions.

These figures reflect take-up of transition-to-retirement opportunities and tax-free super over

the age of 60, and indicate boomers will begin to draw down their savings shortly.

According to Salt, the best way for planners to engage with Gen Y is through their parents.

“There is an opportunity for events where par-ents bring their kids along to meet with planners,” he says.

“Parents will be susceptible to long-term sav-ings plans for their kids; any parent would welcome an opportunity to talk about long-term financial goals with a professional and with their kids in tow.”

The hook is the need of the boomer generation to progress succession planning, he adds.

“Succession planning could mean bringing the kids into the business, engaging them as executives of their will, estate planning – a whole range of issues,” Salt says.

“It’s been easy with the boomers to singularly focus on one generation, and if you’ve focused on the Baby Boomers you’ve probably done well, but that won’t be there in future.

“You need to be a generalist, dancing between clients, and you need to talk across client segments.

Planners in the past only needed to focus on one segment, now they need to focus on multiple seg-ments. People that do that will thrive.”

However, a recent KPMG survey on attitudes towards financial planning from Gen Y revealed this technologically-savvy and socially-aware gen-eration has very different aspirations from those of their parents.

NEW MARKEtS

‘If you’ve focused on the Baby Boomers you’ve probably done well, but that won’t be there in future’

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Gen Y typically desires access to the housing market, travel and education experiences, control over their investments and a “flight path” to wealth, Salt says.

This calls for a “sexy, funky Generation Y web-site” and requires planners to tailor communica-tions and services to suit the investment needs and goals of this “here and now” generation, he adds.

“They are not a set and forget generation, they want to tinker and change their investments,” Salt says.

Neil Younger, head of advice business solutions at Securitor, agrees the key issue for Securitor’s planning practices as their client bases get older is the ability to connect to the younger generation.

“The reality is that you will get a new genera-tion of clients,” he says.

“The pre-retirees and the wealth accumulators have different needs; they have needs around debt – they’ve got mortgages, they have different needs around risk because they’ve generally got families and have to protect their incomes and their lives, so the conversations and solutions are different to

what they are for a pre-retiree or retiree market.”He adds: “A lot of [what Securitor is doing

to position itself ] is about providing the equip-ment and tools to give advice to that segment of the market. Generally, the industry is focused on pre-retirees and retirees, and that’s not to say we won’t continue to provide solutions to that segment of the market, but there’s a growing segment of the market that needs a broad proposition. There are kids of the parents that are retirees today, and [planners] have to work through the process of engaging that next generation.”

Justin Wood, head of strategic solutions and client advisory group at Barclays Global Investors, says financial planners should be aware that a low level of financial assets does not equate with low net worth for generation X and Y.

Human capital – the stock of productive skills and technical knowledge embodied in labour – reflects the present value of future income earning potential, he says.

It is far greater during an individual’s youth, making Gen Y a lucrative target for financial plan-

ners. “Thinking about clients with higher financial

assets will push you towards older people,” he told planners at the Securitor convention.

“But younger people have more human capital, which will translate into wealth.” Putting a value on human capital will motivate the need for death and disability insurance, and has implications for an individual’s asset mix, he says.

Human capital also motivates the need for lifetime financial advice, including lifetime spend-ing and saving, superannuation contributions and advice on managing human capital as an asset.

Wood believes the number of Australians seeking advice is set to grow dramatically, the main triggers being retirement, selling or starting a busi-ness and receiving an inheritance.

“You’re in a great position, your businesses will grow,” he told planners.

“Demographic changes are driving a growth in assets and demand for advice.”

Kristen Paech attended the convention in Auckland as a guest of Securitor.

NEW MARKEtS

The Financial Planning Association of Australia (FPA) has called for uniform

qualifications and competency standards for any-one who advises on the setting up and running of self-managed superannuation funds (SMSFs).

The FPA’s call, contained in a submission to a review of SMSF governance, is echoed by the Association of Superannuation Funds of Australia (ASFA), also in a submission to the review.

The review, announced in February by the Min-ister for Superannuation and Corporate Law, Sena-tor Nick Sherry, aims to “ensure that trustees, and potential trustees, are aware of the risks involved and [are] provided [with] the skills necessary to run a superannuation fund in a prudent fashion”.

The FPA says the aim of any overhaul of SMSF regulation should be to ensure that SMSF members may be confident of receiving comprehen-sive and competent advice on their fund, regardless of where they go to get that advice.

The FPA says a removal of the exemption that accountants receive under the Financial Services Reform (FSR) Act, is a vital step in the process. The FPA says that accountants can currently give limited advice on SMSFs without having to obtain appropriate financial planning competence and qualifications.

“It’s about a level playing field,” says Jo-Anne Bloch, chief executive of the FPA.

“What we’re saying is that if people are going to get advice, they should be getting it from someone who has a minimum level of qualification.

“Professional designation certainly doesn’t qualify [someone], and being an accountant doesn’t qualify [someone], either, because the business of financial planning is very different to the business of accounting.

“While we welcome accountants being financial planners, and it’s an obvious combination, it is a combination – it’s a separate skill set, not some-thing you would just dabble in.”

Bloch says uniform standards would help over-come the situation where an SMSF member gets advice on how to establish and structure a fund, but is then left to their own devices when it comes to establishing a sound investment policy, and imple-menting that policy.

“I think that you find there are a large number of self-managed super funds set up by accountants because they don’t frankly have any other options,” Bloch says.

“I think you find asset allocation in some cases may be as a result of inadequate advice, or no advice. So someone gets an SMSF set up, and then they’re on their own.

“When you look at some of the disasters that have befallen the investing public, they are at-tributable to unlicensed advisers and accountants – though that’s not to distract from the fact that financial planners have been involved.”

Lest accountants cry foul over the FPA’s ap-parent desire to pull them into line, Bloch says the FPA’s philosophy applies equally to its own mem-bers. She says financial planners must be properly and appropriately qualified for any and all advice and services they provide.

For example, “financial planners should only be providing tax advice on the basis that they are prop-erly qualified to do so”, Bloch says. “It’s no different.”

In its submission, the FPA says it “strongly support[s] a level playing field” in the area of advice provided to trustees.

“People who provide financial advice should have consistent, benchmarked standards irrespec-tive of their professional background,” it says.

“Only then can it be guaranteed that the advice provided to SMSF trustees is appropriate and of sufficient quality, and that clients have been pro-vided with comprehensive and relevant advice.

“It is essential that advice should meet the con-sistent requirements that operate within a uniform licensing regime.”

The FPA says the Australian Taxation Office remains the most appropriate body to regulate SMSFs; there should not be any “entry hurdles” to setting up an SMSF, such as fund size or the make-up of the fund’s assets; and SMSF trustees should themselves be subject to minimum educational standards.

ASFA says that 85 per cent of all new SMSFs are set up with “the help of tax agents or accoun-tants”.

“There exists ample anecdotal evidence that suggests a number of individuals are being con-vinced to establish an SMSF inappropriately,” it says.

ASFA recommends “the regulatory framework for any person providing a recommendation in rela-tion to the establishment of an SMSF or becoming a member of an SMSF be subject to Australian Financial Services Licence (AFSL) requirements”.

ASFA also says that trustees themselves should meet “certain knowledge and experience thresholds”.

“These thresholds should be embodied in a special licence, registration or certificate and should cover minimum financial literacy, investment and legal obligations,” ASFA says.

One law to rule them allthe fpa wants everyone who advises on smsfs to meet the same levels of competence and qualifications,

writes simon hoyle

28

‘Asset allocation in some cases may be as a result of inadequate advice, or no advice’

SELF-MANAGED SUPER

“There’s always someone worse off than you” is a phrase often used to offer

some kind of comfort to people facing difficult circumstances in life. Whether the miserable can be cheered up by contemplating the fate of the even less fortunate is a moot point.

The strategy could also backfire, as by the same logic, there’s always someone better off than you - an angst-compounding thought for those prone to such moods.

Despite the dangers of comparisons, however, humans are naturally curious about how they rank across almost every conceivable attribute next to the rest of mankind.

For the most part, people are happy to talk openly about where they may fit in the scale of things, but according to Wealth Benchmarks founder Doug Turek, when it comes to money they tend to be more circumspect.

“We don’t have conversations over the dinner table about money. It’s just not talked about,” Turek says. “We can’t tell the affluent from the wealthy.”

Which is where Wealth Benchmarks comes in. The internet-based system (which featured in the April edition of Professional Planner) has so far collated data from thousands of high net worth individuals who have, on condition of anonymity, supplied intimate details of their money and wealth habits.

Turek says more than 50,000 individuals have visited the website. Of those, 10 per cent claim to be worth more than $5 million, while two-thirds rate themselves as “millionaires”.

At a recent private banking conference in Syd-ney, Turek shared some of the findings of this rich database, contained in the company’s first Wealth Report.

He says the study aimed to create a profile of “who are the wealthy” as well as revealing some of their “secrets” and the products and services they used. The firm is currently collecting further

research on how and why the wealthy use financial advisers, which should be available later in the year.

The high net worth individuals who contribut-ed to the Wealth Benchmarks report also received feedback about where they fitted in compared to their peers, which was a powerful motivator, Turek says.

“I’ve come to understand it’s them [high net worth individuals] searching for another touch point to guide them through this very anxious money management world, where they’re not sure they’re going to trust even their most trusted adviser - who either works for an investment bank or a private bank,” he says.

“You always wonder about conflicts of interest or [whether] an individual adviser may have other motivations.”

While individuals might find the benchmarking useful, or at least interesting, Turek says the broad results also provide valuable insight for advisers to the wealthy.

The firm’s first batch of research, for instance, has added a quantitative layer to some of the intui-tive perceptions of who the wealthy are.

For example, the primary driver of wealth, not surprisingly, is age. The Wealth Benchmarks report shows that 40 per cent of those over 50 had $1 mil-lion in assets outside the home while only 10 per

cent of those at age 40 had achieved that goal. The age effect is even more pronounced at age

60, where 60 per cent of those surveyed reported over $1 million in wealth outside the family home.

Income is the second most influential driver of wealth, the report says. According to Turek, this factor really only comes into play as an indicator of long-term wealth creation when individuals earn over $500,000 per annum.

“Some people earn a lot, but waste a lot too,” he says. “It’s really only when people earn over $500,000 each year that they find it hard to spend more than they earn and so save more,” he says.

The Wealth Benchmarks report also shows that the builders of long-term wealth tend to be: male; married; professionals and managers; more edu-cated; investors; have offshore links (either through employment or foreign wealth); and self-employed.

“We found the self-employed were two-times wealthier than the employed but the range in wealth is very large - if you go looking for the self-employed clients you’d better find the successful ones,” Turek says.

The Wealth Benchmark research is an ongoing project but he says the data so far could prove use-ful to advisers, such as private bankers, who work with the high net worth investor.

“You can be a better adviser by relating indi-vidual behaviour to general patterns... you can be a much stronger influencer,” he says.

As well, Turek says private banks could also use the benchmarking methodology to make new staff seem more established and knowledgeable than they really are.

He says: “They can talk as if they’ve been in the industry 20 years, when they’re really sharing the statistics of thousands of others.”

Lifestyles of the rich and anonymousOne law to rule them alldavid chaplin reports that a new study of thousands of wealthy individuals has unearthed some facts even their

private bankers didn’t know

PRIVAtE BANKING

29

‘It’s really only when people earn over $500,000 they find it hard to spend more than they earn’

Reassuring clients takes hours minutes 1800 119 270www.fidelitytools.com.au

F I D 0 4 6 5 _ H P . p d f P a g e 1 1 8 / 1 / 0 8 , 1 2 : 3 7 P M

“We’ve educated our clients really well, we have had hardly any phone calls

in the last couple of months. Our revenues are very secure.”

The above is a regular response I get from most advisers when asked what they are doing differ-ently since markets turned last November. I reckon something is wrong with that response.

Really wrong. Many up-and-coming advisers in today’s

climate look back at the careers and experience of those they follow, or aspire to become. They figure these more experienced advisers have been around longer and therefore they should know what to do in these uncertain times. But it’s similar to my kids asking me for help regarding how to get songs onto their iPods off iTunes. I might suggest they would be better off asking their cousins or the 18-year-old next door. Just as the technology landscape has changed from anything I experienced, so too has the advice landscape.

Some experienced advisers will say they have seen these conditions before. They will say it’s all about the swings and roundabouts, concluding that it’s always been the way that you make good money in good times which has to sustain you in the harder times, like now.

What nonsense! These aren’t the reasonings of advisers but of product providers.

The marketing “pornography” camouflages product providers behind terms such as “holis-tic”, “wealth manager”, “fee-based” or one I heard yesterday from a die-hard old and bold: “concierge services provider”. Our clients do not know the dif-ference, because the terms are all designed to sound sexier than they really are.

It is easier to pick the differences between the product providers and advice providers in volatile times. In volatile times, product providers look for

defensive strategies, talk long-term, and hang on for the better times. Advice providers, on the other hand, come to the fore in volatile times in their role as their client’s financial firewall.

Advice providers have approached each client in a well-defined consultative process, far broader and deeper than a traditional fact-find that focuses on a client’s assets, liabilities, cash flows, and objectives - with a compliant and templated SoA popping out the back end.

What are the crucial elements upon which advice providers have built their clients’ financial firewalls?

The first is leadership. Product providers are not as interested in leading a client to a destination as they are in getting their transaction into place. Advice providers spend time, and are well paid, to understand what financial leadership their clients require to help them make the smartest possible decisions for them to achieve their desired financial outcomes.

The second element is direction. Advice provid-ers realise their clients don’t want any “financial surprises” and build a series of consultative meet-ings and reviews to ensure their clients are on track and only deviate from agreed plans after considered judgement. Advice providers make the phone calls to ensure their clients are still on track during times of volatility. Product providers, by contrast, wait for the phone to ring - which is similar to the usual response I get from many advisers right now. Many product providers do not really care if their clients do not turn up for their reviews and some even reckon their best clients are those that they never hear from.

The next element is capability. The only capa-bility a product provider can bring to a client is cen-tred on the products they can provide. For product providers, if there is no product provided, they are

not paid, so there is little interest. They might care, but not too much. For advice providers, they know how to get paid well for advice, therefore they can provide much more capability, many more options, and more choices to their clients - especially where there is no insurance, investment, debt or other product required in the short term.

A crucial element is obviously trust. Trust is not built on performance. Many product providers believe that, thanks to the performance of markets, they have won their clients’ trust. These people are confusing trust and rapport. Advisers build trust not on rapport, but on a consultative, high-contact relationship delivered by a team of committed people who want to help their selected clients make the smartest possible decisions regarding their fi-nancial future - whether there is a product attached to the solution or not.

One of the best tests for product providers is whether they can lift their fees when markets are not performing. Advice providers can and do because the basis of their fees is consultative-based, not product-based. If you think that means hourly rates, forget it. It is all about doing the job the clients need and want you to do.

After all, you’re a firewallin volatile times, you’re your client’s best protection, writes martin mulcare

Martin Mulcare is a consultant with Strategic Consulting & Training, and can be contacted at [email protected]

PRActIcE MANAGEMENt

Reassuring clients takes hours minutes 1800 119 270www.fidelitytools.com.au

F I D 0 4 6 5 _ H P . p d f P a g e 1 1 8 / 1 / 0 8 , 1 2 : 3 7 P M

PRActIcE MANAGEMENt

If there is one thing a financial planner wants to get right, it’s the financial plan. The obliga-

tion to the client and the dark shadow of a vengeful regulator keeps most of us on our toes.

That’s the way it is, and because many of us aren’t good at self-regulation and self-discipline, that’s the way it should be.

A few weeks ago I was asked by the team at Axa to talk to their annual conference of plan-ners at Hamilton Island. Yeah, I know what you’re thinking: Nice work, if you can get it. Well, it is a tough assignment, and someone has to put their hand up to do it. I am that man!

The job was to help these business owners and their key staff to improve their businesses or busi-ness performance. After 20-plus years of analysing and talking to the best in small and big business for my gig as small business editor for The Australian and my hosting of Talking Business on Qantas, there are those who think I might have an insight or 200.

In fact the best small business book I have ever read — 350 Ways to Grow Your Small Business, which just happens to have been written by yours truly – shows I know at least 350 innovations that

could help your business.I’d like to claim that I hate to be so self-promo-

tional, but you would know I am lying. In fact, as a former educator, I feel an obligation to blow my own trumpet. You see, small business people, and often professionals, are poor at marketing – partic-ularly inexpensive, direct marketing. And here’s the second lesson I’m teaching you: market the socks off your business.

You should think about ads on cars, ads on business cards and going to networking events with an actual plan. You might have learnt scripts for these events that are subtle ads that plant a seed that comes back to help you down the track.

You might be asking, what about the first les-son? I didn’t spell it out but I wonder if you picked it? The first and most important lesson comes in the title of the book — 350 Ways To Grow Your Small Business.

This was never going to be the title of the book but Harper Collins asked me if there was a way to get a number into the title because business books with numbers in their title sell really well.

As I always want to learn from experts in their field, I agreed and decided to analyse the 78 case

studies we had in the book to see what they did to make a difference and to get ahead of their rivals.

I thought I might have got a sexy title such as “33 Ways” or “66 Ways” but a whopping 350 ways turned up! And that became the lesson — no mat-ter how good you are at business there will always be other innovations or ways to grow your business.

I actually asked the planners at Hamilton Island if they were financial planners or business owners. The reason is, if you think of yourself only as a financial planner you could fail as a business owner. It will be hard to grow a business that suc-ceeds without you changing — the most important innovation. This will be a hard business to sell and a hard one to grow, especially as the old ways of this industry come under challenge in coming years.

Building a wonderful reputation and brand name has to be our number one goal and that will complement your aspirations to grow your busi-ness.

Over the past few years, I have built up Switzer Business Coaching, which now has eight coaches around the country, who deliver their coaching modules via telephone and the Internet.

And apart from showing businesses how they can create a business that is systematic, that elimi-nates problems and becomes a pleasure to work in, there is a major marketing lesson taught about the calibre of the message people like us put out there.

This message is our unique selling proposition or unique value proposition and it has to answer a key question that our marketing has to ask: Why should I buy from you?

As financial planners we must answer that question in our marketing for potential customers.

And here are two tips. First, it must show your uniqueness and it must be succinct. Second, it has to say who you are and what you stand for.

Thinking or strategising about your business is crucial to growing a great business. It is all about that wonderful cliché that has driven our business coaching — small business owners spend too much time working in their business and not enough time working on their business.

Peter Switzer is founder of Switzer Financial Services — www.switzer.com.au

Blow your own

trumpetno slouch himself,

peter switzer recommends

self-promotion

The importance of regularly seeking feedback from your clients can never be overestimated. This is true in any market conditions but

especially so in times of increased volatility and negative returns. So, if your clients truly are your most valuable asset, then why is it that over half of all Australian advisory practices have no structured approach to actively seeking feedback?

Given the tumultuous investment markets of late, why haven’t the 53 per cent of practices taken any action? Could it be:

• Principalsdon’tknowhowtoconstructandimplementa survey capability (or don’t know who can help them do it)?• Itsimplydoesn’trateashighlyasotherpressingworkpriorities?• Maybeitallgetsdowntocostattheendoftheday–cana practice afford the cost of implementing a client survey? • Possiblymanyprincipalsassumetheyalreadyknowwhat their clients think?• Perhaps“ignoranceisbliss”andsomeprincipalsjustdon’t want to know? These are all commonly expressed reasons and (except for the last one), all

have some degree of validity. However the following table clearly demonstrates that the practices that invest the time, effort and money to find out what their clients are thinking, not only strengthen their relationships, but also generate (on average) a 67 per cent increase in bottom line profit.

There are a number of different ways to seek feedback from your clients and all have their pros and cons (see the breakout below). However, regardless of the approach adopted, following are the Business Health Top 10 Tips to maximise the benefit of your survey:

• Don’tembarkonthisprocessunlessyouareseriousaboutdoingsomething with the results – client feedback that is ignored or discounted can do more harm than good.

• Onlyincludeclientswhoseopinionyouvalue–thenyouarealmostcompelled to act on the findings.

• Ensureyouareabletodifferentiateyour“A”class(orverybest)clientresponses from the others – these are your most valuable clients and it is vital

to know how satisfied they are.• Adoptastructuredapproach–itishardforaclienttogiveyouan

objective assessment (good or bad) when you have just bought them a drink at a Christmas function!

• Guaranteeyourclients’confidentialityandanonymity–thiswillensure completely honest (and sometimes brutally frank) feedback.

• Don’tjustconsideryourfindingsinisolation-benchmarkyourresults against your peers and colleagues (or better still, best in class practices).

• Ensureyouthankyourclientsfortakingthetimetoprovideyouwiththeir feedback – no-one likes to think their efforts have been taken for granted. A little thank you goes a long way.

• Shareyourresultswithyourclients,prospects,referralpartnersandof course your staff – post selected extracts to your website, include a summary in your next newsletter, incorporate testimonials into your marketing/promo-tional material.

It is not set and forget – your first survey will create a baseline from which you will be able to measure your progress over time (we recommend that you conduct client surveys at least on an 18-month to two-year cycle).

Act on the key findings and continually remind your clients that the changes are a direct result of their feedback.

PRActIcE MANAGEMENt

Formally ask for client feedback

NoYes

$126,437$210,918

-67 %

KEY VALUE DRIVERPROFIt

PER PRINcIPAL

INcREASEIN

PROFIt#

#All “profit” calculations assume a notional $100,000 salary for each principal working in the practice

Rod Bertino is a partner and director of Business Health Pty Ltd, a consulting firm specialising in the financial services industry.

A wise investment of time and effortit’s a mystery why more than half of financial planning practices don’t actively survey clients, says rod Bertino

32

DIFFERENt APPROAcHES tO SEEKING cLIENt FEEDBAcK

Focus Groups Can be expensive Can be hijacked by strong personalities, providing only marginal feedback

One on Ones Expensive both in terms of time invested and dollar cost Better results if facilitated by an external party

Phone Survey Can often be considered intrusive by clients Asks for quick response with limited time to consider answers Telemarketers often have no financial services experience – supple- mentary questions by client and subsequent explanation can often confuse the results

In-house Survey May not illicit completely open and honest feedback Can be disruptive and expensive Results can not be measured against peers/competitors

Independent Written Survey Offers time to provide a considered response Confidentiality/anonymity generally results in more honest responses Results can be benchmarked to the broader marketplace Often the most cost effective deserve a differentiated service. Make sure your communication program recognises your “A” class clients.

MEtHOD cOMMENtS

Like justice, financial advice today doesn’t just have to be done; it has to be seen to be

done. In the post-Financial Services Reform (FSR)

world, compliance has been accepted, reluctantly in many cases, as a fact of life for financial planners. The modern adviser has become very well acquaint-ed with the niceties of form-filling and document production, as per regulatory requirements.

From time to time the industry has won small victories in the ongoing effort to reduce the paperwork, but the trend of compliance has been inexorably upwards.

Intuitively, it might seem obvious that the cost of compliance is also skyrocketing. However, according to a report released this March by the Australian Securities and Investments Commission (ASIC), not many of the 64 financial services firms it surveyed – including eight financial planning firms – put a definite figure on the total costs they incurred in the pursuit of compliance.

“Most respondents readily admitted to not knowing the cost of their organisations’ compliance activities,” the report says.

And A Report on the Cost of Financial Services 2007 concludes there were some sound reasons why most firms remain ignorant of exactly how much they are shelling out on compliance.

Firstly, ASIC notes compliance costs are often deliberately “embedded into the everyday activities of all staff ” and hence difficult to track. Furthermore, the regulator says compliance costs vary considerably from year to year with most of those companies surveyed also seeing little value in knowing how much they spend keeping up to legal specifications.

“Monitoring compliance costs would in itself incur further cost,” the report also says.

Despite the lack of accurate knowledge about compliance costs, however, most of those firms

in the ASIC survey (which was carried out by research firm Chart Link & Associates) were sure of one thing: compliance was becoming more expensive.

“The majority of respondents said that compli-ance costs were increasing year to year, with many quoting increased costs of between 15 and 20 per cent per year, although there was considerable variation around this estimate,” the survey found.

Disturbingly, ASIC says those firms were likely to have underestimated the total impact compliance was having on their businesses’ bottom lines (see break-out box).

For example, while some staff training costs were easily identified, most of the survey respon-dents did not include in their estimates the ensuing loss of productivity while their employees were absent.

In particular, the study identified a wide dispar-ity in compliance cost awareness between the eight financial planning businesses in the survey.

“A few [financial planning firms] had detailed calculations (although they did not cover all costs), while others could provide only a broad estimate, or no estimate at all,” the report says.

One large financial advisory business, for in-stance, estimated its annual compliance costs were at least $7.4 million. That included $2.4 million

spent on staffing the compliance department; $2.3 million on board and senior management time; $1.7 million for compliance audits; and, $700,000 for putting its 1400 advisers on five training courses each year.

The same firm admitted to, but could not quantify, compliance costs generated by IT, printing documents, communicating with advisers, and lost opportunities.

For the smaller advisory firms in the survey compliance cost estimates varied from about 1 to 10 per cent of operating expenses. In nominal terms, one small financial planning business priced annual compliance costs at $830,000 while another similar-sized firm put it at only $250,000.

ASIC’s preferred answer to the compliance cost confusion, however, is not to educate the market on how to better identify and value such expenses.

Instead, the regulator proposes spending more time letting financial services firms know that it “is aware that a need exists to reduce the cost of compliance, especially with respect to areas where organisations are incurring costs as a result of per-ceived inefficiencies associated with the implemen-tation of aspects of various regulations”.

Priceless.

PRActIcE PROFIt

Compliance headache? Take one ASIC reporta new report from the corporate regulator reveals the ever-escalating cost of compliance. david chaplin reports

33

DIFFERENt APPROAcHES tO SEEKING cLIENt FEEDBAcK

• Staff costs (compliance staff; senior management and board, legal staff, customer-facing staff, other staff);• training (training programs, staff time in attending training, development, management and monitoring of training programs);• Documentation (researching, writing, printing and dissemination of documents including SOAs and PDSs);• It (new hardware and software, upgrades, integration into existing systems); • Outsourcing (legal, audit, compliance consulting); • Procedures (development and implementation throughout the organisation);• Monitoring and recording (dedicated compliance staff and input from many customer-facing staff);• Opportunity cost (staff time, impeding business expansion, limiting new product development, delays in implementation of new products). Source: ASIC

cLIENt RELAtIONSHIPS

Some consider that Jack Gibson was the ultimate coach, not just in football but

also in life. Gibson’s philosophy, which was initially revolutionary but eventually influenced every coach who was to follow, was simplicity.

Indeed, visiting Buddhist and French inter-preter to the Dalai Lama, Matthieu Ricard, who specialises in training the mind to achieve genuine happiness, believes simplicity is the key.

But how does this translate when things aren’t simple, as is the case with a lot of financial products and financial decisions? What do you do when decisions are hard?

Barry Wyatt, national manager, business development for Axa, believes planners still need to focus on very basic, simple messages.

While it is commonly held that investors buy at a peak and sell in a trough, Wyatt has put data around this so planners, and their clients, can see the effects of their actions.

Looking at Plan for Life data in 2003, the last time there was a real trough in Australian equities, he found that there was negative funds flow from Australian equities into cash just as the market hit its all-time low.

The effect is debilitating. By moving into cash, and staying there for only six months, those investors experienced an 18 per cent difference in returns. In dollar terms this means a $100,000 investment was converted into $211,000 instead of $248,000 if the investor had not moved out of equities (see graph).

“This is a huge difference in return,” Wyatt says. “And we can put it down to our behavioural instincts switching into survival mode.”

Wyatt is currently on the road with planners educating them on behavioural finance, so they can then bring these examples to the attention of clients, in a bid to help communicate that superan-nuation is a long-term investment and, to some

extent, is best not tampered with.Planners can learn from the rugby league super

coach, the message is about simplicity.“These are still very basic messages, that super

is for the long term,” Wyatt says. “As a human race we have only been investing

for the past 20 or 30 years, before that retirement income was in defined benefit schemes or people died before retirement age. Our ancestral brain is not very well evolved when it comes to investing.”

Arun Abey, co-founder of ipac, says traditional decision-making theory is based on people making decisions about things they understood.

“The mistake it makes is it assumes all decisions are easily understood. But what happens when they are complex, like with insurance?” he says.

Behavioural finance has given insight into how people make decisions with complexity, and gener-ally the outcomes are bad.

Leading authority on behavioural finance, Professor Schlomo Benartzi, who was brought to Australia recently by Axa, believes planners and product developers should not assume investors should “get it”.

“Investors don’t understand basic things like compounding,” Benartzi says.

“Why should people get it? Finance products are not simple, there are so many of them. What we need to be looking at is how we can use our knowl-edge to help consumers save more tomorrow.”

Benartzi has a special interest in consumer finance and participant behaviour in defined contri-bution superannuation plans. He is also co-founder of the Behavioural Finance Forum, which is a collective of 30 prominent psychologists, consumer behaviour experts and behavioural financial econo-mists, as well as 30 major financial institutions. The forum’s mission is to help consumers make better financial decisions by fostering collaborative research efforts between prominent academics and

industry leaders.One of the seminars presented by the forum -

by Benartzi and fellow academics, Sheena Iyengar from Columbia University and Alessandro Previt-ero from UCLA - questioned the effectiveness of current communication practices which present information to consumers in a cognitively-focused style appealing to an investor’s rationality through tables of figures.

They said that generally people operate in different modes: cognitive or deliberate, which is controlled, rule-based and analytic; and intuitive or affective, which is automatic and holistic.

Testing these two areas and their effect on sav-ings rates, they quoted an experiment where fully-employed MBA students were presented with a hypothetical retirement plan and asked to indicate their intended saving rate.

Savings rates were displayed as either the amount of money they would accumulate by retirement, or, images of apartments in London they could buy at retirement. The results were that savings rates in the cognitive version averaged 10.9 per cent, while in the affective version they were 14.5 per cent.

Benartzi and his contemporaries believe the application of this visualisation and the effects it

Keep it simple, stupidamanda white writes that planners could do well to observe some of the

work and personal traits of a late, great rugby league coach

34

‘By moving into cash, those investors experienced an 18 per cent difference in returns’

cLIENt RELAtIONSHIPS

may have on mutual funds, mortgage loans, annui-ties and risk tolerance questionnaires is something planners and product providers should consider.

“Affective appeals show significant potential for motivating consumers’ financial behaviour,” they conclude.

Certainly Abey believes giving people informa-tion is not enough to change behaviour.

“If giving people information was enough to change behaviour there would be no obesity. How do you change behaviour? By linking with some-thing really important to people,” he says.

“Advice needs to be given in the context of what is really motivating for the person. The ability to engage people emotionally, and the skill set to do that is a key implication. We need to consider the important skills of planners on the emotional side and the impact of effective communication versus numbers and hard facts.”

Indeed the role of the financial planner is changing. Now planners are becoming investment coaches and, to some extent, life coaches.

They need to have the skills to challenge clients

to think about the long term, where they want to be, and what their risks are.

In doing that, the planners’ skill set is shift-ing towards personnel and management skills, including motivation, and communication. Perhaps Benartzi’s research is a tip for how to do this, using communication that appeals to the layperson and crosses boundaries.

Gibson had another trait that all walks of life could do well to adopt. According to Terry Fearnley, a Roosters teammate in the 1950s and a

coaching assistant to Gibson in the 1970s, Gibson was always willing to learn. He was always looking for things to give his team an edge. And he looked outside the norm, helping to introduce tackle counts, regulated weight training, more scientific fitness assessment, and video analysis.

Like Gibson, planners are on a continual learn-ing curve. And there are tools that can help them in their task, if they are willing to adopt them.

A focus on communication, rather than sales, is one way to do that. And one of the key components of good communication is simplicity.

‘If giving people information was enough to change behaviour, there would be no obesity’

35

Fully invested $248,000

2003 2004 2005 2006 2007 2008

Started in cash $211,000

Australian Shares 6 months cash and Australian shares

Starting point $100,000

Investor behaviour – the effect of going to cash in March 2003

Investor behaviour – the effect of going to cash in March 2003

Starting point $100,000

Source: Axa

What are we to make of the current setback to non-residential property

markets? Can they recover from a major external shock or is that shock just the catalyst for what would have been a market downturn anyway? Does it mark the end of the boom and the beginning of a long bear market? Or is it just a setback in the upswing? Are all the non-residential markets the same or should we take a different approach in dif-ferent markets?

Let’s take a step-by-step approach to what’s happening to property markets.

The external shocks have three elements.Firstly, the collapse of the US subprime loans

market, commercial mortgage-backed securities and interbank lending in the United States is having an impact on world financial markets and affecting the ability to fund property investment and development.

Secondly, the setback to sharemarket prices in the US and throughout the world has particularly affected finance and property markets.

And thirdly, the sharp US downturn/reces-sion is threatening economic conditions in other countries, particularly Europe.

In dealing with these, I’ll focus on the impact on property markets. Let’s start with the last item first.

Australia’s problem is not growth but inflation.Australia will, to a large extent, be insulated

from the impact of weakening world growth initi-ated in the US.

Strong business investment, led by mining investment, is driving strong growth. GDP growth is currently around 4 per cent and running above the capacity- and labour-constrained speed limit of 3 to 3.5 per cent. Employment growth is currently 2.8 per cent compared with a non-inflationary rate of around 2 per cent.

The resultant inflationary pressure is putting pressure on interest rates. The collateral damage is continued suppression of recovery in the under-building and understocked housing markets leading to strongly rising rents. Strong employment and wages growth continue to drive strong household disposable income. It is still too early to tell whether the last dose of interest-rate rises has done enough to contain demand. We think inflation will prove more intransigent, requiring more interest rate rises by the end of the year.

The economy will slow through the course of the year as interest rates impact on consumption expenditure, but growth will soften towards a sus-tainable rate rather than enter a major downturn.

The shock to financial markets has affected the ability to finance property investment and development in Australia, with a major impact on listed property trust (LPT) prices.

The US-initiated credit squeeze is affecting Australia’s ability to finance domestic lending. Australia needs to borrow offshore to finance the current account deficit. In recent years, banks have become the main conduit for satisfying this borrowing requirement. While traditional sources have dried up, the interest-rate differential and the strength of the economy have cushioned Australia from much of the effect of the credit squeeze so far.

Further, some corporates are now borrowing directly overseas, reducing the borrowing require-ment through the banking system. But the financial system remains nervous and cautious. We still don’t know how bad the credit squeeze will be or how long it will take to ease. Meanwhile, competi-tion between banks for Australian funds is raising market rates above normal margins with RBA-determined cash rates. Non-bank lenders are being squeezed for funds and some have left the market, while bank lenders are tightening credit risk criteria and becoming more selective about clients. The emphasis has shifted from book growth to credit security. And interest rates for all property clients have risen.

The view from here

PROPERtY

frank gelber says investors have an extraordinary opportunity to get set for the next property cycle,

if they can resist short-term temptation

The fall in sharemarkets around the world, including Australia, has particularly affected financial equities and LPTs.

The initial shock to Australian LPT prices came from an inability to refinance an overseas portfolio - the Centro shock seems so long ago now - but quickly spread through the whole sector. The fall in equity prices cut off the ability to raise new equity funds and put pressure on LPTs to reduce gearing by selling assets. And LPTs own a major chunk of the Australian property market nowadays.

The property investment market has shifted from a seller’s to a buyer’s market.

The volume of property for sale will lead to a blow-out in yields. This process has already begun. But the reluctance of buyers waiting for the market to finish falling has led to a mismatch between buyer and seller expectations and a very low volume of sales. And it’ll take a long time for valuers to confirm. The problem is that we don’t really know how bad the yield blow-out will be. There is no real precedent for an episode of this type and mag-nitude. The BIS-Shrapnel forecast is that prime yields for commercial industrial and retail property

will soften by half to 1 per cent this calendar year. Secondary properties will soften by more.

The anomaly is that leasing markets will remain strong.

The strong economy, strong demand and con-strained supply will continue to underwrite rising rents, cushioning the impact of softening yields on prices. While there may be a slight pause in forward leasing demand because of the current uncertainty in the economy, that will evaporate in the face of continued strength.

The strength of leasing markets means that, after the setback this year, property prices will rebound next year.

Our experience over many cycles is that leasing market conditions drive property market condi-tions. The investment market setback is being driven by a financial market shock. Once the credit squeeze is over and the backlog of properties for sale is absorbed, property sales markets will rebound to levels determined by the underlying leasing market conditions.

But, medium term, we’re coming towards the end of the cycle.

In many markets the cycle will turn within the next five years. Even with sustained demand, and even with some setback to development associated with tighter credit conditions, we’re on the thresh-old of the period of overbuilding. The question is: by how much? What will be the extent of oversup-ply? And how long will it take to absorb? And that means we need to think long, not short, carefully working our strategy towards the shape we want in five years’ time.

Five years from now the cycles will have turned.The Melbourne, Brisbane, Perth, Adelaide and

Canberra commercial markets will have turned down. Only Sydney commercial will remain strong because it will have missed the excesses of the cur-rent commercial boom.

The industrial market boom will have ended with no more firming yields to come to the rescue and an end to the phase of demand associated with strong business investment.

Retail property will remain reasonably solid, although here too there will be no further firming of yields to drive prices.

The residential cycle, currently waiting in the wings, will take over as the primary driver of growth.

The current financial-market-driven setback and the impact on confidence in lending provide an extraordinary opportunity to take a position in markets. But we should avoid short-term gain, rid-ing out the end of the current cycle, and use this as an opportunity to position into the next cycle.

PROPERtY

Dr Frank Gelber is director and chief economist of BIS Shrapnel.

5 Years from now:

- Sydney commercial

- Residential

commercial Markets:

- Melbourne

- Brisbane

- Perth

- Adelaide

- canberra

Industrial Property

Stylised property cycle chart: The next five years.

!

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B+1='7&4%5"?&)C$&70""Source: BIS Shrapnel

many people believe we’re currently

in a bear market. greg hoffman says

they’re wrong

The trouble with expressions like “bull market” and “bear market” is that they

presuppose that we know where the market is go-ing next. The reality is that everyone is just as clue-less as they always are. Naturally it’s always at the point of maximum doom-mongery that the market starts its recovery, and it’s always at the point of maximum bullishness that you should watch out. But it’s only possible to see these inflection points with the benefit of hindsight.

In October 1974, for example, the Australian sharemarket had roughly halved in value in six months, and you’d have forgiven anyone for feeling a little bearish around the edges. But by the end of 1975, the market had recovered 50 per cent. So then you might have felt a bit bullish – and watched the market go sideways for the next three years.

So really there are no such things as bull markets or bear markets, there are just markets that have gone up a lot and markets that have gone down a lot. And it’s always impossible to say, until afterwards, how long the downward or upward lurches will continue for.

That said, the big downward moves do tend to be somewhat different in character to the big moves upwards. In particular, the downward moves tend to be characterised by difficult economic condi-tions (or at least the anticipation of them) and this can make the future very unpredictable. The long upward runs, on the other hand, tend to be characterised by benign conditions which can look as if they’ll go on forever (and they sometimes do continue for a very long time, as we’ve experienced recently).

On the whole, you’re probably better to invest when you’re getting a discount for uncertainty, rather than pay a premium for a cheery consensus.

But that, of course, means accepting the uncer-tainty, which is easier said than done.

There are a couple of ways you can help yourself, though. The first is to keep a tighter than ever focus on your “circle of competence”. When the market is flying around it can be tempting to launch into stocks and sectors that have seen big falls, but if they’re not your normal investing fare and you don’t understand them fully, then don’t allow yourself to get sucked in.

The second trick is to focus on quality. The quality stocks often get marked down with the rest of the market, but the best of them can actually benefit from tough economic conditions. This paradox arises because the weaker companies have to switch their focus towards survival (and some may still fail), while the great companies have the strength to keep investing in their products, thereby stealing a march on the competition. What you’re looking for here are dominant companies with wide competitive “moats”, sound financial positions, and strong and flexible management teams. When the storm is over, not only are these companies more likely to appear on the other side, but there’s a good

chance they’ll appear in better shape than they went in.

Finally, no matter how tempting it is, you should resist the temptation to borrow money to invest. Ben Graham, the “father of value investing”, geared up in 1930, in the aftermath of the 1929 crash, and piled in to strong, undervalued com-panies (as they would later prove to be), but the market didn’t care and marked them down anyway. By 1932, Graham’s investing partnership was down 70 per cent and he was close to ruin – and that’s after he managed to avoid the actual crash. The “Dean of Wall Street” didn’t borrow money to invest ever again.

Bear market? It’s all bull

Greg Hoffman is research director of The Intelligent Investor, which provides independent sharemarket research for Australian investors. See www.intelligent-investor.com.au for more details.

GOOD ADVIcE / MARKEt FOREcASt

38

It’s now easier to create a charitable trust or foundation.Let Equity Trustees help you create a philanthropic option for your clients. Call 1300 133 472 or go to www.eqt.com.au

EQUV0068 Press 200x31mm.indd 3 12/9/07 12:19:03 PM

Not all of the recent financial pain in Australia is due to the sharemarket

downturn. Many Australian farmers have become saddled with debt in an effort to keep properties running, while money troubles continue to under-mine some urban families.

With no means to pay for advice, these people have traditionally been excluded from the wealth management industry.

Their common fiscal problems – often involv-ing debt, repossession, and budgeting – are usually handled by financial counsellors. But some financial planners and dealer groups are piloting programs in which participating advisers make themselves available to work on more specific concerns, such as access to superannuation under duress, savings strategies or insurance cover, on a pro bono basis.

Last month AMP announced it would undertake a six-month pilot, in which 12 advisers from the dealer group will take referrals from two financial counselling services run by The Salvation Army: Moneycare and the Northside Women’s Service.

Before this, the South Australian arm of NAB Financial Planning set up a similar partnership with Anglicare. And in July 2007, the Sunraysia chapter of the Financial Planning Association (FPA) teamed with local Rural Financial Counsel-ling Service (RFCS), to offer pro bono advice to farmers in Mildura.

The NAB and FPA Sunraysia pilots were initi-ated by planners in both communities while the FPA put guidelines in place, such as processes for the referral systems and liaising with local mem-bers, says Jo-Anne Bloch, FPA chief executive.

The Sunraysia partnership “started with the

FPA members”, Bloch says, while the association “helped to break down the barriers – we vetted a lot of ministers and local members”.

Without a national partnership – say, for example, with the RFCS – this process is “very ad hoc”.

Steve Helmich, AMP director of financial planning, advice and services, says the dealer group sought out The Salvation Army as a partner for its pro bono program. The AMP planners will be available to handle clients referred to them from the Sydney, Newcastle and Canberra offices of the non-profit organisation’s counselling services.

The demand for the planners’ input cannot be forecasted, Helmich says, since it depends on the type of financial problems the non-profit organisa-tion’s patrons have.

“We could get to the end of the year and end up with 20 plans, or it could be 12,” he says.

Helmich says the pilot will provide an indica-tion of the work required to set up a national pro bono program.

In Mildura, the three RFCS counsellors have to date made 10 referrals to local FPA members.

Lyn Heysman, who is principal of a Financial Wisdom practice in Mildura, a rural financial counsellor and part of an industry and government taskforce monitoring the pilot, says the partner-ship has expanded the range of options available to drought-affected farmers that need financial advice.

She says a pro bono partnership is required since Financial Services Reform (FSR) prevents counsellors from advising on specialist investment products, superannuation, insurance and taxation.

“They work with accountants and bank manag-ers. They can’t give advice,” she says. But while

counsellors’ awareness of what pro bono advis-ers can provide their clients is “beginning to gain momentum”, more education is required so they can better tap pro bono resources.

Graeme Thornton, a counsellor with the RFCS, says the partnership is beneficial but the small number of referrals to date is due to the fact that many farmers receiving counselling are in financial crises.

“They are focused on immediate issues rather than wealth accumulation and future directions,” he says.

The FPA has also established a pro bono pro-gram to enlist more advisers to the field, in which planners register to make themselves available to provide free advice. So far, roughly 30 planners have joined, Bloch says.

It will act like a clearing house to link requests with advisers. But the local partnership model will still be required since the association does not have enough resources to assess individual requests that are not sent by a third party.

The FPA is in contact with rural and urban financial counselling groups, including the RFCS and Centrelink, about partnering to provide pro bono advice on a national basis. But “it’s prob-ably better done locally,” Bloch says. If you had a national social agency co-operate with us, it would still be delivered through local chapters, by our members.”

Heysman is keen to see the Mildura program expand and will introduce a training module for counsellors engaged in a pro bono advice partner-ship during a presentation in June.

“I hope this is one of many projects and that the drought breaks soon,” she says.

Relief, but no rainthree pro bono financial advice pilot programs have begun in the past 12 months,

and two of them are aiming for nationwide expansion, writes simon mumme

PHILANtHROPY

tHE MARKEtPLAcE

New kids on the blockmorningstar’s phillip gray casts an eye over five interesting new share funds

There’s no let-up in the number of new managed funds which continue to appear

– in the first three months of this year, we here at Morningstar added another 150-odd funds to our database, ranging from those investing in small-cap Australian shares through to global property, emerging markets, and currency trading funds. Let’s take a closer look at five of the more interesting new domestic share funds.

A&t FIRSt 200

The “A” and “T” in this fund’s name stand for James Anderson and Laura Tees, two former port-folio managers from the now-defunct Glebe Asset Management business, who launched their own Sydney funds management boutique in 2007.

Their aim is to identify 20 – 30 companies from the top 200 stocks which are underpriced for their expected future earnings growth, and likely to outperform over a six- to 24-month timeframe. An-derson, Tees, and analyst Amanda Ho screen stocks on factors such as management quality, balance sheet risk, liquidity, and industry structure, also undertaking meetings with company management.

Anderson & Tees expects the First 200 fund to have a reasonably low annual tracking error of 2 to 5 per cent, and the shop’s mandate allows it to in-vest up to 20 per cent in cash. The fund comes with a peer-competitive 0.85 per cent annual price tag, slightly below the average for our wholesale large-cap blend category. And unusually for a boutique, Anderson & Tees doesn’t charge a performance fee.

Anderson & Tees’ process differs from that of former employer Glebe Asset Management, where numerous stocks were screened out from potential

investment in line with an ethical charter based on Christian values. At the time of the termination of the Glebe retail funds in March 2006, the flagship

Table1:FundCharacteristicsIncludingOngoingandPerformanceFeesFund Name APIR code Fee %pa

Fund code Ongoing Fee Performance Fee Website

A&TFirst200 TOL0065AU 0.85% — www.first200fund.com.au

ArmytageStrategicOpportunities ETL0139AU 1.31% 10.0%ofperf>10.0%pa www.armytage.com.au

AtomSmallCap — 1.00% 19.90%ofperf>S&P/ASXSmallOrds www.ioram.com

ClimeHighYieldUnderdogs CRE0002AU 0.00% 10.25%ofanypositiveperformance www.clime.com.au

Patersons80:20Equity PML0001AU 1.38% — www.pam-psl.com.au

40

Phillip Gray

tHE MARKEtPLAcE

Glebe Large-Cap Shares Fund had been a fourth-quartile performer among large-cap blend domestic share funds over the previous one and three years.

ARMYtAGE StRAtEGIc OPPORtUNItIES

This invests in 25 to 35 companies across the market-cap spectrum which Melbourne boutique fund manager Armytage Private believes are capable of producing above-average returns along with consistent and replicable earnings and divi-dend growth. Lee IaFrate and his team also look for strong cashflow from operations, companies trading at discounts to net assets, and contrarian invest-ment opportunities (for example, where a stock has the potential for takeover, asset sale, or corporate restructuring).

This philosophy and process translated at the end of the December 2007 quarter into a portfolio whose major stockholdings included BHP Billiton, Fairfax Media, National Australia Bank, ANZ, Asciano, and Warrnambool Cheese and Butter. Armytage can also invest in unlisted companies it expects will list within the next 12 months, looking to make profits from buying stakes in companies coming to market; up to 10.0 per cent in hybrids; and up to 20.0 per cent in cash.

Prospective investors will have to pay 1.31 per cent each year as an ongoing fee (2.31 per cent for the retail version available through Equity Trust-ees), with a performance fee on top of that of 10.0 per cent of the performance Armytage achieves greater than 10.0 per cent per annum.

AtOM SMALL cAP

Another boutique fund, this one concentrates on small- and micro-cap stocks, and is offered by newly christened Atom Funds Management (known previously as Indian Ocean Rim). The key decision-maker here is former Westpac, Macquarie, and QBE portfolio manager David Shearwood.

The Small Cap fund invests in companies out-side the top 100, down to a market-cap of A$10.0 million, giving it an eligible universe of some 1600 stocks. Atom argues that its broad coverage gives it an information advantage over its competitors, en-abling the shop to identify companies which other small-cap investors overlook. The manager does this by employing analysts in India, who use 28 dif-ferent screens to filter the opportunity set, while the

Australian staff undertake company visits (some 190 over the seven months to the end of January) and make the ultimate stock selection decisions.

The final portfolio comprises 25 – 75 compa-nies, with no single stock greater than 10.0 per cent of total portfolio value. To avoid potential capacity problems, Atom has commendably indicated that it will cap the fund’s assets (currently about A$0.70 million) at A$500.0 million. The 23-stock portfolio at February 29, 2008 included names such as Linc Resources; CPT Capital, which provides diagnostic software for computer mainframes; optical chip-maker Arasor; and Radio Rentals.

Cost-wise, Atom’s one per cent annual fee compares favourably with the average for equivalent mid-/small-cap growth unit trusts. The firm also charges an additional performance fee of 19.90 per cent of the return generated above that of the S&P/ASX Small Ordinaries Accumulation Index. This is on the higher side for performance fees, but Atom is at least measuring itself appropriately against a meaningful benchmark, rather than just earning its performance fee from any performance achieved.

cLIME HIGH YIELD UNDERDOGS

Buffett fan Roger Montgomery’s Clime Capital boutique has created a local version of the well-known “Dogs of the Dow” investment strategy.

Clime’s investment process involves the con-struction of an equally-weighted portfolio of the 10 large-cap industrial shares with the highest divi-dend yields, held for one year, after which stocks no longer among the highest-yielding are replaced by those that are. The establishment portfolio com-prised ANZ, Boral, IAG, Perpetual, St George, Suncorp, Tabcorp, Telecom New Zealand, Telstra,

and Wesfarmers.In an unusual move, rather than levying an

ongoing fee, Clime is charging a 10.25 per cent performance fee linked to any positive performance, with a high watermark for recouping previous underperformance. High Yield Underdogs comes with an A$10,000 investment minimum, and will pay income twice-yearly.

PAtERSONS 80:20 EqUItY

Our final new domestic share fund is another one with a twist. Stockbroker Patersons’ mandate allows it to have 80.0 per cent of its investments in the top 200 stocks, and the remaining 20.0 per cent outside the top 200 in event-driven opportunities, special situations, and in companies Patersons is helping to raise capital or to list on the sharemarket.

The fund is managed by Murray McGill, who’s run Patersons’ discretionary client portfolios for the past 10 years. He’s assisted by Steve Suleski, whose background includes stints at Patersons and Euroz Securities, and Mark Simpson, a former Deutsche Bank and Macquarie analyst and market strategist who leads the broker’s team of 14 stock analysts.

Stock selection for the portfolio of 30 – 50 companies is by a standard combination of bottom-up and top-down research, beginning with quantitative screening. This is followed by rankings on the basis of relative attractiveness, looking for stocks which are undervalued relative to long-term earnings potential, have sustainable competitive advantages, sound recurring earnings, and a quality management team. The final selections draw heav-ily on the Patersons stock analysts’ buy recom-mendations. The ten largest positions at February 29 included BHP Billiton (9.10 per cent), Telstra (7.20 per cent), and CSL (6.70 per cent), while financial stocks featured heavily among the rest of the top 10 stockholdings.

At 1.38 per cent each year inclusive of a 0.44 per cent adviser trailing commission, Patersons’ ongoing fee is competitive at about half a per cent below the average for retail large-cap share funds, and there’s no performance fee.

‘Rather than levying an ongoing fee, Clime is charging a 10.25 per cent performance fee’

Phillip Gray is Morningstar’s editorial & communica-tions manager. He welcomes your email but cannot offer specific portfolio advice. He can be reached at [email protected]. He does not own units in any of the funds mentioned above.

41

Every workplace has a Tony. Our Tony has only been with the company for six

months, but he’s already infiltrated the work culture on every conceivable level, like a computer virus with perfect hair. Let’s boil it right down: Tony is an A-grade prat. No matter what time I get to work, he’s always there before me. I once passed out from a boozy lunch and didn’t wake up until 4am, crawled out from under my desk and bumped into Tony “talking to London” with a mug of gen maicha tea balanced on his lap. Remember when the thumbs up sign had a renaissance a couple of years back? That was Tony. The thing that hurts most about Tony is that he’s almost impossible to dislike. He’s generous, charming, punctual, funny, incred-ibly attractive, well presented and articulate. He knows about wine, literature, films, architecture and he’s devastatingly good at his job. Clients worship at the altar of Tony. He knows everybody’s name. He’s always a year older but looks five years younger than almost everyone. He dresses with courage and restrained flair and when my mother met him, she couldn’t stop talking about his skin. “He just glowed,” she kept repeating, like some crazy mantra. “Glowed.”

It’s probably obvious that I hate Tony. I can’t share this with anyone, so I do things like making Tony effigies out of Blu Tack during meetings and smashing them with a hole punch. It calms me. To make matters worse, as a compensatory act, I’m always seeking him out and being incredibly nice to him. I hang out with him, joke with him and one time I put my arm around him at the pub and announced “God, I love this guy!” in front of everyone. I was so disgusted with myself that when I got home I sat in the shower and cried until the hot water ran out.

I’m no psychologist, but I’m pretty sure I hate Tony because I am Tony. Or at least, I was. Now Tony’s Tony and I’m some kind of second-rate Tony wannabe, like those parasitic fish that hang

off the side of sharks. I used to be confident, a lone wolf, dazzling co-workers and clients alike with my kooky insights. I knew the jig was up when Tony and I were lunching together with a bunch of cli-ents and I, with my usual laissez-faire charm, said, “Is there really any difference between chutney and relish? I mean, who do they think they’re kidding here?”.

Tony didn’t miss a beat. “Actually, Wes, the word chutney derives from the Indian ‘c-h-u-t-n-i’, meaning ‘strongly spiced’, and consists generally of fruits, sugars, spices and vinegar combined into a chunky preserve. Relishes generally use little if any sugar, are cooked less, have little or no sweetness and are crunchy to the bite. It’s easy to see where your confusion comes from. In today’s culinary cli-mate, the definitions are blurred to the extent that a

chutney can be savoury and a relish sweet.”Bastard. And of course Tony knows the chef. He always

knows the chef. Knowing the chef has, in the last five years, become the ultimate social cachet. Chefs are the new DJs, crapping on endlessly about how it’s impossible to find an olive in Australia that tastes like the olives from their one-horse, backwa-ter hometown in Portugal. So they’ve set the earth back into its proper balance by growing them in their backyard in Palm Beach. And now people can come from all around to taste authentic, rural Por-tuguese olives because, heaven forbid, we go about our lives eating regular olives. I mean, what are we? SAVAGES??!!

I fear I’m becoming bitter. And bitterness is a very un-Tony quality. I’m the original Tony ’round here and this Tony 2.0 has got to go.

Unlike Tony, I am actually quite vindictive and spiteful but able to conceal it, whereas Tony is actu-ally genuinely quite nice.

He’s got no chance.Game on, Tony. Game on.

tHE FINAL WORD

42

Relish the challengethere’s a new tony in town – and wesley’s not happy

Wesley Doom is the alter ego of comedian Eddie Perfect.

Compare the pair

The comparisons show projected outcomes, applying today’s average fees for a sample of Industry Super Funds and a sample of Retail Master Trusts, over 25 years*.

Differences in fees may change in the future and this would alter the outcome.

*These amounts are not predictions or estimates of actual outcomes. Outcomes will vary between individual funds. Above example is a comparison of two employees that assumes same starting account balance of $150,000, same initial income $200,000; starting age 40; retirement age 65; 2.5% inflation rate; 3.5% salary increase per annum; 9% superannuation guarantee contributions; no additional salary sacrifice or voluntary contributions; 15% contributions tax; employer asset size $5,000,000 accumulated at 11.6% per annum; investment return of 7.225% (gross of taxes and fees at 8.5%) compounded annually but with taxes of 15% deducted; explicit costs deducted from members’ accounts (eg member fee) subject to a 15% tax allowance; and contribution fees, entry fees, exit fees, additional adviser fees are excluded from calculations. Comparisons modelled by SuperRatings, commissioned by Industry Fund Services P/L (ABN 54007016195 AFSL 232514) using average fees for a sample of 16 Industry Super Funds and a sample of 15 Retail Master Trusts. Current at 31 March 2008 and may be revised if further information becomes available. Consider your own objectives, financial situation and needs before making a decision about superannuation because they are not taken into account in this information. You should consider the Product Disclosure Statement available from individual funds before making an investment decision.

There’s a big difference between super funds. Take the example above: Same age, same income, same super contributions and same investment returns. The only difference is the man on the left is with an Industry Super Fund. The reason he could be better off is that Industry Super Funds currently have lower average fees and don’t pay sales commissions. Industry Super Funds are run only to profit members. To find out more about how Industry Super Funds can make a lifetime of difference for you, call 1300 881 371 or visit www.industrysuper.com

Average Industry Super Fund Average Retail Master Trust

Participating Funds:

ISN 0140_ProfPlan_300x230.indd 1 9/5/08 2:40:32 PM