money management (march 1, 2012)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Tim Stewart

A PERCEPTION that volumerebates from product issuers todealer groups will be allowed“in some shape or form” led toa turnaround in practice valuesat the end of last year, accord-ing to Forte Asset Solutionsdirector Stephen Prendeville.

But he was quick to warn thatplanners who are basing theirbusiness models on the contin-uation of volume rebates couldbe in for a nasty surprise.

In the last six months of 2011,average practice valuations fellfrom 3.29 times recurringrevenue on 1 July to 2.88 timesby the end of the year, Prendev-ille said.

However, valuations havesince staged a recovery thatbegan in late November, andare now closer to three timesrecurring revenue, he added.

“Whilst the market senti-ment was largely negativethrough the latter half of 2011,it did recover in November withthe release of tranche 2 of theFuture of Financial AdviceReforms and the belief – or

assumption – that volume over-rides would be protected insome shape of form,” Prendev-ille said.

Addressing Parliament on 24November, Minister for Finan-cial Services and Superannua-tion Bill Shorten stated:

“If an adviser is confidentthat a particular stream ofincome does not conflictadvice, then these reforms donot prevent them from receiv-ing that income.

“In the case of the receipt ofincome related to volume ofproduct sales or investiblefunds, there is a presumptionthat that income would conflictadvice.

“However, this is a presump-tion only, and if the adviser candemonstrate that the receipt ofthe income does not conflictadvice, then such remunerationwill be permissible under the bill.”

Minter Ellison partner ChrisBrown said it was very risky forplanners to assume Shorten’scomments indicated a soften-ing of the Government’sapproach to volume rebates.

“In reality, with institutionalownership and the require-ments to change systems andprotect reputations, I don’tthink it’s something anybodyworking within an institutionaldealer group would want totake on,” Brown said.

Prendeville said that volumepayments “must be considereda risk” due to the likelihoodthey would be deemed‘conflicted’.

“Any practice receivingvolume-based payments needsto reduce their dependency onthis revenue stream,” he added.

Association of FinancialAdvisers (AFA) chief executiveRichard Klipin said there was

little clarity about what wouldbe permissible under the draftlegislation.

“At the moment we’re readingbetween and into the Minister’scomments, and while theyappear clear on the face of it,it’s subject to a lot of interpreta-tion,” Klipin said.

From the AFA’s point of view,commercial arrangements thatdon’t conflict advice are“absolutely appropriate”, hesaid.

He said that if the currentagreements were deemed‘conflicted’ it could disrupt theentire value chain, and prac-tices would have to rethinktheir business models.

“Where does the value comefrom, what’s their chargingmodel, what services do theydeliver, and where’s the prof-itability of their practice goingto come from?” Klipin asked.

By Milana Pokrajac

TWO years after the Australian Pruden-tial Regulation Authority (APRA) advo-cated better guidance on the appropri-ate risk levels for investment optionswithin super, concerns have been raisedthat the industry has yet to properlyaddress the matter.

In its letter to trustees in June 2010,APRA stated that, at the time, there wereno standard risk descriptors or indus-try-wide standard asset allocations fordifferent labels such as conservative,balanced and growth, which “leads toconfusion on the part of fund membersand makes it difficult to properlycompare investment performance”.

“APRA is not, currently, suggestingguidance on the risk level appropriatefor labels…this is something we wouldexpect the industry to develop goodpractice material around over time,” theregulator wrote.

Since then, the Association of Super-annuation Funds of Australia (ASFA)and the Financial Services Council (FSC)have developed a ‘Standard RiskMeasure’ framework, whereby superfunds will be required to disclose thelevel of risk each option carries.

While the solution has been endorsedby APRA and is due to kick off on 22 June

this year, creating standardised defini-tions of investment options has notbeen discussed.

Recent analysis by Super Ratingsfound AustralianSuper, Cbus, REST andBT Bus Super all had similar exposureto growth assets in their default options(between 74 per cent and 78 per cent),but each fund labelled their optiondifferently.

Super Ratings managing director JeffBresnahan said the labelling inconsis-tency could sometimes mislead supermembers.

“The overall picture is that there is noconsistency in labelling in the industry,and that’s something we need becauseconsumers quite rightly have an expec-tation that all balanced funds would bevery similar, and they’re not,” Bresna-han said.

“Let’s say for example that investor Aplaced their funds in a 50/50 [growth-defensive split] balanced option andinvestor B placed their funds in a 80-20balanced option. Investor B – usinghistorical returns – would retire with alot more money than investor A, butthey both thought they were in the samething,” he added.

Both Bresnahan and Chant Westmanaging director Warren Chant havecalled for the regulator to step in and

create standard definitions of invest-ment labels.

“The only way we are ever going toget consistency is for APRA to consultthe industry, then come out and say ‘thisis how you do it’,” Chant said.

“If you want to educate people aboutinvestment and superannuation, youneed some consistency,” he added. “Byhaving common labels and clearlystating what they mean, it is going to beeasier to communicate to members, butI don’t think it would change the wayfunds manage money.”

Neither ASFA nor FSC were availablefor comment on this matter at the timeof publication.

Planners punt on volume rebates

Calls for standard label definitions in super

INFOCUS: 1 | BEYOND STRONGER SUPER: Page 12

Vol.26 No.7 | March 1, 2012 | $6.95 INC GST

By Andrew Tsanadis

SOCIAL media such as Facebook, Twitterand LinkedIn are more about marketing theservices of financial planners than aboutadvice delivery.

That is the assessment of industr yexperts, who have warned of the dangersof planners moving beyond the legal andregulatory confines applying to such media.

They say that despite the benefits, advis-ers run the risk of using social media as an“education point” for general financial infor-mation – and clients may feel that they havethe knowledge to potentially engage in aninvestment strategy prematurely, accordingto Synchron director Don Trapnell.

“I think the law is quite clear – you can’tproduce statements of advice online. In sayingthat, you have to try and balance the infor-mation you are pushing to clients with theadvice you are giving.” Synchron independ-ent chair Michael Harrison said mostlicensees have strict guidelines in place whenadvisers engage in web-based or mobile com-munication with clients. But the other poten-tial problem with social media is that newcommunications technologies can be a sig-nificant time-waster for planners who do not

Social media atrap for unwary

Stephen Prendeville

Continued on page 3

Jeff Bresnahan

A tall orderI

t is a reflection of the silliness whichhas beset the Federal ParliamentaryAustralian Labor Party this year thatsuggestions emerged last week that

Kevin Rudd would offer Bill Shorten theTreasury portfolio in the event the partyreturned Rudd to the prime ministership.

Given the importance of the Treasuryto policy execution and the attention todetail required of the relevant minister,Shorten’s elevation to such a role wouldsmack of factional expediency rather thanministerial competency or even runs onthe board.

Indeed, any examination of the policyexecution debacles which dogged Ruddas Prime Minister and now Julia Gillardought to suggest that, factional wheelingand dealing aside, Shorten is not the manfor the job.

If the Future of Financial Advice (FOFA)and Stronger Super changes were held upas the core elements of Shorten’s ministe-rial report card, then he would barelysecure a pass mark. The number oflegislative tranches involved in getting keybills to the Parliament suggest he is goodat neither detail nor deadlines.

If this judgement seems harsh, thenconsider that the Government’s journeytowards today’s FOFA legislation wasborne of the bipartisan report whichemerged from the Parliamentary JointCommittee (PJC) which focused on thecollapse of Storm Financial and otherplanning sector mishaps – the RipollInquiry.

That’s right. Both sides of politicsagreed on the recommendationscontained in the PJC report, and for themost part, the financial planning industryembraced what it believed would be theconsequent legislative changes.

More than two years later, and underShorten’s ministerial stewardship, anynotions of bipartisanship have evapo-rated, the FOFA bills are the subject ofanother PJC process, and there existsno cer tainty about t ransi t ionar yarrangements.

Shorten has done slightly better withrespect to the legislative implementationof the Stronger Super changes, but again,uncertainty lingers because the Produc-tivity Commission has yet to even startdealing with the future of default funds

under modern awards.While Money Management tends to

focus mainly on how Shorten’s effortshave impacted the financial planningsector, the not infrequent concernsexpressed by the National FinancialServices Federation point to a similarexperience and a similar ministerialtrack record.

It ought to be remembered, of course,that up until Prime Minister Gillard’s lastCabinet reshuffle, Shorten was regardedas a junior minister sitting outside ofCabinet. Since then, he has not only beenelevated to the Cabinet but also beenhanded a mega-portfolio – Employmentand Workplace Relations, FinancialServices and Superannuation.

The incumbent Treasurer, Wayne Swan,has been a Member of Parliament formore than 20 years. Bill Shorten has beensitting on the green benches of the Houseof Representatives for less than half adecade. Elevation to the Treasury portfo-lio clearly requires someone with a longerand more compelling track record.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

2 — Money Management March 1, 2012 www.moneymanagement.com.au

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Average Net DistributionPeriod ending March ‘1110,207

By Mike Taylor

JUST weeks after announcing aparting of the ways with its chiefexecutive, Perpetual Limitedhas announced a 25 per centdrop in net prof i t after taxattributable to equity holders of$22.931 mil l ion for the s ixmonths to the end of December.

The company told theAustralian Securities Exchangethat the result included a $10.2mil l ion after-tax expenserelated to the closure of i tsDublin global equities manu-facturing capability, and therestructuring of the retail distri-bution and marketing func-tions.

The result also included a

$2.2 million after-tax loss onmarket-linked investments.

Commenting on the result,Perpetual chief executive GeoffLloyd pointed to a strategybased on pursuing further effi-ciencies and cost reductions,including the outsourcing ofi ts infor mation technologyarrangements.

“I have formed a dedicatedi n t e r n a l t e a m t o i d e n t i f yfurther meaningful cost reduc-tions across our business units,commencing immediately,” hesaid.

Lloyd said an internationalconsult ing f i r m had beenappointed to provide the teamwith access to global expertisein the area of cost reduction and

“we expect to start implement-ing the outcomes of the costreview before the end of thereporting period”.

Drilling down on its division-al performance, the company’sPrivate Wealth division reflectedthe decl ine in investmentmarkets and reduced grossinflows, recording a 7 per centdecline in funds under advice.

“We executed the platformagreement with Macquarie andlast month received the finalregulatory approval for our newSuper Wrap product, which weexpect to offer late in thesecond half of this year,” Lloydsaid.

He said the business hadcontinued to invest in non-

market-related service offeringsand capabil i t ies to fur therenhance its holistic offering tokey client segments.

Perpetual Investments expe-r ienced net outf lows of $3 billion during the half, butthe company said the majorityof these were in lower-marginchannels and products.

L loyd said s ignif icantprogress had been made intackling some of the issues thatwere holding back the business’ability to attract flows in whatwas a difficult market.

“We created a new invest-ment product distribution func-tion to focus on key clients anddecision-makers in the retailfunds market,” he said.

www.moneymanagement.com.au March 1, 2012 Money Management — 3

News

Perpetual looks to future after tough half

Social media a trap for unwary

understand how tomanage it effectively.

The negative effects ofsocia l media occurbecause many financialplanners are not askingthemselves fundamentalmarketing strategy ques-tions, Harrison said.

“I think a lot of advis-ers are getting hooked onsocial media and theyhaven’t got a lot to talkabout. If you’re going topromote your brand, getto the point,” said TheHumble Investor directorColin Williams.

While social media isnot designed to capturea lot of information, it isa key component inbeginning the financialplanning process withc l ients . P lanners canface a significant cost toreputation if they are notengaged correctly.

“The mistakes I seeadvisers making with socialmedia are that they’re for-ever pushing their storiesin the face of their clients.It’s the ultimate turn-off,”Williams said.

According to Experi -ence Wealth Advice direc-tor Steve Crawford, it isimportant for practicesemploying social mediato communicate wi thclients in mediums thatthey are familiar with.

“Just because you canpopulate the same mes-sage on multiple sites,doesn’t mean the end-user is going to use it inthe same way,” he said.

Crawford said he

believed that by followingwhat clients were follow-ing on websites like Face-book and Twit ter, theadviser is able to focusmore on what matters totheir target market.

Socia l media is notabout “pushing” but“pulling” clients towardsyour website, and even-tually towards a financialplanner, he said.

“The whole premisearound web-based com-munication tools is clientreferrals. If you’re goingto use it as a soapbox,this can potentially turncustomers away from thepractice because they’llthink that the adviser isarrogant or over-confi-dent,” he said.

“Out of the 10 thingsyou post , only one ofthem should be a salespi tch – n ine of themshould be promot ingthings that a client maybe interested in – andthat doesn’t necessarilyequate back to financialservices,” Crawford said.

Continued from page 1

Geoff Lloyd

Don Trapnell

News

Insurance dilemma in auto-consolidationBy Mike Taylor

INSURANCE policies within low bal-ance superannuation accounts willprove a challenge for the effectiveimplementation of the Govern-ment’s auto-consolidation propos-als within its Stronger Super policy.

While research released by theFinancial Services Council (FSC)strongly supported the need forauto-consolidation, it also pointed

to the number of small accountscarrying life insurance benefits.

It said superannuation accountswere often linked to products suchas life insurance which “could pres-ent a barrier to consolidation asindividuals may rely on theseaccounts for protection”.

“Of the 6.9 million inactiveaccounts eligible for consolida-tion, it was found that 1.3 millionaccounts are linked to life insur-

ance policies,” the research analy-sis said.

“Even though members whoown these low balance accountsmay be unaware of their linkagesto life insurance, these accountspresent a challenge for auto-con-solidation, as some of thesemembers may wish to maintaintheir life coverage despite notmaking contributions to thefund,” it said.

“Additionally, given that Aus-tralia’s underinsurance gap standsat $972 billion, it is important thatthe desire to reduce duplicatesuperannuation accounts does notresult in members losing existinginsurance cover that may not beaccessible to them in the future,thereby exacerbating the numberof underinsured Australians,” theanalysis said.

The research was conducted

by the FSC and financial serv-ices technology provider DSTSolutions, with FSC chief execu-tive John Brogden saying it con-firmed that auto-consolidationwould lead to a considerablereduction in the number ofaccounts and would signifi-cantly improve the efficiency ofAustral ia’s superannuationsystem, leading to lower feesfor consumers.

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Some see investmentas an abstract game of numbers.


By Milana Pokrajac

PLATFORM providers haveinvested around $130 millionon new developments in 2011,with MLC Wrap and Naviga-tor platforms receiving thehighest ranking from financialplanners.

That is according to theInvestment Trends December2011 Platform Report, which alsofound the Government’s Futureof Financial Advice (FOFA)reforms were both a catalyst anda hindrance to innovation.

The new developmentsmainly focused on improvingfinancial planners’ business effi-ciency, according to InvestmentTrends principal Mark Johnston.

Johnston said the level ofinnovation pointed to thecompetitiveness in the plat-forms industry.

“In spite of the consolidationwitnessed over recent years,this remains an intenselycompetitive industry, withproviders continuing to raisethe bar,” he said.

However, uncertainty overthe final details of the legisla-tion might compel some plat-forms to take a minimalistapproach to development andhoard the so-called “develop-ment cash”.

“Many fear that once thelegislation is finalised, they willbe forced to develop a lot of func-tionality over a very short periodof time,” Johnston added.

MLC Wrap and Navigatorcontinued to rank highest interms of overall functionality,while FirstWrap, netwealth,Asgard eWrap and MacquarieWrap made up the top five, asvoted by financial planners.

AXA North was the one toincrease its score the most over2011.

The report compared 26master trust and wrap platformsacross more than 455 aspects oftheir service offerings.

News

ANZ buys Optimix from UBSGAMBy Milana Pokrajac

ANZ has purchased the OptiMix multi-manager business unitfrom UBS Global Asset Management (UBSGAM), the bank hasconfirmed.

The acquisition of OptiMix is part of ANZ’s broader strategy to offera suite of multi-manager single-sector and multi-sector funds.

The business first came under the ownership of UBSGAM inJune 2011 as part of its acquisition of ING Investment Man-agement (INGIM).

With ANZ’s purchase of OptiMix’, its intellectual property, businessassets and key staff will move to the bank.

“The acquisition of OptiMix will not impact customer accounts ortheir investments,” ANZ’s spokesperson said in a statement.

Furthermore, the purchase does not include the OnePath single-sector funds managed by UBSGAM through the purchase of INGIM.

Research house Standard & Poor’s has issued a statement sayingits rating of multi-sector products available through OptiMix wouldremain unchanged and on hold, pending the researcher’s formalreview of these capabilities.

IOOF result down, but solidBy Mike Taylor

IOOF Limited has reported a six per centdecline in net profit after tax attributable tomembers to $46,089 million to the end ofDecember, amid what its managing direc-tor Chris Kelaher has described as chal-lenging market conditions.

However, he said the result reflected theunderlying resilience of the firm in circum-stances where revenue had been impactedby markets, but IOOF’s margins hadremained steady.

The directors declared a fully franked divi-dend of 19 cents per share.

As well, Kelaher said that during theperiod IOOF had acquired DKN FinancialGroup, which had now been fully integratedinto the group, adding 270 advisers to the

distribution network and $6.8 billion toIOOF’s funds under advice.

He said that since acquisition, DKN hadcontributed $100,000 in reported profit, or$2.3 million in underling net profit after taxpre-amortisation in three months.

Looking to the future, Kelaher said thatfollowing on from IOOF’s simplificationprogram, the company had a heightenedfocus on investment in organic growthinitiatives, including new products, brand-ing and the continuous improvement of theIT infrastructure.

He said continuing market volatility madeproviding forecasts difficult, but IOOF waswell-placed to meet the upcoming regula-tory deadlines, with all flagship productsalready Future of Financial Advice-compli-ant with fee-for-service options available.

AFA membershipto require extraeducationBy Chris Kennedy

FROM 1 July this year the Association ofFinancial Advisers (AFA) will require all newadviser members to attain the Associate Char-tered Financial Practitioner (AChFP) desig-nation, AFA national president Brad Fox tolda recent AFA partners briefing.

The only additional study required to gainthe AChFP for those already with a diplomaof financial planning (DFP) is the AFA’sethics unit. Advisers joining the AFA will beprovisional members and will need tocomplete the ethics unit within 12 monthsof joining, he said.

“The beauty of completing this one unit isyou’ll be an AChFP. It’s got credibility and it’sgot some standing around it,” Fox said.

The AFA was currently at an inflexionpoint at the “pointy end” of the FOFAprocess and needed to switch from fight-ing to leading, he said.

“We’ve got an enormous competitivetension that’s going to confront our advisersand some of the product players – betweenefficiency and customer intimacy,” he said.

He said there was a margin squeeze on atthe foot of the value chain, with a competi-tor in the market to traditional advice in theform of scaled advice.

“We’ve got a big role to play in a leadershipposition to take people out the other side ofFOFA,” he said, adding the AFA needed to beat the forefront of that process.

Fox said the AChFP was one of the threelevels of designation offered by the AFA, whichalso included the group’s premier designation– the Fellow Chartered Financial Practitioner(FChFP) – and the Chartered Life Practitioner.


Brad Fox

Suncorp profits despite natural disasters By Tim Stewart

SUNCORP Group has announced a $389 million net profit aftertax (NPAT) for the six months to 31 December 2011, with generalinsurance contributing $162 million despite the impact of natu-ral disasters over the Christmas period.

The company’s overall NPAT was up from $223 million in theprior corresponding period.

However, the Christchurch earthquake on 23 December 2011and the Melbourne hailstorm on Christmas Day meant that nat-ural hazard claims were $149 million above allowances.

Suncorp Group chief executive Patrick Snowball said theperformance of the group amid ongoing “weather events”and natural disasters demonstrated the “resilience” of thecompany.

“Although external challenges mean that our first half profit isnot what we, and our shareholders, know the business is capable

of, I’m proud of what Suncorp has achieved over the last sixmonths, and am confident the transformation of the Group is ontrack,” Snowball said.

The NPAT of Suncorp Bank improved to $102 million for thesix months to 31 December 2011. The Core Bank NPAT was$156 million, largely due positive broker flows. However, thenon-core portfolio took a $54 million loss, reflecting “lowerimpairment losses” and the $34.5 pre-tax profit on the sale ofthe Polaris data centre.

Suncorp Life reported a NPAT of $133 million for the half, withnew individual life risk business up 11 per cent from the priorcorresponding period to $51 million.

The company has announced a fully franked interim dividendof 20 cents for 2012.

Suncorp group chairman Ziggy Switkowski said the company’scapital position remained healthy, with more than $1.18 billionidentified as surplus to the group’s internal targets.

Chris Kelaher

ATO figures show SMSFs still growingTHERE are more self-managedsuper funds (SMFSs) in operationthan ever before, with 874,000SMSF members in 458,000 fundsat the end of December 2011,according to figures recentlyreleased by the Australian Taxa-tion Office (ATO).

There were also more total andnet fund establishments in the2011 financial year than in anyprevious year other than 2007,with almost 33,000 new funds and3,200 windups – less windups thanin any of the previous seven years.

In the two quarters since, therehave been around 16,000 newestablishments, with just over 200funds wound up.

At the end of the Decemberquarter, the sector held assets of$400 billion – slightly down fromthe June 2011 peak of $407 billion.The ATO reported $122 billionwas in listed shares and $115billion in cash and term deposits.Close to $80 billion was held inlisted and unlisted trusts andother managed investmentschemes, while real property

(both residential and non-resi-dential) accounted for $60 billion.

Around a quarter of SMSFs fellinto each of the $200,000-$500,000 and $500,000-$1 millioncategories. The ATO said 6.8 percent of SMSFs held less than$50,000 in assets. The averageassets held per SMSF were justunder $900,000.

Around half of all fund membershad current incomes between zeroand $40,000 per annum, suggest-ing a large proportion of retired andsemi-retired members.

The number of members perfund was steady over the past sixyears: around two-thirds of SMSFshave two members and just undera quarter of funds have onemember. Three- and four-memberfunds each represent between 4and 5 per cent of the overall funds.

Member ages were also steady,with around a third of SMSFmembers in the 55-64 age range, aquarter each in the over-65s and45-54 brackets, less than 15 percent aged 35-44, and around onein 20 younger than 35.


News

FOFA scaring away potentialplanners, says FSCBy Tim Stewart

REGULATORY uncertainty is causing thefinancial planning industry to contractand dissuading young graduates fromtaking up the profession, according toFinancial Services Council chief execu-tive John Brogden.

Speaking at the SMSF Professionals’Association of Australia conference,Brogden pointed to UBS analysis thatshowed a 1.7 per cent contraction in theindustry over the past year (equating tothe net loss of 250 planners).

The average age of financial advisers inAustralia is 55, Brogden added – and for alot of those planners the current regulato-ry changes “are too hard, and the value oftheir practice is getting knocked about atthe moment”.

The only way to counteract the contrac-tion in the sector is to attract youngerpeople into the profession, he said.

“But if you look at the financial adviceindustry and you’re a 22-year-old gradu-ate who’s just left university, would youbecome a financial adviser? Right now youwouldn’t, because there’s too much uncer-tainty,” Brogden said.

Financial Planning Association chairMatthew Rowe pointed out that newmembers of his organisation would berequired to hold an undergraduate degreefrom 1 July 2013.

Part of the “evolution” of financial plan-ning must see it referred to as a ‘profes-sion’ rather than an ‘industry’, Roweadded.

“My vision would be that in 10 yearstime there will be a Bachelor of FinancialPlanning in every university. And the kidswho are doing that would see financialplanning the same way they would seeengineering or the legal profession,” Rowesaid.

Australian Securities and InvestmentsCommission chairman Greg Medcraftreiterated the regulator’s desire to intro-duce a national exam for individuals whoprovide general or personal clients on tierone financial products.

“We initially proposed doing it from 1 July 2012, but that’s clearly very ambi-tious so we’re probably going to move thatto a later date – probably July 2013 with atwo-year transition period,” Medcraft said.

Bendigo Wealth looks toProvisio for scaled adviceBy Chris Kennedy

BENDIGOWealth has formed apartnership with Provisio Tech-nologies under which the soft-ware firm will help Bendigoform a scaled advice offering.

Head of Wealth Markets atBendigo Wealth Alexandra Tulliosaid the service would initiallystart off with five advisers. Thebank would be looking to growthe service quickly, and it mightalso be used by other advisers inthe field. Bendigo Wealthcurrently has more than 500branches and the number isgrowing, with around 60 to 70advisers in the advice network.

Bendigo Wealth will continueto use XPLAN for its full adviceservices, she added.

Tullio said that while the bankwas currently set up for provid-ing complex advice, there was ademand for a simpler andcheaper advice model, asevidenced by the rapid take-upof Bendigo and Adelaide Bank’s

new low-cost super offering,SmartStart Super. “We’re makingit easier for people to apply andspeak with a consultant,” shesaid.

The new offering addressesFuture of Financial Advicechanges, which have forced theindustry to rethink how it serv-ices the tail-end of its business,Bendigo stated.

Tullio said the younger gener-ations were typically cominginto branches less and wouldnot be looking for hour-longphone consultations – meaninga 15-to-20 minute simpleradvice scenario would bettersuit their needs.

Under the new arrangement,Bendigo Wealth will use Provi-sio’s underlying technology tocreate the document that isgiven to the customer, access-ing Bendigo’s full range of advicetemplates. The service isBendigo-centric, bringing all therelevant information together ina merged document in approx-

imately 20 minutes.Tullio said the service was

aimed at the type of consumerswho say they want advice butdon’t want to pay $3,000 for astatement of advice, and atthose who are more interestedin “piece by piece” advice ratherthan full holistic advice .

“Financial advice can now beprovided in just 20 minutes,compared with the traditionalmodel which can take days. Thistechnology gives BendigoWealth the ability to offer adviceon a larger scale at a time whenbranch-based planners arerestricted in the number ofclients they can physically see,”Tullio said.

The new arrangement willmean that planners are betterable to service existing clients ina market that has significantmargin squeeze, and will be ableto continue to service “C and D”clients while also providingcross-selling opportunity toadvisers, according to Bendigo.

DIVERSIFIED financial services groupWHK has been impacted by continuingvolatile markets, investor uncertainty andinternal change costs, reporting a 51.6per cent decline in net first half profit to$13.859 million.

However, the company told the Aus-tralian Securities Exchange last week thatwhile it had faced a difficult business cli-mate and the ongoing implementation of a business transformation program,it had still managed to deliver solid revenue growth.

"Business conditions continued to be challenging but the group's strategy isclear; transformation is underway and WHK is well positioned for continuedgrowth," it said.

However, the bottom line for the group was that while overall group revenuewas up 1 per cent to $215 million, with business services revenue up 3 percent, financial services revenue was down 5 per cent.

WHK said the decline in financial services revenue was attributable to a sig-nificant fall in investment markets, and retail investors maintaining overweightcash positions or deferring retirement.

Referencing the impact of its business transformation program, the WHKannouncement said first half earnings had been impacted by $8.8 million ofone-off costs, including a provision of $6.7 million encompassing all expectedfuture costs.

However, it said the successful implementation of remuneration models andgroup shared services projects in the second half, along with other improvementinitiatives, would ensure the group was well positioned for continued growth.

The directors said they expected second half normalised earnings to bebroadly in line with the previous corresponding period.

FSC attacks industrialjudiciary on modern awardsBy Mike Taylor

THE Financial Services Council (FSC) has urgedthe Productivity Commission to eliminate theindustrial relations judiciary, in the form of FairWork Australia, from the superannuationdefault fund process.

The FSC said it was of the view that super-annuation funds should "not be entangled inthe Fair Work system" and accused the indus-trial judiciary of “abrogation of responsibility",such that "funds under investigation by theAPRA (Australian Prudential Regulation Author-ity) [are] being prescribed as default funds".

In a submission filed with the ProductivityCommission last week, the FSC has urged acompetitively neutral regime for default fundsunder which employers would be permitted toselect any APRA-regulated super fund as adefault fund.

It said that if this were permitted, "a desig-nated Fair Work process would not be required,as an employer would be free to select anyAPRA-regulated fund".

"This approach has the benefit of removingconflicted industrial parties from selectingdefault superannuation funds which areapproved without consideration by Fair WorkAustralia," the FSC submission said.

The submission then goes on to recom-mend that the Fair Work Act 2009 beamended to eliminate the need to nominateparticular superannuation funds by specifi-cally stating that "a modern award must notinclude terms requiring employer contributionsto be paid to named superannuation funds".

The FSC submission also suggests that all

MySuper products should be capable of beingutilised as default funds in awards approved byFair Work Australia.

The FSC submission makes clear it believesthat Fair Work Australia erred from the Govern-ment's original intentions by becoming involved inthe specific selection of superannuation funds.

It pointed to a letter written by the formerMinister for Superannuation and CorporateLaw, Senator Nick Sherry, which requestedthat if Fair Work Australia prescribed defaultsuperannuation funds in modern awards, itshould establish an appropriate process andcriteria for selecting funds rather than doing soon an arbitrary or non-transparent basis.

"The Commission chose not to heed theMinister's request and instead prescribedsuperannuation funds into awards withoutadopting a process," the submission said."The consequence is that neither a processnor review mechanism for the selection ofdefault superannuation funds in modernawards exists."

John Brogden

WHK transformationsees profit hit

News

Securitor launchesresearch websiteBy Milana Pokrajac

BT-OWNED dealer group Securitor haslaunched a new investment researchwebsite which gives advisers access toproduct and thematic research, as wellas market commentary.

Selected information from the sitewill also be available to clients thatwill assist financial advisers with clienteducation and information delivery.

The reason behind the launch ofthis website is the changing adviser-client relationship and the need foradvisers to access timely information,according to head of dealer groups atBT Financial Group Matt Englund.

“Investors are closely tuned tomarket fluctuations, and as a result,are playing a more active role in theirportfolios; advisers need insightfulcommentary at their fingertips,”Englund said.

The key information available toadvisers on the new site includesequity research via eQR Securities,annual capital markets review,monthly economic/market updates,sector papers, approved product listsand podcasts.

The way dealer groups and institu-tions provide research material andshare insights has evolved since theglobal financial crisis, with a greaterneed for constant information flow,said Piers Bolger, head of research andstrategy at BT Financial Group.

“Now there is a bigger appetite forin-depth market and product infor-mation to assist advisers in theirdiscussions with clients,” Bolger said.

More than 90 per cent ofassets directly held by clientsMORE than 90 per cent of personal invest-ments are held directly by individuals,rather than investment products and plat-forms provided by major wealth managers,according to a new Rice Warner report.

This reflects substantial holdings in cashand term deposits (33 per cent), invest-ment property (46 per cent) and shares(10 per cent), with other asset classesmaking up the rest.

However, assets held on investment plat-forms will almost double by 2026, with wrapplatforms to be the fastest growing market,according to Rice Warner predictions.

“Assets held on wrap platforms andinvestment master trusts combined willgrow to be more than two and a half timestheir current level (in 2011 dollar terms) in15 years’ time,” the report predicted.

The Rice Warner Personal InvestmentsMarket Projections Report 2012 revealedthe personal investments market – whichincludes personal investments held inbanks, shares and investment properties –sat at $1.9 trillion at 30 June 2011, whichcompares to $1.3 trillion currently sitting insuperannuation assets.

“Whilst superannuation will grow morequickly in the future due to the significant

compulsory component, the personalinvestment market will become increas-ingly important as Australians seek flexi-bility of access to their savings and conces-sional contribution caps, and other taxchanges dampen the attractiveness ofinvesting in superannuation,” director ofRice Warner Richard Weatherhead said.

The ease and simplicity of straightfor-ward bank and term deposits might losetheir appeal when the cost of investmentplatforms falls and their sophistication,along with reporting capabilities, increases.


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News

FOFA drives anotherpractice to ipacBy Chris Kennedy

IPAC south australia hasadded the $70 million prac-tice XPAL to its stable, withformer practice directorKeith Brenner citing a desireto get back in front of clientsrather than dealing withmore red tape created byFuture of Financial Advice(FOFA) changes as a keyreason for the move.

XPAL started as anaccounting practice in themid-1990s and added finan-cial planning in 1999. It hasnow added three advisers,one staff member and 400private clients to ipac southaustralia. A fourth adviserchose to move on rather thanstay with the business,Brenner said.

“We were looking at succes-sion planning, which wassomething we at least neededto start planning for soonerrather than later,” he said.

“We started to have a look

and realised the businesswas more saleable than wethought, so we made a deci-sion to sell the f inancialplanning business.”

Brenner said the directorsof the business were keen tocontinue looking after theirclients. However, they werefinding that with industrychanges, including regulato-ry reform, it was getting more

difficult to spend the amountof time they wanted withtheir cl ients, as well asmaking sure they ticked allthe boxes from a compliance,administration and staffingpoint of view.

“So we decided we wouldsell to ipac and just be faith-ful to our clients and spenda lot more time doing whatwe wanted to do, rather thanworking out how FOFA isgoing to impact us. Ourclients deserved that as well,”he said.

The directors were happy tohave a larger licensee such asipac to monitor the compli-ance side of things, enablingthe advisers to spend the bulkof their time back in front ofclients. There had been anoticeable improvement in thefirst six weeks following thesale, he said.

ipac south australia nowhas $1.3 bil l ion in fundsunder advice, and a staff of54 with 26 advisers.

Challenger’s ‘excellent’half-year resultBy Mike Taylor

CHALLENGER Limited hasannounced a record normalisedinterim net profit of $127 million onthe back of record annuity productsales during the six months ended31 December 2011.

In an announcement released onthe Australian Securities Exchange(ASX), the company said annuity prod-uct sales had increased 74 per cent to$1.27 billion, with funds under man-agement (FUM) up 27 per cent to$27.7 billion – a level not seen sincebefore the global financial crisis.

The company said that statutorynet profit af ter tax had been $20 million due to negative invest-ment experience following a furtherdislocation of debt and equity mar-kets during the latter part of last year.

Commenting on the result, Chal-lenger’s newly appointed chief execu-tive and managing director BrianBenari said it had been “excellent”.

“Challenger continues to benefitfrom demographic tail winds as wellas today’s consumer-driven ‘back tobasics’ approach to investment,

which favours simple, regulated andguaranteed products,” he said.

Benari said Challenger was alsostarting to reap the full benefit ofreinvigorated distribution, advertis-ing and marketing efforts, with annu-ities increasingly being used as a toolin retiree portfolios. This enabledclient and adviser to build on agepension entitlements with a“bedrock” level of income.

Reflecting Challenger’s bullishattitude, Benari said the companyhad decided to increase its full-yearretail annuity sales growth target to30 per cent. He added that “even atthese levels there remained enor-mous long-term upside for thoseable to capture and keep a leader-ship position in the retirementincomes market”.

Challenger’s ASX announcementsaid that its funds managementoperations – including equity part-nerships with 10 independentlybranded boutique funds – recorded a27 per cent increase in FUM to $27.7billion.

Benari said this had seen FUMreturned to pre-GFC levels.


Trustees anxious aboutretirement incomesBy Tim Stewart

SELF-MANAGED superannua-tion fund (SMSF) trustees are lessconfident about reaching theirtarget retirement income thanthey were a year ago, according toa study by the SMSF Profession-als’ Association of Australia (SPAA).

The Intimate with Self-Managed Superannuation study,commissioned by Russell Invest-ments in conjunction with SPAAand conducted by CoreData,found that only 17.2 per cent oftrustees were confident aboutreaching their target income inretirement. In last year’s reportthe figure was 34.1 per cent.

In particular, two-fifths ofwomen are concerned they willfall short of their retirementincome – despite the fact theyhave more moderate retirementincome expectations than men.Only 27.1 per cent of maletrustees hold similar concerns.

The reduction in confidencewas down to the local and inter-

national economic environ-ment, along with trusteeconcerns about the Govern-ment’s superannuation policies,according to the report.

Over the last 12 months 20.5per cent of trustees reported anegative return, compared toonly 1.5 per cent in 2010.

The report also found that thehigh cash holdings in SMSFswere now part of a “deliberaterisk reduction strategy”, ratherthan representing money “sittingon the sidelines” awaiting aninvestment opportunity.

The number one reason foroverweighting to cash is a desireto reduce risk (48.9 per cent),eclipsing concerns about cost and

return, according to the report.There is also a demographic

shift underway in the sector, withSMSFs becoming more popularwith younger people. Theproportion of do-it-yourselffunds with balances under$150,000 increased to 20.4 percent from 8.2 per cent in theprevious year.

In addition, 13.7 per cent ofGeneration X respondents (31-45) and 10 per cent of Genera-tion Y respondents stated theirintention to establish an SMSFwithin the next two years. Only10.5 per cent of baby boomersintend to establish an SMSFwithin the same timeframe.

A perception that it is notworthwhile to establish an SMSFwithout a large account balanceis a barrier to future growth in thesector, according to the report.

“Yet many of those who holdthis perception have balances ofat least $350,000, a level at whichhaving an SMSF may indeedmake sense,” said the report.

Limited recourse borrowingchanges welcomeBy Mike Taylor

SPECIALIST self-managed superannu-ation funds (SMSF) companyCavendish Superannuation has wel-comed the Government’s announce-ment that it intends amending corpo-rations law to make limited recourseborrowing a financial product.

In a bulletin issued last week,Cavendish said the move by the Gov-ernment would give heart to thosesupporting limited recourse borrow-ing in the context of SMSFs.

It said the Government intended tochange the corporations law to makelimited recourse borrowing arrange-ments a financial product – some-thing which had been flagged back inMarch 2012, and which had been along time coming.

It said the exposure draft of theintended legislation represented animprovement on that first released inJune 2010.

“Essentially, this legislation will havethe effect of bringing consumers underthe protective mechanisms that apply tofinancial products,” the Cavendish analy-sis said. “This will require limited

recourse borrowing dealers and theirassociated advisers to hold a relevantfinancial services licence and providea product disclosure statement andstatement of advice to clients.”

Cavendish’s head of educationDavid Busoli predicted there would beconsiderable debate concerning whichparties within a limited recourse bor-rowing arrangement must be licensed,given the number involved.

“The ‘issuer’ requires licensing andis defined as a person who enters intoa legal relationship that sets up thearrangement and includes each partyto the arrangement,” he said.

Busoli said the previous draft of thelegislation had caused some confusionabout the type of authority a licenseerequired, but the latest draft states thatan Australian Financial Services Licencethat provides a licensee with the author-ity to advise on derivatives or on securi-ties is taken to also cover limitedrecourse borrowing arrangements.

He said the draft also confirmed thata limited recourse borrowing arrange-ment is not a credit facility, so entitiesthat merely provide finance are notcaught by the new requirements.

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The continuing image problemconfronting financial planners was lastmonth reinforced by the chairman ofthe Australian Securities and Invest-

ments Commission (ASIC), Greg Medcraft,during a forum at the Self Managed SuperProfessionals’ Association (SPAA) conference inSydney.

When the chief executive of the FinancialServices Council John Brogden conjectured whatmight have happened to the financial planningindustry if Storm Financial had not collapsed,Medcraft quipped that there had been other issuesinvolving financial planners such as Westpointand agricultural managed investment schemes.

In doing so, the ASIC chairman neatly encap-sulated the inability of many of those drivingcurrent debate to differentiate between a failureof product and a failure of advice. Storm Finan-cial was, indeed, a failure of advice. Westpointand the numerous MIS collapses were a failureof product.

This is not to say that all planners were blame-less in terms of client losses with respect to West-point or the MIS collapses, but it is worth notinghow many people were self-directed investorsor, by their own acknowledgement, threwmoney at forestry and olive oil schemes at thebehest of their accountants so they could accesstax deductions.

Brogden’s point to the SPAA national confer-ence is therefore important, because it succinct-ly makes the point that Storm Financial was theonly really definitively advice-related failureamid all the other financial services collapses ofthe past half-decade.

It begs the question of what type of regula-tory future would have been imposed on the

financial planning industry if Storm Financialhad not collapsed.

A report published in a major Sydney dailynewspaper last week also revealed the degree towhich lobby groups such as consumer groupChoice have sought to leverage off the collapseof Storm to prosecute their agendas.

In that newspaper report, Choice chair-woman Jenny Mack said that what had beenseen in the financial planning industry had“been a sales force, not a professional adviceservice”.

‘’It’s these very conflicts that have caused hugeconsumer losses in Westpoint, in Timbercorp,in Rewards Group … these were commission-paying products and advisers recommendedthem because they were getting a big cut fromthem,” she asserted to the newspaper.

‘’The business model of Storm [Financial] wasdriven by remuneration structures that paidadvisers commissions every step of the way,”she said.

It is, of course, well accepted that StormFinancial planners operated on a fee-for-servicebasis, but this does not stop the likes of Macksuggesting that the whole issue was driven byfat commissions.

Nor does she seem to be unduly concernedabout the amount of evidence surrounding theinvolvement of accountants and self-directedinvestors in the losses incurred from the collapseof Westpoint and Timbercorp. Financial plan-ners and the now largely-defunct commissionsseem to be her target.

According to Mack, the Government’s Futureof Financial Advice changes will represent apanacea for the ills of the financial industry, butin reality, the changes which will progress

through the Parliament over coming weeks willnot serve to prevent consumers losing moneyin ventures such as those pursued by Westpointor Timbercorp.

Indeed, it is doubtful whether the FOFAchanges will serve to prevent another StormFinancial collapse in circumstances where thelosses incurred by clients were not the result ofregulatory breaches, but a failure of strategy.

Both Medcraft and Mack might care to reflecton the fact that where regulatory compliancewas concerned, Storm Financial had ticked allthe right boxes and only collapsed because therapid tightening in liquidity which accompa-nied the onset of the global financial crisis servedto rupture investment strategies based on toomuch leverage.

Medcraft, who last week released ASIC’s policyon enforcement and investigations, might alsoreflect upon the fact that his organisation hadreceived warnings about the strategies beingpromoted by Storm Financial but chose to lookno further than meeting its statutory obligations.

While the changes outlined in the FOFA billsextend ASIC’s power to act in circumstancessimilar to those surrounding Storm Financial,the degree to which the regulator utilises thosenew powers remains to be seen. It will certain-ly need to do more than simply be the police-man managing the scene after an accident hasoccurred.

Then too, the current economic climatesuggests it may be some time before the impactof FOFA and the extended powers of the regula-tor are put to the test. Few new products arebeing introduced to the market and mostinvestors are showing an inclination to remainin cash.

InFocus


Mike Taylor writes that the failure of the industry’s critics to distinguishbetween the failure of product and the failure of advice is continuing to tarnishthe reputation of the financial planning industry.

$1.9billionPersonal investments held

in banks, shares andinvestment properties as

at 30 June 2011

The Great Reset – Adjusting to New Economicand Financial Norms7 March 2012Auditorium, UNSW, Sydneywww.australiancentre.com.au

M&A Masterclass:Opportunities, Strategies and Risks20 March 2012Stamford Plaza Adelaide,South Australiawww.finsia.com

Recent Estate Planning Issues23 March 2012Rydges, Port Macquariehttp://www.spaa.asn.au/events.aspx

Financial Services Council Life InsuranceConference 201222 March 2012Sydney Convention andExhibition Centrewww.fsclifeinsuranceconf.org.au

SMSF Essentials 201227 March 2012Doltone House, Sydneywww.moneymanagement.com.au/eventlist

Source: Rice Warner Actuaries – PersonalInvestments Market Projections Report 2012

4.2% p.a.Expected growth rate of thepersonal investment market

over the next 15 years

What’s on

PERSONALINVESTMENTSNAPSHOT

33%Held in cash and

term deposits

46%Held in investment property

10%Held in shares

Don’t blame advisers forproduct failures


Superannuation

Super

Freya Purnell takes a closer look at what life after Stronger Super might bring to the superannuation sector.

Stronger Beyond


Superannuation

FOR the past few years, the SuperSystem Review (known as the

Cooper review) seemed toconsume all the oxygen in the roomaround superannuation. But just as theGovernment released its response andbegan to move into implementationmode, many other issues began to reartheir ugly heads – concessional taxation,a dearth of post-retirement options,prudential standards, default funds undermodern awards and more. So what mightlife after Stronger Super hold for theAustralian superannuation system?

Stronger SuperIn September, the Federal Governmentreleased its response to the Cooper Reviewas the Stronger Super reform packaging,supporting 139 of Cooper’s 179 recommen-dations. In framing its response, theGovernment said it was particularly mindfulof three issues identified in the review – thatfees in superannuation are too high; thatchoice of fund failed to deliver a competi-tive market and reduced costs for members;and that there is too much tinkering insuperannuation.

The key planks of the Stronger Superreform package were:

• The creation of MySuper as a defaultsuperannuation product with a single diver-sified investment strategy and single set offees, to be available from 1 July 2013;

• Providing the Australian PrudentialRegulation Authority (APRA), the AustralianSecurities and Investments Commissionand the Australian Taxation Office (ATO)with the tools they need to improve theiroversight of superannuation; and

• Improving the administration andmanagement of accounts through theSuperStream reforms, to make processingtransactions easier, cheaper, and faster formembers and employers.

Other measures included the consolida-tion of multiple member accounts on anopt-out basis, as well as additional require-ments for employers to provide bettercontribution information to employees.Taken together, the Government estimat-ed the reforms would reduce the fees paidby members by up to 40 per cent.

MySuperThough created as a ‘simple’ option,MySuper has drawn a chorus of misgivingswhich have dominated the Stronger Superreform discussions. Jeremy Cooper – chairof retirement income at Challenger andchair of the Super System Review – believesthat the implementation of MySuper is oneof the challenges now facing the sector.

“The MySuper product is conceptual,and as much a philosophy as anything – itis not so tangible or practical as Super-Stream,” Cooper said. “If it is merely amatter of complying with a checklist ofitems, and you don’t really get on boardwith the principles of it, then it may notbe as successful; the challenge is that itdoesn’t get bogged down in the prescrip-tive elements with the substance of itbeing lost.”

Given the timeline, the clock is nowticking for funds to develop and offer this‘no frills’ option. Despite the ‘one size fitsall’ intention of MySuper, the addition ofsome flexibility has been seen as critical bysome industry bodies for it to be successful.

The Financial Services Council (FSC), for

example, welcomed the addition of vari-able pricing and tailored investment strate-gies for large employers (those with 500employees and over).

“This is a great outcome for the 2.2million Australians in corporate superan-nuation plans as it means their super strat-egy will continue to be tailored to theirspecific needs,” FSC chief executive JohnBrogden said.

However, concerns remain about theimpact of a single fee structure for fundsusing a lifecycle investment strategy, withAon Hewitt calling the plan “inequitable”.

“Lifecycle strategies that shift a higherweight to fixed income as a member nearsretirement would result in lower costs asso-ciated with these members,” says JaniceSengupta, chief investment officer of AonHewitt. “If the fund has to charge allmembers the same investment manage-ment fee, then older members would besubsidising younger members in the moregrowth oriented strategies.”

In addition, there remains considerableuncertainty around the provision of adviceattached to MySuper products, which isbeing dealt with as part of the Future ofFinancial Advice (FOFA) reform process.

SuperStreamBy contrast, the SuperStream initiative toincrease back office efficiency has beenuncontroversial and, in fact, welcomed withopen arms.

“SuperStream is a group of really practi-cal measures that are going to save funds a

lot of time and money. It’s just been greatto see how the industry has embraced it –the paperwork and clunkiness that thesystem has now will be gone,” Cooper says.

SuperStream specifically includedproposals to improve the quality of data inthe system, allow the use of tax file numbersas the primary account identifier, encour-age the use of technology to improveprocessing efficiency and improve the wayfund-to-fund rollovers are processed andthe way contributions are made. Again, 1July 2013 marks the first deadline for imple-mentation, with data and e-commercestandards mandated for super funds fromthis date, and the Government’s clear direc-tion has given impetus to industry-ledmoves on electronic transacting.

The Affiliation of Superannuation Practi-tioners (ASP) – a consortium of funds andadministrators including AAS, AMP, BTFinancial Group, Colonial First State, MLC,Pillar and Superpartners – last year piloteda program allowing ASP members to trans-act superannuation rollover data andpayments electronically.

The pilot was very successful, accordingto ASP spokesperson Nigel McCammon,with 12,000 rollovers with a collective valueof $120 million completed, and a reductionin the average time member funds were outof the market from more than five days toless than 48 hours. However, the technolo-gy underlying the system meant it facedissues of scale.

In February, the group agreed to take theproject to the next level as a web-basedsystem – a move which “supports fully theGovernment’s intention and direction inregards to services and data standards”.

However, looking more broadly, theSuperStream initiatives are going to be lessachievable for some players than others.

“There is a lot of diversity in the indus-try around operating environments.There are some challenges for those thathave not invested in technology, andthey now face a greater leap than others,”McCammon says.

In seeking to make improvements acrossthe industry, McCammon also believes it isimportant that “we don’t derail efficienciesalready in play”.

Is the industry ready for Stronger Super? Despite these initial moves, new researchby the Association of SuperannuationFunds of Australia (ASFA) in collaborationwith Ernst & Young indicates that industryexecutives are quite unprepared for the newenvironment.

The report, ‘Stronger Super Preparedness:Preliminary findings of study II’, builds onan earlier survey, and shows that industrypreparedness has increased in eight of 12business dimensions over the past sixmonths, including fund governance, busi-ness strategy, and technology and data.

However, in areas such as members andemployers, governance and leadership, andprocesses and procedures, little headwayhas been made. ASFA attributes this to thedependency of Stronger Super to otherreforms, including Future of FinancialAdvice and the introduction of prudentialstandards by APRA, as well as ongoingdebate about the finer details.

“Until the missing regulatory detail is

“The MySuper product isconceptual, and as much aphilosophy as anything – itis not so tangible orpractical as SuperStream.”- Jeremy Cooper

Continued on page 14

Despite the upcoming ban on plannercommissions, the industry versus retail waris set to continue.

The use of term deposits within superaccounts is one of the new developmentsover the past couple of years.

Super returns in the September 2011quarter took a turn for the worse, accordingto APRA.

Research shows superannuation indus-try executives are quite unprepared for thenew regulatory environment.

Key points

Jeremy Cooper


Superannuation

provided, the industry will struggle with thiselement of preparation,” the report says.

However, ASFA warns that without asense of urgency to assess and act on thenew requirements, industry players couldmiss an opportunity to renew themselves.

“Those players employing a wait and seeapproach may be making a terminalmistake. Without a robust understandingof key implications now, industry stakehold-ers will not have sufficient time to prepare,”the report says.

The research also indicated a shift in theassessment of the costs involved in imple-menting the reforms. While in the firstsurvey, SuperStream accounted for most ofthe anticipated costs, the second survey sawit level with MySuper, with each attracting37 per cent of respondents’ estimated costs.

“This is a fundamental shift in thinkingfrom earlier this year, when the industrysaw MySuper as ‘just another product’,” thereport said.

So while MySuper is pitched at reduc-ing costs to members, initially at least,there will still be a considerable cost forits implementation.

More super reformDespite the wideranging nature of theStronger Super reforms and other measuressuch as increasing the superannuationguarantee (SG) contribution to 12 per cent,introducing the low-income superannua-tion contribution and abolishing the SG age

limit of 70, it seems there are still many otherissues around super yet to be resolved.

Treasurer Wayne Swan and Minister forSuperannuation and Financial Services BillShorten announced a superannuationroundtable to work throughout 2012 andspecifically address how to better target and

deliver current tax concessions and giveretirees more product options in the post-retirement phase.

Tax concessions within super have longbeen debated in the industry, and while theremit of the roundtable is broad, Coopersays there is a clear message that any“tinkering” will have to be balanced fromthe superannuation system.

“It won’t fly if people change concessions,and that is going to have fiscal conse-quences,” Cooper says.

Also on the table this year is the intro-duction of prudential standards for super-annuation by APRA, and a ProductivityCommission inquiry into the selection andongoing assessment of default superannu-ation funds in modern awards.

Expected to last around eight months,the inquiry will seek to develop transpar-ent and objective criteria for choosing adefault fund – a step applauded by the FSC,who called the current process “anti-competitive” and “riddled with conflicts ofinterest”, due to the involvement of employ-er groups and unions in the decision-making processes.

“Opening the default market to compe-tition and creating a level playing field


John Brogden

Features Maritime Super Health Super Rest Personal AustralianSuper Cbus Personal Super UniSuper (Stevedores Division) Superannuation Accumulation Super

Accumulation Standard (1) Members

Life Insurance Life insurance cover Yes Yes Yes Yes Yes Yes

Maximum level of cover 1000000 5000000 5000000 No maximum 1200000 No maximum

Maximum eligibility age 64 69 69 69 69 74

Cover expiry age 65 70 70 70 70 75

Salary Continuance Salary continuance No Yes Yes Yes Yes Yesinsurance cover

Benefit period Not applicable Two years or to age 65 2 years 2 years 2 years 2 years

Maximum cover Not applicable 85 85 85 100 85- % of income

Death Benefit Nominations Binding death Yes No Yes Yes Yes Yesbenefit nomination

General Contribution splitting Yes No Yes No Yes Yesbetween spouses

Pension Accessibility Account Based Yes Yes Yes Yes Yes YesPension

Pension Accessibility Non-Commutable Yes Yes Yes Yes No Yes

Allocated Pensions

Investment Options Number of Investment 5 9 12 16 6 12

Options

Switching between Greater than 5 Greater than 5 Up to 4 Unlimited free switches Unlimited free switches Up to 1 free switch

investment options free switches free switches free switches

Investment Access Direct share investments No No No Yes No No

Alternative or leveraged No Yes No Yes No Yesinvestments

Communication Statement Frequency Yearly Half-yearly Quarterly Half-yearly Yearly Half-yearly

Online Access Online transaction Yes Yes Yes Yes Yes Yes

functionality

Transactions Minimum Initial No minimum No minimum No minimum No minimum 250 No minimumInvestment

Minimum Regular No minimum No minimum No minimum No minimum No minimum No minimumInvestment

Midwinter Fee Index* 0.94% 0.63% 0.65% 0.49% 0.98% 0.45%

Investment Option Maritime Super Balanced Balanced Standard Balanced Balanced Core Strategy Balanced

Growth/income split 65/35 42.5/57.5 46.5/53.5 74.5/25.5 71/29 63/37

One-year return to 9.61% 10.65% 7.06% 10.27% 8.70% 8.88%30 June 2011 (after taxes and fees)

Table 1a: Industry Super Platforms

Source: Features and fee comparison, Midwinter Financial Services.Assumptions for MFI: current age 50, super balance $300,000; projections are to age 65, on a salary of $60,000 per annum, and 9% SG contributions. *The Midwinter Fee Index is a calculation that determines the averageimpact of fees on a platform over the project period, taking into account all the ongoing fees and entry fees to calculate the average cost.

“Opening the defaultmarket to competition andcreating a level playing fieldbetween all MySuper fundsis crucial to ensuring feescontinue to be drivendown.” - John Brogden


Superannuation

between all MySuper funds is crucial toensuring fees continue to be driven down,”Brogden says. “The industry fund monop-oly must be broken so that competition canflourish in the superannuation system.”

Obviously, the endgame with this exten-sive reform process is to have a better,more secure, more efficient, and ultimate-ly, more effective superannuation system.But do investors and advisers see it thatway, or are they just losing patience withthe endless change?

SMSF Professionals Association ofAustralia (SPAA) chief executive officerAndrea Slattery, for one, believes confidencein the market is a critical issue at present.

“Both sides of government had promisedover the last four or five years that theywould not make any further changes tosuper once the reforms were finished. Nowhere, we have already got people talkingabout tinkering with tax concessions post-reform, and there are a lot of issues comingout of the implementation which will reallyaffect people’s confidence in super as asystem,” Slattery said.

Disappointing performanceThe current poor performance of manysuperannuation funds isn’t helping matters.APRA figures show that returns in theSeptember 2011 quarter took a dramaticturn for the worse, with the overall rate ofreturn -4.9 per cent. Public sector fundsgenerated a return of -4.2 per cent, industryfunds generated a return of -4.6 per cent,corporate funds -5.1 per cent, and retailfunds -5.4 per cent.

While the blame for this performance canbe easily driven home to lacklustre invest-ment markets, members may start to ques-tion the overall approach, given the volatil-ity of recent years.

“The philosophy on asset allocation thatwe have enjoyed for some time – beingequities focused – is starting to test thepatience of a lot of members. Particularlyas it affects retirees and those approachingretirement – I think there is a lot of work todo in that area,” Cooper says.

Research by ASFA bears this out – itsresearch report, ‘Consumer attitudes tosuperannuation and super policy issues’,

released in November 2011, shows that only27 per cent of respondents were satisfiedwith the superannuation industry as awhole – down from 34 per cent in 2010.

Levels of satisfaction with the main superfund of respondents are also now at their

lowest level in eight years – a period whichincludes the bloodbath of 2008 – whichASFA director of research Ross Clare attrib-utes to continued volatility and negativeinvestment returns in many asset classes.

Countplus MBT principal Roy Masseyagrees that amongst clients, superannua-tion performance is a big issue, but they arealso becoming increasingly fee sensitive,and looking for an expanded range ofoptions from their wrap account.

“A new development over the last fewyears has been the use of term depositswithin super accounts. Clients are nowinclined to hold a substantial amount ofcash in their portfolio. One thing we havebeen asked for quite a bit recently is wrapaccounts that use a range of providers forterm deposits,” he says.

Performance issues have also impactedthe levels of funds under management inthe personal super sector, according toMark Kachor, managing director, DEXX&R.

Full year figures to the end of September

Continued on page 16

Challenger Guaranteed AMP Eligible AMP Flexible IOOF LifeTrack Personal Zurich CFS First Choice Super Personal Personal Super Rollover Fund Super - Personal Superannuation Superannuation Personal Super Retirement Plan

- Core Investment Plan- Essentials Protection

Life Insurance Life insurance cover No No Yes Yes Yes Yes No

Maximum level of cover Not applicable Not applicable 250000 No maximum No maximum No maximum Not applicable

Maximum eligibility age Not applicable Not applicable 55 69 69 74 Not applicable

Cover expiry age Not applicable Not applicable 65 70 Greater than 90 75 Not applicable

Salary Continuance Salary continuance No No No Yes Yes Yes Noinsurance cover

Benefit period Not applicable Not applicable Not applicable 2 years 5 years 1 year 2 years 5 years Two years Not applicableto age 65 to age 60 or 65 or to age 65

Maximum cover - Not applicable Not applicable Not applicable 75 75 85 Not applicable% of income

Death Benefit Nominations Binding death benefit No No Yes Yes Yes Yes Yesnomination

General Contribution splitting Yes No Yes Yes Yes Yes Yesbetween spouses

Pension Accessibility Account Based Pension Yes No Yes Yes Yes Yes Yes

Pension Accessibility Non-Commutable Yes No Yes Yes Yes Yes YesAllocated Pensions

Investment Options Number of 6 1 2 201 - 250 21 - 30 126 - 150 9

Investment Options

Switching between Unlimited Not applicable Unlimited Unlimited Unlimited Unlimited Unlimited investment options free switches free switches free switches free switches free switches free switches

Investment Access Direct share No No No Yes No No Noinvestments

Alternative or leveraged No No No Yes No Yes Noinvestments

Communication Statement Frequency Yearly Yearly Yearly Yearly Yearly Half-yearly Half-yearly

Online Access Online transaction No No Yes Yes No Yes Nofunctionality

Transactions Minimum Initial 1000 No minimum No minimum No minimum 2500 1500 2000Investment

Minimum Regular 100 No regular No minimum 100 No minimum 100 100Investment contribution available

Midwinter Fee Index* 0% 1.64% 0.57% 2.37% 1.58% 1.55% 1.20%

Investment Option Guaranteed Fixed No. 1 Fund AMP Super IOOF Multimix Zurich Balanced CFS Balanced BalancedRate 4 year Easy Balanced Balanced Growth

Growth/income split 0/100 13/87 67.5/32.5 65/35 49/51 47.5/52.5 55/45

One-year return to n/a n/a 6.70% 8.45% 5.09% 5.46% 9.33%

30th June 2011

(after taxes and fees)

Wayne Swan

Table 1b: Retail Super Platforms

Source: Features and fee comparison, Midwinter Financial Services.Assumptions for MFI: current age 50, super balance $300,000; projections are to age 65, on a salary of $60,000 per annum, and 9% SG contributions. *The Midwinter Fee Index is a calculation that determines the averageimpact of fees on a platform over the project period, taking into account all the ongoing fees and entry fees to calculate the average cost.


Superannuation

2011 show that total funds under manage-ment/advice in the personal superannua-tion market fell by 2.83 per cent, or $4.6billion to $158 billion. The employer supermarket, by contrast, grew by 4.63 per cent to$88.5 billion – though this represented a1.79 per cent drop on the June 2011 quarter.

He believes this shift is reflective of thefact that fund flow for employer super islargely dominated by mandatory SG contri-butions, while personal super tends to drawdiscretionary contributions – whichinvestors are less likely to make whenbalances are falling due to poor investmentmarket performance.

“What you notice particularly in thepersonal super market is that it tracks withabout a nine-month lag on how the overallequities market is going,” Kachor says,adding that he believes this dynamic ismore responsible for the decline of person-al super than the rise of industry funds.

The retail vs industry fund warWith a ban on commissions and intra-fund

advice imminent, the battleground betweenretail master trusts and industry superannu-ation funds seems set to continue – onfeatures, returns, and of course, fees.

In this comparison of retail and industrysuper funds (see Table 1), there is signifi-cant variability in the features available forthe funds, but there is a clear trend for lower

fees among the industry funds, and gener-ally higher returns (on a one-year basis). Nosurprises there, perhaps – but what maysurprise some is that the most recent RoyMorgan Research Superannuation andWealth Management report found that inthe 12 months to June 2011, 10 per cent ofall superannuation products that switchedto industry super funds came through afinancial planner – representing an increasefrom 7 per cent in the year prior.

Massey believes much of this increasewould come from planners employed byindustr y funds, but says he wouldrecommend an industry fund in certaincircumstances.

“Where the client does not requireongoing advice, they’re usually better offmoving to an industry fund than staying ina retail product, where there is a fee beingpaid to an adviser and potentially a dealergroup as well,” he says.

According to Industry Fund FinancialPlanning (IFFP) – which provides adviceservices to 16 super funds, includingAustralian Super, HESTA, MTAA Super,Care Super, CBUS and Host Plus –


THE self-managed superannuation fund(SMSF) was also a target area for theStronger Super reforms, and while Slat-tery says broadly the association washappy with the proposed measures,there are still some concerns aboutimplementation – in areas such as assetvaluations and off-market transfers, forexample.

For the most part, though, shebelieves the SMSF sector will be largelyunaffected, and recent ATO figures showthat it certainly remains a force to bereckoned with. In the five years to 30June 2010, according to ‘Self-managedsuperannuation funds: A statisticaloverview 2008-09’, the SMSF sector hasbeen the fastest growing in the Aus-tralian superannuation industry, withSMSF assets growing by 122 per cent,compared with total super assets at 60per cent.

Slattery says there has also beensteady growth over the past 12 years inthe number of people starting their ownSMSF, motivated by an interest in con-trolling their retirement savings. Thisgreater knowledge and sophisticationmeans that SMSF trustees are comfort-able voting with their feet when dissatis-fied with platforms, for example, accord-ing to Massey.

“That’s where wrap providers anddealer groups to a certain extent need tobe very cautious in terms of how theyprice their platforms. Because if they’renot seen as good value, people likeSMSF trustees are starting to movetowards dealing directly with a fund man-ager,” he says.

Interestingly, the ATO figures show atrend for members of newly establishedSMSFs to come from younger agegroups. At the other end of the market,Slattery also argues that the SMSFsector is managing the post-retirementphase better than the rest of the market.

“The SMSF sector is actually the onlyone that doesn’t have a longevity or ade-quacy issue in retirement,” she says,though she concedes that account bal-ances tend to be higher for SMSFs.

“At the moment, you have got closeto 90 per cent of people choosing toremain in a pension with their fund,rather than taking a lump sum.”

This is the exact opposite of the APRA-regulated sector, where 90 per cent takea lump sum.

As the sector grows, there will also bean increasing need for SMSF advice spe-cialists, and advisers are grabbing thisopportunity with both hands – over thepast 12 months, the number of SPAASMSF Specialist Advisors or SMSF Spe-cialist Auditors grew by 65 per cent.

As well as raising their competencystandards, Slattery believes this is animportant vote of confidence in thesector – especially as the superannua-tion landscape evolves.

“It is a more complex area, and con-sumers are seeking advisers they cantrust and have a relationship with.”

SMSF sectorstays strong

Andrea Slattery

Table 2: Personal Super – Total groups by productFunds under management past 3 Years

Source: DEXX&R

Group Year Ending % of Total % change Year Ending % of Total % change Year Ending Sept 11 Sept 10 Sept 09

AMP 35,615.95 [ 1] 23.75 40.65 25,321.96 [ 3] 15.83 2.44 24,718.69 [ 3]

Commonwealth 27,875.09 [ 2] 18.58 -5.91 29,626.47 [ 2] 18.52 0.49 29,482.87 [ 1]

National 27,574.95 [ 3] 18.38 -7.69 29,871.37 [ 1] 18.68 17.79 25,359.33 [ 2]

BT / Westpac 20,380.31 [ 4] 13.59 -2.14 20,826.92 [ 4] 13.02 4.93 19,847.65 [ 4]

IOOF Group 8,073.92 [ 5] 5.38 -12.61 9,239.28 [ 6] 5.78 -1.93 9,421.16 [ 6]

ANZ 7,220.28 [ 6] 4.81 -9.34 7,963.83 [ 7] 4.98 -1.98 8,124.43 [ 7]

Macquarie 5,393.14 [ 7] 3.60 -4.51 5,647.69 [ 8] 3.53 0.33 5,629.30 [ 8]

Mercer 3,763.60 [ 8] 2.51 1.23 3,717.70 [ 9] 2.32 7.47 3,459.30 [ 10]

Oasis 2,659.75 [ 9] 1.77 -10.00 2,955.31 [ 10] 1.85 2.35 2,887.34 [ 11]

Tower 1,497.40 [ 10] 1.00 -6.18 1,596.02 [ 11] 1.00 2.01 1,564.64 [ 12]

Suncorp 1,406.71 [ 11] 0.94 -7.93 1,527.91 [ 12] 0.96 104.77 746.16 [ 18]

Perpetual 1,161.91 [ 12] 0.77 -10.76 1,301.99 [ 13] 0.81 -1.95 1,327.85 [ 13]

Jacques Martin 982.81 [ 13] 0.66 -1.28 995.53 [ 15] 0.62 2.31 973.01 [ 15]Admin & Consult

Count 975.78 [ 14] 0.65 -12.54 1,115.68 [ 14] 0.70 1.23 1,102.14 [ 14]

DKN Fin Group Ltd 698.53 [ 15] 0.47 -11.54 789.69 [ 16] 0.49 -8.23 860.49 [ 16]

Asteron Grp 616.12 [ 16] 0.41 -13.03 708.41 [ 17] 0.44 -7.44 765.31 [ 17]

Fiducian 605.88 [ 17] 0.40 -0.83 610.97 [ 20] 0.38 -1.43 619.81 [ 21]

Zurich 588.40 [ 18] 0.39 -14.56 688.65 [ 18] 0.43 -6.79 738.82 [ 19]

MBF 574.41 [ 19] 0.38 -10.85 644.31 [ 19] 0.40 -9.70 713.56 [ 20]

Tynan Mackenzie 427.63 [ 20] 0.29 -20.32 536.67 [ 21] 0.34 -10.91 602.36 [ 22]

NM Super 374.11 [ 21] 0.25 -1.28 378.96 [ 22] 0.24 2.31 370.38 [ 23]

AON 345.28 [ 22] 0.23 -5.79 366.50 [ 23] 0.23 3.46 354.23 [ 24]

Aust Ethical 294.38 [ 23] 0.20 -6.68 315.46 [ 24] 0.20 1.58 310.55 [ 25]

Sandhurst Trustees 243.82 [ 24] 0.16 -5.12 256.98 [ 25] 0.16 -5.16 270.96 [ 26]

Investec 167.49 [ 25] 0.11 -0.83 168.89 [ 26] 0.11 -1.43 171.34 [ 28]

Astarra 132.76 [ 26] 0.09 -5.54 140.54 [ 27] 0.09 3.58 135.69 [ 29]

Challenger Life 122.30 [ 27] 0.08 -3.39 126.60 [ 28] 0.08 -43.17 222.76 [ 27]

Plan B 71.23 [ 28] 0.05 -0.23 71.39 [ 29] 0.04 0.72 70.88 [ 30]

Trust Co Aust 56.66 [ 29] 0.04 -4.14 59.11 [ 30] 0.04 -0.97 59.69 [ 31]

Equity Trustees 40.90 [ 30] 0.03 -0.85 41.25 [ 31] 0.03 -2.27 42.21 [ 32]

Savings & Loans 25.27 [ 31] 0.02 0.40 25.17 [ 33] 0.02 -0.26 25.24 [ 34]

Rabobank Aus 22.06 [ 32] 0.01 -23.04 28.66 [ 32] 0.02 -7.55 31.00 [ 33]

AXA -- -- -- 12,272.84 [ 5] 7.67 -1.33 12,438.06 [ 5]

Aviva Group -- -- -- -- -- -- 4,805.49 [ 9]

TOTAL 149,988.83 [ 32] 100.00 -6.22% 159,938.71 [ 33] 100.00 1.07% 158,252.68 [ 34]


MM

Superannuation

demand for financial advice by industryfund members is on the increase.

The group is on a dramatic growth path,according to Frank Gayton, national prac-tice manager for IFFP, with adviser numbersnow up 15 per cent from the number at 1July 2011, and negotiations are underwaythat could see adviser numbers up 50 percent by the end of this financial year. Witha huge increase in the number of membersseeking advice – which Gayton attributesto “fierce resistance” from consumers tocommissions as well as the baby boomerstaking an interest in their superannuation –there is currently a four to six week wait foran appointment with an IFFP planner.

On the issue of switching superaccounts into an industry fund, he says inmany cases it is logical for their plannersto advise such a step – especially for aninvestor with multiple accounts.

“It may be that someone has an accountof $200,000 with Australian Super, forexample, and a legacy account of $10,000with Colonial First State. Logically, ifsomeone is planning their retirement, youwould consolidate them in one fund, andthat would invariably be with the majorityof the money,” Gayton says.

The post-retirement landscapePerhaps more significant than any ongoingtussle between industry and retail funds isthe impending demographic shift as babyboomers begin to move into retirement enmasse. With the first of the generation

hitting age 65 last year, the move is alreadyunderway, but is the industry ready?

According to Cooper, baby boomershold approximately $850 billion of the $1.4trillion held in superannuation assets, andthis is the group which will be transition-ing from accumulation to drawdown overthe next 20 years.

He predicts in future, many more will stayin the super system after retirement.

“Today, 50 per cent of retirees just takethe lump sum and then step out of thesuper system when they retire. That’s goingto change very quickly, so within a relative-ly short number of years, 90 per cent willstay in the system in retirement, receivingsome sort of income stream from theirfund,” Cooper says.

This has implications for advisers, forwhom retirees will form a larger part of theirclient base (with much larger superannua-tion balances than seen previously). AndCooper argues that the complexity of thisphase is very different to the objectives ofthe accumulation phase.

“There is no silver bullet solution – it is allvery specific to the individual retiree aboutwhat their needs and concerns are, theirtolerance for risk, and what they are seekingto get out of retirement. Accumulation is aone-trick pony – you’re seeking to maximiseyour returns so you have the largest amounton which to retire,” Cooper says.

Crucially, to better meet retirees’ needs,the right products need to be available as

well, according to Actuaries Institute chiefexecutive Melinda Howes – and this is thetask ahead for legislators, product manu-facturers and super funds.

Cooper says that while the Govern-ment agreed in principle with the SuperSystem Review’s recommendation thatpost-retirement products should bedesigned around a strategy that woulddeal with inflation risk, longevity risk andmarket risk, it ended up in the “too-hard”basket because it is a very differentapproach to that taken currently.

He hopes that the superannuationroundtable will be able to provide a concreteplan on expanding the product options inthe drawdown phase – including perhapsresolving the technical problems withdeferred annuities, which help to addresslongevity risk for retirees.

Howes agrees that there is insufficientchoice available to retirees to help themmanage key risks, and also believes road-blocks to product development need tobe removed.

“Over the last 20 years, people have beenhappy to be in account-based pensions inretirement because returns have beenstrong and consistent up until 2008. Backbefore that, interest rates were high, sopeople were happy to be in lifetime annu-ities and pensions.

“But now you have got a situation wherepeople don’t want to be exposed to marketrisks, so they are looking to lock in someprotection,” Howes says.

“There is no silver bulletsolution – it is all veryspecific to the individualretiree about what theirneeds and concerns are. ”- Jeremy Cooper

Bill Shorten

Several months ago, MoneyManagement discussed some ofthe pros and cons of the newMacquarie Active risk insurance

product (Money Management,30 September 2010).

The verdict was that Active appearedto give the adviser access to someunique opportunities in various areas.However, in the end the article conclud-ed, “it will come down to the adviser’sanalysis of the client and the needs ofthe client”.

And therein lay the problem. Theunique design of Active made the iden-tification of the client need and thesubsequent reasonable benefit amountrecommendation somewhat problem-atic, and thus the reason for this follow-up article, the purpose of which is toexplore whether or not it is possible toestablish an objective basis for an Activebenefit amount.

A specific client is not being consid-

ered, so a general approach will be taken.Term, trauma and total and perma-

nent disability (TPD) – and their Activeequivalents of term and health eventscover – is where the challenge lies.

Term insuranceThe payment basis of the term insur-ance component of Active, while alsoidentical to its equivalent traditionalproduct, requires a slight variation ofapproach because of the structure ofterm within Active.

Within Active, the term insurancecover can be established in two ways:

Initial coverInitial cover is the amount of cover thatis shared with the health events(trauma/TPD) insurance within thepolicy.

If the first insured event to occur is thedeath or terminal illness of the life insured,100 per cent of the initial cover is payable.

If, however, one or more health eventpayments occur first, the initial coverwill be reduced by the amount paid.There is no buy-back facility withinActive, so the amount that is subse-quently paid on death or terminal illnessmay well be less than what is required.

Additional coverAdditional death cover can be purchasedand this additional cover is not affectedby payments under health events cover.

Additional cover may therefore beused if:

- The client needs death cover inexcess of the initial cover, in which caseadditional cover would be the level ofextra cover needed; and/or

- The effect of health events paymentson the initial cover needs to be offset, inwhich case additional cover would dupli-cate the initial cover. The need to duplicatethe death cover in this way will increase thepremium commitment required.

Trauma insuranceThe health events component of Activehas a relatively complex set of paymenttriggers in that:

• Benefit payment amounts differbased on the severity of the insuredevents; and

• Multiple payments can be made overthe duration of the policy.

These complexities, however, do notpreclude establishing an objective basisfor a benefit amount recommendation.

The health event cover recommenda-tion within Active can be made to focuson Severity A health events, as it is theseevents that will have the greatest finan-cial impact on the client.

Traditionally, the initial focus of atrauma insurance recommendation isin the area of the costs associated withmedical care and rehabil i tat ions.Generally, these costs will be severity-based and will be incurred each time ahealth event occurs; which appears to


OpinionRisk insurance

Weighing the benefitsMacquarie Life broke new ground in May 2010 with the launch of Macquarie Activerisk insurance product. Col Fullagar examines whether or not it is possible to establishan objective basis for an Active benefit amount.

fit in well with the structure of Active.A benefit amount recommendation in

this area of trauma insurance cover canbe arrived at by following a logicalprogression.

Base coverLike most trauma insurance products,the number of insured events coveredunder Active is such that it would not befeasible for advisers to individuallyconsider each of these insured events.

It is therefore appropriate to initiallyconsider only those events which aremost likely to occur: ie, cancer, heartattack and stroke.

In respect of the medical and rehabili-tation costs associated with these condi-tions, research has shown that theaverage, gross costs (ie, prior to the impactof any medical insurance rebates) to theindividual are as set out below:

• Cancer: of the more commoncancers, the most expensive on averageis leukaemia at around $100,000. (Opti-mising Cancer Care in Australia, Nation-al Cancer Control Initiative February2003. Access Economics – Cost of Cancerin NSW, April 2007.)

• Heart attack: on average, the equiva-lent costs for a heart attack is $25,000.(Australian Institute of Health and Welfarepublication, Health System Costs ofCardiovascular Disease in Australia 1998-99, indexed in line with CPI to 2011.)

• Stroke: because of the higher reha-bilitation component associated with astroke, the equivalent average costs arearound $125,000. (Lifetime costs of strokesubtypes in Australia, Melbourne, June2003, indexed in line with CPI to 2011.)

Thus, if providing general advice inregards to the personal medical andrehabilitation costs associated with themost likely-to-occur trauma-insuredevents, an amount around the higherfigure above might be considered appro-priate.

Thus, a base cover amount of$125,000 will be assumed.

Above-average health care allowanceThe base cover amount above – ie,$125,000 – is an ‘average’ amount. It maytherefore be that a particular clientwould prefer f inancial access to ahigher-than-average level of health care:eg, an additional $75,000.

Provision for this can be enabledsimply by increasing the recommend-ed base cover amount to that required.Any increase in this way would effec-tively be arbitrary, in part driven byclient affordability.

Specific health eventsAlso, a particular client may wish to givea greater focus to specific insured healthevents than the likelihood of thoseevents occurring would other wisedemand.

Examples might be that the clientwants to focus on:

• Paralysis, because the client is youngand very active; or

• Dementia or multiple sclerosisbecause the client has seen the impactthis disease has had on others.

If the medical and rehabilitation costsassociated with a specific condition aregreater than the base amount plus anyabove-average health care allowance,the difference would be added to therecommendation.

In the example below, it wil l beassumed that the client wishes to protectagainst the personal costs that may arisein the event of Alzheimer’s disease beingdiagnosed. An allowance of $225,000 hasbeen made.

Health insurance rebateThe total of the above amounts,however, may be adjusted downwardsby any amounts likely to be receivedthrough health insurance rebates. It isnot the place of this article to mandatea specific adjustment, bearing in mindthat it is unknown what health insur-ance cover a particular client will havein place.

In the example below, however, a rebateamount of $50,000 will be assumed.

Lifestyle changesHaving considered the medical andrehabilitation costs associated with thetrauma insurance recommendation, thisamount may need to be supplementedif the client wishes to overlay somelifestyle changes.

Whilst medical and rehabilitationcosts might be severity-based and recur-ring, the costs associated with so-calledlifestyle changes are generally not.

For example, the following tradition-al lifestyle costs are neither severity-based nor do they recur:

• Debt reduction; • Pre-fund children’s education costs;• Pre-fund early retirement; and• Discretionary home improvements.On the other hand, the following

traditional costs are not severity-basedbut may recur:

• Holiday;• Hire home-carer or cleaner;• Top up the 25 per cent income

protection insurance shortfall; and• Time off work.Therefore, in the area of lifestyle

changes, Active, while equally as effectiveas traditional trauma insurance, is not asappropriately designed as it is in the areaof medical care and rehabilitation.

As the cost of each of the lifestyle itemsis capable of being objectively estimated,the amount needed to implement therequired lifestyle changes is simply thetotal cost of those changes required.

In the example below, it wil l beassumed that the client wishes to makeprovision of $150,000, being the totalcost of the following lifestyle changes:

• Debt reduction – $130,000, and• An overseas holiday in Italy – $20,000.Thus, in regards to the trauma insur-

ance component of the Active healthevents recommendation, the followingflow can be followed: base cover, plusabove-average health care allowance,plus specific health events, less healthinsurance rebate, plus lifestyle changes.

TPD provisionTotal permanent disability (TPD) insur-

ance makes funds available to provide forthe needs and costs that arise as a resultof the total and permanent inability of thelife insured to work in their own occupa-tion or an occupation for which the lifeinsured is reasonably suited by training,education and experience.

‘Needs’ can be defined as the financialoutgoings that were previously providedfor by the earnings of the life insured.

If revenue needs such as the payment

of debt instalments are covered underincome protection insurance, addition-al cover under Active is not required.

Capital needs would include:• Debt repayment or reduction; and• Pre-payment of school feesIf capital needs are covered under the

lifestyle changes component of traumainsurance, additional cover under theTPD component is not required.

‘Costs’ can be defined as the financialoutgoings that arise as a result of the lifeinsured’s sickness or injury.

Revenue costs would include:• Cost of home maintenance;• Transport to medical facilities; and• Ongoing medical costs associated with

the treatment of the sickness or injury.Capital costs would include:• Home and car modifications or even

a new, more suitable home or car; and• One-off medical expenses.The ‘costs’ component is driven to a

large extent by the nature and severityof the sickness or injury, which againaligns this component with the struc-ture of Active. However, as the natureand severity are not known when theadvice is given, it is in fact not possiblefor an objective benefit amount recom-mendation to be arrived at.

Bearing this in mind, an adviser maymake a recommendation in regards tothis component in the following way:

“You indicated that, were you to bepermanently unable to work, you wouldlike provision to be made for the following:

• $150,000 to cover any possible homeor car modification costs or one-offmedical expenses not covered underyour private health fund; and

• $300,000, that could be invested to

cover ongoing medical and home main-tenance costs, for a total of $450,000.”

Affordability will play a large part incapping the upper limits of the recom-mendation, and within this capped rangethe adviser can split the recommendedbenefit amount and provide objectivepurposes for each part of the total.

Personal insuranceIn regards to the personal insuranceneeds, a basis for arriving at an Activebenefit amount can (using the figuresnoted above) be seen in Figure 1 below.

Business insuranceEach of the business insurance needshas some things in common:

• The financial impact is dictated byan agreed, theoretical formula;

• The financial impact does notinclude any medical or rehabilitationcosts;

• The financial impact is linked to thetotal loss of the life insured to the busi-ness, not the partial loss; and

• The financial correction mechanismwill be handled in line with a signedagreement.

Because benefit payments under thehealth events component of Active aregeared to periodic, severity-basedpayments which can have the effect ofdissipating any final payment, thiscomponent of Active is less suited tocover business insurance needs.

SummaryThere are acknowledged limitations tothe above approach, for example:

• The product design does not enablethe one-off lifestyle provision to be sepa-rated and thus only paid once, thereforein making provision for them in thebenefit amount there will be somepotential for duplication of cover; and

• If payment is made under a severitylevel lower than A, only a portion of thelifestyle provision will be paid – forexample, 80 per cent or 65 per cent, etc– which will result in an inability to effectthe full lifestyle change.

Notwithstanding these limitationsand the fact that some advisers mayapproach the benefit amount calcula-tion in a completely different way, theimportant thing is that whatever basisis used for arriving at a recommenda-tion, it must possess objectivity suchthat, if necessary, it can be activelyexplained and defended.

Col Fullagar is the national manager,risk insurance at RI Advice Group


“Whatever basis is used forarriving at arecommendation, it mustpossess objectivity suchthat, if necessary, it can beactively explained anddefended. ”

Base cover

Plus above-average health care allowance

Plus specific health events

Less health fund rebate

Plus lifestyle changes

Plus TPD allowance

TOTAL

$125,000

$ 75,000

$ 225,000

$ 50,000

$ 150,000

$ 450,000

$ 1,075,000

Figure 1

The financial services world as weknew it before the global finan-cial crisis (GFC) has changedconclusively. This is evident in

many ways, but three stand out.First and foremost, matching perform-

ance achieved through the 1990s and thenaughties – at least up to when LehmanBros imploded in September 2008 – willbe difficult. It’s now more than threeyears later, and despite the market rallyin equities in the immediate aftermathof the GFC, there’s no sign that investors(particularly in property and equities)have regained their nerve.

The simple fact is any bullish news inthe market (especially the Australianresources story) continues to be drownedout by what’s happening in Europe andthe United States. For Europe, in partic-ular, the public debt story seems to gofrom bad to worse to nearly apoplectic,with the recent resignation of ItalianPrime Minister Silvio Berlusconi just thelatest potent symbol of this ongoingcrisis.

Europe’s woes have taken some of thespotlight off the US, but no-one shoulddoubt the world’s biggest economy hasdeep structural problems – of whichunemployment (and the accompanyingsocial ills) and public debt head the list.

Second, expect more regulation of thefinancial services sector globally. InAustralia, there are Future of FinancialAdvice (FOFA) reforms, and that’s unlike-ly to be the last of it. Governments areslowly responding to what’s perceived asthe excesses of this sector before theGFC. The mass protests across the world– called Occupy Wall Street – might bethe most extreme manifestation of thispublic angst, but rest assured, this angerextends (in a far less visible form) acrossthe social spectrum in developed coun-tries worldwide. What’s magnifying thisanger, of course, is the amount of govern-ment support delivered post-GFC for thissector, and the perceived lack of socialresponsibility by the main players inresponse to this ‘public’ generosity.Investors are far more indulgent ofbonuses and greed when markets arerising, and all are participating; they arefar less forgiving when the game appearsrigged in favour of one sector.

Third, clients are more market savvyand less trusting of their financial insti-tutions; crises like the GFC and the effectof individual corporate collapses such asStorm do (unfairly or not) leave a markon how investors view institutions andadvisers. These crises aside, it’s certain-ly arguable that the exponential growthin self-managed super funds – as well asthe advent of 24-hour business televi-sion channels – reflects an investor senti-ment that says they are wary of outsideadvice, as well as being more confidentin making their own decisions. And inthe same vein, so does the movementaway from managed funds to directinvesting.

Pull these three factors together, andwhat emerges from the viewpoint ofretail investors is a new paradigm aboutwhat they want from their financial insti-tutions and financial advisers. It has

shifted quite dramatically from a worldof returns and income to one far morefocused on capital preservation. Finan-cial advisors are becoming increasinglyaware of this phenomenon, and arehaving to respond accordingly.

In this brave new world, being ableto quantify risk assumes far greaterimportance; clients paying more atten-tion in trying to assess whether theirportfolio will lose capital (irrespectiveof market conditions) than earning areturn above the market benchmarkmeans they will demand a different skillset from their advisor. In other words,traditional client discussions usingrules of thumb for risk and concentrat-ing on the return or dividend side of theequation – for example, using estimat-ed returns to illustrate asset allocationssuch as a balanced fund should achievea 7 per cent annual return – are assum-ing less importance for investors whounderstand that even a 7 per centreturn goal can require significant risksto achieve.

For many financial advisers who haverelied on the rule of thumb, it’s a skill setthey simply don’t possess. In manyrespects, that’s not their fault. It reflectsa retail investor culture where the focushas been on returns rather than therisk/return balance. And as the GFCgraphically illustrated, many institution-al investors that had risk strategies builtinto their portfolios did not exactly coverthemselves in glory when the financialmarkets imploded in 2008.

In the first instance, what financialplanners have to do is determine fromtheir clients their risk tolerance – howmuch are they willing to lose.

If, for example, the market falls 10 percent in a month, how will their shareportfolio look in such a downturn? Will itbe off more, less, or simply match thebroader market index? What if themarket falls 20 per cent? Using statisti-cal analysis tools, financial advisors canassess – to a fair degree of accuracy – howa client’s portfolio is likely to behave insuch market downturns.

As returns become harder to generateand the current economic environmentin Europe and the US settles in as thenorm for the foreseeable future, a focuson risk will be needed to meet retailinvestor needs. By quantifying possiblelosses and risks, a retail investor (who iswell aware that investing means takingrisks) will be able to understand theexpected performance of their portfolio– and not only in good times.

For some financial advisors, factoringin risk expectations of clients’ portfolioswill require a significant rethink of howthey explain and review portfolios forclients. But they have no option. In apost-FOFA world, and with returnsunlikely to offer positive numbers withany degree of consistency, it needs tobecome an integral part of their serviceoffering.

Gabriel Carey is regional manager forVictoria, South Australia, Tasmania andWestern Australia of the boutiqueinvestment house, Instreet Investment.


OpinionRisk

The riskfactor

For financial advisers, the need tobe able to assess their clients’ riskis assuming far greater importance,according to Gabriel Carey.

There does not appear to be anymeaningful ‘thawing’ in the rela-tionship between the industryfunds and financial planners. The

most obvious manifestation of this stand-off is the prolific industry fund advertisingcampaign promoting the central messagethat they “do not pay commissions tofinancial planners”. The fee differential isthen projected over the lifetime of typicalsuperannuation fund members to suppos-edly represent the benefit that an industryfund member stands to gain. This advertis-ing also incorrectly promotes a perceptionthat financial planners deal only withsuperannuation matters.

The key assumption of the campaign isthat planners charge fees but do not addany long-term value to a client’s portfolioor financial position. I am not aware of anyresearch that supports this assertion. Iron-ically, I have personally seen a disclosure ina statement of advice (SOA) produced byan industry fund that acknowledges thepayment of asset-based bonuses to theirplanners. There are also other industryfund websites that offer the opportunity

for their members to pay for their SOAdirectly from their super (which arearguably both forms of commission too).

This highlights the hypocrisy of theadvertising campaign and does nothing toencourage professional financial plannersto engage with the industry fund sector forthe superannuation component of theirfinancial plan.

The industry fund movement hasfocussed the debate on the commissionsissue and claims that planners do notrecommend industry funds to their clientsbecause commissions are not (generally)payable. I believe that they are missing thereal point.

The financial planning industry isincreasingly moving away from commis-sions and will continue to do so as theFuture of Financial Advice reforms unfold.From my perspective, there are some veryimportant reasons why industry funds aregenerally a poor option for my clients.

• Industry funds do not generallyprovide a reporting capability for financialplanners to cost-effectively manage clientportfolios. If I had a large number of clients

in an industry fund, I would have to askeach client to give me their member log-indetails and log in separately for each clientquery/report. This is time-inefficientcompared with state-of-the-art platformsthat enable reports to be run across a clientbase seeking to identify clients with specif-ic characteristics or requirements. Thisencompasses both superannuation andnon-superannuation assets, which areequally important.

In many cases, industry fund websitesdo not provide ready access to important

taxation component information (for taxand estate planning) and Centrelinkincome schedule reports. This wouldrequire phone calls to call centres on behalfof clients to seek the required information.The additional time it would take to sourcethe client information would inevitablyraise the cost of providing ongoing finan-cial planning advice (which could under-mine much or all of the cost savings fromusing an industry fund in the first place).

• Many industry funds only offer a veryrestricted, streamlined investment menuunder the assumption that mostmembers will direct their capital into oneor two diversified funds (a ‘one size fitsall’ approach). However, this is not howfinancial planners manage client capital.Most financial planners assess theirclients’ risk profile and personal objec-tives before proposing a portfolio of assetstailored to suit them. These portfolios mayinclude specific tilts into specialist sectorssuch as local smaller companies, globalsmaller companies, emerging marketsfunds, resources funds, geared funds and,at the other end of the spectrum, higher-yielding defensive assets such as termdeposits. The capacity for this level ofportfolio management is beyond thescope of most industry funds.

• A related investment issue is the factthat many industry funds provide poorvisibility of the underlying assets withintheir diversified funds. Financial plannershave a legal obligation to understand thenature of the investments that they recom-mend for clients (particularly when build-ing portfolios). We cannot take a simple‘leap of faith’ that many of the unlistedassets (including private equity and hedgefund investments) are appropriate for allclients. The extent of the unlisted assetswas evident when industry funds domi-nated the performance ratings in 2008,deserted them in 2009 and stormed back tothe top in 2011. This is not about superiorreturns but symptomatic of only infre-quently revaluing assets when the market

values are changing significantly. It alsoraises the ethical question for industryfunds of accepting contributions from theirmembers at prices knowingly overvalued,prior to significant revaluations.

• Some industry funds have poor feetransparency. Published research contendsthat some industry funds incur greatercosts than they openly charge theirmembers in management fees, with theremaining costs being garnished from fundearnings (the funding of the extensiveprime time television advertisingcampaign is a case in point). This alsomakes it difficult for planners to accurate-ly meet stringent fee disclosure require-ments.

Industry funds have been keen topromote ‘intra-fund’ and ‘scaled advice’ sothat their staff can look after their memberswithout involving independent financialplanners. Intra-fund advice is limited andby definition does not take into accountall of a client’s financial circumstances andneeds. It also does not consider investmentoptions not offered by the superannuationfund, and therefore could be criticised asbeing designed essentially to enable asuperannuation fund to maintain existingassets. How this measures up to best inter-ests advice is unclear.

Simplistic, single-issue advice orscaled advice using a low frills industryfund platform will only appeal to alimited demographic within the finan-cial planning market that may be appre-hensive about paying the fees for moreholistic advice. These are often the verypeople who most need comprehensiveadvice, yet scaled advice on a singleissue like rolling superannuation into anincome stream may not pick up impor-tant broader planning issues such asCentrelink eligibility, estate planningstrategies, debt reduction, mortgageplanning, gearing, cash flow, risk plan-ning and lifestyle issues. Many of thepeople who have breached superannu-ation contributions caps and receivedharsh penalties have not had financialplanners guiding them (our practice hasprevented many clients from inadver-tently making this mistake). If industryfund members accidentally breach thesecaps, then cheaper management feescan be a poor compensation for thepenalties that can apply.

Rather than criticising financial plan-ners for not using them, industry funds’focus should be on building the function-ality that assists financial planners toprovide effective services to their superan-nuation clients. Offering cheap, no-frillssuperannuation platforms will not addressthe client’s need for proper financialadvice. Financial planners increasingly donot mind how they are paid and arelooking for the best overall value proposi-tion for their clients. As a financial plannerI am looking to provide efficient servicesto my clients and to act in their best inter-ests. Quite simply, industry funds have away to go to provide a viable businessoption.

Cameron Darrow is an authorisedrepresentative of Fiducian FinancialServices.

OpinionSuperannuation


“Rather than criticisingfinancial planners for notusing them, industry funds’focus should be on buildingthe functionality that assistsfinancial planners to provideeffective services to theirsuperannuation clients. ”

No love lost

There are several reasons why manyfinancial planners avoidrecommending industry super funds.Cameron Darrow outlines a few.

For a while it looked as thoughthe worst was behind us withthe global financial crisis. But2011 saw increased volatility,

with markets going up and down like ayo-yo.

So with all this going on, how areretirees feeling? And what does it meanfor the advice you’re providing toclients in pre-retirement and retire-ment phase?

Many of your clients are opening themorning paper and scanning the newswith a sinking feeling. Headlines like‘Guess who’s back?’ over a snarling beardon’t make for happy reading, particu-larly for those with a nervous disposi-tion. The relentless focus on doom andgloom is starting to take its toll.

Clients who have just retired areentering a whole new world. Their finalpayday has come and gone. They’reliving off a lump sum and have beentold they need to stay invested in thestock market to beat inflation. But theylose money every time the market falls.

The temptation is to give in to theirimmediate emotional response, to exitthe market and take refuge in the rela-tive calm of cash. It may not even beintentional – it turns out that our brainshave been built to respond that way.

The limbic danceOur emotional responses are governedby our limbic system. It’s been aroundsince Homo sapiens emerged on theplains of Africa about 200,000 years agoand means we’re hard-wired to go intosurvival mode when faced with danger.Our limbic system is the reason that wefeel the pain of a loss more keenly thanwe feel the pleasure of a win by an esti-mated factor of two to one.

The limbic system goes into over-drive in retirement, and we becomeeven more loss averse. Retirees suffer

from ‘hyper loss aversion’ – they are upto five times more sensitive to lossesthan the average person.

Brave new worldAustralia’s demography dictates thereare about to be a whole lot moreretirees. As baby boomers approachretirement, millions of Australians aremoving from accumulating assets tounlocking capital to fund their lifestyle.

But as they march over the hill intoretirement, new risks evolve. The old,safe world of defined benefits is goneforever. The rise of defined contribu-tion plans has shifted the risk fromgovernments and corporations, to indi-viduals.

No matter how carefully clients haveplanned their retirement, some thingswill always be out of their control.Current market volatility, combined

with the prediction that a quarter of 65-year olds will live to 100, makes the riskof running out of money in retirementa very real one. At the very least, it’s arecipe for a nervous retirement.

Shaking the tinsSuccess comes from tapping into howyour clients think. We’ve traditionallythought in terms of lump sums when itcomes to retirement planning; now weneed to consider individual accountsand income.

People who understand theirfinances think in a series of mentalaccounts. One account might be anoverseas trip, another might be forschool fees, while another might besaving for a new car.

Mental accounting has its roots inpast generations when times weretougher. My grandmother’s pensionmoney came through on Tuesdays and

she immediately divided the moneybetween four tins: food, rent, electric-ity and ‘spoiling the grandkids’. When-ever I visited, I knew that my tin wasthe red one at the end of the mantel-piece.

The same way a conductor bringsdisparate sections of an orchestratogether into a symphony, bringingtogether these mental accounts, or tins,into part of a cohesive financial strate-gy is central to your client value propo-sition.

Tomorrow’s world of adviceSo how does the mental accountingtheory work in practice?

Let’s take a typical retired couple.They’re worried about retiring in avolatile period, but know they need tostay invested in growth assets to maketheir savings last. They are keen tomaintain a comfortable lifestyle without


OpinionSentiment

Music totheir earsMental accounting can help financial plannersharmonise their client’s money by acting as theirfinancial conductors, writes Barry Wyatt.

“The key to your adviceproposition isunderstanding your client’sshort-term, medium-termand long-term retirementgoals, and allocating theappropriate amount to eachaccount. ”


compromising their need to save for thelong term to keep pace with inflation.

After years of hard work, they areplanning the trip of a lifetime in 2012.In the meantime, the grandchildren’sbirthdays are coming up and there’swork to do on the house. Afterdiscussing their concerns and aspira-tions, you create a series of separateaccounts (within an allocated pension)for different purposes and distributetheir funds between the ‘tins’.

1. Guaranteed income account –using a newer-style variable annuity ora traditional l ifetime annuity, thisaccount generates a guaranteedmonthly income for your client’s life-time to meet essential living expenses.

2. Regular income account – theinvestment profile of this accountwould be a moderately defensive strat-egy, mixing equities and fixed income,seeking to generate a higher income

yield. This helps meet your client’sdiscretionary retirement income needs.

3. Cash account – secure ter mdeposits to pay for short-term goalssuch as celebrations, home improve-ments and holidays. It can be easier forclients to spend money if they know it’scoming from an account created forthat very purpose.

4. Future 2018+ account – a higher-growth strategy using managed funds,shares or exchange-traded funds. Thisaccount helps to combat inflation andlongevity risk over the long term forgoals later in retirement. Earmarkingthe account with a date helps manageconcerns about short-term volatility.

The key to your advice proposition isunderstanding your client’s short-term,medium-term and long-term retire-ment goals, and allocating the appro-priate amount to each account. Theproportion you end up allocating will

also depend on your client’s appetitefor risk and personal preferences.

Talking in terms of ‘tins’ of moneyaddresses the need for control thatmany retirees feel. Despite the fearfactor, many retirees are unwilling tofully trade off control for protection.The right advice approached in theright way can help them feel in controlof their financial future.

Together, the tins generate ongoingincome as well as capital growth. Yourclients remain exposed to growth assetsbut have a measure of protection toguard against market downturns. You’veimplemented a strategy to address keyrisks of retirement, and you’ve retainedthe flexibility to adjust money acrossthe various ‘tins’ in response to chang-ing circumstances.

Mastering the batonAs financial planners, we conduct theorchestra for our clients. The foursections of an orchestra (str ings,percussion, brass and woodwind) cometogether in harmony under the guid-ance of a conductor. The success orfailure of the composition depends onhow the conductor br ings al l thesections together.

The role of the conductor/financialplanner comes to life at the annualreview. This is where you take stock ofthe progress in the four tins and decidewhere next year’s income will comefrom. Rather than talking about invest-ment returns, you can help clients focuson their monthly spending and futureincome needs.

If markets are down at review time,you can still have a more reassuringconversation. Instead of focussingsolely on the bottom line, you canemphasise the underlying value of thedifferent tins, reminding your clientsthat they still have:

• A guaranteed income account;• A lower-volatility account that still

provides a high level of income;• A secure cash account as an addi-

tional buffer, and• A longer-term high growth account.

While this account will have fallen invalue, it’s labelled as a future-datedaccount, so i t can be left a lone torecover.

Whether markets are up or down,your client conversation can be a posi-tive one. You’re able to demonstrate thevalue that your advice has added byadjusting each account, crystallisinggains into cash and fulfilling everyretiree’s desire to lead a comfortablelifestyle in their golden years.

By being the conductor of yourclient’s financial situation, you’ve puttheir limbic system in its shackles,freeing them to think rationally andenjoy peace of mind about the finan-cial aspect of retirement. Getting closerto the way your clients process finan-cial information and adjusting yourapproach to advice is the key to culti-vating the advice business of the future.

Barry Wyatt is the director of sales atAMP.

“By being the conductor ofyour client’s financialsituation, you’ve put theirlimbic system in itsshackles, freeing them tothink rationally and enjoypeace of mind about thefinancial aspect ofretirement.”

Exposure to corporate andgovernment bonds and otherfixed income securities can beobtained directly, via a direct

bond or fixed income portfolio, or indi-rectly, via the purchase of either a term orlifetime annuity product.

An annuitant’s exposure to fixedincome is indirect because the issuingAustralian Prudential Regulation Author-ity (APRA)-regulated life company iseffectively wrapping a very large fixedincome portfolio with a contractualguarantee, so it can provide a known,fixed rate of return upfront.

Different levels of income certaintyand capital securityAn annuity in Australia is a policy issuedby a life insurance company. It is apromise to pay a certain amount ofmoney for either:

• A fixed period of time; or• The remaining life of the policy

holder.APRA regulates the life company and

its statutory fund. The statutory fundholds the assets backing the annuity poli-cies and the additional capital requiredby APRA. Policy holders have specialstatutory protection, based primarily onregulatory supervision of the adequacy ofthe assets in the statutory fund.

Neither direct fixed incomebrokers/advisers nor the underlyingissuers in a direct corporate bond port-folio make any promises as to capital orincome certainty. Hence, a direct port-folio doesn’t need to hold any capital orliquidity buffers. It is also not subject toprudential oversight, but rather to amuch less onerous regime administeredby the Australian Securities and Invest-ments Commission that is founded ondisclosure, but with few other protec-tions. The client is more exposed to theperformance risk and return of theunderlying assets.

Lifetime payment of income andinflation protectionA direct bond portfolio doesn’t pay youan income for life, no matter how longyou live, nor does it carry explicit infla-tion protection.

Conversely, a lifetime annuity pays outfor l ife and may continue to makepayments to a surviving spouse. Typical-


OpinionAnnuitiesChallenger’s AaronMinney provides hiscomparison ofannuities and directfixed income in aresponse to an articlerecently published inMoney Managementand authored by fixedincome provider FIIG.

Annuity security

ly, annuity payments will increase withinflation to protect against an increasein the cost of living.

Because annuities with a fixed term aremore analogous to a direct fixed incomeinvestment, the rest of this article will dealwith these rather than lifetime annuities.

Risk and returnA central tenet of finance is that risk andreturn are positively correlated; that is,if you want higher investment returnsthere is higher risk of capital loss.

A direct portfolio may be higher risk,higher expected return than an annuity,or vice versa, because the investor canselect whether or not they invest in high-yielding, riskier ‘junk bonds’ or govern-ment bonds with lower returns and lowerrisks.

An annuity would generally be regard-ed as lower risk because it provides expo-sure to a large pool of diversified finan-cial assets through a statutory fundunder the supervision of APRA. Thesewill generally be fixed income assets witha range of credit ratings. Typically, theaverage rating will be relatively high (ie,well above BBB) because APRA wouldrequire the life company to hold morecapital if it chose to invest in riskierassets than these.

In addition, ratings agencies often ratethe life insurer providing the annuity,and this rating will reflect the quality ofthe underlying assets as well as thecapital buffers of the issuer itself.

Guarantees and defaultsAn annuity policy has a guarantee thatis backed by the prudential frameworkdeveloped and supervised by APRA. Theaim of APRA is to ensure sufficientcapital is available to meet obligationsto policy holders, even under veryunfavourable market events. Thesemarket events include the default risk foreach bond in the portfolio as well asmarket volatility. Indeed, the regulatoryframework expressly contemplates the

statutory fund working to protect policyholders in the event of the failure of thelife company.

With a bond portfolio, neither themanager, nor the broker, nor the indi-vidual companies provide any sort ofguarantee that capital or yield will bepaid. A direct investor will be subject tolosses with any bond that defaults.

DiversificationBy virtue of the statutory fund andAPRA’s regulatory framework, annuitantsare protected by the underlying assets inthe life company and are not simplytaking single-name credit risk on theissuer.

Buying an annuity policy – like invest-ing in a managed fund – enables a highlevel of diversification due to the largebalance sheet of the issuer.

A direct investor simply cannot matchthis level of diversification. Indeed, it isquestionable that (even with smallerparcels) many investors would be ableto purchase a sufficiently diversifiedbond portfolio to adequately cover creditand default risk. Having a single default

in a portfolio of 20 bonds would have alarge impact on an investor’s portfolio.

FlexibilityFor annuitants, the benefits of capitalbuffers, risk management frameworks,and regulatory-backed guarantees comeat a cost of flexibility to change exposuresin the underlying portfolio – an optionavailable to direct investors. Of course,such trading activity also gives risk totransaction costs, including research andexecution.

Management time and peace ofmindDirect portfolio investors will need toconsume considerably more timemanaging their investments than anannuitant, who can ‘set and forget’ theirguaranteed income investment andspend more time on leisure activities ormanaging share or property investments.

Also, because an annuity earning rateis fixed up front, annuitants don’t need toworry about the potential impact ofeconomic and market events on thevalue of their bonds. These risks are laidoff to the life company, which has theexpertise, resources and risk manage-ment framework to better manage them.

LiquidityAnnuities are purchased for life or for afixed term – as is the case with bank termdeposits – and hence, cannot bedescribed as liquid investments likelisted shares or cash. However, much liketerm deposits, the annuities’ term canbe ‘broken’ early at cost to the investor,and the balance of capital returned.

Direct fixed income investments aregenerally more liquid than an annuity, butnot as liquid as say listed equities. Thecapacity to sell a bond will depend on thenumber of market participants preparedto deal in that security at any particulartime. In the depths of the crisis in 2008,this liquidity dried up completely in somefixed income markets.

FeesThere are no product-related feespayable with respect to annuities (ie, nobrokerage, establishment, entry,management or performance fees). Theheadline or quoted rate for an annuity iswhat is actually paid to the policy holder,less fees they’ve agreed to pay theiradviser – as is the case with any finan-cial product. Any costs of the annuityprovider, including capital, operatingand distribution expenses are coveredby the annuity provider out of theirmargin. There are no additional fees tothe policy holder as long as they main-tain the annuity.

By contrast, there are ongoing costs inthe management of any direct bondportfolio, which would reduce the netreturn to the investor, including broker-age fees and transaction costs associat-ed with maturing bonds.

Discussions of the historical and/orexpected returns of bonds and bondfunds should explicitly detail the costsand provide the after-fee returns so theycan be appropriately compared withother fee-free fixed income investmentslike annuities.

ConclusionThis article has briefly considered therelative merits of purchasing an annuitypolicy against an alternative of investingin a portfolio of direct fixed incomeassets. They tend to meet different needs,and both can be used by investors.

For investors who don’t mind payingbrokerage and other fees, and have thecapability, knowledge and time, a directbond portfolio can be a way of generat-ing higher returns at higher levels of risk.

For investors who want the security offixed and guaranteed income, competi-tive earning rates, and regulatory over-sight, an annuity may be the preferredoption.

Aaron Minney is head of retirementincome research at Challenger.


“A direct bond portfoliocan be a way of generatinghigher returns at higherlevels of risk.”

Appointments


Please send your appointments to: [email protected]

Opportunities For more information on these jobs and to apply,please go to www.moneymanagement.com.au/jobs

MARKETING MANAGERLocation: MelbourneCompany: Lloyd MorganDescription: An industry superannuation fund iscurrently looking for a marketing manager tosupport its administration team.

In this role you will be responsible forstrategic planning and budgeting of marketing,implementing marketing campaigns, attractingnew members to the fund and assistingmanagement with decision-making andoperations.

The successful candidate will have a strongbackground in superannuation, ideally with anindustry fund. You will also have strongmarketing and management experience, and abusiness or marketing-related degree.

This role is a great opportunity to strengthenand further develop your existing marketing,management and operational skills.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Stewart at Lloyd Morgan – (03) 83197888, [email protected]

JUNIOR PARAPLANNERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial services firm is offering aqualified paraplanner an entry-level position tostart their career in the financial services industry.

In this role, you will assist in the preparation

of SOAs, maintain relationships with a networkof financial planners and uphold complianceprocedures.

To be considered for this role, you will be DFP-qualified and have a minimum of 12 monthsexperience in paraplanning, or in a client servicescapacity within a financial planning practice.Experience with COIN would be an advantage.

The successful applicant will be offered acompetitive salary and a flexible and supportiveworking environment.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0422918 177 / (08) 8423 4466,[email protected]

SENIOR FINANCIAL ADVISERLocation: NSWCompany: Terrington ConsultingDescription: A well-established financialplanning business is seeking a client-focusedsenior financial adviser.

You will be working with an existing portfolioof clients, providing advice on direct investments,gearing, SMSFs, retirement planning, andpersonal and business protection strategies.

To be successful, you have extensiveexperience in financial planning and a trackrecord in successfully managing and growing aclient base. CFP and/or CA/CPA qualificationswill be highly regarded.

For successful candidates there exists theprospect for equity or upfront equity opportunities.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0422918 177 / (08) 8423 4466,[email protected]

RISK ADVISERLocation: Western AustraliaCompany: Terrington ConsultingDescription: A Western Australian businessadvisory firm is seeking a financial adviser – riskspecialist to join its wealth management team.

In this role, your main responsibility will be tooffer detailed risk insurance advice to businessclients. You will also be required to identify andcapitalise upon business growth opportunitiesfor the firm.

To be considered, you will have excellentknowledge of tax structures, entities, estateplanning and SMSFs.

Successful candidates will also have a proventrack record in a similar financial planning role, ademonstrated ability to build and maintain clientrelationships and a desire to grow a successfulbusiness.

In return, you will be rewarded with state-of-the-art facilities and a competitive remunerationpackage.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, or

contact Myra at Terrington Consulting – 0422918 177 / (08) 8423 4466,[email protected]

HEAD OF SALES AND DISTRIBUTION –SUPERANNAUTIONLocation: MelbourneCompany: Lloyd Morgan AustraliaDescription: A boutique superannuation andfinancial services company is seeking acommercial expert to fill a national salesmanager role.

Reporting to the general manager of financialservices, you will be responsible for driving thegrowth of the business' superannuation funds.

You will achieve this by managing the nationalsales and distribution team, focusing on salesand retention, and identifying professionaldevelopment where required.

To be considered for this role, the candidatewill have experience in a similar role withinsuperannuation, specifically where you havebeen required to identify volume default andchoice business and achieve growth targets byleading a sales team.

You will also have relevant tertiaryqualifications in business and be RG146-compliant.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Liz at Lloyd Morgan, 0418 385 809 /(03) 8319 7835.

WEALTH manager Equiti PrivateWealth has bolstered its finan-cial advisory team with theappointments of Gregory Fuziand Peter Sheather as seniorfinancial advisers.

Sheather has more than 30years' experience in the financialservices industry and hasmanaged and expanded his ownAMP financial planning business– Sheather Financial Services –for over 25 years. Since that time,he has worked for Integral Asset

Management, and most recent-ly, Refund Financial Planning.

Fuzi has worked in financialservices for over 17 years, special-ising in financial planning, corpo-rate super, risk, and capitalraising. He has previously workedat IPAC, Schroder InvestmentManagement, AXA, and Stafford-shire Financial Services.

To support the growth of its clientbase, Zenith Investment Partners

has appointed Quan Nguyen asan investment analyst and Keira-Louise Heasly as a client and salesadministrator.

Currently undertaking tertiaryeducation in applied finance,Nguyen was previously a finan-cial markets analyst at the Port-land House Group, responsiblefor the research and implemen-tation of investment strategies.He has also worked with StateOne Stockbroking as a propri-etary trader.

Heasly has two years of person-al assistant experience and fouryears in an administrative capac-ity in which she has developedskills in dealing with customerand client relations within theservices industry.

Macquarie Life has appointedMarcello Bertasso to the newlycreated role of national under-writing manager.

With ten years' experience inreinsurance, Bertasso will take ona national role leading Macquar-ie Life's underwriting team.

The South African-bornBertasso previously worked withglobal reinsurer Swiss Re beforejoining CommInsure in a senior

underwriting capacity in 2008.Most recently, he served as headof underwriting at AMP.

Bertasso's appointmentreflects Macquarie Life's desire tostrengthen its underwriting teamand capabilities.

The Self-Managed Super FundProfessionals' Association ofAustralia (SPAA) has appoint-ed Andrew Hamilton as chairfor a two-year term endingFebruary 2014.

As the managing director ofCavendish Superannuation,Hamilton has been instrumentalin growing the business' offeringto now include self-managedsuper, portfolio administration,and actuarial services.

Hamilton said SPAA is criticalto the future structure of super-annuation in Australia because itprovides a broad representationof all of the trustees, advisers,accountants and auditors thatmake up the self-managed superfund (SMSF) industry.

Commenting on his appoint-ment, SPAA chief executiveAndrea Slattery said Hamilton'sexperience in SMSF productdesign, software design and

development, training programs,technical knowledge and under-standing of compliance will allowhim to offer unique insights andadvice to SPAA members.

Australian Ethical Investmenthas appointed Ironbark Groupexecutive director Louise Herronas a director of the board.

With a background as a lawyer,Herron has worked as a corporateadviser with Wentworth and Asso-ciates, Macquarie Bank andCarnegie Wylie. As a partner withMinter Ellison, she previously led ateam of 50 lawyers nationally in thepractice of technology, communi-cations and competition law.

Move of the weekIN line with the reorganisation of its retail distribution set-up,Perpetual Limited has appointed former MLC Wealth executiveMatt Thompson as general manager strategic accounts.

Thompson brings 23 years of financial services experience toPerpetual and has held a number of senior roles at AMP, Suncorp,Colonial First State and NAB/MLC Wealth. In his most recent roleas MLC Wealth head of national accounts and research, he led ateam of nine and was responsible for sales across platforms, insur-ance and investment.

Perpetual acting group executive Perpetual private and head ofretail distribution Nick Langton said that, with the addition ofThompson, all teams were now in place to start making an imme-diate impact on the retail funds market.

“Matt’s team has a critical role to play in servicing our targetsegments, and his proven ability to create strong client relationshipswill ensure we can get our products in front of the people who holdthe keys to a wider distribution footprint,” he said.

Andrew Hamilton

IF you're reading this on Wednesday 29February or Thursday 1 March, 2012,then you'll know who is currently PrimeMinister, because that person wonMonday's ballot for the Federal Parlia-mentary Labor Party leadership.

Outsider is hoping that it was not theMinister for Financial Services, BillShorten. This is not so much becauseyour venerable correspondent doubtsShorten's tenacity or ambition, but

because he worries about the minister'sability to maintain a suitable work/lifebalance.

As a gentleman of independent meanswho keeps something akin to bankers’hours, Outsider almost felt a lump in histhroat at last month's SMSF Profession-als’ Association of Australia conferencewhen he heard Shorten bemoan thehours he was being forced to keep as amember of the Gillard Cabinet.

Why, it seems that Shorten is up andworking before 5.30 am every morning andis lucky to get home before 10.30 pm.

"Maybe I'll find a work/life balance oneday," the minister pined.

Outsider reflected that age and hisprostate often sees him out of bed wellbefore 0500 hours, and a convivialsnifter or two at the club means he'slucky to get home before 11 pm. Thenagain, Outsider does not feel compelled

to count numbers in the caucus, or briefthe media reptiles who inhabit the federalparliamentary press gallery.

Finding a work/life balance just isn'teasy when you're holding down two jobs– one as a minister covering a mega-portfolio, and the other as a factionalnumbers man.

The good news for Shorten is that Out-sider understands that finding a work/lifebalance is much easier in opposition.

Outsider


Three hotdogs from hell

A bit of a stretch for Shorten

OUTSIDER attended the SPAA conference inSydney last week, hosted by the ever-affa-ble Andrew Daddo.

As Outsider was settling down for thefinal session, Daddo took a break from hisintroductory banter and the lights dimmedfor the obligatory messages from two ofthe conference's sponsors.

The first promotional spot was innocu-ous enough, with inspiring messages drift-ing across the screen set to the usual uplift-ing muzak.

But the second presen-tation was particularlyunimpressive by com-parison. It consisted ofa series of Powerpointslides about the won-

ders of index investing, accompanied by –wait for it – complete silence.

Daddo glanced around anxiously forabout a minute, apparently concerned thatthe audio department at the Sydney Exhibi-tion Centre had gone to sleep at the wheel.

But when it became obvious that noaudio component was forthcoming, Daddoproceeded to ridicule the presentation mer-cilessly – much to the amusement of theaudience.

Outsider has his doubts that laughterwas the reaction the marketing team waslooking for.

But then again, their soundless approachmay have been deliberate. Perhaps theywere hoping to replicate the recent suc-cess of the silent movie The Artist.

OUTSIDER acknowledges that, in thecorporate world – especially in thefinancial services industry – image iseverything.

This is why Outsider is neversurprised when he hears about a certainfirm spending millions of dollars onrebranding, or creating new logos.

He also found that financial serv-ices firms often like to put meaningbehind their companies’symbols, which often pointto their strength and/orother virtues their market-ing teams like to focus on.

This is why Outsider wasbaffled when he realised acapital management firmbased in the US, CerberusCapital Management, basedits company name and logoon a three-headed monsterfrom Greek mythology.

Sure, this Cerberus beast guardedthe gates of the Underworld, whichcould be a metaphor for the ability ofthis company to guard its clients’investments.

But this three-headed hound was

also known in mythology as a beastwhich cornered people and ate themalive if they tried to escape.

Outsider is not sure what the lattercould translate to, but he is sure hedoes not want to find out whathappens when clients decide to pulltheir investments out of CerberusCapital Management.

A L I G H T - H E A R T E D L O O K A T T H E O T H E R S I D E O F M A K I N G M O N E Y

“…I have one unique distinction:I am the only one who has neverbeen promoted. That will give yousome idea of the level ofconfidence you're dealing withtoday.”

BT Financial Group chief economist DrChris Caton reassures delegates at the 2012

Investment Administration Conference.

“I engaged in a month-long study ofthe Greek and Italian debt crisis …along with my wife, I should say. Ishould say that if the Eurozone is inserious recession then it is certainlynot her fault.”

Caton does the hard yards in unravellingthe state of world economies.

“I figure you’ve made it inthis town when you get acartoon made of you.”

Chief executive of AVCALKatherine Woodthorpe intro-

duces the animated version ofherself at a private equity

breakfast in Melbourne.

Go ahead, makeDaddo’s day!

“Out ofcontext“

money management (march 1, 2012)

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