money management (march 8, 2012)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

FINANCIAL planners may well be resistantto the Government’s two-year opt-in, butmany are already putting in place the paper-work necessary to establish the arrangementwith their clients.

Money Management has confirmed thatnumerous planners and a number of dealergroups have begun moving ahead of theFuture of Financial Advice (FOFA) bills actu-ally passing the Parliament to ensure they areready to become compliant with the newregime.

Guardian Financial Planning executivemanager Simon Harris confirmed thatGuardian had already moved to assist itsplanners in ensuring they would be compli-ant with the new regime.

“It has been a case of planning for theworst but hoping for the best,” he said.

Harris said Guardian had put a programin place to assist its advisers and to providethem with the necessary tools to handle thenew regime, including pricing models andother collaterals.

“Some of our advisers have readilyaccepted the need to be prepared for thechanged regime, others are taking a littlelonger,” he said.

Premium Wealth Management generalmanager Paul Harding-Davis said that mostmembers of the dealer group were ready tohandle the new regime because they alreadyhad in place written client service agreements.

However, he said that those client serviceagreements had been modified to takeaccount of the expected new regime, andwould be utilised at each client meeting toprovide rolling two-year approval.

“It is simple enough for the clients whoregularly come in for face to face meetingsbut it becomes harder with respect to thoseclients who are harder to convince to cometo regular meetings with their advisers,”Harding-Davis said.

“We don’t yet have a system in place tohandle those clients in terms of first letter,second letter, third letter and the wholerenewal process,” he said.

Harding-Davis said that opt-in represent-ed a considerable logistical challenge for

those clients who did not regularly visit theiradvisers – and one capable of adding signif-icant cost.

Harris also pointed to the costs involvedin getting advisers ready to handle the newregulatory environment.

“We have already incurred significant costsbut we are hopeful that the Government willprovide a 12-month phase-in to help allevi-

ate the immediate impact,” he said.Mercer’s Jo-Anne Bloch agreed that exist-

ing client service agreements would servewith respect to meeting some facets of opt-in, but warned that the annual fee disclo-sure requirements contained in the FOFAbills represented a considerable challenge.

Matrix Planning Solutions managingdirector Rick Di Cristoforo said any adviserwho regularly reviewed their Terms ofEngagement and/or services with the clientwould likely be complying with the princi-ples of opt-in.

“That is one part of Matrix’s FOFA-readi-ness approach,” he said. “However, the coreissue is that the details of compliance withopt-in are unclear. How can any of us be sureuntil we see the final approved legislation?”

“Compliance with opt in is less problem-atic when the message/paperwork isprepared and signed off [in whatever form]on time, every time; the problem is when asubset of clients don’t sign off, on time, forany range of reasons, that may or may not bebecause they are unhappy with their adviseror the fees,” Di Cristoforo said.

By Andrew Tsanadis

PROPOSED fund disclosurerequirements for hedge fundshave industry support, but expertssay that the guidelines shouldextend to all complex investmentschemes and that a better defini-tion of what constitutes a hedgefund is required.

Released last month, the Aus-tralian Securities and Invest-ment Commission (ASIC) is cur-rently seeking submissions onthe likely compliance costs ofConsultation Paper 174 Hedgefunds: Improving disclosure –Further consultation.

While Australian Fund Monitorschief executive Chris Gosselinbelieves the guidelines aredesigned to better informinvestors on the nature of com-plex products, he said simplermanaged investment schemes(MISs) could potentially be givenan advantage over hedge fundsin more easily meeting their regu-latory commitments.

Under the Government’sShorter Product Disclosure State-ment regime, it was announcedthat hedge funds would not beincluded in the arrangement untilthey could be fully considered in

light of the policy intent of theregime.

Despite the shor ter PDSarrangement making it less oner-ous for simple funds to be com-pliant, Gosselin concedes thatASIC’s disclosure guidelines arejustified because investing inhedge funds can be high-riskventures.

He argued, however, that theregulator has been focused tooheavily on long-short productsand pointed out that simple long-only products also carry with

them investment risk.“What ASIC are focused too

heavily on is the Trio Capital deba-cle, which was the result of fraudrather than poor investment man-agement,” he said.

Zenith Investment Partnershead of alternatives researchDaniel Liptak agrees that allinvestment funds should disclosethe custody of their assets.

He added that ASIC’s definitionof a hedge fund is “deliberatelyvague” and could potentiallycreate a “catch-all” situation inwhich the proposed legislationcould target products that are nothedge funds.

“As per the guideline’s defini-tion, a hedge fund is anything thatis marketed as a hedge fund –effectively all a responsible entity(RE) has to do is say that it is not ahedge fund.”

The uncertainty around whatconstitutes a hedge fund may alsogive rise to confusion on the partof investors, added Nikki Bentley,a partner at Henry Davis York andchair of the Alternative InvestmentManagement Association’s Regu-latory Committee.

CP 174 states that the RE

Canny planners prepare for post-FOFA world

Continued on page 3

Hedge fund clarity needed

INFOCUS: 3 | MULTI-ASSET FUNDS: Page 24

Vol.26 No.8 | March 8, 2012 | $6.95 INC GST

By Tim Stewart

WITH little new business beingwritten, most planning prac-tices are reluctant to take onnew staff – but there are stillopportunities out there forrecent graduates.

Based on her recent discus-sions with planners, WealthInsights managing directorVanessa McMahon believes thecurrent environment is looking“grim”. Practices simply don’tneed to take on new people theway they used to, she said.

RI Advice chief executive PaulCampbell said his company’sexperience has been that prac-tices are getting their business-es in shape in order to reflect thecurrent economic climate.

“What we’re noticing is theirproduction is remaining thesame but they’re doing that withfewer people, and they’re a lotmore efficient,” Campbell said.

While RI Advice does not havethe capacity to run an internshipat the moment, the salaried armof the business, OnePath Finan-

cial Planning, does have a smalldevelopmental program, he said.

“It’s a career pathway. The rolethey can come into involvesgetting on the phone and justresponding to enquiries. Thenthey become a junior adviserand progress through the ranks,”Campbell said.

For Campbell, the bestpathway into the industryremains through the salaried armof institutions and the big banks.

However, Tupicoffs partner NeilKendall believes that experiencewith a smaller practice is the bestway for younger people to learnabout the advice process.

“The big institutions have anability to provide training, but inmy experience that can befocused more around productknowledge and product sales asopposed to broader advice prin-ciples,” Kendall said.

Tupicoffs has a relationshipwith Griffith University, whichruns a Bachelor of Commerce(Financial Planning) program

Career paths stillbeckon planners

Continued on page 3

Daniel Liptak

Rick Di Cristoforo

The value of unbiased umpires

Did the Australian Securities andInvestments Commission(ASIC) intrude too far into thepolitical sphere when it

relayed the early, headline results of itsmost recent shadow shopping exercise tolast month’s hearings of the Parliamen-tary Joint Committee reviewing the Futureof Financial Advice (FOFA) bills?

This question was placed squarelybefore ASIC chairman Greg Medcraftwhen he appeared before a Senate Esti-mates Committee, and those who believethat either ASIC or its sister financial serv-ices regulator the Australian PrudentialRegulation Authority (APRA) are simplyunbiased policemen would have beendisappointed.

The question was put to Medcraft by theOpposition’s Financial Services spokesman,Senator Mathias Cormann, who askedASIC’s chairman: “…. whether you see yourrole as administering the regulatory frame-work – as being the regulator – or whetheryou see your role as being an active partic-ipant in policy debates”.

Medcraft’s answer was both direct and,for some observers, worrying, in the contextof the impact the draft shadow shoppingreport had on the broader reputation of thefinancial planning industry.

“Our focus at ASIC is on our framework,which is making sure that investors areconfident and informed, that markets arefair and efficient, and that registering andlicensing is efficient and fair,” the ASICchairman said. “We use the tools at ourdisposal. Our role, and it is one of thosetools, is to provide policy advice to govern-ment in the areas of our expertise. That isoften what we do; that is our role. Policy isa matter for government and our role is toadvise government in relation to policy.”

What Medcraft might properly haveadded is that ASIC, as a regulator, is aCommonwealth statutory authority andthat its personnel ought to be largelygoverned by the same rules which apply tothe Australian Public Service (APS).

And, indeed, if ASIC adheres to the samerules that apply to the APS, then the policyadvice it provides to the Government oughtto be frank, fearless and unbiased.

Which, in turn, ought to raise seriousquestions about the advisability and appro-priateness of a regulator – tasked withproviding frank, fearless and unbiasedadvice – conveying a draft shadow shop-ping report to a parliamentary committeein the midst of a heated political debate.

While, as Medcraft asserts, it is true thatboth ASIC and APRA have a role in provid-ing policy advice, they should be doing sowith respect to legal/technical questionsrather than with a view to the broadersweep of social or political outcomes.

The financial services regulators oughtto consider themselves on notice that amidthe current political sensitivity surround-ing financial services policy, their bestrecourse is to the professional objectivitydemanded of good public servants.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

2 — Money Management March 8, 2012 www.moneymanagement.com.au

[email protected]

“If ASIC adheres to thesame rules that apply to theAPS, then the policy advice itprovides to the Governmentought to be frank, fearlessand unbiased.”

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Average Net DistributionPeriod ending March ‘1110,207

By Mike Taylor

THE financial services industry hasexpressed its disappointment at the failureof the Parliamentary Joint Committee (PJC)reviewing the Future of Financial Advice(FOFA) bills to deliver a unanimous set ofrecommendations reflecting the industry’sconcerns.

The chief executive of the FinancialServices Council (FSC), John Brogden, saidhis organisation was disappointed at thecommittee’s unwillingness to accept indus-try concerns and make pragmatic changesto improve the legislation.

At the same time, Association of FinancialAdvisers (AFA) chief executive Richard Klipinsaid that with the Government and Coalitionmembers of the PJC having failed to findagreement, his organisation would be callingon the independents in the House of Repre-

sentatives to support key amendments.“We urge the independents to review the

evidence put forward by the industry whichreinforced many of our key concerns -namely that FOFA, as it currently stands,doesn’t deliver, creates an unlevel playingfield that advantages one sector of theindustry over another, and will ultimatelyresult in poorer outcomes for consumers,”Klipin said.

Financial Planning Association (FPA)chief executive, Mark Rantall said the FPAwas disappointed with the overall recom-mendations outlined in the PJC’s report onFOFA.

“Whilst the report acknowledged someof the concerns raised by the FPA, themajority of the suggestions the FPA madethroughout the inquiry, and indeed recom-mendations made by other representativesof the financial planning industry, have not

been adopted,” he said.For his part, Brogden said the industry

would now increase its efforts to convincethe Government of the need to make thelegislation workable so that it delivered onthe Government’s own objectives ofincreasing trust and confidence in finan-cial advice, improving accessibility andreducing conflicts of interest.

“The FSC supports the overwhelmingmajority of the FOFA reforms,” he said. “Wewant higher standards for financial advis-ers, we want a best interest duty that putsconsumers’ interests first and we want anend to commissions.

“But we need to be able to provideaffordable advice, not just to theAustralians who receive it now, but mostimportantly to the millions who do not,”Brogden said. “In its current form, thelegislation puts this at risk.”

www.moneymanagement.com.au March 8, 2012 Money Management — 3

News

Industry laments failure of PJC

Career paths still beckon planners

that consists of one year offull-time study, followed bytwo years of part-time studycoupled with an internship.

Griffith University associ-ate professor Mark Brimblesaid there was so muchdemand from planning prac-tices last year that thereweren’t enough students tofill the internship places.

Kendall said there arecurrently two financial plan-ners at Tupicoffs that camethrough the Griffithprogram, along with a full-time paraplanner.

“We will probably takemore people this year. Grif-fith graduates are very goodquality, well educated andhave strong ethical values,so they are a good fit for us,”Kendall said.

AMP Horizons directorTim Steele said that it wasessential for the industry to

provide people who arekeen to become adviserswith a clear career pathway.

“We have to evolve as aprofession to provide clarityabout career paths for reallybright people who havedone a degree in financialplanning,” he said.

He added that it was a“myth that you have to havegrey hair to be good finan-cial planner”.

should provide ‘sufficientinformation to explain thestrategy for selecting whichunderlying funds they willinvest in’.

Furthermore, for eachmaterial investment in anunderlying fund, the REshould also ‘explain whythat particular fund wasselected and how it fits withthe investment strategy.’

“If you’re a fund of fundsyou don’t want to give fulltransparency about the under-lying managers, because all

you’re doing is telling yourcompetitors the strategybehind your fund. You cangive the disclosure in generalterms,” Gosselin said.

The issue of intellectualproperty has been raisedby fund managers more inrelation to the disclosureof portfolio holdings of allmanaged investmentschemes, Bentley said.

“Where there isn’t a suffi-cient time lag or [if disclo-sure] goes into minutedetail, that’s where the intel-lectual property issue hasbeen raised,” she said.

Hedge fund clarity neededContinued from page 1

Continued from page 1

Mark Rantall

Neil Kendall

News

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Stuart Piper

More diversityneeded onfixed incomeBy Benjamin Levy

INVESTORS aren’t diversifyingtheir fixed income portfolioenough and ensuring there isgood liquidity, according toMLC Investment portfoliomanager for debt assets StuartPiper.

Speaking at the NAB PrivateWealth annual conference inMelbourne, Piper suggestedthat investors are not usingfixed income allocations totheir full advantage and are notdiversifying enough to providebetter returns.

Piper nominated non-investment grade bonds andcredit as two areas that havebeen neglected when buildingfixed income allocations.

A globally weighted fixedincome allocation outper-formed cash by 2 per centover the past 10 years, so itwas disappointing that NABfigures showed allocations tofixed income are approxi-mately 9 per cent, comparedto a 30 per cent weighting tocash, Piper said.

Credit has performed evenbetter than that, he added.

The non-investment gradesector has generated incredi-bly good income and pays highyields, Piper said.

He said that just because low-quality bonds did not providegood diversification and couldbecome illiquid, it did not meanthey weren’t good assets.

Piper warned investors to beaware of interest rate riskswhen putting fixed incomeportfolios together.

Accountants urge SMSF advice abilityBy Mike Taylor

ANY device the Federal Governmentintroduces to replace the accountants’exemption must provide accountantswith the ability to provide general finan-cial advice, according to the Institute ofPublic Accountants (IPA) chief executive,Andrew Conway.

Speaking just days out from anexpected announcement by the Minis-ter for Financial Services and Superan-

nuation, Bill Shorten, Conway said theIPA was advocating a licensing solutionwhich recognised the experience andtraining of accountants and whichallowed them to talk about all aspects ofsuperannuation, including self-managedsuper funds (SMSFs), but not necessarilya specific fund choice.

As well, he said any licensing regimemust allow accountants to provide gen-eral financial advice.

However, Conway said the changes

evolving out of the Government’s Futureof Financial Advice (FOFA) changes weresuch that accountants should reviewtheir business models and consider howany amendments to the accountants’exemption might impact them.

“Accountants in practice servicingtheir clients in the SMSF space shouldconsider reviewing their business modeland assess how the announcement ofthe accountants’ exemption is likely toimpact them, thei r business and

clients,” he said. “We believe thatopportunities exist for those practiceswilling to make the leap beyond tax andcompliance work.

“It is not just about responding to theFOFA reforms; it is about responding toclient demands for more holistic, strate-gic and value-adding advice from theirtrusted advisers; i t is also aboutresponding to the challenges and oppor-tunities in our constantly changing envi-ronment,” Conway said.


News

By Mike Taylor

THE Financial OmbudsmanService (FOS) has admitted it doesnot keep specific records relatingto the number of intra-fund advicedisputes it handles, but it believesthey are at a relatively low level.

The absence of specific informa-tion about intra-fund advicedisputes was revealed in a lateaddendum to its submission to the

Parliamentary Joint Committee(PJC) reviewing the Government’sFuture of Financial Advice (FOFA)bills.

The PJC handed down its reportlast week, with Coalition membersissuing a dissenting report basedon continuing differences aroundopt-in and annual fee disclosurearrangements.

However in the information itprovided to the PJC last week, the

FOS admitted “we do not keeprecords to indicate whetherdisputes about financial advicerelate to intra-fund advice”.

“So we do not have statistics onthe prevalence of intra-fund advicedisputes”.

The best that FOS could offerwas that Investments, Life Insur-ance and Superannuationombudsman Alison Maynard“becomes aware of the details of

many of the financial advicedisputes we receive”.

“According to Ms Maynard, weonly receive a small number ofintra-fund advice disputes -perhaps three or four a year,” it said.

The FOS said manual searchesof its database indicated that threeof the disputes it had received since1 January, 2010, out of 2,235disputes, had been about intra-fund advice.

ASIC warnedon researchpayments banBy Benjamin Levy

RESEARCH house Lonsec haswarned the Australian Securi-ties and Investments Commis-sion (ASIC) to resist revisiting apossible ban on direct pay-ments from fund managers toresearch providers, saying itwould ruin the availability ofresearch for advisers.

Speaking at Lonsec’s annualroadshow in Melbourne, Lonsecmanager of research strategyRichard Everingham warned thatif the regulator decided in futureto move against the direct pay-ment model, it would reduceresearch house competition andreduce the total amount of avail-able research.

Everingham also criticisedsuggested payment optionssuch as a pure user-pays sub-scription model as unworkable.

“You won’t pay that [full] costof research, it is a very inten-sive activity, and very, veryexpensive,” he said.

Advisers only value researchat one-tenth of the cost of whatit actually costs to produce,Everingham said.

Planners would also possi-bly pass on the cost ofresearch, which would be ananti-Future of Financial Advicemove, he said.

Lonsec receives direct pay-ments from fund managers tounderwrite the cost of research.

Everingham claimed exter-nal market evidence showedthe direct payment model didwork. Advisers are free tochoose which research houseto receive ratings from, he said.

Any conflict of interest arisingfrom payments from fund man-agers to research houses canbe managed robustly and effec-tively, Everingham said.

“This is a conflict we workunder, but like in lots of areasof business, it’s not the factthat you’ve got a conflict, it’show you go about managing it,”he said.

FOS’ slim grasp of intra-fund advice disputes

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Shape of FOFA bills in hands of independentsBy Mike Taylor

THE fate of the Government’s Future of Finan-cial Advice (FOFA) legislation will be decidedby debate in the House of Representatives afterthe Parliamentary Joint Committee (PJC)reviewing the FOFA bills failed to produce abipartisan report.

The divide between the Government andOpposition members of the PJC was wide, withthe Labor members of the committee adheringclosely to delivering only minor changes to theFOFA bills originally tabled by the Minister forFinancial Services, Bill Shorten.

By comparison, the Coalition made clear itwants opt-in removed and annual fee disclo-sure made prospective, with the best interestsduty amended to specifically allow agreementbetween clients and their advisers.

The Opposition also wants the ban on riskcommissions inside superannuation limitedto automatic insurance cover within superan-nuation funds where individuals have notaccessed specific advice, namely in defaultsuper arrangements.

However the dissenting report said theCoalition wanted no changes to existing remu-neration structures with respect to risk insur-ance where the consumer accessed specificadvice – and it said that should be irrespec-tive of whether that insurance is structuredinside or outside super or whether it is an indi-

vidual or a group policy.The Coalition members of the PJC have

produced a dissenting report claiming the twoFOFA bills are unnecessarily complex and insome parts unclear. It says they will likely causejob losses in the financial services industry, willenshrine an unlevel playing field amongstadvice providers and will cost about $700million to implement.

The Coalition senators and members wantthe FOFA legislation deferred until it passes aRegulatory Impact Statement. As well, theywant the legislation timed to coincide with theGovernment’s MySuper changes.

Commenting on the PJC outcome, Opposi-tion financial services spokesman SenatorMathias Cormann said the Coalition support-ed sensible reforms which increased trust andconfidence in Australia’s financial servicesindustry by increasing transparency, choiceand competition.

He said the government had failed to achievethe right balance with FOFA because it hadfailed to comply with its own internal processrequirements around best practice.

The differing reports flowing from the PJCprocess mean the shape of the FOFA bills whichadvance to the Senate will be decided in debateon the floor of the House of Representatives.

This means the stance of independents RobOakeshott and Andrew Wilkie on the key ques-tion of opt-in will be crucial.

Default fund arrangements questionedTHE Productivity Commission (PC) hasmade clear that it will be delving deeplyinto the competition and transparencyissues surrounding the selection ofdefault funds under modern awards.

The PC’s direction has been outlined inan issues paper released this week, whichalso makes clear the degree to which thefuture of default funds under modernawards is directly linked to the implementa-tion of the Government’s Stronger Superpolicy, particularly MySuper.

On the question of the current selec-tion process for default funds undermodern awards, the PC paper asks threekey questions:

Is the process transparent? Is it com-petitive? Is there a level playing fieldbetween industry and retail funds? Isthere a level playing field betweendomestic and international funds andshould there be?

“If not, what are the barriers to trans-parency and contestability? What are theeffects of these barriers on member out-comes?” the PC paper asks.

The document also raises the keyissue of whether the industrial judiciary inthe form of Fair Work Australia (FWA)should be a part of the process of select-ing default funds.

“Is there a case for an organisationother than FWA to assess the eligibility offunds against any selection criteria?” the

paper asks. “What should be the role ofthe industrial parties to the awards?What should be the role of FWA?”

Commenting on the release of the posi-tion paper, the Australian Institute of Super-annuation Trustees (AIST) chief executiveFiona Reynolds said the questions raisedby the PC highlighted the complex issuesthat needed to be considered.

She said this included the question asto whether additional criteria wererequired over and above those for newMySuper funds.

Reynolds said AIST expected to be anactive participant in the inquiry and wouldargue strongly that default fund selec-tion was a matter for workers andemployers to decide through the indus-trial award process.

Fiona Reynolds

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News

Five assistant treasurers in five yearsBy Mike Taylor

THE Federal Opposition has pointed outthat the resignation of Assistant Treasur-er Senator Mark Arbib means theGovernment will have had five peoplefilling the portfolio in the past five years.

The opposition spokesman on Finan-cial Services, Senator Mathias Cormann,said the four politicians to fill the roleunder Labor in the past five years hadbeen Chris Bowen, Nick Sherry, BillShorten and Mark Arbib.

He said that with Senator Arbib’sdeparture, a fifth person would need tobe appointed to the role.

With Prime Minister Julia Gillardexpected to announce a further minorCabinet reshuffle later last week, theimpact on the financial services portfo-lio is expected to be relatively minor, withthe Minister for Employment and Work-place Relations, Financial Services andSuperannuation, Bill Shorten, expectedto remain in his existing roles.

The most likely successor to SenatorArbib in the Assistant Treasurer role isregarded as being the ParliamentarySecretary to the Treasurer, David Brad-bury, who declared himself early as asupporter of the Prime Minister in therecent leadership spill.

Tasmanian PerpetualTrustees signs up forS&P rating By Chris Kennedy

MYSTATE subsidiary Tasmanian Perpetual Trustees (TPT) hasannounced its Select Mortgage Fund has been given a three-starrating by Standard & Poor’s, just two weeks after the ratingshouse announced it would be withdrawing from local fundsresearch effective 1 October.

Two weeks ago Russell Investments became the first majormanager to withdraw its funds from S&P ratings following theannouncement. The TPT rating will be valid until S&P’s 1 Octobercut-off.

TPT general manager of wealth management and trusteeservices David Benbow said TPT was looking to attract newinvestors to the fund, including from outside of Tasmania.

“We plan to place the fund on our MyState investment plat-form for financial planners and dealer groups in different regions,and to leverage the distribution potential in Central Queenslandwhere MyState has recently merged with The Rock BuildingSociety,” he said.

According to TPT, S&P found that the fund had performedwell over the past five years, outperforming the fund bench-mark and peer group benchmark and maintaining liquidity levels.S&P also viewed the fund’s investment management capabilityfavourably, TPT stated.

“We are particularly pleased that S&P’s analysis recognisesthe capability of our investment management and lending teamsand the loyalty of our investor base,” Benbow said.

TPT has $930 million in funds under management in Aus-tralian and global equities, cash and income funds, mortgages,property and balanced funds.

ASIC prompts AMEXinterest policy changeBy Milana Pokrajac

AMERICAN Express Australia(AMEX) has agreed to slash itspolicy of increasing interestrates for credit card customersin default, following concernsraised by the financial servicesregulator.

According to the AustralianSecurities and InvestmentsCommission (ASIC), AMEXincreased the interest rate onthe whole balance where acard holder had defaulted inmaking their minimumrepayment three or moretimes over 12 months.

ASIC found the increase inrates was up to 6 per cent fora 12-month period, while thepolicy affected 7.9 per centof credit card accountsissued by AMEX.

“ASIC was concerned thatthis policy was potentially inconflict with the restrictionson the charging of defaultinterest under the NationalCredit Code,” the regulatorstated.

As a result of the changes,the holders of thoseaccounts would receive a

reduction in interest rate ofup to 6 per cent, startingfrom today.

ASIC Commissioner PeterKell said the regulatorbelieved the policy intentbehind the National CreditCode was to limit the level ofincreased charges whichmay be imposed on aborrower in default.

“ASIC welcomes AMEX’sagreement to change its inter-est rate practice,” Kell said.

Instos targeting global and passive investments

By Tim Stewart

INSTITUTIONAL investors continued the trend ofinvesting away from local markets in 2011 as theysought to diversify their portfolios, according to TowersWatson.

The clients of Towers Watson made 800 manager selec-tion decisions in 2011, which reflected around US$80billion of assets moved – up 40 per cent from 2010.

Bond mandate selections accounted for US$21billion, with the allocation to US bonds almost doublingfrom 2010. Equities mandates accounted for US$24billion in 2011, with global equities accounting for athird of all equity mandate selections.

Towers Watson global head of investment researchCraig Baker said the move to global equities was partof a move by institutions to diversify their portfolios.

There was also an increase in passive investments in2011, with the Towers Watson clients investing over US$16billion in the asset class – up 60 per cent from 2010.

“Indexation and smart beta are playing increasing-ly important roles in investors’ portfolios, as many newinnovations provide efficient access to markets at lowercost,” said Baker.

Passive investors could now choose from among arange of options – including insurance and emergingmarket currency – with the expectation of better risk-adjusted returns, he said.

When it came to alternative investments, institu-tions were choosing to go direct rather than throughfund of funds due to a focus on “better fee structureand greater transparency”, said Baker.

Bank satisfaction reaches 16-year high By Andrew Tsanadis

CUSTOMER satisfaction amongAustralian banks has grown to itshighest level in the past 16 years,but sentiment among businesscustomers still lags behind that ofpersonal customers, according tothe latest report by Roy MorganResearch.

The ‘Customer Satisfaction –Consumer Banking in AustraliaMonthly Report’ for January 2012revealed that bank satisfactiongrew to 79.6 per cent, increasingby 4.2 percentage points over thepast 12 months. Home loan cus-tomers in particular showed anabove-average improvement of 5.4percentage points.

National Australia Bank (79.5per cent) took the top spot in cus-tomer satisfaction among the fourmajor banks, followed by ANZ(78.6 per cent), CommonwealthBank of Australia (77.6 per cent)and Westpac (76.3 per cent).

According to the report, NAB

increased its overall satisfactionlevel by 7.7 percentage points overthe past 12 months – spurred onmostly by its 9.5 percentage pointimprovement among its non-home-loan customers.

Improving customer sentimentby 4.9 percentage points over thepast year, CBA’s result was duelargely to its improved perform-ance among its home loan cus-tomers, which gained 8.1 percent-age points.

According to Roy Morgan, thecustomer satisfaction survey was

finalised prior to the well publicisedinterest rate increases in early Feb-ruary. Based on previous customerreactions to this type of publicity,the research house expects satis-faction to take a negative blow overthe next few months.

Despite the gains made by thebig four institutions, the smallerbanks are still ahead of theirlarger competitors, with BendigoBank and ING Direct reporting sat-isfaction levels of 89.5 per centand 89.2 per cent respectively.

The report also revealed thatwhile sentiment among personalcustomers sits at around 79.6per cent, business customersrecorded an overall rating of66.1 per cent.

The disparity between the twomarkets is likely to attract increas-ing attention by banks, and possi-bly the Government, due to therole the small-to-medium enter-prises have in terms of expandingemployment levels, Roy Morganstated.

Peter Kell

Mark Arbib


News

Expect variable FOFA transitionary arrangementsBy Mike Tayor

THE Minister for Financial Servicesand Superannuation, Bill Shorten, isexpected to announce variable tran-sition arrangements for the imple-mentation of the Government’sFuture of Financial Advice changes.

While the Financial PlanningAssociation has used a submissionto the Senate Economics Commit-tee to argue for a 12-month transi-tion period, and Financial ServicesCouncil chief executive JohnBrogden has predicted such anarrangement, Shorten has thus farrefused to commit to specifics.

All Shorten has been prepared tosay is that there will be appropriatetransition arrangements – somethingwhich is being interpreted as meaningthat at least some elements of thechanges will be introduced effectivefrom the original 1 July 2012 start date,while other, more complex elementsimpacting industry infrastructure willbe implemented over time.

Many of the changes impactingplanner remuneration are expectedto be applied effective from the legis-lation start date.

As well, with the ParliamentaryJoint Committee (PJC) reviewing theFOFA bills tabling its findings late

last week, few people expected theminister to make a definitiveannouncement on transitionaryarrangements until the committeereport was made public.

While the Federal Opposition hadsignalled its desire for the PJC toproduce a bipartisan report,Government and Coalitionmembers of the committee were notable to agree on the key issue of opt-in, giving rise to the a dissentingreport.

As well, NSW independent RobOakeshott has declared he will notbe supporting opt-in when thematter is brought on for debate in

the House of Representatives –something that is likely to result inan amendment which might thenbe opposed in the Senate.

In the meantime, the head offinancial services at Chan & Naylor,David Hasib, has claimed thecurrent leadership challengewithin the Australian Labor Partyhas acted as a distraction toprogressing FOFA.

“We at Chan & Naylor are alreadyexpecting delays of up to 12 monthsfor FOFA reforms and are concernedthere will be even longer to waitshould this leadership battle becomeongoing,” Hasib said.

S&P withdraws ratings on Russell fundsBy Milana Pokrajac

STANDARD& Poor’s Fund Services (S&P) has suffered its firstmajor ratings withdrawal after the announcement that S&PCapital IQ would no longer conduct its services in Australia.

Russell Investment Management has asked S&P to with-draw the ratings on 22 funds managed by Russell, theresearcher has confirmed.

This is the first ratings withdrawal request made by a

major client after S&P Capital IQ – a division of Standard& Poor’s that provides web-based analytics and informa-tion services – announced it would no longer be conduct-ing local funds research and local wealth managementservices in Australia as of 1 October 2012.

In January, Macquarie Investment Management asked theresearcher to withdraw ratings on its Australian MicrocapFund, while ANZ Group’s conduit Aurora Securitisation hadS&P ratings pulled on its ABCP programs in mid-February.

OnePath appoints investment managersBy Chris Kennedy

ONEPATHhas announced the appoint-ment of new investment managers,name changes to its investment funds,and changes to its diversified investmentfunds following last year’s acquisition ofING Investment Management (INGIM)by UBS Global Asset Management (UBS).

ANZ general manager superannu-ation and investments Craig Brack-enrig said OnePath was now partner-ing with specialist investmentmanagers and taking a more active

role in asset management.The changes include the acquisition

by ANZ of OptiMix from UBS, whichwill enable ANZ to bring this specialistcapability in-house. ANZ said thiswould provide greater flexibility for thecreation of new products and enhanceits research and investment managerselection skills.

The former ING single sector fundswill be rebranded to OnePath and willbe managed on behalf of OnePath by aselect range of specialist investmentmanagers. UBS will manage a number

of funds, including Australian andglobal shares.

PIMCO will manage diversified fixedinterest, Karara Capital will managesmall companies, CBRE Clarion willmanage global property securities andSG Hiscock & Company will manageAustralian securities, ANZ stated.

The single manager diversified fundspreviously managed by INGIM haveevolved into OnePath multi-managerfunds that blend the processes andstyles of leading active investmentmanagers with index funds, ANZ stated.

AIA Australia reportsstrong growth inpremiums and assetsSTRONG growth in localmarket business has con-tributed to a record set ofresults for AIA Group inter-nationally, according to finan-cial results for the yearended 30 November 2011.

AIA Australia announceda 21 per cent growth in pre-miums and a 27 per centgrowth of total assets whichit said was driven by itsinvestment in partner- andcustomer-focused solutions.

The group pointed to arecent Plan For Life reportanalysing life insurance riskpremium inflows and salesfor the year ended Septem-ber 2011 that showed AIAAustralia is dominating thegroup risk market with aquarter of total market shareand $831 million of in-forcepremiums.

However the Plan For Lifereport showed AIA Australialagged all other major insur-ers in terms of individual risklump sum sales and inflows– an area the group is look-ing to improve according toAIA Australia chief distribu-tion and marketing officerDamien Mu.

Mu points out that AIA’sindividual lump sum riskinflow growth of 20.6 percent was more than doublethat of the overall marketgrowth of 10.1 per cent,although from an admittedlylow base.

The retail market is a prior-ity growth area for AIA Aus-tralia, which had increased itsretail team in the front andback office by a headcount of15 above normal growth inthe past year, Mu said. The

group would continue to lookto strengthen its retail prod-uct proposition, he added.

AIA Group overall saw a40 per cent increase invalue of new business(VONB), which the groupdescribed as its key perform-ance measure, to US$932million. AIA Group’s VONBmargin grew from 32.6 percent to 37.2 per cent.

There was a 22 per centincrease in annualised newpremiums to US$2,472 mil-lion and embedded value ofUS$27,239 million, up fromUS$24,748 million at 30November 2010. Operatingprofit after tax increased 13per cent to US$1,922 mil-lion and the solvency ratioon the Hong Kong InsuranceCompanies Ordinance basismore than tripled, which AIAsaid reflected a very strongcapital position.

The group’s final dividendof 22 Hong Kong cents pershare recommended broughtthe total dividend for the 2011financial year to 33 HongKong cents per share.

European woes create fixed interest opportunitiesBy Tim Stewart

THE “dislocated markets”caused by Europe’s sover-eign debt issues are creatingopportunities that qualityfixed income managers canexploit, according to Zenith.

From an initial universeof 89 funds, the Zenith 2012Fixed Interest Sector Reviewawarded nine funds a‘highly recommended’rating and 18 a ‘recom-mended’ rating.

The ‘highly recommend-ed’ funds are the PerennialFixed Income Trust, thePIMCO EQT WholesaleAustralian Bond Fund, theTyndall Australian BondFund, the Macquarie IncomeOpportunities Fund, the

PIMCO EQT WholesaleGlobal Bond Fund, the CFSWholesale Global CreditIncome Fund, the Macquar-ie Master Diversified FixedInterest Fund, the SchroderFixed Income Fund Whole-sale and the KapstreamWholesale Absolute ReturnIncome Fund.

Zenith senior investmentanalyst Steven Tang said thekey to receiving a consistentreturn in the fixed incomeenvironment was to “blend”a number of high qualitymanagers who have the“requisite skill” to exploit thecurrent opportunities.

“Dislocated marketsprovide an abundance ofopportunities for qualityfixed income managers to

exploit. As seen post theglobal financial crisis, thiscan set them up for strongperformance once funda-mentals reassert themselvesand markets become lessdominated by macroeco-nomic events,” Tang said.

However, the fact thatsovereign debt is largely heldby European banks adds anextra layer of risk to thecurrent crisis, Tang added.

“While the largestpurchasers of the sovereigndebt of any particular Euro-pean country are usually thebanks in that particularcountry, half or more of thedebt of Greece, Ireland,Portugal and Italy is inforeign hands – predomi-nantly in North Europeanhands,” Tang said.

That meant that adistressed sovereign wouldnot only put domesticbanks in danger, but wouldalso put many Europeanbanks at risk, he added.

“Multiple sovereigndefaults would imperil theentire European bankingsystem, throwing the entireregion into a severe recessionor depression,” Tang said.

Bill Shorten

Damien Mu


SMSF WeeklyATO signals changes toSMSF annual returns

By Mike Taylor

THE Australian Taxation Office (ATO)has signaled it is changing its datacollection systems around self-managedsuperannuation funds (SMSFs).

The ATO’s move was f lagged lastmonth in the context of a presentationto the SMSF Professionals’ Associationof Australia (SPAA), with the assistantcommissioner in charge of superannu-ation, Stuart Forsyth, saying it waspossible changes would be made to theSMSF annual return.

Forsyth said the ATO was engagingindustry and stakeholders to explorethe design of its data collection, withthe focus being on minimising theadditional reporting requirementsplaced on SMSFs.

He said he expected the processwould run through to 2014.

Flexibility remainsSMSF trump card By Damon Taylor

ON the back of the second annualse l f -managed super fund (SMSF)report released jointly by the SMSFProfessionals’ Association of Australia(SPAA) and Russell Investments, PlazaFinancial principal Peter Hogan saidthat while gauging SMSF performancemay be the million-dollar question,trustees continued to be well servedby the nimbleness and flexibility thatSMSFs provided.

“What SMSFs do offer trustees, andwhat is an attraction, is that degree offlexibility in terms of the investmentsthat they make,” he said. “For exam-ple, I have a number of clients whohave managed funds and managedaccounts with fund managers, and forvarious reasons, but they quite happilytell me that their self-managed superfunds are doing quite well compared tothe managed funds.

“And the reason for that, of course, isthat they’re all sitting in cash or termdeposits,” Hogan continued. “They’vegot positive returns!

“And with the way the market is atthe moment, a positive return is lookingpretty good compared to the ups anddowns and swings of the share marketthat we’ve been through.”

Adding weight to Hogan’s perspec-tive, the data yielded from this year’sSPAA/Russell SMSF report tells a simi-lar story, with most survey respondentsciting risk reduction as the key driver oftheir asset allocation in 2011.

“So one of the things that self-man-aged super funds do offer in terms of areturn is a higher degree of flexibilityfor trustees to move the whole of thefund into more defensive assets whenthey think it’s appropriate,” commentedHogan. “And naturally, that’s as com-pared to writing off to a fund managerand saying that they want to cash outthis investment, which takes a day ortwo, and then saying that they want toinvest in this other investment and thattakes a day or two again.

“But when markets improve, they’reequal ly wel l ser ved,” he added.“Because at that point they can againbe a little bit more nimble and moveback into markets when it’s appropriateas well.”

Stuart Forsyth

Govt holds firm oncontribution capsTHE Minister for FinancialServices, Bill Shorten, usedlast month’s first meetingof the Government’sSuperannuation Round-table to reiterate itscommitment to itschanges to concessionalcontribution caps.

Amid speculation thatthe May Budget mightcontain some amend-ments to the contribution,Shorten said the Round-table had involved“productive discussions

about the administrationof concessional caps forover 50s”.

In doing so, he reinforcedthat from 1 July this yearAustralians over 50 withsuperannuation balances ofless than $500,000 wouldbenefit from $50,000concessional caps.

On the eve of the firstRoundtable meeting, theAustralian Institute ofSuperannuation Trustees(AIST) had urged that theGovernment hold firm to

its 1 July commitment.Discussing the work of

the first meeting of theRoundtable, Shorten saidthere had been agreementthat a priority in the futurewould be getting betterinformation around thecurrent distribution of taxconcessions.

He said the participantshad also agreed theRoundtable would furtherdiscuss ways to provide abetter deal for women inregards to superannuation.

SMSF superMategains selectionSELF-MANAGED super fund (SMSF)software suite, superMate – an integrat-ed administration product provided bySupercorp Technology – has beenselected by Super Concepts, Roberts &Morrow and The Super Group tosupport their SMSF compliance andaccounting requirements.

After a detailed review of the solu-tions available, Super Concepts chosesuperMate due to its ability to signifi-cantly reduce the effort required inproviding an end-to-end investmentmanagement and compliance service.

Commenting on Super Concepts’selection of superMate, Kurt Groen-eveld, chief executive of Supercorp, saidSupercorp was pleased to have beensuccessful in this review and was keento continue its longstanding relation-ship with Super Concepts.

“Super Concepts is another in agrowing list of high quality, profession-al SMSF administrators that have recog-nised the depth and value of the super-Mate solution,” he said.

David Mendelovits, national salesmanager for Supercorp, said he expect-ed Super Concepts’ several thousandSMSFs would be transitioned to the newsoftware over the next few months.

“The new system will then be fully

operational by July 2012,” he said.According to Supercorp, The Super

Group has also been delighted with theproductivity gains that have beenachieved with the use of superMate. Withthe significant growth it is experiencingin its SMSF business, it is also finding ittakes very little time for new staff to learnthe system and to quickly become highlyproductive.

Peter Hogan

Kurt Groeneveld

No one should be surprised thatthe parliamentarians who makeup the Parl iamentar y JointCommittee (PJC) reviewing the

Government's Future of Financial Advice(FOFA) bi l ls could not f ind the sameconsensus that existed in 2010. Opt-in andannual fee disclosure were always going tobe the stumbling blocks to bipartisanship.

While the Minister for Financial Services,Bill Shorten, is expected to endorse some ofthe suggested amendments flowing fromthe PJC reports, he has made clear bothpublicly and in private negotiations thathis position remains fixed on the issues ofopt-in and fee disclosure.

Given the tensions which arose withinFebruary's battle for the Federal Parlia-mentary Labor leadership between PrimeMinister Julia Gillard and the man sheousted, Kevin Rudd, the ALP members ofthe PJC were always regarded as highlyunlikely to disagree with Shor ten'sapproach.

Thus, the final shape of the FOFA legis-lation will be largely determined by thesuccess or failure of amendments movedby the Federal Opposition during debatein the House of Representatives in comingweeks.

This reality underscores the continuingpresence of representatives from theFinancial Planning Association (FPA), theAssociation of Financial Advisers (AFA) andthe Financial Services Council (FSC) inCanberra over recent days.

Realising that a number of the key issueswould be fought out on the floor of theParliament, the key lobby groups devotedsignificant time to gaining the ear of thekey independents – an exercise that hasmet with varying levels of success.

What the planning organisations knowis that they can rely on Port Macquarie-

based independent Rob Oakeshottsupporting an opposition amendment withrespect to opt-in and the probable similarsuppor t of Tasmanian independentAndrew Wilkie along with Far Nor thQueensland's Bob Katter.

Less certain is the view of Tamworth-basedindependent Tony Windsor, while theAustralian Greens appear to have fallen instep with the Government on the FOFA bills.

At least a part of the problem for Shortenin gaining sufficient House of Representa-tives support for all of the FOFA bills is thegrowing body of evidence that suggeststhat it has failed to appropriately gatherthe necessary evidence concerning regu-latory and financial impacts.

This much was made clear in evidencegiven during Senate Estimates hearings inearly February, where representatives fromthe Department of Finance confirmed thatmuch of the FOFA legislation had failed tomeet the requirements concerning Regu-latory Impact Statements (RIS).

What might be of greater concern to theindependents in the House of Representa-tives is the fact that once the Governmentsignaled it had made up its mind on whereit was headed with the policy, the appro-priateness or otherwise of the RIS becameacademic.

The proceedings during Senate Esti-mates relating to the FOFA bills and repre-sentatives of the Office of Best PracticeRegulation are infor mative, with theexchange with the Opposition spokesmanon financial services Senator MathiasCormann going like this:

Senator Cormann: When you say you didnot get it to an adequate standard, normal-ly it is a negotiation is it? It goes backwardsand forwards, where a department puts upa draft Regulatory Impact Statement to youand you say, “That's not enough”, then they

go back and do some more work and thenit comes back.

Mr McNamara: That is right, Senator. Senator Cormann: But on this occasion

they decided not to do that because theyhad run out of time.

Mr McNamara: They had run out of time.There was an interaction. They werepreparing it. They had responded to somecomments we made. In our view they hadnot responded enough. Had there beenmore time, I would have thought theywould have been able to get those RISsacross the line. They would have been ableto get them to an adequate standard, butthere was not enough time.

Senator Cormann: It is good process,though, with significant regulatory changeslike that which increase costs for businesswhich increase costs for consumers? It isgood process to have adequate informa-tion about cost benefit before you make adecision, right?

Mr McNamara: That is why we have a RISprocess.

Hardly surprisingly, the Coalition membersof the PJC pointed to the absence of RIS sign-off as being one of the reasons for theirdissenting report on the FOFA bills.

Their dissenting report made clear thekey points of difference were opt-in, annualfee disclosure and best interests duty.

As well, they have argued that the FOFAlegislation should be delayed to coordinateits implementation with the Government'sMySuper initiative.

While the Government is not expectedto accede to the dissenting points made bythe Opposition, the financial planningindustry can at least be satisfied that thelegislation will be subject to a thoroughdebate in the House of Representatives andthe hope that enough independents willsupport the amendments they want.

InFocus


Mike Taylor writes that the dissenting reports produced within the ParliamentaryJoint Committee reviewing the FOFA bills will ensure the key points arethoroughly debated and possibly successfully amended in the Parliament.

FOFA destined for thorough debate

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What’s on

LIFEINSURANCECONSUMERSNAPSHOT

59%Little to no research

conducted before purchasing

52%Consult friends and family

when researching a new policy

10%Customers who have

changed policy providers in the past five years

21%Customers not confident with

their insurance product

Source: Ernst & Young's 'Global Insurance

Customer Survey

IN an investment world whereflexibility and the ability to

respond quickly are increasing-ly important, fleet-footed hedge fundsmay be finding their time in the sun hasfinally arrived.

Although many long-only equitymanagers found market conditions in2011 very challenging, several hedgefund strategies revelled in the unsettledconditions. And their nimble responsehas left traditional long-only managersscurrying to catch up.

Chris Gosselin, chief executive ofAustralian Fund Monitors (AFM) whichtracks the performance of Australianhedge funds, believes adaptability isnow an essential quality in the face ofongoing market volatility.

“Traditional long-only managers aremoving more towards the hedge fund

approach as they are finding increasingf lexibi l i ty is essential . They can’tperform with one hand tied behindtheir back,” he says.

“In this type of volatility, long-only isnot the way to go, and we are increas-ingly seeing the blurring of the defini-tion of hedge funds and absolute returnfunds and long-only approaches. Somemanagers are taking very concentratedpositions with hedging to cope.”

Flexibility is now an essential forsuccessful funds management, Gosselinargues. “Set and forget was great in2003-07, but in a volatile environment itcauses great damage.”

This explains the introduction ofmore tactical products. “Multi-strategyand multi-asset funds are a response tomarket conditions and fund managersnot wanting to be as locked into the

market as they were in 2008 and 2009,”he says.

“Active management is completelythe way to go at the moment.”

Daniel Liptak, head of alternativesresearch at Zenith Investment Partners,agrees the new investment landscapefavours hedge funds and managers whoare not tied to a set asset allocation.

“For the next five years we are likely to

be in a low return environment and soinvestors need to look elsewhere forreturns,” he says.

Elsewhere may mean hedge funds, sotraditional managers are not going tobe left without an offering.

Several firms have already taken theplunge. In February, Money Manage-ment repor ted Perpetual hadannounced plans to build a long/short


Hedge funds

Timeto shine

The new investment landscape favours hedge funds and managers who are not tied to a setasset allocation.While not turning in stellar results, hedge funds performed better than many other assetclasses in 2011.Given their boutique structure, the main challenge for hedge funds is their inability to accepthuge allocation into their strategies .Experts predict growing interest from high-net-worth investors.

Key points

Given the new investment environment, flexibility is essential. This might create perfectconditions for the growth of the hedge fund sector, writes Janine Mace.

equity fund in response to c l ientdemand. Caledonia Investments is alsogearing up for the March launch of anew long/short equity strategy focusedon Asian and Chinese economic growth.This complements i ts new globalresources long/short fund.

“ We are seeing a number ofannouncements that tradit ionalmanagers are launching long/shortproducts to handle volatile markets,”Gosselin notes.

“ The quest ion is, do long-onlymanagers have the shorting skills to runthese funds? Shorting is a very differentskill set.”

Hedge fund performanceMuch of the current interest in hedgefunds is due to their per for manceduring 2011.

While not turning in stellar results,they performed better than many otherasset classes, explains Deanne Fuller,senior investment analyst at Lonsec. “In

an absolute sense they have done well,particularly compared to equities – andespecially high risk equities such asemerging markets.”

Gosselin agrees the performance wasgood in a very difficult year. “The hedgefund industry as a whole, on average,was marginally negative in 2011, but themarket itself was down 14 per cent,” henotes.

“The overall hedge fund industry in2011 for the AFM All Funds Index saw a-3.86 per cent return, while the ASX200had a -14.51 per cent return. The plat-form was negative, which is never good,but performance was good comparedto the underlying market.”

Complicating matters, some hedgefund strategies found the going tougherthan others, explains Gosselin. “Therehas been a wide range of performancesover the past 12 months, from plus 31per cent to negative 37 per cent to theend of December, which is a mammothrange,” he says.

“This creates an issue for financial plan-ners, as there are 200-250 hedge funds inour database with different styles, strate-gies and sizes. They range from Platinumwith $15 billion to an emerging managerwith only $5-$10 million.”

Fuller acknowledges there was abroad spread of results. “We have seena greater dispersion than in previousyears due to the risk-on/risk-off marketin 2011. However, the result is a goodperformance given what equity marketshave done during the year.”

Although many local hedge fundsturned in good results, managers pursu-ing one investment strategy in particu-lar found conditions to their liking,according to Liptak.

“In the Australian market neutralspace, we have seen a 20 per cent plusincrease to December 2011. Over thepast five to ten years, we have seenaround 15 per cent with no liquidityissues or redemption gates,” he says.

With institutions moving to increasetheir allocations to these funds, Liptakexpects to see more market neutral start-ups this year due to the “wall of dollarsthat is flowing into these strategies”.

Other strategies are also gainingfavour. “Long/short equity funds havealso done very well, and we have seenthem produce very good numbers,”Liptak notes.

Growing international interestOffshore, the picture is a little lessattractive. According to BarclayHedge –a US provider of alternative investmentdatabases which tracks 1,600 US hedgefunds and fund of hedge funds – thesector underperformed the S&P500 inthe year to 30 December 2011. Industryassets also declined 7.7 per cent, fallingto US$1.64 trillion – their lowest levelsince February 2010.

In performance terms, only three ofthe 14 major hedge fund categoriestracked by BarclayHedge (marketneutral equity, merger arbitrage andfixed income) showed positive returns.

Despite this, the good performancecompared to long-only equity managersis translating into fresh investor interest.

A recent Barclays Capital reportsur veying 165 investors managing

approximately US$4 trillion in assetsunder management (AUM) found 56 percent of respondents planned to increasetheir hedge fund allocations over thenext 12 months – more than seven timesthe number planning to decrease theirallocation. These findings are backed byreports the US$228 billion CaliforniaPublic Employees’ Retirement System(CALPERS) is likely to increase or main-tain its hedge fund investments, whichalready total around US$5.2 billion or 2per cent of its total AUM.

Institutional investors are not theonly ones showing renewed interest,according to Liptak, who has receivedmany calls from direct investors askingwhich managers to consider. “We aredefinitely seeing a lot of demand forgood quality hedge funds. There is achange to people dipping their toesback into alternatives.”

Nikki Bentley, a partner at HenryDavis York and chair of the AlternativeInvestment Management Association’s

Regulatory Committee agrees. “Goodhedge fund performance has shown thevalue of hedge funds to investors,” shesays.

“Hedge fund managers are meant tomanage the downside r isk and theperformance in 2011 has been a goodindication of that.”

Liptak believes sentiment towardshedge funds is different in Australiacompared to many offshore markets.“People were very negative on everythingpost GFC, but in Australia it is not reallytrue of the top hedge funds like Platinum,which hardly saw a drop in inflows.”

Gosselin agrees views are slowly chang-ing. “Hedge funds were really vilified afterthe GFC but their reputation is improvingas once the failed funds – such as Astarra– have been dealt with, their performancecan be the focus,” he says.

Fuller is another who sees interestincreasing. “Institutional inflows are stillsolid, but retail funds less so. Anecdo-tally, we have seen increasing adviserinterest, but whether that has resultedin fund flows is still doubtful, especial-ly given term deposit rates in Australia.”

Key challenges aheadThe growing interest is bringing its ownchallenges for managers.

“There is a capacity problem as localhedge funds cannot accept huge allo-cation into their strategies,” Gosselinexplains.

“This is a major issue for hedge funds,as by definition, they are smaller andboutique. If an institutional investor has$200 million and wants to invest into a$500 million fund, then that is a realproblem. Such concentration is a realdanger for both the investor and the fund.”

Liptak agrees: “Capacity is the biggestissue for the hedge fund space, and it


Hedge funds

Continued on page 17

Daniel Liptak

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Figure 1 ASX200 v Equity Based Funds 5 Year Cumulative Returns

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Figure 2 2011 Distribution of Returns - All Equity Based Hedge Funds and ASX200


Hedge funds

will be difficult to get access to the goodmanagers – some of which are alreadyclosing to new money.”

Fees are also a massive issue at themoment, according to Gosselin. “But inmy view, i t depends on what theperformance is. If you receive a 5 percent return net of fees when the marketis down 10 per cent to 15 per cent, thenI would be happy to pay.”

He also points out the debate overfees has led to questions about the useof fund of hedge funds (FoHF) struc-tures, as these involve two levels of fees.

Fuller agrees the fee question is verydivisive, but notes “we have yet to seeany significant decline in fees”.

While agreeing the higher nominalfees of hedge funds are an issue, Liptakargues they are often justified. Forexample, he points out investors inAustral ian market neutral fundsreceived $2.54 of alpha for every $1 paidin fees. This compares to $0.05 of alphafor every $1 in fees paid to the averagelong-only Australian manager.

“The current debate sees investmentmanagers as an industrial input, not asa value add from skill or other IP relatedactivities. It also ignores the outcomefor investors,” he argues.

The arrival of new ‘passive’ or betahedge fund strategies onto the marketmay provide a partial solution to the feeproblem.

“With hedge fund performance, thereality is not all of it is alpha and someof the trades can be replicated, so thereis a lot of beta in it,” Fuller explains.

“If more beta market strategies cometo market, we will see increased feepressure in this market space. We expectto see hedge fund beta start to gain trac-tion in the next year or two.”

The entrance of beta strategies alsoreflects a new-found level of trans-parency among hedge funds.

“We have been seeing increasing trans-parency in recent years and it is now excel-lent. Often monthly performance reportscan be two to ten pages long,” Gosselinexplains. While he believes hedge fundtransparency is now often better than inmany long-only funds, pressure remainson liquidity.

“We have seen growing pressure fromplatforms to increase the underlyinglevel of liquidity in some strategies.However, we bel ieve the optimum

approach is where liquidity matches theunderlying assets,” Fuller notes.

“Better liquidity can compromise thestrategy’s performance.”

Gosselin believes liquidity is improv-ing. “There have been changes to thelock-up and liquidity, and very fewfunds now have less than monthlyliquidity. In retail products, they nowhave daily liquidity in funds such asAurora Fortitude and Bennelong.”

Role in client portfoliosGosselin believes market conditions willencourage many high net wor thinvestors with allocations of $200,000plus to move into hedge funds this year.

“Many self-directed investors whohave been making their own decisionshave been finding conditions very diffi-cult, so they are now looking to usehedge funds’ expertise instead,” heexplains.

“They believe this is a market whereit is so difficult to make money it isbetter to give it to a hedge fund.”

While retail investors may be inter-ested, the task for advisers is not an easyone.

“The diversity of hedge fund perform-ance, style and strategy is extraordinary,and that makes it very difficult for theinvestor and financial planner to sortthe wheat from the chaff,” explainsGosselin.

“From one year to the next , theperformance is very different. In 2008,23.5 per cent of the AFM universe waspositive in the wipe-out, but they didn’tnecessarily do well in 2009 and 2010.The key for financial planners is to findmanagers which have performed acrossa range of conditions.”

He also believes high quality, timelyresearch is vital. “In the hedge fundspace once a year is not often enough,as managers and performance canchange quickly.”

Liptak agrees advisers have an impor-tant role to play. “In the hedge fundspace, manager selection is very impor-tant. You need to identify the strategyfirst and then select the best manager

for that strategy.”When it comes to portfolio construc-

t ion, Gossel in favours a blend ofmanagers.

“We recommend not investing in asingle fund, but in a blended portfolio.A tightly blended portfolio helps as nomanager is immune to negativemonths, and you want a slightly differ-ent strategy at different times – so if themanager suffers in one month, it isoffset by one of the others,” he says.

However, a blended portfolio can bea problem with smaller investors. “Themajority, but not all, hedge funds havea minimum investment of up to$500,000, so they are really for sophisti-cated investors,” Gosselin notes.

For this reason, Fuller still supportsthe FoHF approach. “A FoHF can begood for retail investors, notwithstand-ing the high fees, as it is a type of one-stop-shop. However, it is not really suit-able for bigger investors.”

She believes there is a strong case forincluding hedge funds in a retail portfo-lio. “Hedge funds can help smooth outthe r ide in this type of investmentmarket, although we acknowledge theyare not suitable for all clients.” MM

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Figure 3 Correlation of Hedge Funds vs ASX 200 - 10 Best & Worst Months: 5 years to Dec 2011

“You need to identify the strategy first and then select thebest manager for that strategy. ” – Daniel Liptak

Continued from page 15


Hedge funds

When an investment sectorfinds itself under the regula-tory spotlight around theworld, life can be tough.

Just ask hedge funds. In the wake of theglobal financial crisis (GFC), Australia andinternational regulators have been focusingon the sector due to heightened concernsabout investor protection, market integrityand systemic risk.

This is despite recognising hedge fundswere not responsible for the financial crisis.As the Australian Securities and InvestmentsCommission (ASIC) commissioner, GregMedcraft, acknowledges, “it remains unclearwhat role hedge funds did play … and theymay well have been more victims thanvillains”.

However, this has not stopped regulatorsacting. In November 2008, the G20 called forgreater oversight of hedge funds and referredthe issue to the International Organisationof Securities Commissions. It published a2009 report, Hedge Fund Oversight, whichcalled for hedge fund registration, betteroversight and investor disclosure, greaterregulatory information sharing and regula-tory principles around fund liquidity andredemption policies.

In addition, the Dodd-Frank Act in the USand the European Union’s Alternative Invest-ment Fund Managers Directive haveimposed very prescriptive regulations onhedge funds.

These initiatives represent a major changein direction according to Nikki Bentley, apartner at Sydney law firm Henry Davis Yorkand chair of the Alternative InvestmentManagement Association’s (AIMA) regula-tory committee. “It seems overseas regula-tors have gone to the other extreme from pre-GFC and changed quite dramatically fromhedge funds being unregulated to beingclosely supervised.”

She says the regulatory focus in Australia“is not a huge change as hedge funds havealways been regulated like any financialproduct,” but admits the rapid and sweepingreform of the local financial services indus-try is making life more difficult.

“There is a lot of regulatory change in theindustry coming through – such as theFuture of Financial Advice and MySuperreforms – and that is causing further uncer-tainty,” Bentley notes.

ASIC takes a lookFor Australian hedge funds, a key develop-ment has been the February 2011 releaseof ASIC’s Consultation Paper 147 HedgeFunds: Improving Disclosure for RetailInvestors. It sought feedback on disclosureenhancements aimed at ensuring retailinvestors have the necessary informationto make informed decisions about hedgefunds. The paper also discussed how theproposed disclosure guidance would inter-act with the tailored product disclosure

statement (PDS) requirements for simplemanaged investment schemes.

According to Medcraft, ASIC believes theuse of “diverse investment strategies,complex structures and use of leverage, shortselling and derivatives” by hedge fundsmeans they can “pose more diverse andcomplex risks for investors than traditionalfunds”.

The hedge fund industry has consultedclosely with ASIC on CP147 during 2011, anda final regulatory guide is expected this year.

Most industry observers are relaxed aboutthe likely outcome of the consultationprocess.

“We don’t expect the regulatory interest tohave a major impact on the sector as most ofit is about increased disclosure, which is goodfor retail investors – especially the improvedPDS and fee information,” explains Lonsecsenior investment analyst, Deanne Fuller.

Bentley agrees the regulatory focus is apositive move. “The hedge fund industry isvery supportive of increased disclosure andis generally supportive of ASIC’s approachand feels it was very good.”

Chris Gosselin, chief executive of hedgefund research firm Australian Fund Moni-tors, is another who sees the consultationprocess as valuable. “ASIC wants to makesure the industry is transparent and allinvestors are treated efficiently and fairly,”he says.

“It needs to regulate so consumers areinformed and therefore protected, and sothat if a fund breaks the rules it is regulatedappropriately.”

However, an enhanced disclosure regimemay result in higher fees. “All the extra infor-mation is available in standard industry

documentation – so it is not a major impost,but it could lead to increased costs from anexpanded PDS and other documentation,”Fuller points out.

While AIMA supports the ASIC initiative,it believes the regulator should have gonefurther. “The industry felt enhanced disclo-sure should apply more broadly to othercomplex products as well,” Bentley explains.

Gosselin agrees a more wide-rangingapproach is required. “ASIC also needs toregulate the research industry so its reportsare quantifiable, rather than based on a viewof the potential performance [of hedgefunds].”

Although the sector is largely comfortablewith the ASIC consultation, Bentley saysthere are still some issues to be thrashed out.

“The industry is pleased there will be acarve-out for hedge funds from the shorterPDS regime. However, there is still uncertain-ty on what a hedge fund is and how it will bedefined in the legislation,” she explains.

“ASIC is still grappling with how it willapply its enhanced disclosure approach, andwe expect to see another draft regulatoryguide and further industry consultation.”

International regulatory developmentsWhile the local interest by regulators has

been relatively benign, overseas the scruti-ny is a different story. The EU Directive, inparticular, has caused considerable angst inthe hedge fund sector.

“AIMA globally spent a lot of time on it, asthere was increasing concerns about whatwas proposed and it became a very publicand political debate. The European system isvery different, but it created huge concernsfor Australian managers wanting to raisemoney in Europe,” Bentley explains.

“However, there will now be a time lagbefore it comes in and it is less strict than itinitially was.”

The US reforms are also causing heartburn. “In the US, the huge volume of regulato-

ry change created huge uncertainty and thishad an impact on many hedge fundmanagers. The local industry is still digest-ing what the regulatory changes will meanfor their operations. For example, previous-ly there was an exemption for overseasmanagers marketing to a US investor, butnow they need to be registered,” Bentley says.

The introduction of the Volker Rule –which restricts US banks from makingcertain kinds of speculative investments – isalso having an impact on the sector.

“We are seeing the start of the implica-tions of the introduction of the Volker Rule onbanks’ proprietary desks,” Bentley notes.

“This may lead us to see new boutiquesbeing started by professionals previouslyworking on the banks’ proprietary desks. Weare seeing a bit of activity in that area.”

If these regulatory developments were notenough, the rollout of the new ForeignAccount Tax Compliance Act (FATCA) regimeby the US Government is set to make lifeeven more challenging for hedge fundmanagers.

From 2013, the legislation imposes signif-icant new information reporting and with-holding requirements on foreign financialinstitutions such as Australian banks andhedge funds receiving US-sourced income.

“Most large financial institutions will haveto make system changes, and the risk is itmay lead to FATCA rules and standards legis-lation being rolled out in other countries,”Bentley explains. MM

Dealing with scrutinyEver since first impact of the global financial crisis, both international and domestic regulatorshave been announcing changes to hedge funds, which would aim at improving disclosure andinvestor protection. Where are we now? Janine Mace reports.

OpinionTechnical


There’s no doubt that superannu-ation has been subject to neverending change as far back as wecare to remember. The pace of

that change seems to have quickened asthe impact of the Stronger Super changesstarts to reach its final stages and we waitto see what will make it into legislation.

The recent announcements by theGovernment to gradually increase thesuperannuation guarantee rate from 9 percent to 12 per cent by 2020, the reductionin the co-contribution, as well as theintroduction of the low income earners’superannuation contribution seem toindicate that the concessions for super-annuation are being squeezed yet again– “not more change”, I hear you say.

Depending on your client’s situation, ifyou take some of the changes in isolationyou may come to the conclusion they areworse off, or at best, no better off.However, when the overall impact of thechanges is considered, things may bebetter than they seem in the longer term.Let’s compare the increase in the superan-nuation guarantee and the proposedreduction in the co-contribution.

Superannuation guarantee has beenaround approaching 20 years and hashad a huge impact on the retirementsavings of Australians. In many cases,any person who has been an employeeduring that time has received the benefitof additional retirement savings beingaccumulated in superannuation forthem. Anyone who is less than about age40 may have received super guaranteecoverage for the vast bulk of theirworking lives as an employee.

The gradual increase in the SG percent-age from 9 per cent to 12 per cent of aperson’s ordinary time earnings by2019/20 may not increase the coverage ofthe workforce, but it will have the effectof increasing the amount being accumu-lated in super for most employees. Theincrease in the percentage is:

The additional amount being accu-mulated in super will depend on thecurrent age of the person and any earn-ings on those amounts until the accu-mulation has been drawn down. Theyounger the person and the longer theamount is left in the fund, the greater

the amountavailable forretirement.

As an example,a person who is age25 when commenc-ing work today andearning $25,000 perannum will have accumu-lated approximately another$108,000 by the time they are age60, and about another $164,000 atage 65 merely due to the increase in theSG percentage. This is based on the salarybeing indexed at 4 per cent, with income of3 per cent and capital gains of 4 per centbefore tax, with a 20 per cent franking rate.A person who is age 25 when commencingwork today and earning $50,000 today willend up with approximately $217,000 moreby age 60 and $329,000 more by age 65based on the same assumptions. Of course,

a person earning more than these amountswill benefit even more with the increase.

At the other end of the scale will bethose 50,000 or so employees who areolder than age 70. They will benefitfrom the new requirement to have SGpaid no matter what their age. With theaging population and increased lifeexpectancies, it can only be expectedthat the number of people over age 70being provided with SG will increasesignificantly.

In contrast to the increase in the SG,the co-contribution has had more of achequered history. It started out from anencouraging base, with the Governmentmatching a person’s non-concessionalsuper contributions at the rate of $1.50for each $1 up to a maximum of $1,500.

Other factors for qualification dependedon the person’s occupation and incomelevel. In one year, the co-contribution wasdoubled. However, over recent years theco-contribution has been reduced,thresholds frozen, and the currentproposal suggests further reduction.

The recently announced proposal toreduce the amount of the co-contribu-tion to 50 cents for each $1 of after taxcontributions from 1 July 2012 will reducethe amount accumulating for retirement.In addition, qualifying for the co-contri-bution is also impacted by the reductionin the maximum adjusted income atwhich the co-contribution cuts out to$46,920. These changes have mainlyarisen due to the cost of the co-contribu-tion system to the Government and itspopularity for those who make after taxcontributions to super.

If we assume a person who is 25 yearsold is currently earning $25,000 p.a. thedecease in the co-contribution wouldmean about $62,000 less in retirementsavings at age 60 and about $87,000 less atage 65. For someone who earns $50,000at age 25, the difference is about $98,000less at age 60 and nearly $140,000 by thetime they reach age 65. The impact is dueto the reduction in the upper adjustedincome threshold from 1 July 2012. Thedifferences assume the person is able tomake after tax contributions of $1,000 ineach year and the co-contributionremains constant for the whole period.Assumptions relating to earnings, index-ation and franking are the same as thosefor the change in the SG rate above.

If the increase in the SG rate iscombined with the reduction in the co-contribution, the overall impact is that aperson would be better off compared tothe continuation of the current system of9 per cent SG and a maximum co-contri-bution of $1,000. However, for a personage 25 and earning $25,000 today, thebreak-even point where the person wouldbe in the same position had the currentsystem remained would not be reacheduntil they reached age 39. For someoneearning $50,000, the break-even pointwould occur at age 36.

What this means, is that the changes tothe balance of government support forsuperannuation concessions and subsi-dies will require a greater level of non-concessional contributions made to thefund over a longer period.

By OnePath’s technical services team.

Table 1

Source: OnePath

Year Rate (%)

2013/14 9.25

2014/15 9.5

2015/16 10

2016/17 10.5

2017/18 11

2018/19 11.5

2019/20 12

Sameyet different?OnePath’s technical team takesa look at the super guaranteeincrease and finds the morethings change the more theystay the same.

“The changes will requirea greater level of non-concessional contributionsmade to the fund over alonger period. ”

The pace of change in superan-nuation is significant. One ofsuper’s most common criti-cisms is that things are always

changing. Yet despite the dynamic paceof change, superannuation is i l lequipped to deal with the evolution ofour society and family structures.

There are many issues surroundingthe payment of death benefits that havethe potential to cause additional griefand uncertainty for super fundmembers. When things do go wrongwith death benefit payments, it isusually during a time when the familymembers are experiencing personal lossand emotional strain, which adds anadditional degree of difficulty to solvingproblems. Examining ways to improvecertainty for members in respect to thepayment of their death benefit can addsignificant value by avoiding unexpect-ed outcomes.

The distribution of death benefits hasaveraged more than 25 per cent of theSuperannuation Complaints Tribunal’s(SCT) case load over the past five years.Correctly identifying competing bene-ficiaries and/or using nominations thatfall outside of the jurisdiction of the SCTmay assist in expediting payments andreducing angst if there is the likelihoodof family disputes.

The changing nature of dependantsThe nature of our family structures andrelationships has changed significantlyduring the modern era in which super-annuation has been available to thewider community. In 2004, the treat-ment of same sex relationships wasfinally catered for as a result of a privatemember’s bill which introduced theability to make a death benefit paymentto an interdependent. An interdepend-ency relationship requires that twopeople have a close personal relation-ship, that they live together, that one oreach of them provides the other withfinancial support and that one or each ofthem provides the other with domesticsupport and personal care. With a fewminor exceptions, it is important that all

four of the criteria are met.Since 1 July 2008, same sex couples

have been formally recognised asspouses as a result of changes inCommonwealth law.

The interdependency provisions havealso provided the abil ity for fundtrustees to pay death benefits to theparents of many younger, single peoplewho are living at home. The recenttrends of younger people not marryingor having children until later in life hasresulted in an increasing percentage ofsuperannuation fund members whohave no spouse or child to whom theirdeath benefit can be paid. The rise ofcompulsory super and minimum insur-ance levels has compounded this issue.Interdependency is an area that is oftenoverlooked, and worth exploring withthe superannuation fund to see ifparents may qualify as dependants oftheir child.

Blended familiesDespite the improvements for same sexcouples and interdependent relation-ships, issues with death benefits andblended families continue to presentchallenges to trustees and advisers.

Often the client will want to use theirsuperannuation to provide an incometo their spouse, but then have anyresidual balance left to children fromtheir first marriage. A self-managedsuperannuation fund (SMSF) may beable to cater for this type of arrange-ment, but it is unlikely to be an optionin retail, industry or corporate funds.Clients should consider directing theirsuperannuation to their estate andestablish testamentary trusts via theirwill. This type of arrangement willgenerally ensure that the benefit isreceived as intended, however, theremay be tax consequences.

Another issue that arises in blendedfamilies is in relation to stepchildren.A stepchild is considered a “child”beneficiary as long as the natural andstepparents remain married, or thenatural parent dies. This has long beena pr incipal in family law and was

recently confirmed as the case forsuperannuation death benefits in ATOID 2011/77. The SCT has also used thisprincipal in deciding cases. This meansthat the stepparent is unable to leavetheir superannuation benefits to theirstepchi ldren. The chi ldren may,however, still qualify under financialdependency or interdependency.

Identifying dependantsOften members nominate people who donot meet the definition of dependant,despite many funds’ efforts to explain thenature of nominations and the legalrequirements. An example of this is wherea member nominates their parents to bethe recipients of their death benefit,however, they are not living with theirparents nor is there any provision offinancial support – hence, they do notmeet the definition of a dependant.

Working with clients to identify theirpotential competing dependants and

how to best ensure that the desiredoutcomes will be achieved – can addsignificant value. Similarly, identifyingthat a client has no dependants andtherefore needs a will in order to choosewho receives their death benefit, is alsobeneficial.

Other dependantsSuperannuation law permits a trusteeto pay a death benefit to a person whodoes not meet the definition of depen-dant, in the event that the trustee isunable to locate any dependants orlegal personal representative. In manyinstances, the recipients will be theparents of the deceased. However,many funds will only allow this type ofpayment for small amounts (under$5,000 – $10,000). For higher amounts,the trustees will invariably require thenext of kin to obtain letters of adminis-tration and distribute the benefit inaccordance with the laws of intestacy.


OpinionDeath benefit

When thingsgo wrongSuperannuation is not catching up to theevolution of our society, according to Julie Steed.

“We need to work withthe Government tobring in appropriatelegislation that keepspace with the changingnature of familystructures andsuperannuation.”


Nomination typesHaving identified all potential benefici-aries and to whom the death benefit willbe paid, it is essential to have structuresin place to ensure that the client’s wisheswill be complied with. Identifying situ-ations where trustees can makepayments to beneficiaries other than asthe client wishes can enable clients tomake alternative arrangements that willensure their plans are fulfilled.

When nominating beneficiaries,superannuation funds offer a range ofnomination options, including:

• Trust deed provisions – directednominations;

• Binding nominations;• ‘Non-lapsing’ binding nominations;• Reversionary pensions; and• Nominated beneficiaries.

Trust deed provisions – directednominationsMembers of SMSFs and small APRA

funds (SAFs) are able to incorporatecertainty using a clause in the trust deed.The clause would typically state that ifa member nominates a valid dependantthe benefit shall be paid to them, but ifthere is no nomination – or the nomi-nation is invalid – the benefit shall bepaid to the estate.

Superannuation law generally prohibitsfund trustees from being subject to adirection, however, SMSFs and SAFs areexempt from the prohibition. According-ly, it is not a breach of superannuationlaw for a SMSF or a SAF trust deed to stip-ulate that the trustee shall make apayment to a dependant or to their estatein line with a member’s direction.

Binding nominationsBinding nominations are an exception tothe rule that no-one other than the trusteecan exercise a discretion. The SIS Regula-tions (Regulation 6.17A) prescribe the nineconditions that must be satisfied for the

exception to be granted. In addition, a fund’strust deed must permit binding nomina-tions to be made. If a trustee accepts anomination that meets the conditionscontained in the SIS Regulations, the trusteeis bound to make the payment in accor-dance with the nomination.

There are two common problems withbinding nominations, firstly that theyexpire after three years, and secondlypeople not updating their nominationswhen their personal circumstanceschange. Superannuation funds have goneto considerable lengths to remindmembers as to when their nominationsexpire, however, many members simplylet their nominations lapse. In thisinstance, it is generally up to the trustees toexercise discretion and determine towhom the benefit should be paid.

The second issue is even more prob-lematic. Consider the situation of Joe whoseparated from his wife and is living withhis current de facto, Louise. Louise ispregnant with their first child. Joe made abinding nomination in favour of his wifeCarla two years ago. If Joe dies, thetrustees of his fund will be required to payhis death benefit to Carla – Joe has a validbinding nomination and Carla meets thedefinition of a dependant. Louise and Joe’schild will receive nothing.

‘Non-lapsing binding’ nominationsThese nominations are also an excep-tion to the rule that no-one other thanthe trustee can exercise a discretion.This exemption permits discretion to beexercised by a party other than thetrustee, provided that the governingrules require the trustee’s consent to theexercise of such discretion. Providedcertain requirements are met, a memberis allowed to exercise discretion as to therecipient/s of their death benefit.

Whilst the use of this provisionexempts the trustee from the require-ment to exercise discretion, it does notnecessarily mean the nomination can’tbe disputed by competing beneficiaries.

In addition to the legislation, APRACircular 1.C.2 provides a framework forthis type of nomination. Although thereis no legislative requirement, the APRACircular indicates that a periodic reviewshould occur when there is a change inthe member’s circumstances, or at leastevery three years. This is also consistentwith the trustee’s duty to act in the bestinterests of all members.

The other ‘non-lapsing binding’nominationsA small number of retail funds haveincorporated specific provisions intotheir trust deed which enable them toaccept binding nominations that do notexpire. The nomination may require themember to declare that they will alwayskeep their nomination up-to-date toreflect any changes in their personalcircumstances. Whilst there appears tobe no case law yet, it will be interestingto see how an aggrieved beneficiary willbe treated if they can prove that – givena change in the member’s circumstances– the payment to another person isunfair and unreasonable.

The confusing dual use of the term‘non-lapsing binding nominations’makes it important for clients and advis-ers to understand the legal basis underwhich their nomination is made and anyterms and conditions which apply.

Reversionary pensionsUpon the death of the pensioner,payments from reversionary pensionsrevert to the reversionary beneficiary.These types of nominations generallyprovide certainty for members. Nomina-tions are made at pension commence-ment and cannot generally be changedwithout commuting the pension andcommencing a new pension. If the rever-sionary beneficiary pre-deceases thepensioner, the benefit would ordinarilypass to the pensioner’s estate.

From 1 July 2007, death benefitscannot be paid in the form of an incomestream to adult children. Therefore,adult children cannot be nominated asreversionary beneficiaries.

Nominated beneficiariesAn ordinary beneficiary nomination is anexpression of wishes which is not bindingon trustees. As with all other types of nomi-nation, a nominated beneficiary mustmeet the SIS definition of a dependant.

The legal landscapeWhilst superannuation law is Common-wealth law, the distribution of non-super-annuation assets after death is state basedlaw, which varies across the country.

In NSW, the Family Provision laws allowan eligible person to challenge the estate,which may result in the NSW SupremeCourt overturning a binding nomination.The conflict between state based lawprovisions and Commonwealth superan-nuation laws provides a system which isstructurally flawed and makes advicemore complex.

Whilst there is generally merit in havingconsistent application of laws across thecountry, the current variation in lawsmakes harmonisation discussions diffi-cult. When discussions do occur, it is likelythe more restrictive terms of the NSWsystem will be suggested – which manystates and territories will firmly resist.

The Cooper Review recently recom-mended that binding death benefit nomi-nations cease to be valid when certain lifeevents occur (ie, divorce) and that thenominations should subsequently onlylapse every five years. Whilst such amend-ments may assist members avoid a situ-ation where their benefit is automatical-ly paid to an inappropriate dependant, itwill not assist trustees who will then berequired to undertake the full decision-making process.

As always, nothing will provide thesecurity of a comprehensive estate plan– but sadly, this is undertaken by so few.

As an industry, we need to work withthe Government to bring in appropriatelegislation that keeps pace with thechanging nature of family structures andsuperannuation.

Julie Steed is the technical servicesmanager at IOOF Holdings.


OpinionEuro debt

Financial markets have started2012 with considerablemomentum, with a sustainedperiod of ‘risk-on’ evident in

global commodity markets, high-betaexchange rates, global oil prices andglobal share markets. There has been adistinct pecking order on the rise:Europe has led the rise (with all marketsup between 14 per cent and 24 per cent),followed by the United States (up 17 percent) with Asian and Asia-related marketsrecording more modest rises (upanywhere between 7 per cent and 14 percent). The rebound in sentiment hasreflected four factors:

1. Market valuations were very low. Inlate 2011, price-earnings ratios reached oneof their lowest levels since the mid-1980sin many international markets, and thisprovided a potential springboard for pricesif data was a bit better than expected.

2. US and Asian economic data has beenconsistently better than expected. Whilefinancial markets have been Europe-focused, the remainder of the globaleconomy has been growing at a faster pacethan in mid-2011. The US recovery has

consolidated, and Asia is in line for a softlanding with falling inflation enablingpolicy support, if required.

3. The Greek default has, to date, beenorderly – private investors appear willingto take a 70 per cent hair cut on their Greekdebt holdings in exchange for broader andlonger lasting reforms, including largeGreek public service reductions, highertaxes and lower spending.

4. The European Central Bank (ECB)appears to have ring-fenced contagion riskfrom periphery economies in their govern-ment and bank funding markets, throughits 0.5 trillion long-term refinancing organ-isation (LTRO), where the ECB lends fundsto banks at 1 per cent for three years. Thishas seen interbank funding spreadsdecrease for the first time in a year.

A European quantitative easing (bystealth)The key driver out of these four has beenthe LTRO program. After eight summitsand numerous press announcements inlate 2011, Europe seemed to stumble ontothis solution, and may not have realisedhow successful it could be in stabilising

sentiment. The strange thing about thisprogram is that the German leadershipwas ardently against a quantitative easingin the second half of 2011.

In a quantitative easing, the central bankprints money (either physically or electron-ically) and buys bonds off its government,and the government can use these fundsto increase spending or fund investment,or both. The LTRO is a quantitative easing,but instead of giving funds to governments,the European Central Bank has lent themoney to the banks who have, in turn,bought government bonds. So in essence,Europe’s LTRO plan is a quantitative easingprogram involving a third party.

Lending quality is the keyIt is not yet clear whether European banksare using the funds wisely. The LTRO wasaimed to strengthen bank balance sheets,but it could have the adverse effect ifbanks load up on risky assets such as thegovernment debt of stressed peripheryeconomies. This would explain why the10-year yields on Italian, Spanish andevery other Euro member (with the excep-tion of Cyprus) have declined in recent

months and tended to outperform theirUS and Australian peers.

Borrowing funds and receiving a creditspread can be a good trade, as long as thebond issuer remains solvent. The ECB willoffer another round of LTRO at the end ofFebruary 2012, and has just eased thecollateral rules to encourage smaller banksto participate. However, low interest rateswith potential low-quality lending to Portu-gal, Spain and Italy (all of which wererecently downgraded by Moody’s) is not agood combination – especially in stressfultimes, and there is no clear endgame forthis policy. The ECB will need to manageand monitor the situation very carefully, aswhile it is well intentioned, it could becomeproblematic for markets if periphery bondyields rise.

A return to trend US growth is hardwith low savings

Recent US data on consumer credit, retailsales and employment growth have beeneye-catching, and even the downtrend inhousing has stabilised – which has fuelledexpectations that the US recovery is self-sustaining and could return to trend in 2012.

Can an improving United States offset theproblems in Europe? Matt Sherwood writes.

Balancing out the losses

There are two issues that will make areturn to trend growth in the US harderthan normal. Firstly, the US savings rate islow. Although the US savings rate (at 4 percent) is high relative to the past 15 years, itdoes not take into account mortgage inter-est payments, which contrasts with nation-al accounting conventions around theworld. US savings after interest paymentsare negative today (which has been the casefor most of the past 15 years – see Chart 1).This means that the US consumer is in noposition to borrow more – unless they wantto be in a situation where debt is being usedto repay debt. In this world, US economicgrowth will primarily be determined byemployment and income growth. Refer toFigure 1.

Austerity will hit US income growthSecondly, the level of household incomeis being subsidised by the US Govern-ment. Indeed, the level of US savings aftermortgage payments – but before govern-ment handouts (including social securityand other support payments) – is aroundits lowest levels in 35 years. One has towonder, how much longer the Obama

administration can keep borrowing fromthe US Federal Reserve and globalinvestors to fund US consumers. Impor-tantly, the Obama administration is likelyto reach the US$16.4 trillion US Govern-ment debt ceiling in the 2013 financialyear, and under the August 2011 agree-ment between Republicans and Democ-rats this will trigger austerity cuts. Giventhe US Government is subsidising theconsumer, this could impact US house-hold income and spending. This suggestssizable headwinds are in place to hindera return to trend US growth, although adouble-dip recession looks as equallyunlikely in the absence of a severe nega-tive shock.

US earnings growth remains buoyantHistorically, a US rebound is typicallyassociated with annual US earningsgrowth peaking around 15 per cent – 25per cent (see Figure 2). Although theprevailing US economic recovery is the

third weakest in US history (dating backto 1871), the earnings recovery was thestrongest since World War II (with earn-ings growth peaking at 40 per cent). Thislarger recovery reflects the size of thelosses during the global financial crisisand the growing share of US earningsfrom Asia and other growth markets.Earnings growth has since slowed, but isstill around the peaks of previous recov-eries. Refer to Figure 2.

February’s reporting season is keyWith subdued local economic data, astrong Australian dollar and continuedEurozone uncertainty, the market hasalready lowered its expectations for the

2012 financial year from 16 per cent inJune 2011 to 4.3 per cent in February 2012,with the largest downgrades occurring inresources (reflecting lower commodityprices) – although financials have alsobeen reduced lately, in light of develop-ments at QBE.

As the 2012 financial year forecasts havebeen lowered, 2013 forecasts have beenrising (partly reflecting base effects), but at14 per cent they remain optimistic. Themain wildcard here is resource prices, andif they can continue to reverse recent pricefalls, then the market forecast could beachieved. Elsewhere, the assumed expan-sion in non-resource sector earnings willbe challenging if the domestic economygrows sub-trend, and tighter financialconditions are making this task harder.When the ECB attempts to ease financialconditions in Europe, they tighten them inAustralia through the impact on the curren-cy, and the Reserve Bank of Australia hasclearly stated that conditions would need totighten further before domestic rates willbe lowered.

The banks are cost-focusedBank earnings growth is under pressure– primarily due to weak domestic creditgrowth. The best ways for banks to offsetthis change is to either increase lendingmargins (or at the bare minimum stopthem contracting further) or to cut costs.The banks have all announced slightincreases in lending rates and broad-based staff reductions (to boost produc-tivity). Although it is tough for theworkers, it will be very hard for the banksto maintain their cost base – which wasprogressively established when creditgrowth averaged 14 per cent per annum inthe 40 years to 2007 – in the prevailing de-leveraging environment (where creditgrowth slowed to just 3.5 per cent in 2011).

Implications for investorsIn an uncertain market environment,

investors will wonder if there is any upsidepotential in global share markets. WhileEurope has taken a step back from thebrink and the US economy has improved,the prevailing environment is unlikely toreward large and careless exposure to risk.

By the same token though, with termdeposit rates now declining and govern-ment bond yields remaining near all-timelows, the environment is equally unlikelyto reward ‘no risk’.

Importantly, the building blocks for long-term wealth creation (attractive dividendsyields and valuations) remain intact. Thethree factors containing sentiment atpresent are global macro concerns, the highAustralian dollar, and Australia’s high rela-tive interest rates – and these factors appearunlikely to dissipate in the near-term. Withmarkets up for a few months, a furtheruptick would require macro risks to lessen– which is more likely to occur over themedium term. In this environment, lowquality companies or stocks facingsustained structural headwinds are likelyto struggle. Consequently, conservativeinvesting (in terms of balance sheets andearnings growth) with a steadfast focus onvaluations should serve investors well, asit gives downside protection with upsidepotential.

Note: This article was featured in Perpetual’s monthly market com-

mentary – Perspective.

Matt Sherwood is head of investmentmarket research at Perpetual.

“In an uncertain market environment, investors willwonder if there is any upside potential in global sharemarkets. ”


Source: Credit Suisse as at 10 February, 2012

Figure 1 US Savings (% US GDP)

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

1977 1981 1985 1989 1993 1997 2001 2005 2009

US savings Savings after mortgage

payments

Savings after mortgage payments before transfer payments

Source: Datastream as at 15 February 2012

Figure 2 US Economic and Earnings: Annual Growth (%)

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Earnings growth

Economic growth (advanced 6 months)

Many traditional multi-assetclass funds disappointedduring the global financialcrisis (GFC). They experi-

enced significant drawdowns boughtabout by being structurally required tohold as much as 70 per cent in equities(35 per cent in Australian equities and35 per cent in global equities for a typicalgrowth fund) at a time when equitymarkets were in free fall. Strategic assetallocation benchmarks are designedaround long-term historical return, risk(volatility) and correlations expecta-tions. During the GFC, markets behavednothing like those long-term averages,leading to per verse performanceoutcomes. Investors who thought theywere ‘diversified’ were surprised thatthat was not the case, with bonds andother diversifying assets offering littleprotection.

Since then, we have seen a number ofmanagers (Ibbotson, Mercer, MLC andRussell) widen their asset allocationranges and opt for a more dynamicapproach to asset allocation. Dynamicasset allocation aims to only take posi-tions over the medium term whenmarkets are extremely over/under valued.We see this approach to be particularlybeneficial when used as a risk manage-ment tool (used to protect on the down-side when markets are extremely overval-ued), rather than specifically trying togenerate alpha from the process (markettiming bets). Dynamic asset allocation

processes tend to still operate in aconstrained environment: + / - 5-10 percent from strategic asset allocationbenchmarks.

Dynamic asset allocation, whilst usefulin providing some additional flexibility,does not go far enough for a select groupof managers. They argue that marketshave entered a period of heightenedvolatility and the need for flexibility inasset allocation is essential in deliveringportfolio risk and return objectives. Thisincludes the ability to ‘go anywhere’,meaning the fund may be completelydivested from a particular asset class inperiods of severe market stress. It alsoallows for more opportunistic investingin new asset classes as and when oppor-tunities arise.

These funds aim to limit the extent andseverity of drawdowns and deliver a ‘real’rate of return above cash or inflation.What sets these funds apart from thetraditional multi-asset class funds is theabsence of the structural impedimentsusually associated with strategic assetallocation.

It is not unusual to see a 0–70 per centasset allocation range around Australianequities for example. Multi-asset class realreturn funds should not to be confusedwith ‘hedge funds’, because although theyare less constrained than traditionalmulti-asset class funds, they are not‘unconstrained’ in the truest sense. Thesefunds generally do not use gearing (MLCLong Term Absolute Return Trust is the

exception) and will not employ ‘shorting’at the asset class level.

In a similar vein, multi-asset incomefunds allow for flexible asset allocationsin order to deliver a more reliable incomestream to investors. These funds aredesigned for those investors who have aneed for stable and consistent yield, forexample retirees. Many fixed incomefunds currently researched by Lonsec areconfined to investing in fixed incomesecurities and are not structured toproduce a targeted yield. Instead they arefocused on performance against an indexor a peer-relative performance. Multi-asset income funds are designed to beliquid, invest across a range of income-producing assets, and provide a regular,stable income – a level of capital growth tokeep pace with inflation and to providesome downside protection.

These new style of funds, while still intheir infancy, seek to overcome some ofthe issues raised post-GFC and are consid-ered to be an exciting development withinthe space. That said, Lonsec recognisesthat no one investment style will outper-form in all market conditions. Multi-assetreal return funds are likely to underper-form their more traditional counterpartsin strong bull equity markets, but as atrade-off, will potentially provide a muchsmoother ride for investors. Traditionalstrategic asset allocation does have its limi-tations, but provided the underlyingassumptions (risk, return, correlations)are revisited regularly, and risk is consid-

ered in its broadest sense (ie, minimisingdraw-downs, managing liquidity), thetraditional strategic asset allocationapproach can still be an appropriate wayto invest for those who have long terminvestment horizons.

Diversified FundsWhile many managers offer solid diver-sified products, it has proven difficult forone manager to be the ‘best of breed’across all underlying asset classes at anypoint in time. Schroders is a notableexception, having consistently ratedsolidly across all major asset classes overan extended period of time.

A structural limitation of many diversi-fied funds is that they tend to be restrictedto a single style within each asset class. Themajority of managers will typically haveonly one capability within each asset class,which will display an inherent style bias(value, growth, etc) consistent with thehouse philosophy. This can lead to signif-icant underperformance or outperfor-mance depending on market conditions.

Furthermore, it is not easy for a diver-sified manager to terminate its owninvestment managers over performanceissues or the loss of key investment staff.Multi-manager funds were originallyestablished to overcome some of thestructural limitations associated withdiversified funds. In recent years, some ofthe larger diversified managers (Black-Rock, CFS, Schroder, UBS) have sought todiversify their style of exposures within


Multi-asset funds

A changeof strategy

As many traditional multi-assetfunds disappointed during theGFC, recent times have seen manymanagers diversify. Deanne Fullerexamines the sector.

asset classes, by blending a number ofinternal capabilities. This has led to some-what of a blurring of the distinctionbetween multi-manager and diversifiedfunds.

Outflows continue to affect the sub-sector, with most managers experiencingsignificant outflows in 2011. When facedwith declining funds under management(FUM), it becomes difficult for managersto commit resources, evolve products,and add asset classes, particularly thosethat may offer good diversification bene-fits but may be less liquid in nature.

Despite these headwinds, diversifiedfunds continue to play an important rolefor some investors, particularly those withsmall account balances. Notably, diversi-fied funds provide a convenient accesspoint to a range of asset classes, with assetallocation determined by experiencedprofessionals. Managers that Lonsecregards highly in terms of capital marketexpertise include Goldman Sachs,Schroder, and Perpetual. With underly-ing exposures managed in-house, diver-sified portfolio managers tend to be closerto the decision-makers at the asset classlevel, enabling a greater understandingof the particular nuances of an underly-ing fund.

Multi-managerMulti-managers share some of the bene-fits of diversified funds in that they arediversified across asset class; convenient;managed by experienced asset allocationprofessionals; and provide efficientimplementation and rebalancing as wellas monitoring. They go further by provid-ing access to underlying funds that maynot otherwise be accessible to Australianretail investors, and invest in best-of-breed managers within each asset class.Multi-managers tend to be better

resourced than diversified funds, largelydue to manager research requiring largeteams or the assistance of asset consult-ants. Objectivity is enhanced, withmulti-managers able to more readilyredeem from underlying sector special-ists if required. In contrast to diversifiedfunds, multi-manager funds have gener-ally evolved more rapidly in terms ofincorporating new strategies anddynamic asset allocation approaches.Multi-managers have, however, often

been criticised for over-diversificationand generating index-like returns, diver-sifying the wrong risk, and being toopeer conscious. FUM has grown in thissub-sector, with most managers record-ing inflows. For the most part, this FUMgrowth has been at the expense of diver-sified funds.

Managers with strong managerresearch capabilities include Advance,AMP, ipac, Mercer and Russell. For themost part, multi-managers are objectiveabout how they select their underlyingmanagers. That said, there are a numberof managers who continue to increasetheir allocations to internal and relatedparties, potentially comprising the objec-tivity of the portfolio construction process– particularly when it comes to theremoval of underperforming managers.AMP and Colonial First State hold thelargest allocations to internal managers,although MLC is also increasing its expo-sures to related parties as it expands itsNabInvest business.

Multi-asset income and real return fundsLonsec believes multi-asset income fundswill play an important role as investorscontinue their search for stable yield.

For investors who want a real returntarget, and greater potential certainty inperformance outcomes, multi-asset realreturn funds may be attractive. Whilemost investors have an overall investmentobjective to target a medium- to long-term return above inflation, few investorsspecifically manage to achieve this objec-tive. Lonsec sees these funds as playingan important role in filling that gap.

People and resourcesReassuringly, the level of industry expe-rience within the multi-asset class sectoris high and generally increasing with an

average of close to 15 years experience inboth multi-manager and diversifiedinvestment teams. The range of averageteam industry experience is impressiveat 10-24 years. Pleasingly, the level ofindustry experience has continued to riseover recent years across most managers,indicating that where investment teamturnover has occurred, managers havetended to fill vacancies with equally expe-rienced candidates.

In terms of size, multi-manager teams(average size of 10) tend to be far largerthan their diversified counterparts(average team size of three), due to thelabour intensiveness required in under-taking manager research. Multi-assetreal return and multi-asset incomeinvestment teams tend to be the invest-ment professionals who are managingthe more traditional multi-manager ordiversif ied funds within a fundsmanagement business.

In Lonsec’s view, on-the-ground cover-age, both in Australia and in other regions,is important when researching and select-ing managers. As expected, thosemanagers who undertake all their ownmanager research tend to have largeteams (eg, Russell, MLC) whereas thosewho use third party research tend to havesmaller teams (e.g. typically less than six).

TurnoverWhilst some minor staff movementswithin the Multi-Asset Class universewere evident throughout 2011, on thewhole, the sector remained relativelystable. The most notable staff changesoccurred at manager level, where a degreeof corporate uncertainty was evident, inparticular INGIM Optimix and AXA/ipac.

Deanne Fuller is an investment analystat Lonsec.


Note: This column is part of Lonsec’s Multi-Asset Class Sector Review. For the first time in 2011, Lonsec bought diversified and multi-asset multi-

manager funds together under the one multi-asset class sector review. Furthermore, a number of developments have occurred within the multi-

asset class sector over the last 12–18 months that have warranted Lonsec introducing two additional sub-sectors to the review – multi-asset

income and multi-asset real return.

Disclaimer: Diversified and multi-manager funds follow a more traditional approach to asset allocation, combining long-term strategic asset alloca-

tion with shorter-term market views (tactical asset allocation), reflected via relatively small deviations (+ / - 2-5 per cent) away from the long-term

SAA positioning. Throughout the report, this style of investing is referred to as ‘traditional’.

“Lonsec believes multi-asset income funds will playan important role asinvestors continue theirsearch for stable yield. ”

Since 20 September 2006, parentsand immediate family membershave been able to set up specialdisability trusts to meet the care

and accommodation needs of an individ-ual with a severe disability. Special disabil-ity trusts provide generous social securityconcessions for both the beneficiary andfamily members who gift to the trust.However, their restrictive nature – coupledwith taxation pitfalls and other complex-ities – has resulted in a low number oftrusts being established.

In the last three Federal Budgets, theGovernment announced changes tospecial disability trusts which have nowbeen legislated. These changes are aimedat improving flexibility and taxation treat-ment and should result in an increase inthe number of trusts established.

Social security benefits Concessions for the principal beneficiary Special disability trust assets held up to theconcessional limit ($578,500 from 1 July2011) are exempt from the social securityassets test for the principal beneficiary ofthe trust. Where the primary residence isheld by the trust, it will also be excludedfrom the assets test. In addition, income ordistributions from the special disabilitytrust are not assessable under the socialsecurity income test.

Concessions for immediate familymembersA gifting concession limit of $500,000(combined) is available to immediatefamily members who contribute to aspecial disability trust on behalf of theprincipal beneficiary. To be eligible for theconcession, immediate family membersmust be at (or over) age, or service pensionage, and receiving a social securitypension when the contribution is madeto the trust.

Tax concessions at lastWhile social security concessions haveexisted for some time, the Governmenthas only recently implemented changesto improve the taxation of special disabil-ity trusts.

Trust incomeGenerally, trust income to which no bene-ficiary is presently entitled is taxable to the

trustee at the highest marginal tax rate,plus Medicare levy. Due to the restrictionson how special disability trust income canbe spent, it is not uncommon for someunexpended income to remain in thetrust. To prevent unexpended incomefrom being taxed at 46.5 per cent, theGovernment introduced legislation thattaxes net income of a special disabilitytrust at the principal beneficiary’s margin-al tax rate. This rule is effective from the2008/09 income year.

Main residence exemptionThe Government has extended the capitalgains tax main residence exemption toinclude a residence owned by a specialdisability trust – as long as it is used by theprincipal beneficiary as their main resi-dence. This measure is backdated to 1 July2006.

Other changesThe following changes have been back-dated to apply from 1 July 2006:

• A capital gains tax (CGT) exemptionon assets transferred into a special disabil-ity trust for nil consideration;

• Equivalent taxation treatment for trustsestablished under the Social Security Act1991 and Veteran’s Entitlement Act 1986;and

• A CGT exemption where the principalbeneficiary dies and their main residenceis distributed to a recipient who subse-quently sells the property within two years.

Stamp duty considerations [ital]Some states and territories offer stamp

duty concessions for special disabilitytrusts. It’s a good idea to have a specialistconfirm stamp duty concessions prior totransferring property into the trust.

Improved functionality measuresOne of the criticisms of special disabilitytrusts was that trust funds could only bespent on care and accommodation costs.This was found to be very restrictive whenfunds were required for other purposessuch as medical expenses or maintenancecosts. In response, from 1 January 2011 theGovernment broadened the range ofexpenses to include:

• Medical expenses, including member-ship costs for private health funds, andmaintenance expenses for trust assets andproperties; and

• Up to $10,250 (2011/12) in a financialyear on discretionary items not related tothe care and accommodation needs of thebeneficiary.

In addition, a beneficiary is now able towork up to seven hours a week in the openlabour market.

Tips and traps of establishmentIt is important to follow the correct stepswhen establishing a special disability trust.A trust will be assessed under normal rules

for both social security and tax purposeswhere a beneficiary does not satisfy thedefinition of severe disability under theSocial Security Act 1991. As such, a bene-ficiary assessment should ideally becompleted before the trust deed isprepared to avoid unnecessary set-upcosts.

Special disability trusts can be estab-lished through a trust deed or via a will;however, the trust must contain specificclauses in order to be eligible for theconcessions. The compulsory clauses canbe found in the ‘model trust’ deed avail-able on the Department of Families,Housing, Community Services and Indige-nous Affairs (FaHCSIA) website.

The rules To qualify as a special disability trust, itmust meet the following requirements:

• Can only have one beneficiary;• Must not accept any asset transferred

by the principal beneficiary or theirpartner, unless the contribution isfunded by a bequest or superannuationdeath benefit within three years ofreceipt of the bequest or superannua-tion death benefit;

• Only immediate family members willreceive the gifting concession – whichincludes relatives such as parents, grand-parents and siblings;

• Trustees must be carefully selected –for example, they must be Australian resi-dents and eligible to act as a trustee of thetrust;

• The trustee must act in accordancewith the terms of the trust. This meansinvesting money with care, applyingincome appropriately, avoiding unneces-sary expenses and seeking professionaladvice when required;

• The trust is allowed to pay for the costsof care (eg, aids and vehicle modifications)and accommodation (eg, modificationsto the beneficiary’s residence). Expendi-ture must be reasonable and discretionaryexpenses (eg, toiletries, recreation andleisure activities) should not exceed theindexed limit, which is $10,250 for2011/12;

• Third parties must not benefit fromthe trust’s expenditure. The exception isan ‘incidental benefit’ – ie, benefit of anon-cash nature that is minor and provid-ed on an infrequent and irregular basis;

• When the beneficiary dies, the trustterminates and the trust’s assets will vestin the residual beneficiaries as specifiedin the trust deed.

Failure to meet these requirements canresult in the concessional treatment of thetrust being stripped, resulting in the trustbeing taxed under normal trust rules andpotentially resulting in deprivation forimmediate family members who havecontributed within five years from the dateof non-compliance.

ConclusionSpecial disability trusts are an importantvehicle to ensure that severely disabledfamily members are taken care of finan-cially and maintain their social securityentitlements. Advisers should considersuch structures for eligible individuals inlight of recent legislative changes.

Harry Rips is technical servicesconsultant at Count Financial.


ToolboxSpecial disability trust improvementsChanges to special disability trusts, which have now been legislated, are aimed at improvingflexibility and taxation treatment. Harry Rips outlines some of the implications.

1. From 1 January 2011, the principalbeneficiary can work for up to:(a) 7 hours a week(b) 10 hours a week(c) 7 hours a fortnight(d) 10 hours a fortnight

2. It is suggested that assessmentconfirming a person with a disabilityis an eligible beneficiary for a specialdisability trust is completed:(a) After the trust deed has beenprepared by a qualified solicitor.(b) Before the trust deed has beenprepared, to avoid incurring costs insetting up the trust in the event that theperson is not assessed as an eligiblebeneficiary.(c) Within 12 months of setting up thetrust deed.(d) A beneficiary assessment is notrequired, receiving the disabilitypension is sufficient to determine thatthe person is an eligible beneficiary.

3. From 2008/09, unexpended incomeof a special disability is:(a) Taxed at the highest marginal taxrate plus Medicare levy.(b) Subject to flat concessional tax of15%.(c) Taxed at the beneficiary’s margin-al tax rate.(d) Subject to nil tax at all times.

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

CPD Quiz

For more information about the CPDQuiz, please contact Milana Pokrajac on

(02) 9422 2080 or [email protected].

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 fundis currently looking for a marketing managerto support the administration team.

In this role you will be responsible forstrategic planning and budgeting ofmarketing, implementing marketingcampaigns, attracting new members to thefund and assisting management withdecision-making and operations.

The successful candidate will have astrong background in superannuation,ideally with an industry fund. You will alsohave strong marketing and managementexperience and a business or marketing-related degree.

This role is a great opportunity tostrengthen and further develop yourexisting marketing, management andoperational skills.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Stewart at Lloyd Morgan - (03)8319 7888, [email protected]

AMP HORIZONS ACADEMYLocation: Australia-wideCompany: AMP Horizons AcademyDescription: AMP is accepting applications

for its 2012 AMP Horizons Academy 12-month training program.

The paid traineeship begins with a 10-week course at the AMP’s academy inSydney. Graduating as a competentfinancial planner, you will be provided witha position in your home state and receiveadditional on-the-job training for ninemonths in an AMP Horizons practice. Youwill be mentored by experienced financialplanners throughout the year.

The successful applicants will have aDiploma of Financial Services (FinancialPlanning) or be RG146-compliant.

You will be rewarded with a fast-trackedcareer in the company and a competitivetraining salary.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact AMP – 1300 30 75 44

SENIOR PARAPLANNERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial planning business isseeking a senior paraplanner to assist theirnetwork of financial planners in strategydevelopment and the construction of SOAs.

Reporting to the paraplanning manager,you will be responsible for the preparationof SOAs for superannuation, SMSFs,

gearing, investments and risk. As a seniormember you will also be involved in thetraining and development of junior-to-intermediate colleagues.

To be successful, you will have excellenttechnical and interpersonal skills andeither have, or be in the process ofcompleting, a DFP or Advanced DFP.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting - 0404835 895, [email protected]

TAX CONSULTING MANAGER /ASSISTANT MANAGERLocation: AdelaideCompany: Terrington ConsultingDescription: A mid-tier firm is seeking atax consulting manager to provide taxadvice and consulting services to adiverse client base.

In this role, you will also providetechnical support to staff and identifyopportunities to improve tax-related clientstrategies. You will deal with high-level andcomplex tax issues, provide technical taxplanning advice and resolve issues inaccordance with ATO and legislative rulings.

To be successful, you will be CA or CPAqualified, possess a solid grounding in ATOlegislation, and have experience within a

business services or consulting environment.Although this is a fulltime position,

candidates seeking part-time employmentwill also be considered.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Jack at Terrington Consulting -0412 690 268,[email protected]

TECHNICAL PARAPLANNER - SMSFSPECIALITYLocation: AdelaideCompany: Terrington ConsultingDescription: A boutique financial planningfirm is seeking a senior paraplanner withspecialist skills in SMSFs.

You will be responsible for producingSOAs using financial planning software,assisting with ASIC and licenseecompliance obligations, and researchingand reviewing client portfolios.

Experience with XPlan software and aparticular interest in, and in-depthknowledge of, SMSFs would be a distinctadvantage in securing the position.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting -0404 835 895,[email protected]

PERPETUAL Investments hasannounced a number of keychanges to its equities teamline-up.

After 10 years on sabbatical,S e a n Cu n n i n g h a m hasretur ned to Perpetual as asenior equities analyst and willbe focussed on developing anew high-conviction yieldstrategy.

In regards to the PerpetualIndustrial Share Fund, currenthead of equities Matt Williamswill step down from 1 April,2012 and be replaced bydeputy head of equit iesCharlie Lanchester.

Lanchester will be responsi-ble for 70 per cent of the fund,while the remaining 30 percent will be managed by senior

analyst Vince Pezzullo.Will iams wil l remain the

por tfol io manager of theAustralian Share strategy andthe Pure Value Fund.

In a six month handover process,QBE Insurance Group hasannounced that John Neal willsucceed long-serving groupchief executive Frank O'Hallo-ran from 17 August, 2012.

As the former chief execu-t ive off icer of special istcommercial motor insurerEnsign, Neal has considerableunderwriting skills.

For eight years he served aschief underwriting officer andchief operating officer in QBE'sEuropean operations before

heading to Sydney in 2011 tomanage the company's globalunderwriting operations.

As QBE's current CEO ofglobal underwriting operations,Neal facilitated global forums todrive both strong underwritingdiscipline as well as operationaland cost efficiencies.

Aon Hewitt Wealth Manage-ment has announced theappointment of Prue Petinskyas the new head of productdevelopment.

Petinsky, who headedproduct management for theAsgard platform at BT Finan-cial Group until late 2011, willprimarily be responsible for thedevelopment of Aon MasterTrust.

Her previous roles in thefinancial services industryinvolve distribution, customerservice, operations, projectmanagement, people manage-ment and marketing.

The company has alsoannounced the appointment ofRobert Olney as head of prac-tice solutions and JeremyLubrano as head of alliances.While Olney takes on a newlycreated position to strengthenAon Hewitt's relationships withits financial advisers, Lubrano

will be closely involved with thecompany's alliance partners.

Australian Unity Investments(AUI) has appointed FionaDunn as general manager – jointventures and institutional.

Reporting to AUI chief execu-tive officer David Bryant, Dunnmoves into her new role follow-ing the appointments ofStephen Alcorn as head of insti-tutional and Kara Gilmartin ashead of joint ventures. BothAlcorn and Gilmartin will nowreport to Dunn.

Dunn has more than 22 years'experience in financial serviceshaving held a number of seniorbusiness advisory roles. She waspreviously general manager of

Perpetual's wholesale business,and a division director withMacquarie Bank 's fundsmanagement division.

Commenting on her appoint-ment, Bryant said Dunn had aproven track record buildingsuccessful businesses, predom-inantly within the institutionalspace, and an ability to createand maintain strong businessrelationships.

Zurich Australia has appointedPaul Bedbrook and EveCrestani as non-executive direc-tors on the Zurich InvestmentManagement board.

As the former chief executiveofficer of ING Australia and INGAsia Pacific, Bedbrook has morethan 30 years experience infinancial services. He currentlyserves as a non-executive direc-tor with Credit Union Australiaand a director of the NationalBlood Authority.

Crestani has more than 35years experience in financialservices and professional serv-ices industries, as well as abackground in law andmanagement. She currentlyserves on the board of direc-tors at Au s t r a l i a n Un i t y ,Mercer Investment Nomineesand Booking.com.

Move of the weekPATHWAY Licensee Services – formerly Paragem DealerSer vices – has announced the appointment of KateHumphries as general manager.

Humphries has experience in providing support to licenseesand planning practices in the financial services industry.

She had previously held senior roles at FSP, DKN/Lons-dale and Zurich in addition to running her own consultingbusiness.

Humphries will work closely with the existing Pathway team.Paragem founders Ian Knox and Charlie Haynes will continueas directors of Pathway to ensure business continuity.

Fiona Dunn

““OUTSIDER thinks he nowunderstands why the Govern-ment was so reluctant to referthe issue of default fundsunder modern awards forreview by the ProductivityCommission.

He believes that reluctancewas based on the old Parliamen-tary Party maxim that you neverask a question to which youdon’t already know the answer.

And, when Outsider last weekread the issues paper releasedby the Productivity Commissionrelating to its inquiry into defaultfunds under modern awards, itbecame very clear the Govern-ment cannot know the ultimateanswer to the question it hasasked.

The Productivity Commis-sion’s issues paper raises anumber of questions about the

current default funds regime.Not the least of which iswhether, obliquely, the regimemay amount to an industryfunds monopoly, and whetherthe industrial judiciary – akaFair Work Australia – shouldeven be involved.

As well, the Commission hasposed the following questions:Is the current process for listingdefault superannuation funds

in awards transparent? Is itcompetitive? Is there a levelplaying field between industryand retail funds?

Outsider may only be guess-ing, but he feels the questionsbeing posed by the Productiv-ity Commission may havealready given rise to someserious discomfort within theboardrooms of a number ofindustry funds.

Outsider


“Have a go at using the

microphones, we paid a lot of

money for those.”

Perennial Investment head of retail

funds management Brian Thomas

urges the audience to realise their

assets at the Perennial annual

conference.

“Listening to what the taxi

driver told you might not be the

right decision for you.”

Pick your experts carefully, according

to NAB Private Wealth chief

investment officer Philip Kimball.

“You can’t fall when you’re on

the floor”

BT Financial Group chief economist

Dr Chris Caton says the US economy

can’t dip any lower.

Out ofcontext

Born to be mild

Planners in a League of their own

Ask me noquestions

OUTSIDER has been around thisindustry long enough to know, ifnot entirely understand, thevarious quirks exhibited by manyin the financial services industry.

For example, he knows quite afew chaps who use cycling as anexcuse for shaving their legs andwearing lycra.

So it should come as no surprisethat Outsider is also aware of threeindividuals who have a thing forleather and, more disturbingly,throbbing mechanical contraptionsbetween their legs.

Outsider is never afraid to nameand shame and so points the finger

at you, Brian Thomas, Lynn Ralphand Ray Griffin.

The trio have once again decidedto slip into their leather jackets,jump on their motorbikes (throb-bing mechanical device) and maketheir way to destinations such asPort Macquarie, Coffs Harbour andGloucester – all for charity.

In fact, their journey will be partof Corners for Kids motorcyclerally, which raises money for theInspire Foundation and the CreateFoundation.

Outsider has it on good author-ity that the financial servicesindustry raised $600,000 since the

inception of this event, which onlypoints to the fact that Thomas,Ralph and Griffin are not the onlyones enjoying tight leather outfits.

The Corners for Kids charityride begins in Gosford on Thurs-day, 8 March. Unfortunately,Outsider had already RSVP-edfor another event – the picniccelebrating the InternationalDay of Women and feminism.

WELL, it’s that time of year again – the timewhen the days grow shorter and cooler, thesummer tans begin to fade and we all settlein for another long year of hard graft, hopingthat the global markets will be slightly kinderto our battered nest eggs.

And for the sports-mad among us, it’salso the time when our plethora of winterfooty codes get underway. By the time youread this, all the rah-rahs in financial serv-ices will have witnessed their second roundof Super 15s action and those in the south-ern and western states who may be moreclosely following the AFL’s NAB cup will alsobe two rounds in.

And those of us in New South Wales andQueensland with a slightly more blue-collarleaning will have just enjoyed the openinground of the National Rugby League.

It is the last of these that has proved asignificant distraction for one of Outsider’s

younger colleagues over the past week, ashe spent many a late night hunched over acomputer screen attempting to assemblethe perfect Rugby League fantasy footballteam.

You see, it appears that said colleaguehas been talking himself up around thetraps as a bit of a fantasy football guru.Which seemed all well and good at a variety

of pre-Christmas functions, but come thenew season he has now found himself in anindustry league alongside 15 financial serv-ices types who put their advanced analyticalskills to use for a living.

And as this chap searches frantically forpricing discrepancies in the player marketand wonders week to week which players tobuy, hold and sell, it has apparently nowdawned on him that a group of 15 financialservices professionals who analyse, buy,hold and sell company stocks on a dailybasis may provide stiffer competition thanthat to which he is accustomed.

For his part, Outsider’s colleague ishoping raw fanaticism provides him withsome extra insights and even a competi-tive edge.

It’s fair to say Outsider eagerly looks for-ward to reporting on the chap’s progresscome September.

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

money management (march 8, 2012)

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