money management (october 20, 2011)

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By Mike Taylor

A LARGE segment of the financial planningindustry was effectively blindsided when theGovernment last week introduced the firsttranche of its Future of Financial Advicechanges to the Federal Parliament andincluded an annual disclosure on financialplanners with respect to all existing clients.

The disclosure obligation, not flaggedbefore the Corporations Amendment (Futureof Financial Advice) Bill 2011, was tabled inthe House of Representatives, caught virtual-ly all of the major financial planning groupson the back foot.

Money Management understands thatonly a very few financial planning indus-try officials got wind of the Government's11th-hour move and had barely enoughtime to express their objections – whichwere ignored.

The inclusion of the annual disclosurerequirement is believed to have been at thebehest of the Industry Super Network (ISN),and the complexity of the document meansit will add significantly to the administrativeburden carried by financial planners.

Financial Planning Association (FPA) chiefexecutive Mark Rantall said he was in nodoubt that the complexity of the arrange-

ment made a mockery of the Rice Warnerresearch suggesting opt-in would cost as littleas $11 per client a year.

"This requirement and the form of thedocumentation will drive it up to around$100 per client," he said.

Assistant Treasurer and Minister for Finan-cial Services Bill Shorten claimed in his secondreading speech that the opt-in provisionscontained considerable flexibility and that,consistent with what the Government hadagreed in negotiations with the FPA and others,the renewal obligation would apply only to

new arrangements after 1 July, next year.However, the minister then dropped the

bombshell by saying that while the renewalobligation would not apply to existing clients,the annual disclosure obligation would applyto all clients of advisers.

Association of Financial Advisers (AFA)chief executive Richard Klipin said he was inno doubt that the move had been inspiredby the Industry Super Network.

"We have been left in no doubt as to theinfluence of the industry superannuationfunds with respect to the shaping of govern-ment policy," he said.

Both Klipin and Rantall said that in lightof the shape of the Government's bill andtheir inability to support it in its present form,they would be intensely lobbying the inde-pendents in the House of Representatives, inparticular Rob Oakeshott and Andrew Wilkie.

For his part, the Opposition spokesmanon financial services Senator MathiasCormann has said the Coalition would bemoving to have the legislation referred toa Parliamentary committee – somethingthat has been welcomed by both Rantalland Klipin.

"Reference to a parliamentary committeewill at least ensure that we can ventilate ourconcerns," Rantall said.

By Chris Kennedy

THE current rapid growth of theself-managed super fund(SMSF) sector may presentseveral challenges when a largenumber of trustees begin toreach an age where they eitherno longer want or are unable torun a SMSF.

Technical services director atSMSF administration firm Multi-port, Philip La Greca, said thesector as a whole, despitecurrently experiencing rapid

growth, may find a cap to thatgrowth when more trustees startreaching an advanced age whenrunning a SMSF becomes toomuch work or they start to losetheir capacity to be a trustee.

As SMSFs become too muchof a distraction, too timeconsuming or more complicatedthan the trustee’s needs, trusteeswill start to switch back to otherproducts such as retail funds orannuities and will draw back outof the sector, he said.

The advice trustees get in that

period will be crucial. Advisersand accountants will need tohave some tough conversationsto ensure trustees don’t reach apoint where they have lost thecapacity to make financial deci-sions, or act as a trustee withoutmaking succession plans forfunds, La Greca said.

No-one likes to address the factthey may become mentallyincompetent, but advisers needto be aware of the possibility

Legislative blindside

Ageing challenge for SMSF sector

FOFA RESEARCH DISCLOSURE CALL: Page 5 | RETIREMENT INCOMES: 4

Vol.25 No.40 | October 20, 2011 | $6.95 INC GST

By Milana Pokrajac

RETAIL investments have recorded theworst performance across the retirementincomes sector over the year to June2011, losing more than $10.6 billion infunds under management (FUM).

This represents a fall of 7.2 per cent,according to the MoneyManagement/DEXX&R 2011 RetirementIncomes Survey.

The reasons for the drop could befound in the everlasting market volatilityand anxiety around the upcoming leg-islative changes as advisers begin torestructure their clients’ a retirementincome portfolio, according to EquityTrustees’ head of wealth managementPhil Galagher.

“Anecdotally, there has been a lot ofinternal debate about longevity and how aretirement portfolio should be structuredto cope with longevity, and that relatesto the mix between a more conservativeasset like fixed interest versus a moreaggressive growth asset like equities –and the balance between those two,”Galagher added.

“But from our point of view, there is aclear difference between what’s requiredin the first period in retirement and what’srequired in the later years ofretirement…and I don’t think the industryhas come to grips with that yet,” he said.

The total retirement incomes markethas achieved some growth in the year toJune 2011, but has lost $7.4 billion inFUM in the June quarter of this year.

Apart from employer super, which hasrecorded year-on-year FUM growth of 11.6per cent, allocated pensions havereported the biggest growth of 7.2 percent.

DEXX&R managing director MarkKachor said the non-super products willcontinue to slide until confidence returnsto equities.

Drop in FUM forretirement incomesinvestments

Continued on page 3

Mark Rantall

Philip La GrecaContinued on page 3

When the industry superannu-ation funds in 2005 firstbegan their now-famous‘compare the pair’ advertis-

ing campaign, the Australian PrudentialRegulation Authority (APRA) was challengedto consider whether the campaign breachedthe sole purpose test contained in the Super-annuation Industry (Supervision) Act.

Given that the campaign had been devel-oped as part of the industry funds’ responseto the Howard Government’s choice ofsuperannuation fund regime, APRA wasdisposed towards accepting the propositionthat the funds were acting in defence of theirmemberships, and that because the adver-tising expenditure was drawn from feesrather than from member balances, it didnot breach the sole purpose test.

APRA even outlined to Liberal Senatorssitting on a Budget Estimates Committeethe arcane method in which the originalcampaign was financed with “participatingindustry funds contributing variousamounts to Industry Funds Services Pty Ltd.

“APRA has ascertained that the partici-pating superannuation fund trustees haveallocated these amounts from their advertis-ing budgets. The source of funds for theadvertising budgets is the administrationexpense which is charged by the funds. Theadministration expense is disclosed to all

members of the funds as part of each super-annuation fund’s Product Disclosure State-ment (PDS). APRA has clarified in its indus-try communication that trustees could applya part of fees and charges to advertising.”

So there you have it: APRA gave the greenlight to industry funds advertising back in 2005on the basis that the members of those fundswould just have to accept that the advertisingexpenditure was all part and parcel of the feesand charges they ultimately paid.

What is more, it seems clear that APRAhas applied much the same rationale to themanner in which the Industry FundsServices pays for the running of the Indus-try Super Network, which not only seems tooversee the advertising expenditure but isalso the industry funds’ lobbing arm.

More than six years later the industryfunds advertising campaign reached such alevel in September and early October that itprompted the Financial Planning Associa-tion (FPA) and the Association of FinancialAdvisers (AFA) to question whether theindustry funds were really acting in the bestinterests of members at a time when super-annuation returns are in negative territory.

The inevitable response to the concernsexpressed by the FPA and AFA was that theindustry funds’ advertising campaign wasno worse and no more expensive than thecampaigns pursued by the likes of Chal-lenger, AMP Limited or MLC.

However there is a difference. Thosepublicly-listed companies do not advertise viaa conduit such as ISN – and the shareholdersof Challenger, AMP and National AustraliaBank can, if they have enough time, deter-mine the advertising and marketing spendsof those companies by examining the balancesheets appended to their annual reports.

When APRA in 2005 set down theground rules for the ‘compare the pair’advertising campaign, it is unlikely to haveconceived of the amounts which would bespent in the succeeding six years - or thestructures and salaries which would evolvearound that spend.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider the relevant PDS available from us

before making an investment decision. *Source: Wealth Insights 2011 Platform Service Level Report and survey of 867 aligned and non-aligned advisers, conducted Mar/Apr 2011.

**Investment Trends 2011 Planner Technology Survey. Sample of 490 IFAs (advisers employed by dealer groups with less than 50% institutional ownership) surveyed in June-July

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2 — Money Management October 20, 2011 www.moneymanagement.com.au

[email protected]“When APRA in 2005 setdown the ground rules forthe ‘compare the pair’advertising campaign, it isunlikely to have conceivedof the amounts whichwould be spent in thesucceeding six years.”

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Average Net DistributionPeriod ending March '1110,207

Industry funds ad onslaught ‘incomparable’

By Milana Pokrajac

THE gap between industry superfunds and the big six retail fundshas significantly shrunk over thepast year in terms of customer sat-isfaction, according to RoyMorgan’s Superannuation Satisfac-tion research.

The report found that customersatisfaction for retai l fundsincreased by 4.3 per cent in theyear to August 2011, while industryfunds’ rating dropped by 0.2 percent, although they still lead theretail sector.

BT is now in the top five brandsbased on satisfaction with invest-ment performance, while MLC isseventh, suggesting the industry

funds dominance may be underquestion in the future, accordingto Roy Morgan industry communi-cations director Norman Morris.

“It is interesting to see that thedifference in satisfaction betweenindustry and retail funds continuesto narrow in line with the improvedstock market performance, butmore recent market volatility maychange this,” Morris said.

“With retail funds increasingtheir activity in the low-cost end ofthe market, this may also impactsatisfaction levels,” he added.

BT Super has achieved thebiggest increase in customer satis-faction rating in the 12 months toAugust 2011, with 55.3 per centof customers saying they were

fairly or very happy with the com-pany’s products – an improvementfrom 45.1 per cent last year. BTwas closely followed by MLC, whileAMP and AXA are still sitting wellbelow the 50 per cent mark.

“The low levels of satisfactionamongst those ho ld ing the i rsuperannuation with AXA andAMP present a major problem forthe market leader, but aboveaverage improvement over thelast year gives some cause foroptimism,” Morris said.

The report shows MTAA superwas deemed very or fairly satisfyingby 53.7 per cent of customers,beating most of the big six retailfunds (MLC, Colonial First State,AMP, AXA and Onepath).

www.moneymanagement.com.au October 20, 2011 Money Management — 3

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673/

1011

Industry vs. retail gap shrinks

Drop in FUM for retirementincomes investments

“Many people who haveretired are transferring theirsuper lump sum into allo-cated pensions, and this iswhy they are growing,” hesaid. “But with other prod-ucts, the reason why theFUM is dropping is becauseclients are not required toput 9 per cent of theirincome or put extra moneyin like with super – it’s out-side of that; all the stats saythat everything is going into cash or similar,” Kachor.

Top companies operating in the allocated pensionssector include the Commonwealth Bank with almost $20billion in FUM, BT/Westpac Group on $17.1 billion, closelyfollowed by AMP (including AXA) on $17.09 billion undermanagement.

Others include National Australia Bank, ANZ Group, IOOFGroup and State Super, who have also lost FUM in theJune quarter.

For more on trends in the retirement income sector, turnto page 14.

before it happens, andmake sure trustees haveappointed an enduringpower of attorney, he said.

If clients are going to getout of their SMSF, adviserswill need to make sure wellin advance that none of theinvestments are locked inlong-term. Assets such asdirect commercial propertymay take some time todissolve, depending on thestate of the market at thetime, he said.

Institute of CharteredAccountants head of super-annuation Liz Westoversaid the issue was becom-ing bigger. People are livinglonger, but accountants canuse the annual occasionwhen they help clients withtheir tax returns to assesstheir needs – rather thanwaiting for an event such asillness to prompt a reassess-ment of a trustee’s needs.

Andrew Yee, director ofsuperannuation at HLBMann Judd Sydney, saidclients are used to beingable to look after their ownfinancial affairs and can beresistant to handing over adegree of control. In thosecases getting the trustee’schildren to move into thefund (if they are not already

members) and taking onmore responsibility as thedominant trustee can be anoption.

SMSF Professionals’Association of Australiatechnical director PeterBurgess said he didn’tforesee a significantnumber of people exitingSMSFs. However, for thosefor whom competencybecame an issue, oneoption could be appointingan external trustee andcreating a small APRA(Australian PrudentialRegulation Authority) fundor outsourcing more of theadministrative duties. Thoseoptions would allow thefund to continue with thesame investments, althoughit would incur some addi-tional cost, he said.

Ageing challengefor SMSF sectorContinued from page 1

Continued from page 1

Phil Galagher

Peter Burgess

The founder and formerchief executive of Profes-sional Investment Holdings(PIH) Robbie Bennetts hasformally parted ways withthe group, with parent com-pany Centrepoint Allianceannouncing i t would beending the two-days-per-week consultancy agree-ment it has with him.

Bennetts stepped asidefrom his executive role earlylast year, and the group for-malised a merger with Cen-trepoint later in 2010.

Since ending his full-timeemployment with PIH, inAugust this year Bennetts hadbeen employed by Centrepoint

as a consultant for two days aweek to support PIH Groupconferences and develop newbusiness opportunities,according to Centrepoint.

The Centrepoint board hasnow elected to conclude itsconsultancy agreement withBennetts, Centrepoint stated.

“Robbie has made a signif-icant contribution to PIH overthe past 15 years through hisenergy and drive,” said Cen-trepoint group chairman RickNelson.

“I am sure many PIH peoplewill continue to enjoy a strongpersonal relationship withRobbie and we wish him wellin his future endeavours.”


News

Choice lobby independents on opt-inBy Mike Taylor

CONSUMER group Choice has announced it ispressing federal parliamentarians – particularlythe independents – to support the Government’sFuture of Finance Advice (FOFA) bill.

Describing itself as “the people’s watchdog”and claiming to have run a 20-year campaign inthe pursuit of improved financial planning, theChoice announcement said the vote of the inde-pendents would be vital to ensuring the pas-sage of ‘opt in’.

Pointing to the fact the FOFA changes begantheir progress in Parliament last week, Choicesaid the legislation contained “a critical meas-ure to ensure consumers who are disengaged ornot aware they are paying fees out of their invest-ments, or are not receiving an ongoing servicefor the fee, will get important reminders.

Choice director of communications and cam-paigns, Christopher Zinn said he believed it wasastonishing the financial services industry “hasgot away with hidden charges for so long”.

“Regular renewal of fees will put an end toadvisers drawing fees off accounts with little or no

transparency or consent from clients,” he said.Zinn claimed many advisers were already seek-

ing client consent for ongoing fees, and haddemonstrated the change would create very littleadditional cost.

“The cost to planners will not be significant,but the benefits to consumers and the widerindustry will be enormous through increasedlevels of trust and confidence,” he said.

ASIC accepts EU from OpusBy Chris Kennedy

THE Australian Securities and Investments Commission (ASIC) hasaccepted an enforceable undertaking (EU) from Opus Capital, aresponsible entity for 14 unlisted property funds.

The EU follows the rectification of a breach of a condition of itsAustralian Financial Services (AFS) licence, ASIC stated.

Under the EU, Opus has agreed to not rely on deferred tax assetsor sale and performance fee assets for the purposes of meeting itsNet Tangible Asset (NTA) conditions, and must classify these assetsas intangible assets in all financial reports.

Opus must also not recognise the sale and performance fee thatmay arise on the sale of properties held by schemes it manages asrevenue, except to the extent that a particular fee relates to an assetthat has been sold, and will use an amortised cost of the sale andperformance fee of zero rather than its fair value, ASIC stated.

Opus will also provide ASIC with a quarterly report on its compli-ance with the financial conditions of its licence for the next two years.

Prior to accepting the EU, Opus rectified the breach of the NTAcondition through a subordinated loan of $2.5 million, according toASIC.

StatewideSuper and LocalSuper begin due diligenceSTATEWIDESUPER and LocalSuper have announced thecommencement of due diligenceahead of a potential mergerbetween the two superannuationfunds.

According to StatewideSuperchairman Nicholas Begakis AM andLocal Super chairman Juliet Brown,major shareholders from BusinessSA, SA Unions, the Local Govern-ment Association, AustralianServices Union and the AustralianWorkers Union had given their ‘inprinciple’ support for the proposedmerger.

PriceWaterhouseCoopers, KPMG,and Russell Investments havebeen appointed to undertake ashared process of due diligencewhich is expected to be completedby the end of November, the super

funds stated. A final report will beprepared for presentation to theboards of both funds before theend of the year.

StatewideSuper is the profit-for-members industry super fund forSouth Australians, with around$2.4 bi l l ion in funds undermanagement (FUM), while LocalSuper has around $1.7 billion inFUM and provides super needs tolocal government employees inSouth Australia and the NorthernTerritory. StatewideSuper andLocal Super stated the merger ofthe two funds would result in FUMin excess of $4 billion.

The super funds believe theFederal Government’s StrongerSuper refor ms wil l make themerger of smaller funds morelikely.

Equities as yield; Aussie dollar the new safe havenINVESTORS concerned over sharemarket volatility should look atequities in terms of yield as a tax-effective income stream, while thecurrent global economic environ-ment may have led to the Australiandollar becoming a new safe havenasset, according to Tyndall.

Tyndall deputy head of equitiesWarwick Cumming said that whenfranking credits are included, manystocks are providing yields asattractive as other more traditionalincome-providing asset classes,and many stocks are offering excel-lent growth potential at currentprices.

The twin search for yield andgrowth requires discipline becausecompanies paying dividends at thetop end are not necessarily the oneswho have the best growthprospects, he said.

Tyndall has also presented awhitepaper that noted that sincethe onset of the global financialcrisis the Australian dollar hasbecome far less positively correlat-ed to global share market move-ments and commodity prices thanit has traditionally been.

The dollar held up well in the faceof European sovereign debt woes anda weakening US economy, partly due

to a strong local economy and Asiandemand for Australian exports, andalso because the US woes have ledother central banks to increase theirholdings in other currencies, thepaper stated.

Long term this could mean theAustralian dollar becomes an alter-native safe haven asset, accordingto paper author Roger Bridges.

But the Australian dollar will prob-ably fall if anything upsets worldgrowth, such as Greece leaving theEurozone, and will also become lessattractive if the Reserve Bank ofAustralia decreases the cash rate,Bridges warned.

Centrepoint and PIH part wayswith former CEO Bennetts

Robbie Bennetts


News

van Eyk calls for FOFA research disclosureBy Chris Kennedy

FINANCIAL planners should haveto clearly disclose the remunera-tion models of their researchproviders to clients, according toresearch house van Eyk’s submis-sion on draft Future of FinancialAdvice (FOFA) legislation.

The requirement should comeunder the ‘best interest’ test pro-posed in draft FOFA legislation,

so clients would have an assess-ment of the research advisersrelied on to make their recom-mendations, according to van Eykchief executive Mark Thomas.

The best interest test whenapplied to advisers needed totake greater account of the linksin the advice chain and disclosehow product ratings have beenobtained, he said.

A pay-for-ratings model where

product providers pay to havefunds rated creates a conflict ofinterest where funds are notbeing rated purely on merit, whichis not in the interests of advisersor their clients, Thomas said.

When an adviser recommendsa fund, there is currently norequirement to disclose within astatement of advice how theunderlying research and productrating was paid for or any conflicts

of interest, van Eyk stated.The van Eyk submission sug-

gested that where a dealer groupor adviser has relied on aresearch house that utilises apay-for-ratings business model, itwas in the client’s best intereststhat the adviser be required bylaw to clearly and explicitly dis-close that fact in plain English inthe statement of advice given to aclient.

MLC launchesnew insuranceofferBy Milana Pokrajac

MLC has come out with anew insurance product,aptly named MLC Insur-ance, which marked theculmination of the com-pany’s integration withAviva.

MLC claims the newproduct will provide a 70per cent improvement inturnaround times for newinsurance business andat least 20 per cent ofonline applications areexpected to be approvedimmediately.

Executive general man-ager at MLC InsuranceDuncan West said thenew offer was made tomeet the needs of riskadvisers.

“MLC Insurance andMLC Insurance (Super)of fer a wide range ofinsurances designed toprovide f lexibi l i ty forcl ients and advisers;these are packagedwithin one policy solution,with options inside andoutside of superannua-tion and no restrictionson combinations of pre-mium or remunerationstructures,” West said.

The company had alsocome out with a numberof new features, includingthe Illustrator – a desk-top insurance quoting toolwhich allows advisers togenerate a quote forclients offline – and Risk-first, which allows advis-ers to create and submitnew insurance businessonline.

The new features alsoinclude MyLink, whichenables advisers to sendclients a secure link viaemail to complete their per-sonal details statement.

Mark Thomas


News

Asgard platform tests industry funds on feesBy Mike Taylor

ASGARD will be marketing itsnew Infinity platform as provid-ing a cheaper option than manyof the publicly available industrysuperannuation funds.

After announcing the launch

of the new product last month,Asgard has released furtherdetails of the Infinity platformahead of a national roadshow,and will be promoting the prod-uct as something that will helpadvisers to adapt and thrive in anew environment.

At the core of the Asgard pushis a finding by Chant West thatAsgard Infinity Core is “cheaperthan the top 10 publicly availableindustry superannuation funds ona $50,000 account balance”.

The new Asgard platform isthe latest in a range of products

– brought to market by the majorretail financial services housesthis year – offering fee structuresregarded as being lower thanthose of the industry superan-nuation funds, with one of theearliest to market being ColonialFirst State.

New boss at Wilson HTMBy Tim Stewart

WILSON HTM has announced the retirementof managing director Steve Wilson, effective27 October 2011. He will be replaced bycurrent head of private wealth managementAndrew Coppin.

After 27 years with the company in anumber of senior roles, Wilson will become adirector and provide consultation on thecompany’s funds management business,corporate financing, Pinnacle and the Priori-ty managed funds.

The change in leadership at the firm is partof a transition process for the 2012 financial

year and beyond, according to Wilson HTMchairman Steven Skala AO.

“We are delighted to appoint Andrew Coppinto lead and profitably grow the business as anindependent advisory firm, leveraging hisbroad wealth management experience withinternational and Australian firms,” Skala said.

Coppin was excited with the prospect ofhelping Wilson HTM grow its business so itcould achieve appropriate scale.

“I am supported by an exceptional team ofpeople with a proven track record of deliveringhigh quality advice, research, funds manage-ment and corporate advisory services to ourclients,” Coppin said.

Misleading signalsMarket value can significantly deviate from business value, usuallyinfluenced by sentiment and other transient factors that have little

to do with the real value of the business. The secret is to distinguishbetween temporary set-backs and fundamental problems.

www.platinum.com.au | 1300 726 700

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3CPAMM07

ETFs buck redemptions trend

Australia needs morepension reform: MercerBy Milana Pokrajac

THE risk of governments failing tofinancially support their ageing popula-tion will become more apparent unlesssignificant pension reform is madenow, according to Mercer’s senior part-ner David Knox.

Furthermore, as world retirementsystems come under increasingstress in the current economic cli-mate, they will require ongoingreform to ensure they’re robustenough to support a rapidly ageingpopulation.

Knox’ comments followed therelease of Melbourne Mercer’s GlobalPension Index, which revealed Aus-tralia’s pension system regained itsranking as second in the world.

The Australian retirement systemhas an overall index value of 75 –second only to Netherlands (77.9), butbetter than Switzerland (72.7).

“Australia is very much in reach ofbecoming the first in the world toreceive an A-Grade score if we canaddress the issue of adequacy by rais-ing the level of compulsory savings viasuperannuation and continue reformsto reduce costs,” Knox said.

He suggested the Australian systemcould be improved by raising the level of

mandatory contributions, introducing arequirement that part of the retirementbenefit must be taken as an incomestream and reducing the costs of thesystem.

Director of the Australian Centre forFinancial Studies Deborah Ralston(who worked with Mercer on the GlobalPension Index) said ageing populationwas a top priority for developed coun-tries around the world.

“The ongoing difficulty of develop-ing systems that provide an adequatelevel of retirement income and yetmaintain sustainability – especially incountries with an ageing population –warrants further research and discus-sion worldwide,” Ralston said.

David Knox

THE exchange-traded fund(ETF) sector grew by $25million in September, revers-ing a month of net redemp-tions in August, according tothe BetaShares Australian ETFReview for the month ending 5 October.

The ETF industry sawoutstanding units grow by 1.5per cent in September, equatingto $25 million in “new money”,according to BetaShares.

However, the market capi-talisation of the ETF sectordeclined by $272.6 million (or

5 per cent) in the last monthdue to a downturn in local andglobal stockmarkets. Theoverall market capitalisation ofthe Australian ETF sector was$4.9 billion as of 5 October.

The global market volatilityis seeing investors continue totake up gold ETFs as a safehaven. The gold bullion ETF(GOLD) is the second largestAustralian ETF by market capi-talisation, standing at $712million as of 5 October.

Trading volumes on inter-national and currency ETFs

are stil l proving popular,suggesting investors are“taking a view on the localfundamentals weakening”,according to the review.

BetaShares head of invest-ment strategy Drew Corbett saidinvestors were looking to prod-ucts that benefited from a weak-ening in the Australian market.

“While still maturing, thesuite of ETFs available forinvestors continues to expand,allowing investors to benefitfrom a variety of market condi-tions,” Corbett said.


News

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A measured investment approach.

By Mike Taylor

TIMES are tougher forsmal l to medium-sizedbusinesses than at theheight of the global finan-cial crisis (GFC) – if corpo-rate insolvencies andexternal administrationsare to be taken as ameasure.

That is the analysis ofindependent accountingf i rm Tay lor Woodings ,which said the latest Aus-t ra l ian Secur i t ies andInvestments Commissiondata had shown thenumber of externaladministrations for thethree months ending 31 August had total led2,997 – up 16 per centon the same period lastyear and 23 per centhigher than at the heightof the GFC in 2009.

The analysis said courtwind-ups had continued toincrease, rising 17.4 percent in July to their high-est level in more than twoyears, and suggested thiswas a sign that the Aus-t ra l ian Taxat ion Of f ice(ATO) was cont inuingenforcement act ionsagainst companies.

The Taylor Woodingsanalysis said until consumerconfidence improved andstabilised, the companyexpected the number ofexternal administrations toremain stubbornly high fora period of time.

“Due to current eco-nomic uncer ta inty, weexpect consumers to con-tinue to save, and directsurplus cash to debtreduction,” it said. “Thiswill continue to place astrain on industries relianton discretionary spendingsuch as retail, housing,enter tainment, restau-rants and tourism.”

Externaladministrationsexceed GFC levels

S&P withdraws ratings on two INGIM share fundsBy Andrew Tsanadis

STANDARD & Poor’s Fund Services(S&P) has withdrawn ratings on twoING Investment Management(INGIM) share funds fol lowingtermination of the funds, effective 6 October 2011.

S&P stated that the ratings ofboth ING Alpha Plus AustralianShare Fund and ING Extended

Alpha Australian Share Fund wereplaced ‘on hold’ when UBS GlobalAsset Management proposed acqui-sition of INGIM in June 2011.

This acquisit ion closed on 4 October, and INGIM has sincestated that fund assets wi l l berealised and proceeds returned toinvestors within 10 business days ofthe termination announcement on7 October 2011.

The integrat ion of UBS andINGIM will continue through thefirst quarter of 2012, and INGIM’sexisting clients will continue to bemanaged by its investment andsupport teams, INGIM stated.

UBS Global Asset Managementhead Ben Heap said the acquisitionwould enhance the client offeringto include investment options fromboth organisations.


News

Planners question ISN advertising blitzBy Mike Taylor

THE Industry Super Network (ISN)needs to explain how a current tor-rent of television advertisingserves the best interests of superfund members, according to boththe Financial Planning Association(FPA) and the Association of Finan-cial Advisers (AFA).

Commenting on a spate ofindustry funds’ television advertis-ing that has coincided with majorfootball finals and the Rugby UnionWorld Cup, AFA chief executiveRichard Klipin said he believed theISN needed to explain itself in cir-cumstances where it appearedmillions of dollars were beingspent on prime-time televisionadvertising when markets werevolatile and superannuationreturns were in negative territory.

The advertising was also occur-ring at a time when, if a personwere to switch funds, they mightcrystallise any losses they hadincurred.

FPA chief executive MarkRantall said he was concernedthat such advertising expenditurewas occurring when super returnswere under pressure.

As well, he said the “compare-the-pair” advertising campaignwas “redundant in a post-FOFAand MySuper world where com-missions are banned.

“This will confuse consumers byraising a distinction that is nolonger relevant,” Rantall said.

Klipin said the ISN has said agreat deal about financial plannersacting in the best interests of theirclients, “so we believe it is incum-bent on the ISN to explain how thistelevision advertising is in the bestinterests of their members.”

Klipin acknowledged there hadalso been recent television advertis-ing in support of the financial plan-ning industry, but pointed out thatthis had been fully sanctioned andspecifically funded by planners.

He said he believed most mem-bers of industry superannuationfunds, by comparison, would beunaware of the amounts of moneybeing directed towards televisionadvertising either directly by theirfunds or via the ISN.

“The best interests question hasto be asked, and the ISN needs toexplain how this recent advertis-ing serves the best interests ofmembers,” Klipin said.

Aussie finance professionalsmost satisfied, says surveyBy Milana Pokrajac

AUSTRALIAN finance profes-sionals have the highest jobsatisfaction in the Asia Pacificregion, according to a surveyconducted by eFinancialCa-reers.

The Job SatisfactionSur vey, which includedparticipants from Australia,Hong Kong, China andSingapore, found that intel-lectual challenge, remuner-ation and opportunities forpromotion were among themost important work moti-vators for Aussie financeprofessionals.

However, almost half ofrespondents (45 per cent)are not satisfied with theopportunities for promotionat their current firm.

“Firms need to recognise

employees’ desire for avisible career path andbetter manage their expec-tations about promotion sothat there are no surprisesduring the performanceassessment meetings,” saidGeorge McFerran, head ofAsia Pacific for eFinancial-Careers.

Australian finance profes-sionals are also more opti-mistic about the economicoutlook than the regionalaverage, with almost halfbeing positive about whattomorrow holds.

Overall, 69 per cent ofAustralian participants weresomewhat, very or extreme-ly satisfied with theircurrent job, whichcompares to 64 per cent inHong Kong and China, and63 per cent in Singapore.

Life insurance inflowscontinue to surgeBy Tim Stewart

INFLOWS into the life insurance riskmarket were up 10 per cent overall in thepast year, growing from $8.9 billion in theyear ended June 2010 to $9.8 billion in theyear ended June 2011, according to PlanFor Life data.

Newly rebranded TAL reported thestrongest inflows – up 19.2 per cent. Thenext best reported inflows were Zurich(15.6 per cent), AIA Australia (14.1 percent), BT/Westpac (13.4 per cent), andOnePath Australia (10.3 per cent).

Overall premium sales in the sector roseby 6.1 per cent, with AMP recording thebiggest increase at 27.4 per cent. The nexthighest inflow went to Suncorp (16.7 percent), OnePath (8.4 per cent), andBT/Westpac (7.2 per cent).

Within the overall market, the individ-ual risk income market performed thestrongest, with inflows up 12.3 per cent.BT/Westpac was the strongest performer(25.1 per cent), followed by AIA (18.8 percent) and OnePath (17.3 per cent).

Inflows into the group risk market wereup 10.2 per cent year on year, with TAL out

in front with an increase of 30.1 per cent.Macquarie Life reported an inflowincrease of 14.4 per cent, and AIA was up12.2 per cent – but MetLife Insurancereported a large drop in group risk inflowsof –20.9 per cent.

Plan For Life said in its report that theindividual risk lump sum market had beensignificantly affected by the “unabatedgrowth in the housing market” over thepast few years. This sector, which encom-passes term life, total and permanentdisability and trauma, increased itsinflows by 9.1 per cent over the past year.AIA was the best performer, with inflowsup 20.1 per cent, followed by Zurich (12.1per cent), Suncorp (11.1 per cent),BT/Westpac (10.9 per cent), CommInsure(10.5 per cent), and TAL (10.3 per cent).

OneVue attracts moreinterest in UMA platformBy Andrew Tsanadis

WITH interest growing in unified man-aged accounts (UMA), platform providerOneVue is about to finalise new con-tracts with a number of advisory groupsto expand the distribution of its UMAplatform.

OneVue chief executive Connie McK-eage said the company would be makingsubsequent announcements about thecontracts in the next week or two.

OneVue stated that the platform iscurrently being used by Yellow BrickRoad, Australian Financial Services andMadison Financial Group

“While the concept of the UMA is stillrelatively new in Australia, OneVue isgetting more traction from advisersbecause the UMA provides a consoli-dated administration and reporting serv-ice online that gives advisers a completeview of their clients’ total wealth posi-tion,” said McKeage.

McKeage described the offering asone account with many products man-aged cost-effectively. She said it was dif-

ferent from tradit ional platformsbecause it accommodated al l of aclient’s fixed interest securities and termdeposits, traditional WRAP accounts,managed funds, separately managedaccounts, listed securities and cash.

“They can put anything on there –they (an investor) can put jewellery onthe account (which we don’t chargethem for). They can choose from over300 different term deposit solutions,and they can even hold art and othercollectables,” McKeage said.

Advisers were recently able to oper-ate managed discretionary accountsthrough the UMA platform and OneVuewas close to launching its retail superand insurance offering through the plat-form, McKeage said.

According to McKeage, UMAs are oneof the fastest growing markets in theUS. She said OneVue has recognisedthis potential for growth in Australia, par-ticularly in regards to the ability toadminister and report on exchange-traded funds.

Richard Klipin

News

FOFA may pressure age pensionBy Mike Taylor

THE Government’s Future of Financial Advicechanges could have the unintended conse-quence of placing more pressure on the agepension in future years, according to IOOF’sRenato Mota.

Pointing to the latest bout of market volatil-ity, Mota said regardless of the long-termnature of their superannuation investments,clients may judge an adviser’s performanceusing short-term outcomes.

Mota said advisers would feel they needto justify to their clients why they should opt into receiving advice for another two years, withclients looking to their fund performance and

what an adviser has recommended over theprevious two years.

“Advisers may be tempted to move theirclients into more conservative portfolios toavoid the painful discussions that are likely tooccur over a two-year term,” he said.

Mota claimed this could have a negativeimpact, as more conservative portfolios wouldunderperform over the longer term when com-pared to the higher growth portfolios thatadvisers would normally have recommended.

He said it was in these circumstances thatone of the biggest unintended consequencesof the two-year opt-in might prove to be thatthe Federal Government is liable for a greaterpension liability in the future.

ASIC bans futures adviserBy Chris Kennedy

THE Australian Securitiesand Investments Commis-sion (ASIC) has handed afour-year ban to a financialand futures adviser forunauthorised discretionarytrading.

An ASIC investigationfound that Paul Hing, whowas an authorised repre-

sentative of Novus Capital(formerly known as AxisFinancial Group) from2003 to 2011, fai led tocomply with financial serv-ices laws when servicingclients between July 2009and July 2010.

The ASIC investigationfound that Hing undertookunauthorised discretionarytrading on client accounts;

that he held that the tradeswere within the authoritygiven to him by NovusCapital; and that he engagedin misleading or deceptiveconduct by failing to informclients or Novus Capital thattrades were not authorised.

Hing’s conduct wasbrought to ASIC’s attentionby Novus Capital, ASICstated.

Suncorp denies offshoringinsurance jobsBy Andrew Tsanadis

SUNCORP Group has denied claims bythe Finance Sector Union (FSU) that it ispreparing to send Australian insurancejobs offshore in search of higher profits.

A spokesperson from Suncorp said theFSU’s claims were overweight on rhetoricand underweight on facts following anFSU release stating that Suncorp hadconfirmed it is considering offshoringback office and processing jobs.

A Suncorp spokesperson said thecompany is currently looking at a numberof strategies to improve its operationsincluding, but not limited to, using exter-nal companies to provide services wherethey have more expertise.

“We have not made any decisionsabout cutting jobs,” the spokespersonsaid.

“We are actively recruiting for over 100customer-facing insurance roles at themoment – not surprisingly, the FSUdoesn’t say much about that.”

According to FSU acting nationalsecretary, Chris Gambian, recruiting 100insurance consultants is no assuranceagainst the company then cutting jobsand moving those jobs overseas or to thirdparty providers.

Gambian said Suncorp insuranceemployees are facing a nervous wait tohear if they will still have a job with thecompany.

“Suncorp employees put in long hoursto process the high volumes of claimsquickly, carefully and compassionatelyduring natural disasters,” Gambian said.

“It is disappointing that Suncorp putsboosting their bottom line before theneeds of the people who made them prof-itable in the first place.”

FSU stated that the exact number ofjobs to be sent offshore is still to beconfirmed, but thousands of Australianjobs may be at risk.

“Companies that do their business inAustralia and profit from the Australiancommunity owe the Australian people aninvestment in excellent services, jobs andskills,” Gambian said.



News

ATO still vigilant on illegalearly release schemesBy Mike Taylor

THE Australian Taxation Office (ATO) hasreinforced its intention to crack down onillegal early release superannuationschemes and has warned of the significanttax implications for those involved.

ATO Assistant Commissioner Superan-nuation Stuart Forsyth has used an addressto a recent Self Managed SuperannuationFund (SMSF) conference to point to arecent Administrative Appeal Tribunal(AAT) decision reinforcing the tax officeapproach of imposing higher taxes andadditional penalties.

He said the AAT decision, handed downin August, involved a taxpayer who hadused money from her SMSF to prop up herand her husband’s real estate business.

“The amounts withdrawn wereincluded as assessable income to her,”Forsyth said.

He said the illegal early release schemesoften targeted particular groups within thecommunity, and people needed to be

aware that such schemes were illegal andattracted significant penalties for bothpromoters and participants.

Forsyth said that this year the ATO wouldbe auditing about 40 promoters and 300participants.

RECENTLY issued income taxregulations clarify the extent towhich super fund trustees canclaim tax deductions for life anddisability insurance premiums,which Macquarie AdviserServices executive directorDavid Shirlow said will helpcreate clear boundaries aroundthe types of insurance thatshould be held inside andoutside of super.

The regulations provide adefault means of claiming adeduction for trustees whoseinsurance policies do not clearlydefine the deductible portion ofthe premium, Shirlow said. Theyalso prescribe the percentage ofpremiums which are deductiblein some typical insurancearrangements, he said.

The regulations are pickingup a number of positiveimprovements advocated by thesuper industry, including moreflexibility in the range of addi-tional features [total and perma-nent disablement] policies canhave, without diluting the levelof deduction available, Shirlowsaid.

Shirlow also pointed out thatfor fund members to optimisethe efficiencies of their life anddisability insurance and ensurebenefits are available for release,policies need to comply withcurrent conditions of release.

Previous rule changes makeit clear that disability insurancepremiums are tax deductible forsuper fund trustees only to theextent that the insurance

proceeds can be paid immedi-ately to the relevant fundmember by the trustee, accord-ing to Macquarie.

Increase contributions capto $35,000: SPAABy Tim Stewart

THE Self Managed Super Fund Pro-fessionals’ Association (SPAA) hascalled for the Government toincrease the standard concessionalcontribution cap by $10,000 to$35,000 for those over 50.

The Australian Taxation Office hascollected $300 million in excess con-tributions tax from individuals since2007, making the change moreurgent, according to the SPAA chiefexecutive Andrea Slattery, who wasspeaking at the Tax Forum this week.

“The severity and manner inwhich this tax is imposed is one ofthe most significant issues con-fronting consumer confidence in thesuperannuation sector and the levelof voluntary superannuation savings,particularly when a significant major-

ity [of the cases are] low to middleincome earners,” said Slattery.

The costs of the changes wouldbe offset by the Government’s pro-posal to keep the cap at $50,000for people earning less than$500,000, according to Slattery.

“In any case, the Governmentshould give consideration to amodest increase in revenue costacknowledging the strong appeal ofthe longer-term administrative/com-munications efficiency gains thatthis approach would produce,” sheadded.

Other issues raised by the SPAAat the Tax Forum were the removalof disincentives for those aged 65 orolder who wanted to continue con-tributing to their superannuation,and the increase of the superannua-tion guarantee to 12 per cent.

David Shirlow

Stuart Forsyth

Willmott growers asked to reinvestBy Chris Kennedy

THE Willmott Action Group has askedinvestors in floundering Willmott Forestsmanaged investment schemes to give con-sideration to reinvesting in the schemesand replacing the responsible entity.

The proposed new strategy aims to getinvestors’ trees back on track in terms oftheir care and maintenance, and seeks torestore the original investment decision,according to a letter to investors from theWillmott Action Group.

The proposal would require altering theconstitution of the various project schemesto allow maintenance to be paid annuallyrather than at the end of the project, withan anticipated annual cost of around $75per woodlot.

The group’s proposed changes alsoincluded changing the responsible entityaway from PPB advisory, although noreplacement entity has yet been named.

The changes would also require a one-offproject re-establishment fee of $150 perwoodlot to provide cashflow to allow thechanges to occur and for your trees to beprofessionally managed; would provide anexit mechanism to allow growers to selltheir woodlots at a future time after theschemes have been reconstituted; andwould provide a mechanism where growersare formally and legally represented as anadvisory committee to the new responsi-ble entity.

The proposed changes to the schemewould require the support of a minimum of50 per cent of growers by woodlots, thegroup stated.

“We need to know how many of you areprepared to spend money now to get thestrategy in place,” the letter stated.

“Please note we are not asking formoney now, however, if the survey resultsare positive we will be asking for moneywithin the next 45 days.”

Macquarie welcomes clarityaround insurance in super

Industry superannuation funds in theguise of Industry Fund Service Pty Ltdand the Industry Super Network wouldhave been celebrating two significant

events last week – the first was the introduc-tion of the first of the Government’s Futureof Financial Advice (FOFA) bills to the Parlia-ment and the second was six years of success-ful campaigning around its ‘compare the pair’advertising campaign.

In a very real sense it can be argued thatthe ‘compare the pair’ advertising campaignthat started in 2005 laid the ground-work forthe FOFA bills. More than six years later, thereare plenty of people in the financial planningindustry still shaking their heads.

And while the Federal Opposition has beensending signals that it might act to rein in thepower of the industry superannuation funds,it needs to be remembered that ‘compare thepair’ and the creation of the Industry SuperNetwork grew out of a Coalition policy initia-tive – the advent of choice of superannua-tion fund in Australia.

While the Howard Government neversuggested that its choice of superannuationregime was aimed at undermining the indus-try superannuation funds, there were thosewho believed that would be the effect.

They believed that, given a choice,members would vacate the then somewhatbasic offerings of the industry superannua-tion funds and migrate to retail funds offer-ing a broader suite of offerings.

The ‘compare the pair’ advertisingcampaign was the industry funds’ way ofanswering that threat. What is more, the polit-ically-hardened operatives in the trade unionmovement pinpointed the key differentiatorbetween industry funds and retail mastertrusts – financial planners and commissions-based remuneration structures.

Having identified that ‘key differentiator’,it took only a very short step and a more than

adequate advertising agency to devise acampaign which has not only lasted morethan six years but which also proved to be,along with a number of other factors, a cata-lyst for change in the financial planningindustry.

But it is worth reflecting that while theHoward Government may have triggered theindustry funds campaign via its choice offund policy, it was its own Parliamentarianswho were quick to recognise the dangers ofthe industry funds campaign.

Sitting on a Budget Estimates Commit-tee back in May, 2009, Tasmanian LiberalSenator, John Watson asked the AustralianPrudential Regulation Authority (APRA)what it knew about “the recent prominentnational newspaper and television adver-tising campaign undertaken by IndustryFund Ser vices Pty Ltd, on behalf of anumber of participating industry superan-nuation funds”.

Watson then pointed to correspondenceby APRA’s deputy chairman, Ross Jones,which explained the ground rules withrespect to the advertising campaign andincluded the statement that – “imposingmarketing expenses on current membersprimarily to attract new members [wouldbe] difficult to justify [under the solepurpose test].”

“Does APRA agree that this mass advertis-ing campaign is aimed at attracting newmembers and/or employers to industryfunds?” Watson asked.

He also asked whether APRA intended totake action to protect members’ funds beingspent in breach of the sole purpose test.

APRA’s written response to the questionsposed by Watson thereafter became the greenlight which saw the industry funds not onlycontinue their campaign but also underpin itvia the development of a marketing andlobbying structure, including the birth of the

Industry Super Network.What APRA said was that the advertising

had been funded by the participating indus-try funds contributing various amounts toIndustry Fund Services.

“APRA has ascertained that the participat-ing superannuation fund trustees have allo-cated these amounts from their advertisingbudgets. The source of funds for the advertis-ing budgets is the administration expensewhich is charged by the funds. The adminis-tration expense is disclosed to all members ofthe funds as part of each superannuationfund’s product disclosure statement (PDS),”APRA said.

The regulator said it had no evidence thatthe advertising campaign was funded frommember balances (after disclosed fees andcharges had been debited).

“Trustees are able to defray, out of theirfee revenue, advertising aimed at attract-ing new members and/or employers to thefunds.”

History and the statistics show that of allthe movement created in the 18 monthsimmediately following the introduction ofchoice of fund, it was the industry superan-nuation funds who emerged as the netwinners from the exercise.

Within two years, while the member churnrelated to choice of fund had abated, theindustry funds did nothing to wind back whathad proved to be a highly successful advertis-ing campaign. And, with the election of theRudd Labor Government in 2007, the indus-try funds had secured an ally on the Treasurybenches in Canberra.

While the ‘compare the pair’ advertisingcampaign and its offshoots have proved veryeffective, their impact on public perceptionsof the financial planning industry would havebeen less substantial in the absence of eventssuch as the collapse of Storm Financial, West-point and Opes Prime.

InFocus


It is now more than six years’ since the industry funds launched their‘compare the pair’ advertising campaign and, as Mike Taylor reports, itappears to have exceeded even the wildest expectations of its authors.

AFA National Conference23-25 October 2011RACV Royal Pines Resort,Gold Coast www.afa.asn.au

Finsia Financial ServicesConference25 October 2011Ivy Room, Sydneywww.finsia.com/Confer-ence2011

ASFA National Conference & Super Expo9-11 November 2011Brisbane Convention & Exhibition Centrewww.superannuation.asn.au

Procure to Pay 201115 November 2011The Sebel, Sydneywww.procure-to-pay.com.au

FPA 2011 National Conference16-18 November 2011Brisbane Convention & Exhibition Centrewww.fpaconference.com.au

Australian Securities Exchange Compliance

Monthly Activity Report – September 2011

What’s on

ASXSNAPSHOT

The secret of success

Month endingSeptember 2011

2,229Listed entities

8New listings

11,328Total companyannouncements

$315,000Fines imposed


SMSF WeeklyStronger Super disadvantages SMSFsBy Damon Taylor

THE banning of in-specie asset transfers, asannounced within the latest Stronger Superreforms package, will disadvantage self-managed super funds (SMSFs) and exposethem to greater costs and risks, accordingto Hewison Private Wealth.

John Hewison, CEO of Hewison PrivateWealth, said while the proposed introduc-tion of MySuper had been widely applaud-ed, the ban of in-specie, off-market assettransfers for SMSF investors unfairlydiscriminated against self-managed superfunds.

“The issue is that under the new reforms,SMSF investors have restrictions applied,but institutional and industry superannua-tion funds (which also use these transac-tions) are exempt,” he said. “In addition, the

ban will most likely impose additionalbrokerage costs on SMSF members andexposes their assets to greater risk, especial-ly given current market volatility.”

Hewison said that under the proposedreforms, SMSFs must now make these trans-actions through a recognised market, suchas the Australian Stock Exchange.

“So using shares as an example, thismeans the investor must sell the asset onthe share market, wait four days for trade tosettle, transfer the cash into their super fundand rebuy the shares – taking up to a weekto complete the transaction,” Hewison said.“Given the current market volatility, thesemeasures are an unnecessary gamble forSMSF members which could impact thevalue of their assets in the process.”

According to Hewison, the reforms followthe Cooper Review’s speculation that SMSFs

were using this type of transaction tominimise capital gains tax (CGT) by choos-ing the transfer date to coincide with a lowprice for the asset – most commonly,

publicly listed shares.“But if this is a concern, then it should

apply equally to any entity, including indi-viduals, trusts and companies that alsocommonly use this form of transaction – forinstance, in lending shares to short sellers,which it could be argued is market manip-ulation,” he said. “There is no logical reasonto have singled out SMSFs, which areaudited, when there is little evidence tosuggest SMSFs are using in-specie transfersto avoid capital gains, and one could arguethat institutional investors would have a fargreater impact in this regard.

“This additional red tape goes against thegrain of a simplified superannuation system,particularly when there are already systemsin place to protect the integrity of self-managed super funds and auditors whoshould be trusted to do their job.”

John Hewison

SMSF trustees needappropriate tax treatmentBy Mike Taylor

ANY government review of theAustralian taxation system needsto take account of the fact SelfManaged Superannuation Fund(SMSF) trustees are the leastlikely to look to taxpayers forsupport in retirement.

That is the analysis of the SelfManaged Super Fund Profes-sionals’ Association (SPAA) inthe wake of the recent taxsummit, with chief executiveAndrea Slatter y saying theGover nment needs to takeaccount of the SMSF trusteedemographic and ensure anychanges encourage thecommunity to reduce relianceon gover nment suppor t inretirement.

“In particular, any proposedtax changes should be testedagainst whether they might actas a disincentive to save forretirement,” she said.

Responding to the issuesdiscussed at the tax forum, SPAAcalled for an increase in theannual concessional superannu-

ation caps and a long-term solu-tion to excess contributions tax.

“In SPAA’s view, the current,excessively low concessionalcontribution cap represents asignificant barrier to voluntarysavings under pillar three of ourthree-pil lared retirementincome system,” Slattery said.

“We acknowledge the budg-etary cost of increasing thestandard concessional contri-bution cap by $10,000 to$35,000 for those over age 50;however, we believe the cost torevenue would be partial lyoffset by the cost-savings of notincreasing the cap to $50,000for those with $500,000 or lessin super,” she said.

Slattery also pointed to ATOfigures showing that more than$300 million in excess contri-butions tax had been collectedsince 1 July 2007, and said theseverity and manner in whichthe tax was imposed was one ofthe most s ignif icant issuesimpacting consumer confi-dence in the superannuationsector.

Clock ticking on SMSF property timetableNEW SMSFs seeking to buy and settle a prop-erty by Christmas are starting to run out of time,according to New South Wales based mortgagebroker SMSF Loans.

Craig Morgan, director of SMSF Loans, saidthe real deadline for commencing a SMSF prop-erty purchase with the expectation of settling byChristmas was probably around 10 October.

“No one wants a property transaction to dragover Christmas, and we believe that a conserva-tive date like the 10th of October is also a practi-cal guide for new SMSF trustees,” he said. “Whilewe have access to lenders who can comfortably

settle in a shorter timeframe, it is better to look atthe best outcome possible across the wholerange of lenders in this sector.”

Morgan said established SMSFs could startlater, but early November would be the latest thatthey could commence property acquisition with aChristmas deadline in mind.

“The changes to SMSF borrowing rules to allowimprovements to properties will definitely lead tomore SMSF lending in 2012,” added Morgan.“SMSF lending was increasing anyway, as account-ants and advisers became more comfortable withclients buying property inside an SMSF.”

Diversa acquires administratorSUPERANNUATION administration company Diversa hasacquired SuperAdmin Services.

The company announced this week that – at the sametime as entering into a three-year promotion and administra-tion agreement with the Transport Industry Superannua-tion Fund – it had acquired the fund’s administrator, Super-Admin Services.

Commenting on the acquisition, Diversa managing direc-tor, Stuart Korchinski said it built on the company’s superan-nuation promotion and administration capability, and was inline with its objective of providing key services to specialistfunds and advisors to help them compete with larger indus-try peers. Stuart Korchinski

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No time for panic

THE current share market is full ofpitfalls for retiree investors. It now

looks as though Greece will defaulton its debt while the Europeans sit near-idle.The United States economy, and its unem-ployment level, is as bad as ever. Closer tohome, there are indications that China’sdemand for resources, which saved Australiaduring the global financial crisis (GFC), isslowing. The retail sector is in the doldrums.

Australia may have avoided the worstof the global financial crisis, but it is nowclear that the country can no longer staveoff the cumulative effects of a globaleconomy in turmoil.

It is no surprise then that older investorsare turning to their superannuationaccount balances in alarm and makingfrantic calls about their retirement plans.

But is it really time to panic? Despitenegative returns on superannuationaccounts, many financial planners believetheir clients are better off than they think.

Financial planners need to help theirclients reassess their retirement goals andmake stronger retirement plans. For that,open and frank conversations are needed.

Market volatility is also driving advisersaway from relying on single retirement

income products towards offering long-term strategic retirement investment advice.

Coupled with the creation of a doubleportfolio approach to retirement, theassets that investors are relying on forincome generation are changing, whileusing growth assets such as shares forwealth creation has assumed muchgreater importance.

But annuities are not finished yet, withsuper funds and the government planningto reinvigorate the sector.

Investors need reassuranceAs overseas tremors become morepronounced here in Australia and sharescontinue to plunge, the need for finan-cial advice in retirement planning ismore critical than ever.

“Engaging with clients is really to under-stand what retirement actually is for them,

and this is critical particularly at themoment with people being a bit disillu-sioned with returns,” says Mark O’Leary,director of AMP Financial Planning prac-tice Eluvia.

Pre-retirees have continued to flock toadvisers for retirement income advice sincethe GFC, and that trend has only strength-ened as investors have become moreconcerned over problems in Europe and theUnited States reaching Australian shores.

“What we’ve seen over the last coupleof years is this huge appetite for advice inrelation to the provision of income, andobviously a lot of that is driven off the backof the GFC. I guess what we’re seeing thesedays is a lot more focus on cash flowmanagement and generation, and incomegeneration, rather than these massiveinvestments that we saw previous to theGFC,” says senior executive of advice at

Count Financial, Dean Borner.Superannuation is the primary source

of retirement income for most clients, andthe volatility in global and domesticmarkets is fuelling the perception thatsuper is suffering by an inordinateamount.

Super contribution caps have alsoremained low, adding to clients’ frus-trations that during the last 10 or 15years leading up to retirement theycannot maximise the amount they arecontributing to their future retirementincome.

The government will increase theconcessional contr ibution cap to$50,000 for those with under $500,000in superannuation from July next year.While that will go some way towardsalleviating the disappointment, it won’tsatisfy everyone.

The effect on retirement savings hasbeen severe. Research jointly commis-sioned by the Self Managed Super FundProfessional’s Association of Australia(SPAA) and Russell Investments this yearfound that there was $15.1 billion lessgoing into superannuation as a result ofthe contribution caps.

Retirement Incomes

Market volatility is altering the make-up of retirement portfolios.Retirement planning becomes more important in the current economic climate.There is more focus on wealth protection and longevity risk.Retirement incomes market fell by 1.5 per cent in three months to June 2011.

Key points

Market volatility is changing the way advisers structure their clients’ retirement income and theadvice they are offering around it. Benjamin Levy reports on the latest trends in retirement incomes.


SPAA chief executive Andrea Slatteryslammed the contribution caps as restric-tive, prohibitive and counter to the intentof the Government to make super themain retirement vehicle for Australians.

Together with the reduction of supercontribution caps, market volatility ispushing clients to forgo salary sacrificingand place their funds in assets like cashaccounts, which may not generate thesame level of returns. It also means theywill miss out on the tax reductions gener-ated through placing money into super.

“Many clients are under the percep-tion that their portfolios have suffered

significantly, but that might not be thereality, because many clients have theirmoney invested in a moderately conser-vative or balanced portfolio, which is welldiversified,” O’Leary says.

It is up to planners to convince theirclients that their superannuation may notbe suffering as much as they think andget them to recommit to the long-termaccumulation of their super balance.

That will involve a reassessment ofwhere they are in terms of retirementsavings, benchmarking that against theirlong-term objective.

Count Financial is developing a moreadvanced interactive retirement incometool for advisers to use with clients whichwill demonstrate the volatility of capitalmarkets and help them better plan retire-ment funding.

Count will educate advisers on how touse the tool with their clients when plan-ning retirement, Borner says.

Despite all the talk from advisers aboutgetting clients ready for retirement, Core-Data’s Retirement Report earlier this yearfound that pre-retirees over the age of 55are being overwhelmed by the planningneeded for retirement.

Out of 1690 participants in the survey,69 per cent of respondents felt over-whelmed by their superannuation andretirement finances. One in three saidthey did not believe they would be able tochoose when they retired and would beforced to work for as long as possible, and

39 per cent said they were unlikely tomeet their retirement needs.

CoreData head of advice, wealth andsuperannuation Kristen Turnbull said thefindings showed that super funds andadvisers needed to do more to engagepre-retirees about the products and serv-ices available to them when they retire.

Providing financial advice on retire-ment planning is even more urgent inlight of the imminent retirement of thebaby boomer generation.

In the two decades leading up to theGFC, including the introduction of thesuperannuation guarantee, there was astrong bull market run, in which investorsand super fund members were focused onthe accumulation of assets, not the protec-tion of assets. Even with some years ofnegative returns, there was time enoughfor assets to recover.

Now that there is a wave of baby

boomers entering retirement, there issuddenly an overwhelming focus on wealthprotection and longevity risk – and finan-cial planners must cater accordingly.

“The catchcry of a retiree when they sitin front of a financial planner is ‘I don’twant you to make me rich, I just want youto ensure I’m never poor’,” says AMP direc-tor of sales Barry Wyatt.

ipac chief investment officer JeffRogers also warns that advisers mustready themselves for the upcoming shiftamong older clients to a wealth protec-tion situation.

“The whole demographic of the babyboomer beginning to retire means thereis just going to be this acceleration ofpeople hitting that retirement markwhere the major issue will be that there’sno salary stream,” Rogers says.

Continued on page 16

Retirement Incomes

Dean Borner

Market Segment June 2011 3mth % June 2010 1 Yr %($ millions) Change ($ millions) Change

Retail Employer Super 90,101 0.47% 80,735 11.60%

Personal Super 164,189 -1.22% 157,901 3.98%

Allocated Pensions* 102,110 -0.66% 95,410 7.02%

Annuities 9,813 -3.09% 9,771 0.43%

Retail Investment 137,909 -3.38% 148,557 -7.17%

Total 504,123 -1.45% 492,374 2.39%

Table 1: Total Market

Source: Money Management/DEXX&R Retirement Incomes Survey *Including Term Allocated Pensions.


Retirement Incomes

How market volatility is altering themake-up of retirement portfoliosMarket volatility isn’t only driving investorsto seek out financial advice about theirretirement planning. It is also changing howadvisers structure their client’s retirementincome and the advice they are offeringaround it.

Advisers are shifting away from relyingon a single type of retirement product suchas an annuity or longevity risk product toan approach of a long-term investmentstrategy.

“A lot of the advice has been more aroundstrategy management of the whole retire-ment income stream, not so much a flightto certain types of products,” says Borner.

Count Financial has seen only a smallincrease in annuity business recently.

A lot of their clients are instead sitting oncash to finance pension payments for acouple of years, Borner adds.

As part of that investment strategy, advis-ers are building two or more portfolios perclient: one a more growth-oriented portfo-lio to build their assets, the other a sustain-able income generating portfolio.

The income portfolio would include atypical combination of defensive assets suchas fixed income, cash, infrastructure, prop-erty, and blue chip shares, enough to providea steady ongoing income for a few years.

The rest of the money not needed for thatincome would be placed in a growth port-folio to continue accumulating assets.

This strategy of splitting retirement fundsinto a defensive and growth portfolio islargely to make their clients feel morecomfortable about the volatility of the sharemarket.

Even if there may be some volatility inthe unit price of their fund, seeing sustain-able, predictable income coming throughevery month will make clients feel morecomfortable with where their retirementsavings are, Rogers says.

The two-buckets approach of ‘safe for theshort term’ and ‘risky for the longer term’ isalso an effective attempt to calm the wildinvestor behaviour of previous years whichsaw falls in investor confidence, massivedives in shares both in Australia and over-seas, and unnecessary sell-offs that ate intoinvestor’s funds.

The approach of placing everything thatyour client won’t need into a growth portfo-lio may run against the conventionalwisdom of making retirement income long-lasting and safe, but with their incomeneeds provided for, the benefits of such anapproach are becoming clear.

Fund managers have been promoting thechange in approach to retirement incomefor some time.

In an article in Money Management at thebeginning of the year, chief investmentofficer at Select Asset ManagementDominick McCormick pushed advisers tocreate simple ‘low stress’ retirement incomeportfolios that would more closely resemblewhat worked for retirees, rather than thefinancial services industry.

By placing half of their funds in cashaccounts, and the other half in a do-it-your-self super fund with a growth-oriented mixand wide diversification and flexible assetallocations, McCormick’s clients sufferedfar fewer stresses of retirement and yetweren’t inhibited from meeting their long-

term objectives, he said.“The primary role of a good financial

planner should be to arrange their client’sfinancial affairs in ways that reduce thatclient’s financial pressures and stresses,”McCormick said.

PIMCO global head of wealth manage-ment Peter Dorrian approves of the newapproach to retirement income investment.

“It’s not a bad idea, because it’s all verywell for all of us who work in the financialmarkets to say ‘You can buy on the dip, andthings will get sorted out over time’ but wealso have [a salary] coming in every month,”he says.

“If you’re in a situation where yourworking career is over, and you’re lookingfor that pool of savings to give you yourincome, the last thing you want to do is becontinually stressed about whether or notit’s going to be there.”

That approach reduces stress for theadviser as well. Many advisers feel they haveto be investment gurus for their clients,always being on top of portfolios andconstantly issuing reports.

That only leads to unnecessary scrutiny,spending more and more time worryingabout a particular poorly performinginvestment and considering substitutingit with another every time an asset dropsin value.

However, creating an adequate doubleportfolio approach needs many elementsto work. McCormick warned that in order towork across a range of client situations,advisers must utilise a generalist approach,with broad knowledge of investments,insurance, social security, tax and estateplanning, including access to appropriateexperts when needed. Few dealer groupsare structured this way.

For some, the number of portfolios youcan create is only limited by the number ofneeds that you can identify. ipac haspinpointed three needs that investors havein retirement – essential needs, discre-tionary spending needs, and estate plan-ning needs – and built three different port-folios for each.

“Instead of bucketing the portfolio intoparts, start at the needs of someone in

retirement and then go and build a portfo-lio that is best at meeting all of thoseneeds,” Rogers says.

Typically, an adviser works on essentialneeds with retired clients first, calculated togo up with inflation, and whatever is left overcan be split between discretionary needs andleaving money for their descendents.

How is market volatility changingwhich products are used in a portfolioBuilding a solid income-generating portfo-lio needs to have some careful thoughtbehind it.

When it comes to income generation,market capitalisation doesn’t matter somuch as dividend payouts. Only compa-nies that will pay out the bulk of their freecash flow in dividends should be part of thatside of a retiree’s portfolio.

And of those companies, only thestronger dividend yield companies, whichare less affected by market volatility, shouldbe used.

That means that small resource compa-nies, for example, while incredibly attractive

Continued from page 15

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

For Years ending 31 December

DEXX&R Projection High Assumptions Low Assumptions

Source: Money Management/DEXX&R Retirement Incomes Survey

Graph 1: Allocated Pensions – Net Cash Flows

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

For Years ending 31 December

DEXX&R Projection High Assumptions Low Assumptions

Source: Money Management/DEXX&R Retirement Incomes Survey

Graph 2: Allocated Pensions – Funds Under Management

Rank 2011 Company FUM June 2011 3 mth % FUM June 2010 1 Yr % ($ millions) Change ($ millions) Change

1 CBA 19,972 0% 19,580 2%

2 BT/Westpac 17,110 0.5% 14,993 14.1%

3 AMP* 17,091 62.4% 9,350 82.8%

4 NAB 13,150 -2.4% 12,508 5.1%

5 ANZ 7,594 -2.5% 7,261 4.6%

6 IOOF Group 6,560 -1.3% 6,098 7.6%

7 Macquarie 5,991 0.2% 5,382 11.3%

8 State Super 3,220 -0.4% 3,042 5.8%

9 Mercer 1,617 0.2% 1,490 8.5%

10 Oasis 1,522 0.2% 1,357 12.2%

Total 102,110 0.7% 95,410 7%

Source: Money Management/DEXX&R Retirement Incomes Survey *Including Term Allocated Pensions.

*AMP includes AXA Australia. On a “like for like” basis AMP increased by 12.7% to $17.1bn from $15.2bn over the year.

Table 2: Allocated Pensions – Top Ten Companies


Retirement Incomes

for their share growth, are useless for incomebecause they don’t pay out for investors.

Borner suggests that advisers considerwhether investing in shares throughdirect equities or managed funds wouldprovide a more consistent income streamin retirement.

Advisers and investors need to be awareof future downturns in the economy, whichcould force companies to cut dividends,Dorrian warns.

Even stronger companies could suffer inthat environment.

“If this is all people have got in their retire-ment in terms of their pool of savings, theyreally do need to ensure they have somelevel of predictability in terms of what thatincome is going to be,” Dorrian says.

Count Financial’s research departmentconstantly investigates the types of retire-ment income products available.

Advisers shouldn’t restrict themselvesto annuities and longevity products, butshould explore alternate arrangementssuch as Investment ManagementAccounts that can also meet retirement

needs, according to Borner. Capital protected solutions also have

some part to play in retirement income.Geoff Watkins, managing director offinancial investment consultant companyPath Independent, noted earlier this yearthat super funds and platforms have beenconsidering implementing some form ofcapital protection over the last six monthsof the current market downturn.

The prospect of low earnings for fundmanagers may prove the benefits of spend-ing money to build a safer way of investingin equity, Watkins said.

The shock to investors from fallingaccount balances will also increase theirscepticism about shares and drive them tocapital-protected solutions, he added.

AnnuitiesLongevity risk products and new variableannuities still feature in some people’sconversations.

PIMCO, which counts a large number ofsuper funds among its clients, expects enor-mous growth in the annuity product space.

Annuity products are a regular feature oftheir dialogues.

“They are all looking at getting into theproduct space that will allow them toprovide some sort of post-retirementincome stream to their investors,” Dorriansays.

Traditional annuities have normallybeen quite expensive, and dependent onthe insurance companies to survive forthe next 30 years to pay out the annuity.The money also went back into the insur-ance company when the beneficiary died,rather than to his or her relatives. But nowthat super funds and wealth managers aredeveloping their own products with adifferent mix of fees and assets, there is achance that more investors may becomeinterested.

PIMCO has also been pushing for theintroduction of hybrid longevity risk prod-ucts. In a recent Retirement Income Forumconvened by the company, PIMCO head ofretirement solutions Tony Hildyard saidlongevity risk remained the major unsolvedproblem of marrying growth-based invest-ment solutions with the risk aversioncommon to many retirees.

The development of more retirementincome products has the support of theGovernment, with former minister forFinancial Services Chris Bowen acknowl-edging it needed to examine the regulatoryand tax burdens preventing more attractivesolutions being offered.

However, the Government also warnedthat it would not take on the responsibilityof mandating compulsory products.

The Institute of Actuaries of Australia(IAA) has warned there can be no innova-tion in the annuities space unless there aretax law changes.

In a Federal Budget submission early thisyear, the IAA called for the Government toreverse the unfavourable treatment ofannuities under aged care and Centrelinkrules. Annuities should also be able to beissued as a component of an account-basedpension.

The product should also be regarded asa pension for tax purposes if taken out inthe drawdown phase, the IAA said.

Financial Planning Association chiefMark Rantall also encouraged the Govern-ment to make tax law changes. In anaddress to the two-day Tax Forum inCanberra, Rantall said the current superan-

nuation and tax legislation overly restrictedthe definition of an income stream.

Providers should be allowed to developdeferred annuities and other longevityprotection-style products, he said.

However, while lifetime annuities canwork can work as part of an asset mix aslong as they are competitively priced, andeven replace the cash component of a port-folio, McCormick warned that alternativearrangements such as the ones his clientsuse showed that there are alternatives toannuities that provide greater flexibility andbetter returns.

Time to talkIt is has historically been difficult to getclients to engage in a retirement planningprocess early in their working lives. Theconcept of retirement for many people issynonymous with a sudden lack of purposeand consequently a loss of joie de vivre.

“I think it’s a discussion you have whichis a bit of a confronting discussion in manyways,” says O’Leary.

“A lot of people are disengaged with theretirement planning process, because theword is like a full stop, you just stop workand then exist for a few years before youturn your toes up.”

However, funding income in retirementtakes many years of planning and thereforegetting clients to engage with the conceptearly on in their working lives is crucial,O’Leary says.

Financial planners should at least opena conversation about retirement whentheir clients are working and have a strongmonthly commitment to superannuation,even if later in life that commitmentbecomes diluted by other financialresponsibilities such as a mortgage andeducating children.

But more needs to be done. Clients alsoneed to be made more financially literateand engaged if they are going to fullyappreciate the importance of planning forretirement.

In an address to a Money ManagementRetirement Incomes Seminar, Parliamen-tary Secretary to the Treasurer David Brad-bury said consumers could be encouragedto engage more in making decisions aroundretirement – but it demanded a more finan-cially literate consumer.

As workers pass middle age and start toapproach their pre-retiree years, advisersneed to move beyond a conversation andestablish a solid retirement planningprocess. Clients in the 55 year age group,with the objective of retiring in 10 years,should start reviewing their situation andcorresponding investment strategies everyfive months and increase the pace of thosereviews as they get closer to retirement,according to O’Leary.

Investment strategies should be reviewedregularly just to keep on top of marketvolatility, Dorrian warns.

The outlook for the global economy isnot good. The low growth environmentthat investors are suffering through islikely to continue until at least the end of2013, according to some, making it imper-ative that retiree portfolios stay under thespotlight.

“I can’t remember a time in financialmarkets when both advisers and manywealth managers were so uncertain as towhat the outlook is for the world economy,”Dorrian says. MM

Geoff Watkins

Trauma insurance has alwaysbeen promoted as a means ofproviding the life insured whosuffers an insured event with a

lump sum benefit payment so they had:• Financial access to the best possible

medical care either in Australia or over-seas, if necessary;

• Financial access to rehabilitation serv-ices; and

• The ability to implement any desiredchanges to their lifestyle.

A trauma insurance claim paymentcertainly continues to provide consider-able benefits in these three areas.However, by studying the aftermath ofone particular trauma insured event, itseems it may be able to assist in a fourth.

Of all the insured events covered withinthe policy, claims statistics from insurersindicate that the one most likely to occuris cancer.

In 2005, 752 cancer survivors weresurveyed 12 months after their cancerdiagnosis, and a question was posed tothem:

“What problems have you been experi-encing in dealing with your cancer?”

A review of the Top 20 or so responsesprovides an insight into the positiveimpact a trauma insurance benefitpayment might have in an otherwise verydifficult time, and it also reveals thehidden, fourth trauma insurance benefit.

Half of the problems faced by thecancer survivors surveyed were of a phys-ical nature; they were problems thatexisted in the sense that the person “had”them:

• 67 per cent had fatigue and loss ofstrength;

• 48 per cent had difficulty sleeping;

• 40 per cent had difficulty makinglong-term plans;

• 37 per cent had ongoing major prob-lems with their health;

• 36 per cent had a diminished ability toconcentrate;

• 29 per cent had difficulty meetingmedical expenses;

• 27 per cent had difficulty returning totheir former role;

• 26 per cent had difficulty providingfinancially for their family;

• 22 per cent had eating difficulties;• 20 per cent had problems communi-

cating with their spouse or partner;• 17 per cent had difficulty in obtain-

ing adequate insurance; and• 16 per cent had difficulty pursuing the

career of their choice.Clearly, a trauma insurance benefit

payment could provide pragmatic assis-tance with the above.

Having access to an effective rehabili-tation regime might assist to improveoverall fitness and endurance, which may,in turn, alleviate some of the issues withsleeping.

Difficulty in making long-term plansmay, in part, be a flow-on from currentfinancial difficulties or a lack of assuranceof ongoing financial security. If it was,having a significant lump sum readilyavailable could serve to remove or reducethese concerns. Some of the lump sumcould even be invested to top-uppayments being received from incomeprotection insurance.

With the average gross personal cost ofbreast or lung cancer treatment beingaround $25,000, and the equivalent costfor leukaemia up to $100,000*, it is notdifficult to see that someone who does

not have access to sufficient funds maybe concerned about meeting medicalexpenses.

Effectively combating ongoing medicalproblems may require setting up a finan-cial reserve fund.

If there are difficulties returning to aformer role or finding the career of choice,having funds available can open up anumber of opportunities. It may be that:

• Sufficient funds are available, suchthat the need to work a standard week isno longer necessary;

• Superannuation savings can beboosted so that early retirement is possi-ble; or

• Time off work can be taken so that theideal job can be found.

Insurance is a lot about providingoptions.

The difficulty of providing financiallyfor the family is an obvious area where alump sum benefit payment should assist,and again, it’s about options:

• Being free of debt might reduce theworry about being able to provide finan-cially for the family;

• School fees may be an issue, so beingable to pre-pay them will go a long way;and

• Hiring a home-carer or cleaner mayfree-up other family members to returnto the workforce.

When problems are related to commu-nication, counselling could help — ascould taking time off work, spendingmore time together, dinner at a toprestaurant, a romantic weekend away, oran overseas holiday.

And finally, if the issue is an inability toaccess sufficient life insurance, alreadyhaving it in place or having a buy-back

facility under the policy could be the idealsolution.

Even if additional insurance wasneeded – which generally would besubject to an underwriting loading – thechances are, it would be more affordable.

Clearly, having appropriate traumainsurance in place will provide a practi-cal way forward for many of the physicalproblems that may arise. However, theseproblems only made up half of thoseidentified by those taking part in thesurvey.

The other half were not physical prob-lems, as such – they were psychologicalissues epitomised by the word “felt.”

• 68 per cent felt fearful that illnesswould return;

• 58 per cent felt fearful about thefuture;

• 41 per cent felt less physically able toengage in sexual intercourse;

• 40 per cent felt uncomfortable withtheir changed physical appearance;

• 39 per cent felt a preoccupation withbeing ill;

• 37 per cent felt vulnerable;• 33 per cent felt helpless;• 33 per cent felt angry;• 30 per cent felt dependant;• 25 per cent felt isolated;• 25 per cent felt guilty; and• 20 per cent felt fearful about infec-

tions and crowds.Feelings (particularly in situations such

as cancer survival) are deeply personal,and it would be inappropriate tocomment on them. However, it is appro-priate to consider the positive impact thata lump sum benefit payment under atrauma insurance policy might have inpossibly reducing or alleviating the prob-


OpinionInsurance

Col Fullagar studied the aftermath of one particular trauma insured event anddiscovered a fourth, hidden area, in which this type of insurance can assist clients.

and overall health being welldocumented, the importance ofpsychological wellbeing cannotbe overstated. Interestingly, theaverage proportion of peoplereporting problems in this areawas 37 per cent, as compared to30 per cent with physical prob-lems.

The fourth purpose of traumainsurance has lain largely hidden

in the past. It would be good tosee it being given greater promi-nence.

Col Fullagar is RI Advice Group’snational manager of riskinsurance.

*Access Economics – Cost of Cancer in NSW, April 2007.

Source: Adult cancer survivors; how are they faring?

Frank Baker PhD, October 2005.


“Trauma insurance is not just giving the lifeinsured an improved opportunity to return tophysical health, but also to psychologicalhealth.”

lems identified above. Confidence that the best

medical care available hasbeen obtained may reducethe fear that illness mayreturn.

Reassurance regardingfinancial security mayreduce fears about thefuture.

Effective rehabilitation– including access to agym and even a personaltrainer – may improvefeelings of self-worth,which could manifest inimproved relationships.

The increased effec-tiveness of drug regimesin cancer treatment hasreduced, but not removedthe need for radicalsurger y. If surger y isrequired, being able toafford cosmetic surgeryor the latest prostheticdevices may well assist toimprove feelings about achanged appearance; orit may be that a personalmake-over would help. Anew wardrobe mightwork wonders with self-esteem.

It may even be thatgiving the home a make-over could assist, as coulda fresh coat of paint,renovations or landscap-ing the garden.

As for feelings ofvulnerability, helpless-ness, anger, dependence,isolation and guilt —highly qualified profes-sional help may be whatis required.

Stepping back from theabove, it would seem thattrauma insurance is infact providing valuableassistance in not three,but four key ways, byvirtue of the lump sumbenefit payment. Thereceipt of this paymentwill enable the l i feinsured to have:

• Financial access tothe best possible medicalcare either in Australia oroverseas, if necessary;

• Financial access torehabilitation services;

• The ability to imple-ment any desired changesto their lifestyle; and

• The facility to bettercope with the psycholog-ical issues that may arise.

Trauma insurance isnot just giving the lifeinsured an improvedopportunity to return tophysical health, but alsoto psychological health.

With the correlationbetween adverse feelings

In almost 30 years following invest-ment markets, I am hard pressed tothink of a time when share marketinvestors were as pessimistic as

they have become in recent months – atleast before the recent strong rally. Sure,there have been times when marketshave fallen faster and further, with both1987 and 2008 coming to mind. Butthese periods were dominated by thefear generated by unexpected andunprecedented events (record one-dayfall in markets, disorderly collapse of amajor investment bank respectively),which created deep uncertainty within aconcentrated time period.

Today is quite different. We know whatthe major macro economic problemsare: sovereign debt issues in Europe, astruggling US economy and the risk ofa slowdown in China. And these issuesare clearly very serious. But they havealready been front page news formonths or even years. Meanwhilecommentators seem to be trying tooutdo each other in predicting worstcase scenarios on how these issues willdevelop, ensuring that share pricesincreasingly reflect dire scenarios goingforward.

I do remember the aftermath of the1987 crash leading into the 1990 reces-sion as par t icular ly g loomy forAustralia, as short-term interest rateswent to 18 per cent and the Gulf wardampened global growth. However, Isuspect only the grinding bear marketof the early/mid-1970s created some-thing similar to the dark mood we haveseen recently.

In any case, the one common featureof all of these periods – whether domi-nated by fear or all-encompassingpessimism – is that they created greatopportunities to buy shares. They wereperiods where valuations reached levelswhere good returns looking forward overthe medium-to-long term were highlylikely. However, once again, few seem tohave learned this lesson today. In fact,most investors are doing the opposite.The recent Investment Review from US-based Mittleman Brothers InvestmentManagement perhaps describes it best.


Observer

Learning thewrong lessons –again

At a time when investors fear a repeat of theSeptember 2008 panic, Dominick McCormickwrites most have missed a very important lesson.

"Investors are once again, en masse,doing exactly the wrong thing: sellingstocks more aggressively as prices getprogressively lower. It’s a pathologicalreflex afflicting the investing public ingeneral that seemingly no amount ofexperience can cure. Anxiety and paral-ysis are once again winning the day,while huge piles of cash sit on the side-lines ‘waiting for the dust to settle’ –which really translates to ‘waiting formuch higher prices’."

The selling, and unwillingness to buy,is reflected in massive outflows of USequity mutual funds: $75 billion in thefour months to August and more inSeptember, which was more outflowthan during the same length of time atthe peak of the GFC. It is also reflected inthe rush to cash and bond ‘safe havens’despite paltry and in some cases non-existent yields. Clearly Australian termdeposits are one of the few exceptions,although even here rates have beencoming down recently.

The 9 per cent rally on the Australianshare market from early October showswhat can happen when there is just awhiff of clarity on these key macroeco-nomic issues. These dramatic rallies alsohighlight the risks of ‘waiting out’ thevolatil ity, either trying to pick thebottom of the market or holding off untilit feels ‘safe’ to wade back in.

Meanwhile, there is no shortage ofcommentators saying that the crisisnow is worse than 2008. That any daynow Europe will have its "Lehmanmoment" and the world will cascadeinto a depression as a result. We needto get a grip here.

Sure, it is probably worse for someEuropean economies, for some Euro-pean sovereign bonds, some Europeanbanks and for people without jobs. Andpoor policy decisions could createfurther chaos and further volatility onmarkets in the short term.

But worse than 2008 for Australianinvestors and the Australian sharemarket? Come on. Where is the nextAllco, Babcock, or Centro about to fail,where are the dozens of leadingAustralian companies that have toomuch debt and need to rapidly recapi-talise their balance sheets with dilution-ary rights issues, where is the massivelevel of leverage into the share marketsand other investments through struc-tured products, margin lending andhome equity loans? Where is the exces-sive enthusiasm and complacencyregarding share market (and manyother) investments that permeated theperiod leading up to 2008?

Remember at the recent low the S&PASX 200 was already 22 per cent belowits levels of just a few months ago andstill 43 per cent off its record high ofNovember 2007. Even in the mid-1970sbear market, the market fall was limitedto 50 per cent. This is not to say itcannot go lower but we are certainlynot talking about a market that has yetto notice that the global environmentis pretty tough.

Meanwhile many investors won'ttouch shares with a barge pole. Senti-

ment indicators globally show that retailinvestors remain extremely bearish.Local adviser sentiment is the worstsince early 2009. Flows into cash/cash-like investment are at record levels. Self-managed super funds, for example, aresitting on around $125 billion in cash.

Of course, there are those advisers andinvestors who say they went heavily orfully into cash/term deposits months oreven years ago and are complacentlygloating through the recent volatility. Ihave heard of cases of long-term clientsbeing advised to go all into cash.

This strategy might sound like a goodidea at the time, but in my view exitingmarkets completely and moving largelyinto cash creates a range ofproblems/challenges for investors andadvisers. It can result in both clients andadvisers becoming somewhat detached

from what is going on in investmentmarkets, which may inhibit their futurejudgement. They can also develop anaggressive aversion to the share market –accentuated by the realisation of recentlosses – which inhibits their ability to lookat the share market objectively.

Finally, if they can overcome thesebarriers they still face the enormouschallenge of determining when to getback in – and actually doing this. Toooften these factors delay any re-entryuntil prices have recovered dramatical-ly, much of the better returns havealready been had and the actual risksare once again much higher. Most sharemarket gains occur in the very earlystages of a recovery and this is the exactper iod that many investors missbecause of these previously mentionedbehaviours.

These problems can be compoundedby unrecognised risks of some of the‘safe haven’ investments they haveswitched into, which admittedly is abigger problem in the US and Europe.At least in Australia one can still earn arespectable real return on term deposits,although this situation won't last foreverand is less attractive for those payinghigh tax rates. Meanwhile, the potentialcapital losses from rises in bond interestrates is being ignored by investors.

In the weekend Australian FinancialReview (1 October) J Bradford DeLong,an economics professor and formerAssistant Secretary of the US Treasury,put it bluntly when he said: "Bondinvestors are being really stupid. In aworld in which the S&P 500 has a 7 percent annual earnings yield, nobodyshould be happy holding a US govern-

ment 30-year inflation-adjusted bondthat yields 1 per cent. That 6 percent-age point difference in anticipated realyield is a measure of bond investors'extraordinary and irrational panic.They are willing to pay 6 per cent peryear for ‘safety’."

Perhaps as investors gradually realisethat sovereign bonds are not the safehaven they once were, especially atminiscule yields, equities – which arenow generally offering higher yields –will benefit from a major asset alloca-tion shift. Although, given the short-term focus of investors, I am not suremany will ever come to this realisation.Investing is not about reacting to short-ter m noise, yet this is what manyinvestors are doing: changing theirinvestment mix one bad news story ata time.

We have recently been doing theopposite amongst all of this volatilityand have been shifting our own portfo-lios to the point where we have recent-ly begun bumping along the bottom ofthe allowable ranges in terms ofcash/fixed interest. This doesn't meanthe balance all needs to be in equities –property, infrastructure and a range ofalternative assets and strategies are alsolooking attractive in the current envi-ronment. And there are ways to make theequity component a lower risk than thebroad market. While we may be wrong inthe short term, we believe that, given theprices we are now paying for earnings andthe health of many corporate balancesheets, these decisions will reward ourinvestors over the longer term.

Having said that, it is true that thisasset shift can make portfolios morevolatile, particularly at times like these.However, sometimes we just need toaccept higher volatility and realise that,at times, volatility is a terrible measureof risk, one that can be totally wrong,telling you shares are at their riskiestwhen they are actually priced mostattractively.

In my view, the key is to remaininvested throughout these difficult times– but in ways that enable clients to expe-rience a low risk of permanent capitalimpairment, to tolerate higher-than-normal volatility, and to benefit fromimproved markets when they come. Asimplied in my last article, active assetallocation with a valuation frameworkat its heart is part (but certainly not theonly) component of this approach.Diversification across assets and strate-gies, in particular less reliance on equity

beta risk, is crucial. Good communica-tion with clients is also important.

It is interesting that to the extent thereare flows into equity funds locally, mostof it is into passive funds, with exchange-traded funds also picking up support.Fees are obviously a big driver, but Iwonder whether this is the appropriatecourse. Not because I don't think returnswill be OK from current levels over thelonger term (although chaotic periodsdo offer good opportunities for stockpickers), but rather that I think manyinvestors won't have the emotionalstrength to ride through the furthervolatility that such funds offer.

I think the investment managementindustry is moving towards a pointwhere it can better deliver the solutionssuch clients require. The move awayfrom the benchmark/relative constraintsof the past and towards moreabsolute/real return-focused, multi-asset solutions incorporating dynamicasset allocation, using a range of strate-gies in mainstream asset classes plussensible utilisation of alternative assetsand strategies, is a quiet revolution. It iscreating more robust solutions for suchshell-shocked investors. And this is notjust something smaller boutiques areoffering. Several large managers areentering the space and more are likelyin coming years.

Such portfolio solutions will tend tounderperform a more traditional port-folio in a raging bull market or dramat-ic rally, but they will still participate.More importantly, they can make thedownside moves shallower and moretolerable to nervous investors.

All up, I believe we are in an environ-ment where, despite the volatility,advisers need to strive to keep clientsinvested in growth assets to a meaning-ful degree. However, they need to beinvested in ways that ensures theemotional rollercoaster of difficultmarkets will not undermine their abilityto stay the course.

Sharp rallies like that of early Octobermay or may not be sustainable. ButOctober’s speed and size certainly doesindicate that an enormous amount ofpessimism had been built into markets inpreceding months, and that only a whiffof clarity on major macroeconomic issuesis needed to move markets dramaticallyhigher in a short period of time.

Let's finish off with some additionalwords from Mittleman.

"Investors in general continue to behaunted by the scarring memory ofSeptember 2008 to March 2009, and thecollective psyche of the investing publicseems to be screaming out ‘Oh no, notagain! I can’t go through that again. Iwon’t!’ …when they should be think-ing, ‘Oh wow, I can’t believe prices areso low again! This time I won’t miss theopportunity!’ There was a lesson to belearned during the September 2008 toMarch 2009 panic, but investors who’vebeen selling recently seem to havemissed it, again."

Dominic McCormick is the chief investmentofficer at Select Asset Management.


“Investing is not about reacting to short-termnoise, yet this is what many investors are doing:changing their investment mix one bad newsstory at a time. ”

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Many years ago, a fundmanger produced a smallpublication titled “Greed,fear and the psychology of

sharemarket investing”. Its commentsare as true now as they were then.

In essence, it noted that in ‘goodtimes’, investors follow newspaper hypeand the lead of others as though there isno tomorrow, and keep investingwithout having regard to the fundamen-tals of the stock market generally, or thestock in which they are investing.Conversely, in bad times, the sameinvestors are prone to panic selling –again, forgetting to consider the funda-mentals.

One of the critical tenets of financialplanning is that planners shouldeducate and ‘condition’ their clients tounderstand that investing is not one-way traffic. In other words, stocks willr ise and fal l , depending upon theeconomic cycle and other factors. Inmost cases where a financial plannerhas correctly assessed an investor’stolerance for risk, the investor is lesslikely to react to short-term ‘dips’ in hisinvestment portfolio.

The current global economic uncer-tainty, however, is causing even thosewho would otherwise be quite comfort-able with the investment decisions theyhave made to now question the advisa-bility of some of those investments. Thisis particularly so, where investors areapproaching retirement only to see thepaper value of their retirement savings

shrinking at an alarming rate.Few would deny that stock markets

throughout the world are experiencingunprecedented levels of market volatil-ity. It is this volatility that is causingeven the most experienced of investorsto doubt some of their prior invest-ment decisions.

More than ever, financial plannershave a critical role to play in steeringtheir clients through the mire. One ofthe issues a financial planner needs toask is how confident can we be that thecurrent state of the world economy isanything more than a short-term ‘bump’.This is a particularly difficult issue toreconcile at a time when world leaders(particularly in the Eurozone and theUSA) seem to be either unable or unwill-ing to make the hard decisions. Despitethe r isks, the perception (from aplanner’s viewpoint) is that many politi-cians are still inclined to place a highervalue on short-term political expedien-cy than national, and for that matter,international interests.

Another issue is that when the globalfinancial crisis first took hold in 2008,governments chose to bail out financialinstitutions which it was believed weretoo large to fail. In consequence, exces-sive private bank debt (brought on by‘cheap’ money and lax banking regula-tions) was replaced by public debt.

Even here in Australia, where we haveone of the better performing economiesin the Western world, government poli-cies have had a tendency recently to rely

on borrowing (deficit financing).A further thing that must be borne in

mind is that should world leaders beunable to resolve the current crisis inthe financial markets, there is a realdanger of much of the developed worldfalling back into recession. Such anoutcome could lead to a softening indemand for commodities and this, inturn, could have a direct impact on thecurrent backbone of the Australianeconomy – mining.

In other words, while Australia to datehas managed to escape the worst of theeconomic downturn, it is not immunefrom negative external developments.

The challenge facing many govern-ments, particularly in the Eurozone, isto find a means to finance their debts.Readers would be aware that majorausterity programs have been intro-duced by many governments, includingthose of Greece, Ireland and Italy in anattempt to stave off default. The conun-drum, however, is that these austeritymeasures themselves can create furtherdownward pressure on an economy byreducing a country’s capacity for growth.

Having regard to the precedingcomments, today’s financial planner hassome difficult challenges. Is it “businessas usual”, or having regard to the currenteconomic circumstances, is it moreappropriate to adopt a more conserva-tive approach in the investment recom-mendations made to clients?

For the longer term investor (at leastfive to seven years) the current econom-

ic uncertainties should offer significantupside opportunities, as and wheneconomic conditions return to some-thing approaching normality. However,even for the long-term investor, now isnot the time (in this financial planner’sview) for investment in highly specula-tive ventures, as these are simply toorisky. Using proven processes and strate-gies, a financial planner should be alert-ing clients to both the risks and oppor-tunities that currently exist in themarket. It’s business as usual.

For investors in or approachingretirement, the challenge is more diffi-cult, as unlike the longer term investorstill earning a regular income, time maynot be on their side. The length of thecurrent economic malaise is such thatmany of these investors have used upall or a large portion of the cash bufferwhich most financial planners will havebuilt into their portfolio. The challengefacing financial planners and theirclients is deciding what investmentsshould be liquidated to provide cash-flow, and what should be retained. Thisplanner is finding that many retireessimply want to cut their losses and getout. Fear has overwhelmed them. Inthese situations, it’s still business asusual managing cl ient needs andexpectations, but with an extra touchof caution.

Michael Carrigan is an authorisedrepresentative of Fiducian FinancialServices.

OpinionPlanning


The current global economic uncertainty has resulted in many investors questioning the wisdomof some of their investment decisions. Michael Carrigan explores ways in which financialplanners can prepare their clients for the new economic environment.

The financialplanner’s

conundrum

On Sunday 11 September theGovernment guarantee ondeposits (officially called theFinancial Claims Scheme or

FCS) was reduced to a $250,000 cap, downfrom $1 million provided since October2008. The lower limit will be a blow toinvestors in that it reduces competivenessbetween the big four banks and theirsmaller competitors, the regional banksand the mutuals (credit societies andbuilding societies). Deposits larger thanthe cap are likely to drift back to the bigfour given their much higher creditquality. The big four will rightly capitaliseon the move and as a consequence weexpect term deposit rates for more than$250,000 to fall in coming months.

However there are strategies availableto retain the government guaranteeand/or the higher rates of return.

The factsFrom 1 February 2012, the new depositguarantee ‘permanent cap’ will be$250,000 and will continue to apply perperson per authorised deposit-takinginstitution (ADI).

The FCS has been confirmed as apermanent feature of the Australianbanking system. This was announced inthe Government’s banking competitionpackage released back in December2010. The announcement on 11 Septem-ber 2011 now provides a ‘permanent cap’of $250,000 (effective from 1 February2012).

In October 2008 the Governmentbrought in the automatic deposit guar-antee capped at $1 million. The guaran-tee was set to expire on 11 October 2011.In the recent announcement, theGovernment has extended the $1 million

limit until 31 January 2012.However, there was one transitional

concession provided in the announce-ment. Term deposits already in existenceas at 10 September 2011 will continueto be covered up to $1 million until theearlier of either the scheduled maturitydate or 31 December 2012.

Accordingly, the following guaranteecap applies to the various scenarios:

• New or existing deposits that matureon or before 31 January 2012 will contin-ue to be guaranteed up to $1 million.

• Existing deposits that have a sched-uled maturity after 31 January 2012 willreceive transitional relief and arecovered up to $1 million until the earlierof the scheduled maturity date or 31December 2012. Such deposits musthave been entered into on or prior to 10September 2011 and investors will not

be able to roll over term deposits thatmature prior to 31 January 2012 to availthemselves of the transitional relief.

• New deposits made from 11 Septem-ber 2011 onwards that mature after 31January 2012 will be guaranteed to $1million until 31 January 2012 and thenrevert to the new cap of $250,000 from 1February 2012.

The Government also announcedsome minor legislative changes itintends to make to the FCS framework.In essence the Government will removethe deposit guarantee for deposits madeby foreign branches of Australian-incor-porated ADIs. The charter of the BankingAct and the Australian Prudential Regu-latory Authority (APRA) is to protectAustralian depositors (and hence notforeign depositors in Australian ADIsoffshore).


OpinionInvestment

The deposit guarantee handicap- and how to win it

The Government guarantee on deposits was recently capped at $250,000. Tamara Radice detailsthe facts about the change and explores options available to investors under the new lowerguarantee limit.

There will also be some amendmentsto improve flexibility for operating theFCS in the unlikely event an ADI is expect-ed to fail. APRA will have the ability totransfer deposits to a new institution andthe Treasurer will be able to activate theFCS before an ADI has formally reachedthe point of winding-up.

Investor optionsA government guaranteed term depositis an excellent investment. The guaran-tee gives the investor the same protec-tion as those investing in Common-wealth government bonds, which areconsidered risk-free as the Governmenthas the ability to raise taxes and printmoney. So, in Australian market terms aCommonwealth government bond anda guaranteed term deposit are the lowestrisk investments investors can own. Thedifference between the Commonwealthgovernment bonds and government-guaranteed term deposits is liquidity.The bonds are highly liquid and thatmeans easily traded. A term depositlocks the investor into a set investment

period, so investors should be reward-ed for that loss of liquidity.

At the moment you can earn more than100 basis points (bps) over the bank billswap rate (BBSW) for a $250,000 one-yearterm deposit. The best rate on offer fromwww.termdeposit.com.au was 5.9 percent from a regional bank. However oneof the major banks was offering a high5.60 per cent, or 145bps over today’s one-year BBSW rate of 4.15 per cent.

Option 1If you or your clients have more than$250,000 to invest, you could split theinvestment between institutions. Atwww.termdeposit.com.au they have rela-tionships with around 60 ADIs, all ofwhom provide access to the $250,000government guarantee. If you were todeposit $250,000 with each one of themyou could potentially invest $15 millionand have the total sum government guar-anteed. It would involve a bit of work toset up but if you’re wanting a governmentguarantee, then it’s worth the initial effort.

The negative with this strategy is that

if you lock in your funds you can’t accessthem without incurring a break fee. Butyou can invest the funds for differentterms to suit your cashflow needs.Remember that shorter investmentperiods will pay lower returns.

Option 2Do some research, or find a third partythat will do the research for you, andmake a risk assessment of the ADI. Keymeasures you’ll need to assess are:

• Size• Geographical diversity• Profitability• Loan book or business risks of the ADI• Deposits-to-loan ratioThe funny thing about the guarantee

is that it has been implied but not explic-it in Australia for years. Can you think ofa financial institution in Australia thathas gone into wind-up and as a conse-quence, depositors have lost money?Pyramid Building Society collapsed, butthe Treasury eventually came to therescue of depositors to the value ofaround $900 million.

The point I’m making here is that theguarantee provides us with a degree ofcertainty that exists implicitly. I thinkthe possibility of a depositor losingmoney in Australia is remote. However,it does exist. As an investor, if you wantto invest more than $250,000 in a singlefinancial institution, you’ll need to makea risk/reward assessment.

The top four banks are low risk as theyare diversified, have significant assetson their balance sheet, and are consis-tently profitable. The low risk nature ofthe institutions means they can paylower rates to attract deposits. Smallercompanies with higher risk will need topay more to attract deposits. But if youare comfortable that they aren’t going togo into liquidation, then you can poten-tially pick up a higher return.

If you also think the risk of loss isminuscule, you would opt to deposityour funds with the institution payingthe highest rates.

Option 3Consider putting part of your cash intobonds for added return. By investing

lower in the capital structure in thosewell-known banks you are confident willcontinue to trade, you can pick up anadditional return. While senior bondsare sl ightly higher r isk than termdeposits, the main benefit they have isthat they are liquid (see the capital struc-ture diagram below). Typically, you cansell at short notice without loss.

Yields on Australian dollar bondscontinue to contract as market expecta-tions for a low-growth economy becomemore widespread. Some of the bondsyou might consider are the Westpacfixed rate bond maturing in February2020, which currently has a yield tomaturity of 6.20 per cent. While thisbond is long-dated it is liquid. Shouldmarket perceptions about interest ratescontinue to contract this bond’s pricewill rise, providing investors with thepossibility of a capital gain (rememberyou can also incur a loss if you need tosell prior to maturity). The other bond Iwould consider is one issued by Nation-al Wealth Management, a subsidiary ofNational Australia Bank. This bond issubordinated debt, so sits under seniordebt and for that reason is higher risk.It has a June 2016 maturity date, has afixed coupon and a current yield tomaturity of 7.2 per cent.

For investors prepared to considerforeign bank issuers, the yields arehigher than those offered by domesticissuers. Australian dollar issued seniordebt is yielding over 7 per cent to matu-rity and some subordinated debt issuesare paying close to 10 per cent.

ConclusionIt seems most of us are uncertain aboutthe future and don’t want to take onadditional debt. The regulatory environ-ment is changing at the same time as thebanks are having difficulty lending. Thismeans we’re likely to see rates go lowerstill. By doing your own research andcomparing what’s available in themarket you can make the deposit deci-sion that’s right for you.

Tamara Radice is the director forinstitutional investment and plannerservices at FIIG.


Lowest risk

Highest risk

Term Deposits

Senior Debt

Hybrids

Equity

Subordinated Debt

Pri

ori

ty o

f p

ay

me

nt

in li

qu

ida

tio

n

Ap

pli

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on

of

loss

es

Source: FIIG Securities Limited

Table: Capital Structure – Bank

By Philip La Greca

As a result of the Cooper Review,rule changes have been imple-mented in relation to therequirements for the ownership

of collectible and personal use assets byself-managed super funds (SMSFs). Theserules will apply to any specified assetacquired after 1 July 2011 and to assetsowned prior to this date, with effect from1 July 2016.

The assets covered include artwork,jewellery, antiques, artefacts, coins, medal-lions and bank notes, postage stamps andfirst day covers, rare folios, manuscriptsand books, memorabilia, wine or spirits,cars, recreational boats, memberships ofsporting or social clubs, and other assetsused or kept primarily for personal use orenjoyment (excluding land).

Questions that often arise regarding theeligibility of collectibles tend to focus onwhen coins and notes qualify ascollectibles, and how bullion is treated.For coins and notes, it is often the casethat their value is different to the facevalue of the currency, and this makes thepurchase of precious metals in the form ofcommemorative coins a collectible.Whereas, it is argued that if it is purchasedin the form of bars or ingots then it is acommodity rather than a collectible.

Outlining the new rules andstandardsFor all collectibles, these changes meanthere are now a series of additional specif-ic investment standards that are to be metby the SMSF, including:

• Asset cannot be leased to a relatedparty;

• Asset cannot be stored in a privateresidence of a related party;

• Documented decision of assetstorage;

• Asset to be insured within seven daysof acquisition in the SMSF’s name;

• Asset not to be used by a related party;and

• If the asset is disposed of to a relatedparty, then it must be at market price andassessed by a qualified independentvaluer.

Each of these standards carries a sepa-rate strict liability penalty of up to $1,100.

In relation to insurance, an issue thatis still to be resolved is whether or not theownership of the policy can be in thename of an entity that may be providing

storage and/or has usage of the asset. Thisis particularly relevant with artwork storedor rented though a gallery where thegallery will be covering the artwork undertheir policy.

Other considerations and measuresto have in placeJust meeting these new standards is notenough. There are several other factorsthat need to be verified for ownership,including compliance with the superan-nuation legislation and satisfaction foraudit. These can be categorised as thefollowing:

• Confirmation the asset or its acquisi-tion does not breach the superannuationinvestment standards – we need to ensurethe prior owner is not a related party ascollectibles are not within the acquisitionsfrom related party prohibition exceptions.The penalty for breaching these acquisi-tion rules may involve gaol time.

• Confirmation of the asset conformswith the SMSF’s written investment strat-egy – we need to consider that collectiblesare generally indivisible and illiquid. Thismeans we need to consider the impact onthe SMSF’s capacity to manage its cash-flow requirements and provide timelyaccess to liquidity to meet both its

expenses and benefit liabilities as they falldue. We also need to consider the rate ofreturn of the collectible. This does notmean that it must produce income, but ifno income is arising from the collectible,then there should be an indication of whyand how capital appreciation is expectedto arise to justify the acquisition as a legit-imate investment.

• Proof of acquisition – unlike shares orproperty, there is no standard acquisitiondocumentation, so sufficient details needto be obtained to identify the actual assetbeing acquired. Apart from a uniquedescription of the item, confirmation thatthe vendor is the owner would be benefi-cial, as well as proof of its authenticity.

• Proof or recognition of ownership –generally, there is no equivalent of aregistry to formally list ownership. Thismeans written records of not only theacquisition, but location of storage anduse (including confirmation by thoseparties provided storage) also adds weightto evidence of ownership.

• Associated transaction aspects – if thecollectible is producing income, then awritten lease should be in place. This willpotentially cover aspects such as care,maintenance and storage of thecollectible. Additionally, as physical assets,

they may be subject to degradation –either naturally or due to other actions –and the costs for maintenance will needto be factored into the overall return onthe asset.

• Ongoing valuation of the asset forboth accounting and member interestpurposes – most collectibles do not haverecognised secondary markets with dailytrading for valuations. Other methods willneed to be used to obtain valuations forthese assets. It is important to note thatthese valuations must be at arm’s length,and the methodology for the valuationshould be justifiable to independentscrutiny.

All this does not mean that an SMSFcannot invest in a collectible, but thatserious consideration must be given to itsappropriateness as an investment,compared with other assets that mayproduce similar returns – particularlywithout the additional red tape.

Finally, for those SMSFs with collectiblespurchased prior to 1 July 2011, examina-tion about whether they will be able to meetthe new conditions should be considerednow, and not left to 30 June 2016.

Philip La Greca is technical servicesdirector of Multiport.


ToolboxHow to work with the new SMSF collectible rules

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Appointments


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

FINANCIAL ADVISERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial planning firm islooking for a financial planner withownership over their client base or strongexisting networks.

You will learn how to save on dealer-group fees, reduce administrative costsand improve your referral stream.

The candidate will have the opportunityto grow their business or sell their clientbase while transitioning to their ownretirement.

For more information and to apply, pleasevisit www.moneymanagement.com.au/jobs orcontact Myra at Terrington Consulting – 0404853 895 / (08) 8423 4466

JUNIOR PARAPLANNERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial planning group iscurrently looking to recruit an energetic,service-orientated junior paraplanner.

The role entails all aspects ofparaplanning and is a great entry-levelposition within financial services.

The opportunity is a part-time positionwith the opportunity of full-timeemployment.

In this role you will be responsible forassisting in the preparation of SOAs, andbuilding and maintaining clientrelationships and compliance procedures.

You will present professionally, haveexceptional communication andinterpersonal, and have the ability towork within a centralised teamenvironment.

For more information and to apply, pleasevisit www.moneymanagement.com.au/jobs orcontact Myra at Terrington Consulting – 0404853 895 / (08) 8423 4466

INSURANCE BROKERLocation: Alice SpringsCompany: Terrington ConsultingDescription: An insurance broking firm isseeking an insurance broker with their ownbook or someone comfortable starting andgrowing a book.

In this role, you will focus on commercialand domestic insurance as you grow newbusiness and promote the company and itsproducts.

To be successful, the candidate will beRG146 compliant and have experience inattracting new business as well as buildingon current client relationships.

To find out more and to apply, pleasevisit www.moneymanagement.com.au/jobsor contact Jo at Terrington Consulting –0408 090 749 / (08) 8423 4440,[email protected]

ASSOCIATE FINANCIAL ADVISERLocation: BrisbaneCompany: Zanetti Recruitment & ConsultingDescription: A financial planning group islooking to recruit a senior paraplanner andprovide the candidate with the opportunityto work up to associate financial plannerwithin 12 months.

You will undertake a defined programunder the mentoring of a senior financialplanner to guide you in your training.

You will have an excellent team ethicand leaderships skills, previous seniorplanning experience, and preferably anADFS. Experience in financial planningsoftware is beneficial.

To find out more and to apply, pleasevisit www.moneymanagement.com.au/jobs

or contact Ric at Zanetti Recruitment –0413 020 864.

SENIOR PARAPLANNERLocation: BrisbaneCompany: Zanetti Recruitment &ConsultingDescription: A privately-owned financialservices practice is seeking a seniorplanner for its inner west office.

The practice specialises insuperannuation and retirement planning,wealth creation, tax minimisation, estateplanning, debt management and wealthprotection.

In this role, you will support a smallteam in producing compliant SOAs andmaintain a high level of technical andproduct knowledge through ongoinglearning and development.

You will possess a DFS, a minimum oftwo years experience as a paraplanner anda good knowledge of the financial servicesindustry.

To find out more and to apply, pleasevisit www.moneymanagement.com.au/jobsor contact Ric at Zanetti Recruitment –0413 020 864.

WILSON HTM has announcedthat managing director SteveWilson will be replaced by thecurrent head of private wealthmanagement Andrew Coppin,effective 27 October 2011.

Wilson will retire after 27years with the company in anumber of senior roles. Thefirm stated that the leadershipchange is part of a transitionprocess for the 2012 financialyear and beyond.

Wi l s o n H T M c h a i r m a nSteven Skala said Coppin’sbroad wealth managementexperience in internationaland Australian firms wouldhelp to grow the business asa n i n d e p e n d e n t a d v i s o r yfirm.

ZENITH Investment Partnershas made a number ofappointments fol lowing amajor inter nal companyrestructure.

Assuming the investmentanalyst role, Jonathan Bairdwas previously responsible forproducing equity analysis,performance and attributionanalysis for Australian Unity.

Due to his extensive expe-rience in retail investment,A r y e h K r a e m e r h a s b e e na p p o i n t e d d a t a a n a l y s t .B e f o re j o i n i n g Z e n i t h ,Kraemer provided investment

i n f o r m a tion and productadvice as a superannuationconsultant at ESSSuper.

Su s a n Ho d g e s has beenappointed client and salesadministrator due to her 15years of experience in market-ing, having previously held therole of supervisor and seniorclaims analyst.

Wright also announced theappointment of ChristopherHuang as investment analystas part of the newly-createdZenith Alternatives Researchteam.

T. ROWE Price has announcedthe appointment of He a t hBranigan as business develop-ment manager focused onadviser distribution.

Based in Sydney, Braniganwill be responsible for build-ing relationships with financialadvisers, with a particularfocus on Victoria, New SouthWales and Western Australia.

Branigan was previouslyI N G In ve s t m e n t Ma n a g e -ment’s wholesale businessdevelopment manager, andprior to that sold alternativestrategies to clients acrossEurope. He also worked withA M P Ca p i t a l in Wester nAustralia for three years.

“T. Rowe Price continues toinvest in capabil i t ies and

personnel to better serve theAustralia market,” said nation-al manager, adviser distribu-tion for T. Rowe Price Interna-tional Darren Hall.

“Heath’s hire is a continua-tion of this long-term plan.”

B R AV U R A S o l u t i o n s hasappointed Dar yl Wright asproduct marketing manager,global wealth management.

Wright will report to Bravurahead of product for globalwealth management DarrenStevens, and will work with theproduct, sales and marketingteams to develop productmarketing strategies for theglobal wealth management

division, focusing on clientneeds and identifying markettrends.

Wright previously workedfor D e l o i t t e as a seniormanager, marketing and busi-ness development. He has alsoworked in both Australia andthe United Kingdom in variousfinancial services and soft-ware-related marketing,product and business develop-ment roles, including Legal &General and Reuters.

IRONBARK Asset Manage-m e n t has announced theappointment of Luci Douez askey account manager.

As part of her role, Douez

will be responsible for servic-ing the f inancial planningcommunity in Victoria, SouthAustralia and Tasmania. Shehas over seven years experi-ence in the financial servicesindustry and previously heldkey account roles with INGInvestment Management andGoldman Sachs JBWere AssetManagement.

Commenting on theappointment, Ironbark headof distribution Alex Donaldsaid Douez is highly regardedamongst the financial plan-ning community and thecompany was committed toproviding a high level ofser vice within the retai lmarket.

Move of the weekAMP Limited has appointed ColinStorrie as chief financial officer (CFO),effective 1 January 2011.

Storrie will replace current CFOPaul Leaming, who will retire at theend of the year after almost 14 yearsof service.

Storrie first joined AMP earlier thisyear as deputy CFO and group treasur-er. Prior to this role, he was CFO forQa n t a s and ser ved as a boardmember, and previously held financeand accounting roles in investmentbanking and the NSW Government. Colin Storrie

““ “You could have written thescript to this before coming in.”

Former Treasury secretary Dr Ken

Henry AC on the debate on corporate tax

at the 2011 Tax Forum.

“…Are we now at risk of linedancing around the Great Hall tothe strains of ‘Love is in the Air’?”

Assistant Treasurer and Minister for

Financial Services and Superannuation

Bill Shorten gets sentimental over the

2011 Tax Forum.

“This is a pledge in blood...”

Opposition Leader Tony Abbott gets

serious on no carbon tax under a

Coalition Government.

Out ofcontext

OUTSIDER is fond of trivia in most social settings,but when he’s attempting to digest complicatedmarket commentary (and more importantly, hislunch) it can be rather trying.

Guests at a recent Fidelity luncheon settledinto their chairs to discover a handheld electronicpin pad on their tables. They were duly informedthat the pin pad would instantly relay theiranswers to financial general knowledge questionsthroughout the two-hour luncheon.

Given his disdain for all things technological,Outsider was quick to volunteer a fellow hack asthe operator of the device.

In the short breaks between speakers, Out-

sider and his team of fellow journalists were pum-melled with questions like “When did the DowJones Industrial Average first break 10,000points?”, and “When did Australia last go intorecession?”

Unfortunately, the media table failed to trou-ble the scorers, and was nowhere to be seen onthe leaderboard for the duration of the luncheon.By Outsider’s reckoning, his table answered ameasly three of the eight questions correctly.

But perhaps it isn’t completely surprising thatthe media table fared so badly at the quiz. Asone self-deprecating colleague was heard toremark: “We’re only journos, after all!”.

Outsider


Legless conference crawl

League of gentlemen?Generally no knowledge

OUTSIDER always looksfor ward to conferenceseason with a mixture ofeagerness and trepidation.The lead-up is always filledwith serene thoughts oflazy afternoons chinwag-ging with fellow financialservices types on the golfcourse.

But inevitably, once theconferences get into fullswing (ahem) thesedaydreams are quicklywashed away by the realityof airport lounges, taxis,conference halls, network-ing functions, and ofcourse, those relentlessdeadlines.

Of all of the above, it’sthe interstate travel and

red-eye flights that can getto be the most grinding,but Outsider has longsince adjusted to thisnecessary evil.

However, he now has anervous eye cast towardssaid flights, given the dailyupdates regarding theQantas strikes. The flyingkangaroo seemingly cancelsmore flights every day – tothe point where Outsiderwould be reluctant to bookwith the Aussie icon until itsaffairs are back in order.

It seems not that longago to Outsider that anAssociation of Superannu-ation Funds of Australiaconference in far northQueensland was seriously

disrupted by the collapseof domestic carrier Ansett(although, maybe 2001wasn’t all that recent, givensome of the younger MoneyManagement journos claimnot to even remember acompany cal led Ansettoperating f l ights inAustralia).

Regardless, once bittenmeans twice shy, andOutsider will be going tolengths to ensure hisdisrupted travel from thatevent is not repeated.Hopefully, this will involvebooking ahead with a lowcost carr ier, becauseOutsider fears his besthitchhiking days arebehind him.

OUTSIDER is all admira-tion that even amid thechal lenges provided byvolatile markets and theodd salar y freeze, hecould scan the crowds atRugby World Cup gamesin New Zealand andspot a few f inancialservices identities.

By the time Outsider’sfollowers read thisparticular edition ofMoney Management,they will know whetherthe Wallabies havedefeated the All Blacksand made it through tothe final, and whetherthey will be playingeither France or Wales.

Some people havemore riding on theoutcome than others,and Outsider canreport that MoneyManagement’s MikeTaylor is standing byhis wager with inveter-ate All Blacks supporter,ANZ Wealth’s Paul Barrett, and

h e k n ow s t h a t a c e r t a i nNational Australia Bank exec-

utive of Welsh heritage whocancelled his regular Sundaygolf gig in the knowledge thatwin, lose or draw, he wouldb e i n n o f i t s t a t e t o d r i v eacross Sydney.

The only people whoseemed to be sanguineabout the outcome were theguys at BNP Paribas, wherethe knowledge that LesBleus were vying for aplace in the final seemedto not have made it ontothe Gallic radar.

As for the boys over atInvestec, so far as Outsidercould tell, the only personwho seemed genuinelyhappy was former Wallabyhooker, Phil Kearns.

Outsider remembersgetting plenty of cheekfrom English colleaguesduring the cricket season,

but they have been strange-ly silent where discussion of

matters relating to rugby unionare concerned.

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 (october 20, 2011)

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