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Vol.25 No.45 | November 24, 2011 | $6.95 INC GST
The publication for the personal investment professional
www.moneymanagement.com.au
FUNDS WARNED ON THIRD PARTY PROMOTERS: Page 6 | PLATFORMS: Page 14
Low-cost products defy ISN campaign By Mike Taylor LOW-cost products introduced over the past 12 months by major providers such as Colonial First State, BT and AMP may have served to undermine the assumptions and disclaimers underpinning the Industry Super Network’s (ISN’s) ‘compare the pair’ advertising campaign. The Federal Opposition has specifically asked the Australian Prudential Regulation Authority (APRA) to check whether the new products have changed the underlying assumptions contained in the advertisements. If the assumptions are proved to be wrong, then the ISN will be faced with the need to withdraw the advertising pending any corrections that need to be made. The key questions around the ISN advertising assumptions
David Bushby were placed on the Senate Notice Paper by Tasmanian
Liberal Senator David Bushby, who has raised a number of issues with APRA over its handling of industry superannuation funds, including whether the ISN advertising might be in breach of the sole purpose test or give rise to the possibility of future class actions. In a written follow-up to questions he raised during Senate Estimates Committee hearings late last month, Bushby has asked APRA to “confirm that the assumptions (contained in the ISN advertisements) do not include the current mainstream low-cost retail super products which currently account for approximately 50 per cent of net flows”. In doing so, Bushby cited AMP Flexible Super, FirstChoice Wholesale Super, and BT Super for Life. He asked whether on the basis
of the introduction of these new products, the assumptions attaching to the ISN advertisements “therefore might overstate the costs of retail funds which generate the long-term projection numbers included in the advertisements”. The Australian Securities and Investments Commission has also been asked questions in the Parliament relating to the industry superannuation fund advertisements. The accuracy of the assumptions attaching to the ISN advertisements are crucial to them being sanctioned by the regulators. Opposition Senators have questioned whether those calculations have changed to take account of the newer retail products. Last week APRA wrote to all registrable superannuation entities (RSEs) reminding trustees
Platforms call for FOFA deadline extension By Milana Pokrajac
MAJOR platform providers have called for parts of the Future of Financial Advice (FOFA) reforms to be delayed due to lingering uncertainty with respect to grandfathering and opt-in arrangements. Companies working in the financial services sector will have until 1 July 2012 to make final adjustments to their business models, IT and compliance systems, but BT’s head of platforms Chris Freeman said the industry still hasn’t got clarity in terms of what FOFA will bring. “We’ve got the FOFA announcement, but we’re still waiting to see where we Mark Spiers land with transition arrangements and also grandfathering,” Freeman said. Colonial First State (CFS) and IOOF have been particularly vocal on this issue, with both institutions lobbying the Government – directly and through industry associations – to extend the FOFA deadline. IOOF general manager of distribution Renato Mota said the Government was underestimating the amount of change platform providers need to deal with in terms of systems and processes. “Six months, which is the timeframe we’re dealing with for some of the change – and we’re yet to find out the
Chris Freeman finer details for some of these components – is really an unrealistic timeframe,” Mota said. Uncertainty around opt-in, transition arrangements and grandfathering of fees and volume rebates presents one of the major challenges for platform providers, according to CFS general manager for product and channel development Peter Chun. But CFS is also hoping for parts of FOFA to be delayed to 2013 so the final deadline can coincide with the introduction of MySuper. “It’s actually incredibly impractical having two sets of changes being
forced upon existing clients; if there is just one start date, it would be a much more customer-friendly outcome,” Chun said. Mota agreed that synchronising implementation dates of some of the FOFA proposals and MySuper would make sense. “As a platform you cannot look at each of the regulatory regimes in isolation,” he said. “To get the best possible outcome you need to look at all the regulatory change in aggregate and try to implement something that’s hopefully going to cover more than one of those requirements.” Developing opt-in solutions presents another one of the challenges for platforms, because the current FOFA draft does not address many possible scenarios, according to OneVue’s chief executive officer Connie McKeage. “If the client doesn’t opt-in within a specified period of time, you’ve got to turn off the revenue for the adviser; but if you turn it off and the client comes back and says ‘I didn’t mean to do that’, can you then go back and pay retrospectively to the adviser?” McKeage said. “It’s a very complex scenario to try and implement in this market – and with such ambiguity remaining, with the time ticking.” For more on platforms, turn to page 14.
that they remained responsible for the activities of third-party fund promoters, including marketers. While the APRA letter did not specifically mention the television advertising campaign, it was clear it fell within the fund promoter criteria. The letter said that APRA expected fund trustees would exercise their own independent and informed judgement in relation to decisions concerning the fund, including on such matters as product design, investment strategy and the types of investments that the RSE licensee is to offer its members. “RSE licensees should not be unduly influenced by the expectations or interests of third parties (which may possibly include the expectations or interests of Fund Promoters),” the APRA letter said.
Leadership teams crucial to business growth
Mark Spiers By Chris Kennedy AMID a scramble from several major institutions to acquire extra scale in terms of distribution, retaining and acquiring key leadership personnel is also crucial to business development, according to BT’s general manager of advice Mark Spiers. BT recently announced the appointments of key DKN and Lonsdale executives Phil Butterworth, Mario Modica, Kon Costas and Andrew Rutter to lead a new business unit, following the acquisition of Continued on page 3
Editor
Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Journalist: Keith Griffiths Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2011. Supplied images © 2011 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.
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Professionalism comes at a price
T
he moment members of the Financial Planning Association (FPA) voted to become a professional association, and in doing so, dispense with the organisation's long-standing principal member category, it became a foregone conclusion that the consequences would show up on its balance sheet. There should therefore have been little surprise last week when the FPA annual report revealed a before-tax deficit of $542,670 for the year ending 30 June 2011. While the deficit revealed in the annual report was due, in part, to some accounting changes, it has been no secret within the FPA that the changes necessary to become a professional association – the clear-cut separation of advice from product – would leave a revenue black hole of sizeable proportions. Simply put, by opting to dispense with the principal member category, FPA members not only removed something that could be perceived as an obvious link between advice and product, they also cut off a lucrative source of revenue. In many respects, the inevitable revenue shortfall encountered by the FPA must be seen as just a part of the cost of pursuing professionalism and breaking with the conventions of the past. It follows that the
In many respects, the “inevitable revenue shortfall encountered by the FPA must be seen as just a part of the cost of pursuing professionalism and breaking with the conventions of the past.
”
organisation must find other ways of sustaining itself that do not conflict with its professional ideals. This will not be easy in circumstances where, looked at objectively, the FPA is now reliant on the support of its financial planner members – most of whom could best be described as running small to medium-sized businesses. On all the available evidence, financial planner members of the FPA are willing to support their organisation in pursuing specific projects – something which was evidenced by the money raised via a levy
to support the current round of print and television advertising. However, the FPA knows it must go further than simply relying on membership fees and raising specific levies. It knows it must find sustainable long-term revenue streams via the provision of products and services that meet the needs of its members. This is no easy task when weighed against the attractiveness of the large-scale corporate support of the past. That the FPA has no shortage of critics is evidenced almost every day in comments posted on Money Management's website, but if the events of 2011 have proved nothing else, they have proved the good sense of financial planners pursuing the ideal of professionalism and eliminating some of the stereotypes of the past. While financial planners have been right to rail against many elements of the Gillard Government's Future of Financial Advice changes, they also need to recognise the bipartisan political support that exists for a financial planning industry based on professionalism rather than product sales. They also need to recognise that becoming a profession comes at a price that some might be unwilling to pay.
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2 — Money Management November 24, 2011 www.moneymanagement.com.au
– Mike Taylor
News
Treasury asleep at the wheel on FOFA By Benjamin Levy THE Financial Planning Association (FPA) has raised concerns about Treasury’s admission that its failure to conduct a regulatory impact analysis on the Future of Financial Advice (FOFA) reforms breaches best practice regulations. FPA general manager of policy and government relations Dante De Gori placed the issue under the spotlight at the FPA conference in Brisbane. In evidence to a Senate Estimates Committee hearing last month, Treasury officials admitted they had not done a full regulatory impact analysis on the FOFA bill and that this breached the Federal Government’s best practice regulations. The Government’s Office of Best Practice Regulation had found that changes
Treasury officials “admitted they had not done a full regulatory impact analysis on the FOFA bill. ”
Dante De Gori
such as opt-in were not assessed as adequate for the decision-making stage, said Shadow Assistant Treasurer Mathias Cormann last month. Because the true impact to consumers hasn’t been measured by Treasury, questions need to be asked about the impact figures that are being quoted and who
came up with them, De Gori said. Since Bowen announced the reforms in April last year, through all the changes in policy, there has been no official modelling into a regulatory impact statement, De Gori said. De Gori urged delegates to continue to go out and inform their local MPs about the impact FOFA would have on consumers. At least talking to local MPs will mean they will know what they’re voting for when the bills are passed, even if they vote in favour of the legislation, De Gori told delegates. “Your local MP may not understand what they’re voting for; with 235 pieces of legislation [passed by the Government] they cannot understand the ins and outs of each of those pieces of legislation and what the impacts are,” he said.
Leadership teams crucial to business growth Continued from page 1 the DKN Group by IOOF. Spiers said BT was looking to build an A grade team and was prepared to invest in the best people in the market, bar none. “It comes back to that old adage; people don’t leave organisations, usually they leave leaders,” he said. “If you find talented leaders, usually you find talented direct repor ts under them; like breeds like. We’re prepared to invest in the best people in the market,” Spier said. Matrix Planning Solutions managing director Rick Di Cristoforo said that if an institution viewed a potential group as having value from a distribution point of view, then “you would think the skills around managing and handling distribution challenges and the way you put groups together would have to have some value as well”. Institutions would have to look at the teams in ter ms of the group’s overall infrastructure and ask how that infrastructure was put together. As for whether the r ight leadership teams could help attract quality advisers to a group, Di Cristoforo said it was more
likely that a poor reputation would act as a negative screen. If people have a reputation for not necessarily focusing on an adviser’s needs they will find themselves in a difficult position trying to put a group together, he said. If a leader had a reputation for being wonderful in terms of building a team, in terms of distribution or of delivering advice, then an adviser may look at that. But a more sensitive issue would be if they had heard of that person doing the wrong thing – which could cause advisers to steer clear, he said. Di Cristoforo would not be drawn on his future in the event that Matr ix acquires an institutional backer, and added that his current focus was on the Matrix advisers. Spiers said wealth management is all about people and knowledge. “ Those two assets are absolutely critical success factors for any wealth management business. Everyone should be close to their people and know who their talent is; and have strong development, engagement and leadership plans in place to attract clients, to retain talent and grow talent,” he said. www.moneymanagement.com.au November 24, 2011 Money Management — 3
News
ASIC revokes AFS licence from Mark Power Financial By Andrew Tsanadis THE Australian Securities and Investments Commission (ASIC) has cancelled the Australian financial services (AFS) licences of Adelaide business Mark Power Financial Pty Limited (MPF) and Mark Raymund Power, effective from 14 November. According to ASIC, MPF’s business involved authorising individu-
als and companies to provide financial services which include the provision of financial product advice and the trading of such products as derivatives, foreign exchange contracts and securities. ASIC’s investigation found, among other breaches, that MPF had failed to carry out appropriate background checks before appointing authorised representatives; failed to determine whether its
representatives complied with financial services laws; failed to identify and remedy various misleading or deceptive statements on the websites operated by its authorised representatives; and failed to have in place a robust mechanism for remedying breaches. The regulatory body determined that, as the responsible manager for MPF, Power does not understand the obligations of an
AFS licence and lacks knowledge of legal requirements relating to the appointment of authorised representatives. ASIC stated that no findings have been made in its investigation about the conduct of any authorised representatives. MPF and Power have applied to the Administrative Appeals Tribunal seeking a stay and review of ASIC’s decision.
Matthew Rowe
FPA pushes professionalism By Mike Taylor
THE Financial Planning Association (FPA) has pointed to a future in which there are no Australian Securities and Investments Commission (ASIC) bannings of professional financial planners. FPA chairman Matthew Rowe made the call when opening the FPA's national conference in Brisbane. He pointed to a professional environment in which planners exacted their own standards on their peers. Rowe and FPA chief executive Mark Rantall both used the conference opening to restate their call for restricting t h e u s e o f t h e te r m ‘financial planner’. Rowe reinforced the message by saying not one of the planners banned by ASIC this year had been a member of the FPA. T h e i r c a l l s a ro u n d exc l u s i ve u s e o f t h e term ‘financial planner’ came ahead of an a d d r e s s by A s s i s t a n t Treasurer Bill Shor ten scheduled for this afternoon. 4 — Money Management November 24, 2011 www.moneymanagement.com.au
News Paritech licence suspended Advisers need to dispel insurance myths By Benjamin Levy
THE Australian Securities and Investments Commission (ASIC) has suspended the Australian financial services licence of financial software provider Paritech for 12 months after the company failed to comply with a number of its obligations as a financial services licensee. ASIC found that Paritech failed to lodge financial statements, auditor reports and auditor opinions over consecutive years, in breach of both its legal obligations and licence conditions, despite repeated demands from ASIC to comply. It did not advise ASIC of these breaches. Paritech develops computer software packages to provide general financial product advice to retail clients. According to their website, over 200,000 investors, traders, brokers and finance institutions use Paritech online trading and investment systems and tools. Major clients include IOOF Portfolio Online, JB Global Investment Services, Menzies Securi-
ties, Martin Place Securities and Halifax Investments Services, according to the website. According to an ASIC spokesperson, suspension of Paritech’s licence means it has to cease trading, including servicing existing clients. ASIC said it may consider revoking the suspension period in the event Paritech lodges the outstanding reports. Paritech chief executive Rick Klink said that the 2009 and 2010 accounts had been lodged, but not in the correct sequence due to a change in the company’s auditors. He said the suspension only affects Paritech’s retail clients rather than their wholesale clients, and the firm would be issuing a press release shortly. When contacted yesterday, one client who uses their software was unaware of the suspension. JB Global said they use one Paritech Pulse terminal that provides a function that isn’t provided through IRESS, and the impact of the Paritech situation on JB Global clients will be zero.
THE advice industry is failing to do enough to convince consumers of the need for adequate insurance cover, according to Tim Browne, general manager for retail advice at CommInsure. Speaking at CommInsure’s insurance roadshow in Melbourne, Browne said financial advisers had an obligation to make clients aware of the financial and personal cost of being underinsured. Financial advisers need to arm themselves with the facts to dispel myths that clients will never fall ill, insurance was too expensive, and insurance companies never pay out claims. Advisers know about all the problems, and
yet talking about the issues of underinsurance was becoming a lost art, Browne said. Consumers also need to be warned away from doing insurance themselves, as it would still not solve their underinsurance problems, he said. CommInsure has implemented a new website for planners and increased the amount of data and marketing material online, and introduced a new range of courses within its Risk Sales Academy offered to advisers to increase their insurance sales. They also announced widespread upgrades to its life insurance offering, including lowering work thresholds on income protection for part time workers, more cancer benefits, and adding 33 new occupations that are covered for income protection in the mining industry.
Tim Browne
Bond ETFs need to be explained By Milana Pokrajac ANoverwhelming majority of financial planners and brokers agree bond exchange traded funds (ETFs) need to be better explained before they are accepted and they can recommend them to clients, according to a survey commissioned by Russell Investments. The survey found that more than half of financial advisers and brokers were ready to embrace bond ETFs, with 36.5 per cent seeing this product as a substitute for term deposits. Director of ETFs at Russell Investments Amanda Skelly
said bond ETFs have experienced significant growth, accounting for 18 per cent of total ETF assets. “However, this result definitely shows we as an industry need to do more to educate people in Australia about the benefits for advisers, brokers and the end investor,” she said. When selecting which of their client segments they viewed as most suited to bond ETFs, brokers and advisers gave the most votes to self-managed super funds with 77 per cent, while post-retirees came in second (61 per cent) followed by high net worth individuals (42 per cent). The survey was conducted by CoreData on behalf of Russell Investments, involving 104 participants.
…5 years and still delivering Navigating up and down markets, Australian equity manager Greencape has consistently delivered outperformance… 1 year (%)
2 years (%) p.a.
3 years (%) p.a.
Greencape Wholesale Broadcap Fund
–5.49
–1.11
4.66
4.32
5.10
S&P/ASX 300 Accumulation Index
–8.71
–4.14
–0.10
–0.71
–0.17
3.22
3.03
4.76
5.04
5.27
Greencape Wholesale High Conviction Fund
–5.78
–2.21
3.08
5.11
6.02
S&P/ASX 200 Accumulation Index
–8.56
–4.09
–0.11
–0.68
–0.13
2.78
1.88
3.19
5.79
6.15
Outperformance
Outperformance
5 years Inception* (%) p.a. (%) p.a.
Performance is calculated after fees.
Greencape is a stable and experienced team of investment professionals, whose aim is to deliver superior, repeatable performance. Greencape’s focus is purely on investing.
*Inception: 11/09/06. Performance is calculated after fees and assumes reinvestment of distributions. Past performance is not a reliable indicator of future performance. The information in this document is current as at 30 September 2011 and is provided by Challenger Managed Investments Limited ABN 94 002 835 592 AFSL No. 234 668 the issuer of the wholesale units in the Greencape Broadcap Fund ARSN 121 326 341 and Greencape High Conviction Fund ARSN 121 326 225. The information is general information rather than advice and does not take into account the investment objectives, financial situation and particular needs of an investor. Each person should obtain and consider the Product Disclosure Statement (PDS) for the Fund and consider whether or not the Fund is appropriate for them before deciding whether to acquire, continue to hold or dispose of units in the Fund. A copy of the PDS can be obtained from www.challenger.com.au.
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www.moneymanagement.com.au November 24, 2011 Money Management — 5
News
Super funds warned on third party promoters By Mike Taylor THE way in which superannuation funds are marketed by third parties has been flagged as an issue by the Australian Prudential Regulation Authority (APRA). The regulator has written to superannuation fund trustee boards reminding them that, as Registrable Superannuation Entities (RSEs), they remain at all times legally responsible for
commonly outsourced activities and that “fund promoter” activity including marketing must be treated as “material business activity”. While the APRA letter does not specifically mention television advertising such as the Industry Super Network’s (ISN) ‘compare the pair’ campaign, such campaigns run by third par ties fall under the fund promoter activity descriptor. The regulator said it had
noted that despite the obligations of superannuation fund trustees to treat marketing and other fund promoter activity as a material business activity, there were many examples where this was not occurring. “APRA has obser ved that there are numerous examples in the industr y in which outsourced activities to fund promoters are not being treated by RSE licensees as ‘material business activities’ that need to
Resources investors keeping eye on China
satisfy the requirements of the Outsourcing Standard,” the regulator’s letter said. It said that, specifically, there had been cases in which the requirement to have in place a material outsourcing agreement – with the prescribed terms and conditions – had not been met. The letter said that RSE licensees were reminded that APRA also expected that they would at all times exercise their own independent and informed
judgement in relation to decisions concer ning the fund, including on such matters as product design, investment strategy and types of investments that the RSE licensee is to offer to members. “RSE licensees should not be unduly influenced by the expectations or interests of third parties (which may possibly include the expectations or interests of Fund Promoters),” the letter said.
ASIC asks research houses to manage conflicts By Chris Kennedy
CHINESE demand will be the key factor influencing the price of resource stocks both in Australia and overseas, regardless of whether specific countries trade with China directly, according to Perpetual. Many countries are likely to put up the price of the commodities exports (in response to China’s firm hold over its currency) in the form of new taxes and levies, which will increasingly become a task for investors to manage, according to Perpetual’s global resources portfolio manager James Bruce. This could create both opportunity and risk, with the potential of higher prices across the board down the track, he said. Investors will also need to watch this political risk, he said. The likes of Peru, Chile, Kazakhstan, Zambia and the Democratic Republic of Congo have all added various taxes and levies in the past two years, according to Bruce. Australia’s carbon tax and mineral resource rent tax (MRRT) also represent significant political risk, and Bruce said the market may be underestimating the long-term impact of the MRRT in particular. There is also concern in the resources market that European contagion could impact China, which
consumes half the world’s commodities, he said. “What gives me confidence in China is the Government has the levers at its disposal to manage the economy. Those levers are many and varied, whereas the levers of governments in some of the Western world countries are broken,” he said, referring to low interest rates and higher unemployment in many western states. “From our point of view, value is what we’re most interested in, and we’re seeing some wonderful opport u n i t i e s i n t h e m a r ke t a t t h e moment to buy some high quality stocks,” he said. Value is driven by the extraction process and the access to markets, and that’s what Perpetual looks at; assessing the value of the ore body, how it is extracted, the cost of the extraction and how efficient the company is in getting the product to market, he said.
THE Australian Securities and Investments Commission (ASIC) has released a research paper proposing research report providers, including research houses, separate their business units in order to manage conflicts of interest and improve confidence in the independence and quality of research reports. This would involve strict physical and electronic separation between units such as the consulting and funds management services and the research business, ASIC stated. ASIC is seeking feedback on whether conflicts of interest such as report providers accepting payments from product issuers can be effectively managed, or whether they should be avoided altogether. ASIC is also proposing research houses lodge a biennial report addressing research methodology and processes, internal c o n f l i c t s m a n a g e m e n t p ro c e d u re s, conflicts disclosure to users, and managing research quality and transparency. Consultation Paper 171, Strengthening the regulation of research report providers ( i n c l u d i n g re s e a rc h h o u s e s ) , f o l l ow s conversations ASIC had with financial planning industry associations and their members. These conversations addressed the issues of real or perceived conflicts of interest arising from research houses’ revenue models, the adequacy of skills and
Greg Medcraft experience of research analysts in producing quality research, and the lack of transparency and comparability for research methodology. There was also a disparity in the expected role of research houses between the advice firms and researchers themselves. Advisers thought research houses should cover less products in more depth, while some research houses saw it as their role to provide coverage for a range of products in each market segment, ASIC stated. A S I C c h a i r m a n G re g Me d c ra f t s a i d research report providers are a significant gatekeeper and can influence which products advisers recommend, and it is expecte d t h e y a d h e re t o h i g h s t a n d a rd s o f conduct.
Macquarie offers ordinary shares to employees By Andrew Tsanadis ELIGIBLE employees will each be offered up to $1,000 of ordinary shares under t h e Ma c q u a r i e G r o u p Employee Share Plan. Macquarie stated that the shares will be allotted on or about 28 December 2011 to around 6,024 eligible employees. The exact
number of shares will be advised after the allotment, the group stated. “The ordinary shares will be issued at the weighted average price at which ordinary shares are traded on the ASX in the one-week period up to and including the trading day prior to the allotment date and will ra n k p a r i p a s s u w i t h a l l
other ordinary shares then o n i s s u e,” Ma c q u a r i e’s release read. Macquarie stated that the offer is subject to ASIC C l a s s O rd e r ‘E m p l oye e share schemes’ and shareh o l d e r a p p r ov a l i s n o t required for the issue of ordinary shares. In the company’s annual general meeting in July,
6 — Money Management November 24, 2011 www.moneymanagement.com.au
Macquarie chief executive Nicholas Moore said there were challenging conditions ahead for the company. The latest announcement follows Macquarie posting a net profit after tax of $305 million for the halfyear ended 30 September 2011, down 24 per cent on the same period last year.
Nicholas Moore
News
ATO focuses on high net worths By Mike Taylor
THE Australian Taxation Office (ATO) has confirmed it has identified and is monitoring the compliance of 2,660 Australian high net worth individuals, including getting in contact with their accountants and advisers. The degree to which the ATO is looking at high net worths has been revealed by the Tax Commissioner, Michael D’Ascenzo, while addressing a conference in New Zealand. The Tax Commissioner referred to the continuing growth in international transactions associated with high net worths and said data sharing, mining and matching had proved particularly useful in the ATO’s work. He said that as at June this year, the ATO
had identified and was monitoring the 2,660 high net worth individuals. He detailed the most common risks associated with the group as being capital gains tax not being returned, access to company profits other than via dividends, overseas interests and international dealings, and arrangements involving trusts. “Our data analysis has become sophisticated to the point that we can not only better identify these individuals, but we can usually link them back to entities they control, in order to provide a bigger picture of their wealth,” the Tax Commissioner said. “As with our other business lines, we apply a differentiated approach to this sector, so that our resources are used to focus on those high wealth individuals who pose the greatest risk of non-compliance,” he said.
Michael D’Ascenzo
Comfortable retirement costs increase, ASFA says THE amount needed for retirees to fund their post-work lifestyle continues to increase, albeit slowly, according to the Association of Superannuation Funds of Australia (ASFA) Retirement Standard. A couple looking to achieve a comfortable retirement will need to spend $55,316 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $31,767 a year, according to figures from the September quarter – an increase of 0.7 per cent from June 2011.
Retiree households on average have somewhat different spending patterns to the rest of the population, ASFA said. “Along with generally owning their own home outright, they don’t tend to spend as much on education services,” ASFA stated. “In contrast, food, health, transportation and recreation spending form a large part of retiree budgets.” Despite a slight decrease in cost of food in the September quarter, there was an increase of 6.4 per cent over the year to September 2011.
FPA in the minus By Milana Pokrajac THE Financial Planning Association (FPA) has recorded a before-tax deficit of $542,670 for the year ending 30 June 2011, according to the newly released annual report. The closure of its Melbourne office, significant restructuring costs and advertising levies over the past 12 months, combined with the FPA’s revenue sliding down from almost $11.3 million in 2010 to $10.8 million in 2011, led to the association incurring an overall loss. The decrease in revenue, according to the FPA, could be attributed to a 6 per cent decrease in conference and seminars revenue and reduced enrolments revenues from the previous year for the Certified Financial Planner designation. A very large revenue decrease came from almost half a million dollars in lost sponsorship and contributions for the Value of Advice advertising campaign made by FPA Principal members. The FPA no longer offers Principal membership, as voted by existing members at last year’s annual general meeting. The main reason the revenue was down, however, was due to the FPA removing its Chapter accounting from the reports, according to chief executive officer Mark Rantall. “The Chapters run many events in their local region and a decision was made to allow them to carry over any surpluses from one year to the next, and therefore they will no longer have an impact on the FPA operating accounts; other variances are minor and reflect fluctuating operating conditions.” Despite the revenue loss and a reported deficit, Rantall said the association’s financial position remained “very strong”, with more than $5.8 million in member funds as reserves.
S&P
FUND AWARDS
2011 AUSTRALIA
www.moneymanagement.com.au November 24, 2011 Money Management — 7
News
WHK shuns vertical integration By Chris Kennedy FUTURE of Financial Advice (FOFA) reforms will mean advice groups will either move down the vertical integration path towards a hybrid model or focus purely on the professional advice model, according to WHK head of financial services John Cowan. FOFA changes have helped WHK focus i t s b u s i n e s s m o d e l f ro m a g ro u p o f disparate businesses. WHK will now focus purely on an advice model rather t h a n g o i n g d ow n t h e i n c re a s i n g l y popular vertical integration path, he said. The vertically integrated model has been favoured by some larger groups such as Count and DKN, which were headed down that path even before their m ov e s t o a l i g n w i t h C B A a n d I O O F
respectively. The vertically integrated or institutional advice model will suit those clients who do not wish to pay a “professional” fee for advice and hope to receive advice for $300, Cowan said. The sales of groups like DKN and Count to institutions will also provide an opportunity for the remaining nonaligned groups such as WHK to pick up quality advisers who do not wish to work under the institutional model, he said. W H K i s l o o k i n g a t a m e a s u re d approach to growth, and would be open to conversations with both individual advisers and practices that would be a cultural fit for the group, he said. WHK now uses a badged wrap platfor m from BT that does not feature volume rebates. This agreement is a clear sign of the group’s FOFA readiness and commitment to lower fees, Cowan said.
John Cowan
Volatility dogs CommBank’s wealth management By Mike Taylor
Ralph Norris
MARKET volatility is continuing to challenge the wealth divisions within the Commonwealth Bank, according to the big banking group's latest quarterly trading update filed on the Australian Securities Exchange last week. Commenting on the September quarter data, the bank said market conditions had "continued to create headwinds for Wealth Management". It said Funds Under Management and Funds Under Administration had declined by 2.7 per cent and 3.7 per cent respectively during the quarter due to negative investment returns, partially offset by foreign exchange gains as the Australian dollar pulled back from some of its recent highs.
However, the banking group said FirstChoice and Custom Solutions had experienced positive net inflows of $408 million and $321 million respectively during the quarter. Looking at insurance, the quarterly update said in-force premiums grew by 2.3 per cent in the quarter, with good growth in retail direct life and general insurance. While the overall quarterly update revealed unaudited cash earnings for the quarter were approximately $1.75 billion, chief executive Ralph Norris said operating conditions remained challenging amid the continuing global economic uncertainty. He said that given the continuing volatility and economic uncertainty, the Commonwealth Bank would be maintaining its conservative business settings.
ECB bond buyout could relieve Euro debt drama: Russell By By Keith Griffiths AN unconditional promise from the European Central Bank (ECB) to be the buyer of last resort for Italian bonds would provide reassurance to the market, according to Russell Investments chief investment strategist Andrew Pease. However, if the ECB does not commit to large-scale Italian bond purchase then the markets will continue to freefall, he said. “Rising bond yield make investors worried about Italy’s ability to repay its near $2 trillion of outstanding debt. As a result investors demand higher interest rates on Italian bonds, marking them even more concerned about Italy’s ability to repay,” Pease said. According to Pease, Italy’s main problem as opposed to Greece’s is one of solvency. While Italy has a debt-toGDP ratio of 120 per cent, its primary
Andrew Pease fiscal position indicates revenues are almost equal to spending. This makes the debt manageable at current interest rate levels. However, if yields continue to rise beyond 7 per cent Italy becomes effectively insolvent. Pease said if the crisis continues to escalate the ECB would have no other
8 — Money Management November 24, 2011 www.moneymanagement.com.au
option than to act as the buyer of last resort. “While it won’t mean the end of Europe’s problems by any stretch, it will mean that the risk of an uncontrolled illiquidity-driven crisis is effectively over,” he said Russell thinks the biggest risk facing the US is Europe pulling down the banking sector. Going forward Pease thinks that eventually (sometime after 2013) the housing market could be the trigger for growth there and provide the kick-star t to the rest of the economy, with demand stimulating other parts of the economy such as infrastructure and utilities. Locally, Russell is more cautious on the rationale for lower interest rates and sees this as very much driven by employment trends. “We’d expect another cut if employment continues to trend lower post the slowdown in GDP growth we witnessed in the first half of this year.”
IRESS launches UK division WEALTH management sof tware provider IRESS has launched a wealth management division in the UK following its appointment as technology provider by Sesame Bankhall Group (SBG) – the UK’s largest financial advice group with more than 3000 advisers. The UK division has been set up with a local management team including directors from financial services consultancy group AT8 Group, who will be responsible for delivery to SBG and building a broader local team, IRESS stated. The team will wind down their current operations and be retained as executives of IRESS. The UK market is undergoing wide-ranging reforms similar to Australia’s Future of Financial Advice reforms, including a shift to feefor-service. This will require many advisory firms to change their business models and will also require a new generation of software, IRESS stated. Iress and SBG have entered a long-term strategic agreement where Sesame Bankhall will deploy XPLAN to its adviser network. IRESS managing director Andrew Walsh said the UK represented a strategic growth opportunity for IRESS and the deal was significant for both parties.
ASIC obtains orders against Australia AFT Finance Market By Andrew Tsanadis THE Australian Securities and Investments Commission (ASIC) has obtained interim orders in the Federal Court in Adelaide against Australia AFT Finance Market Pty Limited (AFT). According to ASIC, AFT is currently running an unlicensed financial services business and previously operated a website that promoted trade in forex, metals and contracts for difference (CFDs) through the MetaTrader 4 platform. The regulatory body also stated that it is concerned that the contents of AFT’s website contained false statements that the company was established as a result of the merger between Adelaide Finance Market Co Limited and Brisbane Financial Securities Co. Limited. No companies with those names have been incorporated in Australia, ASIC’s investigation found. The commission is also concerned t h a t w h i l e A F T i s i n c o r p o ra t e d i n Australia, the company’s sole director appears to have never been a resident of Australia. T h e c o u r t o rd e r s o b t a i n e d o n 4 November restrain AFT from marketing any financial product and providing any financial product advice. The orders have also frozen over $180, 000 currently held by the company in a foreign exchange account, ASIC stated. ASIC stated that the matter would return to court on 8 December 2011.
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News Incentives, not compulsion, the best path for super: Cormann By Tim Stewart SHADOW Minister for Superannuation Mathias Cormann has reaffirmed that t h e Co a l i t i o n w i l l n o t re p e a l t h e increase in the superannuation guarantee (SG) from 9 to 12 per cent, despite its in-principle opposition. Rather than raise the SG, the Opposition preferred to increase the retirement savings of Australians by providing incentives for voluntary contributions, Cormann said. “We have been concerned about the Government’s moves to dramatically cut t h e c o n c e s s i o n a l s u p e ra n n u a t i o n contribution rates, which has severely restricted people’s capacity and enthusiasm for making additional voluntary contributions,” he said. To explain the Opposition’s position, he pointed to the Henry Review, which recommended that the SG remain at 9 per cent. He added that the Henr y Review found an increase in the SG would hurt low and middle-income earners by reducing their pre-retirement quality of life. With the increase in the SG projected to cost $3.6 billion once fully phased in, Cormann said the Government would
HUB24 adds seven dealer groups to client list By Milana Pokrajac
Mathias Cormann be unable to fund it with the Minerals Resource Rent Tax, which he said was expected to raise $3 billion. The Opposition would also improve competition in the superannuation industry, Cormann said. “If the current Government has not acted to implement an open and transparent process for the selection of default funds, we will act on that very swiftly upon coming into Government,” he said.
HUB24 has added seven dealer groups and three separately managed account (SMA) managers to its client list, the platform provider has announced. Ord Minnett, Paradigm, Financial Force, Avestra, Bristol Street, Gleneagles Securities and Global Prime have selected HUB24’s investment platform for their advisers and brokers. HUB24 chief executive officer Darren Pettiona said the platform also added three more SMA managers, bringing the total to 31 portfolio managers and 67 SMA funds which currently sit on the platform. Many platform providers have recently moved to secure their distribution networks, ahead of the prospective ban on all volume rebates passed down from platforms and/or fund managers to dealer groups. IOOF has recently acquired DKN, the Commonwealth Bank of Australia made a move on Count, and netwealth bought Paragem Dealer Services. “With the imminent enactment of the
Darren Pettiona Future of Financial Advice reforms, an increasing number of dealer groups are seeking ways to participate in the manufacturing process,” Pettiona added. He also confirmed the release of HUB24’s retail superannuation and insurance options targeted for later this year, in addition to a self-managed super fund administration service that is already integrated into the HUB24 Investment Service.
ETF investors return to risk AXA’s upgraded North By Chris Kennedy EXCHANGE-traded-fund (ETF) investors returned to riskier assets in October as fears eased on the European debt crisis and US corporations showed positive third quarter earnings, according to BlackRock. Money flooded back into equity and high yield bond funds during October, according to the BlackRock Investment Institute’s latest ETF Landscape report. BlackRock managing director Kevin Feldman said while flows into exchangetraded products (ETPs) suggested a preference for safe haven assets in early October, this was overtaken by a move to equity assets and high yield bonds later in the month. “Flows during October demonstrate that the risk-on trade has definitely resumed,” he said. Investors placed US$21.3 billion into equity ETPs during October, particularly
in funds and products offering exposure to North American and German equities, according to BlackRock. Emerging market equity ETPs attracted US$4.1 billion of new assets following two months of heavy outflows, while high yield bonds attracted US$2.4 billion globally during the month. Gold ETPs gathered US$2.0 billion during the month and $7.3 billion year to date, while demand for commodities faltered, the report found. In Europe, physically-backed products gained market share from synthetic ETPs over the past three months. “While the ETP industry had strong asset gathering overall, in Europe, the fortunes of physically- backed and derivative-backed products have diverged over the last three months, with investors showing a preference for funds and products that purchase the underlying assets,” Feldman said.
Vow Financial launches Vow Legal FINANCIAL services group Vow Financial has b ra n c h e d o u t f u r t h e r, launching a legal service to its broker network. Vow, which earlier this year launched a financial planning service and i n s u ra n c e s e r v i c e, h a s for med a joint venture
with national legal firm Astill Legal Group. Astill offers online conveyancing, and the partnership will allow Vow to roll out the service to its broker network, as well as services around estate planning, self-managed super, wills, business and corpo-
rate law, according to Vow Financial head of marketing Matt Mitchener. The service will feature standard pricing nationa l l y, w h i c h f o r m o s t brokers will be lower than what their current solicitor would be charging, Mitchener said.
10 — Money Management November 24, 2011 www.moneymanagement.com.au
product doubles inflows A COMBINATION of an expanded offering and caution from investors has helped AXA’s Nor th platform double its net inflows in the September quarter compared to the same time last year. “In a quarter where people have been reluctant to invest money due to markets, our net cash flows have doubled compared to the same quarter last year [to] $242 million,” said AMP director of sales Barry Wyatt, who was previously AXA’s general manager of marketing and strategy prior to the merger with AMP. But he said the North business had really expanded since developing it into a full wrap offering, including direct share trading, 200 managed funds and a variety of term deposits, rather than just the guarantee. Investors were also star ting to split their accounts into four subaccounts, he said. These included a cash strategy to meet short-term needs; an investment portfolio for generating income (including a combination of high-yielding stocks and income securities); a high growth por tion designed as a long-term investment based on equities; as well as the traditional North guarantee component. “That way clients can manage short-term volatility because they have security. If markets drop 20 per
cent, it’s in the longer-term portion – which has time to recover,” he said. North will continue as a standa l o n e o f fe r i n g s e p a r a te to t h e Summit and Generations platforms and AMP’s Flexible Super – although Summit and Generations are still on track to migrate over to the same technology that currently underpins North, Wyatt said. Summit and Generations are still on sale, and serve as a complement to North, offering slightly different things. AMP Flexible Super also forms an interesting combination to North, because its pricing makes it cheaper than most industry funds and creates the opportunity for clients to start off as industry fund-type accumulators in AMP Flexible Super, then move into North closer to retirement, he said. “They’re complementary, they’re different ends of the spectrum. The group [AMP/AXA] is comfortable with the two separate offers.”
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SMSF Weekly SPAA attempts to bust ‘overselling’ myth By Tim Stewart THE Self-Managed Superannuation Fund Professionals’ Association (SPAA) has moved to refute the ‘myth’ that selfmanaged superannuation funds (SMSFs) are being oversold by financial planners and accountants. Speaking at the Association of Superannuation Funds of Australia (ASFA) in Brisbane, SPAA technical director Peter Burgess said there was a perception in the industry that unscrupulous advisers were convincing their clients to set up SMSFs in order to charge them a fresh set of fees. “It seems to me that if we had
a problem with overselling, we would expect to see a downward trend in the average balance of SMSFs. That is clearly not happening – the average balance and the median is increasing,” Burgess said. Another piece of evidence against the ‘myth’ of overselling was the lack of any increase in the number of compliance breaches, he added. SPAA chair Sharyn Long said she believed the SMSF sector had changed, and was addressing the issue of overselling. “You can’t necessarily control everyone out there, but I think the level of compliance and the requirement to do the right thing is increasing,” she said.
However, the ASFA audience was unconvinced that the myth had been adequately ‘busted’ by the SPAA speakers. When asked to raise their hands if they thought the myth had been disproved, only one hand went up. Burgess also tackled the myth that SMSF members tend to be “old and rich”. While he acknowledged the average balance of a SMSF was $900,000, he said a small number of very high-balance accounts skewed the data. The median figure of $300,000 gave a better picture of the state of SMSF account balances, Burgess said. As for the ages of SMSF
SMSF issues overblown By Damon Taylor
ONE of the constant criticisms of selfmanaged super funds (SMSFs) is the number of gaps that persist in the sector’s overall framework, and yet according to Chris Malkin, principal and head of superannuation audit and consulting for WHK, the issue is being built up as far more of a concern than is warranted. Speaking specifically to the prevalence of dominant trustees and ensuring appropriate insurance cover, Malkin said there were obviously clear advantages to obtaining insurance through superannuation. “Insurance from any superannuation fund, be it self-managed or otherwise, is obviously very good because the life component of its premium is tax deductable to the fund,” he said. However, according to Malkin, a trustee’s decision as to whether or not to leverage that insurance advantage did not imply any particular gap. “Personally, I don’t think there are any gaps,” he said. “Because I don’t think it should be compulsory to have insurance through any superannuation fund, even though it’s certainly advantageous to do so.” And as for a perceived prevalence of dominant trustees in self-managed super, Malkin said the legislated responsibilities of being a trustee, and more importantly education around that, should void any such issue. “As far as trustee arrangements and trustee responsibilities are concerned, t h e l aw s i mp l y s ay s t h a t w h a t ’ s expected of a trustee of a super fund i s t h a t w h i c h wo u l d n o r m a l l y b e expected of a reasonable person in exercising their duties towards that fund,” he said. “And I don’t think you
members, he said 30 per cent were under 50 years of age. He added that the average age of SMSF members was decreasing. Another ‘myth’ about SMSFs was that there would be a problem when SMSF trustees reached their mid-80s and could no longer administer their funds. However, Burgess said this was not a problem, since under Section 17A of the SIS Ac t , S M S F t r u s t e e s c a n appoint a person to administer the fund when they are no longer capable. He added that another option was to covert the SMSF into a small-APRA fund, which wouldn’t mean closing the fund.
Macquarie launches new SMSF-related product By Mike Taylor
need any more education on that than what is available at the moment. “ T h e ATO ( Au s t r a l i a n Ta x a t i o n Office) has got some great publications to educate trustees, but one of the really good things about self-managed super funds and the legislation that surrounds them is the fact that you can’t escape the requirement to be skilled in running your own affairs.” According to Malkin, fund trustees should know that if they’re getting a tax concession to put money into their own superannuation fund, there is no such thing as a free drink. “A, you can’t get the money before you’re entitled to it and B, while the money is in the fund, you’ve got to look after it in certain ways that are befitting the tax concessions that you’re getting,” he said. “And one of those ways is ensuring that you’re educated enough to know what you’re doing. “You’ve got to realise that if you sign your life away as being a trustee of anything, you’ve got a whole lot of responsibilities that you need to be aware of.”
12 — Money Management November 24, 2011 www.moneymanagement.com.au
Peter Burgess
Macquarie Specialist Investments has launched a new product aimed at helping self-managed superannuation funds (SMSFs) and other investors migrate out of cash. The new product, Macquarie Step, is described by Macquarie as offering investors access to share market growth while delivering 100 per cent capital protection at maturity. Discussing the launch of the new product, Macquarie Specialist Investments head Peter van der Westhuyzen said recent volatility and uncertainty in the
Peter van der Westhuyzen market had left many investors facing the dilemma of knowing that while an investment in the sharemarket might deliver
higher returns, it might also increase the risk of them losing their capital. “Many of our clients are now looking for new investment solutions which allow them to use their own capital without the need for borrowing; providing them with market exposure and benefits of capital protection at maturity and portfolio diversification,” he said. van der Westhuyzen said the new product might prove useful for investors who remained cautious about the sharemarket, but were still heavily invested in cash but at the same time concerned that their portfolio is under-diversified.
Key licensing deal delivers for accountants AXA and MLC have entered into an arrangement with the Institute of Public Accountants (IPA) to help deal with the new regulatory environment which has evolved out of the removal of the accountants’ exemption under the Government’s Future of Financial Advice legislative proposals. Under the arrangement, members of the IPA will be able to choose from five licensing solutions provided by AXA and MLC. Once qualified, members will have the ability to advise clients in relation to the
establishment and closure of selfmanaged superannuation funds (SMSFs), advise on assets including direct property, life risk, and give general advice in relation to superannuation. Commenting on the arrangement, IPA chief executive officer Andrew Conway said the new service would enable members to provide a full range of financial planning and financial advice services to their clients”. The benefit for AXA and MLC is that the companies will have greater access to the accounting sector via the IPA’s membership.
InFocus RISK SNAPSHOT Planners’ satisfaction with insurers
77%
Rated their provider as good or very good
34
%
Stopped using at least least one insurer over the past year
23
%
Propping up the bar The Financial Planning Association seems determined to “raise the bar” on professionalism in the industry, but as Mike Taylor reports, this might take much longer than just a few years.
W
hen the Financial Planning Association (FPA) held its annual conference in Brisbane last week, it was the proud claim of its chief executive Mark Rantall that it was being attended by more practitioner members than at any time in the past. Given the key decisions taken by the FPA earlier this year to become a professional association, Rantall might have been disappointed if a larger number of practitioner members had not been attending the conference. But for all that the theme of the conference was “raising the bar”, and that both Rantall and FPA chairman Matthew Rowe exhorted delegates to embrace professionalism and earn the respect of the Australian public, the conference exhibition hall was still largely inhabited by product manufacturers – making it difficult to argue that the link between product sales and advice can ever be entirely broken. What was clear from the words of Rowe and Rantall is that their vision for the FPA is that it will become the financial services equivalent of the Australian Medical Association (AMA) – a professional body fully supported by a membership of professionals. However, something which also became clear from the words of both men is that they were hoping they might extract from the Government’s Future of Financial Advice (FOFA) process legislation restricting the use of the term “financial planner” to those who are appropriately qualified and who are members of a suitable professional body. As Rowe told the conference, he wanted to
see the emergence of an environment in which the Australian Securities and Investments Commission did not announce the banning of financial planners because the ethical standards of the profession were being maintained by the professionals themselves. What Rowe wants to see is an environment in which the discipline of professional financial planners is maintained by the ethical pressure of their peers. Rantall, in exhorting those attending the FPA conference to support the organisation in its crusade towards professionalism, told delegates that the FPA “had their back”. He said that during the process of the Government’s drive towards the implementation of its FOFA legislation, representatives of the FPA had attended more than 100 meetings, and that this is reflective of the organisation “having the backs of its members”. However, there is plenty of evidence to suggest that while the FPA has worked hard to maintain a viable relationship with the Government on FOFA, little of this effort was reflected in the shape and content of the first tranche of the legislation, particularly the eleventh hour inclusion of an exacting fee disclosure requirement. Rantall has made clear to the Government that the FPA cannot support the first tranche of the legislation, but it was evident that the organisation was hoping it might be able to support most, if not all, of the second tranche. Something which would secure that support, and represent a major win for Rantall, would be the Government delivering not only the legislative restriction on the term “financial planner”, but also the endorsement of the FPA as the professional organisation of
choice for the industry. While the FPA has followed a conventional strategy in dealing with the Government on FOFA, the Association of Financial Advisers (AFA) has adopted an approach so robust that the Minister has made his displeasure clear. However, in circumstances where both the FPA and the AFA have found themselves rejecting the first tranche of the FOFA legislation, there exists a perception that the more conventional approach pursued by Rantall and Rowe has not entirely paid dividends. This, of course, is unfair but Shorten now needs to deliver something tangible which the FPA can take to its members as absolute proof that it does, indeed, “have their backs”. The measure of the success or failure of the FPA’s lobbying approach will be contained in the second tranche of the FOFA legislation and Rantall and Rowe will be hoping that it includes a specific approach referencing the use of the term “financial planner”. In the event that the Government ultimately delivers on the FPA’s agenda, the challenge for the organisation will be to deliver on its promise to create a profession which carries the trust of the Australian public. This will not be easy in circumstances where the term “financial planner” or “financial adviser” have become generic, and where bodies such as the Industry Super Network continue to pursue advertising campaigns which question the value of advice and the role of financial planners. With or without Government support, the FPA’s noble objective of creating a genuine profession seems likely to be something achieved over decades, rather than a few years.
Seeking new or additional insurers over the next year Source: Investment Trends 2011 Planner Risk Report
What’s on
Financial Services Council Deloitte Lunch 30 November 2011 Four Seasons Hotel, Sydney www.fsc.org.au
VIC GenXt Social Networking Party 1 December 2011 CQ Functions, Melbourne www.afa.asn.au
AFA Sydney Chapter Christmas Lunch 8 December 2011 Hilton, Sydney www.fpa.asn.au
The Superfund Reform Summit 2012 7 February 2012 CQ Functions, Melbourne www.superfundreform.com.au
Effective Business Forecasting Conference 2012 14 February 2012 Park Royal Darling, Sydney www.cpaaustralia.com.au
www.moneymanagement.com.au November 24, 2011 Money Management — 13
Platforms
Platforms are facing pressure from all sides, Milana Pokrajac writes. How will they deal with changing adviser demands, low investor sentiment and fast approaching regulatory deadlines? Key points z
Platforms are experiencing FOFA fatigue z Most providers are moving to secure distribution networks z The number of platform owners in the market was reduced from 16 in 2006 to nine in 2011 z Platforms are introducing new offerings to satisfy investor apetite for cash
THERE is so much to do and so little time to do it. With fast approaching regulatory deadlines and shifting investor/adviser demands, these are definitely challenging times for investment platforms. Big or small, institutionally owned or not, the impact of continuing market volatility, plummeting investor sentiment, proposed changes and the increasing focus on cost will be significant. The pressure is mounting from several sides and platform executives are seeing both challenges and opportunities pop up before their eyes. But just how will they cope with numerous changes?
Land-grab game As of 1 July 2012, all volume rebates passed down from platforms to dealer
groups will be banned. Despite industry-wide support for this proposal, institutions and platform providers now have to secure their distribution networks. Although the AMP/AXA merger might have started the latest round of consolidation, we have recently seen IOOF’s acquisition of DKN and Commonwealth Bank of Australia’s proposed purchase of Count Financial not long after that. But for Connie McKeage, chief executive officer of platform provider OneVue, the ever-growing market consolidation presents a major challenge. “We need the support of either institutionally owned planning groups who have some independence left or the independent financial planning sector,” McKeage said, adding OneVue does not own product distribution channels. “When institutions buy up dealer groups they are buying up our distribution because we don’t own it the same way that the large firms do.” However, some non-institutionally owned platform providers decided it would be best to make a move. Just over two weeks ago, netwealth announced the purchase of Paragem Dealer Services, while HUB24 added seven more dealer groups to its client list. “We are not in a position, nor are we keen, to buy a large dealer group, so we’ve been looking at different ways to make sure we can increase our footprint,”
netwealth managing director Matt Heine said. “Through the purchase of Paragem [Dealer Services] we get access to a huge network of independent financial planners, which is a part of the market that we work very closely with.” There is one major player, however, which hasn’t made a move yet, and that’s BT Financial Group. Apart from Westpac Financial Planning, Securitor and Magnitude (which are owned by the banking group), DKN was a big supporter of BT Wrap prior to its acquisition by IOOF. “We are closely watching the consolidation in distribution at the moment,” said BT ’s head of platforms, Chris Freeman. Freeman said the BT strategy before it was bought out by Westpac was to build the best product and service, regardless of who owned the distribution channel. “There is still an element of truth in that, and if you continue to invest in the platform and have the most functionality at the right price, people will still use you, because they otherwise have to build their own – and we all know how expensive that is,” he said. BT Wrap and SuperWrap have generated by far the biggest inflows over the year to June 2011 and have the largest amount in funds under management (see Figure 1). However, the company was quick to snatch DKN’s former chief, Phil Butterwor th, following the buyout of the
Chris Freeman dealer group.
Shifting market - shifting offerings Securing continued support for products by way of acquisition alone will not cut it in today’s market environment. Platform providers are realising that investors’ thirst for cash and defensive assets is not just a quick fad resulting from the financial crisis, and many are moving to introduce more attractive offerings than those of managed funds. Term deposits, in particular, are proving to be a hit. Just under a year ago, ANZ-owned
Figure 1 Platform and Wrap analysis ALL MASTER TRUSTS, PLATFORMS & WRAPS Company Product
FUM Jun-11
Inflows YE Jun-11
Outflows YE Jun-11
Net Flows YE Jun-11
Investment Earnings YE Jun-11
FUM Jun-10 37,236.0
BT Financial Group
SuperWrap & Wrap
40,612.8
21,694.8
17,053.4
4,641.3
1,006.3
MLC
MasterKey
34,557.9
4,841.6
5,655.4
-813.8
2,285.3
33,565.3
AMP Financial Services
Flexible Lifetime
27,420.3
4,506.7
6,102.3
-1,595.6
1,989.5
27,412.3
Colonial First State
FirstChoice
24,844.5
4,577.1
4,811.8
-234.6
1,752.9
23,399.0
Colonial First State
FirstChoice Wholesale
24,273.2
9,113.2
6,382.7
2,730.5
1,733.5
20,240.9
Macquarie Investment Man.
Macquarie Wrap Solutions
22,163.0
6,085.5
4,314.1
1,771.4
1,226.0
21,001.9
Source: Plan for Life
14 — Money Management November 24, 2011 www.moneymanagement.com.au
Platforms OneAnswer platform introduced six new ANZ term deposits which have generated more than half a billion dollars in inflows, while BT has had $3 billion in term deposit inflows on its platform since 2009. Colonial First State (CFS), too, is currently promoting its FirstRate Investment Deposit on FirstChoice. “Given the demand for safer, more secure investment options and basic, simple to understand products, we’ve been developing income generating solutions,” said CFS general manager for product and channel development, Peter Chun. While cash-style products are important, platforms also need to accommodate other shifts in the market, such as the increased use of exchange traded funds (ETFs) and separately managed accounts (SMAs). HUB24 chief executive officer Darren Pettiona said platforms will start to include a lot more of direct investment options. “What was the big traditional fund manager and management expense ratio model will start to disappear in some shape or form,” he said. “We’ll see a lot more things like bonds, partial bonds, fixed income instruments, direct equities, ETFs, SMAs, and a lot more cash.” In April this year, AXA rolled out a twotiered approach to pricing – a lower, discounted rate for certain investments and a full rate for others, Burgess said. “Platforms have a huge role to play in helping advisers demonstrate the value of their advice when they come to implement their advice through a platform – being able to be confident about what
Figure 2 Market share (based on priary adviser relationships) CFS First Choice (incl.Wholesale)
17%
BT Wrap
15%
Macquarie Wrap
9%
Asgard
9%
MLC
5%
Source: Investment Trends Planner Technology Report, July 2011; based on a survey of 1394 planners
“
We also know that pricing is raising its head again, and a number of competitors out there are putting competitive offers out on the table. - Steve Burgess
”
Steve Burgess they’re putting in place and being able to show it to the client either on the screen or through a printout actually really does underpin and support the whole approach to the client,” he said. “We also know that pricing is raising its head again, and a number of competitors out there are putting competitive offers out on the table,” said AMP/AXA head of platforms, Steve Burgess. For MLC, though, the platform market is falling into two distinct categories: investment solutions needed for the majority of investors and the platform needs of a high net worth (HNW) client base. “In HNW we continue to see the trend towards self-managed super funds, direct shares, greater control and flexibility in investment offerings and investment choice,” said Michael Clancy, executive general manager of investment platforms for MLC and NAB Wealth. MLC Wrap, he said, was specifically designed for that market, while MasterKey Fundamentals caters for the masses. “We are doing a significant relaunch in the next few weeks; in that market space we see investors are looking for … more absolute return options, with markets being as volatile as they have been,” Clancy said.
ASX AQUA - opportunity or threat? Competition in the platform space is fierce, and isn’t coming just from within the sector. The Australian Securities Exchange (ASX) hopes to launch the second part of its AQUA project in April 2012, which will allow the listing of managed funds and structured products, and provide electronic settlement services through its Clearing House Electronic Subregister System (CHESS). “It’s about encouraging managed funds to quote their prices on the ASX, so we can introduce the efficiency of CHESS,” said Richard Murphy, general manager of equity markets at the ASX. “As you know, applications and redemptions at the moment are 100 per cent paper-based, fax-based, with cheques flying around Australia.” However, the ability of investing in managed funds on the ASX will put pressure on platforms, according to former chief executive officer of platform provider Praemium, Arthur Naoumidis. “The platforms are owned by the big banks who own fund managers – from what I hear, there is a lot of resistance from the big names,” Naoumidis said.
“Independent fund managers are happy to play, because all of a sudden they’re not tied to a platform, there are no shelf fees and they can be traded on the ASX.” While some see it as a threat, Murphy said AQUA would provide opportunity for platforms in terms of adopting the CHESS system and dumping physical paperwork. Colonial First State and AMP stated they had been discussing the new AQUA framework with the ASX for some time, and considering potential opportunities for the funds management side of the business. “We see it as an alternative channel – it is going to be very attractive for stock brokers and their clients to be able to access managed funds via the ASX,” said Peter Chun, adding that platforms have primarily been supported by financial planners, who will continue to use them. A platform is about wrapping administration and reporting functions around wholesale investments – a service AQUA does not offer, according to Burgess. “I could definitely see a continued role for the administration hub that is the wrap platform to perform for advisers and clients,” Burgess said.
FOFA fatigue Just like every sector in the financial services industry which will be affected by the proposed Future of Financial Advice (FOFA) reforms, platform providers have also been working on the new requirements for more than two years. Volumebased payments to dealer groups will be banned, and so will volume-based shelf space fees coming from fund managers; there are compliance requirements to be implemented, as well as the opt-in solution to cater for planners. Many platforms have already developed different contingencies to implement (depending on where FOFA lands), but they cannot quite get on with the changes. “We also operate in the MySuper space,” said Peter Chun. “Given the staggered start date (1 July 2012 for FOFA and 1 July 2013 Continued on page 16
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www.moneymanagement.com.au November 24, 2011 Money Management — 15
Platforms Continued from page 15 for MySuper), it’s actually incredibly impractical having two sets of changes being forced upon existing clients.” CFS has been involved in lobbying the Government both directly and through industry associations to extend some aspects of FOFA to coincide with the MySuper deadline. “If there is just one start date it would be very beneficial and [there would be] a friendlier customer outcome, as we won’t have to put them through two sets of changes,” Chun said. ANZ Wealth’s head of OneAnswer and employer superannuation Mark Pankhurst agrees. “We are talking about very big, complicated and complex registry systems,” he said. “We could meet the deadline, but I believe that without clarity and without legislation in place, that creates challenges and could mean that you could spend far more money, time and effort building things you might not actually use if legislation changes. “We would prefer to see an extension, and we would like to see a situation where an implementation date could be 2012, but ultimately we would like an opportunity to actually implement over another year,” Pankhurst added.
We would prefer to see an “extension, and we would like to see a situation where an implementation date could be 2012, but ultimately we would like an opportunity to actually implement over another year. - Mark Pankhurst
”
Opt-in deadline stress There is definitely a ‘wait and see’ approach being adopted by platforms, especially with respect to the development of an opt-in solution for financial p l a n n e r s. At a re c e n t r o u n d t a b l e conducted by Money Management, CFS general manager for strategy Nicolette Rubinsztein said Colonial would adopt a two-stage approach to future platform development. The ability to capture the client information and the fee information, she said, would be developed in the first instance, while the next build – which only needs to happen in two years time – will be developed afterwards. The Government hasn’t provided much certainty as to how grandfathering will work, and many claim there is just not enough time to make significant changes by the time opt-in is implemented in July next year. There are many questions regarding opt-in yet to be answered. “Even things like if [the clients] don’t opt in within a specified period of time, you’ve got to be able to turn off the revenue for the adviser; but if you turn it off and the client comes back and says ‘I didn’t mean to do that’, can you or can you not then go back and pay retrospectively to the adviser?” OneVue’s Connie McKeage pointed out. However, there is another, very obvious issue. Many clients have assets on multiple platforms, which makes it difficult for a single provider to collect all of the information and manage the whole process. OneVue has acknowledged this issue, and is looking to set up a stand-alone opt-in solution which is not limited to just the OneVue platform. “By t h e t i m e e v e r y b o d y s e n d s through their reports, clients will be inundated with information, and they’re going to be very confused unless there is a standard format in the industry,” McKeage said. “It’s a very complex scenario to try and implement in this
market, with such ambiguity remaining and with the clock ticking,” she added. But whether platforms can come up with a common approach to opt-in is yet to be seen. Over the past few years, there has been a rationalisation of the number of platforms planners use for their clients, and according to Matt Heine of netwealth, planners will have to pick a primary platform and potentially use it as a method to scrape their fees. “People are making sure that their back office is as tidy as possible, and FOFA is going to continue to drive that back office efficiency requirement,” Heine said. Some, however, have acknowledged that the real opt-in solution might sit at the adviser technology level with some of the financial planning software providers.
Figure 3 Consolidation in the platform market
Have conflicts been removed? Removing conflicted remuneration models across the industry is one of the most supported FOFA proposals. As of 1 July 2012, payments based on volume that are paid from the fund manager to the platform provider and from the platform provider to the licensee will no longer be permitted. But it seems most platforms have been ready for this change for some time now. Many providers, such as AMP, HUB24 and OneVue do not charge shelf space fees at all, but rather charge dealer groups a flat-dollar administration fee. Others, like BT, do charge shelf-space fees, but Chris Freeman says the volumebased component is gone. “The total fund manager payment amounts to 2 per cent of our total revenue,” he said. “What it means for us is that it’s an administration clawback rather than a profit driver.”
16 — Money Management November 24, 2011 www.moneymanagement.com.au
Source: Wealth Insights
Platforms
“
Paying extra so you get access to your advisers is really conflicted; charging [fund managers] fees is double-dipping – it’s platforms using their muscle to control distribution. - Darren Pettiona
”
Darren Pettiona Preferred partner programs are part of some providers’ remuneration models, too. As par t of some deals, fund managers pay additional fees to platform providers that buy them greater access to advisers via additional marketing and distribution opportunities. BT Advantage and Asgard Preferred Partners programs involve such deals, while AMP and netwealth also r un similar programs. AMP charges a voluntary additional fee, whereas netwealth selects fund managers for its preferred partner program based on ratings, and passes on the discount to the end client. Nevertheless, some industry participants see this service as a clear conflict. “Paying extra so you get access to your advisers is really conflicted; charging [fund managers] fees is double-dipping – it’s platforms using their muscle to control distribution,” said HUB24’s Darren Pettiona. However, in an interview conducted by Money Management in December 2010, Treasury’s general manager for the corporations and financial services division, Geoff Miller, said eliminating payments with the potential to create conflicted
advice was the focus of proposed FOFA reforms — and that preferential deals between platforms and fund managers weren’t causing much concern. “They are getting so far removed from the advice that’s actually given to the client that we feel less [worried] with that type of payment,” Miller said. Treasury is more concerned with stopping conflicted remuneration methods between platforms and dealer groups, and dealer groups and advisers, with further steps to be decided upon consequently.
A tale of two platforms Any debate about conflicts of interest leads to a debate about vertical models and consolidation in the financial services industry. This consolidation was initially driven by the global financial crisis, and then (as some would argue) by the proposed FOFA reforms (see Figure 3). Do platforms provide a product agnostic service or are they products themselves? For some, it’s whether a platform is owned by a product manufacturer. Smaller players have been particularly vocal on this issue. “The reason we are not a product is because we don’t own any of the products
on the platform,” said OneVue’s Connie McKeage. “I still think institutionally owned platforms are a service, but there needs to be a clear delineation between the service elements of it and the product elements of it,” she said. “Maybe it’s time to disaggregate platforms from advice, and from other services.” For others, it’s about managing conflicts of interest. In the eyes of the law, platforms are a product. “But there is no doubt in my mind that we are an administration service,” said Chris Freeman. Platforms provide administration, tax reporting and electronic execution for all products, amongst other services. But in terms of product neutrality – apart from non-aligned platforms with open models – institutionally-owned providers also claim they are product agnostic. “We have over 850 different managed funds offerings on our wrap platform,” said Freeman. “The proportion of managed funds that are on the BT Wrap in total, in terms of dollars, is less than 10 per cent – there is no bias, platforms have to stand on their own.” Colonial’s FirstChoice also lists funds from close institutional competitors such as BT, Macquarie, AMP and ING, amongst others. Peter Chun added that Count’s APL model would remain the same. “We don’t think there’ll be any changes to their model, they will still have an open APL as all our dealer groups do – Financial Wisdom has eight platforms on their APL,” he added. But whether the current market is a tale of two types of platforms is not a question of high pr ior ity for many players in the sector. Although most have acknowledged the next 12 months and the implementation of FOFA will be challenging, they are looking forward to the next period. FOFA, and the increasing focus on cost, will give rise to cheaper platform solutions in the new year for some, while others will look forward to introducing modern IT systems and ridding themselves of the legacy burden. MM
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www.moneymanagement.com.au November 24, 2011 Money Management — 17
OpinionEuroDebt Shuffling the deck chairs Current shuffling of the deckchairs on the Titanic that is Europe will not solve the Euro crisis, according to Martin Conlon.
T
he significantly positive returns provided by equities during October were a welcome respite from the unfortunately familiar declines. Ascertaining why confidence has improved and whether the market recovery is sustainable, is more problematic. We cannot claim any insight whatsoever into the short-term direction of sentiment. However, cursory observations on the price of bonds, gold and other perceived defensive investments (and I use that term loosely in relation to gold) relative to their riskier peers would indicate that investors still aren’t positive. We are, however, far less sure that fundamentals are likely to provide the reassurance for investors to become more optimistic. For some time, we have believed that the investment landscape over coming years will be characterised by an environment of developed world deleveraging. This does not necessarily answer the question as to whether one should buy equities or bonds, but it suggests that investing on the basis of extrapolating recent decades could prove painful. We have never believed that growth – particularly gross domestic product (GDP) growth, as it is most popularly defined – is an important driver of investment returns. However, investor adherence to this delusional yardstick means its evaporation is likely to create headwinds. The search for GDP growth has, in our eyes, been a significant contributor to current problems. GDP is no more than an estimate of the value of goods and services produced in an economy – it is not an indicator of economic wellbeing. Its value is measured in monetary terms. If more money is introduced into the economy – generally through individuals or governments borrowing it – the measured value of GDP will generally increase, even if no more goods and services are produced. It should not make us feel better. If we doubled the amount of money in the economy tomorrow, we could all get a big pay rise, see our house prices double, and Coles might even raise the price of milk – but we wouldn’t be any richer. Measurement units don’t create wealth. Explosive credit growth has created the illusion of wealth whilst actually delivering increasing wealth disparity and dismal productivity outcomes. Investment returns are no different – they are about maintaining purchasing power, and must be thought of relative to the things we’re trying to purchase. The centre of attention in this regard remains Europe. Rather than focusing on whether the current shuffling of deckchairs on the Titanic which policymakers have disguised as a solution to the current Euro debt crisis will have any
pensions for citizens not prepared to work anymore. The real hope of policymakers in this latest deception is that European banks can convince European bank shareholders to contribute large amounts of new capital to an insolvent banking system to allow bondholders to mitigate some of their losses. It’s about time equity holders and taxpayers asked bondholders to fund their own losses. The only way debt issues are going to be corrected is for a lot of it to be written off. Closer to home, the Qantas Airways saga – which dominated headlines during the month – highlighted the increasing imbalances impacting the Australian economy, and why complacency is ill-advised. From a company perspective, cost structures have become untenable. Fares are already high compared to global peers, with currency adding to the difficulty in raising prices. Wages and conditions, also exacerbated by currency strength, are uncompetitive. The position of Qantas highlights the vulnerability of many Australian businesses. Unemployment, collapsing asset prices, and overcapacity are plaguing much of the world. To expect that we can continue to deliver significant wage gains and maintain almost full employment without significant productivity gains is ‘cloud cuckoo land’. The longer this situation prevails, the more vulnerable the domestic economy will become.
Outlook & strategy
impact whatsoever, it is probably more important to step back and put the situation into context. The key issue – which outgoing European Central Bank (ECB) president Jean-Claude Trichet has raised – is the restoration of credibility in sovereign debt. “If we don’t have the credibility of the sovereigns, we don’t have a backstop if we have new possible crises”. The reason the credibility of sovereign debt is progressively declining across the world is two-fold. Firstly, there is too much of it. Secondly, the use of it is abysmal. As observed above, levels of both government and individual indebtedness across most of the developed world have been on a consistent trajectory for some time – and it’s not down. This deterioration has occurred in peacetime, when demographics were favourable, publicly owned assets were rundown and
18 — Money Management November 24, 2011 www.moneymanagement.com.au
sold – rather than improved – and a good portion of liabilities (significantly pensions) weren’t, and still aren’t, actually recorded as liabilities in government accounts. Increased debt levels have primarily been funding bloated bureaucracies and wasteful spending. We are now supposed to believe that a voluntary haircut by some bondholders (not the ECB – they’re a public institution and don’t need to mark assets to market) on the government debt of the worst offender – together with a plan to leverage the little remaining firepower of the European Financial Stability Fund to provide artificial confidence in those yet to default – will solve the problem. Not only that, having not generated any meaningful productive growth whilst they racked up all the debt, growth will remain almost unaffected as governments pay off all the debt and fund
As we’ve raised previously, sustained confidence and sustainable economies and businesses will require some deviation in thinking from the currently adopted methodologies. Adding more liquidity, deceiving investors and not acknowledging mistakes, is not the recipe for success. We credit investors, and citizens generally, with more intelligence than that accorded to them by policymakers. They will generally see through deception. It is for this reason, that despite apparently attractive valuations in equities, we remain somewhat cautious. International equities are still at valuations below that of Australia – evidence that sentiment can deteriorate further. The UK prices of BHP Billiton and Rio Tinto are our reliable anecdotal benchmark. Billiton closed the month at a 20.5 per cent discount to the Australian listing, and Rio Tinto 25.3 per cent. It is for this reason, that where possible, our preference is for the vast majority of the portfolio holding in these stocks to be held offshore. Martin Conlon is the head of Australian equities at Shroder Investment Management Australia.
Opinion Insurance
The evolving underwriter Underwriting is a continually evolving area and as a result insurers need to stay ahead of the game if they are to understand the changing insurance needs of our nation, writes Marcello Bertasso.
H
e who stops getting better, stops being good. This is the mantra of all good underwriters. However, good is a relative term, and something that is interpreted differently by everyone. Yet when comparing something good to something bad, it gains a greater level of context. As an example, a decade ago life insurers thought it was ‘good’ to fulfil a life policy in less than 30 days. Now it’s considered ‘not good’ if it takes longer than two weeks. Over the past 10 years a great deal has changed for the average underwriter. Each component in isolation could be seen as relatively small, but when aggregated presents a more significant journey of change. After all, this is what underwriters do – we consider all factors that influence the outcome of the policy we are underwriting. This includes factors that increase the risk of a claim, or reduce the risk of an early claim. While there has been a great deal of change in the industry, not all of it has been on par in terms of impact. Some underwriting changes receive more attention, while others hit hard but are more transient, and some just continue on a path of evolution. One area that received a great deal of attention was the 2003 bird flu pandemic and the more recent 2009 swine flu scare. As underwriters, we were asked to be ready to adapt underwriting practices to assess potentially impacted individuals, for example persons who were about to embark on a journey to a high-risk region. Health scares such as these are spread more easily with the advent of an increasingly
mobile world population. And with Australians being a gregarious bunch, travel comes as second nature to us. This, of course, presented even more significant challenges for the underwriter in the last decade, especially since the September 11 attacks, and subsequent London and Bali bombings brought terrorism to our door. These threats are an ever present reminder for how underwriting continues to evolve. Fortunately for underwriters, not all change results in an increased risk of claim. Advances in medical diagnosis and treatment have improved mortality rates and recovery from serious illnesses. However, this is a double-edged sword. Consider cancer. Most will agree that diagnostic techniques and treatments have improved outcomes for the affected, with patients surviving in greater numbers than in the past. Yet significantly, incidence rates (of newly diagnosed events and resultant valid trauma claims) have increased. This requires understanding from underwriters, product managers, actuaries and claims assessors. These changes mean that the underwriting practices must keep pace with the burden of injury and disease that may arise after an application has been accepted and issued. Not all health issues are improving though. This is evident from the statistics gathered in our annual risk report Claims We Paid, covering life insurance payouts by AMP in 2010. The report shows an increasing trend in the number of cancer and mental illness claims, mirroring
national health trends and reinforcing the need for adequate life insurance and protection against trauma and disability. The report showed mental illness as the leading cause for total and permanent disability claims at 15 per cent, almost doubling the previous year's figure. It also showed that cancer remained the most common form of trauma claims in 2010, representing 77 per cent of the $24.4 million payment figure. AMP paid almost $300 million in claims to its customers in 2010. Our ever-expanding waistlines and the multiple health issues that can result from being overweight, as well as mental health issues, diabetes and increased rates of certain cancers are also an obvious cause for concern. While underwriters have adapted their view of what’s acceptable in these various areas, they must work in partnership with product managers and actuaries to correctly assess the increased risks associated with global health trends. However, not all changes in the last decade have been influenced by health matters. A good underwriter is always looking for greater efficiency and improved speed, and some of these features have come from technological improvements. Technology such as automated underwriting ensures that customers are only asked questions relevant to their individual profile and the type of insurance they are applying for. By helping us deal with more straightforward applications, it ultimately allows us greater scope to offer alternative solutions to complex situations – resulting in our ability to insure more
people with more cover. As an industry, we compete on many facets. Even though price and service are key, product differentiation is also essential. This is a challenge for underwriters, as we must keep our assessment standards in place to handle a constantly changing product set, maintaining consistency between the electronic rules and the decisions of the human underwriter. Even though the last few years have seen a number of significant changes, there is still one area that remains an unknown element with the potential for a huge impact in the future. I refer to the human race having mapped out the human genome. As a result, thousands of new genetic changes, mutations, interplays and therapies have been discovered. Its impact on underwriting has been muted but sustained, but it’s what looms ahead which is both exciting and daunting for the underwriting industry. On review, it has been a very rewarding decade and underwriters have grown and evolved. We’ve met the challenges headon and I believe responded appropriately to them. Underwriters have also increased their professionalism, technical skills, social skills and improved their customer focus. We look at our processes end-to-end, always with the view of doing more with less. The next decade looks even more exciting, never boring and filled with multiple opportunities. Marcello Bertasso is head of underwriting at AMP.
www.moneymanagement.com.au November 24, 2011 Money Management — 19
Observer
Multi-asset revolution Dissatisfaction with the performance of traditional managed funds and the resulting criticism may see the rise of multi-asset solutions, according to Dominic McCormick.
I
t is not surprising that many investors are dissatisfied with the performance of traditional diversified (balanced and growth) funds and their model portfolio brethren over the last decade. Part of this dissatisfaction is probably unfair, given the very difficult environment we have faced for much of that decade, including an ongoing, once-in-a-generation global financial crisis. However, I believe some of this dissatisfaction and resulting criticism is fully justified, as traditional multi-manager and single-manager diversified funds and most model portfolios have proved too inflexible, too wedded to flawed financial theory and too slow to recognise, let alone adjust to, the dynamics of a challenging new macro environment. Fortunately, a quiet revolution is slowly taking hold in the management of diversified funds with the creation of a new category of more flexible, ‘multi-asset’ funds. Led by some of the more innovative institutional funds locally and globally, but gradually encroaching on the retail investment industry, it represents an abandonment of the constraints of modern portfolio theory and strategic asset allocation and a focus on – some would say return to – diversified investment options with true flexibility and, importantly, an emphasis on absolute or real (cash/inflation) investment objectives that actually matter to everyday investors. This means ‘making’ money versus cash and/or inflation, preserving capital over the medium-to-long term and moving away from the unhealthy obsession with peer comparisons and business risks. However, this is not just a simple return to the more active balanced funds of the 1980s when the BT Retirement Fund and several others were prepared to make large asset allocation moves between equities and cash/bonds. Sure, much more flexible/dynamic asset allocation is one key element of the new multi-asset approach, but it has many more dimensions than this. ( When both bonds and equities enjoyed sustained bull markets from the early 1990s the limitations of the earlier approach in some investment scenarios were highlighted). Rather, the new multiasset approach seeks to utilise the much broader range of tools available in the modern investment world to produce
robust, well-diversified portfolios. What, then, are the defining features of this multi-asset revolution? • The proper incorporation of, and adherence to, investment objectives that actually matter to clients – ie absolute/real ones (cash-plus or inflation-plus) over the medium to long term, and also attempting to preserve capital in the meantime. These objectives are integral to the way money is managed, and not just in there for marketing/competitor reasons. • Abandonment of the straightjacket of strategic asset allocation and adoption of much more flexible and dynamic asset allocation, driven from a forward-looking, valuation perspective. • Much more focus on sub-asset and sector selection, irrespective of benchmark/index weightings; ie a sector/asset earns its way into the portfolio because of its future return/risk characteristics, not due to its past performance or current market capitalisation. • When using active managers, there is a focus on looking for those with an absolute/non-benchmark mindset and the resulting flexibility to fully utilise valuable insights. • A willingness to use low-cost passive vehicles (including exchange trading funds) for expressing a short/medium-term asset/sector view, or for core exposures to attractively valued asset classes – but not for a ‘set and forget’ approach many are now advocating). • Greater use of selected alternative assets and strategies in the portfolios, particularly to reduce risk. • Greater consideration of adverse future scenarios and the extreme risks in financial markets, and the inclusion of certain tail risk hedges in portfolios when they can be purchased cheaply and efficiently. Not all of the new multi-asset funds embrace all of these elements. Some believe that certain of these elements are not necessary or even appropriate to deliver on these real/absolute objectives. Some even believe gearing should be selectively employed. However, they all tend to be consistent in the view that this new approach is necessary because we live in a world where just relying on market beta alone is too unreliable, and even if one is eventually rewarded
20 — Money Management November 24, 2011 www.moneymanagement.com.au
for taking this market risk, many investors cannot handle the rollercoaster ride involved. It is also a long overdue recognition that the path of returns – and not just average returns – over time matters most for clients in the real world, especially, but not only, for those in the pension phase in retirement. Putting much of a client's assets into equity markets when they are expensive and vulnerable to a big drawdown, or drawing down a client’s money during a bear market, are recipes for poor investor returns and ultimate disappointment. Conversely, at the other end of the spectrum, currently rigidly loading up on the perceived safety of low yielding bonds as occurs in most capitalstable funds/model mixes, as suggested by lifecycle approaches for retirees, is likely another recipe for disappointment. A more diversified and smoother path of returns is achievable. Of course, the new multi-asset approaches are not about eliminating volatility or avoiding any negative returns, but they do aim to avoid or limit the very large drawdowns that can destroy client portfolios because they are almost impossible to recover from. It also aims to prevent investors being slowly decimated in longterm bear markets that go on for years because they are heavily exposed to equity risk and little else. Part of the solution for retirees, I believe, is to shore up better the cash/liquidity needs of the next few years (three-to-five) by specifically allocating sufficient amounts to cash, term deposits and other low-risk fixed income as the ‘liquidity’ or ‘preservation bucket’ of client portfolios. This enables clients to be more objective about, and patient with, the diversified/growth-oriented ‘bucket’ and be prepared to wear some (but not excessive) volatility. A feature of the new multi-asset funds is they typically offer only a couple or even just one option or ‘risk profile’. This makes sense given the features described above and is a welcome move away from the confusing multitude of only slightly different diversified options and model portfolios some groups offer (sometimes as many as seven or eight). Some fund managers are approaching this ‘revolution’ by slowly revamping some of their old diversified options, while others
are launching totally new products and even separate investment teams. Both approaches come with some significant issues. Those gradually changing their existing diversified products are understandably implementing a process of evolution rather than revolution, with the result they may only achieve partial benefits of the new approach. On the other hand, those groups launching totally new products are faced with the challenge of explaining where each product sits. If this approach is ‘new and better’, the average financial planner and investor might ask, “Why is my money stuck in the old-style diversified fund?” Some of these new diversified funds are multi-manager and some single-manager. And they include well-known brand name managers such as AMP, MLC, Perpetual and Schroder. Even some overseas managers are coming into Australia to specifically tackle the multi-asset market. Of course, while these funds are new as retail offerings, the approach is not new in the investment world. Endowment funds globally have long adopted some of these elements, as have some of the more innovative institutional funds and super funds. In Australia, the Future Fund is a clear example. Some say that the ‘absolute return’ term sometimes used to describe such diversified funds is just a meaningless marketing term. I disagree. While the term has been misused and misunderstood, in my mind
“
But isn’t using such multi-asset funds as the core of a portoflio taking away some of the adviser’s job?
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absolute return is primarily about a nonbenchmark mindset and linking the actual investment strategy with the absolute return-oriented objectives. It does not promise to always achieve positive monthly, quarterly or even yearly returns, but is about achieving reasonable absolute returns over the medium- to long-term period of the objectives (typically three-to-five years-plus) and avoiding large, sometimes ‘permanent’, drawdowns. Because some of these new multi-asset funds cannot be easily put into a box, some research houses have placed this new type of multi-asset fund into the ‘alternative’
investment category, to be used as a noncore, small part of a client portfolio. We believe this view will be increasingly seen as primitive thinking, and that this new style of fund will eventually deserve a core role representing at least half and, in some cases, even all, of clients' portfolios. While an ability to invest in hedge funds and other alternative assets and strategies in meaningful ways is one component of this approach, it is just one element, and not all the new multi-asset funds will use alternatives significantly anyway. What is the point of having true flexibility if it is not utilised across the majority of an investor’s portfolio? Clearly, one cannot say that this new approach is always better than more conventional diversified approaches. Indeed, in raging bull markets for equities, multi-asset funds will almost certainly lag their more traditional peers. However, I am confident that they can be more than competitive over the long term and, particularly, can do better in most (but not necessarily all) difficult periods for equity markets. But why bother with what is a more complicated approach to diversified portfolios now? Clearly, it is harder to fully explain to investors and harder to implement for fund managers. Increasingly, however, investors and advisers trying to build or access truly robust portfolios will have little choice. In the current challenging environment, applying the appropriate tools, expertise and flexibility is necessary.
And remember, the whole idea of fund managers implementing these is that much of this complexity does not need to be fully seen nor understood by investors, as long as they judge the manager to have the appropriate skills and resources. Meanwhile, some investors and advisers are reacting to the challenging environment by resorting to more passive investment solutions which actually introduce more equity risk than conventional diversified funds. When excessive exposure to equity risk has been a major problem, many advisers have opted for solutions that give their clients more of that same risk, no doubt partly blinded by a narrow focus on cost alone. They had better get used to explaining volatility and large drawdowns to their clients. Clearly, it will be extremely difficult for advisers or investors to develop and implement these more innovative multi-asset portfolios for their clients themselves. Most lack the appropriate skills and focus and, even if they have these, there are some aspects of the new approaches that simply cannot be implemented easily by advisers, including timely asset allocation changes, use of derivatives for currency and market hedges, or access to some fund structures and offshore managers that are not available on platforms they use. But isn't using such multi-asset funds as the core of a portfolio taking away some of the adviser’s job? To an extent this is true,
although there are still plenty of elements of the adviser’s job outside investments. Indeed, this is a broader industry trend that is already well developed. Increasingly, dealer groups and owners of dealer groups are realising that letting the majority of financial planners loose on extensive approved product lists with little control is a recipe for disaster. Model portfolios have been a step in the right direction, but with little of the flexibility or tools of the more developed multi-asset diversified portfolios. Therefore, while financial planning groups are increasingly embracing the outsourced investment model, some are resorting to passive portfolios while others are moving to the other end of the spectrum and using truly active multi-asset funds. Both have advantages from a business perspective. However, in the same way that some advisers are using a passive core and adding satellite investments, I believe using a diversified multi-asset core also works well from a business perspective. It makes administration easier. It also ensures diversification. However, unlike the passive core approach which requires faith that the markets will deliver appropriate risk premiums over time, and that clients will handle the volatility that this will entail, the multiasset approach is more diversified across various risks, although it does require confidence in the skills of the multi-asset manager selected and their ability to select attractive underlying investments over time. The advantages of the more flexible multiasset fund are likely to help renew interest in diversified funds generally during a time of significant criticism of the fund management industry. Indeed, those adviser groups who believe they are taking little or no ‘business risk’ by ignoring this trend or using a core passive investment approach may become increasingly exposed to delivering client returns and risks that deviate markedly from what more progressive investors and advisers are achieving with such funds. If you are convinced that traditional markets are readying for new multi-year bull markets and the difficulties of the last decade are largely over, then the long-only, equity-focused approach at the heart of the traditional or passive diversified approaches will do well. Even then, the challenge will be to keep investors invested over time given the volatility of this approach. However, if you are of the view that global economic deleveraging and other macro challenges will continue to create a world of high volatility and provide no certainty that historical equity risk premiums will be delivered, then the new multi-asset approaches are much better placed to deliver for investors. This certainly doesn't mean it will be easy for fund managers operating them, but at least they are playing to the appropriate rules of the game and with the right goals in mind. There is a lot of intellectual firepower in the investment industry. Finally, it is being deployed in ways that are focused on truly meeting clients’ real objectives, rather than just creating products with an appealing story attached. Dominic McCormick is the chief investment officer of Select Asset Management.
www.moneymanagement.com.au November 24, 2011 Money Management — 21
Opinion Strategy
Is there a hole in the bucket strategy? Tim Sanderson puts the traditional asset allocation approach head to head with the bucket strategy, with some surprising results.
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hen advising a client to commence an account based pension, many advisers recommend that a ‘bucket strategy’ is used as part of the client’s asset allocation process for risk management purposes. Theoretically, a b u c k e t s t ra t e g y t h a t s u c c e s s f u l l y prevents growth assets being sold at temporarily low prices should provide a better outcome than a traditional asset allocation approach over the longterm. However, little analysis has been done to see whether this approach is likely to work in practice and the effect of differing market conditions and different approaches to implementing and managing the strategy.
The bucket strategy approach involves always holding a larger portion of the portfolio in cash assets, which are likely to underperform growth assets over the long-term.
How does the bucket strategy work?
• At the end of the three to five year period, or earlier if the cash bucket is depleted sooner; • Each year when the client’s situation is reviewed; or • Tactically, where the investment bucket cumulative returns have exceeded certain benchmarks, or the investment bucket appears overvalued. Another important consideration is w h e t h e r i n c o m e g e n e ra t e d by t h e investment bucket will be immediately allocated to the cash bucket (minimising the need to replenish this bucket) or reinvested (which may be the only
Essentially, the bucket strategy involves segmenting a client’s pension balance into two or more pools or buckets: • A ‘cash bucket’ with safe investments for pension payments expected over three to five years; and • An ‘investment bucket’ invested in accordance with the client’s risk profile for longer term growth. The cash bucket is then replenished periodically, with enough funds to cover the next three to five years of expected pension payments. Depending on the strategy approach taken, this could occur:
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Figure 1 Traditional approach v bucket strategy approach – actual earnings $750,000
— Traditional approach pension balance — Buck et strateg y pension balance
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practical option available in non-wrap style super funds). Historical returns have shown that growth assets such as shares and property are very likely to outperform purely cash based investments over the longt e r m ( t h e s o r t o f t i m e f ra m e t h a t normally applies to an account based pension). In the short-term, however, the stock market can be extremely volatile, as anyone who has endured the global financial crisis would know. The logic of the bucket strategy is that regardless of the short-term performance of the investment pool, pension payments can continue from the cash pool without the forced sale of growth assets at unfavourable prices. What is often not discussed though, is that a traditional asset allocation approach automatically benefits from a reverse version of dollar cost averaging – a strategy often used to minimise risk when investing by buying parts of the overall investment at a range of different times and pr ices. Assuming pension payments a re re c e i v e d o n a
regular basis (eg, monthly), the sale price of investment bucket assets on a particular day is of reduced importance because many different prices are used throughout a financial year (and over many years).
Analysis With this in mind, we have compared a traditional asset allocation approach against a bucket strategy approach using historical returns from October 1998 to September 2011 1 . Our comparison involves a client (age 65) who is commencing a $500,000 account based pension. They will draw pension payments
of $25,000 per annum (paid monthly and indexed at 3 per cent annually – always exceeding the required minimum payment). Under the bucket strategy approach, three years worth of pension payments were allocated initially to a cash pool, which was then run down over three years and replenished at the end of the three year period (with the next three years worth of pension payments). We can see that, although the account balances vary significantly throughout the timeframe, the traditional asset allocation approach provided for a higher overall pension balance at all times. By the end of September 2011, the difference in account balance between the two was $6,304, with balances of $551,020 (traditional approach) and $544,716 (bucket strategy approach). Interestingly though, the difference between the two approaches reached over $35,000 around age 73 and then reduced to $4,200 around two years later, indicating that short-term market movements affect these strategies in contrasting ways. We previously mentioned a variation on the bucket strategy involving tactically replenishing the cash bucket where investment bucket returns exceeded certain benchmarks. To demonstrate how this would fare in this example, we assumed that under the bucket strategy approach, the cash bucket would be replenished immediately (with
three years worth of expected pension payments) once the investment bucket had returned 10 per cent (including income and capital growth). A further replenishment would occur with each subsequent 10 per cent return. When compared with the traditional asset allocation approach, results were as follows: Fi g u re 2 s h ow s t h a t t h e t a c t i c a l bucket strategy was less successful than either the original bucket strategy ($9,810) or the traditional asset allocation approach ($16,113) over the period of historical earnings. While once again the difference varied throughout the timeframe (determined by periods of good or poor market performance), it is clear that the tactical approach risked replenishing the cash bucket more frequently than was really required (in this case, it led to a sustained over-allocation to cash assets).
second six-year period (November 2001 to October 2007), a cash por tfolio returned 5.2 per cent per annum, while a balanced portfolio returned 7.4 per annum. During this time, the traditional approach outperformed the bucket strategy approach by $5,183. While analysing short-term market trends assists us to understand the way each strategy works, it is most important to focus on the overall return profile a client can expect over the life of their pension. History suggests that over many years, an appropriately diversified portfolio invested in line with a client’s risk profile is not enhanced by an artificially high allocation to cash assets.
Conclusion
$600,000
Based on the above analysis, we have summarised some of the shortcomings of the bucket strategy and why, as a long-term strategy, it doesn’t compare with a traditional asset allocation approach: 1. Overweight in cash investments – the bucket strategy approach involves always holding a larger portion of the portfolio (than dictated by the client’s risk profile) in cash assets, which are likely to underperform growth assets over the long-term. During short-term market downturns, the bucket strategy approach performs relatively well (due to the higher allocation to cash), but if the long-term trend in markets is up, the long-term trend in the bucket strategy approach will be to underperform t h e t ra d i t i o n a l a s s e t a l l o c a t i o n approach. 2 . A s u c c e s s f u l b u c k e t s t ra t e g y involves timing the market successfully – the bucket strategy would likely provide a better long-term outcome than the traditional asset allocation approach if the cash bucket was only refreshed (by selling assets in the investment pool) at or near the top of the market cycle, and never when markets are at temporarily low levels. While it might be possible to successfully time this refresh some of the time, it is almost impossible to ensure that this is always the case throughout the life of the pension. 3. No dollar cost averaging – the traditional asset allocation approach naturally involves dollar cost averaging out of growth assets as regular pension payments are made, reducing some of the risk of short-term market volatility. Under the bucket strategy, however, a relatively large amount (a number of ye a r s w o r t h o f f u t u re p e n s i o n payments) needs to be ‘switched’ out of the growth portfolio periodically as a lump sum, which (with the benefit of hindsight) may or may not take place at a favourable price.
$550,000
Tim Sanderson is senior technical manager at Colonial First State.
Rising and falling markets It is apparent from Figure 2 that the bucket strategy approach tended to perform relatively better during periods of poor market performance (eg, age 74 to 76) and relatively worse during times when markets were performing strongly (eg, age 70 to 73). The simple reason for this is that, by design, the bucket strategy involved a significantly higher allocation to cash assets, which generally performed better over the shortterm than a falling share market. For example, using the above client, we analysed the same pension over two sixyear periods2. In the first six-year period (October 2005 to September 2011), a cash portfolio returned 5.4 per cent per annum, while a balanced portfolio returned 2.1 per cent per annum. Unsurprisingly, the bucket strategy approach outperformed the traditional approach by $4,246. In contrast, during a
Figure 2 Traditional approach v tactical bucket strategy – actual earnings $750,000
— Traditional approach pension balance — Buck et strateg y pension balance
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1 Monthly historical returns for Colonial First State Cash Fund and Colonial First State Balanced Fund.
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2 Six year periods were chosen to allow for two full cashbucket replenishing cycles.
www.moneymanagement.com.au November 24, 2011 Money Management — 23
FPA 2011 National Conference
Spruiking in Brisbane The end of this year’s conference season is once again marked by the Financial Planning Association’s National Conference, which was held at the Brisbane Convention and Exhibition Centre in Queensland. Guests and speakers included Financial Services Minister Bill Shorten, Shadow Treasurer Mathias Cormann, Delia Rickard from the Australian Securities and 1 Investments Commission and the 3 Industry Super Network chief executive officer, David Whiteley, among others.
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FPA 2011 National Conference
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1. Zita White, Griffiths University student of financial planning; Nigel Gralton, student; and Ian Chester-Master, chairman, FPA Brisbane Chapter; Ailoa Chong–Lee, student; Steven Ferry, student. 2. Kylie Paton, Abacus Property Group; Rene Daquino, APN Property Group; and Kim Kitchens, Abacus. 3. Nicole Morrell, Perennial Investment Management; and Nick Parsons, BT Financial Group. 4. Neil Heriot, Boston Private Wealth; and Grant Kennaway, Morningstar. 5. Jamie Murrell, AMP; Sheldon Rivers, Orion Asset Management; Simon Beram, Maple Brown Abbott; and Bryn Jones, AMP. 6. Lauren Jackson, BDM of FIL Investment Management. 7. Maureen Reynolds, MFR Financial Planners; Ben Phillip, E Trade; and Deborah Rognlien, FinancialCare Group. 8. Meagan McNeill, AMP; and Len Whelan, Hillross. 9. Bain Swanson, BT Investment Management; and Peter Mill, APN Property Group. 10. Camille Giles, Equipsuper; Steve Perrell, Equipsuper; Renae Smith, MLC; and Ricky Morris, MLC. 11. Scott Kilvington, Moneo, in chair; Margaret Green, massage therapist. 12. Ruth Ferraro, The Tax Institute; and John Moore, The Tax Institute. 13. Steve Trevisiol, GESB Financial Advice. 14. Amanda Woodcock, Securitor; Greg Schapkaitz, Securitor; Paul Gaffney, Securitor; and Annick Donat, Securitor. 15. Matt Brown, NAB; Andrew Shaw, NAB; and Brett Slattery, AMP. 16. Johann Koch, IRESS; and Lance Meikle, ALPS. 17. Amelia Constantinidis, AMP; and Craig Banning, Navwealth. 18. Paul Robertson, Tynan Mackenzie; and Barbara Glover, AMP Capital. www.moneymanagement.com.au November 24, 2011 Money Management — 25
Toolbox Proceed with care Advisers will still need to be very cautious in recommending reverse mortgages to their senior clients, despite the proposed protections around this product. Anna Mirzoyan writes.
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everse mortgages offer asset-rich but income-poor homeowners the option to borrow against the equity they have built up in their home to improve their standard of living in retirement. Whilst there are variations in the product features in the marketplace, they all allow repayments to be capitalised on the loan, therefore don’t require the borrower to make any repayments (principal or interest). Importantly though, once the homeowner decides to sell or the last surviving borrower passes away, the outstanding loan (which includes compounded loan repayments) needs to be repaid. The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, which was introduced recently, amends the National Consumer Credit Protection (NCCP) Act 2009 and relates specifically to reverse mortgage contracts. The proposed Enhancements Bill 2011 introduces new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are: • Specific obligations will be introduced on credit providers and persons engaging in credit services in relation to reverse mortgage contracts. This includes ensuring the homeowner has received legal advice before entering into a contract; and using a website approved by the Australian Securities and Investment Commission (ASIC) to show borrowers projections of the potential effect a reverse mortgage may have on the equity of their home and also provide the borrower with a copy of these projections. • Licensees must ensure the borrower is provided with sufficient information to be able to make an informed decision before entering into a reverse mortgage contract. They must also ensure an information statement is available on their website or upon request by a consumer. • Introduction of a no negative equity guarantee protection, through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property. • New obligations will be introduced on credit providers where they have given a default notice to the borrower. The credit provider will have an obligation to contact the borrower in the event of default and ensure they understand they are in default and therefore provide them with an opportunity to rectify the default.
Who are reverse mortgages appropriate for? As noted earlier, reverse mortgages may be appropriate for retirees who have equity in their home and would like to increase their standard of living.
Reverse mortgages may also benefit those who: • Need urgent access to money for a special purpose such as medical expenses, travel, home improvements or the purchase of a vehicle; • May be considering downsizing to improve cashflow in retirement, but would prefer to stay in their home. It should be noted that by taking out a reverse mortgage, additional issues arise. Reverse mortgages can impact the value of the estate left behind. It is possible that there would be no equity left in the property when it is eventually sold. Therefore, it is important to involve the family when considering taking out a reverse mortgage. • In an environment of rising interest rates, borrowers need to be aware that the compounding effect of interest charges and fees capitalised can cause the loan to balloon to unforseen levels in a very short period of time. For example, at an interest rate of 8 per cent per annum a $50,000 loan could become $87,000 in seven years or $111,000 in 10 years. At 9 per cent per annum a $50,000 loan would become a debt of $93,000 in seven years and $122,000 in 10 years.
• There may be periods of time where properties actually decrease in value, which will result in a reduction of the value of the remaining equity.
Features of a reverse mortgage Interest rates on reverse mortgages are generally higher than standard home loan rates. The rate can be fixed for a term or for the life of the loan or be a variable rate. Repayments may be made at any time, but some providers may have additional charges in such instances. The no negative equity guarantee is a vital feature where a reverse mortgage loan is being considered as it ensures that the homeowner (or their estate) can never owe more than the value of the home, no matter how long they stay in the home. However the guarantee is dependent on borrowers’ meeting the terms and conditions of the loan, such as keeping the home insured and well maintained. Another feature that is available is the protected equity option. This feature allows homeowners to ensure they retain a portion of the home's future value upon sale. This
26 — Money Management November 24, 2011 www.moneymanagement.com.au
feature can be particularly attractive where the homeowner is concerned about leaving an inheritance. The protected equity option ensures the family will receive a pre-determined amount of the equity regardless of what happens to the balance of the loan or property prices in the future. However by taking out the protected equity option, the maximum amount that the homeowner can borrow will be reduced. For example, if the homeowner wishes to ensure that the beneficiaries of their estate receive 20 per cent of the future sale price of their home, they need to choose a protected equity option of 20 per cent. However, this will reduce the maximum amount they are eligible to borrow by 20 per cent.
Impact of reverse mortgages on Centrelink Age Pension If an Age Pension recipient receives a reverse mortgage, the amount drawn is not counted as income by Centrelink. However, the amount drawn may be subject to Centrelink means tests when the amount is held as a financial investment. In general, when the reverse mortgage is drawn down in small amounts and used to meet everyday living expenses, then it should not affect the borrower’s eligibility for the Age Pension. If however it is accumulated or the entire amount is drawn, then it may have an impact on the borrower’s eligibility for the Age Pension. Where a large amount is drawn, Centrelink allows up to $40,000 be exempt from assessment for up to 90 days. After that period has elapsed the entire amount (if unspent) will be subject to Centrelink means tests. For example, if a person takes out a home equity conversion loan of $80,000 and leaves the proceeds in the bank account, then: • The first $40,000 is exempt from Centrelink’s means tests for 90 days • The remaining balance of $40,000 would be counted towards the Centrelink means tests from the day the funds are received. Once the 90 days has elapsed then the whole balance of $80,000 (if it remains unspent) will be subject to the Centrelink means tests. The homeowner status under the assets test will not be affected by taking out a home equity loan.
Summary When a reverse mortgage is taken out against a client’s property, it is important to be aware of the possible consequences, such as the compound effect of interest charges, property prices, family and estate planning issues and the impact of capital drawdowns on a person’s Centrelink Age Pension assessment. Anna Mirzoyan is a technical services officer at Fiducian Portfolio Services.
Briefs INVESTORS are entering a period in which market volatility will return as a long-term factor, traditional safe investment havens will hide unexpected dangers and alternative assets will remain an important diversification tool. That’s according to van Eyk’s latest Strategic Asset Allocation (SAA) review, which sets out its recommended long-term asset allocation for investors over the next three to five years. van Eyk head of research John O’Brien said a relatively high exposure to alternatives should continue to o f fe r s u p e r i o r r i s k- a d j u s te d returns over the next three to five ye a r s . H e s a i d t h e ex p o s u r e to stocks in van Eyk’s SAA portfolio are relatively cheaper and of fer tax advantages that other investments like bonds do not. INFLOWS for the Australian exchanged traded fund (ETF) market continued to increase in October, doubling to $56 million as the total market capitalisation increased by 7 per cent. That’s according to Betashare’s Australian ETF Review, which found that the last three months have seen investors return to markets as a result of the uncertainty surrounding European debt issues, high levels of net buying and increased trading volumes. According to the report, investors are turning to blue chip stocks, international ETFs and Australian dollar ETFs. “While last month saw investors flocking to asset classes which would result in gains from weakening Australian conditions, increased trading volumes and inflows suggest domestic equities returned to favour for Australian investors this month,” BetaShares head of investment strategy Drew Corbett said. CMC Markets has upgraded its money handling arrangements in Australia and New Zealand, announcing the implementation of a fully segregated client money model. CMC Markets Australian head Louis Cooper said the company had been working towards the model for several months and that the move brought the Australian operation into line with the practices of CMC’s parent company in the UK. Cooper acknowledged that the company’s use of client moneys had come into question following the corporate collapse of futures broker MF Global. “Although the demise of MF Global is not necessarily related to its CFD [contracts for difference] business, it’s important our customers feel safe and secure about the money they invest via CMC Markets’ market leading platform,” Mr Cooper said.
Appointments
Please send your appointments to: andrew.tsanadis@reedbusiness.com.au
Move of the week MLC has announced a number of key appointments across its advice and marketing teams. Greg Miller will wind down his role as MLC Advice Solutions general manager and move full-time into the MLC Direct portfolio. Miller previously worked with Garvan, Apogee and MLC Financial Planning and is well-versed in the financial advice industry. Tom Reddacliff will step into Miller’s role as MLC Advice general manager. Current Apogee general manager Wayne Handley will be replaced by Fiona Navarro, who for the last five years has led MLC’s Risk Specialist Network. Peter Smith has been appointed as general manager at Godfrey Pembroke. Smith was previously general manager, distribution for MLC’s UK business, and most recently worked on distribution at nabInvest.
ANZ has appointed Nigel Williams as chief risk officer and member of the ANZ management board. Williams will report to chief executive officer Mike Smith, his appointment becoming effective once current chief risk officer Chris Page retires. Since 2008, Williams has been ANZ managing director, institutional Australia, having previously held the role of managing director, institutional, corporate and commercial banking at ANZ New Zealand. He first joined ANZ in 2004 following the acquisition of The National Bank of New Zealand.
Commenting on the appointment, Smith said that Williams is a career banker with international experience and a strong track record in credit and markets risk.
CHALLENGER’s f unds management business has appointed Cathy Hales as general manager, boutique partnerships. Commenting on her appointment, Challenger’s chief executive for funds management Rob Woods said that Hales has considerable experience across the funds and wealth management business in
Tom Reddacliff
Australia and internationally. “This is a key role in our team, driving strategic growth of our partnership model and managing our relationship with our boutiques,” said Woods. Hales was previously chief operating officer, client relations at RREEF in New York. Before that she worked at Deutsche Asset Management, Colonial First State and BT Financial Group.
CLEARVIEW Wealth has announced the appointment of Scott Hodgson as chief under-
writer. In this role, he will be responsible for ClearView’s life insurance underwriting operations, including underwriting policies and procedures, and individual risk assessment and selection. Hodgson has previously worked with such providers as TAL, AMP, Tyndall Life Insurance, and PrefSure. “His (Hodgson’s) skills and experience will greatly assist us in introducing new products to the market, starting with our life advice products, and expanding our business across Australia,” said ClearView managing director Simon Swanson.
MIDWINTER Financial Advice Software has appointed its executive director, strategy and advice Matthew Esler as director of Midwinter Advice Solutions and non-executive director of Midwinter Financial Services. As a result of Esler’s new role, Midwinter has also announced the appointment of Dimitri Diamantes as head of technical services, Peter Burns as head of distribution, and Lew Howard as business development officer. Burns served as Midwinter national distribution manager for
Opportunities RISK INSURANCE ADVISER Location: Melbourne Company: iSelect Description: A leading provider of comparison and choice in the market for household products and services is currently looking for a risk insurance officer. Reporting to the sales and operations manager, your responsibilities will include consulting, advising, and selling a range of personal insurance products to consumers over the phone. In this role, you will conduct needs analysis reviews for clients; provide advice on life insurance products; maintain ongoing relationships with clients; and achieve monthly sales targets. The successful candidate will be working with an experienced team, and be offered training and career development opportunities. You will be RG146 qualified, have a clear understanding of compliance within the life insurance industry, and have a minimum of one years experience within a risk adviser or sales role. For more information and to apply, visit www.moneymanagement.com.au/jobs, or www.iselect.com.au.
SENIOR FINANCIAL ADVISER Location: Adelaide Company: Terrington Consulting
three years and was previously Advance Asset Management (AAM) head of key accounts. Diamantes was formerly Zurich Australia head of technical services, and prior to that was AAM’s technical analyst. In his new role, he will be responsible for Midwinter’s upcoming release of AdviserTECH CPD. Commenting on Esler’s new role, Midwinter managing director Julian Plummer said that Esler would continue to be “heavily involved in the strategic and commercial decisions at the board level”.
CHARTER Hall Group has announced the appointment of Chris Freeman as research manager. Charter Hall’s joint managing director David Harrison said that Freeman will be responsible for driving Charter Hall’s knowledge across the core property sectors of office, non-discretionary retail and industrial. Freeman has over a decade of research experience, including time spent as national director at Savills Australia where he helped create innovative research such as the Savills Availability Report.
For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs
Description: A leading financial services institution is looking for an experienced senior financial planner to provide advice to a portfolio of high net worth clients. Development of your own referral networks and access to an unlimited product and platform range will provide an opportunity to grow your portfolio. Successful candidates will have several years experience as a financial planner dealing with HNW clients. You will also have exceptional, proven sales and networking capabilities. Successful candidates will be rewarded with a highly competitive salary package and attractive incentives, as well as professional development opportunities. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.
SENIOR FINANCIAL ADVISER/EQUITY PARTNER Location: Adelaide Company: Terrington Consulting Description: A leading South Australian business advisory company is seeking a senior financial planner for a long-term opportunity and a pathway to equities or equity upfront. In this role, you will be working with an existing portfolio of clients and the company’s
market reputation – and referrals from its accounting arm – will provide further opportunities to grow your portfolio. Candidates will have experience in successfully managing and growing a client base, and will possess an understanding of a range of financial planning strategies, services and products – including direct investments, gearing and superannuation. CA/CPS qualifications will be highly regarded. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.
JUNIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial services organisation is seeking an energetic, service-orientated junior paraplanner. In this role, you will be responsible for assisting in preparing/amending documentation for the production of SOAs; building and maintaining client relationships; and maintaining compliance procedures. You will be results driven and have a strong desire and passion for providing high quality customer service. You will also be RG 146 compliant. This is a part-time position, with a view
to full-time employment as the work load increases. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.
FINANCIAL PLANNER Location: Far North Coast, NSW Company: Terrington Consulting Description: A financial services firm is seeking an experienced and established financial planner. The firm has excellent brand and market reputation, and you will be rewarded with a highly competitive salary package and incentives. You will also have access to research, professional facilities, established systems, and an opportunity to grow your portfolio. In this role, you will be engaged in a range of financial services offerings – including stockbroking, strategic planning, superannuation, SMSF, insurance, portfolio management and fixed interest. You will have several years experience delivering to a diverse range of clientele. You will also have proven sales skills and networking capabilities. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.
www.moneymanagement.com.au November 24, 2011 Money Management — 27
Outsider
A LIGHT-HEARTED LOOK AT THE OTHER SIDE OF MAKING MONEY
Fishing for sympathy OUTSIDER was among the attendees at the 2011 Association of Supera n n u a t i o n Fu n d s o f Au s t ra l i a (ASFA) conference in Brisbane earlier this month, and he walked into the Great Hall of the Brisbane Convention Centre on the first day excited to hear East Timorese President and former Nobel Peace Prize corecipient José Ramos-Horta. So it was with some disappointment that he learned from ASFA chief executive Pauline Vamos that his Excellency Ramos-Horta had to remain in East Timor “due to civil unrest”. But Vamos was quick to inform delegates that ASFA’s risk management policy had “swung into action”, resulting in the conference organisers securing former Foreign Minister Alexander Downer to deliver the keynote address on leadership in Ramos-Horta’s place. Downer opened his speech by talking about unsuccessful leadership – citing his brief stint as leader of the opposition – as well as more successful leadership ( w i t h re f e re n c e t o h i s 1 2 ye a r s a s Australia’s Foreign Minister). He also went to lengths to bemoan his
t e m p e s t u o u s re l a t i o n s h i p w i t h t h e media, and conceded that the best way for leaders to cope with the constant attention was to try and ignore it. “There’s nothing worse than getting up in the morning and reading in the newspaper about what a complete idiot you are. And then you listen to talkback radio and ever yone’s ringing in and s a y i n g , ‘t h a t D ow n e r, h e’s a re a l $#%@head’.” Outsider wonders if José Ramos-Horta has the same problem with the East Timorese media.
But where was the kitchen sink? OUTSIDER's award for most ostentatious stand at any conference goes to the AMP stand at last week’s Financial Planning Association conference in Brisbane. While the Money Management stand boasted video and print examples of Outsider's work, it was but a
pale shadow of the AMP effort. How could anyone compete with an AMP stand that boasted a fireplace, a mantle clock, a waterfall, lounge chairs, a cold-water fridge and a bloody good barista? Clearly times are good at AMP – and they have the decor to prove it.
A good dressing down in Bris Vegas
“
Out of context
OUTSIDER has been to more than a few Financial Planning Association conferences and well remembers one that coincided with Schoolies week on the Gold Coast. Brisbane represented a far safer venue for this year's conference – until it was realised that the Brisbane Convention and Exhibition Centre was also being used for some high school formals. Thus as Outsider ambled through the foyer he was starting to believe that financial planning had become the domain of leggy 18 year-olds in little black outfits. It seems that FPA chairman Matthew Rowe was similarly distracted, because he welcomed guests to his chairman’s dinner with the words "if you’re 18 and wearing a very short dress, you’re in the wrong room". Outsider noted some short dresses in the room but, sadly, none worn by 18-year-olds.
“I thought I’d do something challenging for an economist and try to weave some optimism into what I’m talking about.”
That’s me, oil and gas.” – Perpetual analyst Andrew Blakely may or may not be
– Mark Thirwell, director, international economy
wishing he had a title as cool
“I’m very famous for articulating ideas that are unpopular.” – Downer again, sympathising
program, Lowy Institute for International Policy,
as fellow Perpetual analyst
with those whose job it is to sell
searches desperately for the silver lining in his speech
Andrew “the metals guy”
the idea of compulsory saving to
at the ASFA conference.
Corbett.
the public.
28 — Money Management November 24, 2011 www.moneymanagement.com.au