HEWISON Financial news, our views AND other issues Issue 29 ~ October 2009
Understanding the Terms We Use Australian Securities Investment Commission (ASIC) Enforces company and financial services laws to protect consumers, investors and creditors; regulates and informs the public about Australian companies. Separately Managed Accounts (SMA) An individual portfolio investing in a broad range of assets and asset classes that takes into consideration the individual’s goals and objectives and risks. Unlike a managed fund, an investor in SMAs owns the investments in the portfolio. Audit An examination and verification of a company’s financial and accounting records and supporting documents by a professional. Concessional Contribution Certain contributions made to superannuation, generally before tax. Includes employer contributions and personal contributions on which a tax deduction is claimed. Non-Concessional Contribution Contributions made to superannuation after tax. This includes Personal contributions, Spouse contributions and Government Co-Contributions.
uarterly THIS ISSUE • ASIC Must Crack Down on Industry Standards, Not Just Fees... • Beware Superannuation Contributions Caps
• From the CEO’s Desk • Separately Managed Accounts • Investor Insights Seminar Series • Staff News
ASIC Must Crack Down on Industry Standards, Not Just Fees… Story by Andrew Hewison Director/Private Client Adviser | Image by ivan petrov
The commission driven engine that has powered the majority of the Financial Planning Industry for so long is slowly grinding to a halt. The FPA, with other industry bodies, have finally announced their intention for their members to move to fee for service model or risk expulsion from the Association. This announcement has not come without resistance, and we expect it to intensify before the “industry” begins to move in the right direction. The Australian Securities and Investment Commission (ASIC), the industry regulator, on the other hand have not handled this issue well. They have backed the FPA’s remuneration stance, but they were late on the scene when they should have led the charge. To make up for lost ground, ASIC recently made a submission to the Parliamentary Joint Committee inquiry into Australia’s financial products and services. In its report, ASIC not only argued that commissions should be banned, they then stated that asset-based remuneration equated to product sales incentives. This is a disappointing and narrow minded point of view and an “after the event” reaction to financial disasters like WestPoint and Storm Financial in our opinion. ASIC’s point of view supports the argument that inappropriate advice is driven purely by remuneration methods. Perhaps ASIC should spend less time preparing 184 page
submissions to Parliamentary Committees, and focus more on setting and enforcing standards that protect investors from bad practice. Their line of argument appears to show a lack of accountability for enforcing its own regulations. In ASIC’s submission, they list fixed fees and hourly rate charging as two preferred alternatives. In our pursuit to provide the most appropriate remuneration model for our clients, both these methods were considered. In relation to fixed fees, we asked ourselves, how would our clients react to being charged a fixed fee throughout the last two years as markets fell? What about charging an hourly rate? This principal sounds reasonable, but it would result in a reluctance to act unless instructed to do so by the client. As a pro-active portfolio manager, we need to be able to apply ourselves to client issues on a continual basis, therefore charging hourly rates is not a suitable model. So what about asset based remuneration on a sliding percentage scale? When markets rise, client investment values rise, our fees rise in value but they reduce in % terms. When markets fall our fees reduce. This methodology ensures that we are able to provide our clients with the ongoing active management required to achieve their goal and objectives. CONTINUED PAGE 2
From the CEO’s Desk John Hewison
Superannuation Contributions Caps Story by Glenn Fairbairn Director/Private Client Adviser
arkets continue to strengthen as we predicted early this year and we expect the All Ordinaries Index to finish the year at around the 5,000 point mark, a remarkable recovery from its low point of around 3100 points in March 2009. We still have a long way ahead to recover the previous high of 6800 points, but we can see the pattern emerging with strong companies taking advantage of opportunities to strengthen their balance sheets and re-organise to maximise the benefits of a recovering economy. We have been continually reviewing client por tfolios and adjusting where necessary to take advantage of the recovery sectors and this will continue to be our focus over the coming months. As a result, we are extremely pleased with the rate of recovery in client portfolios which is well ahead of the market average. This is one of the key strengths of Separately Managed Accounts (SMAs) – a concept that seems to have escaped the attention of the financial services industry. We have also seen a lot of attention given recently to frozen investments and failed tax effective agricultural investment schemes. We have seen unit trust retirement income funds decimated by the protracted negative market cycle – losses that investors will never recover. This is due to fundamentally flawed massmarketed product design that ignores the basic needs and protection of the individual. There is nothing new about all this – it has all happened before – so why don’t the industry and the regulator learn from the errors of the past? The bottom line is this – successful investment must be client focussed. Too often we read and hear all the hoopla about investment fads and theories and get rich quick schemes. When it all comes down to it, it is about outcomes – what you want your investment strategy to achieve and whether that is a realistic expectation. It then requires discipline and courage to stick to the strategy plan and not get carried away with media sensationalism and market hype. We are glad you had the courage and discipline to stick to your plan and you can now star t to see the fruits of recovery as your reward.
s part of the government’s superannuation reform in the May 2009 budget, the cap for concessional (tax deductible) contributions was reduced from $100,000 to $50,000 for individuals over 50 years of age, (until 2011/12) and from $50,000 to $25,000 for those under 50 years of age. The limit of $150,000 per annum on nonconcessional (tax paid) contributions continues to apply, however, individuals under age 65 as at 1 July have the ability to bring forward a future two years of non-concessional contributions, effectively allowing them to contribute up to $450,000 in one year. Exceeding either contribution cap will result in tax of 46.5% on the excessive contribution. However, exceeding both the concessional and non-concessional cap in a single year, can equate to tax of up to 93%. That’s right 93% on the excessive amount contributed. How can this happen you ask??? Aside from the obvious attention required when contributing to superannuation, particular care needs to be taken when working for multiple employers who each make Superannuation Guarantee Contributions (SGC) of 9%. Let’s look at an example - Jim, a doctor aged 46, works for a number of hospitals in the 2008/09 financial year and earns income from each hospital as follows: $ 80,000 (SGC = $7,200) Hospital 1
$150,000 (SGC = $13,500) Hospital 2 $220,000 (SGC = $19,800) Hospital 3 $450,000 Total Income $ 40,500 Total Concessional Contributions
In the above example, Jim has exceeded his concessional contribution limit by $15,500 ($40,500 - $25,000 = $15,500). Therefore, in addition to contributions tax of 15% ($2,325), additional penalty tax of 31.5% ($4,882) would also be payable. Now this is where this tax really comes home to bite. Not only is Jim’s excessive concessional contribution of $15,500 taxed at 46.5%, it also now forms part of his non-concessional limit in the 2008/09 financial year. Subsequently, Jim’s non-concessional contributions in the 2008/09 financial year are now $165,500 which triggers the ‘3 year bring forward rule’ in that financial year. The outcome is as follows: 2008/09
Total Non-Concessional Contributions = $615,000 As shown above, Jim has now exceeded the three year cap of $450,000 by $165,000 which will be taxed at 46.5%, or $76,725. The effective tax on Jim’s excessive concessional contribution of $15,500 is $14,415, or 93%. In addition, given that Jim used after tax funds to make non-concessional contributions the tax penalty is severe. The onus is on the member to keep track of excess contributions, not the superannuation fund or the ATO. Having said that, clients of Hewison and Associates would be notified in the event of any excess contributions. In some circumstances, the ATO will grant permission for excess contributions to be refunded, but a simple mistake would be considered an acceptable reason.
Jim also contributed $150,000 to superannuation as a non-concessional contribution prior to 30 June 2009 and a further $450,000 on 1 July 2009.
CONTINUED FROM COVER sTORY The missing link in ASIC’s recommendations is that they fail to acknowledge the real issues in respect to the quality of advice like unacceptably low educational standards for licensees and a failure to regularly audit practicing standards. As part of these regulations, the average consumer would be horrified to learn that the regulatory education standard for an authorised Financial Adviser is equivalent to sub diploma standard, and that it can be ‘fast tracked’ in around 6 weeks. Hewison
& Associates have always held the belief that this is totally unacceptable and must be lifted to at least Advanced Diploma level or preferably Bachelor Degree standard. Here we have an industry crying out to be recognized as a professional body, yet when the question of industry integrity is raised, ASIC turns the spot light back on remuneration. Make no mistake, the banning of product related sales commissions remains the issue here, not asset based remuneration.
Separately Managed Accounts Story by JOHN Hewison CEO/Private Client Adviser | IMAGE BY DAVE GREGURKE
he financial press has recently been full of articles on Separately Managed Accounts (SMAs) being the new breed of financial management structure. “Made to measure” and “New Model starts to turn heads” were the headlines of a recent Australian Financial Review (AFR) article (Financial Review 2 September 2009). The fact is, at Hewison & Associates we have been operating SMAs since the late 1980s and are market leaders in the field. In fact, if the AFR article is correct, we account for around 40% of the entire Australian market.
The reason SMAs have not taken off in Australia (or anywhere else in the world) is that they are difficult to package as a mass market “financial product”. They are very much “hands on” and personalised and therefore difficult to manage without purposely designed and built systems and commitment to the task.
As the Australian financial services industry is dominated by product manufacturing and profit driven large institutions like banks and insurance companies, it is highly unlikely that anyone other than specialist providers can or will take on the complexities of SMA management. It is an easy job to put a client through some sort of risk profiling tool, designate them a client type (e.g. “moderate aggressive”) and whack their money into a model portfolio. Then pat them on the head, send them home and review every 12 months. The fact is, this is the mainstream and when we have a disastrous period as we have for the past couple of years, it all comes unstuck. SMAs require a great deal more than that - they require careful strategic and investment design according to each client’s individual needs (not a model). Media articles refer to the profound
advantages of SMAs in respect to cash flow management, taxation management, flexibility and cost economy. But sadly, we have seen the industry attempt to commoditise SMAs into “model portfolios” and a pseudo managed fund format. The fact is, SMAs are hard work and require continual care and attention. But just a minute, isn’t that what we are paid to do? The other issue is the supporting software that is complex and specifically designed to administer SMAs. This requires a large investment and is highly specialised – we know from our experience. It is not something that is likely to be mass marketed because of the requirement for total commitment at all levels of a financial planning business. Clients deserve personal attention, planning and ongoing service. Sadly, institutionalisation of financial planning and management won’t deliver this outcome.
Investor Insights Seminar Series Hewison & Associates invites you to attend an exclusive client wealth management briefing as part of our Investor Insights Seminar Series. We live in a time where knowledge is power, particularly with regard to your financial affairs, and now is the perfect time to reassess your financial situation and understand the potential risks and opportunities associated with protecting and continuing to grow your portfolio. The seminars are free and will be hosted by Hewison & Associates’ Senior Advisors. It is a chance for you to ask questions in an intimate setting and get up to speed on the latest wealth creation and protection strategies relating to the following four key areas in focus: • Estate Planning • Risk Protection • Asset Accumulation Strategies • Asset Allocation These were also the most requested seminar topics as selected by you, our clients, in our poll earlier this year. Furthermore, if you have a friend, colleague or family member who is unsatisfied with their current wealth manager or industry super fund provider and believe Hewison & Associates’ services may benefit them, we extend an invitation to bring them along to the seminar(s). Please confirm your interest for either or both of the seminars below to reserve your place as seating is limited. Event details: Seminar 1: Estate Planning and Risk Protection Date: Tuesday 27th October 2009 Seminar 2: Asset Accumulation Strategies and Asset Allocation Date: Wednesday 28th October 2009 Time:
6.00pm - networking drinks (a light snack will be provided) 6.30pm - 7.30pm event commences
Venue: Australian Institute of Management 181 Fitzroy St, St Kilda Victoria 3182 RSVP: by Tuesday 20th October 2009 - Contact Clare Kerber on: 03 9682 1900 or Email: firstname.lastname@example.org
Hewison Bowling The annual Hewison ten pin bowling tournament was held at Crown King Pin in July. H& A staff and their partners formed into teams and a willing competition was off and running. Denise was the early leader but was gradually pegged back
by the boys. In the final analysis, Andrew won, closely followed by Clare’s husband Chris coming 2nd and Jenny’s partner Daniel 3rd. It was a fun night with plenty of laughs and some “interesting” bowling styles.
Andrew Hewison Completes City 2 Surf Hi everyone, back in August this year I travelled to Sydney to compete in the Herald Sun City 2 Surf, a 14km fun run held annually. The run begins at Hyde Park near the city centre and makes its way through the beautiful streets of Double Bay, then leading you through Rose Bay and up “Heartbreak Hill” before descending on Bondi Beach.
It was a challenging but extremely enjoyable run and I was glad to complete the run in around 66 mins. I was also very fortunate to use the run as a means of raising $1800 for Cystic Fibrosis NSW. I would like to thank all who supported me and more importantly, the cause. I will be back next year!
Our office will be closed on Thursday 26th and Friday 27th November 2009 as Hewison Staff will be attending a Retreat at the Vue Grand in Queenscliff.
Here’s a minute of
Asset / Financial Review Innovation Awards 2009 We are pleased and proud to announce that Hewison & Associates has been adjudged the Best Mature Financial Planning Practice in Australia at the recent Asset Magazine / Financial Review Innovation Awards for 2009. These awards are prestigious industry awards given each year for achievement of excellence and innovation. They are subject to a rigorous judgement and analysis process by both industry luminaries and business analysts. Hewisons has won these awards previously in the areas of Client Management and IT Systems, but this year was awarded for overall practice management in areas of client service, systems, financial management and in particular, our innovations in respect to our people. Asset magazine wrote “The judges were impressed by the way this well managed firm continues to challenge the status quo.” The judging panel specifically highlighted the empowerment of our people, their ownership of their tasks and the client focussed mission of the company. Judge John Godfrey was quoted as saying “Hewison does all the right things and runs it like a well oiled machine.”
Private Client Adviser a) Where were you born? Melbourne
i) Where did you work previously? Super Partners & Mercer HRC
b) Where did you go to school? Catholic Regional College Melton/ Sydenham
j) Who/what do you admire most? People who act honestly
c) What do you do for fun? Hang out with my daughter, Eve d) What is your favourite book? Lord of the Rings e) What is your favourite music? House Music f) What is your favourite food? Shepherd’s Pie g) What is your favourite movie? Lord of the Rings h) How long have you been at Hewisons? 3.5 years
k) What are 4 people in the world you would most like to invite for dinner? 1. Dalai Lama 2. Warren Buffett 3. Miranda Kerr 4. J R R Tolkien
Level 4, 102 Albert Road, South Melbourne VIC 3205 P (03) 9682 1900 | F (03) 9682 5999 email@example.com | www.hewison.com.au
l) What are you hobbies? Sony Play station, watching movies, reading books m) What is it you enjoy most about your role @ Hewisons? Liaising with clients and helping them achieve their financial and lifestyle goals
The information contained in this publication is general in nature and not intended as personal advice. Please obtain advice from your financial planner before acting upon this information.