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February 2011




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Cont e nts


February 2011 04 07 08 10 11

From the editor Practitioner perspective Slattery Rantall Whiteley

42 Investing in overseas real estate 44 The SMSF witch-hunt has failed

Client case study 22 Restoring the years the locusts devoured

Professionalism 26 FPA reforms a strategy for a new profession

Marketing 28 Avoid clichĂŠs like the plague

Superannuation 36 Demand may be just beginning

Technical 38 An enhanced approach to portfolio construction

Managed funds 40 How to tell a rally from a bubble

Cover story - page 12

Planner profile - page 18

Opinion and views

Self-managed super

Practice management 46 Martin Mulcare 47 Ray Henderson 48 Peter Switzer

Investor psychology 49 Training clients to perceive value Property 50 Countdown to liftoff in commercial markets Sharemarket 52 Light at the end of the tunnel

Final Word

54 Reef Oil and Aerogard - welcome to 2011

Roundtable: Shorten sweet on - page 30 the role of planners

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It’s time to speak up and be heard I

t’s not always obvious at the time a particular event takes place just how important the event really is. It’s usually easier to be wise, or to fully understand its significance, afterwards. Politicians, for example, are experts at being wise after the event. But it’s pretty clear that the upcoming vote on how the FPA is structured - and hence, how effectively it serves the interests of its individual members - is an important occasion. It’s important, because it will change how the policy and direction of the FPA are influenced by institutions. It will make it clear that professional obligations attach to members as individuals; and at times these individual professional obligations may put members in conflict with their institutional employers. It’s important, because it sends a signal that financial planners - those who are members of

the FPA and sign up to its codes of ethics and conduct - take their professional responsibilities seriously, will put them ahead of their employers’ interests when they have to, and place their clients’ interests ahead of all else. So the FPA is seeking a mandate. This is a word bandied around by politicians a fair bit, but in this case it’s accurate. The issues under consideration are clear. The association needs its members to give it an unequivocal answer to whether they support its ideas and strategy, or not. One thing that has become very clear to me over 25 years of writing about financial services and financial planning is that too often the vocal minority hijack the really important debates. Those with the most to lose, or with the strongest vested interest in maintaining the status quo, inevitably make the loudest noise. That’s their right, but if you were to base

your assessment of the entire industry on what these few say, it would be a distorted one. There’s a big group of FPA members out there, I dare say a significant majority, who not only support the FPA’s proposals but are heartily sick and tired of those who shout loudest to defend some of the industry’s unacceptable practices. It’s time for that majority to act. There’s no need to make a noise or raise a fuss or attract attention to yourself. If you’re an FPA member, just vote. Vote in favour or vote against, but vote. Whatever the outcome, the FPA has to be able to say the outcome reflects the view of all of its members. In this month’s cover story, Professional Planner journalist Krystine Lumanta canvasses the views of a range of interested parties. As

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are members, after all, and care enough about the association to attend its annual conference - but I know that planners generally are not backwards in coming forwards when they disagree with something. On the issue of education, there is more widespread agreement than I have witnessed on many other key issues over the year. It seems any moves to seriously raise the bar to new entrants will be strongly supported. While there’s some concern about how the new standards should be applied to existing practising planners, these are matters that can be dealt with, without seriously undermining the broad thrust of the reforms. ***

expected, support for the restructuring isn’t universal - but the reasons given both for and against the proposal are illuminating. The cover story begins on Page 12. *** We’ve described the upcoming vote on the FPA’s membership structure and membership as “a new dawn”. With a nagging sense of hypocrisy, we also have a feature, written by the creative director of Wrap Creative, Bruno Bouchet, on why it’s vital to avoid clichés in marketing. Marketing, perhaps, but apparently not magazine covers. Bruno’s feature is on Page 28. *** In the December-January edition of the magazine I outlined how absurdly easy it is, but must not remain, for someone such as myself to become a financial planner. It provoked a range of responses. I won’t be taking up all of your offers - not all of which are physically possible anyway - but I’m heartened by the response it received in some quarters. A good gauge was the FPA conference on the Gold Coast in November. You’d expect delegates to be broadly supportive of the FPA - they

It’s appropriate at this time to spare a thought for our colleagues in the flood-affected parts of the country. Most notably, Queensland, of course; but at the time of going to press it appeared that the issue could become more widespread. The financial planning industry is to be commended for its response, offering pro bono financial planning advice to those affected most. Financial planning businesses have fared just as badly as any other businesses in the inundated areas, and it’s testament to these practitioners’ resilience and sense of community obligation that they are prepared to overlook their own misfortune and to seek to help others. Hats off, also, to Andrea Slattery and the team at the Self-Managed Superannuation Funds Professionals’ Association of Australia (SPAA). SPAA is scheduled to hold its 2011 conference in Brisbane later this month. The Brisbane Convention & Exhibition Centre was affected by the floods, but at last report was getting back on its feet, and SPAA was committed to staging its event and doing its best to support the Queensland economy. Simon Hoyle


February 2011 - Issue 28

Editor: Simon Hoyle Journalist: Krystine Lumanta Head of Design: Saurav Aneja Publisher: Colin Tate Business Development Managers: Laurence Jarvis (Events) Sean Scallan (Advertising) Printing: Sydney Allen Printers Mailhouse: D&D Mailing Subscriptions/Distribution: Jessica Brown Subscriptions are $139 inc GST per year (11 issues), within Australia. Certified Financial Planners may apply for a complimentary subscription

Cover Image : Saurav Aneja Roundtable Photos: Matt Fatches Professional Planner is published by: Conexus Financial Pty. Ltd. Level 1, 1 Castlereagh Street, Sydney GPO Box 539 Sydney NSW 2001 Ph: 61 2 9221 1114 Fax: 61 2 9232 0547 Conexus Financial is an independently-owned company.

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Underinsurance a complex issue Underinsurance has nothing to do with a lack of trust in financial planners and advisers, and everything to do with the complexities and emotive issues associated with life insurance, says Graham Poole, in response to an article published in the December - January edition of Professional Planner.


ensationalisim usually contains some elements of truth, but is not necessarily the whole truth. If life assurance is so easy to sell, why are Australians not over insured? The sale of life assurance is an emotional sale, usually based on the love of someone or something. Logically, when you are dead you are dead - and past worrying. It is not easy to convince a family that has many priorities and life options that they should make life assurance a priority after food and shelter. It is not an easy process to find prospective clients, motivate them to have a meeting, discuss their own mortality or potential for having an accident, illness or severe medical trauma. It is, in fact, extremely difficult. Even if an adviser does manage all this, the underwriting requirements are much more difficult than they were in the 1980s and 1990s. Many clients face a battery of medical tests that they do not want in a busy world; and the percentage of clients that are declined by underwriters has risen quite sharply. But when a case is declined, is an adviser remunerated for all the organisational work, Statements of Advice (SoAs) and follow-ups - including chasing late medical reports? No, generally, they are not. I believe that a lot of insurance cover is still written at times to suit the customer - that is, outside of normal working hours. If financial planners are not to be reasonably rewarded for doing all of this, who else will do it? I remember a newspaper article written about the late Sir Robert Menzies, in which he was interviewed about his life insurance agent. Sir Robert said the premium always seemed so much at the time, but that he had spent some years regretting that he had not purchased more.

Presumably, he was referring to the “dreaded” whole-of-life (WoL) plan that the Professional Planner article was so scathing of. Many of our clients continue to value their WoL plans which are still in force, and will probably be the only policies in force upon their death (for those who live well beyond retirement). I was amused at the colourful phrase that in the 1970s there was “an army of high-pressure sales agents”. Were there some high-pressure agents around? The answer is, of course, yes. Were all agents high-pressure? The vast majority were (and still are) hard-working small-businesspeople who were paid on results only. The fact that most life agents handle claims for grieving widows and widowers, for no additional fee, seems to be conveniently overlooked by industry critics. The agency development loan (ADL) argument raised in the article is irrelevant to the current position of underinsurance, other than to make the case that some agents were greedy (luckily, this has never applied to accountants or solicitors!). There is some truth to the idea that there was a “market frenzy”, but what percentage of advisers was involved? I would argue that only a small percentage was, and that these advisers are no longer in business. It is true that the fall of the life insurance agent coincided with the rise of the financial planner. But it is also true that with the withdrawal of the WoL product, the industry also saw a decline in commission rates on risk cover to around 45 per cent of the premium. Harder underwriting, due to changes in blood tests, which led to higher decline rates, also led many life agents to re-examine whether they could continue to pay rent, staff, and so on, and still make a profit.

Thousands of life agents left the industry during this period, and many of the survivors decided that low commissions and difficulties in underwriting made financial planning a much more attractive and less stressful proposition. But it is folly to believe that financial planners will fix the underinsurance problem with little or no incentive to do so. Who will convince the average Australian to cover their mortgage and leave an income for their dependants? The current compliance regime is the problem. A premium for this sort of cover could be less than $1000 a year. By the time a paraplanner is paid, office costs met and an SoA is researched and produced, this business would be written at a loss. Commission disclosure has been around for at least 10 years, so this is not the problem. The solution to servicing middle-class Australia lies in reducing compliance costs - not writing sensational stories. Will clients happily pay a fee to take out insurance? Will financial planners seek out clients and go through what is usually a tedious underwriting process for such a fee? Will they be prepared to do the 10-year “apprenticeship” that is generally recognised as necessary to produce a highly-skilled lifewriter? To anyone who thinks so, to use the phrase much-used in the film The Castle: “Tell him he’s dreaming!”

Graham Poole is an authorised representative of Matrix Planning Solutions and has more than 40 years’ experience as a life insurance adviser.




ne of the unique features of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) is the high technical expertise of our members, comprising SPAA Specialist Advisers (SSAs) and SPAA Specialist Auditors (SSAuds). To date, SPAA has had more than 1000 members commit to voluntary specialisation to enhance their professionalism. So it’s not surprising that many of our SSAs or SSAuds - such as Peter Crump, Louise Biti, Jo Heighway, Peter Hogan and Graeme Colley feature prominently in this year’s lineup of technical speakers at the SPAA National Conference, taking place at the Brisbane Convention Centre. These are people at the top of their profession; and SMSF trustees should feel confident in employing these specialists for strategic advice about their SMSF. The objectives of this year’s SPAA National Conference are: • to deliver a fresh and exciting program with a blend of new and “popular” SMSF speakers; to challenge delegates with technically stimulating and informative sessions; • to empower delegates with the most cutting-edge SMSF solutions and strategies; • to update delegates on the latest legislative changes and developments; and • to provide a networking forum for peers to connect. Of course, the challenge for SPAA is to ensure the program continually engages delegates; and on this, the feedback from members reflects a consistent hunger for more technical sessions. So, we have continued with our

three technical streams which include: Compliance, Administration, Audit and Legal; SMSF Strategies and Estate Planning; Financial Markets, Investment Strategies and SMSF trends. Looking at the program, there is a wide range of technical issues up for discussion and I will highlight just a few of these. Peter Crump, SPAA board member, will be leading a session called, “Troublesome pensions - what are your options?”. This session will take a look at the history of pension changes over the past 10 years. In particular, Peter will highlight what can be done with market-linked pensions or allocated pensions that are stuck under old rules. He will also be looking at defined benefit pensions and discussing whether they should be retained at all costs. Louise Biti, a leading technical strategist with Strategy Steps, will discuss superannuation anti-detriment laws and will outline a fresh approach on how to use them in SMSFs. She will cover how practitioners should structure their advice, when to use an anti-detriment or a re-contribution strategy, and the best ways to fund and implement this strategy. Peter Burgess, SPAA’s own national technical director, will present a one-hour plenary session on SMSF legislative and technical issues. Graeme Colley, national technical services manager at OnePath, will lead a session titled: “Limited Recourse Borrowing and what you need to do to comply”. This is a timely session, given some of the issues that have arisen in that space this year. High-profile financial planning industry lawyer Peter Bobbin will look

at the good, the bad and the ugly side of the excess contributions tax (ECT). Peter’s catch cry is that ECT is a “tax on mistakes” as no-one would make super contributions knowing they would be taxed at up to 93 per cent. There are also technical sessions covering estate planning, in-house assets, pre-’99 trusts, asset segregation and art and collectables. For a bigger picture focus on legislative and regulatory issues affecting the SMSF sector, look no further than our exciting lineup of plenary speakers, including the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP, who will open the conference with a legislative update. Sir Anthony Mason AC, KBE, ex Chief Justice of the High Court and SPAA patron, will speak on professional negligence and challenge professionals on their moral and ethical behaviour. The conference will close with a FoFA-focused panel session with Bernie Ripoll MP, FPA CEO Mark Rantall, and Count Financial CEO Andrew Gale, who will discuss what those reforms may mean for the industry. We look forward to seeing everyone at the 2011 SPAA National Conference.

To comment on this article go to .

Andrea Slattery is the CEO the SelfManaged Super Fund Professionals’ Association of Australia (SPAA).


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he Financial Planning Association’s (FPA) strategy launch has received an overwhelmingly positive response from members. Two months after launching, more than two hundred practices have pre-registered as FPA Professional Practices, and Professional Partner commitments have been received from large principals, including most of the dealer groups within the ANZ, Westpac, NAB, CBA, AMP and AXA groups. The FPA announced a new three-year Strategic Plan at the 2010 National Conference, Your Wavelength, last November. The immediate response at the conference was positive, and this reaction has grown since. The FPA Board launched the three-year strategy alongside a new brand and advertising campaign to position FPA members as trusted professionals. The FPA engaged in lengthy discussions with members ahead of the launch, refining proposals and ensuring the launch would be well received by members. Our determination to make the FPA a true professional association has resounded with our members and the new strategy has received the broad support we had hoped for. The feedback the FPA has received during and since the conference shows that our members believe we are going in the right direction for the profession. We continue to receive support from all involved including individual members, chapters, both small and large principals, other associations, government and regulators. We expect the new FPA strategy to result in significant growth of

Associate Financial Planner (AFP) and Future Planner members, and increased Certified Financial Planner (CFP) enrolments. The initial rapid take-up of Professional Practice preregistration is a good sign, and there is anecdotal evidence of both increased membership growth and increased interest in CFP enrolments since the launch. Last year, close to 500 young people joined the FPA as students or Future Planners, and we expect this rapid growth in young people - who are the future of the profession - to continue, due to our increased focus on individual professionalism. We are particularly delighted with the initial rush of support for the FPA Professional Practice concept. The FPA brand will become the mark of trust and seal of quality for financial planning practices, enabling Australians to be confident in the higher professional standards of FPA members. It is great that there are already over 200 top quality local practices around the country that will commence using the new FPA brand from July 2011 onwards. It is not enough, however, to just claim to be a professional or member of a professional association. A professional association has to have a professional framework, including entrance standards (minimum degree qualification); ongoing and designation educational standards; evaluation and discipline proceedings; and importantly, an aspirational code of conduct and ethics. It is these attributes that determine a profession, and it is a member’s dedication and commitment to these attributes that determine

whether he or she is a professional. It is for this reason that we will be seeking a renewed commitment to our Professional Code of Practice and Ethics by our members to ensure, when we tell consumers about our members’ commitment to professionalism, that we can do so with confidence and consistency. We are asking members to continue to provide us with feedback over the coming months, via the consultation paper and member survey, by emailing us, or by attending the road shows being held around the country in March. We expect to have the next round of advertising concepts ready for member feedback in time for the road show. Ultimately, the new strategy is the members’ decision, and we hope that the Extraordinary General Meeting on April 7, 2011 will bring a positive result for the entire financial planning industry.

To comment on this article go to . Mark Rantall is chief executive officer of the Financial Planning Association of Australia (FPA).


Early acceptances





he 1997 Wallis Inquiry into Australia’s financial services industry reflected much of the mainstream thinking of the time about consumer behaviour. Regulation was framed around the assumption that consumers will act rationally and in their own best interests; and therefore disclosure and transparency are the centrepiece of consumer protection. The assumption was that consumers want choice and that more information enables them to make the most suitable decisions. This approach was consistent with regulatory approaches in many other countries. A decade or so later Choice of Fund legislation was introduced, guided by the same philosophy. At the time, the thinking was that if employees are compelled to save for their retirement - and bear the risk in accumulation accounts - then they should be able to choose the fund in which their savings are invested. It was expected that consumer sovereignty in the form of members switching to the best performing funds - a rational outcome - would drive down fees and increase net returns. In relation to financial planning, consumers had the option to choose whether they wanted to pay for financial advice in the form of sales commissions or on an up-front basis. The financial planning industry reported that people typically preferred to pay for financial advice through sales commissions. The first signs that this approach

did not reflect the real world were the low levels of switching by consumers. Furthermore, the disparity in net performance between industry super funds and retail super funds, and several financial planning scandals, forced a re-think about how superannuation and financial planning are regulated. During 2010, ISN published Supernomics. This paper identified three causes of market failure in the superannuation sector: member inertia and disengagement; product complexity and low levels of financial literacy; and conflicted remuneration structures in the financial planning industry. The paper found these factors had led to market failure that was costing individual workers tens of thousands of dollars in “lost savings” and Australia tens of billions of dollars. Further, it has become clear that information asymmetry and “choice overload” prevent many consumers from making informed decisions about their retirement savings that are in their best interests. Over the past three years, two separate reviews - one led by Jeremy Cooper and the second a Joint Parliamentary Inquiry into the collapse of Storm Financial and other scandals - concluded that existing regulations and consumer protections were insufficient. Similar reviews and conclusions were drawn in the US and UK. The Cooper Review recommended rules to ensure that workplace default funds meet with certain criteria (the “MySuper” proposals). This

provides the 80 per cent of Australian employees who do not choose their own super fund with a “safety net” for their super savings. Where people do wish to choose their own super fund, and perhaps seek financial advice from a financial planner, the Government has also proposed rules requiring financial planners to act in their clients’ best interests. Proposals are also on the table enabling clients to “opt-in” to paying for financial advice on an annual basis. This addresses member/ client inertia. There is consensus within the super industry about the Government’s proposals to improve the back office functioning of the industry (Superstream) and its measures to address retirement incomes adequacy. That consensus should extend to the need to place the protection of our members’ interests as the centrepiece of reforms. Support for MySuper and the Future of Financial Advice (FoFA) reforms would achieve this ambition. Superannuation is one of Australia’s greatest economic assets; its regulation needs to reflect the reality of consumer behaviour rather than a theoretical economic construct.

To comment on this article go to . David Whiteley is chief executive of Industry Super Network


From transformation to consensus




A n ew


The Financial Planning Association of Australia is set to radically overhaul its membership structure, aiming to put its focus squarely on individual members. These changes must remove the perceptions of institutional influence that have dogged the FPA, but there may be implications. Krystine Lumanta reports.


n April, members of the Financial Planning Association of Australia (FPA) will vote on changes to the structure of the association that would require businesses to meet new criteria to be FPA-affiliated. The blueprints for a new, improved FPA were unveiled at its national conference on the Gold Coast in November last year. The changes to the association’s membership structure promise to support individual members in their quest to attain professional status. As the principal industry body, the FPA has battled perceptions of unfavourable links to large

institutions, creating the impression that it is unduly influenced by the big end of town, often at the expense of individual members’ and smaller planning groups’ interests. But the cornerstone of the FPA’s plan for structural change is to focus squarely on individual members. The changes propose that the Principal member category be removed so that only Certified Financial Planners (CFPs) and Associate Financial Planners (AFPs) will have the right to vote. In addition, a financial planning practice that meets the new membership criteria will be

referred to as a “Professional Practice” and will be licensed to use the FPA brand. The new category needs 75 per cent FPA membership and 50 per cent of the practice’s planners must be CFPs. Australian Financial Services Licence (AFSL) holders who have achieved 25 per cent FPA membership among their practitioners will be given the opportunity to become “FPA Professional Partners” and to continue working with the FPA on industry issues. Lastly, the Affiliate category will replace the General member category to allow for additional sub-categories, including paraprofessionals and subscribers.



The possibility of such major restructuring has garnered an assortment of responses, varying from full support to strong opposition, and even indecision among some. Tony Gillett, director of Retirewell Financial Planning, says that during the past three to seven years, there has been a lot of “antipathy toward the FPA”. “The FPA, with its current and old guys, was trying to represent too many interests,” he says. “They tried to represent the planners and the dealers, and there were natural antagonisms between the small dealer, which was the large majority in the membership, and the small number of very large dealers. I really believe that [people’s assessment of ] the FPA as only representing the big end of town is just rubbish. These changes really cut those criticisms of the FPA off at the knee.” Peter Roan, principal of Roan Financial, believes that the FPA is finally shifting its focus on to individual financial planners and bringing personal accountability to the forefront. “I’m very positive about the changes,” Roan says. “It was always going to be inevitable that to be seen and perceived as a professional organisation, you had to be member-based and individually-based. “If you had to look for some minuses, I suppose logically some of the principals, particularly the bigger ones, bring a fair bit to the table … [and they] might be upset by the changes.” Fair and accurate member representation has always been an issue for the FPA, according to Dennis Bashford, managing director of Futuro. “I think generally speaking, the FPA membership is not exactly happy with the way the FPA has represented it,” he says. “Certainly the numbers suggest it - that they’re walking with their feet and they have a much better alternative now available to them through the Association of Financial Advisers [AFA].” Paul Kelly, a founding director and director of network services for Futuro, supports Bashford’s view. “There’s no doubt that the AFA has been

getting a number of planners across and I think it’s probably an indication of the way people feel about the FPA,” he says. “A fair majority of our planners are still with the FPA but largely that has to do with them being CFPs, so there’s no choice in that one.” Bashford says financial planners across the board voice this concern to him regularly - not just those that work in his business. They’ve told him that the main reason they remain FPA members is because they want to keep the CFP designation. “In terms of the FPA no longer being relevant, that’s a pretty harsh call,” Bashford says.

‘Some of the principals, particularly the bigger ones, bring a fair bit to the table’ “I think that they are trying to become more relevant and some of those proposed changes are designed to address that perception. “What the industry needs is a true professional association that only represents the individual, authorised [representatives] and it should be compulsory for them to be members of that association,” Bashford says. According to Kelly, setting compulsory membership to the industry association is imperative and he believes it is a key issue that needs to be addressed. “There are a lot of planners out there who aren’t a member of anything,” he says. “The reality is if you’re a teacher, if you’re a doctor, a lawyer, it’s not an option. You have to be a member of the professional body. The question

has to be asked, ‘Why isn’t this the case for financial planners?’ We brought it up with the FPA and it’s a government issue. But the Government won’t bite the bullet on that one.” For those at the other end of town, Richard Nunn, executive general manager of advice at MLC, says they’ve been one of the first to sign on as a Professional Partner. “I’m quite relaxed about institutions and large dealer principals not being in their previous capacity,” Nunn says. “If this is about focusing on the planners themselves and their businesses, then I think this is a decision the FPA had to take and we were obviously consulted about it. The FPA is the peak professional body, so it would be in the best interest of all planners that have done the education to be deemed professional [to] get on board with these changes.” If the changes are approved, Louise Lakomy, CFP at Yellow Brick Road and member of the FPA Small Principals’ Forum, predicts that the challenge will be to ensure everyone is taken care of, particularly boutique businesses. “There are different nuances between large and small and at the end of the day it should be one voice about financial planners,” she says. “But I hope going forward that there is still assistance that the FPA provides … [to] better assist small businesses. As long as we have that support, I think it will be very valuable for us. “What they’re also recognising is that even though you might be under a large dealer, you’re running a small business; so a lot of the financial planners under the big guys are affected the same way as those in my business,” Lakomy says. Perhaps the most considerable change recommended by the FPA’s consultation paper is the discontinuation of the Principal member category of membership. The current arrangement gives small, medium and large principals a right to vote at general and annual meetings, allowing them to influence policy development and constitutional amendments. However, the FPA believes that this is no longer necessary as it promotes an inaccurate


perception. Currently, the Principal member brand can be used irrespective of the number of FPA members and CFP qualified professionals within their financial planning business. The FPA will be removing the category altogether so that Principal members will be replaced with the title of either a Professional Practice or a Professional Partner. A financial planning practice will be labelled a Professional Practice and be authorised to use the FPA brand if it holds 75 per cent of its staff as FPA practitioner members and 50 per cent as CFP qualified. A Professional Practice will not have any voting rights. Professional Partners will include those AFSL licensees who hold at least 25 per cent FPA practitioner membership. They will continue to be affiliated with the FPA but will not be able to use the FPA brand or represent themselves on the board; and their vote will also be removed. There is now debate between those that believe their vote is vital and those that do not want the risk of reputational damage, as epitomised by the Storm Financial example. Bashford says that the removal of the Principal category is highly worrying. “We do have issues with the way it’s been proposed,” he says. “The fact that we’re members paying fairly significant membership dollars with no vote and no real say is a bit of a concern.” Kelly says their main concern at Futuro is having some kind of representation and keeping their entitlement to be heard. “We did have a talk to the FPA about it,” he says. “Quite frankly, we’ll be voting against that proposal to scrap the Principal members category, because in the end … there needs to be some kind of representation where the licensees have some voting rights in relation to policies and procedures. “We have to remember we only have one vote just like everybody else. So why take the one vote away? That doesn’t ring true for us.” If the vote passes, Bashford will be taking a closer look at whether to stay an FPA member.

“We will certainly be reviewing and not automatically renewing our membership whereas previously, [it] was automatic and we hadn’t questioned it, we just paid the money. So we’ll have a look a lot more closely at what we’re going to get for our dollars,” Bashford says. On the other hand, Lakomy says that she has not heard any negative comments from small businesses about the removal of the Principal category, citing that such a change will give businesses an advantage. “We’re covered in the Professional Practice arena and most of them like that label a lot better for public awareness,” she says.

‘This is a decision the FPA had to take and we were obviously consulted about it’ “It’s more simplistic and it says something. I think that it’s a positive step and I don’t see the removal as negative because it’s about financial planners; and whether you’re in a small or large business, at the end of the day if we can have one voice that moves forward with Government, that is a great step forward. “Yes, they’re removing the small principal designation, but what’s the outcome? We’re going to become very accountable.” Roan refers to the “Storm Financial” collapse to emphasise the problems created by the Principal member category. “When you look at Storm, it was a Principal member, but how many advisers were actual FPA members?” Roan asks. “I, as a practitioner member, get measured


against that and this was one of the problems of the P{rincipal membership - it inadvertently gave all advisers a tie to the FPA that they could promote, but they weren’t really [a] part of it. I think the changes, if anything, should draw more people that weren’t members into the profession.” Lakomy agrees that the changes to qualify as a Professional Practice are reasonable and compensate for the elimination of voting rights. “They’ve removed the Principal membership; yes, we can’t vote at that level,” she says. “However, the Professional Practice is now what we’re changing to, which to me makes more sense to the community. “This way, we’ve got financial planners at the core face of dealing with clients, putting their hand up and saying, ‘I’m going to be abiding by the code of ethics, I’m going to be abiding by professional conduct, I will be abiding by all these rules and regulations when I see clients.’ “A Principal member meant nothing to the community, whereas if I can put the banner on the door and say, ‘I’m a Professional Practice’, I think that’s very positive for the business.” “In a Professional Practice you only [need] 50 per cent CFPs, so those smaller businesses that don’t have CFPs won’t miss out. The FPA are saying that the CFP is a designation - like the chartered accounting, like doctors, like all professionals. There is a designation the community understands as the highest acumen that each professional aspires to. Fifty per cent need that aspiration; the other 50 per cent don’t necessarily - so they’re not going to be left behind, because the FPA are not asking for 100 per cent.” Lakomy also sees value in the FPA symbol if it means current and prospective clients can differentiate between authentic financial planning businesses and non-professionals. “If more of my colleagues are saying they’re a Professional Practice and I’m not, well then it’s really about public perception,” she says. “The more businesses that become Professional Practices, the better, because from a marketing perspective, it will [increase] consumer confidence.” There will be a three-year transition period



for businesses to allow their representatives to become CFPs - which is more than enough time, according to Lakomy. However, she can see that for larger businesses it could be an issue getting their practitioners to reach the 50 per cent CFP measure. Les Batchelor, general manager of Sinclair Wilson Investment Services, says that despite the lenient 50 per cent criteria, it will still result in significant implications for smaller principals and their planners. “For example, where they might have five financial planners, two of them might already be CFPs. Then they might have two or three others that are quite senior and have been in the industry for a long, long time and these guys may not be in a position to get the CFP qualification,” he says. “The end result of that is they’re singled out as being the 11 out of 12 non-professionals that are not placing their clients first. It also means that the practice cannot use the FPA brand.” Attaining the CFP certification itself has become a topic for discussion, putting its value under the spotlight with people wondering whether it should be made obligatory for every financial planner to hold one. Gillett says that the power of the CFP qualification is in its world-recognised value. “The CFP is the big central pot of gold that the FPA holds,” he says. “It’s been around for 20 years, it’s worldwide and the only worldwide designation. They’re going out boldly and grabbing the whole heart of financial planning, grabbing professionalism and attaching it to the FPA and attaching it to the CFP mark. “New designations fracture this. “So I think this has been a masterstroke by the FPA. [By] focusing on the professional financial planner, we’re going to grab the heartland of financial planning. They’re getting rid of distractions like the Principal category. I believe that they’ve moved at the right time. This could be the start of the way to bring the industry back under a single umbrella, with the professional planner holding the CFP designation being at

the heart of it all.” But there are opposing views about CFP certification under the FPA’s changes. Although Batchelor feels that the FPA are on the right track, he doesn’t believe the changes are 100 per cent right. “I’m still a bit confused, and I’ve read the paper a number of times as to whether they’re selling this CFP designation as a qualification of professional standard or as a brand,” he says. “It came across fairly strongly at the FPA conference as a brand … so I took the liberty of ringing a few of my peers and that seems to be the general consensus; at least in the circles in which I move.” Batchelor expresses concern over financial planners being alienated if they do not become a CFP. “There’s a lot of financial planning professionals who hold post graduate qualification and unless they then go on and attain their CFP designation and subscribe on an annual basis, they’re going to be singled out as one of the 11 non-professionals in the FPA’s marketing campaign,” he says. “I’m not sure about insisting that my firm has 50 per cent CFPs and 75 per cent FPA members in order to be an FPA Professional Practice. I’m not sure that’s going to change a lot, except we’ll be paying a lot more in fees.” Paul Barrett, general manager of advice business at Colonial First State, has firm ideas about what the FPA must do before people vote on the consultation paper. “The FPA have got a large number of constituents from different perspectives. What the FPA needs to work out is what are the handful of things they need to stand for and do well and clearly,” he says. “Professionalism and lifting the standards is one of those things. The challenge for the FPA is not to become too fragmented and try to do too many things. It just needs to do a handful of things really well. From what I’ve seen so far of the FPA ‘new era’, I think that’s what they intend to do. “[It’s] a great problem when you’ve got a large

number of members [and] you can’t meet all of the members’ needs all of the time; so the challenge is to find out what the key needs are, focusing on those and communicating that strategy back to the membership base. “For Mark Rantall, as the CEO, his challenge is going to be to make sure that communication is clear and consistent.” The FPA overhaul seems to be the final kick that will bring all members of the financial planning community together and Roan is optimistic that the message will be received. “I think this could be our only chance to get it right,” he says. “Over the years, our industry has always been a mixture of everyone - people with their own agendas and points of views - and sometimes those points of views have not been in sync with the FPA. “As per the new logo, it’s now black and white who the FPA are and who they are representing going forward. To put it in another way: a line in the sand has now been drawn. This is a chance to promote and convey that we finally have a professional organisation that will represent the interests of the members who are the financial planning professionals.” Members have the option of voting electronically from April 1-7 or at the Extraordinary General Meeting on April 7. The FPA’s presentation inspired those who attended the national conference, so it is now a waiting game to see whether it will gain consensus from its member base for these proposed changes. Says Batchelor: “If I had to vote today, I’d vote against it. “I can’t speak on behalf of the industry at large, but in speaking to my peers, I think the answer is much the same as mine - if they had to vote today, they would probably be against it. [Although], it’s not time for knee-jerk reactions, and the financial planning profession needs to be united and moving forward, not fragmented.”

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Taking an active interest Three jolts prompted a 2010 FPA Value of Advice Award winner to choose a new career path. Simon Hoyle reports.





harles Badenach’s first lesson on the importance of planning for the future came from watching his grandfather. “He was very much from the old school,” Badenach says. “He started working at a law firm at 14, and finished work at 79, on a Friday. I was about 17 at the time. He packed his desk up, drove to hospital to check himself in, and he passed away on the Tuesday. “He’d worked for 65 years and didn’t have a retirement. He’d been diagnosed with cancer, and didn’t tell anyone. I thought, my goodness, if I don’t take an active interest in my own affairs that could happen to me. So that was my first jolt. “Then I had a second jolt, when I was working in the law in the 1990s - I was a lawyer for seven or eight years. I used to get disturbed because you’d get clients who would come in with a large personal injury or estate or family law settlement, and all the lawyers would do is just hand the cheque to them, without referring them to other professionals. “You’d inevitably find, after you’d talked to the lawyers after three or six months, what would happen would be the same thing. People had never received such a large lump sum, so they’d waste it on the traditional temptations of life - a new car, a holiday, some gift to the children. I thought that while that gives you some kind of short-term pleasure, there’s got to be a better way. So that was my second jolt. “And my third jolt was that I didn’t really enjoy the law.” Badenach started his Diploma of Financial Planning in 1997 and says he was “surprised at how straightforward it was, compared to the law degree at uni - it was scarily easy”. “After completing that diploma I got a taste for it, so I moved on to the Graduate Diploma in Applied Finance and Investment, through the Securities Institute,” he says. “I had all the courses, but I didn’t have anywhere to put my shingle up. So I was all qualified but had nowhere to go.” Badenach put a proposal to the partners of the law firm to set up a financial planning prac-

tice, and after a fairly detailed investigation the practice was up and running. “But after six months it just became clear that it was too difficult - it was like working with a doctor and a dentist in the same office,” he says. “It was next to impossible.” Looking around for options, Badenach contacted David Catchpole and Nick Bedding at Shadforth Financial Group, started there in June 2001, “and the rest is history, really”. “It was run as a professional firm,” Badenach says. “Advice was the focus. Acting in the best interests of the client was the focus. It had a very high ethical standard; very highly regarded. It set the benchmark, certainly in Tasmania and many would argue in Australia, in terms of what you needed to do to be an adviser. So you could only see clients if you were a CFP, for example. You had a lot of continuing education; so you were constantly pushed to he next level and that really appealed to me.”

‘So that was my second jolt. And my third jolt was that I didn’t really enjoy the law’ When Badenach joined Shadforth, he’d done all the study to qualify as a CFP, but lacked the required practical experience. But given his background as a lawyer, Shadforth was prepared to make an exception. “They allowed me to be an adviser with L plates straight away, because I’d come from a fairly senior role in the law - I was a senior associate with Murdoch Clarke, and the next step was partner, but that didn’t really appeal to me,” he says. Badenach says he was immediately struck by

Name: Charles Badenach Position: Private client adviser, principal, shareholder, Shadforth Financial Group Years in financial planning/financial services: 10 Qualifications: CFP, BA, LLB, DipFP, GDipAppFin, JP Industry background and experience: Prior to joining Shadforth, worked at Murdoch Clarke, a major Tasmanian legal firm specialising in commercial law. Involved in a number of community and industry-based bodies both as a trustee or board member, including Shadforth’s Board of Advice. Regular speaker at both professional and community-based forums in Tasmania.

the difference between how lawyers relate to clients and the relationships that financial planners develop with clients. “It’s a very different approach from the law,” he says. “With the law, for example, you would be able to tell a client what to do, because a client relies on you totally for advice. “In the financial planning profession, you need to engage a client in terms of what do they want, what are their preferences? It can be very different. I found the approach took probably a year or so to work out because I was so ingrained with [the idea that] whatever I said, people would do. You had to change your method with clients.” Badenach describes his clientele as “high-end, accumulating professionals, so I act - surprise, surprise - for a lot of lawyers; a number of medical professionals and CEOs of business and managing directors and that sort of thing; and self-funded retirees and a couple of charitable foundations as well”. A highlight in Badenach’s career came at the end of 2010 when he was awarded a Financial Planning Association of Australia (FPA) Value of Advice (VoA) Award. The award recognised the technical understanding that he brought to bear on his client’s issues and - in the case study he submitted for consideration - the ability to


empathise with their personal circumstances. “The main reason why I do this is I enjoy helping people,” he says. “I get a lot of satisfaction when you make a difference to someone’s life. You take it for granted, the knowledge you have, and it’s just a fantastic feeling. You can do a wide and varied range of work here. “One of the things, for example, is I run a financial literacy course for the Migrant Resource Centre, here in Hobart. It’s very much a leveller. It’s non-branded, it’s a very plain thing, but I quite enjoy it, because it makes you realise how lucky you are. You might be dealing with Sudanese or Bhutanese refugees, and it’s quite confronting how little they know, and how they can be exploited without that sort of advice. “I think as a society, if you’re reasonably successful as a society, you need to do that; otherwise the place doesn’t go forward.” Badenach’s career switch revealed an insight into how other professionals, particularly lawyers, regarded financial planning a decade ago. “Initially they were surprised, in that for them it was seen as a step backwards,” he says. “And disappointed as well, because my father was a senior partner in the law firm at that time; we had a very strong family association with that firm.” Badenach says the legal fraternity initially looked down on financial planning. “My move to the financial planning field helped to change a few of those perceptions at a local level, because I have a lot to do with lawyers and they can actually see

the value of advice that you provide - it’s not uncommon for a lawyer to come in here with a client and we’ll go through the strategy together and I’ll engage him in the process and he’ll realise, ‘My goodness, this is amazing, what you’re doing, that I wasn’t aware of ’,” he says. “So I think it’s been a positive, really.” But he says financial planning still has further to go. “We need to increase educational standards, and we’re not going to be taken seriously as a profession until the barriers to entry are lifted substantially,” Badenach says. “The recent moves by the FPA are a step in the right direction. As you know, it’s pretty easy to put your shingle up.” Badenach’s legal background

influences the way he approaches the job. “I have always put clients first,” he says. “And that’s what you do in the law. It’s drummed into you. I’ve had a fiduciary duty as a lawyer for years, so effectively I’ve just assumed that same role. I could not think of acting contrary to a [client’s interests]. “I’ve had clients come in to see me and they’ve said, ‘Look, Charles, I want to put $300,000 into this tax-effective investment’, and I’ve said, ‘You’re absolutely mad’. “I think that’s how a professional should act. This traditional commission-driven model is dead, and to be an adviser of the future it has to be highly personal, holistic, and take an active interest in the scheme of life for the client.


You also need to work with other professionals. “Going forward, I see as financial advisers we’ll be the principal wealth adviser for the client, so we’ll co-ordinate, manage and implement the strategy for the client. That role is going to encompass things like lifestyle goals, cashflow management, super, estate planning, investment planning, risk management, asset protection, debt management, salary packaging and, of course, retirement planning.”



Restoring the years

the locusts devoured One spinster’s desperate search for tax

guidance inadvertently helped rebuild the

wealth she thought was permanently lost to bad advice. Mark Story explains.






aving had her fingers burnt twice before in dealings with two different financial advisers, Melbourne-based nurse Patty Knight (not her real name), 60, was beginning to think the best thing she could do with the remains of her accumulated wealth was shove it under the mattress. While Knight is a self-confessed novice when it comes to financial matters, she had managed to accumulate a reasonable retirement nest egg before it started unravelling, courtesy of the wealth-destroying recommendations of previous advisers. In addition to a debt-free family home, Knight also had a geared share portfolio, a $250,000 investment property, an industry super fund and about $30,000 in cash. A decision 20 years earlier to back her first financial adviser’s recommendation ended in tears. Knight was steered into the ill-fated Great Southern Plantations forestry investment and ended up joining a lengthy queue of creditors struggling to receive four cents for every dollar invested. Ten years ago, with her experience of forestry investments a long forgotten nightmare, Knight mustered the courage to attend a financial seminar. She was looking to recover former losses and accelerate her wealth creation strategy. Knight’s newly appointed financial adviser convinced her to invest $40,000 into each of two property funds within a self-managed super fund (SMSF) structure. To add further insult to her previous losses, one fund subsequently failed, leaving her with nothing, while the other was frozen. And at the current rate, these funds may take 10 years to be redeemed in full. With retirement fast approaching, Knight was concerned that she may never sufficiently rebuild her nest egg - so she decided to start working extra shifts to help offset some of the losses. Unbeknown to Knight, her planner’s recommended transfer of direct shares into a newly created SMSF threw up a $10,000 liability in capital gains tax (CGT) and PAYG tax instalments that she could neither afford nor emotionally cope with.

Call for guidance

With no immediate means of paying this debt, Knight knew it was time to get some help. Based on the recommendation of a neighbour, she approached financial adviser and tax specialist Daryl Forge three years ago, looking for tax guidance. “When Patty first came to us she was not only distraught and confused at having lost half her wealth - courtesy of both bad financial advice and the GFC - but angry at having been left with such a hefty tax burden,” says Forge. “Having accumulated wealth more by living frugally than investment stealth, her faith in financial advice had understandably been shaken.” While Knight’s initial contact with Forge was for tax advice only, she says a thorough perusal of her tax position revealed the need for an immediate review of her overall financial position. Knight was understandably anxious at the prospect of falling prey to yet another dodgy financial adviser. But having been suitably impressed by the quality of the underlying tax advice provided, she finally agreed to a full review of her entire investment portfolio in March 2009. Better strategy

Two key developments ensued, within short order. Firstly, Forge lodged a request with the Financial Ombudsman Service to investigate claims of professional negligence by Knight’s former adviser. On the strength of those complaints, the former adviser was required to pay Knight an amount equal to the unexpected tax liability of $10,000. Secondly, Forge recommended that the $230,000 of assets held by Knight within her SMSF account - including a significant basket of blue-chip shares - be sold and converted into cash and that the SMSF be immediately closed. According to Forge, the SMSF strategy was fatally flawed because it lacked the necessary breadth to provide the right level of diversification. As well as placing extraneous demands on Knight as a trustee, Forge says her SMSF also lacked the critical mass needed to justify the

The Planner Daryl Forge Financial Adviser - JDFA Business & Financial Advisers Brighton, Vic

Forge established JDFA three years ago, together with tax specialist and partner Jennifer. Between the two of them they provide holistic financial planning services for predominantly mid- to high-net-worth Melbourne-based (and some interstate) clients. A qualified chartered accountant, prior to becoming a financial planner Forge spent nearly 20 years in the stockbroking industry, with the last three spent running NAB’s online stockbroking division. His partner, Jennifer, has been in public practice as a Certified Practising Accountant (CPA), specialising in tax advice, since 2000, and also has a Diploma of Financial Planning. Advice structure Having been mindful of pending regulatory changes and their impact on future commission structures, Forge established the business under a fee-for-service model from day one. Charges are based on funds under advice, the complexity involved in developing and maintaining a client’s wealth creation strategy, and the underlying risk. History Patty Knight initially crossed paths with Daryl and Jennifer Forge three years ago, following a referral from a neighbour who had been utilising their tax services. Knight’s initial contact with the Forges followed two previous, equally destructive stints with financial advisers. Given the net loss position they’d collectively left her in, Knight’s faith in financial advisers had fallen to an all-time low. Strategy Knight had been left severely out of pocket, due to some inappropriate financial advice provided by two former advisers. The anomalies associated with some unexpected PAYG tax issues - the initial reason for her contact with Forge - prompted Forge to question her prevailing investment strategy. Following an initial review, Forge discovered that the SMSF foundation on which Knight’s portfolio had been constructed was not only costly, ill conceived, and unlikely to ever deliver stated returns - it forced her into investment and governance decisions she was not qualified to make. The SMSF needed to be wound up before a new wealth creation strategy could be developed and implemented. The first step to unravelling her problems was to deal with a totally unexpected and hefty tax bill that was causing her sleepless nights.


to fund some lifestyle acquisitions, including future holidays and a new car.

Financial summary Assets

Nov 2007

Cash Geared Share Portfolio Residential Property Investment Property Pension Fund Super Fund Total

$30,000 $34,000 $1.1M $150,000 $267,000 $49,000 $1.630M

fees involved in maintaining it. Based on Forge’s recommendation, cash was invested into Dimensional funds via a Macquarie Wrap diversified platform, comprising three different fund managers, to provide conservative exposure to capital growth. To ensure sufficient diversification across asset classes, the money was divided equally between Australian shares, international shares and investment grade cash assets. At Knight’s request a smaller portion of direct shares was retained under her control to cover any unexpected future expenses. Accelerating super

Meantime, Forge also recommended that Knight make salary-sacrifice super contributions up to the maximum $50,000 annually, leading to annual tax savings of around $8,000. A transition to retirement (TTR) strategy initiated by Knight’s former adviser remained intact. Also based on Forge’s advice, an additional $40,000 in cash has been added to Knight’s combined super/pension funds. Undertaken initially as a trial run to see how much or little she could live on, Knight decided to take 10 per cent of her pension fund as an allocated pension to offset reduced salary from working fewer hours. “I was pleasantly surprised how far a certain amount of money would go, and this helped to allay some of the fears about income into retirement,” admits Knight. With the Macquarie Wrap platform outperforming the S&P/ASX 200 benchmark, and the recovery of lost funds progressing slowly but surely, Forge says Knight is notably more relaxed about her financial position. In addition


Nov 2010

$30,000 $97,000 (net of debt) $1.4M $230,000 (net of debt) $295,000 $115,000 $2.167M

‘At Knight’s request a smaller portion of direct shares was retained under her control’ to reducing her working hours, Forge has also convinced Knight to enjoy the fruits of her hard work - and she recently started to take overseas holidays. Renewed freedom

Forge wanted to get Knight to the point where she had the freedom to decide whether she would retire fully or partially. If she decides to stay working, he says, it’s because she wants to, not because she needs the income to live on. “As to when to retire, Patty plans to spend the next six months working, go on holiday, then on her return decide what to do next,” says Forge. With the debt paid off on what was initially a geared share portfolio (using a margin loan), Forge recommended that Knight retain the outstanding debt on her investment property and use additional income from her fully franked dividends to service it. The plan is to hold off selling the investment property until Knight is finally retired to minimise any capital gains tax (CGT). But once she does retire, Forge says it’s likely that she’ll sell her remaining direct shares

Looking back

To Forge, the most pleasing outcome especially given how much of Knight’s super funds had been lost - is ensuring that she now has more than enough money for a comfortable retirement. That’s especially reassuring, adds Knight, given that she comes from a family known for its longevity. Knight was sufficiently impressed with her dealings with Forge’s partner, Jennifer, on tax matters that she felt comfortable accepting his invitation for a complete no-strings-attached review of her financial situation. Her main priority was for Forge to sort out her super-oriented investment strategy and ensure she had sufficient funds to be able to stop working while she was still relatively young. “My dealings with Daryl have restored my confidence in the value of independent financial advice,” says Knight. “The recovery of lost money has also renewed my faith in ‘checks and balances’ within the system to weed out dishonest and incompetent practitioners.” With Knight being in a highly vulnerable state during those initial tax dealings, Forge decided not to charge fees up-front. And given that her scepticism of financial advisers remained high, he says it was important to gradually garner her trust. “My decision to slowly recover the initial advice fee of $3000 over three years recognised a commitment to working with Patty over the longer haul,” says Forge. “I’m looking for clients who want 20-year relationships.”



FPA reforms a strategy for a new profession Robert MC Brown says changes to the association’s structure create a clear path to true professionalism.


eserved or not, the Financial Planning Association (FPA) has suffered much criticism in recent years, both from its own members and from external commentators. Therefore, it’s important to give credit when it’s due. Consequently, I’m more than happy to congratulate the association on its recently proposed structural reforms (I trust that won’t be the “kiss of death”). The main proposals (in sum-

mary) are to mandate tertiary qualifications; to introduce a supervised “professional year”; to establish a Financial Planning Education Council; to require at least 75 per cent of practitioners in financial planning firms to be members of the association (and 50 per cent to be CFPs) before their firms may use the association’s brand; and to discontinue the “principal member” category of membership, thereby endowing voting rights on CFPs/

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associate members only. Surely, it’s not a coincidence that these proposals bear a remarkable resemblance to the rules that currently apply in the accounting bodies. The oft-stated strategy of the FPA is to look and feel like a professional body. These changes will go a long way towards achieving that outcome (but not far enough). Perhaps the FPA has calculated that much of its growth in membership is likely to come from accountants in public practice. Therefore, if it can get close to members (and prospective members) of the accounting bodies, while heavily promoting the CFP designation to them, it may be able to build a designation to rival membership of the accounting profession. The accounting bodies should not underestimate the ability of the FPA to do this (should it be of a mind to do so). Furthermore, they should not conclude that financial planning is a small and specialised area that is of little concern to the bulk of their membership base. In fact, strategic (non-product-based) financial planning is central to the work of most accountants in public practice. Accounting and financial planning fit together perfectly. Could it be that the FPA knows this and intends to talk up the role of accountants as financial planners?

The most important FPA reform is the proposed discontinuation of the “principal member” category and the restriction of voting rights to individual members. This reform is long overdue. The powerful voting and financial influence that these corporate members have held since inception of the FPA in 1991 has always been a significant force in limiting the reform of ethical and professional standards in the industry, particularly in the area of conflicted remuneration. The commercial interests of many of these members lie in preserving the control that conflicted remuneration models hold over financial planners, thereby maintaining the so-called “product distribution network” or “value chain”. This proposal recognises that problem and will result in a significant shift of power in the industry towards financial planners and away from their corporate Australian Financial Services Licence holders. After that, the FPA will be able to much more easily address the issue of remuneration-driven conflicts of interest, without the “dead hand” of the institutions limiting its ability to do so. One only need look at the submissions from dealer groups and institutions to the independent Accounting Professional and Ethical Standards Board (APESB) concerning its proposed financial

planning standard APES230 to appreciate just how pervasive that conservative influence has been in curtailing necessary reform of the industry’s conflicted remuneration models. Even the accounting bodies’ own submission to the APESB perfectly reflects and supports the commercial interests of the dealer groups and institutions (the “principal members”) whom the FPA is now seeking to sideline. However, many financial planners, including members of the FPA and the accounting bodies, agree with the principles outlined in APES230. They are quite open (at least privately) that this is where the industry must go, if it is to have any hope of becoming a true profession. These members readily admit that the industry can introduce many worthy structural reforms, but without the unqualified trust that follows from comprehensively avoiding conflicted remuneration (asset fees, commission, volume bonuses and so on) the industry’s controlling culture of product selling and distribution will not change fundamentally. Therefore, the industry will never become a profession. The Australian Securities and Investments Commission (ASIC) knows this too (and said so in writing in evidence to the recent Parliamentary Joint Committee of Inquiry into Storm Financial et al). Unfortunately, the politically compromised Future of Financial Advice legislation (FoFA) proposes to ban asset fees, but only on gearing, thus recognising the conflicts of interest inherent in them. Regrettably, it seems that the Government was not able to go further, presumably because of representations from the usual interests whose commercial imperatives lie in maintaining remuneration-driven conflicts. Of course, eventual adoption by the accounting profession of APES230 will make comprehensive ethical reform so much easier in the wider financial planning industry. In the recent words of a senior member of the financial planning industry, “if APES230 is adopted, the industry will be shamed into adopting its principles. The accounting profession will lead the industry and the FPA will have no alternative but to follow the leader”. Therefore, it was most unfortunate that

the accounting bodies decided not to support APES230 in their extraordinary submission to the APESB. This lack of strategic thinking not only immediately removed much of the relevance of the accounting bodies in the financial planning industry (except on marginal issues like the “carve-out” for accountants), it confirmed to observers (perhaps unfairly) that the accounting bodies are heavily influenced by conservative institutional interests. Furthermore, it has opened the door for the FPA to make the running on these issues, thus claiming the leadership that the accounting bodies have chosen to forgo. Surely, the “big picture” of the FPA’s strategy may be to build its CFP designation to become the principal professional brand for general practitioner accountants (all of whom are engaged in financial planning one way or another). Sound far-fetched? Perhaps, but the accounting bodies should not assume that their members will pay for both designations. Perhaps it’s no coincidence that the FPA’s CEO and its current chairman are qualified accountants, as are many of its influential members. Unfortunately, the accounting bodies’ failure to endorse APES230 is a “gift” in support of a strategy aimed at practising accountants and students currently engaged in business-oriented tertiary education. My hope is that the APESB will endorse APES230. If it does, the accounting bodies will lead the financial planning profession in the provision of ethical financial planning services. If it doesn’t (as proposed by the accounting bodies), the irrelevance of those bodies in financial planning, and to a growing extent in general practice accounting, will be confirmed. Ironically, whether or not the accounting profession adopts the principles in APES230, the FPA will eventually do so, because they are so obviously necessary for the creation of a true profession of financial planning. The FPA’s proposed structural reforms will clear the way for that to happen. It’s only a matter of time.

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Avoid clichés like the plague Financial services companies are often guilty of resorting to clichés in marketing material. In the first of a twopart series, Bruno Bouchet examines the images that you should steer clear of.


inancial services is one of the most challenging fields of marketing and promotions to work in. The biggest challenge is actually “the truth”. If the rest of the world had the same restrictions placed on them that financial services do, then half the ads on TV, in magazines and on websites would vanish. This challenge also makes it exciting. Restrictions on what you can say and show can foster creativity, not stifle it. Unfortunately, the images selected by financial services organisations for their websites and marketing material often do not live up to the challenge, with the same images cropping up again and again. The plant in hand

This is the runaway winner for the most overused image in financial services. Have a look at how many variations there are of this on to see how overused it is. The concept is fine. It says growth, it says nurturing, it adds a nice human element; the problem is simply that it is used so often that it puts people off your message. It now says “lack of thought” as much as anything else. Even without the hands, seedlings are overused. If you want to communicate growth through nature, try finding some more interesting shots of plants - look for shots from unusual angles, or photos that stop and make you look at them. If you need a human element, avoid images such as children and watering cans; a pair of earth-covered boots suggests nurturing in a more subtle way. The stack of stones

The popularity of this image in financial services is a complete mystery. It says “precarious pile that will collapse in a gust of wind”, which

isn’t a great message for financial services to be putting out. Big rocks and boulders do suggest greater stability; but again, they have been used a lot. If you must have rocks, perhaps try using close-up grained shots of rock texture, or fossils in rocks. The retired couple on the beach

This is one of the all-time classics. Nothing says happy retirement more than a happy couple holding hands on the beach. If this is true, then given the number of baby boomers nearing retirement, our beaches will soon be overcrowded by couples in co-ordinated muted colour clothing. Remember that today’s 55 to 60-year-olds are the pot-smoking, free-loving hippies of the 60s and 70s. They invented the sexual revolution and aren’t likely to be happy with walks on the beach. There is a danger in going to the opposite extreme and using the couple in bike leathers with a Harley Davidson to denote an “exciting” retirement. Smiling at barbecues, women enjoying coffee, and men playing golf should also be avoided. The Malcolm Turnbull clone

It’s not often a particular person becomes a cliché, but this guy has been used so often, it feels like he’s worked for every major and minor institution in the country. The fact that he looks like one of our political leaders just makes him even more familiar. He represents a broader, overused image group - the smiling and dynamic office team. Sometimes they are sitting around a table; often they are walking up stairs; occasionally they point at charts. However, even if they don’t look like Malcolm Turnbull, they still look fake. If you are talking about your team, then show

your team - but don’t stand them close together and take a photo from the stairs with them all looking up at the camera. It might be good for stretching loose jaw lines, but it’s been done a lot. The corporate builders

Using building as a metaphor for financial services is very tempting. It’s about making plans, taking visions and turning them into a reality. You can use “blueprints for wealth”, talk about building on success and construct yourself a nice pile of clichés until you end up with the guys in suits and hard hats pointing to the future. Resist the temptation, because your clients have seen it all before. If you want to use building imagery try focusing your search on specific instruments and seek out photos that show them from a different angle. Stock photography sites like istockphoto have undoubtedly been a boon in making hundreds of thousands of images available cheaply, but sadly only a fraction of those images ever get used. Spending a little more time seeking out unusual images can really reap rewards, so you don’t fall into the classic clichés. There are more expensive sites such as that have more interesting images. It’s worth spending more time or money for a striking image that ensures your audience stays with your piece of communication longer.

Bruno Bouchet is creative director of Wrap Creative -

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Shorten sweet on the role of planners When Bill Shorten met key industry representatives at a joint Professional Planner/Investment Magazine roundtable, his message for financial planners was clear. Simon Hoyle reports.


hree Government reviews - Henry, Cooper and Ripoll- have formed the perfect storm of regulatory reform, tackling the big issues of tax, superannuation and financial advice, respectively. The three areas are interdependent: Tax reform will be pointless if it does not encourage saving and investment; superannuation reform will be counterproductive if it undermines the tax system; and both tax and super reform will be ineffective if the financial planning industry remains conflicted and continues to suffer public mistrust. Boosting superannuation contributions from 9 per cent to 12 per cent is one part of the “confidence puzzle” (as it were) - but so is making it easier for individuals to get money into the system, and to access high-quality financial planning services. “High quality” means not only technically sound, but conflict-free and framed in the client’s best interest. The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, says he recognises the role financial planning plays in making super individuals achieve adequate retirement incomes. And he says the Government will not shy away

from making the changes it thinks are required. “We will implement what we say we’re going to do,” Shorten says. “So there shouldn’t be any uncertainty about that, no reading of the tea leaves. There’ll be plenty of wrinkles in the implementation, and we will count upon people in this room, and again, the broader industry, to help us iron out those wrinkles.” Fiona Reynolds, chief executive of the Australian Institute of Superannuation Trustees (AIST), says increasing compulsory superannuation contributions from 9 per cent to 12 per cent is “the most important issue, and I’m glad that it’s really high on your agenda”. Terry McCreddan, chief executive of UniSuper, agrees, but says there needs to be an effort to explain to the broader community why an increase in compulsory super is necessary. “The Australian population, in general, is reasonably [well informed],” McCreddan says. “If you put the proposition to them, we should be able to get them to understand it. It’s about the adequacy, that we’re living longer - longevity - so people [understand] that 9 per cent isn’t enough.

Bill Shorten


John Brogden, left, and Marianne Perkovic

Twelve per cent probably isn’t quite enough.” And John Shuttleworth, general manager of platforms, marketing and communication for BT Financial Group, says it has to be made simpler for people to actually get enough money into the system, and to have confidence in the system. “Because we reduced the contribution caps and we’ve come off the back of a GFC, it’s what we actually do to encourage people to put more in,” Shuttleworth says. “It’s the ability to look at contribution caps and what we do beyond just the 9 to 12 per cent to really make it attractive because I think the fundamental issue with a lot of the reforms is loss in confidence in the system.” David Whiteley, executive manager of Industry Superannuation Network, says lowering the contribution caps had “a disproportionate effect on people’s confidence, because I think people don’t necessarily understand the detail of it”.

“We’ve got to remember though, we’re looking at providing incentives for people to contribute to their super, but there is somewhere in the order of between well, just under three million people that are receiving no tax concessions on the super contributions. “There would be a lot of lower income earners, people working part-time, of course, whose marginal tax rate is at 15 per cent or lower. So they’re receiving no tax concession on the contribution they’re making to their super. “I think what happens a lot in our industry is we tend to focus more on those members of the community that can afford to contribute more, and we need to do that - I’m not diminishing that - but we tend to focus less on those for whom compulsory superannuation was first set up. These are the people that need the system so they’ve got something to retire with. It’s not about having, you know, the icing on the cake; it’s about having

Independent asset managers

something to retire with.” Shorten says he recognises the importance of the adequacy issue, but says there are “three Cs” that the Government must balance: compulsion, concessionality and certainty. “I think that certainty’s got to be something we do; at some point we have to bed down the debate and say, not, ‘That’s it’ - there’ll always be things which come up; you should never be monolithic but we’ve got to remove it a bit from the day-to-day political hurly-burly, because I think one of the things which undermines confidence in superannuation, obviously continued poor performance, definitely, but I also think that [with] inconsistent tax treatment, people just get annoyed,” he says. “So when we talk about adequacy, I think those three Cs underpin the debate about adequacy too.” Shorten says another issue that must be addressed is how to get


people engaged with superannuation and with their own superannuation funds. “I know as a former Australian Workers’ Union rep, I couldn’t interest my younger workers or members in super; but somewhere in their early 40s, when we’re talking about pay claims and super came in, they switched on,” he says. “I’m sure Andrea [Slattery] knows from the sort of demographic profile of people who’ve set up self-managed super funds, some of the trend I’m describing would exist, people engage more.” Slattery, chief executive of the Self-Managed Superannuation Fund Professionals’ Association of Australia (SPAA), says that among self-managed fund members “we have, effectively, 100 per cent engagement”. Mark Rantall, chief executive of the Financial Planning Association of Australia, says an important piece in the engagement puzzle is to make high-quality financial advice Brett Jollie



more readily available. “I think part of that is the importance of obtaining financial advice from a whole variety of sources: superannuation funds and call centres and banks; but also from financial planners,” Rantall says. Richard Klipin, chief executive of the Association of Financial Advisers (AFA), says one reason more people don’t seek advice is a lack of confidence in the industry’s services. He says the industry knows that what it offers is valuable, but that message doesn’t necessarily reach the wider audience. “What we’ve got in the mix at the moment obviously, with the superannuation conversation and the FoFA conversation, is kind of this moribund conversation because it’s kind of so [mired] in the technicality of it, and…we talk to ourselves a lot about our own stuff - and it’s just noise; in ‘Consumerland’, it’s not about their world,” Klipin says. “You know, that’s five years of, I reckon, lost opportunity where people are kind of turned off because we, as an industry, are not talking to them about their issues; we’re talking to ourselves about our issues.” Steve Helmich, director of financial planning, advice and services for AMP Financial Services, says the financial planning industry has “a great opportunity” arising from the current industry reviews. “We see the opportunity from the many reviews that are coming on to try and lift public confidence

John Shuttleworth

in broad financial planning and financial advice,” he says. “[There’s] a great opportunity coming from the banning of commissions and the increased transparency, getting confidence into the sector, getting people to understand more about the role financial planners play, because I think there’s been too much focus on investment performance, and issues like that. “I don’t know a financial planner who can control the market or tell you what the markets are doing

Independent asset managers

day-to-day, but it’s more around the actual advice and planning and strategy and discipline that planners bring.” Marianne Perkovic, general manager of distribution at Colonial First State, says the job that institutions have done to improve systems and cut costs should not be overlooked in the debate about how to improve consumer confidence. Perkovic says the debate about platforms and the issue of volume rebates shouldn’t be allowed Mark Rantall

to compromise the benefits to consumers. “Over the years, when I ran an advice business and negotiated the payments, it actually did reduce the cost of advice to clients, and I think that’s what’s forgotten,” she says. “The big players - like BT, Colonial, AMP - we’ve got the systems that show that transparency, and ultimately reduce the cost of advice to clients. So I just want to make sure that that’s highlighted. “[More broadly], as an industry, I think we’ve got to show a bit more unified position together, so it’s not retail up against industry. It’s one industry, and it’s superannuation, and we are many parts and we service different clients, and I think, instead of attacking each other and criticising different value propositions that we bring, ultimately that will help confidence be restored back to the consumer.” Even so, “what is very clear is we haven’t done ourselves any favours as an industry developing a phenomenally complex system”, says John Brogden, chief executive of the Financial Services Council (FSC). “To that end, what we realise - and I say this with the utmost respect - is when your predecessor made the FoFA response, the Ripoll response, on 26 April, what we discovered very soon thereafter, particularly with platforms, was that there was very low level of understanding in Treasury,” Brogden says. “And that’s only because they’ve really never had to deal with this


Andrea Slattery

before in any complex detail. It’s really been regulated and dealt with by ASIC. “So we’ve been very pleased because Treasury’s been happy to go down this process and understand this in detail, but it is fair to say this…remains a very complex issue and one that, at the very least, runs the risk of eliminating benefits to consumers of being part of the discount. “I mean, if you’re a consumer purchasing a product which goes through a platform and up to an investment product, say at Aberdeen, and Aberdeen pays a discount coming back down, and if you knock out all rebates, you knock out the benefit the consumer gets in that, you know? “In other words, you buy 100 Commodores, you get a better deal than buying one Commodore. We can’t risk consumers losing out in that track.” However, the financial planning industry needs to do a better job of

proving it has the best interests of clients at heart. Gerard Noonan, chair of MediaSuper - whose members include journalists and actors - says his fund’s 125,000-strong membership owes nothing to financial planners. “Actors think that a platform is a thing that they actually act on,” Noonan says. “The issue about platforms is a complex one. “But I do know, in the area of financial advice, we have leakage at the top of our membership, usually with the high-net-worth people, right? They’re at the top, and I know that none of those 125,000 members have got there because a financial adviser has said, ‘You should be in MediaSuper because it’s a really good fund, because it makes X per cent per year, and it’s really cheap’. Not one of them has. From the point of view of - me, as a trustee, a chair and a trustee of that fund, that’s a really big issue to me. “Part of the solution would

be…that financial advice has got to be in the interest of individual people; that would be a starting point, and I know that’s where the Minister’s headed.” Shorten says he does not buy into the view that financial planners do not have clients’ best interests at heart, and says the debate over the value of planning services could, if unchecked, affect the public’s confidence. He says the Government recognises the potential consequences for the industry of some of the changes being considered. “For the zealots who think that all financial planners are evil money-sucking leeches, I don’t agree with that - you know, that is some of the debate,” he says. “The ‘Financial Planner Wars’ have been a bit disproportionate in the rhetoric. But by the same token, for those who think that volume rebates are an unmitigated good well, whilst it’s a complicated structure, there’s some arrangements that


seem to sort of pass the smell test, and there’s others which I think are opportunistic. “So there will have to be a meeting of minds in the middle; and people in this room will be part of doing that. “I take a consumer view on it. People can get better returns if they invest in riskier products. People can get better returns if they can find a sweet spot of tax minimisation. There’s a whole lot of reasons why people have high performance - you know, better or worse accounts. But I also see the aftermath of poor advice or indeed, not poor advice, even, but malfeasance - that’s where people lose their money. “I get that if we’re going to change something, it has economic consequences for people. “So I should say, on a positive note, to those who might be negatively affected by change, you know, I’m open for discussion on transition. I get [that] contracts have been entered into; I get that Steve Helmich



people have made arrangements; so let’s be pragmatic about, not that we’re going to change, but trying to do the change in a way which tries not to see too many losers in the short term.” The managing director of Aberdeen, Brett Jollie, says a missing ingredient is the confidence that consumers have in the services provided by financial planners. “I think there is a lack of confidence in the industry, at the moment, a lack of confidence in financial advice,” Jollie says. “I think the advice industry, in particular, copped a pretty raw deal out of the last couple of years. How do we change that? Obviously, we improve the system, we can eliminate conflicted remuneration structures, we can improve the structure of superannuation; there’s a lot of things that we’re working towards. “But one thing that hasn’t been addressed is education, and I firmly believe that, given we have a compulsory superannuation regime in Australia…we need to go back to the grass roots. “I think we need to go back to school…to really teach the fundamentals of superannuation, the fundamentals of investment markets, so people aren’t jumping in and out of markets when, as soon as markets fall, you have this mass shift out, as we saw, into cash. That’s a classic way to destroy wealth. We need to educate consumers on the benefits of advice; really, it’s a case

Richard Klipin

of understanding what you don’t understand.” SPAA’s Slattery says education has started. “It’s already started, and working very well, actually, at the moment,” she says. “I agree with the [importance of ] education, and I would link it back to that confidence issue. Our system is actually set up under the financial services regime - it was set up for the consumer - but in actual fact, it’s actually benefitted the industry. “If you have a profession, rather than some kind of disparate advice [industry] where the consumer has no idea where to go, and perhaps the language is not uniform and imparted from a [single] information source, then perhaps the issue of a fiduciary duty, [of ] conflicted remuneration, all of those [things] actually become secondary issues.” Shorten says disengagement from superannuation and financial planning is an issue for the industry

Independent asset managers

to address, not for individuals. “If people are disengaged, that doesn’t mean that people are stupid,” he says. “If the customer’s disengaged, there’s a challenge for you, as opposed to the customer. “I think there’s other challenges, along with financial literacy, towards engagement: it’s the fees you charge; and it would be really good if the industry didn’t always complain about each other to the press, because that undermines confidence. “A bit of legitimate healthy competition’s fine; but every time we run down some other segment of the economy, you’re actually tarnishing your own brand. “So there’s a challenge there, I think, in terms of talk about the issue, but not - play the issue, not the man, so to speak.” BT’s Shuttleworth questions whether there’s fair competition, when, for example, the process of Award modernisation seems to

favour industry superannuation funds. “I guess, you look at that and you go, ‘It doesn’t feel like a level playing field’, ” he says. But Shorten disagrees. “Retail funds think there is some sort of Shangri La, El Dorado, Lassiter’s Reef of monopoly rent-seeking by industry funds, and that but for the Award system, the world would be different, and there would be all these serfs freed from the domination of industry funds, who could flee to the happy lands and the sunny uplands of retail funds,” he says. “And whilst I’m being deliberately colourful, you know, at Beaconsfield Mine, if you were on an AWA, you could only be signed into the BT fund. And good luck to you for getting the arrangement - but I’m just saying that perhaps there’s a whole lot of arrangements which are complex. Perhaps there’s a whole lot of employers who’ve set up arrangements with retail funds because they do their banking with them, historically, and that’s the fund which is the default. I’m just saying that perhaps it’s not quite one-way traffic. “Having said that, the Government did commit to go to the productivity commission to have a look at how we can address this question; and I do accept that there’s principles of competition and not having monopoly access.” The chief investment officer of the Retail Employees Superan-


Liz Gray

nuation Trust (REST), Mark Delaney, says what the industry does is pretty simple but incredibly important, and it should never be forgotten that it exists in its current form because of government initiatives. “The simple task is just gathering people’s savings today and [paying] them out tomorrow; it’s just a massive thing,” he says. “Given the industry exists because of government regulation and government incentive, we [must

not] lose sight of what is our public duty, what we’re trying to achieve. “But if we’re going to do a better job of it, we’ve got to get more money going in, we’ve got to get better returns, we have to take less money out in costs…and we’ve got to protect consumers. “The task isn’t all that hard; it’s just focusing on the bigger picture and not what’s our own self-interest.” Liz Gray, a partner in law firm Henry Davis York, says a touchDavid Whiteley

stone of any reform must be simplicity - brave words, she admits, coming from the mouth of a lawyer. “I don’t think anyone around this room would like to see some of the complexity that we’ve got in the FSR laws at the moment. What we’re talking about here is a lot of law reform over the next couple of years, and I think simplicity is the key,” Gray says. “Complexity is cost, and that will cost, at the end of the day, members and super fund investors.” Don Russell, chair of State Super, says the Government is on the right track, certainly compared to where things stood 18 months ago. “I mean the industry’s taken a lot of chops in the last little while, but a lot of that came from that debate 18 months ago, where we were talking about…lifting the preservation age to 67, we were talking about whether we’d cut the [contributions] caps, we got rid of the age-based [caps],” Russell says. “I think at that stage, a lot of people started to wonder if it was government policy to actually support the SG…and I think, at that stage, people started to have second thoughts about super. But in the last 18 months, I think we’ve gone a long way to redressing that. I think the Minister’s on the right track.” An issue yet to receive a formal decision from the Government is whether commission on risk business will be abolished along with commissions on investment-based products.


“I’m not anti-insurance, but by the same token, the whole thrust the legitimate thrust of FoFA and the Ripoll Report - is that people shouldn’t be getting remuneration through conflicted structures,” Shorten says. “But I guess, to console your concern, I’m not an idiot; I get the TPD and the life insurance stuff; and again, you’ve heard my general philosophy about underinsurance is an issue, which perhaps I was less aware of, until I got involved - especially in the reconstruction after the bushfires. It is important, more than I’d realised previously. “In terms of some of the other issues [such as] tax deductibility [of financial planning fees] - you know, at some point, we’ve got to protect the integrity of our tax system. “I said that I liked planners; it’s okay, you know? “There are many ways of proving it, though. I’m an imaginative person.” Shorten says that on the issue of fiduciary duty, the Government is “committed to the statutory test”. “At the very professional end, and the committed end of this industry, people get that,” he says. “We’ll just work it through, try and have a common sense test which doesn’t [for example] make people reluctant to make any decision other than invest in cash or, you know, blue-chip equities. “But you know, beyond that, I think we can get that one right.”



Demand may be just beginning The Government’s planned changes to superannuation will have a profound effect on the services demanded of financial planners. Bill Buttler explains.


ust before Christmas, Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, released the Stronger Super statement, announcing the Government’s intention to implement several recommendations of the recent Cooper Review. One of the key measures is the introduction of a new standardised superannuation product called MySuper. The objective of MySuper is to create a low-cost, no-frills superannuation plan suitable for the 80 per cent of Australians who are deemed to be “disengaged”. MySuper will have no investment choice, and trustees will have to comply with a set of rules designed to eliminate cross-subsidies and commission payments. Not part of Stronger Super, but mentioned elsewhere in the media release, is the Government’s intention to progressively lift the SG employer contribution rate from 9 per cent to 12 per cent by 2020. One of the stated objectives of the proposed lift in SG contributions is to reduce budgetary pressures that would otherwise result in increased taxes as the projected ageing population creates large numbers of retiring baby boomers with inadequate self-funded superannuation. The overall picture is one of increased standardisation towards a single MySuper investment strategy for the bulk of Australian workers, together with reduced reliance on the Age Pension as retirees progressively become self-funded. Whilst retirement funding is not the only driver for financial advice, is superannuation destined to become an “adviser-free zone” over the longer term? The fallout from MySuper

Total superannuation assets currently stand

at approximately $1.2 trillion (as at June 30, 2010), made up of roughly two-thirds preretirement superannuation ($863 billion) and one-third post-retirement ($366 billion). The $863 billion of superannuation assets is spread across three broad segments: • “Not for profit” (industry funds, corporate funds like Telstra Super, and public sector funds) - $399 billion; • Commercial “retail” funds (managed by the banks and other financial institutions) $264 billion; • Self-managed funds (SMSFs) - $200 billion. The SMSF sector is exempted from the MySuper changes. The not-for-profit sector is already predominantly in “default” investment options that will eventually be repackaged to achieve MySuper status. The commercial sector will be where most of the change will occur. The commercial superannuation sector has historically been largely built around “platform and product”, with high levels of investment choice driving a need for advice, paid for via trail commissions from the product providers. Whilst platforms will still be able to offer choice products, the default for SG contributions must be an approved MySuper fund, which will eliminate the need for investment advice in many cases. The introduction of the Future of Financial Advice (FoFA) reform package will accelerate the decline. We can therefore expect a gradual withdrawal of the traditional platform/trail commission model from distribution of employer superannuation. Smarter advisers have already started the transition to a more broadly based business structure, supported by fee-based remuneration.

‘Advice may or may not involve implementation of investment decisions’ Impact of the Superannuation Guarantee

Since the genesis of the SG in the original 3 per cent “Award Super” in the late 1980s, superannuation coverage has spread across the entire workforce, even to casual and part-time workers, as well as salaried staff and wage-earners. Workers who would once have completed most of their career with little or no superannuation may now eventually retire after a lifetime of employer contributions at 12 per cent of remuneration. Our research suggests that total superannuation assets will rise over the next 15 years from just over $1 trillion today to just under $3 trillion (in real dollar terms), assuming that the Government’s planned changes go ahead (Source: Rice Walker Actuaries 2010 Superannuation Market Projection Report). If all retirees are ultimately going to be self-funded by the increased SG, what further need is there for financial advice, other than for the wealthy few? The retiree of the future

However much future federal treasurers may


hope to take pressure off their budgets, the reality is that most future retirees are still going to be drawing at least a partial Age Pension, despite the SG. In fact, there is likely to be an increase in the numbers of retirees drawing a part pension, and therefore in need of advice to help maximise their entitlements. Across all market segments, there were approximately 1.8 million account-based pensions for people at or above age 65 at June 30, 2010, with an average account balance of $199,000. Our research suggests that this will grow to approximately 4.3 million account-based pensions by June 30, 2025, with an average account balance of $244,000 (in today’s dollars). Why so low? Surely the planned contribution increase to 12 per cent of wages will have a bigger effect? Well, yes, but there are other relevant factors: • The 12 per cent doesn’t come fully into effect until 2020. Those retiring in 2025 will have only had five years at the full 12 per cent level; • The original 9 per cent has only been effective from 2003. Those retiring in 2025 will have only had 22 years at the full 9 per cent, and many may not have received any super at all prior to 1987; • We are still seeing the gradual impact of the original 9 per cent. What is happening now is that more and more workers are retiring with enough super savings to be able to fund a modest retirement income, whereas once they would have taken the entire benefit as a lump sum. This reduces the overall average retirement account balance. What happens when the 12 per cent has become the standard contribution rate for every wage earner? Based on the current average Australian wage ($50,825), we estimate that an individual commencing employment at age 25 and retiring at age 67 will have accumulated a retirement balance of approximately $570,000 (in today’s dollars). That seems a substantial sum of money. What kind of income can the retiree of the future expect? We based the following example on a required income equal to the ASFA/Westpac “comfortable” retirement income standard - cur-

rently $39,081 per annum for a single person. The graph below shows how the required income could be funded by a combination of drawdown from an allocated pension account and the current Age Pension. For this example, we have assumed that all the current Age Pension rules and thresholds et cetera would remain unchanged in today’s dollars. We have assumed that the retiree has no spouse and is a homeowner. Remember, this is the average Australian worker. There will of course be many earning more than the average wage, who will have accumulated much more in super, and will not be eligible for the Age Pension at all. However, there will be many who earn below the average wage, or who have broken careers (for example, on parenting leave) who would previously have retired with little or no super who will now have enough to fund a modest income together with a part Age Pension entitlement.


• More Australians will need help to maximise their entitlements to the Age Pension and related benefits, and to structure their financial affairs to manage risk and wealth transfer. • Successful advisers will be those who are experts on the rules governing tax, estate planning and risk management. • Financial advice may or may not involve implementation of investment decisions, and hence fees will be based on the perceived value of the advice to the user. So, rather than the end of financial planning, this may be just the start!

The need for advice

The examples presented above suggest the following likely outcomes of the Government’s planned changes to superannuation: • There will be a lower demand for advice during the superannuation accumulation phase of retirement planning, but a much larger and more broadly-based demand for advice in the post-retirement phase.

Bill Buttler is a principal of Rice Warner Actuaries



An enhanced approach to portfolio construction Getting a client’s asset allocation right depends on truly understanding their lifestyle objectives and risk tolerance. Assyat David explains.


he asset allocation decision is one of the most important decisions made by a client because the asset allocation will be the principal determinant of their portfolio performance.

Step1: Ascertain  the   client's  risk   tolerance   using  a   questionnaire  

Step 2:   Determine  the   SAA  that   provides  the   highest  level  of   return  for  the   risk  pro=ile  

• To achieve a certain level of income (after tax) from the portfolio. The traditional means of determining a retail client’s investment portfolio is represented below: Typically the above approach starts with

Step 3:  Set  the   portfolio   strategy  &   construction   approach  

However, the current process used by many advisers for determining the client’s asset allocation is more suitable to investment specialists such as institutional investors and trustees of large superannuation funds, rather than retail clients. The first stage of determining the asset allocation benchmark for the investment portfolio is to understand the investment objectives of the investor. Typically, an investment specialist will view these objectives in terms of optimising a portfolio to achieve the highest expected return for a given level of expected risk. This is based on what is known as Modern Portfolio Theory (MPT). On the other hand, a retail client’s objective is generally more dynamic and includes the following: • To generate a certain/minimum level of return to attain a required portfolio balance at a point in time, such as at retirement; • To minimise the downside risks, including the risk of negative returns or returns less than cash;

Step 4:   Determine  the   mix  between   direct  assets,   managed  funds   and  other   investment   types    

Step 5:  Choose   the  investments   to  implement     the  SAA  

the client completing a risk questionnaire to ascertain their risk profile (Step 1). Often there are five to seven risk profiles, including “conservative”, “balanced”, “aggressive” et cetera. A strategic asset allocation (SAA) is set for each of these risk profiles (Step 2). Often this SAA is applied to the client’s entire portfolio. In Step 3, the portfolio strategy and construction approach is determined. This may be based on a “core plus satellite” or “model portfolio” approach. Once this is determined, the mix between asset types, such as direct equities, actively managed funds, index funds et cetera may be set (Step 4); and finally the investments, such as the specific managed funds or direct equities, will be chosen (Step 5). The shortcoming of this approach is that Step 2 applies MPT to “optimise” the portfolio of the retail client for a given level of risk, which is assumed to be the client’s objective. The problem with MPT and efficient frontiers (portfolio combinations for different risk and return levels) is that it assumes investors are rational. If the investor is not rational then this approach, and

consequently the return and risk outcomes of Step 2, cannot be relied upon. The retail client doesn’t think in terms of efficient frontiers and whether or not over time their portfolio is “optimal” and lies on the efficient frontier. Rather, retail investors tend to think of their objectives in terms of the following questions: • “How much money do I need to retire?” • “Can I afford to retire?” • “Will my investments keep me awake at night?” • “Will my money last as long as I will?” The risks that flow from these objectives are not defined by a statistical risk measure, such as standard deviation as used in MPT, but rather by measures such as the risk of negative returns, the risk of not having the money invested in cash, the risk that the portfolio will not grow sufficiently to meet the longevity risk and the risk of not meeting lifestyle objectives. An enhanced approach

The enhanced approach to portfolio construction and asset allocation involves applying MPT, but adjusting for the differences in a retail client’s objective and risk measures. This process is outlined on the right. Step 1: Determine the client’s investment and lifestyle objectives. The risks that are relevant to the client’s situation should be spelled out and understood. Steps 2 and 3: These follow the Modern Portfolio Theory principles and approach. Step 4: The testing phase can include: • Scenario testing for different potential outcomes to understand the likely impact of key



SAA that fits with the client’s risk profile. This approach may fail to address both of the risks Step 1:   Step  5:   Step  2:   Step  3:   Test   w hether   Determine   Discuss   above. If there is an insufficient allocation to Ascertain  the   Determine   the  SAA   the  client's   trade-­‐offs,   client's   the  SAA  for   growth assets then the portfolio value may not outcome   objectives  -­‐   implications   investment   the  given  risk   meets  the   lifestyle  and   and   grow at a rate to satisfy the longevity risk. If the risk  tolerance   pro=ile   client's   investment   alternatives   objectives   income is drawn from the total portfolio, then   there may be a realisation of investment losses in the event of a downturn in financial markets. assumptions; also includes the risk of realising losses when An alternative to address these dual risks • Solving for the required return to meet drawing an income. This risk favours a more is that the portfolio is segmented into several the objectives and comparing this to the results conservative investment portfolio. buckets as follows: in Steps 2 and 3; If the traditional approach is used, the penThe risk objectives and investments used • Solving for the required returns and sion portfolio will be structured in line with the to meet each of these buckets are likely to vary portfolio strategies needed to address such things considerably. The income bucket will have a as longevity risks. conservative objective and the resulting portfolio Step 5: The adviser can now present the reCase Study is likely to consist of cash, guaranteed and other sults of this approach to the client and highlight Sophia has retired at the age of 63 secure investments. The income payments are the trade-offs, implications and alternatives to and is in the process of structuring her drawn from this part of the portfolio, which pension portfolio. She has $400,000 allow the client to make an informed decision. partly reduces the investment risks. saved in her super fund. She expects to At this stage, alternative non-investment-related draw down $25,000 a year to meet her The growth bucket has the objective of strategies can be explored to increase the likeliincome needs in retirement. delivering growth in the portfolio balance and is hood of meeting the client’s objectives. Sophia has benefitted from a healthy likely to constitute a higher allocation to growth lifestyle and expects to live a long life. assets to address the longevity risks. The SAA She wants to ensure that her superanThe enhanced approach in nuation savings will be sufficient to last relevant to the client’s risk profile should apply to practice as long as she does. this part of the portfolio. If the returns applicable She segments her pension fund into The client’s portfolio is often treated as one to this SAA are insufficient to meet the longevity income and growth buckets. Her inportfolio with the entirety assumed to have the come bucket consists of 3 years of her and other risks for the client, then the client may same objectives and risk profile. income drawdown - $75,000 (19 per need to consider a more aggressive investment cent of the total portfolio). In reality, the client’s portfolio should be segportfolio or alternatively consider other nonShe has a “balanced” risk profile which mented, based on the client’s different objectives. investment-related strategies that may contribute results in a growth allocation for her Then the alternative approach should be applied total portfolio of 60 per cent with the to this objective. to each segment. This can result in different remainder in conservative assets. If In this case, the trade-offs and the implicashe applies this allocation to the total portfolio outcomes. tions of each, as well as alternatives, should be portfolio, she will invest $85,000 of the A typical situation where this applies is in growth portfolio in conservative assets discussed and explained to the client so that they the pension phase of a superannuation fund. and the remaining $240,000 in growth are empowered with the information required to assets. Investors structuring their retirement plans tend make an informed decision. Projections should be conducted to to be concerned about two major issues, namely: ascertain how long the funds are likely • Longevity risk - the risk that their savings to last based on this allocation. If the will run out prior to their death, leaving them funds are expected to run out earlier than needed, then the growth portfolio in the unsatisfactory situation where they have may need to contain a higher amount in insufficient income to meet their living expenses growth assets. and instead need to rely on the Age Pension. Other strategies should also be considered, such as strategies aimed at This risk favours a more aggressive investment maximising Sophia’s entitlement to the portfolio. Age Pension and means of accessing • Investment risk - the risk that their additional funds, such as via a reverse mortgage. investment portfolio will suffer significant losses Assyat David is a director of Strategy Steps due to a downturn in financial markets, leaving them with a reduced retirement balance. This Step  4:    



How to tell a rally from a bubble David Smythe looks at whether a “bond bubble” actually exists - and if it does, what it means for investors.

Chart 1: US 10 Year Yield

Yield on  10  Year  US  Note  

Yield (%)  

4.5 4  

3.5 3  

2.5 2  


Source: Bloomberg





Chart 2: US personal savings rates

Chart 3 : US Output gap as measured by the OECD

US Output  Gap   3   Output  Gap  


iscussion of bond bubbles has predominantly centred on the US Treasury market and therefore this market will be our focus. Given this focus, what currently has investors so concerned? Chart 1 shows the dramatic compression in yield over the past year as investors have sought the safety of US Treasuries. (Note: The US Federal Fund rate has remained between zero and 0.25 per cent since December 2008.) However, does this rally constitute a bubble, and what actually defines a bubble? Typically in financial markets a bubble refers to irrational market behaviour driven by speculative mania; that is, investors buying an asset solely in the hope of selling it for a much higher price in the near future. In this sense, it is unlikely the US Treasury market represents a speculative mania. Additionally, short-term gains are likely to be very modest, given current yields. More likely investors are looking for a safe haven for their savings (see chart below), given their torrid experiences of the past few years and the current uncertainty in global financial markets. Chart 2, showing US personal saving rates at their highest in years, in conjunction with the compression in US Treasury yields, would certainly be consistent with recent US mutual fund flows. Between January 2008 and June 2010,

2 1   0  

-­‐1 -­‐2   -­‐3   -­‐4   -­‐5  



Source: Bloomberg






outflows from equity funds totalled $232 billion while bond funds witnessed a massive $559 billion of inflows. So, while the US Treasury market doesn’t appear to fulfil the technical definition of bubble, could investors suffer a large capital loss due to a rapid rise in bond yields? While they may not be an attractive investment at current levels, what is the likelihood of this outcome in the near term? First, we need to determine what could drive yields higher. The US Federal Reserve could raise the US Federal Fund rate (short-term interest rate), which would likely push up all yields along the curve. However, this isn’t probable, given their continual assurances to maintain this rate at low levels for the foreseeable future. In light of their mandate of generating full employment and the parlous state of the US jobs market, it’s unsurprising that they remain com mitted to this course. As at October 2010, the official unemployment rate was 9.6 per cent, but the socalled “U6” measure of employment (official plus discouraged plus total employed part-time for economic reasons) was a horrific 17 per cent (according to the Bureau of Labour Statistics). Inflation expectations are a more likely impetus, as not only would it pressure the Federal Reserve to increase the Fed Fund rate


Chart 4: Excess Reserves held by US depository institutions

Excess Reserves  of  US  Banks   1,200   1,000   800   600  

























400 May-­‐04  

Excess Reserves  (US$  billions)  

(as its mandate also encompasses maintaining price stability) but also, investors would demand higher yields to compensate. However, inflation is unlikely to be a near term issue, given the output gap of the US economy (Chart 3). Output gap measures the difference between the maximum potential GDP versus actual GDP at any point in time; that is, if actual GDP equals potential GDP the output gap is zero. According to theory, inflation is a result of excess aggregate demand at or near full employment. Although the exact method of measuring the output gap of an economy can differ, the chart demonstrates that the US economy is operating well below its maximum potential, relieving inflationary pressures. However, those investors advocating an inflationary environment highlight the phenomenal amount of money that has been created by the Federal Reserve (that is, quantitative easing) in recent years - specifically, the massive amount of excess reserves (money available to be used as collateral for loans) being held by US depository institutions (Chart 4). These reserves have the potential to be hugely expansionary, placing inflationary pressures on the economy. The money multiplier effect indicates that these excess reserves could potentially add 10 times as much (that is, US$9 trillion) into the US economy (approximate GDP of US$14 trillion). However, to date this money has largely remained idle, with banks hesitant to lend and consumers still in balance sheet repair mode.

Source: Bloomberg

Chart 5: US Treasury ownership (March 2010)

US Treasury  ownership   Federal  Reserve  &   Intergovernmental   Depository  Institutions  


US Savings  Bonds   41%  


Pension Funds  

Insurance Companies   Mutual  Funds  

State and  Local  Governments   4%  


Source: US Federal Reserve



Foreign and  International  


Other Investors  


Chart 6: US Treasury ownership by foreign investors (March 2010)

Foreign holdings  of  US  Treasuries   21%   50%  


18% 5%  


Japan UK  

Oil Exporters   Rest  

We can observe that the largest holders of US Treasuries are the US Federal Reserve and US Government itself, with the next largest being foreign and international investors. The most serious threat is if these foreign investors cease buying or begin selling. So who are the largest foreign investors? As can be observed in Chart 6, the largest single - and perhaps most well known - owner of US Treasuries is China. Although there has been considerable concern about China reducing its holdings which it has been doing recently in an effort to diversify its investments (as well as buying more short-term US debt) - the fact remains that they and all other investors have limited alternatives. While it can be debated whether it’s possible to have a bond market bubble, it’s possible that investors could face a capital loss as bond yields rise. However, although they may not remain at their current lows, it’s difficult to see a near term catalyst for a rapid rise in yields. Further out, US growth may surprise on the upside; the US Federal Reserve may maintain its loose monetary policy for far too long, creating massive inflationary pressures; and demand for US Treasuries could dissipate, making US Treasuries an appalling longterm investment. Just not in the near term.

Source: US Federal Reserve

So while inflation doesn’t appear to be a threat in the immediate term, another possible cause of increasing yields could be if demand


disappears or if investors start to sell en masse. Chart 5 shows the breakdown of US Treasury ownership.

David Smythe is a director of Zenith Investment Partners



Investing in overseas real estate Bryce Figot explains how a strong dollar and high property prices at home have left many SMSFs looking to foreign shores for real estate investment.


any trustees may wish to use their self-managed super fund (SMSF) monies to make such investments. This article examines the ability of SMSF trustees to invest in overseas real estate.

trustee owns the shares in the company (see below). There are some specific issues for overseas real estate. Borrowing to do it

It can be done

In short, it can be done. However, all of the usual considerations apply. For example, before investing in overseas real estate an SMSF trustee should have satisfied itself that the following tests are met: • Investment strategy. The acquisition must be consistent with the investment strategy of the SMSF. • Sole purpose test. The acquisition meets the sole purpose test. In other words, is the SMSF being maintained solely for the prescribed purposes (for example, to provide retirement benefits)? In the famous Swiss Chalet Case (Case 43/95 [1995] ATC 374), a superannuation fund trustee invested in a unit trust, the assets of which included a Swiss chalet. The question in this matter was whether the fund met the then equivalent of the sole purpose test. The problem was not so much the investment itself, but that fund members and then friends stayed in the chalet. The fund was

Bryce Figot

held to have failed the sole purpose test. Accordingly, it is important that an SMSF trustee only acquire real estate because it genuinely believes it is an appropriate way to achieve its purposes, such as achieving retirement benefits. • No borrowings. There are

of course a number of exceptions; the most popular is the limited recourse borrowing arrangement (see below). • In-house assets. This is a big issue if it is not the SMSF trustee acquiring the property itself but rather a company, and the SMSF

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Naturally, SMSF trustees are able to borrow now to acquire real estate under a limited recourse borrowing arrangement. However, using such an arrangement to acquire overseas real estate gives rise to several issues. The first is that “arm’s length” lenders are only lending to SMSF trustees on a very conservative basis. This means relatively low loanto-value ratios and higher interest rates. But it also means that sourcing a lender to lend for a property in a foreign jurisdiction could be almost impossible. This then raises the question of borrowing from a related party. A related party could lend for such an acquisition, but the terms of the loan should be the same that an arm’s length lender would have agreed to. Because arm’s length lenders are reluctant to do it, this makes it very hard to ascertain what the “arm’s length” terms would be. Therefore, practically, it is questionable whether a related party can lend to an SMSF trustee to acquire overseas property.


‘There are a number of considerations that should be heeded and weighed up’

in order to meet the exceptions. There are other hurdles too, one of which is that the assets of the company must not include a loan to another entity, unless the loan is a deposit with an authorised deposit-taking institution within the meaning of the Banking Act 1959 (Cth). Essentially this means that the company can only have an Australian bank account and not a foreign bank account or else the shares will be in-house assets.

No foreign bank accounts

There is no restriction on an SMSF trustee owning a foreign bank account. However, remember that in many jurisdictions, it is difficult (if not impossible) for an Australian legal entity to own real estate. Therefore, in some jurisdictions (for example, certain US states) a local company is set up and that company owns the property. The SMSF trustee in turns owns all of the shares in the company. The company will often have a bank account in the jurisdiction where the property is located in order to receive rent and pay expenses. On its face, the shares in the company are in-house assets. However, there is an exception under which the shares are not in-house assets. If the assets and activities of the company meet very specific hurdles, the shares will be excepted from being in-house assets. Many advisers only remember that the company must be ungeared

can be difficult in jurisdictions where there is no Australian-style register of titles. Further, ejecting a non-paying tenant and recovering the debt can be far more difficult and expensive in foreign jurisdictions. This is often the case in certain European jurisdictions where the rights of long-term tenants can be more akin to the rights of the actual property owner. Foreign taxes and restrictions on property ownership

Recognition of the trust relationship

Further, remember that under a limited recourse borrowing arrangement the asset must be held on trust for the SMSF trustee. The Commissioner’s view is that when the loan is paid out, the asset must be transferred to the SMSF trustee. Although Australian states and territories have exemptions from stamp duty on such a transfer, a foreign jurisdiction might not.


Traditionally, only legal systems derived from the English “common law” system have recognised the existence of trusts (although some non-common law countries have recently passed legislation to enact broad equivalents of trusts). This is a problem because the ATO has stated that: “The trustees of self-managed super funds must ensure that the fund’s assets are held in a legally recognised ownership arrangement. This generally means the assets must be held in the name of the trustees on behalf of the fund. In states or territories where this is not possible, a caveat, instrument or declaration of trust must be executed for the asset.” Although a declaration of trust can be made, it might not be enforceable in foreign jurisdictions, which makes it fairly useless. For this reason and others, as discussed above, some SMSF trustees instead opt to acquire shares in a company located in the jurisdiction and the company owns the property.

Naturally, foreign jurisdictions have specific laws. These can include specific taxes. They might even include restrictions on the circumstances in which “foreigners” such as an SMSF trustee may acquire real estate - like a foreign equivalent of Australia’s Foreign Investment Review Board. Accordingly, it pays to do your homework first and to understand what taxes and other laws that are specific to the jurisdiction will apply. It is possible for SMSF trustees to invest in non-Australian real estate. Indeed, a number of SMSF trustees have commenced doing it. However, there are a number of considerations that should be heeded and weighed up before the SMSF trustee commits itself.

Higher costs

Naturally, an SMSF trustee that invests in overseas real estate is going to have a harder time satisfying the auditor that all of the normal SIS rules are met. For example, even basic things, such as the property not having a charge over it,

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Bryce Figot is a senior associate at SMSF law firm DBA Lawyers -



The self-managed super fund witch-hunt has failed With the Government releasing its response to the Cooper Review, the end-of-the-beginning of that review has finally arrived and the beginning of the next stage has begun. Tony Negline explains.


nfortunately, like all Government reviews, we will never be able to say that all ideas and concepts out of the Cooper Review have been finalised. In any event, the Government has accepted more than 75 per cent of the Cooper Review recommendations made in relation to self-managed super funds (SMSFs). Only 17 per cent have been rejected. The remaining recommendations were “noted”. However, more than 70 per cent of the accepted recommendations are the subject of consultations during the formal design phase. In other words, the final outcome may be very different to the actual Cooper recommendation. It seems reasonably clear that the witch-hunt against SMSFs, principally conducted by larger super funds and fund managers, did not succeed. Thankfully, SMSFs will remain a vibrant and important part of the super and financial services sector. The reality is that there are now more than 840,000 members of SMSFs - or an average of 5600 SMSF members for each House of Representatives seat. As a collective group, SMSF trustees could potentially sway the outcome of an election. It should not surprise anyone that our major political parties are aware of this. At present, the Government is saying it wants most of the Cooper SMSF changes to be in place by July 1, 2012, which is earlier than the start date of most other Cooper Review recommendations. Given the volume of other work on the Treasury’s desk (Future of Financial Advice, Henry Tax Reform, 2012 Tax Summit et cetera) this objective seems a little ambitious.

‘The Government has played it safe in relation to the Cooper SMSF recommendations’ What has the Government said it will change? The ATO will: - be given the power to issue penalties that fit the crime - and these penalties will not be payable from a super fund’s assets; - be permitted to demand and compel a SMSF to fix its compliance or regulatory problems; - enforce trustee education if super law contraventions have occurred; - be given a mandate to collect and produce SMSF statistics; - publish guidelines for the valuation of assets. The collection of additional data about SMSFs will be strongly resisted by many SMSF participants if it is collected more than once per year and leads to an increase in administrative costs. It is to be hoped that over time the ATO amends (that is, improves) the type of information it gathers on the SMSF annual tax and regulatory return. One of the more frustrating aspects about

self-managed super funds is that there is no complete meaningful picture of them - simply because the data has never been collected and reported. It is this incomplete picture that allowed myths and fallacies to be propagated as truth. It is a reality that freedom does not come without cost. Financial Advice

- education - a SMSF specialist stream will be added to RG 146; - the accountants’ exemption will be removed (already mooted under the Future of Financial Advice reforms). Many AFS licensees already demand additional training and accreditation in relation to SMSF advice given by their authorised representatives. By placing specific specialist requirements in RG 146, ASIC will merely be formalising the current informal process. Auditors

- SMSF auditors must be registered with ASIC, which will create competency, knowledge and independence standards; - The ATO will police the ASIC-created standards. This idea comes about because some SMSF auditors were doing a poor job. The ATO and accounting associations had been warning auditors to improve their game. But as is always the case, some just wouldn’t listen and refused to learn and consequently the majority are paying for the sins of the few. I can’t help thinking that if these standards apply to SMSF auditors, it should logically apply to professionals providing services to all super funds.


value. It could be argued that, given the close nature of the relationship between the members and trustees of self-managed super funds, that demanding the constant valuation of fund assets is overkill. However, in reality the market value of assets is already essential in many situations (for example, determining the annual minimum pension payments and working out taxable and tax-free components of benefit payments). Valuing assets will also assist with the collection of accurate fund data. Unnecessary administrativE burdens

Tony Negline

Super gearing

- to be allowed as currently drafted; - a review will be conducted in two years’ time; - the ATO will collect data about super gearing transactions. It is very much to be hoped that super gearing doesn’t lead to another Storm Financial debacle, but in the super sector. If this did occur, the Government might find itself in the position of needing to severely curtail many existing freedoms given to self-managed super funds. Related-party asset sales

- buying and selling of assets between super funds and related parties will have to be via a formal process instead of off-market transactions. The Government accepts this recommendation “in principle”. This is an unnecessary change, because there is very little evidence of mischief. Hopefully this will be quietly dropped. Valuation of assets


- the Government will attempt to do away with unnecessary administration processes demanded by legislation. Anything that reduces red tape should be welcomed. It will be interesting to see if this actually achieves anything meaningful. Illegal early release measures

- the small number of illegal early release cases (often involving the use of an SMSF) creates a big headache for ASIC, the ATO and APRA. Various Cooper recommendations have been agreed to in an effort to try and stop this problem becoming even bigger (for example, criminal and civil sanctions for anyone involved in early release schemes). Anything that reduces the ability to conduct an illegal early release is to be welcomed. AML/CTF ID rules

- will apply to rollovers to SMSFs (currently exempt).


Investment strategies

- must take into account the members’ death and total and permanent disablement (TPD) insurance requirements. This is a welcome proposal. Hopefully SMSF trustees will be encouraged to consider the potential impact of having a lumpy asset in their fund and the possible cashflow shocks of a fire sale of that asset. What will not change?

- SMSFs will continue to be permitted to have only up to four members. Right now, very few SMSFs have more than two members, and it’s claimed that there are few requests for this maximum to be increased. It’s not hard to understand the Government’s logic for keeping the maximum, even though this discriminates against larger families. - The ATO will not be permitted to issue binding rulings in relation to the super laws. - The current in-house asset rules will continue as currently drafted, including investing in collectibles (with some slightly stricter rules for this asset class). - Current member reporting rules will not change. The Government has played it safe in relation to the Cooper SMSF recommendations. With the exception of the ASIC registration of SMSF auditors, most of the proposed changes appear to be fairly benign. However, as noted above, the Government is committed to consulting on many changes before finalising their design.

SMSF trust deeds

- anything permitted by the SIS Act or tax laws will be deemed to be contained in a fund’s trust deed. Asset separation

- keeping personal and SMSF assets separate (currently a trustee covenant) will now also be an operating standard.

will be compulsorily done at market

Tony Negline is general manager, corporate strategy at SUPERCentral - He is also the author of A How to Book of Self Managed Superannuation Funds. Details about the book are available at

Who do you turn to for expert advice? Having provided solutions to the SMSF industry for over 20 years, Macquarie knows self managed super inside out. If you’d like to be on top of the latest market developments and legislative changes, our technical team are industry experts.

Call Macquarie Adviser Services on 1800 005 056 or visit



Defining integrity There is some way to go yet before the financial planning industry achieves the goal of being a universally-respected profession, says Martin Mulcare.


y review of the FPA Consultation Paper on membership structure prompted me to go back to basics and I studied the vision, mission and core values of the FPA. As regular readers will recall, I place significant weight on the importance of values, so the FPA core values caught my attention. In my opinion, the most important value, if we are going to achieve the vision of “trust and confidence”, is integrity. I also suggest that it is the least understood value. Many people simply swap the word “honesty” for “integrity” and mentally commend themselves in their self-assessment. I think that integrity involves a lot more substance when it comes to your actual behaviour. There has been plenty of emphasis in recent time on transparency, particularly with regard to fees, and this is an important element of integrity. Regular readers will also recognise that fee transparency is important to me. However, when it comes to integrity, I believe that fee transparency is just one of the challenges that advisers face every day when trying to truly live this critical value. I am indebted to Andrew Horabin’s provocative examination of integrity (www. I would recommend his book Bullshift, in which Andrew presents 14 principles, which test the quality of integrity in the workplace. I have selected three which in my experience are particularly relevant for advisers. See how your conscience responds to the following. 1. Speak up

How often do you remain silent when your clients need your advice? Not very often, I suspect is your answer. But how often do you remain silent when your clients need a good talking to? Here are just a few scenarios where advisers may be reluctant to speak up:

- Your client continues to spend more than their agreed budget. - Your client does not implement your recommendations. - Your client doesn’t accept your advice. - Your client speaks to your staff in an inappropriate tone. - Your client does not bring the material that they had promised. Here is your test - and your staff may be very helpful if you are game. Check how many times you say something about your clients (or their behaviour) that you have not said directly to them. If you don’t speak up and provide some accountability, how can you earn their respect? It’s not easy, because advisers fear upsetting clients and losing business. But if revenue is more important than integrity then you really do have a problem. 2. Don’t make excuses

Plenty of things can go wrong during a long-term relationship with your clients; and given your dependence on so many other people, inside and outside your business, most times it won’t be your fault. Irrespective of the cause, integrity is dependent on taking responsibility and advising what really happened. It’s not easy. Life insurers and fund managers make mistakes and you don’t want to take responsibility. Fair enough. But look at the situation objectively. Identify what you had control over and take responsibility for that. Excuses are childish. More insidiously, excuses become tradable. You run late for a meeting with a client and make an excuse. Your client accepts it and the protocol becomes established. Next time they are late and you accept their excuse. Soon the activities being excused are more serious: omitted this; didn’t sign that. That isn’t a trusted

relationship. 3. Don’t state opinions or beliefs as fact

Advisers are expected to have views on a wide range of financial matters. That’s why clients come to you for advice. And if you have been in the industry, your views may be well established (in your mind). But that doesn’t make them facts. Listen to some of your recordings of your client meetings and check how many times your opinions or beliefs are presented as fact. For example, “private school fees are a great investment for your children”; “industry superannuation funds don’t provide enough choice”; “everyone should have life insurance”; “this is the best value share on the market today”. Translating opinion into fact is a mark of arrogance. Not only is it manipulative, it provides little scope for discussion or an exchange of opinions. Regularly expressing opinion as opinion is not easy. Clear, confident statements make for efficient communication. They support the image of expertise that the adviser is building. They may even appear to add to the strength of your recommendations. However, trusted relationships require two-way communication and trust will suffer if you don’t preface your advice with, “in my opinion” or, “in my view” or, “I think” or, “I believe”. Test yourself. I believe that integrity encompasses a wide range of behaviours that are challenging to live up to in our client relationships. It’s more than honesty and transparency. I think that there is a long way to go in our professional conduct before we achieve the FPA’s dream of a universally respected profession.

Martin Mulcare can be contacted on



What in the world is happening? All successful businesses share some common characteristics. Ray Henderson explains.


ack in 2008 we wrote an article commenting on the five common attributes of the best financial advice businesses around the world. With active clients not just in Australia, but also in the USA, South Africa, New Zealand, Hong Kong and Singapore, we are privileged at Business Health to see and work with some of the best advisory practices in the world. In October/November 2010 I had the opportunity of spending time with some of the best practices in South Africa and the USA and made some interesting observations about the shift in thinking and other changes since the Global Financial Crisis (GFC) hit. As a reminder, back in 2008 we observed that, whilst there are many differences between countries/regions, our experience has shown that, regardless of the operating environment, there are a few attributes common to all successful advisory practices. These attributes were: 1. Great leadership 2. Talented and committed staff 3. Truly client centred 4. A willingness to invest in the business 5. Actively seek outside help and guidance. It won’t surprise you to learn that these apply as equally today as they did back then. However, there are a few standout additions: 1. A real preparedness to embrace change. Whilst this was evident in 2008 (great leaders embrace change), there has been quite a shift. In 2008 there was recognition of the need to change, but this has been replaced with a greater sense of urgency. “I know I won’t be able to do things in the future the way I have in the past” has been replaced with “what do I need to do to be at the front of the pack?”. This is a great question for all of us to ask

‘This is a great question for all of us to ask ourselves as we start 2011 and a new era’ ourselves as we start 2011 and a new era in the financial services industry. And, remember, the Future of Financial Advice (FoFA) and the 2012 deadlines don’t apply in other countries. The best embrace change because they know it’s best for their clients and for their business! 2. There is much less reliance on the principal/s of the business. Principal dependency is an issue for many businesses, but the best can function effectively with or without the principal for a short or longer period of time. Many are asking themselves, “What am I currently doing that someone else could easily do, to free me up for activities which will add real value to clients and the business?” They recognise that it is necessary to let go of some things that they have always done. What comes to mind as you think about your business? There is also greater evidence of effective succession planning. There is either an identified successor who is already working in the business or, at the very least, a credible answer to the client question, “What happens to me if you’re not here?” 3. Multi-generational businesses. We often talk about the need to work with the children of aging clients, for obvious reasons.

However, on several occasions in both countries, there was discussion around the fact that most clients are 45-60 years of age and many of these have children and parents. Offering a multigenerational service to “A” class clients not only makes sense but these practices commented that this was seen as being greatly appreciated by clients. One adviser included an item in the review agenda which said something like: “Are there extended family circumstances/changes which could impact you now or in the future?” Some food for thought as you begin 2011. Oh, and by the way, there was also a lot of talk about client value and what can be done to demonstrate this value practically. Sound familiar?

Ray Henderson is a partner and director of Business Health -



The pain in Spain No matter how careful you are, investing remains a guessing game, says Peter Switzer.


ne of the greatest challenges for all financial advisers carries some doublebarrelled anxiety. First, you have to form an opinion on what will happen to your clients’ investments; and second, you need to convey this to clients, adjusting their strategies accordingly. Of course, many advisers don’t make changes and instead simply hold their clients’ hands, figuratively speaking, and remind them that they are long-term investors. Many of us are also devotees of the maxim that it is time in the market, not timing the market that counts in this game. However, even these kinds of advisers have to be able to communicate competently with clients on what should happen to their investments - simply because clients either expect or like to be comforted by their advisers’ insights. So, what is my call for 2011? As an economist and host of a business television program, I live and breathe the economic indicators and political developments - both current and in the future - that could rattle or excite financial markets, but I am still involved in a guessing game.

On one hand we have the doomsday merchants who support the economic prognostications of associate professor of economics at the University of New South Wales, Steve Keen. He warns that the out-of-control debt of governments and households in places like Australia will eventually come back to haunt optimists. This view has been accepted by many cautious investors and explains why there are trillions of dollars on the sidelines not being thrown at global equities markets. However, this is why many respected US analysts are tipping a strong year on the stockmarket in 2011. In case you missed it, I spent most of December in New York filming Switzer on The Street for my Sky Business program, SWITZER, and had the opportunity to interview some of the best and brightest from Wall Street. Bob Doll, the chief equities strategist for Blackrock - the biggest fund manager in the world, with $3 trillion dollars under its control is a bull for the year ahead. He expects doubledigit returns; and while he is worried about sovereign debt in Europe and geopolitical threats from terrorists, as well as the likes of North

Korea, he is optimistic. On the overall debt problem the global economy has to deal with, he subscribes to the “muddle through” thesis - that is, each problem will be dealt with and economic growth will deliver tax, helping to pay down the debt. This view was shared by Jeff Applegate, the chief investment officer of Morgan Stanley Smith Barney, who is also expecting double-digit returns for US equities in 2011. Both experts see US economic growth surprising on the higherthan-expected side, which should help jobs creation in the States. When this happens, share prices should head north strongly. In between the pessimists and optimists is Art Cashin, the legendary director of floor operations from UBS, who I interviewed on the floor of the New York Stock Exchange. Art thinks America is in a sideways trap - which lasts about 17 years - where stocks as a group might not make as much headway as some expect; but he sees value still in the market for individual companies. If he is right, there could be six years of sideways trade ahead. While I was in New York, a lot was made of a Goldman Sachs report that the market would rise by 20 per cent next year. These guys are often described as “the smartest guys in the room” and they have come out strongly tipping solid economic growth of the US economy in excess of 3 per cent. If this happens, US employment will rise and 2011 will be the year for the optimists and higher share prices, which always makes life easier for advisers. I suspect Spain and its debt is the chief concern for the year.

Peter Switzer is founder of fee-for-service financial planning firm Switzer Financial Services and hosts SWITZER on Sky News Business Channel, Monday to Thursday at 7pm & 10pm. Visit www.switzer. or email:



Training clients to perceive value Value, like beauty, is in the eye of the beholder. Robert Skinner explains how to develop a client’s eye for value.


ost likely, as a planner, you would have revisited your “Client Value Proposition” in the past 12 months. The opt-in regime, if and when it arrives, will certainly require planners to have the ability to articulate what they do for clients and how they get paid for this. There are many articles, workshops and tools now available to help planners revisit their business model and services. It is one thing that we, as the planner, think we are providing a good service for a fair price however, what does the client think? We might have the most cost-effective, robust and comprehensive client service package - yet the client still does not see “the value”. A classic case is the recent survey of 1100 people showing that investors are willing to pay $300 for upfront advice; my guess is they don’t know how personal advice could appeal to their values. Getting the client to perceive value is up to them, not up to us. This happens with every purchase - some people are happy to buy a new Rolls Royce as they see value in spending $500,000 on this type of car. Yet I know some very wealthy people who drive a Holden Commodore or a Toyota Camry. A Rolls Royce simply does not carry the value from their point of view; or more accurately, from their value hierarchy. Interestingly with cars, some people are interested in the acceleration, some with safety, some with gadgets, some with look, some with comfort, some with colour, some with fuel efficiency and the environmental factor, and some with the likely resale price. To most people,



itio ed


what makes one car appeal more than another is the way these features blend to match what the client, customer or consumer typically values subconsciously. Interestingly, when two people disagree on which is the “best” car to buy, they are not only talking about the car; they are also demonstrating their individual value hierarchies. We are not going to dive into marriage counselling today; however, you can see this in your meetings with clients - husband and wife don’t always agree. What a client values in a car is not really any different from the concept of them valuing certain aspects of your financial planning service. In fact, you need to teach your clients to perceive value in your client service package. For optimal outcomes, this needs to be in alignment with their individual values, not yours. In broad terms, let’s look at four different ways that clients might perceive value from you as their financial planner. With our money personality preference tool, we use animals to make different preferences and value sets easy to remember and also light-hearted and fun for both client and adviser. For example, some clients will perceive value in having long-term strategic plans. Building wealth over a long time, a brick at a time, makes sense to them. They value security and tradition, so they will not value the latest speculative stock or new untested managed fund available. These clients will also perceive value in the relationship and being a part of your organisation. We refer to these clients as labradors. Other clients value you getting to know them and what the purpose of money is in their

life. They are purpose-driven and like harmonious relationships. They don’t necessarily value understanding all of the detail of a traditional long-term, accumulative financial plan. They are still forward thinking and opportunity focused; but financial planning is more about the people than the money. We refer to these clients as dolphins. Other clients will perceive value in having shorter-term tactical strategies and will be engaged with investment options which are new and different. They will value having flexibility to change “the plan” if a new opportunity arises. We refer to these clients as monkeys. Lastly, some clients value your intellect. They don’t necessarily want to know all of the detail; however, they will want to know that you have done your homework. They will want to ensure that there is a rational and analytical reason for everything you recommend. They value individual competence and want you to be able to think for yourself, as opposed to rolling-out whatever strategies somebody else has told you to. We refer to these clients as owls. Different parts of your client service proposition will appeal to different clients. A question for you: Do you explain to every client in the same way the value you bring as a financial planner? If you do, there is a commercial risk that some clients and potential clients simply won’t perceive the value in your proposition for them to “opt-in” boots and all.

Robert Skinner is a co-founder of innergi

Rebuild your clients’ confidence by the book. To request your free booklets and Psychology of Investing Seminar Kit, visit

‘Tyndall’ means Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No 237 563.




Countdown to lift-off Strong returns from commercial property are coming. Frank Gelber says now is the time to lay the foundations.


’m not looking for anything spectacular in the commercial property markets this year. That comes later. This is the time to get set. This year will be solid rather than spectacular. This is when we return to the basics of property. This is the time when we rebuild rental incomes, with price rises conservative, largely underwritten by rent increases. There won’t be any rate-fuelled inflow of funds driving down yields. Investors are still cautious following the financial engineering boom and the GFC-induced downturn. They were burned by the fall in property prices - particularly those who geared into the market. And, of course, most investment vehicles were themselves geared. The more conservative vehicles have survived, somewhat chastened by the experience but still in reasonable shape. The banks and the super funds are sitting on their hands. Looking resolutely into the rear vision mirror, they think that property is risky. And those that don’t are afraid to take a position away from the pack. They are keeping a firm hold on the purse strings. Many are still trying to reduce their exposure to property. Fear still rules.

But the horse has bolted. And they’re shutting the stable door, making sure it can’t get back in again. To me, the risk associated with direct property investment is low, not high. I want to increase my exposure, not reduce it - though I may be a little careful about the investment vehicles that I choose to do it through. Others, particularly in the property investment management area, are of a similar view. But they are constrained by their ability to convince investors. There is a huge anomaly - read opportunity - in this market. Certainly, there are major differences between the outlooks for different sectors and for different vehicles. So let me run through a potted summary of my attitude to the commercial property markets. We can talk about investment vehicles another time. Broadly speaking, we’re faced with a near-term mild oversupply after demand weakened in the downturn. But we stopped building as the tightening of credit in the GFC curtailed development across the board. Funding is only now beginning to return but, faced with prices below replacement cost in

most commercial markets, development will be slow to recover. Given the lead times between development and completion of buildings, it’s only a question of time before available supply is absorbed and we enter a period of tight supply. Short-term, the outlook for property will depend on demand. And that in turn will depend on the economy. The rebound in the Australian economy following the GFCinduced downturn has stalled. Households remain cautious, building up their savings. Housing has stalled. Retail sales are still weak. With governments around Australia focused on reducing their budget deficits, strong government expenditure will wind back. The question is whether private investment will come through in time to fill the gap left by weakening government spending. On the positive side, the strength of minerals prices has locked in the next round of investment - mining will be a primary driver of the economy over the next five years. Later on, that means strong demand for labour, the emergence of labour shortages, wage inflationary pressure, strong rises in interest rates and prob-

ably a strong dollar through the middle of the decade. There will be winners and losers, and we need to understand how they will affect the different property markets. But that comes later. We are just at the beginning of that phase. Over the next year, strong household incomes and balance sheets will underwrite improving consumption expenditure. Housing will take time to regain strength. Mining investment will kick start private investment. But the missing link is an improvement in nonminerals-related profitability. Our forecasts at BIS Shrapnel are for an economy picking up momentum through the course of this calendar year. Accordingly, property demand will be solid but not spectacular, picking up as the year proceeds. And that will feed through to property incomes. This is not a time when we should expect strong capital growth, with investor demand driving down yields. Much of the fall in prices following the GFC was a correction in yields following the overvaluation in 2007 when yields were too high. We should not expect yields to bounce back. That comes later when investors return in force.


Commercial property is set to skyrocket

Retail property was less affected by the GFC-induced downturn. Certainly, there was a correction in yields following the previous overvaluation, with regional and sub-regional centre prices falling by between 10 and 20 per cent. But retail property incomes remained solid, with some constraint on rents in the downturn but with relatively few insolvencies and property vacancies. Retail sales weakened but, with the strong Australian dollar, margins remained high. Now, retailers are concerned about the weakness of retail sales growth and about competition from Internet shopping. Generally, the purchasing power of larger retailers cushioned them compared with smaller retailers. And larger, better quality

centres gained at the expense of smaller properties. But, by and large, retailer incomes, and hence retail property incomes in the larger centres, remain reasonably strong. Our forecast at BIS Shrapnel is for solid but not spectacular total returns with regional and subregional centres averaging around 10 to 11 per cent per annum over the next five years. Industrial property markets were hit hard by the downturn with prices falling by between 20 and 30 per cent and yields softening by between 1 and 2 per cent. Most of that was a correction in yields following the overvaluation of the boom. Accordingly, we don’t expect any strong rebound in prices arising from investor demand. For developers, the real pres-

sure was on land prices, which fell dramatically. Even so, industrial property prices remain below replacement cost. As funding returns and demand re-emerges, we expect rising rents to underpin rises in property prices underwriting internal rates of return in the low teens over the next five years. Office markets were hit hard by the downturn with prices falling by between 20 and 40 per cent. Some markets panicked, offering extraordinary incentives to secure tenants. But we are past the trough and into the upswing. Demand has started to pick up. Net absorption has increased but, with most businesses still nervous about taking on new lease commitments, there is still a latent demand for additional space. Meanwhile, development was slaughtered during the GFC period. Prices are now probably 20 to 25 per cent below replacement cost levels. With little new supply, it won’t take long to absorb excess stock. Given the long lead times in office developments, this market will overshoot, building momentum into what will become a boom in five years’ time. And I’m using the word “boom” carefully. Our forecasts for the major capital city markets (apart from Canberra which is oversupplied) show internal rates of return of between 16 and 20 per cent over the next five years. That’s extraordinary. While some risks still remain in the vehicles for holding commercial property, the property risk itself


is low, not high. In the boom we were overgeared, overvalued and on the way to being overstocked. The downturn in prices and building took most of the risk out of the market. Most of the office, industrial and retail markets are, on our forecasts, showing quite extraordinary prospective returns. It won’t happen quickly. It will be slow at first, building momentum only when stock shortages drive up rents and prices and attract investors. A large part of the reason for the strength of the outlook is that the flight of lenders and investors caused an unwarranted overreaction on the supply side, setting us up for emerging property shortages over the next two to three years and hence for an upswing, building momentum into a boom. I’ve never seen it like this. To me, there are extraordinary low risk/high return opportunities for medium-term investors. A 15 per cent internal rate of return for this risk is extremely attractive. There may be better returns over the next five years, but I don’t know now what they are. If you do, let me know. But I do know about commercial property. This is the time to get set, to position for strong returns in two to five years’ time.

Dr Frank Gelber is director and chief economist of BIS Shrapnel.


S h a r e m ark et

Light at the end of the tunnel Ron Bewley reckons 2011 will be good to sharemarket investors, but 2012 will be great.


ast year won’t go down as one of the best in investment history. Our stockmarket finished up just about where it started - but the S&P/ASX 200 did spend one day above 5000. Overseas, a different story played out. Doubledigit growth on the S&P 500, and near that on the FTSE, were the prizes for those investing in faltering economies. So where did it all go wrong for us? Our economy was in great shape, so we had four interest rate rises, which sent the dollar through the roof; and, just for good measure, the Kevin and Julia show got in full swing from June; and then there was that mining tax debacle. Hundreds of broking analysts submit their forecasts of company dividends and earnings to Thomson Reuters. We transform these forecasts into 12-months-ahead forecasts of capital gains and total returns for the S&P/ASX 200 and its 11 major sectors. These forecasts started the year a little on the optimistic side. Perhaps analysts can be forgiven for missing the impact that the mid-year political mayhem would have on the market. In Chart 1, I reflect on how these expectations evolved over 2010. Each day I produce forecasts for the following 12 months. Expectations had been gaining momentum over the latter part of 2009, but they entered 2010 fairly flat at a hefty 24 per cent for capital growth. This optimism took a hit

Ron Bewley

Chart 1

  in   late January when the idea of a

resources tax was first floated. The slide continued in the February reporting season, but our forecasts levelled out at around 21 per cent

for the next few months. Not long after Kevin Rudd’s demise on June 24, expectations started a nosedive into the August reporting season and the federal election. Since the

September 7 formation of the new government, market forecasts settled down at about14 per cent. Importantly, the sectoral forecasts underlying these market forecasts got the sector picks right - energy, materials and industrials strong and financials much less so. But the real benefit to us from these forecasts comes from our turning them into our market mispricing signal or exuberance. I show how exuberance fluctuated over the course of last year in Chart 2. The “6 per cent dotted line” is the magic level that we believe signals a strong chance of a market correction; none in 2010. The market started the year a little over-priced but a good buying opportunity presented itself around February. Just as the market was picking up and looking settled, enter the mining tax, and the market fell like a stone. This fall was not a correction but a reaction to genuine bad news. We marked the market at 12-15 per cent under-priced in the middle of the year. Gradually, the market hauled itself back up to par by Christmas. Our fear index helps enrich that story. We measure fear as excess volatility, and it seems to be a leading indicator for VIX-type measures. The dotted lines in Chart 3 mark the range where the index lives 66 per cent of the time - except for during the GFC. There was a little action at the beginning of the year as the European debt situation


came to light. There were two big peaks in May and July. We argue that when fear is high, under-priced markets have a tendency to stay that way. So when fear got back into the “tram lines”, the market took off again. The market has been really well behaved since August. Good fundamentals, low fear, and no over-pricing describe a great place from which to start the next rally. So where are we heading? Our trusty broker forecasts suggest an above-average year ahead. Materials and industrials are leading the way in Chart 4. Except for REITS (Real Estate Investment Trusts, formerly known as Listed Property Trusts) the rest are in a bunch. The energy sector was running with the big boys until the start of December 2010. I never treat these forecasts as gospel. Market volatility dwarfs underlying trends. It is the broad direction and relative sector strength that counts. But to construct a portfolio allocation, it is also important to bring in sectoral volatility and correlation forecasts. Despite the strong showing of materials in Chart 4, one of our sectoral allocations has materials underweight and financials market weight! It depends so much on the relative risk and investors’ tolerance to it - so take care. But perhaps analysts have overcompensated going into 2011. This pullback in expectations leaves a lot of room for upside surprises in the earnings seasons. But the real


Chart 2

Chart 3


Chart 4

game changer could be the dollar. With the RBA having done its job on rates, and so much optimism (at last) in the US, it won’t take much for our dollar to take a tumble. When? That depends on when the Fed feels strong enough to talk about a brighter future for the US - unlikely before mid-year. Since arguably our market underperformed the US because of our dollar appreciation - the difference in the market growths is just about equal to the dollar appreciation - we might get back the lost ground on top of our fundamentals. If we can get a 10 per cent or more kick just due to currency depreciation, with strong (but not massive) growth in the market fundamentals, there should be a great 12 months starting sometime not too far away probably starting somewhere in the second half of 2011. Of course moods can change quickly. That’s why I update my charts daily. So my gut feel is for a good 2011 and a great 2012!

Ron Bewley is an executive director of Woodhall Investment Research


T h e Fin al W or d

Reef Oil and leather - welcome to 2011 Dixon thinks locking Shane Warne in a metal box would help his hangover (Dixon’s, not Shane’s).


y New Year’s resolution - “If I live through this, I will never, ever drink again” - lasted less than 24 hours. Sometimes, when you fall off the wagon, the best thing you can do is climb right back onto the horse. It was just another reminder of why I don’t usually bother with these things. My resolution for 2012 will be to never keep another New Year’s resolution. That’s one I can’t fail to both break and keep. A hangover that kicks like a mule seems to be the traditional introduction to each calendar year. And as I get older, the introduction seems to last longer and longer. The other early-year tradition is lying on the couch with the test cricket on. For the first time in I don’t know how long, it’s been worth watching (you may guess from this where my sympathies lie). There’s something soothing about the combination of physical inertia and the inane babble of commentators. It goes hand-in-hand with the smell of Aerogard and Reef Oil. The background sound of a big crowd. The satisfying “thwack” of leather on buttocks … I mean on willow. Sorry - I drifted off there for a moment. It can’t be an easy task for a commentator to contribute intelligently to pictures that everyone else can already see. Many of the people watching already know as much or more about the sport than the commentators anyway - and even if they do not, they still have very strong opinions about what they’re seeing. When the action on the screen isn’t sufficiently compelling, I like to close my eyes and count up the malapropisms, non-sequiturs and general mangalisms perpetrated by the commentators. (See what I did there? I invented a new word: mangalism. Commentators are quite good at that, too.) Sometimes a near-enough-is-good-enough approach prevails - you know, using a word that

Dixon Bainbridge

sounds like it could be the one they actually should have used, or combining two words into a new one that sounds like what the commentator means. Let me refudiate the proposition that commentating is straightforward. Two skills critical in the commentator’s armoury are the ability to use “impact” as a verb, as in “this loss is going to impact her hard”; and, whenever possible, to drop the “-ly” from adjectives, as in “he played strong”, or “she ran quick”. This year a new trend is emerging - to actually add “-ly” where it doesn’t belong, as in “this will impact her hardly”. The beauty of this statement is that it leaves the listener unsure as to whether the impact in question is very great, or very small. Sometimes the best commentary is silence. Richie Benaud is a master of saying nothing. There will often be long periods of silence when Richie is at the mic; he’s wise enough and smart enough to know that we do not want a constant steam of chat; that sometimes there’s simply

nothing to say. So say it. I feel a bit sorry for cricket commentators, in particular. They have a lot of time to fill. A test match can last for five days (if Australia is not playing). And I’ve observed that in the space of 60 minutes, there’s approximately 12 to 13 minutes of actual “play”. The rest of the time is the bowler walking back to the start of his run-up, drinks, changing field settings, or swapping ends after each over. Barely 20 per cent of the time is there something actually happening. That sports drink ad, featuring the Australian bowler with arguably the best tattoos in the sport, makes me laugh. He talks about sprinting 30 metres (he’s hardly a threat to Usain Bolt) repeatedly, for six hours a day, and sweating a bucketful. But he omits to mention that if all goes to plan he’ll spend half the match sitting on his arse in the shade in the pavilion. As a direct result of what doesn’t happen on the field, commentators have learned how to fill the gaps wisely, and television stations have perfected the art of the replay - from 25 different angles - and a dozen types of technology: Eagle Eye, Snicko, Hot Spot, the wagon wheel, and so on. They’ve had to. They have to fill more than 30 minutes of every hour (not counting ad breaks) with something that’s not actually happening. This is an impressive feat; but it tells you something fundamental about a sport when entertaining the audience is up to the broadcaster, rather than the players. Of course, all of this doing nothing makes cricket the perfect summer holiday television sport and hangover accompaniment, and I would change hardly anything about it. I’d lock Shane Warne in a soundproof metal box for the five days, but that’s about it.

Dixon Bainbridge can be contacted on

On the flight to quality travel first class

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or call 1800 214 616. 1. As at 31 October 2010. Past returns are not a reliable indicator of future returns. Total returns are calculated based on changes in net asset values and assumes the reinvestment of distribution. 2. To the extent that any ratings, opinions or other information of Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) constitutes general advice, this advice has been prepared by Standard & Poor’s without taking into account any particular person’s financial or investment objectives, financial situation or needs. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Past performance is not a reliable indicator of future performance. Ratings can change or cease at any time and should not be relied upon without referring to the meaning of the rating. For more information regarding ratings please call S&P Customer Service on 1300 792 553 and also refer to Standard & Poor’s Financial Services Guide at Each analytic product or service of Standard & Poor’s is based on information received by the analytic group responsible for such product or service. “S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc. © 2010 Standard & Poor’s Information Services (Australia) Pty Limited. 3. van Eyk has not directed the publication of Walter Scott’s ratings. Past performance information is given for illustrative purposes only and should not be relied upon as it is not an indication of future performance. The rating is not intended to influence you and your client’s investment decision in relation to any products managed by Walter Scott and does not take into account your client’s individual financial situation, needs or objectives. We recommend that you and your client do not rely on this rating in making an investment decision and instead you seek advice from an appropriate investment adviser and read the product disclosure statement before making such a decision. ®Macquarie Professional Series is a registered trademark of Macquarie Bank Limited. The Walter Scott Global Equity Fund ARSN 112 828 136 (Fund) is offered by Macquarie Investment Management Limited ABN 66 002 867 003, AFSL 237492 (MIML). MIML is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MIML’s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of MIML. This information is for advisers only and must not be passed on to retail clients for the purposes of recommending an investment in the Fund or any other financial product or class of products. This document does not contain any financial product advice and has been prepared without taking into account the objectives, financial situation or needs of any particular investor. Before making a decision to invest in the Fund, investors should read the Fund’s Product Disclosure Statement, which is available from us, and consider, with or without their financial adviser, whether the investment fits their objectives, financial situation and needs. Investments in the Fund are not deposits with or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 or any Macquarie Group company and are subject to investment risk, including possible delays in repayment and loss of income or principal invested. None of Macquarie Bank Limited, MIML or any other Macquarie Group company guarantees the performance of the Fund or the repayment of capital from the Fund or any particular rate of return. ST/MQ/PS/WS/PP/Jan2011

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