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March 2011


Tool Time How to be competitive in the SMSF market

Borrowing, ex-pat tax and sis-friendly strategies for smsfs

Comparing the online insurance comparators

why Labradors love financial planning


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March 2011 04 07 08 09 10

Opinion and views

From the editor Practitioner perspective De Gori Whiteley Slattery

44 Aged care reform and the former home

Professionalism 28 Only one can rule the industry

Cover story - page 12

Exchange-traded funds 30 Do your homework on ETFs Insurance 32 Comparing the online comparators Marketing 35 Run a mile from clichéd writing

Planner profile - page 20

Self-managed super

36 38 40

Investing with borrowed funds Avoiding excessive tax for ex-pats Breaching SIS not necessarily fatal

Investor psychology 42 Labradors love financial planning


Practice management

46 Martin Mulcare 47 Ray Henderson 48 Peter Switzer Private banking 49 The importance of onboarding

Managed funds 50 Do it right if you do it yourself Research 52 Things to think about in property investment Property 54 Making property fit the portfolio puzzle Sharemarket 56 Imagine a life without forecasts


57 Harnessing the growth in giving Final word 58 My battery is flat and I’ve gone stupid

Client case study - page 24

Managing risk with a measured approach For information on the Tyndall Australian Bond Fund, one of Australia’s highest rated fixed income funds, visit The value of an investment can rise and fall and past performance is no guarantee if future performance. The Responsible Entity of the Tyndall Australian Bond Fund ARSN 098 736 255 is Tasman Asset Management Limited ABN 002 542 038 AFSL 229664 (trading as Tyndall Asset Management). 2238_PP



It’s not enough just to stand and stare T

he role of journalism and of journalists in society is a vexed issue. At what point do journalists cease to be mere reporters, bystanders and observers? Is there a point at which a journalist should express a view and take a position on an issue? Without wanting to get completely sidetracked by a discussion about the role of the media in an open and democratic society, let me say that, in essence, I believe it’s the role of journalism and of journalists to ask questions, hold accountable people in positions of power and privilege, highlight hypocrisy and deceit, and to shine a spotlight where people don’t want a spotlight shone. Journalism should, where and when it’s appropriate, be an agent of change. I was told by a reader of Professional Planner Online last month - and told quite forcefully

- that I have no right to hold an opinion on what I write about; and if I do, I have no right to express it or to let it inform the articles that I write or publish in this magazine, and elsewhere: “My view is you are biased. You are only a journalist - only a journalist. Journalism carries the responsibility to present all points of view - to report on the issues - not to lead the debate and influence towards one outcome. You are a journalist - only a journalist.  You have no basis to lead towards one result - and you lose credibility with all of those who appreciate that there is another view. “You are only a journalist. There is no basis for you to be anything more.” I get the point, particularly about needing to present different sides of an argument, but I disagree with the idea that this magazine cannot lead a debate about the need for reform in financial planning.

Recently I learned about the News of the World, a newspaper in the UK that has a circulation of more than 25 million, and a campaign waged by the paper against the state of child protection laws in the UK. Let me state very clearly that I am not equating Professional Planner with News of the World; nor am I equating the importance of restructuring the financial planning industry with the importance of protecting children. I use the News of the World simply as a compelling example of why journalism is and should be an agent for change - an example of why journalists sometimes must do more than stand on the sidelines and merely report on events dispassionately. The newspaper’s campaign was prompted by the murder of children by a convicted sex offender who’d been released from jail. The newspaper took the view that the law must change, to

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give children in particular and the community generally more protection. Its campaign included publishing the names and addresses of convicted sex offenders. It was, unsurprisingly, a wildly controversial campaign. It elicited both very strong support and very strong condemnation, from different parts of the community. And it had some unintended consequences. Doctors were attacked - some readers apparently were not sure exactly what a paediatrician is. In the end the paper achieved significant changes. The laws governing child protection in the UK have been substantially revised and strengthened; and there’s a very real chance that the changes will prevent the kind of horrific events that led to the paper’s concerns in the first place. The fact is that this publication - and others - can and should routinely cover issues that some would prefer we didn’t. Anyone who thinks we shouldn’t, mistakes at a very basic level why Professional Planner exists. It does not mean the value of financial planning is not recognised, nor that the calibre and quality of most people engaged in it are not understood. Good planners should be acknowledged, and the work they do should be celebrated. That’s what we do with this magazine, for example, in regular features

like Planner Profile and Client Case Study. But it’s not my job to be popular by writing only what people want to hear. I firmly believe that financial planning should aspire to be a trusted and respected profession, and that it can be exactly that. It would undoubtedly be a good thing if more people trusted and respected the industry. I believe the vast majority of practitioners want to be regarded as professionals, and to be recognised for their qualifications, expertise and standing in their local communities. If I’m wrong, and they don’t want any of that, then fine. We’ll abandon any pretence of financial planning being a profession, and of planners being professionals. The planning industry can continue to languish in the eyes of the public and go on scratching out a living providing a service to the two or three out of 10 Australians who really need it. If I’m banging my head against a brick wall, then so be it. I’ll gladly stop. But we’re not going to achieve anything just by writing stories about how wonderful the industry is and by pissing in each other’s pockets. If the financial planning industry wants to be a profession, then it must undergo some changes to justify those claims. Those changes are difficult for many, and not popular with some sections of the industry. They mean facing up to some things that no one is proud of, and tackling them front-on. Professional Planner will continue to cover the issues that need to be addressed - right alongside the stories that focus on great businesses, great planners, great advice and great ideas. Professionalism is a badge that has to be earned. Let’s sort out the structural issues that dog the industry. Let’s get those right, and then the rest follows. Let’s highlight the things that need to be changed. And then let’s make damn sure that’s what we do. Anything else is a waste of time. Yours and mine. Simon Hoyle


March 2011 - Issue 29

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

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.

Executive Directors: Colin Tate, Greg Bright

Circulation 10,716

Over the past two years, Professional Planner Online has

specialists. And we have a range of developments in the

established itself as an invaluable addition to Professional

pipeline to improve the interaction and community aspects

Planner - the leading magazine for Australia’s fee-based

of the website.

financial planning community. The website has been a source of news and information between editions of the magazine. It has broken crucial industry news, and provided

One thing has not changed: Our aim is to be as useful and supportive as possible to financial planners, accountant

a forum for interaction between readers.

planners, private bankers and SMSF professionals in

Now we’ve made it even better.

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With a new, cleaner look, easier navigation and improved

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The first principle of good advice Sandra Bowley says a planner’s obligation to put clients’ interests first means industry superannuation funds should no longer be treated – nor treat planners – as the “enemy”.


s a member of the Financial Planning Association of Australia (FPA), and a Certified Financial Planner (CFP), I am bound by the association’s Code of Ethics, in which the first point states: client first. The Code says placing the client’s interest first is the hallmark of professionalism, requiring the financial planning professional to act honestly and not place personal gain or advantage before the client’s interests. The Code also addresses integrity, objectivity, fairness, professionalism, competence, confidentiality and diligence. “Client first” is a very simple yet powerful statement, and I object to comments made by the chair of MediaSuper, Gerard Noonan, in a recent Roundtable article (Professional Planner, February 2011), which suggests that financial advisers do not act in the best interests of their clients. In that article, Noonan claimed that none of his fund’s 125,000 members were in the fund “because a financial adviser has said, ‘You should be in MediaSuper because it’s a really good fund, because it makes X per cent a year, and it’s really cheap’ ”. He claims that not one financial adviser has done this, and his comments go on to suggest that financial planning could be improved if all advice were required to be given “in the interest of individual people”. I feel that Noonan’s comments suggest that financial planners are taking everyone they come across out of industry funds, and this is simply not the case. I have dealt with several of Noonan’s members. Having looked at their individual circumstances, I have recommended that they stay in the fund - perhaps switch investment options within the fund, if their risk profiling has not been done correctly - but as to the fund itself, my recommendation to them was to retain it, as this

The Financial Planning Association’s Code of Ethics Principle 1: Client First Place the client’s interests first. Placing the client’s interests first is a hallmark of professionalism, requiring the financial planner to act honestly and not place personal and/or employer gain or advantage before the client’s interests. Principle 2: Integrity Provide professional services with integrity. Integrity requires honesty and candour in all professional matters. Financial planners are placed in positions of trust by clients, and the ultimate source of that trust is the financial planner’s personal integrity. Allowance can be made for legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles. Integrity requires the financial planner to observe both the letter and the spirit of the Code of Ethics. Principle 3: Objectivity Provide professional services objectively. Objectivity requires intellectual honesty and impartiality. Regardless of the services delivered or the capacity in which a financial planner functions, objectivity requires financial planners to ensure the integrity of their work, manage conflicts and exercise sound professional judgment. Principle 4: Fairness Be fair and reasonable in all professional relationships. Disclose and manage conflicts of interest. Fairness requires providing clients what they are due, owed or should expect from a professional relationship, and includes honesty and disclosure of material conflicts of interest. It involves managing one’s own feelings, prejudices and desires to achieve a proper balance of interests. Fairness is treating others in the same manner that you would want to be treated.

was in the client’s best interests. In other cases I have recommended that members increase the amount of money they put in, by way of strategies such as salary sacrifice. I recently had a client who was a member of a local government scheme, and he wanted to increase his insurance. We increased his insurance to $1 million in his industry fund. I did as much as I could through his industry fund, because in

Principle 5: Professionalism Act in a manner that demonstrates exemplary professional conduct. Professionalism requires behaving with dignity and showing respect and courtesy to clients, fellow professionals, and others in businessrelated activities, and complying with appropriate rules, regulations and professional requirements. Professionalism requires the financial planner, individually and in cooperation with peers, to enhance and maintain the profession’s public image and its ability to serve the public interest. Principle 6: Competence Maintain the abilities, skills and knowledge necessary to provide professional services competently. Competence requires attaining and maintaining an adequate level of knowledge, skills and abilities in the provision of professional services. Competence also includes the wisdom to recognise one’s own limitations and when consultation with other professionals is appropriate or referral to other professionals necessary. Competence requires the financial planner to make a continuing commitment to learning and professional improvement. Principle 7: Confidentiality Protect the confidentiality of all client information. Confidentiality requires client information to be protected and maintained in such a manner that allows access only to those who are authorised. A relationship of trust and confidence with the client can only be built on the understanding that the client’s information will not be disclosed inappropriately. Principle 8: Diligence Provide professional services diligently. Diligence requires fulfilling professional commitments in a timely and thorough manner, and taking due care in planning, supervising and delivering professional services.

that case it was in his best interest to do it that way. Putting the client first is the first hallmark of professionalism. Financial planners have to justify their recommendations and I always provide financial advice that is in my client’s best interests. Sandra Bowley is principal of SBFP, an authorised representative of AMP Financial Planning.




ikipedia defines “consultation” as a regulatory process by which the public’s input on matters affecting them is sought. Its main goals are to improve the efficiency, transparency and public involvement in large-scale projects or laws and policies. There are generally three stages: 1. Notification (to publicise the matter to be consulted on); 2. Consultation (a two-way flow of information and opinion exchange); and 3. Participation (involving interest groups in the drafting of policy or legislation). In the context of changes to the financial planning industry, the first stage of notification was when the Future of Financial Advice (FoFA) reforms were announced by the then Financial Services Minister, Chris Bowen, on ANZAC Day 2010. This triggered the industry into action. Treasury fielded numerous visits and meetings with industry stakeholders, including product and platform providers, dealer groups, financial planners, associations, the banks, and anybody else who wanted to get their message across. Treasury also conducted public information sessions in each capital city, all designed to help collate information, issues and concerns as part of the notification process. It is fair to say that these information sessions were at times heated, but constructive, and provided the response Treasury needed to move to the next stage. However, the commencement of the second stage of consultation (two-way flow of information and

opinion exchange) was delayed and the caretaker convention period extended as a result of a longer-than-expected election campaign, the formation of a minority government and a ministerial reshuffle. Out went Chris Bowen and in stepped Bill Shorten, and Treasury had to start again with the new Minister before finally announcing the formation of the Peak Consultation Group (PCG). However, informal consultation commenced even before the announcement on ANZAC Day, and the FPA has had to deal with all sides of politics, Treasury, ASIC and even other industry stakeholders. To stay on top of the issues, the FPA formed a dedicated FoFA Taskforce to tackle the main areas of concern, including: • Fiduciary duty; • Affordable and accessible advice; • Opt-in; and • Volume payments. The Taskforce has hosted and participated in a number of workshops (some directly with Treasury), conducted a member survey, and completed working papers on these topics as part of the work during 2010. The FPA has also recently launched a FoFA information pack, which equips members with information and fact sheets about the FoFA reform issues, such as opt-in and the expansion of intra-fund advice. The FPA has also had numerous one-on-one meetings with Treasury and the Minister to discuss these issues in more detail, as well as participating in the PCG meetings. It is through these various forums that the FPA continues to:

• Push for opt-in to be removed from the reform agenda; • Oppose the expansion of intrafund advice to areas such as Transition to Retirement and Centrelink; • Raise caution about the definition that will be adopted for “best interest” (we do not believe this should be a best advice definition); and • Support, under a conflict management process, the continuation of volume payments (rebates) from administrative platform services to licensees. FPA members, too, have participated extensively both directly, with their local members, the Minister, and Treasury; and indirectly, through the FPA, their licensee or other forums. This stage of a two-way flow of information and opinion exchange is not over and I would encourage all financial planners to continue to voice their concerns and get in front of their local member. The third and final stage of the process is participation in the drafting of legislation. The Minister is to first confirm the Government’s policy positions. The Minister may conduct further consultation before finalising the policy; but once finalised, drafting instructions can be issued to commence the drafting of legislation. Even so, one thing is for sure: when the detail is finally released, even after all the consultation, there will be surprises. You have been consulted! To comment on this article go to . Dante De Gori is general manager, policy and government relations, for the Financial Planning Association (of Australia).

De Gori

You have been warned!





ust before last Christmas a report was released by ASIC looking at why most Australians put off seeking financial advice. In simple terms there is often a big gap between what the financial services market sells and what most people want. Many people want some factual single-issue advice; but typically the market only offers full-service, holistic financial plans. As a consequence, there is a gap between the cost of advice and what people are prepared to pay. While a full financial plan can cost thousands of dollars, consumers are only prepared to pay $200 to $300 at the most. The study also identified mistrust in the advice people received, because of the role of commission selling, compounded by low levels of financial literacy, which make it difficult for consumers to assess the quality of the advice they are receiving. The Future of Financial Advice (FoFA) reforms proposed by the Government recognise that financial advice comes in different forms and that the supply of advice must match demand. A first step in recognising the importance of advice is acknowledging its different forms. One of the least recognised, yet greatest strengths of Australia’s retirement income framework is the in-built financial advice incorporated into the super system itself. We take this feature for granted, but it is absent in many overseas retirement incomes systems. It is worth looking at the number of decisions an Australian employee has to make about saving for his or her retirement compared to a counterpart in the UK or US.

The decision to save for retirement is made for us, through compulsion. The minimum amount to save is set at 9 per cent of wages, but will increase to 12 per cent if Government reforms are successful. While most employees have the right to choose their own super fund, workplace default funds mean we do not need to choose. The vast majority of employees do not choose their own super fund but stick with the workplace default fund. If no investment option is selected, our investment decisions are made for us, through default investment options. These are typically “balanced” funds designed by investment professionals and overseen by experienced trustee boards. Finally, almost all workers have a default level of life insurance through their super. These defaults, including the builtin advice, do not make our system perfect, but they provide a very solid foundation. The recent MySuper proposals strengthen the rules about workplace default funds and implicitly acknowledge the importance of builtin financial advice. However, the MySuper proposals could be further strengthened - and the ASIC report into financial advice points the way forward. Initially, the MySuper reforms will not require default funds to provide their members with basic financial advice about their super fund. So while millions of workers are unconsciously benefitting from the design of built-in advice, many are now seeking further advice about the basics of their super. Members regularly contact their fund asking whether they are contributing enough to their super; whether

they are eligible for the co-contribution scheme; whether they have enough insurance; whether they are in the right investment option. Members are seeking advice about the basic structure of the superannuation system they are compelled to save in. It is part of the evolution that many will make from compulsory savers to informed investors. This type of financial advice is called “intra-fund” advice. It is financial advice that relates only to a member’s existing interest in the fund. For the eight in 10 workers who do not choose their own super fund, it makes sense that the workplace default fund should be required to offer this basic service. In return for the privilege of receiving the super savings, there should be an obligation for the super fund to provide, as a basic service, advice about the fund.

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


One size does not fit all





t’s now widely recognised that the punitive penalty regime applying to excess superannuation contributions is in need of reform. The severity of Excess Contributions Tax (ECT), both in terms of the rate of tax and the manner in which the tax is applied, is one of the most significant issues currently confronting the superannuation sector. Self-managed super fund (SMSF) members are disproportionately affected by ECT because they are the most highly engaged with their super and therefore the most likely to take advantage of legitimate opportunities to increase their retirement savings. As such, the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has devoted a significant part of its 2011 Federal Budget submission to ECT and related issues, such as the excessively low concessional contributions cap. Given the penalty rate of tax applicable to excess contributions, and based on our members’ client situations, we consider that the vast majority of instances of excess contributions have arisen due to mistake rather than by intention. Superannuation fund members who exceed their non-concessional contribution cap should have a genuine right to rectification and this rectification should enable members to minimise their excess contributions tax liability. To facilitate this, the Superannuation Industry (Supervision) Regulations should be amended to enable the voluntary refunding of the excessive portion of a non-concessional contribution back to the member. A nonconcessional contribution which, either

on its own or in aggregate, has exceeded the member’s non-concessional contribution cap should be considered a refundable excess non-concessional contribution for this purpose. The rate of excess contributions tax should uphold the policy intent of the non-concessional contribution cap and deter members from making non-concessional contributions which exceed their non-concessional contribution cap. However, the rate of excess contributions tax should not unfairly or unjustly penalise members who inadvertently exceed their non-concessional contribution cap. A mandatory rate of excess contributions tax should be applied to refunded excess non-concessional contributions. This mandatory rate of excess contributions tax should be based on a proxy for the rate of investment earnings derived on the excess portion of the non-concessional contribution while it remained in the fund. Non-concessional contributions which are not refunded prior to the issue of the excess contributions determination by the ATO should remain subject to excess contributions tax at the rate of 46.5 per cent, and these taxpayers would continue to have access to the limited forms of rectification which currently apply. To simplify the contribution caps for members over age 65, and to reduce instances of unintended contribution cap breaches, the restriction that applies from age 65 to members who wish to bring forward two future years of non-concessional contributions, should be removed. This will enable the bring-forward rule to apply until age 75, consistent with the rule for

non-concessional contributions which enables members to contribute up until the age of 75. While concerned about instances of inadvertent cap breaches which are the result of excessively low contribution caps, SPAA is also concerned about the long-term impact that a low cap base will have on the level of retirement savings and ultimately the Government’s fiscal strategy. The current excessively low concessional contribution cap base, together with the absence of adequate indexation, will deny many thousands of Australians, who typically have a greater financial capacity to save for retirement later in life, the opportunity to do so. Similarly, individuals with broken work patterns - women in particular - and individuals close to retirement with inadequate retirement savings are denied the opportunity of making reasonable catch-up contributions. Of great concern from a public policy perspective, new research released as part of the SPAA National Conference shows that reduced annual caps are causing a significant fall in the level of concessional super contributions; that is, a fall in the nation’s retirement savings investment. Contrary to initial Government projections, the reduced concessional contributions cap, which has applied since the commencement of the 2009-10 financial year, has had a major impact on the level of concessional contributions across all income ranges. Allowing individuals to access a higher concessional contribution cap Continued on page 29


An excessively severe tax


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Tool Time Government support for the Cooper Review means there will be greater opportunities for financial planners to advise self-managed superannuation funds (SMSFs). But before you take on this sector, you will need to know what it takes to really be competitive. Krystine Lumanta reports.



he Superannuation System Review (Cooper Review) has become a wake-up call for the self-managed super funds (SMSF) sector. The recommendations approved by the Government might appear minor in the context of such a robust and well-established area - but nevertheless, they will have a major bearing on the opportunities for financial planners. The role of the financial planner is changing again, this time with the Cooper Review reforms

covering SMSF qualification requirements. However, this should encourage, rather than deter, professionals to enter and succeed in the SMSF environment, due to opportunities that will emerge. According to the September 2010 Australian Prudential Regulation Authority (APRA) Quarterly Superannuation Performance report, there were 434,000 SMSFs in September last year, up 7 per cent from 2009. On average, there has been a net growth of 6300 SMSFs per quarter over the past two years. This includes


establishments and closures. This proves activity is growing, and so the need for quality advice in this space also gets bigger. And knowing the means or tools by which to succeed in this space will create a competitor, rather than just a player. Within the SMSF arena, it is fundamental for financial planners to recognise the significance and impact of competency and specialisation. Ben Smythe, director of sales and marketing at SMSF specialists Heffron, believes there have



been no real barriers to entry in becoming an adviser, an accountant or an administrator in the SMSF sector. “You could easily provide advice to an SMSF client, provided you have the standard licensing,” he says. “But what the whole new SMSF world is going to be is this greater sense of professionalism, in terms of being able to advise clients [due to] licensing requirements, including accountants, the removal of the accountants’ exemption and greater emphasis on training and ongoing education requirements for this space.” Having SMSF competency means a comprehensive knowledge of the sector overall. This means financial planners will need to know the challenges they’ll be up against and what will possibly affect their day-to-day practices. Tony Negline, general manager of corporate strategy at SUPERCentral, says financial planners need to be clear about why people want to set up SMSFs in the first place. “What are SMSFs embracing? A lot of them are quite cost-conscious and that emphasis is not going to change,” he says. David Shirlow, executive director at Macquarie Adviser Services and a director of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA), believes that due to the scarcity of top professionals at this early stage of specialisation development, financial planners have an advantage. “In a way, making the effort to attain specialist accreditation is a means of really establishing yourself in the industry,” he says. “Whilst it’s obviously time-intensive and you go through the hoops to attain it, one of the benefits is [it] then gives you a credential that others are not prepared to go through. I think there will be many advisers who will recognise this opportunity, and many already have.” Smythe agrees and says the number of people who can provide advice to SMSF trustees is going to decrease once the new qualification requirements come in. “This will be pretty significant,” he says. “Those advisers in this space and who are already in are going to be in a pretty good position;

‘I think there will be many advisers who will recognise this opportunity, and many already have’ Government approved Cooper recommendations: • • • •

An SMSF specialist component will be added to RG146 The accountant exemption will be removed and may be replaced by a restricted licensing framework SMSF auditors must be registered with ASIC who will set competency and knowledge standards to meet compliance-based regulatory demands The ATO will have power to issue greater penalties, direct a problematic SMSF to be fixed and be authorised to produce SMSF statistics

they’re going to have a jumpstart on everyone else.” The Government’s response to Cooper was broadly in line with its proposals and was less intrusive than expected. This is a clear sign of stability in the SMSF sector. Negline says: “While the Government saw they could make large-scale changes, they recognised that it was not necessary and resisted to make change for change’s sake; so it was a good outcome.” “What’s come out of Cooper is that the picture of SMSFs is now public knowledge,” he says. “What [the sector] has realised is that it doesn’t come for free - in time, effort or money. You’ve got to be prepared to fight for what you’ve got. That’s the outcome.” According to Neil Olesen, deputy commissioner of superannuation at the Australian Taxation Office (ATO), the reform measures

will “complement and build on what we already have in place, such as our recent work to stop illegal early release (IER) schemes, our focus on improving approved auditor compliance ... and our ongoing support to trustees in understanding and complying with their obligations under the law”. “In the 10 years the ATO has regulated SMSFs, we have seen a strong growth in both numbers and assets held in the sector. SMSF trustees now manage over $400 billion of super assets,” says Olesen. “The ATO will continue to focus on supporting and educating trustees and professionals. We are confident this approach, where appropriate, [of ] taking a stronger stance on non-compliance, is the right one. “Financial planners will need to be aware of changes to comply with the law and also advise trustees on how the changes to the investment rules affect them.” These future changes will maximise the opportunities for financial planners to stand out from the rest of the pack. “Financial planners and advisers play an important role in the SMSF sector. They advise trustees about investments and risks,” says Olesen. “As such, they are in a key position to influence trustee behaviour on investment choices… At the same time, the Government has acknowledged the need for improved regulation in provision of financial advice to provide trustees with greater protection and reduce the risk of inappropriate advice. “The ATO has been tasked with the collection of information about individuals who provide advice in relation to the establishment of SMSFs as part of the SMSF registration process and will pass this information onto the Australian Securities and Investments Commission (ASIC) to assist them in regulating the Australian Financial Services Licence (AFSL) regime.” Financial planners can easily exploit SMSF opportunities by pursing a specialist title, but Smythe believes it is an aspiration everyone should have anyway. “You can’t be a generalist in terms of self-


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managed superannuation,” he says. “You’re going to have to be an expert, because your competitors are going to be specialists. You’re going to be competing against other advisers who have educated themselves, who have aligned themselves and are very well qualified SMSF experts. That’s going to be the game changer.” Smythe says a high level of knowledge is necessary to enter an area that is multifaceted; otherwise planners may experience difficulties. “That’s always been our feeling. We’ve been doing this for over 10 years and it’s complex stuff,” he says. “We see a lot of self-managed funds that are not being run to their optimum [capacity] and that’s probably a result of the adviser, the trusted adviser, not knowing the ins and outs of what you can and can’t do with a self-managed fund.” Philip La Greca, technical services director at Multiport, predicts that in the future there will be a shift towards categorising each aspect of superannuation. “What are the special skill sets that you need for SMSFs, which are distinct from other super?” La Greca says. “This idea of specialisation, if you think about every other profession, is exactly what works. When you talk about accountants you have insolvency specialists, you have corporate specialists, you have tax specialists. The other analogy is, of course, the medical profession … it’s the same thing. This is where we will probably end up.” For financial planning firms, specialisation is also the winning tool to set your business apart from other competitors, says Shirlow. “One means is to go down the track of attaining specialist knowledge and maintaining it,” he says. “As a director of SPAA, one of the really obvious things to do would be to put advisers through the SPAA specialist accreditation.” The SMSF Specialist Adviser and SMSF Specialist Auditor brands have been recognised as the professional accreditation program set by SPAA, demonstrating a proficient benchmark of skills, knowledge and responsibility.

‘If you want to target the SMSF market, you’re going to need to do these things’ A probable risk for financial planners and firms that do not consider SMSF knowledge requirements and basic guidelines is that they will be left behind, according to Smythe. “If you want to target the SMSF market, you’re going to need to do these things,” he says. “That’s where the market’s going and it’s the kind of service providers SMSF trustees want to deal with. It’s really about where the planner wants to take the business. If they seriously and genuinely want to be a port of call for an SMSF trustee, then that’s where they’ll have to go because their competitors are going to be there.” Shirlow says that the shape of impending specialist knowledge will also involve a high understanding of the role and responsibilities of the trustee, so that any advice given will ensure that an SMSF is successfully run. “What the SMSF component requires is a focus on understanding what a trustee of a fund needs to do to comply with the Superannuation Industry Supervision Act and [also] understanding what a trustee needs to do to operate a fund,” he says. “There’s a lot of expertise involved in advising any client on their super and I wouldn’t be surprised to see higher standards [continuing to] be required of advisers. “Your typical client in the Australian workforce is going to be a member of a super fund; and part of your advice for a typical client, whether they’ve got a self-managed fund or not, will be [informing them of ] … investmentfocused advice, advice focused on contribution levels or retirement plans.”

However, pushing specialisation as the industry framework is not fully embraced by everyone. Michael Lorimer, chairman of the Small Independent Super Funds Association (SISFA), says an adviser’s overall competency and qualifications are more critical. “My professional opinion is that [specialisation] is not absolutely required,” he says. “It would be risky to label someone as a specialist because the relevant theme of the appropriate training upfront and ongoing education for SMSFs could become [overlooked]. “And certainly, the opportunities for financial planners in this space have always been there. Financial planners will become more involved in SMSFs; they’re almost there but not all the way.” An SMSF adviser’s role is one that also requires a project management approach, says Michael Hallinan, super counsel at Townsends Business & Corporate Lawyers. “For many people who aren’t in the SMSF sector, when they’re dealing with a client, they aren’t dealing with other service providers in relation to that client,” he says. “Whereas if you’re in the SMSF sector, there are going to be a number of service providers you’ll have to deal with; for instance, the administrator of the fund, a legal adviser, the auditor. You’re going to have to liaise with and develop relationships with them. “So advisers can be moving from an environment where they very much were the sole [person involved] with the client’s financial investments and they’re now moving to an environment where they’re dealing with other service providers [who are] also dealing with that client’s financial investments.” Potentially, SMSF auditors will suffer the biggest changes from the Cooper Review, so financial planners must also monitor the changes their collaborators are undergoing, says Negline. ASIC will require SMSF auditors to register with them and abide by new competency, knowledge and independence standards. “Auditors have themselves to blame,” he says. “They did it to themselves; they didn’t solve the problem. Demands on their work will con-


tinue to grow and definitely their costs will grow.” Negline says the transformation of the auditor’s role will be “an interesting space to watch” during the year. La Greca adds that another aspect financial planners need to be wary of is that the “expectation of what a client wants out of their SMSF is slowly being raised”. “The nature of the client profile of an SMSF is not the same as it used to be,” he says. “[Before], it was the small business owner, but it’s no longer the case. Now people in senior management and executive roles have started to look at these things as their own sort of options. “The traditional paradigm of how you looked after self-managed super is going to change and it’s going to have to align itself with clients’ expectations of super funds.” Then there is the initial and end pieces of the puzzle - pitching and pricing. Proficiency in offering SMSF advice to trustees needs to be highlighted, according to Sue Viskovic, managing director at Elixir Consulting.

‘I’d emphasise that it’s done correctly with an eye for’s about principles’ She says an SMSF adviser’s value proposition needs to have a “less vanilla approach” as it requires more than just traditional listed assets to be offered, to a very specific target market. Viskovic says new competitors need an “ability to articulate why their service stands above and beyond other advice, and [to] tap into all the benefits that all SMSFs can bring”. The next challenge is determining a pricing


model. Viskovic believes SMSF advice tends to be at “the premium end of the marketplace”, but pricing advice is “not just plucking a number”. A fee can be struck that is both reasonable for the individual business offering the advice, and which is also competitive with fees charged by other bsuinesses. Service offerings should be defined, both for the adviser and for each client to understand why they are paying that amount, Viskovic says. “If you’re adding value by bringing in a direct equity, higher-level asset allocation advice or technical tax strategies, that is worth a higher fee than an average run of the mill price,” Viskovic says. From a legal point of view, Bryce Figot, senior associate at DBA Lawyers, warns potential and current SMSF advisers of the need to adhere to compliance rules. “I’d emphasise that it’s done correctly with an eye for compliance…it’s about principles,” he says.

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For trustees that misbehave, usually by borrowing money from the fund, the ATO has taken significant portions of money as a penalty, even if it means the fund becomes insolvent or leaves clients with no retirement money. “This means the adviser was dropping the ball,” Figot says. “Clients don’t know any better, and so there are now very significant and negative outcomes. Three to four years ago, the ATO would only [penalise] a handful of funds every year, about five or six; but each year it’s increased significantly. “From 2005 to 2006, 12 funds were found to be non-complying, but this number grew to 200 for the period from 2009 to 2010. “Greater opportunities exist, but you have to be mindful to comply with the rules,” he says. “If you do it with nicer detail, you can really add a lot of value for clients.” According to the April 2010 Investment Trends SMSF Investor Report (based on a survey of more than 1900 SMSF members), 47 per cent of investors said their main reason for setting up an SMSF was to have more control over their investments; 35 per cent said their accountant advised them to set up an SMSF; and 29 per cent of participants said their financial planner advised them to set one up. The question of who exactly is able to give advice on SMSFs is a licensing issue that will affect accountants providing basic structural advice. Andrea Slattery, chief executive of SPAA, says that a streamlined licensing process is desirable to ultimately mark out what is appropriate to address Cooper’s removal of the accountants’ licence exemption. “We’ve been very much in favour of a restricted licence rather than an exemption,” she says. “The reason we want this is because accountants don’t want to provide investment advice generally. They want to provide accounting services; but currently, they don’t have the ability to provide choice advice - they don’t have the ability to say to a client, ‘You should or shouldn’t be in an SMSF’, or ‘You should or shouldn’t be in

‘We’ve been very much in favour of a restricted licence rather than an exemption’ another super [fund]’.” Slattery’s duty is to see this through, working with the relevant bodies that will support SPAA’s position on this policy. There is a strong possibility that SMSFs could break through their natural ceiling - that is, the money in SMSFs may go past its maximum capacity - and Macquarie’s Shirlow believes the SMSF sector will continue to thrive. “I think the increased focus on competency

standards, both for advisers and auditors, will lead to some increase in costs associated with SMSFs,” he says. “I do think the Government will be looking closely at recommending SMSFs to people [and at the same time] it will be wanting to make sure that SMSFs are not being recommended to people who don’t have the super account size to warrant an SMSF. “That might curb some undesirable growth of the SMSF sector, but I think there will be healthy growth.” When these SMSF changes become set, it’s going to mean “a massive change for the licensees from the terms of how they’re going to decide who they’re going to authorise to do what”, says La Greca. “We will start to see differentiations between advisers. We might even find the way adviser practices are structured in terms of their offices - [they] will have a change in their dynamic, depending where planners want to work in this space. “So the idea of specialisation actually fits nicely because some people say, ‘I don’t want to do three years of training to do this, but I really like doing this part of what I do, so I’ll go there and do the training required’. The non-accounting professional services actually have a big opportunity out of this space, there’s no question.” In an industry that appears to be on its way to improvement, Slattery continues to promote and support specialisation for the SMSF sector, for the benefit of financial planners. “I’d really like to see more specialists in the market so that consumers can recognise a professional,” she says. “We’re really looking forward to 2011; we believe it will be a great year for superannuation and, in particular … the SMSF advice piece. The recognition of specialist advisers and specialists auditors will be the first step in developing a true profession.”

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*This information is intended to provide a broad summary of the AUI Healthcare Property Trust. Investment decisions should not be made upon the basis of past performance, since future returns will vary. You should refer to the relevant Product Disclosure Statement (PDS) dated 25 June 2010 if you wish to know more about the product. A copy of the PDS can be obtained from the Issuer of the AUI Healthcare Property Trust – Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454 by calling 13 29 39 or from our website You should consider the PDS in deciding whether to acquire, or to continue to hold the product. The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned September 2010) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria.




In an over-serviced market, a planner sometimes has to shine brightly to get noticed. Stephen Priestley is doing just that. Simon Hoyle reports.





t’s a crowded market north of Sydney, in Newcastle, NSW. Stephen Priestley, an adviser with Gordon & Gray, says something like 400 advisers, representing a multitude of licensees, ply their trade in the area. That’s why receiving a 2010 Value of Advice (VoA) Award from the Financial Planning Association of Australia (FPA) was particularly valuable for Priestley. Not only did it acknowledge his professional standing, it gave him an effective way to stand out from the crowd. “There’s 400 authorised representatives in the Newcastle area, it’s something ridiculous,” Priestley says. “The market has changed over the last 10 or 11 years. Last year I was talking to one of the senior guys who keeps a record of all the clients that come into the office, and we had something like 200 new clients come into the office in 2000 - and that was among four advisers. “Last year it was nothing like that. There were four main players back then and we were one of them, but now there are so many of them spread around. But I suppose that’s the nature of economics.” Third-party endorsements, like VoA awards, add credibility to any adviser’s pitch; all the more when you’re in a highly competitive market and you’re 28 years old and purporting to advise clients 30 years your senior. Priestley says the case study he submitted for the award was both technically challenging and personally rewarding. “The reason I put it in was to gain a bit of recognition for the work that I do, and from that hoping to get a bit of publicity to further promote what I do,” he says. “But there were a few things that were a little bit different with the case. The lady came to me; she wasn’t in a great place when she saw me. And there were a few little things I did that made her feel, I can’t really think of the best word for it, but just knowing that she wouldn’t have to worry about money at a time when she was grieving. “She didn’t know how she was going to support herself. Just using a little bit of knowledge, I showed her how to do it. “She had debts from a failed business venture

Name: Stephen Priestley Position: Adviser Years in financial planning/financial services: 7 Qualifications: Bachelor of Commerce, Graduate Diploma of Financial Planning, CFP Industry background and experience: Graduated from Newcastle University in 2004 and started working at current business as a paraplanner. Continued studies to become an adviser. Named top of Smart Investor Magazine’s Masterclass in 2009, and in the Top Five in 2011. Awarded the FPA’s VoA Award in the PostRetirement Planning category

Stephen Priestley

and she had a redundancy payout and superannuation. We paid off her debt, restructured her finances, put what was left over into an accountbased pension - one that offered term deposits, because she wanted absolute security on the little bit of money she did have left over. “She was being income-tested, so the best place for the money was inside the pension, and that maximised her carer payment. We got her onto a bereavement payment straight away, and when she was on that we got her assessed for the carer payment.” Despite the professional recognition, Priestley’s career is in some ways in a transition phase, as he establishes himself in the profession. “I started off in a paraplanning role and I did that for a couple of years and that’s where you build up technical knowledge, just through experience and dealing with the other advisers and clients,” he says. “And then I moved into an advising role. You’ve actually got to be advising to qualify for CFP. “It was quite easy. I still do a bit of paraplanning for the advisers here. The clients I have, I’ve built up from scratch, so I haven’t acquired any clients, or anything like that. So I do a bit of plan writing for the [other advisers’] clients here, and

then look after my own clients. So the transition has been quite gradual. I suppose I’m still in a transition phase. It wasn’t a high-risk leap; it was more of a gradual ease. “The guys here realised that being younger, it was going to take a while to [develop] contacts and build up a few clients, build a bit of trust and get a reputation.” Priestley is in the process of building up his client book, currently looking after 20 clients directly and aiming to increase that over time to closer to 100. “It’s not a huge number of my own, but I also look after other planners’ clients in the business,” he says. “Clients talk to me on the phone and they don’t have any idea that I’m 28 and they come in and they’re a bit sort of, ‘Oh, who’s this kid?’. But I go through what I’ve done, my qualifications, go through the awards I’ve won. So when they come to see me they know my qualifications and awards - the FPA award last year; Smart Investor have their Master Class, and I’ve been in the top 50 the last three years. I got top five this year, and I was placed first in 2009. So just using those things as material. “Even though they realise I’m quite young, and younger than they might have expected, that builds a bit of a reputation for me, and a bit of confidence in them.”


In recent months Priestley, in addition to dealing with the publicity surrounding his VoA award, has been occupied by Gordon & Gray switching dealer groups, from Godfrey Pembroke to Financial Wisdom. “The main reasons were the product offerings,” Priestley says. “Under the MLC banner, it was very restrictive. There were obviously the MLC products, I think there was Navigator on there, and I think in some cases they let us use Macquarie Wrap. “With our clients we saw a good opportunity to use Colonial [First State] product and Colonial FirstWrap. The fee savings, going from MLC MasterKey Custom to FirstWrap, we’re talking thousands of dollars per client, so it makes sense. “I don’t see the day-to-day operation would be too different. Obviously we’ve had to change our software, from Visiplan to Coin, and things like that, but [in] day-to-day operations there’s been no change, and from what our clients see there’s been a name change, and some of our clients will be changing platforms. “We’ve explained to them the reason for switching is that they’ll be better off, under the alternative, or the new licensee, because it’s allowed us to offer you a wider range of products. With FirstWrap we can still recommend the MLC MasterKey platform - so a lot of clients will stay on MLC platforms where there’s no benefit in changing. “And also, just a few changes within Godfrey Pembroke, from a business point of view; the two senior advisers here didn’t agree with what they were doing. If we’d wanted to stay with Godfrey Pembroke, they were going to force us to sell off all the trail brokerage, and the offer they put forward from a business point of view just didn’t make sense. So that was another factor in deciding to leave.” Priestley says that while the firm has tried to make the process as smooth as possible for clients, it has entailed quite a lot of additional work within the practice, “and changing a few processes, in terms of compliance, as well”. “GP had their requirements, but the Financial Wisdom requirements seem to be a lot more,

in what they require,” Priestley says. “I suppose it’s just a change in process; but we’re adjusting to it and it’s going along quite well.” Priestley joined Gordon & Gray in 2004, straight out of university, where he completed a Bachelor of Commerce degree. “In the last semester I started a Graduate Diploma of Financial Planning, and that was through then what was called the Securities Institute of Australia, now Finsia, before they sold off their education arm to Kaplan,” he says. “That was quite good doing that. As I did my CFP, it fast-tracked me through the CFP process.” Priestley says a career in financial planning neatly brought together two things he loves. “Obviously, I enjoy finance, the technical side of financial planning,” he says. “There were a couple of courses there at University [of Newcastle] that were to do with financial planning, and I went quite well in those. I’m not sure what they have now, but [then] they had a financial planning course. “And also it was interacting with people, and helping people. I’d had a few customer service roles to pay my way through uni and just really enjoyed that interaction with people. It wasn’t too much - it was just Big W and places like that - but they’d come in with a problem and I’d find a solution for it, and I thought, well, I can combine that with finance, and that’s when I decided to go down that avenue.” As a graduate looking to get into the business, Priestley had a few interviews before he found a home. “I went to a few interviews before I got this job,” he says. “I’m quite happy I didn’t get a few of those jobs. There’s one company in particular now that was on the 7.30 Report the other night. “At the time I didn’t know; it was just luck basically. As a graduate, I was fresh into the industry. I did get a feel from the type of people who were interviewing me.” With the benefit of hindsight, Priestley says there are a few key issues he’d advise new planners to focus on when appraising potential


employers. “I’d ask them how they determine what they invest their clients in,” he says. “And the steps behind that; how they charge their customers; the turnover in staff, would be another thing. Probably those three things.” Priestley’s enjoyment of the job comes from using what he knows to provide reassurance and guidance to clients who may be unsure of where they’re going. “Seeing where a client’s at when they come to me - in a lot of cases their knowledge of where they’re at is not high - and they’re retiring in the next few years, in most cases, or about to retire, so they just want an idea of where they’re going,” he says. “And to show them that, to give them an idea of how we can achieve what they want to achieve in terms of meeting their income needs for the next 30 years, that gives me a nice feeling, to show them that kind of thing. “And on a personal level, growing the business. In the end, that’s what I’m here for. Firstly to service clients, and then to grow a business.” Gordon & Gray is a small firm - there are four advisers, including Priestley - and their approach to solving client issues is quite collegial. “If it’s a case that’s quite involved, I discuss it with the other advisers and basically we draw on our knowledge; run it by the other guys, and if they can think of anything else then we add that, and there’s also technical back-up from the licensee, and we use that extensively in complicated cases,” Priestley says. “Godfrey Pembroke were quite good. What I’ve seen of Colonial First State technical advice, they seem quite good, so I’m quite confident in that area. “I don’t think the number of advisers would increase substantially. We may be looking to employ a paraplanner so they can take a bit of the [workload] so I don’t have to spend as much time looking after other advisers’ clients. “[Client growth of my own] is the main focus.”



When Kathy



smelled a rat Some odd self-managed super fund performance data led a client to question her accountant’s “advice”. Mark Story reports on how a referral to a financial planner saved her.


ike a lot of time-poor medicos, the late Melbourne specialist Dr Tyler Noll was infinitely better at making money than knowing how to put it to good use. Several years ago, unbeknown to Tyler (64) and wife Kathy (63), they had become dangerously over-exposed to the family accountant. As well as previously managing the books for Noll’s former practice, the accountant had also been put in charge of investing the family’s personal finances. Having successfully gained their confidence, he’d convinced them to put all of their personal wealth - comprising around a dozen direct shares, and some managed funds into a self-managed super fund (SMSF), based on the perceived tax benefits. At face value, this seemed like an idea they were willing to let their accountant execute. But after three years of trying to decipher little more than the random balance sheet entries he provided, neither Tyler nor Kathy had a clear idea of their net wealth position. With the SMSF fund balance showing a substantial loss without either a valid reason - especially given the otherwise buoyant (pre-GFC) economy - or explanation by the accountant, Kathy started to smell a rat.

Taking stock

Fuelling Kathy’s suspicions that something wasn’t quite right was a paucity of fund performance data, which amounted to little more than a poorly constructed balance sheet. “When I mentioned this dilemma to a swimming buddy, she immediately referred me to Michael Burton - her financial adviser for over eight years - for a complete review of the fund,” says Kathy. At his first meeting with the Nolls, Burton - a former accountant - found disturbingly large and inexplicable discrepancies between one year’s balance sheet and the next. Based on an original investment of $720,000, the value of the Nolls’ SMSF had plunged to $480,000. On closer investigation, Burton discovered that the family accountant had, over several years, withdrawn more than $300,000 from the fund for his personal use - including trips to the UK to watch an Ashes test match at Lord’s. “Unfortunately the accountant requested and was provided with - under duress - an authority by the trustees when the fund was established to transact on the account,” says Burton. As if misappropriation of funds were not enough, it was subsequently discovered that the accountant was little more than a glorified book-

keeper working as a contractor for a suburban accountancy practice. And to add further insult to injury, because the rogue accountant had no financial planner’s licence, there were no grounds on which he could legitimately exercise an authority to transact on the client’s behalf. Vulnerable state

Having placed such implicit trust in an accountant/adviser who was clearly not acting in their best interests, the Nolls had unwittingly ended up in a highly vulnerable position. And given that Tyler was now retired, Burton says the family’s ability to recover from lost savings looked grim. To further complicate matters, adds Burton, the Nolls’ four grown-up dependents - all with varying degrees of disability - also needed to be provided for financially. Much of this was expected to be provided for via a lump sum benefit from a death and TPD insurance policy taken out by Tyler some years earlier. Prior to Tyler’s death, a claim was made on the TPD policy of $690,000 that was subsequently contributed to superannuation as a non-concessional contribution - with $450,000 vesting to Kathy and the balance of $240,000 to Tyler’s member account.



Covering expenses

Following lengthy ailments caused by postwar trauma and exposure to chemicals while serving during the Vietnam War, Tyler finally died in 2009. At the time of his death, the Nolls had been living on a Department of Veterans’ Affairs Sickness Benefit. Once that stopped, Kathy had to find $60,000 to cover the family’s annual living expenses - which included taking care of her elderly mother. “Following Tyler’s death, I needed to ensure that Kathy’s cost of living requirements were provided for in the most tax-effective way,” says Burton. In the normal course of events, he says, the SMSF would have been quickly closed following Tyler’s death - especially as Kathy had no understanding of her responsibilities to the fund as its sole remaining trustee. However, Burton suggested that the SMSF remain open - albeit under a newly appointed accountant - for the express purpose of recovering lost money. Pay-back time

No fraud charges were ever laid against the former accountant; but after 18 months of investigation and legal action, Burton finally managed to recover the entire $350,000 stolen progressively from the account, together with interest. He also tried to claim against the employer’s professional indemnity (PI) insurance policy, but unfortunately the accountant had no PI cover. “We were over the moon to finally have [our] lost funds recovered, as we never expected to see them again,” admits Kathy. To ensure that the fund could maximise taxfree benefits to the children, $210,000 was withdrawn from Tyler’s account and recontributed to his account. Kathy’s balance was now $865,000 and Tyler’s account balance was $655,000. New strategy

At Burton’s instruction, the SMSF fund was finally closed, and the managed funds were cashed-out before being reinvested - after considering Kathy’s risk profile and objectives - in the rebadged Lachlan Wealth Management - Super

and Pension Wrap. As Kathy neither wanted to be directly involved in investment decisions nor had the necessary knowledge or confidence to do it competently, Burton says it made sense to give her the diversification - including small-cap, large-cap and international exposure - that a multi-manager approach could offer. Given the Nolls were comfortable with quality “blue chip” fully-franked stocks, which were held in the self-managed super fund, this basket of ASX-listed shares was transferred to the wrap account structure. Both member balances were then converted to market-linked pension streams, which upon Tyler’s death became a reversionary tax-free benefit to Kathy. A drawing of $60,000 annually would require a return of slightly less than 4 per cent, while maintaining the capital balance. Future-proofing

Following Tyler’s death, Kathy started coming under greater pressure from son Tony to receive an early death benefit payment so that he could purchase his own residence. But Tyler’s binding death benefit nomination - recommended by Burton, and naming Kathy as the preferred beneficiary - ensured that the payment of the superannuation benefits could not be challenged. “I also recommended that the trustee of the SMSF be changed from Kathy and Tyler to a corporate trustee to avoid transfer of title on Tyler’s death,” says Burton. He advised against an early estate benefit payment to Tony, to avoid any inequalities following any subsequent benefit payments to the remaining children. As an alternative, Burton suggested that pension payments be increased and the additional income be used to help Tony and brother John relocate to a more suitable residence. “If the issue of equality is considered an issue, a loan account could be created on behalf of Tony and dealt with under the equalisation clause of the revised will,” Burton says. Estate planning

Burton’s next consideration was to develop

The Planner Michael Burton Director, Lachlan Partners, Melbourne

An authorised representative of Lachlan Partners, Burton is a Certified Financial Planner, Certified Practising Accountant and member of the Institute of Chartered Accountants of Australia. A founding member of Lachlan Wealth Management when it was established in 2004, Burton gained an initial exposure to strategic financial consulting in 1990 when he joined Bain and Co (later to become Deutsche Bank Financial Planning), after a 15-year career in various accountant positions. He specialises in building, protecting and maintaining the wealth for predominantly high net-worth clients in the greater Melbourne area. Advice structure Lachlan Partners offers five primary service lines: Wealth Management Accounting; Tax and Audit Services; Business Advisory; Property Advisory; and Personal and Business Insurance Advisory, all in a strictly fee-for-service environment. In addition to a set rate for an initial consultation, fees are based on both funds under advice (FUA) and the volume and complexity of advice required. Having concluded early in his professional career as an accountant that fee for service is more honest and transparent, Burton was keen to adopt this model for Lachlan Partners from day one. Any remaining trails are refunded back to clients, together with GST. History Feeling decidedly out of his depth, the accountant responsible for establishing Tyler and Kathy Noll’s SMSF three years earlier finally recommended that they bring in a financial planner to help identify some appropriate income-bearing asset classes. It was a swimming buddy of Kathy’s who, in 2006, subsequently recommended that Burton be charged with sorting out their financial affairs. Strategy Before making any recommendations, Burton’s primary goal was to provide the Nolls with an accurate assessment of their overall financial position. Given that an initial evaluation suggested every facet of the Nolls’ financial position had been decidedly mismanaged, much of Burton’s initial strategy was based on: Rectifying their SMSF fund and its associated tax issues; identifying how Tyler’s substantial death and disability insurance cover should be appropriately administered following his passing; and putting their estate planning back on a sound footing.


Five key outcomes • $360,000 in stolen money recovered. • $60,000 in annual living expenses provided for. • Effective estate planning to cater for disabled children. • Centrelink benefits maximised. • Former estate planning, financial market, and disability-related exposures eliminated.

an effective estate planning strategy which, due to the children’s various disabilities - preventing two of them from working - took on added significance. With the assistance of the necessary third parties, Burton developed an estate plan incorporating legal wills and powers of attorney. “As they had a very old will, written before they had children, the Nolls didn’t have powers of attorney [either] financial or medical in place,” recalls Burton. He says it was important not only to maintain but to maximise, where possible, any Centrelink benefits for the children upon the death of both Tyler and Kathy - using Special Disability Trusts and Protective Trusts managed by non-family trustees. While they are limited in their uses, Burton says Special Disability Trusts do currently provide an Asset Test exemption of $563,000 for the principal beneficiary, provided it meets certain requirements as prescribed under legislation. And it’s the level of disability, adds Burton, that determines whether this type of trust can be used. “A Centrelink gifting concession [of ] up to $500,000 combined is now available for eligible family members of the principal beneficiary,” explains Burton. “This allows assets to be gifted to disabled children without reducing the person making the gift’s Centrelink entitlements.” Over-exposed

In 22 years of providing financial advice,

Burton had never seen a professional couple experience so many unnecessary exposures across so many facets of their lives: Professional negligence, accountant fraud, children’s permanent disabilities, terminal ill-health, insufficient consideration to effective estate planning, and no understanding of superannuation law or their duties as SMSF trustees. “While Tyler had been the strength behind the family, his illness had allowed their former accountant to take advantage of the situation and fraudulently withdraw substantial amounts of benefits from the member accounts,” says Burton. He says the degree to which the Nolls’ four disabled children relied on their remaining parent for financial support only accentuated the importance of estate planning, which had been so comprehensively overlooked. Equally important, adds Burton, is the need to address estate planning matters while the parents are in a fit and compos mentis state to do so rationally. “With Tyler not deemed to be of ‘sound mind’ when a new will was signed just prior to his death in hospital, a previous one written some 15 years [earlier] had to be reverted to,” says Burton. Family affair

On reflection, Burton says his role as financial adviser for the Nolls was as much about managing financial performance as it was about addressing immediate and longer-term family needs at a more holistic level. “We deal with a lot of medicos like Tyler who are running so fast with their careers that even the most perfunctory tasks relating to their personal/financial affairs are often neglected or charged to third parties,” says Burton. “Without adequate scrutiny, this makes them easy prey for those who plan to take advantage of the positions of great trust placed in them.”


As a planner, Burton could have limited his involvement to the financial performance; but he felt it was his responsibility to the client to attempt to recover stolen funds. The Nolls were not in a position to take the former accountant to court, due to Tyler’s medical condition. But Burton says the threat of legal action, and potential damage to the accountant’s reputation in the community, was sufficient leverage to have the stolen funds fully repaid. Relationship management

Once Kathy’s financial dilemmas were successfully dealt with, Burton says it became clear that what she valued equally was having a mentor to help tackle life’s unexpected hurdles. As a case in point, to relieve the burden of managing her health, Burton recommended that her mother, now 92, be cared for within a nursing home. According to Kathy, it gave Tyler considerable peace of mind, knowing that Burton would be there for her after his death. And as Burton was a part-owner in Lachlan Partners, Kathy says Tyler also took comfort in the fact that she wouldn’t subsequently be lured to another planning firm. “As I’m so busy with family, I’m not really savvy with money, and so I completely trust and rely on Michael’s advice,” says Kathy. Burton is convinced that those planners who bother to forge deep and meaningful relationships with clients will ultimately succeed in this business. “It’s a matter of being able to discern the situation and provide the best possible outcomes,” adds Burton. “To do that, you need an intimate understanding of financial planning, and know when to bring in someone else.”

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Only one can rule the industry The battle between individual planners and institutions leads to confusion over whose influence is greater, says Robert MC Brown.


t’s a regrettable reflection on the mindset of much of the financial planning industry, and the media which reports on it, that so many of the industry’s spokespeople in its public war against the Government’s proposed Future of Financial Advice (FoFA) legislation are employed by product manufacturers and dealer groups. This was well illustrated in a recent industry “roundtable” titled, “Financial Planners Prepare for Regime Change” (Australian Financial Review, January 12, 2011). Not one of the journalist’s five interviewees was a financial planner. One was the CEO of the Financial Planning Association, and thus was a logical choice to be interviewed about the industry’s future. At least he could reasonably claim to be an industry leader representing the official views of his association and some of its members. The other four interviewees (promoted in the headline as “financial planning industry leaders and senior representatives”) were employees of public companies principally engaged in product manufacturing and distribution. Of course, these people and their corporate employers are entitled to their opinions, many of which are interesting, intelligent and thoughtful. However, it is extraordinary for an industry that is so desperately seeking professional recognition that “big end of town” spokespeople are still accepted by much of the media as sources that should be interviewed to represent the aspirations and professional interests of individual financial planners. Of course, one could argue the toss about whose views they were representing and whether they would be supported by the bulk of financial planners. That is not the point. The point is that the common background of the participants in the “roundtable” spoke volumes about how the financial planning industry is still viewed by

Robert MC Brown

most of its participants, let alone by the media and the public. After all the efforts to “legitimise” financial planners as independent professionals who are fiercely protecting their clients’ best interests, this was a very bad look. Imagine if the CEOs of drug companies were presented in the media as representing the views of the medical profession; or if directors of public companies were likewise presented on behalf of independent auditors. Actually, one can’t imagine it at all. It would be inconceivable. No journalist would even consider structuring an interview about the future of doctors or auditors in such a lopsided way. And yet, in the financial planning industry, which purports to be transforming itself into a true profession, once again it seems to be the product manufacturers and distributors who are accepted by much of the media as speaking on behalf of advisers.

This raises the question as to whether the industry has changed much at all (I mean fundamentally) since its inception some 30 years ago. Sadly, I must conclude that it hasn’t. It certainly looks different, but appearances can be deceiving. In the end, much of the industry (with some notable exceptions) remains in the mindset of a sales and a financial product distribution network in which financial planners are perceived both by their AFSL holders and themselves as the bottom link in a “value chain”, rather than as independent and trusted advice-based professionals acting in the public interest (“gatekeepers” for their clients, if you like). Transformation of the industry into a trusted profession will only be achieved when the real and perceived nexus between product distribution and professional advice is genuinely broken. Appearances of transformation will not suffice. The public is not that naïve. Unfortunately, “roundtables” of “big end of town” industry luminaries reinforce the perception that financial planners are not genuine about reform. This perception is further reinforced by the industry’s public representations that the Government’s well-intentioned FoFA proposals should be substantially amended before they become law. Essentially, it seems that the industry wants the retention of certain payments to AFSL holders and planners (often referred to as volume bonuses), the emasculation or (preferably) termination of the annual “opt-in”, the adoption of a watered-down fiduciary duty and the retention of commissions on life insurance and asset fees. Much of the industry knows that the politically compromised FoFA proposals, especially in an amended form, will not achieve the scope of reform required to make a profession out of a sales force. That step must be taken by the industry itself; however, it will never be taken


voluntarily until financial planners come to the realisation that the only way to achieve true professional status is to comprehensively remove all conflicted remuneration structures, thereby changing the way in which they think about themselves and their place in the world of financial services. Perhaps, while the FPA is in the mood for changes in its constitution, it should think about changing its name from the Financial Planning Association to the Financial Planners Association. At least, that would send a strong message to the media and to the public that “planners rule” the industry, not the product manufacturing and distribution networks.

Robert MC Brown is a chartered accountant with over thirty years’ experience in taxation, superannuation and financial planning. He is independent chairman of the ADF Financial Q R EConsumer _ P P 0 1Council . p d and f a g e of1 the 7 / 0 Services aPmember Government’s Financial Literacy Board.


Excessively severe Continued from page 10

on the proviso that their superannuation account balance is less than $500,000 is likely to impose difficult, onerous and inefficient administration and reporting practices on funds, reminiscent of the previous reasonable benefits limit (RBL) regime. Furthermore, the legislation supporting this proposal will require careful drafting to ensure strategies and practices, which could compromise the integrity of these measures, do not prevail or return Australians to an old RBL-style system. Therefore, SPAA in principle supports raising the concessional contribution cap, but does not support the capping of $500,000 superannuation balances, as proposed by the 2010 Federal Budget from 2012-13. 2 / While 1 1 , mindful 4 : 0 of 3 the P Government’ M s strong commitment to its fiscal strategy and the need to

offset new spending with savings, SPAA recommends that the concessional contribution caps be returned to their pre 2009-10 levels. In keeping with the spirit of our submission, we strongly encourage Treasury to consider the taxation incentives provided to superannuation in particular, concessional and non-concessional annual contributions - against the backdrop of the Government’s own stated policy objective of reducing reliance on the age pension and promoting self-funded retirement.

To comment on this article go to .

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



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Speak to your adviser or trade online BetaShares S&P/ASX 200 Resources Sector ETF (Synthetic). BetaShares Capital Ltd (ACN 139 566 868 AFS License 341181) (“BetaShares”) is the product issuer. A product disclosure statement (“PDS”) is available at You should read the PDS and consider your individual objectives, financial situation and needs and obtain financial advice before deciding to invest. You can purchase units in the fund on the ASX. Standard and Poor’s ® and S&P ® are registered trademarks of The McGraw-Hill Companies, Inc. (“McGraw-Hill”), and ASX® is a registered trademark of the ASX Operations Pty Ltd (“ASX”). These trademarks have been licensed for use by BetaShares. BetaShares ETFs are not sponsored, endorsed, sold or promoted by S&P, McGraw-Hill or ASX, and S&P, McGraw-Hill and ASX make no representation, warranty or condition regarding the advisability of buying, selling or holding units in BetaShares ETFs. QRE_PP01



Do your homework on ETFs The surge of interest in exchange traded funds shows no signs of abating. However, van Eyk Research has sounded a note of caution for planners and their clients. Not all ETFs are alike. Greg Bright reports.


fter a slow start in Australia, exchange-traded funds (ETFs) have taken off in the past couple of years. There are now 41 products with total assets of $4.1 billion. Six were launched in December last year, and another one in early February. The market grew by 42 per cent in the 12 months to last October and 161 per cent in the previous 12 months. Impressive numbers. But, according to new research from van Eyk Research, planners and investors should do their homework before jumping on the bandwagon. The 20-page paper, Exchange Traded Funds Explained, details the global trend and, importantly, the risks associated with the various types of products. With the addition of synthetic ETFs to the range, for instance, investors now have to consider counterparty risks, along with other issues. For traditional buyers of managed funds, ETFs are appealing. Most, but not all, are cheap and easily traded. In fact, the mishmash of administration systems used by the big managed fund providers who have been inching, painfully, towards straight-through processing for years - remains a frustration for many planners. Van Eyk says that while there are currently six ETF providers in Australia, “two or three are expected to come to the market in 2011

James Armstrong

alone”. In the US, the ETF market is split roughly 50:50 between institutional and retail investors, but in Australia it is the retail sector which dominates. And ETFs have mostly been bought by self-managed super funds (SMSFs) and individual direct investors trading

through online brokerage accounts. Investment through financial advisers and platforms has not been a major aspect of ETF demand to date, the paper says. “However, the number of planners advising on ETFs is growing rapidly, due partly to the industry shift towards a fee-for-service mod-

el. This is also due to retail investors seeking simpler, more transparent and cost-effective investment solutions with more direct control of their investments.” ETFs generally have a lower MER than the comparable index fund but comparisons are not always easy to make because index funds have a sliding fee scale. Once you get into emerging markets, the index funds are generally cheaper. Since they are traded on exchanges using market makers, ETFs will also attract brokerage, which can be as high as 2.5 per cent for small investments using fullservice brokers, down to 0.12 per cent for online accounts and larger investments. There will also be a bid-offer spread. Open-ended managed funds have a fixed bid-offer spread determined by the fund manager for applications and redemptions. ETF spreads are linked to the liquidity of the underlying securities and the availability of efficient hedging products that market makers can use to manage risk. The van Eyk paper, written by investment analyst James Armstrong, says that Australian ETFs have generally traded with bid-offer spreads in line with their underlying securities, which is the way it should be. But international ETFs trading on the ASX may have much wider bid-offer spreads because of the lack of an observable


Exchange-traded funds – an ASX snapshot

Last 12 months

Nov 08

Nov 09

% change

Nov 10

% change











12-month average trades






12-month average value ($m)






Market capitalisation ($m) Number listed (actual)

Source: Australian Securities Exchange, as at November 30, 2010

intra-day index price. ETFs are often promoted as being relatively tax-efficient. The key differentiating features that potentially advantage ETFs relate to overall fund turnover and the process of creating and redeeming units. Basically, managed fund distributions generally consist of a higher proportion of capital gains; plus ETFs provide an additional opportunity in the primary market process to minimise capital gains to other unit-holders. While liquidity is not an issue that is peculiar to ETFs, most retail investors in Australia are essentially confined to trading in the secondary market - so the actions of market makers is critical, the paper says. “With the current regulatory market maker requirements, Australian investors can generally be assured of sufficient secondary market liquidity. However, it is possible that in some shock event, market makers absent the market and liquidity temporarily dries up. “This happened with some ETFs in the US in the May 6, 2010 ‘Flash Crash’. Many ETFs temporarily traded substantially below their NAV [net asset value] as market makers exited the market and some market sell orders were

executed at highly discounted levels. “ETF products that have a lower level of overall secondary market turnover rely substantially on market makers to provide liquidity events, and this should be assessed for each ETF product.” With synthetic ETFs - which are now available in Australia there will be an additional counterparty risk associated with swaps and other derivatives used. The amount of counterparty risk will be affected by several factors such as the volatility of the index, how closely the collateral securities match the index, the credit quality of the counterparty and how often the swap is cash settled. There are a number of other risks discussed in the paper, the main one being market risk, which is the same as for other index funds. The investor does not have the possible protection of active management to avoid the worst of a correction. Similarly, with the advent of sector and regional ETFs, individual investors will have to give some consideration to whether they have adequate diversification. Some sector funds may have high concentration, high volatility and low liquidity in the underlying securities.

The ability of the manager to track the index is obviously important, and the experience, process and infrastructure of the manager should be looked at. Things such as cashflow management can also affect return and tracking error. When derivatives are thrown into the mix they can also introduce basis risk, rollover risk and counterparty risk.


The paper concludes that ETFs can be simple, transparent, flexible, cost-effective, liquid and low-risk. But such characteristics are certainly not a given. “ETFs are a lot more complicated and technical than many investors recognise and they should be viewed with due caution. “There are many factors that contribute to the overall quality of an ETF and this will also be dependent on an investor’s objectives. The key drivers include ETF structure, market structure and ETF management.”

Contango Capital Partners Limited ASX Code: CCQ

Pre-tax NTA at 31/01/2011 $1.16 • CCQ was listed on the ASX on 30 May 2007 • Foundation investment is Contango Asset Management Ltd • Contango Asset Management Ltd offers specialist listed securities for SMSFs • Contango Asset Management Performance as at 31/01/11: Product Inception Index Added Value (pa*) Micro Cap

Mar 2004

Small Ords


Small Companies

Feb 2005

Small Ords


Australian Shares

May 1999



Income Generator

Oct 2004



Global Value

Jan 2008

MSCI ex Aust unhedged


For further information contact David Stevens on 03 9222 2333 * Added value per annum since inception Source: Contango Asset Management Limited - The historic performance of the Manager is not a guarantee of the future performance of the Portfolio or the company.



Comparing the comparators Online comparison websites are an expanding area of the life insurance market and over the past year increasing volumes of business have been written through this channel. Richard Weatherhead investigates.


ince the growth of the Internet, many consumers have turned to the Web in search of a “better deal” on their risk insurance. Many insurers and superannuation funds offer risk insurance online, either with or without underwriting. However, there is a growing number of websites that allow the user to: • Compare the prices and features of the risk insurance products offered by many of the leading insurance companies in Australia; and • Buy their chosen insurance product either online, via the website provider’s advisers or by referral to a third party adviser. These websites have become known as “aggregator sites” but are referred to as “online comparison websites” below. Our analysis of 11 of these online comparison websites currently available in Australia reveals how this new segment of the life insurance market is developing, what is being done well and where there is still room for further development and innovation. A comparison of the websites considered is set out in the accompanying table. Products and pricing

Whilst the products offered on online comparison sites are usually the insurers’ standard products traditionally sold through advisers, they are often priced differently. Some are cheaper and some more expensive. However, a 20 per cent discount on the first year’s premium is provided by many online comparison websites. Many offer additional benefits - for example, a “club lifestyle” reward card and a free mortgage health check. Nearly all websites offer a quotation service for death, TPD, income protection and trauma insurance. One website is restricted to death

cover only and one is restricted to death and income protection. All provide detailed product information or quotes from the majority of the large Australian insurers. The median number of insurers compared for each particular type of cover is 12. Cannex/Canstar does not provide quotes. It is positioned as a product rating site, allowing users to compare product features across life, direct life and business insurance. It also quotes a “reasonable range” for the price of a particular policy and the option to be put in contact with a licensed financial adviser if required. The ability to compare product features as well as premiums should be an integral part of any online comparison website. InsuranceQuotesRUs provides an aggregate score for each product out of 100. However, it does not give an explanation as to how the score is determined. Infochoice also provides a comparison of the basic features available; and Ratesonline provides a star rating for each product. A future opportunity for online comparison websites will be to provide a fully integrated comparison of prices and features, allowing users to view these across all the chosen products before making a buying decision. Commissions

Online comparison website providers (or the advisers who receive referrals) nearly always receive commissions on the insurance business sold. However, since some websites only provide general advice, the Financial Services Guide is often not provided online, so the customer may be unaware of the commission (or fee) structures that apply until an adviser contacts them. Upfront commissions are usually up to 140 per cent of the first year’s premium and ongoing commissions are typically in the range of zero to

40 per cent. These rates are similar to and sometimes slightly higher than those paid to dealer groups under traditional agency agreements. Ability to buy online

Disappointingly, only two of the online comparison websites (iSelect and Insurance Watch) allow the user to apply directly for insurance online. The others require the user to call an adviser or register for an adviser to contact them. This is likely to be an area where the market will develop further in the future. A more flexible approach, which is common in markets such as the UK, is to allow the user to complete the entire transaction online but give them the option of a telephone call to get help through the process if they wish. Insurance needs assessment

Only four websites provide insurance needs calculations. Of these, there is significant variation in the results and methodology adopted, which is of some concern. Two of the calculators are very simple, requiring only the user’s gross annual income and their aggregate debts. However, there are large disparities between the results for these two sites. For example, with gross annual income of $100,000 and no debt, the estimated death cover needed is stated as $1,428,571 on one website and $765,000 on the other - a difference of more than $650,000. These figures do not vary by age or sex. One site provides a very detailed insurance needs calculator requiring more than 30 inputs, allowing a tailored estimate for the individual concerned. However, no default values are set for inputs such as the inflation rate and investment earnings rate (needed to assess amounts required to replace future income), which increases the

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risk that users will enter unrealistic assumptions, leading to an incorrect needs assessment. Nevertheless, this website does provide a link which gives historical rates over the past 10 and 20 years. The InsuranceQuotesRUs website provides a link to the FSC’s Lifewise calculator. This is a comprehensive insurance needs assessment tool with the ability, amongst other things, to recognise spouses/partners as well as dependant children. Online quotation

Four of the 11 online comparison websites do not allow the user to obtain a quote online! Rather, after completing the personal and insurance details forms, the website states that an adviser will be in contact within the next one to three business days. This is despite the fact that, often, the website states the consumer is able to “get an insurance quote online”. The websites with more limited functionality iSelect

Insurance Watch

are more akin to “adviser locator services” and are effectively marketing and distribution channels for advisers rather than direct distribution channels. Insurance information

All 11 online comparison websites provide users with additional, comprehensive information on life insurance in general. This includes: • Explanatory articles highlighting the key features of different types of life insurance; • How to find the right insurance; • Access to related life insurance news articles; • Glossaries; and, in one case • A blog on life insurance related topics.

in Australia will look online, not only to research risk insurance but also to buy it. The growth of tailored online products will continue and this is likely to drive price competition, for the benefit of consumers. These changes could provide opportunities for advisers. Customers with relatively simple personal financial circumstances, or who cannot afford a holistic financial plan, can be directed to an online comparison website, with the adviser receiving an appropriate referral fee. Even for clients who need personal advice, new products and competitive prices offered by online comparison sites will be a useful addition to the overall range of products traditionally available in the adviser market.

Future development

Many websites are essentially extensions of the traditional financial advice businesses. It is reasonable to assume that as Internet usage continues to grow, more and more consumers


Canstar/ Cannex


Richard Weatherhead is a director of Rice Warner Actuaries - Disclosure: Rice Warner developed the LifeWise insurance needs calculator.

Ratedetective/ Zippy


Help Me Choose

Life Insurance Quotes

Rates Online

Insurance Quotes R US


Participating insurers












Insurance needs

Term life quote





TPD quote





Income protection quote


✓ *



Trauma quote




Link to PDS provided

Online quote provided

Purchase insurance online

Ask an advisor to contact you

Related advice group Commission

In House Synchron Unknown N/A Millennium3 Unknown Millennium3 Unknown Millennium3 Millennium3 Upfront: 11% - 130% Ongoing 0%- 40%

Upfront: 25% -130% Ongoing 2.5%-35%

Not disclosed online

Referral fees received from financial advisers

*Quote is not available online but is available over the phone through an adviser

Not disclosed online

Upfront: 100% -140% Ongoing 10%-40%

Upfront: 0% -140% Ongoing 0%-45%

Not disclosed online

Not disclosed online

Not disclosed online

Charter Financial Planning Upfront: 100%-130% Ongoing 8.8% - 15%



Run a mile from clichéd writing Clichés can be verbal as well as visual. Last month, Bruno Bouchet examined overused images; this month he casts his eye over hackneyed phrases.


riting communications for financial services is tricky. There are very limited claims that can be made. Caveat terms like “potential returns”, and legal reminders that sharemarkets can go down as well as up, are important. However, that doesn’t mean that other terms should be trotted out without any real thought as to their value or impact. Phrases that are over-familiar allow a reader to assume they already know what you’re trying to say and so turn off from your message; so it’s important to avoid terms that have been worn as smooth as some of the following. Tailored Solutions

It’s not just financial services that are guilty of offering “tailored solutions”, but the industry does love using them. A chemistry lecturer friend of mine always asks, “How do you sew liquid?” To him, a solution is “a gas, liquid or solid dispersed homogeneously in a liquid”. The concept of individualised products or services that are adjusted to each client’s needs is a really positive one, and the term does offer a neat shorthand for that; but it is so overused and under-substantiated it’s become meaningless. Few companies explain how their solutions are tailored. The general obsession with providing “solutions” rather than products or services is also wearing very thin. We’re passionate about...

There was a time when passion meant intense, even excessive feelings. It was a term of wild abandon that bordered on being a negative. Now it’s a requirement for individuals and companies to be “passionate” about what they do, even if it’s structural market analysis or producing paper clips. It’s become a blandly ubiquitous

term that means nothing. Using words like “determination”, “rigour”, “belief ”, or “commitment” instead can offer real force without falling into cliché territory. Your one-stop shop

This phrase is like the proverbial bad penny. Every time that I think it’s finally disappeared from communications, someone drags it out of the cliché cupboard and dusts it off. For financial advice firms offering a comprehensive range of services, it is a tempting phrase; but it is the company equivalent of describing yourself as a “jack of all trades”. It suggests a cheap supermarket, not quality specialisation. Sadly, I have once seen it combined with another term on this list where a company described itself as a “one-stop shop of tailored solutions”. Making your money work as hard as you do

This is another phrase that has itself been worked so hard it’s collapsed at the coalface. It tries to humanise money by relating financial services to human toil; but beneath the phrase lie some assumptions we should be careful of. Usually, making someone work as hard as you do is an act of resentment - “If I’m working hard, then I’m going to damn well make sure Danny Dollar works hard too.” This isn’t an emotion most companies want to trigger in their audience. Maybe I’m overanalysing the phrase, but regardless, it’s overused.

them an example of how you are different and let your audience decide for themselves. Invariably the phrase is used to suggest a difference that isn’t much of one. I’ve lost count of the number of financial advice firms that claim to be “different” because they charge on a “fee-for-service” basis. It’s an important message, but really it isn’t that “different”. Super [solutions] for your retirement

Any headline about superannuation that has the word “super” as an adjective is a shortcut to “Clichétown”. It’s a hard one to resist because there are so few really positive words that you’re allowed to use in financial services. Terms like “spectacular”, “perfect”, “brilliant”, “ideal” all send ASIC into a compliance tizz, so it may seem unfair to rule out “super” as a descriptor. If you’re going to use “super”, it has to be something really clever that might raise a smile - “super solutions” doesn’t cut it. As each year passes, phrases fall in and out of fashion (in 2008-09 it was “turbulent times”) but a few perennial favourites, like these, seem to endure. By using words your audience don’t expect, you can avoid them skimming your message - in fact, you’re halfway to getting your message through. If it helps avoid clichés, keep this sentence in mind: “We’re passionate about being a one-stop shop of tailored super solutions that make your money work as hard as you do.”

We’re different

This phrase makes me reach for my red marker pen, cross it out and write “show, don’t tell!” in the margin. Telling people your company is different simply doesn’t work. You need to give

Bruno Bouchet is creative director of Wrap Creative -



Investing with borrowed funds Peter Burgess compares limited-recourse borrowing with related unit trusts to see how the options stack up.


ith the introduction of the limited recourse borrowing rules, the trustees of self-managed superannuation funds (SMSFs) now have a wider choice of investment options. The ability of an SMSF to acquire an interest in an asset, even though it may not have the necessary capital to purchase the asset, is not a new phenomenon. In limited situations, SMSFs have for many years been able to invest in structures which utilise borrowed funds, either directly or indirectly, to acquire an asset. In this article we discuss the use of a Division 13.3A unit trust, and briefly outline the main advantages and disadvantages of this approach versus a limited recourse borrowing arrangement. What is a Division 13.3A unit trust?

A Division 13.3A unit trust is a related unit trust which satisfies the requirements of regulations 13.22C or 13.22B of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). Units acquired by an SMSF on or after June 28, 2000 in a related unit trust which complies with regulation 13.22C are excluded from the definition of an in-house asset in section 71(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act). This exclusion applies despite the unit trust being a related trust of the fund. The same exclusion applies to units acquired by an SMSF before June 28, 2000 in a unit trust which complies with the requirements of SIS Regulation 13.22B. Furthermore, the general prohibition on SMSFs acquiring assets from a related party of the fund does not apply if the asset being acquired is a unit in a trust which complies with Division 13.3A. Therefore, as long as the related unit trust continuously satisfies the requirements

of Division 13.3A, an SMSF can jointly invest in that trust with a member or another related party. Over time the units owned by the related entity can be acquired by the fund without contravening the in-house asset rules or the general prohibition on acquiring related party assets. These arrangements can be useful in situations where funds may wish to purchase real property, but do not have sufficient capital to purchase the property themselves. Using a unit trust in these circumstances enables the property to be purchased by pooling the capital provided by other unit-holders with the capital provided by the fund. Although Division 13.3A does not allow the related trust to borrow, the provisions of Division 13.3A do not preclude an investor in the trust using borrowed funds to acquire his or her units. Thus it is common under these arrangements for members to finance the purchase of their units in the related unit trust by using borrowed funds secured against one or more of their personal assets. Superannuation contributions received by the fund enable the fund to acquire the units owned by members and other related parties over time. In turn, this enables such entities to retire any debt which may have been put in place when the units where originally purchased. What conditions need to be satisfied?

In addition to the requirement that the related unit trust must not have outstanding borrowings, there are also a number of other conditions in Division 13.3A which the related unit trust must satisfy. For example, the assets of the unit trust must not include: - an interest in another entity or an asset which has been acquired from or is being leased

to a related party of the fund (unless the asset concerned is business real property); or - an asset which is subject to a charge. The unit trust must also not conduct a business or lend money to another entity unless the loan is a deposit with an authorised deposittaking institution. If the related unit trust fails to satisfy the requirements of Division 13.3A, the units held by the SMSF in that trust will be classified as an inhouse asset. Similarly, if the related trust fails to satisfy the requirements of Division 13.3A any time after the original units had been excluded as an in-house asset under Division 13.3A, that related unit trust will never again satisfy the requirements of Division 13.3A. This would be the case even after the breach or event, which caused the related unit trust to fail the requirements of Division 13.3A, had been rectified. How does it compare to a limited recourse borrowing arrangement?

If the asset being acquired is real property, a Division 13.3A unit trust is likely to be a more flexible structure compared to a limited recourse borrowing arrangement. Unlike a limited recourse borrowing arrangement put in place on or after July 7, 2010, a property acquired via a Division 13.3A unit trust is not restricted to a single title property or properties which otherwise satisfy the definition of a single acquirable asset. Similarly, unlike properties purchased under a limited recourse borrowing arrangement, there are no restrictions on improving or replacing the asset acquired via a Division 13.3A unit trust as long as the trust continues to satisfy the requirements of Division 13.3A. There is also no requirement for finance to be provided on a limited recourse basis. If


‘The benefits of gearing are often reduced under a Division 13.3A unit trust’ external finance is required by a related party to purchase their share of the units in the unit trust, it would normally be done by using borrowed funds secured against one or more of their personal assets. Therefore, the cost of external finance would arguably be lower compared to a limited recourse borrowing arrangement. However, compared to a limited recourse borrowing arrangement where the fund typically has sole rights to the property’s capital gains and income, the fund may not have the same rights to income and capital gains under a Division 13.3A unit trust. Therefore, the investment benefits of gearing are often reduced under a Division 13.3A unit trust. A Division 13.3A unit trust is not able to be used if the asset being acquired is an interest in another entity - for example, shares in a company or units in a unit trust. This therefore excludes a Division 13.3A unit trust from being used to acquire shares or managed funds. The Capital Gains Tax (CGT) implications of acquiring units over time also need to be considered along with the need to ensure the unit trust strictly complies with the conditions set out in Division 13.3A. As mentioned, if the unit trust fails these conditions the trust will never again be considered a Division 13.3A unit trust and the trust may need to be unwound, resulting in significant

CGT, stamp duty and other costs. Can a pre-’99 unit trust be converted to a Division 13.3A unit trust?

The effect of sub-regulation 13.22D(1) is that, where regulation 13.22B or 13.22C applies to units held by a superannuation fund and one of the events listed occurs, those units will no longer be excluded from the in-house assets of the fund under these regulations. It is the ATO’s view that sub-regulation 13.22D(1) is only concerned with events which happen after the commencement of the regulations on June 28, 2000 (Minutes of the NTLG Superannuation Technical Sub-Group meeting held on June 15, 2010). Therefore, provided no event for the purposes of sub-regulation 13.22D(1) of the SIS Regulations has occurred since June 28, 2000, and the trust now complies with the requirements of SIS Regulation 13.22C, the fund is permitted to purchase new units in that trust without those units being classified as an in-house asset. Using borrowed funds to acquire units in a Division 13.3A unit trust

Section 67A of the SIS Act requires that the borrowed monies are used to acquire a single asset which the SMSF is not otherwise prohibited from acquiring. As an SMSF is permitted to acquire units in a related unit trust which complies with Division 13.3A, borrowed funds under a limited recourse borrowing arrangement can be used to acquire units in a Division 13.3A unit trust. In fact, the underlying property which is owned by the Division 13.3A unit trust is not restricted or limited by the conditions imposed under section 67A and 67B of the SIS Act. In other words the property owned by the Division

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13.3A unit trust is not limited to a single title asset and can be improved or replaced as long as the unit trust continues to satisfy the requirements of Division 13.3A. Using the borrowed funds in this way can be an effective strategy as it combines the flexibility of a Division 13.3A unit trust with the gearing benefits of a limited recourse borrowing arrangement. However, this strategy would be limited to the acquisition of real property; and if external finance is required it would be difficult for commercial lenders to accept the units in the Division 13.3A unit trust as security for the loan. This could potentially be overcome if a related party is able to obtain the finance themselves and then on-lend the proceeds to the SMSF on a limited recourse basis. In ATO Interpretative Decision 2010/162, the ATO states that an SMSF is permitted to borrow funds from a related party of the SMSF under a limited recourse borrowing arrangement on terms more favourable to the SMSF. However, what this Interpretative Decision didn’t say is that the transaction must demonstrate the characteristics of a loan and the documentation must clearly reflect that the trustee of an SMSF has made a genuine borrowing to acquire an asset.

Peter Burgess is the national technical director of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).



Avoiding excessive tax for ex-pats Care needs to be taken when self-managed super fund members decide to head overseas to work, even if it’s only for a short time. Tony Negline explains.


t any given time, a large number of Australians live and/or work overseas. Many of them are abroad for only a few years. Most of them want to retire in their homeland. If any of these people run, or are thinking of running, their own super fund, they need to be careful, as the fund might face excessive tax rates. A super fund receives income tax concessions if it is a resident regulated super fund and a complying super fund. A super fund is regulated if the fund’s trustees have irrevocably elected to be bound by the superannuation laws. If a super fund follows all those laws (or doesn’t get caught breaching them) then the fund is deemed to be a complying superannuation fund. But what tests are used to determine if a super fund is a resident fund? One part of the test is found within the income tax laws. The other part, which ultimately determines whether a super fund loses its tax concessions, is found in the super laws. Tax penalties for a non-resident super fund

In the first full financial year that a fund loses its residency status it will be taxed at 46.5 per cent. This tax rate will apply to the market value of the fund’s assets, less contributions not claimed as a tax deduction since June 1983. The 46.5 per cent tax rate will then be applied to the assessable income of the fund for each full year that it continues to be a non-resident super fund. If a fund returns to being a resident super fund then it will again face 46.5 per cent tax on the fund’s assets. Yes that’s right - a potential total tax bill of at

Specific super laws say that a fund must satisfy the three “limbs” of the ASF definition at all times during a financial year before tax concessions are available. So a fund might be an ASF, but not at all times throughout a year, which means the penalty tax rates would apply. Where the fund is established, and is an asset based in Australia?

The answers to both these questions can be factually determined. In reality, all a super fund needs to do is to keep open an Australian bank account (or other similar type of financial product) with a nominal amount in the account in order to have an asset based in Australia. Tony Negline

Central control and management

least 71 per cent on the assets of the fund. The three key questions

So when will a super fund be deemed to be resident for income tax purposes? There are three key questions that must be answered positively at some point during a financial year: 1. Was the fund established or is any asset of the fund based in Australia? 2. Is the central management and control of the fund based in Australia? 3. Does the fund have any resident active members? If these tests are satisfied at a point in time during a financial year, a super fund will be an Australian Super Fund (“ASF”). This means that, technically, these rules could be satisfied for only one day during a financial year to ensure access to residency status.

Next the central management and control of a super fund must be based in Australia. In Tax Ruling 2008/9 the Tax Office says that, at law, the trustee has the legal responsibility to exercise the central control and management; but this does not, of itself, mean the trustee is actually performing this role. The ATO has expressed the view that determining where the central management and control resides involves a “focus on [the] who, when and where of the strategic and high level decision making and processes and activities of the fund”. This includes working out who formulates, reviews and updates a fund’s investment strategy. Where the day-to-day administrative functions are performed is irrelevant. The law allows a trustee to be temporarily absent for up to two years but potentially still deemed to be in Australia. The ATO says that “the duration of the absence must either be


defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose”. Most Australians working overseas have no certainty about how long they will be away from this country. Hence it may be dangerous for Australians living overseas to assume that they will be able to satisfy this particular rule if their time away is for an indefinite period. Active member test

The final issue that must be dealt with is the active member test. A super fund member will be an active member if: • the member is making contributions to the fund; • contributions are being made for them; • they aren’t a resident - this refers to residency under Australia’s income tax laws, which often has nothing to do with immigration or citizenship status (see the ATO website for further details); • and they also fail a couple of other rules. It can be a very complex question to determine if a super fund member is a contributor to the fund. A fund will pass the active member test if: • it has no active members; • the market value of the assets of resident active members held in the fund is more than 50 per cent of all active member assets in the super fund; • at least 50 per cent of monies payable to active members if they all left the fund is attributable to the super interests held by resident active members. The ATO have confirmed in Tax Ruling 2008/9 that a rollover is a contribution even if it relates to the time when a member was an Australian resident. This means rollovers, and even transfers from other super funds, could impact a fund’s tax status. Be careful!

‘In reality, all a super fund needs to do is to keep open an Australian bank account’ How to ensure that a super fund remains a resident


(EPoA) to act as trustee for a member (this doesn’t apply to a disqualified person such as a bankrupt). In April 2010 the ATO released Self Managed Superannuation Fund Ruling 2010/1 which includes an example about satisfying the Australian Super Fund test using an EPoA. We’ll leave how EPoAs are appointed to another time. When an Australian is returning from overseas they sometimes want to bring back with them some overseas retirement money. In these cases the taxation that applies on the transfer of these benefits is very important and must also be considered.

super fund

In reality there are three potential solutions. It may be that for other reasons none of these solutions is suitable. 1. Registrable superannuation entity First option is for the trustee to resign and for a new trustee, which holds a Registrable Superannuation Entity (RSE) licence, to be appointed in their place. When this happens the fund ceases to be a SMSF and becomes a Small APRA Fund. As the fund’s name suggests, the Australian Prudential Regulation Authority becomes responsible for supervising the fund and its trustee. If the super fund members then return to Australia permanently and want to make the fund an SMSF again, then they could ask the RSE licensee to resign and appoint themselves as individual trustees or appoint a company that they are directors of as trustee. 2. Wind a fund up An alternative solution to the problem of failing the residency test is to wind the fund up and transfer the assets to another super vehicle, such as a retail super fund. 3. Appoint an enduring power of attorney The super laws allow a legal personal representative with an enduring power of attorney

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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



Breaching SIS not necessarily fatal Bryce Figot says taking prompt action to fix a breach of the rules can make it more a near-death experience than a terminal blunder.


recent Administrative Appeals Tribunal decision provides valuable guidance and timely reminders for SMSF trustees and their advisers. The decision is especially relevant for those SMSF trustees that have contravened the SIS rules and are concerned about noncompliance. This article summarises the decision and its key lessons. The decision is ZDDD v Commissioner of Taxation [2011] AATA 3 and its full text can be found at AATA/2011/3.html Summary of the decision

Mr K was a lawyer and his wife, Dr K, was a general practitioner. In May 1997 an SMSF was established. At all times Mr and Dr K were the SMSF’s only members and the only directors of its corporate trustee. In July 1997 the SMSF trustee acquired units in a related unit trust. At all times the only assets of the SMSF were units in the unit trust. The unit trust trustee acquired several properties. Mr K had his own law firm and employed a practice manager. In 1998 Mr K discovered discrepancies in his accounts, which resulted in the practice manager being charged with fraudrelated offences. Mr K suffered business losses due to the actions of the practice manager and also due to his poor health. Consequentially, during the 2005 financial year, Mr and Dr K were under significant financial pressure. They had four dependent children and risked losing their family home. The unit trust trustee sold its properties and used the proceeds to pay debtors of the law firm and Mr and Dr K personally. The accounts of the unit trust treated this as being a loan to Mr K of $190,411. The loan was undocumented and unsecured, and no interest was accrued or paid. The unit trust trustee also

Bryce Figot

made or received several loans from Mr K, the family trust trustee and Mr K’s law firm. None of these loans were on commercial terms. Neither Mr nor Dr K lived an extravagant lifestyle. Neither Mr nor Dr K had much knowledge about the roles of directors of an SMSF trustee. In 2008, the Commissioner audited the SMSF. The loan to Mr K was still in place and no interest or repayments had been received. The Commissioner considered the SMSF trustee’s actions in allowing the investment in the unit trust and failing to ensure any income was received. He formed the view that these actions contravened three important SIS rules, namely: • the “sole purpose” test; • the prohibition on the provision of financial assistance to fund members and their relatives; and • the prohibition on investing with related parties on a non-arm’s length basis. The SMSF trustee does not appear to have

contested this view. In July 2009 the Commissioner advised that unless the trustee rectified the contraventions, he might make the SMSF non-complying. Mr K offered to put a loan agreement in place and pay interest. He proposed that the interest be calculated on an “interest only” basis and commence accruing only from July 2009. Rather than repaying the principal of the loan with cash, Mr K offered to take a non-cash lump sum when he attained age 55 (in July 2011), essentially consisting of units in the unit trust. The Commissioner considered that this was “not sufficient to rectify the longstanding contraventions that have occurred”. Accordingly, in December 2009, the Commissioner issued a notice of non-compliance. In January 2010 the SMSF trustee offered to enter into an unenforceable undertaking “to take whatever steps [the Commissioner] feel[s] appropriate to rectify the breach over time”. In October 2010 a formal enforceable undertaking was offered to the Commissioner with specific undertakings (for example, an interest rate of 7.5 per cent and monthly repayments of $1811). However, the Commissioner refused to withdraw the notice. The SMSF trustee applied to the AAT to review the Commissioner’s decision to refuse to withdraw the notice. The SMSF trustee also asked the AAT to review the Commissioner’s decision to refuse to accept the enforceable undertaking. The AAT affirmed the Commissioner’s decisions. Prompt action to fix contraventions

Nowhere in the decision was it suggested that merely contravening SIS rules automatically


‘However, where a contravention does occur, it should be taken extremely seriously’ leads to a notice of non-compliance. Where contraventions of the SIS rules have occurred, the Commissioner has discretion as to whether to make the SMSF non-complying. The legislation requires that the Commissioner considers the following three elements in exercising this discretion: • the taxation consequences of non-compliance; • the seriousness of the contravention or contraventions; and • all other relevant circumstances. The AAT acknowledged that the taxation consequences of non-compliance could be serious and could possibly result in the SMSF becoming insolvent. However, it was not convinced that the tax consequences of the notice of noncompliance outweighed other factors, including the seriousness of the contravention. The AAT formed the view that the nature and extent of the contraventions were serious and militated against issuing a notice of compliance. Although not expressly stated, two key elements seemed to go the heart of seriousness: • money had left the superannuation environment; and • the problem had been left to fester. Accordingly, where an SMSF trustee does

contravene a SIS rule, the contravention should be rectified immediately. Any SMSF trustee who fails to immediately rectify should be sternly warned that by failing to rectify they are implicitly heading down the path to non-compliance and will have only themselves to blame. Where the contravention involves money leaving the superannuation environment, the contravention should be rectified by returning the money. Ideally the money should be returned on an arm’s length basis (for example, with an appropriate amount of interest). Not an in-house asset

There was no suggestion that the SMSF trustee’s investment in the unit trust was an inhouse asset. Usually, an investment in a related trust is an in-house asset. Only 5 per cent of an SMSF’s assets may be comprised of in-house assets. However, investments in unit trusts made prior to 1999 are typically excepted from constituting in-house assets. This was the case in ZDDD: although the SMSF trustee had invested in what appears to be a related trust, because it was made prior to 1999, the investment was probably not an inhouse asset. Accordingly, there was no suggestion that the SMSF trustee contravened the in-house asset rules. Indirect actions led to the


SMSF trustee might find itself having to explain to the Commissioner why it continues to hold investments in the unit trust. Interest rate

There was some discussion as to what the appropriate interest rate was in respect of the loan to Mr K. The Commissioner said the appropriate interest rate was the Division 7A interest rate (that is, the Indicator Lending Rates - Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of the year of income). This is good news for taxpayers because the Division 7A rate may be significantly lower than the arm’s length interest rate. An unsecured interest rate offered by banks for, say, a credit card is currently between 13.5 per cent and 21 per cent. The Division 7A interest rate is currently 7.40 per cent. Naturally, it would be a lot easier for a borrower to pay back a loan with a 7.40 per cent interest rate than a loan with an interest rate ranging from 13.5 per cent to 21 per cent. Of course, this is not to say that the appropriate interest rate on all loans involving SMSFs is always the Division 7A interest rate. ZDDD reminds us that contravening a SIS rule is not necessarily fatal. However, where a contravention does occur, it should be taken extremely seriously and rectified as soon as possible.


The ZDDD decision serves as an important reminder: just because a unit trust is a “pre-’99” unit trust, does not mean its trustee can do whatever it likes. Where an SMSF trustee is the unit-holder, the SMSF trustee still must justify its investment in the unit trust with respect to the sole purpose test and all the other relevant SIS rules. As occurred in ZDDD, if the unit trust trustee is using its moneys for purposes other than legitimate investment purposes, the

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

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Labradors love financial planning If you know what drives your clients’ attitudes to money, you stand a better chance of getting your message across. Robert Skinner explains.


nowing your client’s personality preferences can help you take your relationship with and understanding of your client to a totally new level. It also creates a richer experience for both you and your client. From a reference point of view, we use four animals to describe clients’ money preferences: owl, monkey, labrador and dolphin. While this may seem like a pigeon-holing exercise, it is actually a scaling concept, as opposed to a boxing one. It is correct to say you have all of these animals in you. It is just that one animal is likely to feel “more like you” than the others. In this sense, you will have a primary animal, a support animal and so on. You will also have an animal you just don’t have much in common with. While the animals sound gimmicky, it is important to point out they have been built upon thousands of years of research into human behaviour. The animals indicate distinctive behavioural preferences of different people, while being highly memorable. I am an owl, and I will remember this for the rest of my life. If you knew what an owl’s preferences were, you would know so much more about why I do the things I do, how to communicate with me, and what parts of a financial plan would appeal to me. You would also know what is important to me in my relationship with my planner, which relates back to my previous article about clients seeing value in your service. We will introduce the other animals to you



itio ed


in later editions; but for now, let’s look at the labrador. You could argue the traditional financial plan is a near perfect fit for labradors. Labradors find planning, budgeting, and building wealth a brick at a time appealing. My wife is a labrador, and very different from me. Interestingly, ipac found that 70 per cent of couples experience conflict around money. In many cases this will be a result of people with different animal personalities just having different opinions regarding the best way to acquire, manage and preserve money. Warren Buffett is a well-known example of someone who displays labrador preferences. Labradors have a preference to build wealth in an orderly, measured and structured way. You might find they walk into your office with a good idea of where their finances are up to, what their spending habits are; and they may have already done some forward planning with their finances. Often labradors like to do one thing at a time - for example, paying off a mortgage before engaging in investment pursuits. So be careful if you are attempting to throw a bag full of ideas at a labrador all in one go. As a planner, it would be a challenging exercise to persuade a labrador to take on a risky strategy or a complicated investment that is relatively new to market. You would not see Warren Buffett put his money on a new-to-market technology stock. To provide an example, you may find clients with labrador preferences struggle with strategies involving Transition to Retirement pen-

sions. Most people will see superannuation as retirement savings, and the idea of tapping into super before they retire can seem illogical from a labrador’s perspective. In summary, labradors tend to: • Be planned, practical and organised; • Value loyalty, responsibility and reliability; • Trust what has been proven, tried and tested; • Provide stability and dependability to organisations and people they care about. One of the potential risks of the limited information I have provided is that you may decide which clients fit the profile, without using a robust framework to prove it. In the same way, risk profiles can bring some varied results from what our initial thoughts may have been. As the saying goes, “don’t judge a book by its cover”.

If you want to know more about the background of the animals or find out your animal, go to

Robert Skinner is a co-founder of innergi

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Aged care reform and the former home Louise Biti explores an aged care strategy that may help to improve the financial position for existing residents who have retained a former home.


hought you didn’t need to know much about aged care? Think again. A draft report issued by the Productivity Commission in January this year shows that a 65-year-old woman has a 54 per cent chance of needing to move into residential aged care. For a male, the chance is 37 per cent. These odds increase by another third if you take into account the chance of needing access to any type of aged care service. With statistics like these, aged care issues are likely to impact a significant number of your retired clients. And if your clients are accumulators, they are likely to be the ones making the decisions and seeking advice on behalf of elderly parents. The cost of aged care should be considered a normal expense of growing old and clients cannot afford to ignore the financial planning implications of aged care. The costs and strategic opportunities should be considered at all stages of financial planning. Future reform

The Government currently spends more than $9 billion a year on aged care and this is expected to double over the next 20 years with an ageing population. Even at current levels, the supply of aged care places is not keeping up with demand. A major focus of the Productivity Commission Review is to address the funding of services and the balance between public and private funding. To pay for aged care, the Report identified that the Government can either: • Increase taxes - with an estimate that the Medicare levy would need to increase to 3.1 per

Table 1 Bond payment

Assets test impact

All as a lump sum

Home is rented Periodic payment (full or part)

Home not rented

Income test impact

Homeowner for up to two years and home is an exempt asset for this period. At the end of two years, status switches to non-homeowner and the home becomes an assessable asset.

Net rental income is assessable.

Homeowner indefinitely and home is an exempt asset.

Rental income is exempt.

Homeowner for up to two years and home is an exempt asset for this period. At the end of two years, status switches to non-homeowner and the home becomes an assessable asset.

Not applicable

cent to cover increasing costs; • Reduce Government spending in other areas; and/or • Increase the user pays system. It is not surprising that the Report recommended reforms that would increase a person’s requirement to pay for their own aged care, with a safety net for those of limited means. In particular, consideration is being given to changing the assessment of the home for both funding of aged care and potentially also for access to the age pension. Further details are expected when the final report is issued at the end of June. But for now, some valuable strategies exist for clients to gain exemptions if they still own their former home.

Bonds – lump sum or periodic payment?

Accommodation bonds are payable by residents who enter either low-level or high-level (extra service) residential aged care. Once the amount of the bond is determined, the resident can negotiate to pay the agreed bond as a lump sum or as a periodic payment arrangement. For a resident who retains his/her former home, the bond payment option can impact the Centrelink assessment. This affects eligibility for the age pension and the amount of incometested daily care fee payable, as shown in Table 1. It can be beneficial for a person who wishes to retain his/her former home to negotiate to pay some of the bond as a periodic payment to retain exemptions under both the income and assets tests.


Opportunities for existing residents

In most cases, advice is sought by people first moving into residential aged care. However, do any strategies exist for a client who retained the former home but paid the bond as a lump sum without realising the implications? Once the bond has been negotiated it cannot be increased unless it can be shown that the resident receives an improved living situation that justifies the increase - for example, he/she moves to a bigger or newer room. In these limited cases the bond can only be increased up to the maximum that could have been payable when the resident first entered the facility. Example: When Bill moves to aged care he is assessed with assets of $600,000. The facility asks for a bond of $450,000. A year later a room comes up in a newer part of the facility and Bill is offered the opportunity to move to that room. If he accepts, the facility will ask for a higher bond. The bond can only increase up to $561,500* and will continue to be exempt for Centrelink. *Assumes that resident must have been left with $38,500 in assets when he first moved in.

If the resident moves to a different facility, the new facility cannot charge a bond higher than the bond currently held by the first facility. This applies even if the resident is moving to a better standard of accommodation. The new facility can deduct the retention amount (at the same rate that he/she was paying to the first facility) but only for the remainder of the original five-year period.

Example: Bill is in low-level aged care and paid a bond of $450,000. Two years later he moves to a different facility which is closer to his daughter and is also a newer building. The new facility can accept a transfer of the $450,000 bond (less retention amounts deducted by the first facility). The new facility cannot charge a higher bond and can only deduct the retention amount for the remaining three years.

Negotiating a periodic payment

In most situations, once agreed and paid, the bond cannot be increased. However, if the resident paid the bond as a lump sum, a strategy to improve the resident’s situation may be to negotiate with the facility to repay a small portion of the lump sum bond and convert it into a periodic payment. If the former home has been retained


this may allow it to remain asset-test-exempt and the rental income would also become exempt. Implementation of this strategy requires agreement by the facility and the client should check the implications of a revised assessment with Centrelink. Strategic opportunities are maximised if advice is sought before the person moves into aged care, but some limited opportunities exist after the move. In all cases, it is important to focus on access to the right level of care and the person’s overall financial situation. There are close links between Centrelink, aged care fees, taxation, estate planning and cashflow management, and the person’s total financial situation needs to be considered to determine the merits of any strategy.

Example: When Bill moved into low-level aged care he paid a lump sum bond of $450,000. His former home remains an exempt asset for two years. At the end of two years his status will change to a non-homeowner and the home becomes an assessable asset. The net rental income is assessable income from day one. The aged care facility agrees to repay $10,000 of the bond to Bill and sets up a periodic payment arrangement for this amount. The facility continues to deduct the retention amount from the remaining $440,000 bond and he pays $902* every year as a periodic payment amount. For Centrelink purposes, the periodic payment arrangement and a rented former home mean he remains a homeowner indefinitely. The home is an exempt asset and the rental income is also exempt. *Interest rate is currently 9.02% (Jan-March 2011 quarter).

Louise Biti is a director of Strategy Steps



‘Sorry’ not the hardest word to say The hardest word to say is “no”. Martin Mulcare says there are only 168 hours in a week, so use them wisely.


have a theory that February is the most chaotic month of the year in business. Most people have at least some time off in December/January and return to work refreshed and energised. Now that is a good thing, of course; but that enthusiasm is often manifested in attempting to achieve too many things in one month. If it was just you, it may be manageable and invigorating. However, when clients and suppliers are similarly keen to “get things done”, then your available time shrinks alarmingly. This is exacerbated by similar time pressures in your non-business life: registering and trials for winter sport; back-to-school meetings; first meetings for social and community groups. Here are a few hints that may be helpful in regaining some power over the 168 hours available to you each week: 1. Practise saying “no”

Most advisers are, in my experience, friendly and helpful people. That usually results in an inability to say “no”. Clients, staff, friends and family are after a chunk of your time because they respect you and your talents. Your response is usually “sure, no problem, happy to help”. But where does this leave your priorities? It is important to practise saying “no”, politely and respectfully. You have probably built up a store of goodwill from your history of being friendly and helpful - so use it. When someone seeks your input, and it is not aligned with your immediate objectives, here are some options: • Find someone else to help them; • Challenge them to solve it themselves; • Find a later time that suits you both to address the issue. Please ensure that the majority of your time is devoted to what is important to you - not someone else.

2. Delegate non-critical tasks

You are an expert, a talented individual. I believe that $500-an-hour people shouldn’t be undertaking $50-an-hour tasks, far less $15-an-hour tasks. And that applies to your personal time as well. My rule of thumb is that if someone else can do the job 75 per cent as well as you can, let them do it. With a bit of practice they may, in time, be able to do it 95 per cent as well. (And dare I suggest that some people may even be able to achieve some tasks 105 per cent as well as you can.) 3. Focus on important tasks

How do you decide what you should say “no” to and what you should delegate? I believe that you need to be clear on what is important to you. This means being very clear on your values and your goals. If you have a well thought out business plan you will be in a good position to determine your business priorities. It may be more of a challenge to determine your non-business priorities. For example, deciding between watching the Friday night footy, attending your child’s parent-teacher evening or keeping your tennis commitments. Do you recognise the difference between importance and urgency? Many people play the deadline game to confuse the two and convince you to drop everything. Just because they say it is urgent doesn’t mean it really is urgent. And even if it really is urgent it doesn’t mean it is important (to you). You can still say no - it is your choice. 4. Monitor your time

I know plenty of people who say, “I don’t know where the day went”. If you often find that you get to the end of a day wondering how it could have come and gone so quickly, perhaps you would benefit from tracking your time for a sample week. It is amazing how many of my

clients discover hidden time-wasters from undertaking the simple task of accurately recording their time, as they make decisions for its allocation. For example, someone who thought that their morning and afternoon tea breaks were five minutes each found that, in reality, they averaged 15 minutes each - that’s more than 5 per cent of their working day. Someone else was in the delightful habit of calling their spouse each day and didn’t realise that, on average, the call duration was 20 minutes. Both of those activities were probably very important to the individuals. They just didn’t realise the time commitment without consciously tracking it. 5. Don’t use the word “busy”

Let me confess that this is a pet hate of mine. I hate the frequency with which I am greeted with, “How are you Martin? Busy?” It seems to me that it is compulsory to always claim that we are busy in contemporary Australia. I have a number of problems with this deplorable 21st century custom. There is no doubt that stress and burnout symptoms are increasing, and these can be physical, mental and/or emotional. I think that repeatedly telling yourself that you are “so busy” is contributing to that state of anxiety. Most advisers are looking for new business. If you are regularly telling your clients, your referral partners and your team that you are “busy”, then how willing are they going to be to refer new potential clients if they perceive that you can’t handle your current workload. Give yourself a test and count how many times in one day that you are asked how busy you are. Try a different response. I will often say, “I don’t use the ‘b’ word. Business is going well and I am feeling under control”. Martin Mulcare can be contacted on



Making money in difficult times Ray Henderson says one of the many benefits of working with professional financial advisers around the world is learning what the best do to improve efficiency and profitability.


opefully the worst of the GFC is well and truly behind us; but the need to constantly assess what we are doing should always be on our minds. Over the past couple of years, as many were doing it tough, we constantly asked: “What are some changes you have made to survive and thrive in difficult times?” Here are six simple ideas for your interest and consideration. Maybe one of these is something you should consider in your practice?

‘These are six simple ways that some have used to increase activity, revenue and profit’

5. Consider expanding your service offering

• Are there some services not within your current offer that perhaps could or should be? Services such as life insurance, mortgages, estate planning and self-managed super funds. • And remember, you don’t have to do everything yourself. If you’re not qualified in some area and/or don’t want to provide the service in-house, look to set up an alliance with a suitable organisation.

1. Take every opportunity to ask for referrals

• Include it as a standing item on your client meeting agenda. • Add a simple statement at the end of your emails, newsletters et cetera. Something along the lines that your business depends on receiving quality referrals from its clients. • Remember, nearly 90 per cent of the 60,000 or so clients on the Business Health CATScan client base say they would refer their adviser to others. Why don’t we ask more often? 2.Increase the frequency of client contact - especially to your ‘A’ class clients

• Proactive, “how’s things” calls (without any strings attached) will be greatly appreciated by your clients. • Make use of mail merge and personalise your communications rather than “Dear Valued Customer”! • Ensure consistent reinforcement of your client value proposition - especially your services. When did you last inform clients of the range of services your practice offers? • It’s no coincidence that businesses with greater than 10 contacts with “A” class clients in a year are nearly three times more profitable than

6.Get published!

those with less than five (Business Health Future Ready 1V Report). 3. A financial plan review… at no cost!

• Before you completely dismiss this, why not consider offering to review the financial plan of your key referral sources or the adult children of your ‘A’ clients (if they’re not already your clients) - at no cost. • As well as providing something of value to important people to your practice, this can also be a great way to increase activity and unearth some new opportunities.

• Lift your profile in your area or community. • Profile cannot be underestimated, and whilst many label this as a waste of time, others use simple things like a publication in a local paper or magazine to great effect. These are six simple ways that some have used to increase activity, revenue and profit. Next month we’ll share with you some of the best ideas to save money in difficult times.

4. Look to increase your client facing time

• According to our HealthCheck database, advisers are seeing on average less than one client per day! If increasing your profitability is a key priority, you’ll need to be in front of clients. Review meetings, client events and seminars will all help you to do this. • To free yourself up so that you have time, consider delegating some of those important (but perhaps not revenue-generating) tasks to your staff.

Ray Henderson is a partner and director of Business Health -



Lend ’em your ears Peter Switzer says planners need to learn to listen more


t has always perplexed me why only one in five Australians are interested in doing business with financial planners. Of course, there are lots of reasons, but I reckon the biggest is that our industry, made up mostly of men, are not great listeners. The other reasons include the way we have charged for our services; the poor past reputation - not helped by recent “storms” of scandalous stories; the scabbiness of many Aussies; and the stupidity of legislation that has made it too expensive for less well-off consumers to access financial planners. But I think the catch-all reason is that we have not been great listeners. John Maxwell, in his book The 21 Irrefutable Laws of Leadership, insists that great leaders are also great listeners. Financial planners are ultimately leaders of their clients, and so listening is a skill that is critical. I came across a 30-something financial planner who recently told me that he had “little to learn” at this stage of his career! That was a truly worrying self-observation. The great business thinkers, like Jim Collins

of Good to Great fame, argue that the best in business “confront the brutal truth”. That is what our industry has to do to go to the next level and push up the percentage of Australians who will work with us. In my recent trip to New York for my Sky News Business Channel program, I interviewed a lady who hailed from Rose Bay in Sydney Josephine Linden. When she retired recently she was the head of private wealth for none other than Goldman Sachs. Her clients, some of the wealthiest people on the planet, included the likes of the Prince of Wales foundation. That’s not the local Sydney hospital but the real Prince of Wales! I asked Josephine how she was able to make her way up the ladder in a firm such as Goldman? She said she was always a better listener than many of her male rivals and that was her competitive or inside advantage. I don’t doubt that most financial planners are genuine and want to help their clients; but as a group we have not listened to a large chunk of potential clients, many of whom are self-managed super fund members.

Some of these people are driven by costsaving goals, while others simply like the thrill and achievement of doing it themselves. However, these people still could do with some help. In fact, we know they could do with our assistance, knowledge and even out alerts when key developments emerge from Government or the markets. I came across a CEO of a publicly listed company, who said he loved running his own SMSF, but found it difficult to find an adviser to give him some advice on his DIY fund. “They all wanted me to sign up for ongoing advice,” he complained. “I just wanted information for my set-up and did not want to be forking out every year.” A long time ago an insightful US business speaker, Jay Abraham, explained to me the concept of the lifetime value of a customer. He told the story of a business owner he advised who paid 10 per cent commission to his sales force for new customers. Jay then asked, what is the most important sale? The business owner said, the ones that follow the first, because there were no commissions on ensuing sales. But Jay pointed out that without the first, the others never arrive. He recommended that the owner pay 100 per cent commission on the first sale and the guy’s business grew by 300 per cent. Our industry has been besotted by the lifetime value of a customer and so we have strived to get all customers onto ongoing service; but we have been missing out on those customers who might want to see us every few years, or when they have an important money issue to deal with. We need to change our thinking and start listening.

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:



‘Welcome Aboard’: the importance of onboarding As private banks and wealth managers increasingly turn their attention to acquisition of new clients, Alan Shields addresses the process of introducing and setting up new clients.


nboarding is an important stage of the private banking relationship, not only in terms of retaining a new client but in terms of maintaining other client relationships, maintaining the reputation of the private bank’s brand and meeting regulatory requirements. For new clients it also represents the first opportunity for the bank to both meet and exceed expectations. Onboarding describes the process which takes place between a client deciding to use a service and the point at which accounts have been set up and the client is made aware of this. The process of onboarding is certainly not specific to private banking and wealth management; however, the nature of the business means that there is a variety of complications and reasons for its heightened importance. Private banking relationships involve both a high value service and a diverse set of sub-products, each with strong regulatory requirements. Add to this the fact that any high valued client is in general part of a network of other high valued clients and this means that there is a great deal at stake in making this complex process approachable and efficient for the client. Understandably, the efficacy of onboarding is closely tied not only with processes within the institution but to the systems implemented and the technologies used. In the real world, best practice is only ever the best compromise between conflicting needs and available resources, and this is especially true of the systems implemented in onboarding. The hassles of implementing a system to cover a diverse range of products is exacerbated by a variety of legacy systems which drive divergent information processes and rules; the management of a variety

of channels such as phone, fax and e-mail; and the speed limitations inherent in paper-based processes. There is also the compromise between the needs of the system and the needs of the clients. Where the bank places this point of balance is an important decision. The first stage of a successful onboarding process requires that the institution is able to meet client needs and expectations. To do this the institution must get to know the client, which includes preferences and needs in terms of service and communication. As the onboarding process is necessarily lengthy with a large amount of documentation it is also important that client expectations are managed effectively at this stage. The second stage involves gathering documentation. It is important that paperwork for the client is kept to a minimum, and the best examples of onboarding indicate that there is a preference for splitting this process into two documentation categories - one relating to personal information and one relating to investment and regulatory requirements. While it is important that regulatory requirements are met, duplication of information should be avoided at all costs. The next stage involves managing data entry. It is important that communication is maintained between the various stakeholders in the onboarding process. Some best practice examples include a dedicated onboarding services team, with a single point of contact to the ultimate client relationship manager at all times. It is important to keep the client updated in regards to the status of the process, which should adhere

to the client’s expectations of communication gathered in the first stage of the process. Looking forward, there are opportunities to develop online tools for communicating with the client in particular, via the online banking platform and social media, as well as through mobile notifications. Increasingly we would anticipate the usage of these tools. Once the client exists in the systems it is important to ensure that the client was satisfied with the process and the service received. Our research shows that too many clients feel that their private bank is not aware of their needs and does not value their business, and this onboarding process is a key moment at which this perception can be avoided. If a customer is not satisfied with the process then it is important that steps are taken to amend this for future clients as well as understanding and dealing with the expectations of the client affected. This final stage provides an opportunity to ensure that the client’s needs are fully understood and can be accommodated in the future. The onboarding process is the very first administrative process that a client experiences, yet it lays the groundwork for the entire relationship and its importance cannot be overstated.

Alan Shields is a director of Retail Financial Intelligence -



Do it right if you do it yourself Too many investors who set out to do it themselves end up doing not very much at all. David Wright explains.


n many ways, the name self-managed superannuation fund - or SMSF, as they are often referred to - is a misnomer, because a massive number of this fast-growing superannuation segment are not managed at all. That is, the underlying investments in the fund are not properly managed and monitored. There are a number of reasons for this, including: • Many SMSFs are set up by accountants for legal structure and tax reasons; • Penetration of the SMSF market by investment advisers and fund managers remains quite low; • There seems to be a misguided understanding that running a “self-managed” superannuation fund means managing a portfolio of direct Australian equities; • Member investment apathy is also prevalent in SMSFs; • Some SMSFs are set up with questionable motives of investing in “related” property or collectibles (art, wine et cetera); • Ongoing management of the assets of the fund becomes too onerous for the trustees/ members. Each of these is explored in more detail below. One of the most common reasons that the underlying assets of SMSFs are not well managed is that SMSFs are often established by accountants for their clients for taxation and/ or legal structure reasons. While this is often a valid reason to establish an SMSF, the assets of the funds are then often left without investment advice, as this is not the skill set of many accountants. As with most professions, many accountants are reluctant to “share” or refer their clients to a financial adviser for fear of losing the relation-

David Wright

ship with the client. The result is that many SMSF investment portfolios are “left” invested in cash, either without a specific investment strategy or in breach of their investment strategy. Despite being one of the fastest-growing segments of the superannuation and retirement income market, the SMSF segment has been, and remains, a market that has not been well penetrated by the financial advisory or funds management industry. The reason for this is related to the above point: the establishment of SMSFs is predominantly the accounting profession’s “domain” - but the implementation, management and monitoring of the investment portfolio are not performed by the accountant. As a result, much of the investment that takes

place in a “self-managed” superannuation fund is exactly that - self-managed by the member or members of the fund. For whatever reason, self-managed super funds seem to be synonymous with an investment strategy that involves investment in direct Australian equities. And that’s it! That is, there is little if any diversification into other asset classes. In addition, the underlying stocks are often selected, managed and traded by the super fund member or members, after sourcing their own research from a retail share trading website or a full service broker. While it is this control and interest in investing that attracts some superannuants to establish and manage their own SMSF, it often leads


‘ The result is that many SMSF investment portfolios are “left” invested in cash’ to a less than optimal investment strategy and approach that perversely doesn’t maximise the superannuation amount for the trustee/member. In addition, while superannuation commonly represents the largest asset outside of the family home, many SMSF trustees/members are as apathetic about the underlying investment as public, industry or retail fund members receiving Superannuation Guarantee (SG) contributions into an industry or retail default fund. Only it can be worse in the case of an SMSF, as the underlying investment is often just cash, rather than a default diversified “balanced” fund option that is likely to produce a more attractive level of return and capital growth over the longer term. Unfortunately, some SMSFs are established for questionable purposes, including funding or partly funding a business property related to the fund’s members; or funding the members’ interests in collectibles such as art, wine or coins. While there are rules governing investment in these types of assets, this alone does not guarantee a sound investment portfolio for the fund’s members. Finally, running an SMSF in a compliant, well-managed manner is no small undertaking in that it involves ongoing administration, investment management and monitoring and annual financial statement preparation and audit. Even many of those people who establish an SMSF with a genuine interest or intention to be actively involved in managing the investment of the fund can find it more onerous than they anticipated,

and lose interest over time. As a result, the fund’s investments are not actively managed. The lack of proper management of many SMSF investment portfolios is a massive issue as it may well lead to a funding shortfall of many funds such that trustees/members run out of money in retirement and have to resort to the Government Age Pension. As an example, the high level of cash holdings in many SMSF portfolios will not deliver the required return to adequately fund many SMSF members’ retirement incomes. This may not have been the case if the assets of the fund were invested appropriately and managed properly over the life of the SMSF. So what are the alternatives?

The starting point of any sound investment strategy is determining the appropriate asset allocation for the required level of return, married with the risk profile of the investors. This is a principle of portfolio construction that very few SMSF trustees/members have any knowledge about; yet it is incredibly important, as it is the asset allocation of the portfolio that will determine around 80 per cent of the portfolio’s investment return. Not only that, the strategic asset allocation (SAA) of the portfolio may need to be changed over time as the members get older - or as their circumstances change - to make sure they are adequately funded for retirement. This requires professional investment advice, at least periodically, to see if the SAA remains appropriate for the members’ investment objectives. It is important that SMSF members understand that the term “self-managed” does not mean, “no managed”. That is, there is no reason why managed funds cannot play a part in the investment strategy and process in SMSFs. In fact, the difficulty of investing directly in international assets (equities, property securities and bonds) and alternative assets should mean managed funds are more actively used in SMSF portfolios than they are. In addition, for those SMSF trustees/members who find it onerous managing a portfolio of domestic direct equities, hybrids or


fixed interest securities, investment in managed funds also makes a lot of sense. For those who want investment in direct assets but want those assets to be professionally managed, there is now a selection of separately managed accounts (SMAs) or individually managed accounts (IMAs) where investment managers will manage the direct assets for the SMSF for a management fee similar to that of a managed fund. The main difference is that the asset is held directly by the investor (SMSF), which can bring taxation and portability advantages. Finally, the emergence of exchange-traded funds (ETFs) certainly presents a better investment option for many SMSFs than sitting in cash. ETFs can offer a cheap, index exposure to a broad range of asset classes from which a welldiversified investment portfolio can be built. The SMSF market is one of the fastestgrowing segments of the superannuation/retirement industry. As such, the financial services industry, the Government and regulators need to dedicate significant resources to ensuring we educate and service SMSF trustees/members properly regarding their investment strategy and portfolio, or many will be left disappointed with underfunded retirement income.

David Wright is a director of Zenith Investment Partners -



Ten things to keep front of mind when investing in direct property Kelly Napier says the past few years have taught us some lessons about assessing the merits of direct property investments. Here’s her handy checklist.


roperty fund investors have coped with great challenges over the past two to three years, and there’s no doubt that investment flows into unlisted direct-property funds have subsided from the heights of the mid-2000s. As the global financial crisis unfolded, practices adopted by some direct-property fund managers came horribly unstuck and exacerbated reductions in the value of unlisted property fund investors’ equity. It now seems that investors are beginning to warm to the possibility of reconsidering direct property for inclusion in their overall investment portfolio. In light of investors’ renewed appetite, Standard & Poor’s Fund Services has prepared a list of what it considers to be the 10 most important characteristics of strong core property fund investment offers. We believe that these points should be “front of mind” for investors and their advisers when considering an allocation to direct property, and subsequently when assessing the merits of particular core direct-property investment opportunities. In addition to the points listed below, we encourage investors to look for sustainable and transparent investment structures, which deliver property returns - not the unsustainable, engineered, or structured returns of the past. Overall, funds which are moderately geared, with sound underlying property portfolios, which are able to generate sustainable, consistent income and scope for capital growth over the long term are the most attractive. The idea of fund managers “going back to basics” is a great way to rebuild trust and regain investors’ confidence as they try to put some distance between the old and the new; to demonstrate to inves-

tors the lessons learnt from the past few years, and to ensure better alignment of interests with investors. 1. Be realistic

An investment in direct property can deliver regular income based on contracted leases; provide an inflation hedge, the opportunity for capital growth; access to a diversified pool of institutional-grade property, specialist management; and scope to reduce overall portfolio volatility. Provided investors have a minimum five-year investment horizon, direct-property investment can be an attractive proposition. If you’re expecting something different, then direct property probably isn’t for you. 2. Quality management

There are many “professional” managers out there, but we have found that they’re not all of the same calibre. The manager has an important function and has a strong influence on overall performance, so look for fund managers with a strong reputation, and experienced and stable investment management teams who have gathered their experience across market cycles. Often the team can present a competitive edge and truly add value for investors. Appropriate remuneration structures and incentives provide for a strong alignment of interests. 3. Prudent gearing

Experienced investors in direct property know all too well that gearing magnifies changes in total returns - on the way up and on the way

down. The appropriate level of gearing will depend on the stage in the credit and property cycle. Look for headroom below banking covenants (loan-to-value ratios and interest-coverage ratios) so that the fund can withstand gaps in income and falls in valuations without breaching covenants. Be wary of funds geared too close to covenants at the peak of the property market cycle. 4. Headline yield

Historically, investors and advisers became accustomed to seeing attractive double-digit returns comprising a distribution yield often exceeding 8 per cent per year. But investors need to look past the headline yield to see the underlying assets and what a fair return should be. The distribution yield is a function of many inter-related inputs which vary at different points in time and include: property yield, management costs and expenses, gearing levels, and the cost of funding. Direct-property funds are known for their stability of distributions, but there shouldn’t be any unsustainable support or upward pressure brought to bear on distribution yields when the underlying investments can’t meet those expectations. 5. Distribution policies

After examining the headline yield, investors should understand the composition and source of the distribution. Distributions should only comprise net income and realised capital gains. In the past, some fund managers engaged in the practice of supporting lower income distributions with a



Investors are reconsidering direct property exposure

component of unrealised capital gains. These represented a partial payment of increases in capital value which were often debt funded. This only served to increase the risks to investors as capitalisation rates expanded, asset values fell, and bank covenants were approached or exceeded. 6. Risk-return proposition

Investors should be clear about the assetspecific risks (tenant risk, likelihood of vacancies, tenant demand, potential obsolescence, capital expenditure requirements, asset quality, location, and growth potential), debt risk (not just the level of gearing but its cost, maturity date, and associated covenants), key person risk, development risk, and liquidity risk. Many risks are difficult to quantify as they are qualitative in nature, but investors should be compensated for the risks they are taking on. That is, they should receive an appropriate premium or hurdle over a risk-free rate. Due to the positive relationship between risk and return, the caveat is not to be blinded by the return side of the equation but to ask what risks am I taking on and am I being appropriately rewarded? 7. Liquidity

Investors should approach direct property

with a minimum investment horizon of five years. Property assets are inherently illiquid and cannot be readily converted to cash, so immediate access to capital shouldn’t be expected. If a fund is offering access to capital it’s very important to understand the redemption terms and the conditions under which access can be varied, suspended, or terminated. 8. Conflicts of interest

Conflicts of interest are rarely absent in direct-property funds management, given the evolution of the industry from property development/ownership into property funds management. However, these can be prudently managed by proven professional and ethical management, supported by thorough documented policies and procedures and independent risk oversight. 9. Conservative assumptions

It is important to make sure that fund managers are firmly grounded in reality and don’t have impossibly optimistic objectives. Markets move in cycles, debt costs change (margins and base rates), vacancy rates aren’t constant, asset values can rise or fall, capital expenditure needs to be funded somehow, and

demand and supply for space aren’t constantly in favour of property owners - so incentives and let-up periods need to be factored into budgets. Assumptions need to be reasonable and have a sound basis for being adopted. No-one wins when an investment manager over-promises and under-delivers - least of all investors. 10. Fees

Upfront and ongoing costs could be hefty and significantly affect the return over the investment period. Fees can include fund establishment costs, asset acquisition costs, debt establishment fees, asset disposal fees, and annual management fees and costs. Performance fees shouldn’t be overlooked and can also be significant. Performance fees should be based on an appropriate benchmark or premium over a risk-free rate, which reflects the risk of the investment, rather than an arbitrary hurdle that could easily be achieved without the manager truly “working” the portfolio.

Kelly Napier is an associate of Standard & Poor’s.



Making property fit the portfolio puzzle Residential property is a lumpy asset class, and not one that always fits comfortably into the portfolio construction process. Greville Pabst looks at how including property can be made simpler.


esidential property has captured the hearts of many Australians as the ideal investment. Private residences are the nation’s largest store of household wealth, and property regularly tops the list of places Australians consider the best place to invest. This popularity has seen the number of Australians who own rental property as investments soar. In 1995, the ATO estimates there were 385,000 property investors; but by 2010, that number had grown to 1.7 million - a four-fold increase in just 15 years. This growth in property investment has proved a real challenge for financial advisers for a number of different reasons. Many investors fail to consider how a property holding will fit into their financial plans until after it’s purchased. Yet the effects on a portfolio’s liquidity, diversification and returns can be profound. When the market is performing well, property appears a deceptively easy path to riches, but this can be far from the truth. The performance of different properties - even houses located in the same street - can vary dramatically. Yet many clients, particularly those who have seen the price of their own home rise, are confident they understand the market well. West Australian advisers found this belief nearly universal in late 2006 after the Perth market soared

‘When the market is performing well, property appears a deceptively easy path to riches’ 40 per cent in just 12 months. Similarly, many Melbourne-based advisers are encountering this belief as its residential market has posted three double-digit rises in just the past four years. It’s an unfortunate belief that results in many investors failing to get qualified and independent advice, and relying instead on their own instincts. Each year, I see thousands of investors committing to properties with poor growth profiles, such as high-rise city apartments. These properties have a very low land component per unit and are built in tight, high-density clusters over relatively short periods of time. This segment of the market periodically experiences an over-supply of near-new units, resulting in poor investment outcomes for owners.

The fact that high-rise units are popular with investors demonstrates why advice is needed. What isn’t understood by these investors is that newly developed property prices are typically 20 per cent above their intrinsic market value, and this condemns many owners to years of poor growth. Inexperienced investors are often swayed by stamp duty savings, accelerated depreciation and the rental guarantees offered by developers; but these short-term financial advantages are immaterial compared to buying a property at its intrinsic value with the correct profile for market-leading growth. While investor outcomes in the established property market tend to be better, we also see plenty of poor decisions. Sometimes these are based on the buyer’s pet theory or the “wisdom” of relatives and friends, but these mistakes can be just as costly. For instance, I doubt many of the investors in “blue-ribbon location houses” on Sydney’s lower north shore in 2003 expected anything other than solid capital growth. These properties were widely considered to be gold-plated investments, yet most experienced flat growth or price declines over the following four years - a rude and expensive shock for their owners. During the same period, certain property types in other areas continued to perform,


despite a sluggish Sydney market. Similarly, I remember the scepticism that surrounded investment in Melbourne’s inner northern suburbs around 2000-2001. A decade later and many of these suburbs have turned out to be star performers, with the locals incredulous at the prices their homes now fetch on the market. Just like other asset classes, the bedrock of impressive property investment performance is rigorous analysis and research. Rising markets mask poor performers which are quickly revealed when the tide turns. Indeed, our analysis shows that less than 10 per cent of the properties listed for sale around Australia qualify as “investment grade”. Investment grade properties have several characteristics in common, most notably: average growth rates of 7 to 10 per cent per year; a high propensity to sell within 5 per cent of technical market value in a recessed market; and strong, consistent tenant demand. We use a 14-stage factor-analysis selection technique to find these

properties and then back-test their financial performance against our benchmarks. For advisers looking to build a relationship with a property adviser, I would make the following suggestions. First, anyone acting as property adviser should be professional, highly experienced in the industry and qualified as a real estate agent. Screen out anyone who doesn’t have these bare essentials. Secondly, consider their advice model. Make sure it’s based not just on their experience but that it also comes from well-researched and replicable analysis. A top investment adviser should be able to articulate their investment model clearly and then demonstrate how it gets results. The next step is to look at how your practice and theirs will work together. I feel it’s important to seek partners where each member of the network recognises the other professionals’ fields of expertise. So it’s a legal professional who advises on the structure of holding; the financial adviser


who advises on the place property takes in a client’s portfolio and who sets the budget for their investment; and the property adviser who selects the property within that budget. The final element is how to co-ordinate that advice, and for this, my point of reference is always the question: What is in the client’s best interest? The networks of advice that tend to work best are the “straight-referral” models - that is, models based on complete transparency to the client and without referral fees. No matter how well intentioned, I have found that referral fees open the door to practices which are not necessarily in the client’s interest. On the other hand, a network focused on excellence in advice is continually gaining guidance from thinking about what’s in the client’s best interest. It’s these types of arrangements which ultimately see all parties prosper. Greville Pabst is the CEO of WBP Residential Advice -

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S h a r em ar k et

Imagine a life without forecasts Forecasts are the most unreliable guide to market returns, except for all the others. Ron Bewley explains.


to determine buying opportuniread a blogger the other day Chart 1: Market forecast for 2011 with 10 simulations ties and times when profits might commenting on a newspaper reasonably be taken. Without that article about various high-profile benchmark, I could not distinguish strategists’ market forecasts for between new upward trends and 2011. His point was simple: Why temporary little bubbles. write up all of these forecasts when My method of calculating they are nearly all always wrong? this mispricing is somewhat more And it seemed to be a point of complicated because analysts’ views frustration, rather than a serious of the world do evolve over time. complaint. My article last month describes my I update my forecasts every day, so-called exuberance measure and even though I know they are going how to use it. to be wrong. I do not feel comfortImportantly, different sectors able without these forecasts. A good of the market move at different forecasting process is essential for     paces and with different sets of   determining whether the market   Chart 2: Market forecast for 2011 with 100 simulations “noise” causing the outcomes to is cheap or expensive. And if the   deviate from their smooth paths. fundamentals actually change - so So, by determining which sectors changing my forecasts - I would are better than others, and which not otherwise know that I should are the better times to buy, market adjust my investment strategy. outperformance might be achieved My forecast for the S&P/ASX - even when the number, such as 200 for 2011 is 14 per cent capital 5500, is completely wrong! Indeed, gains with a volatility of 12.5 per if forecasts were always correct, cent. The year 2010 ended at 4745 there would be limited buying. - so the thick smooth black line in The wiggly lines will often cross Chart 1 represents my forecast for the trend line several times over 2011, ending at just under 5500. the course of a few years. So the If my forecasts are based on   real play is in monitoring changes sound research and analysis, I will   in trend and volatility over much get the trend right, but market year as big macro events come to longer horizons. No one will get volatility can take reality a long way from the trend line while most are clustered closer to the trend. light, and so the trend should also every call right but, as they used to away from that line. The 10 wiggly Now you can see the probchange. say with British Rail, “Without a lines in Chart 1 are scientifically callem with market forecasting. An Forecasting is futile without timetable we would not know how culated “simulations” based on my outcome of 5500 has a reasonable understanding the principles of late the train is”! forecasts of returns and volatility. range of something like 4000 to forecasting. Because I believe that I know my forecasts will be Importantly, each of these wiggly 7000. To claim greater accuracy my forecasts are credible - they are wrong, but I cannot imagine life lines is equally likely! There are, of than that is to refute the market based on broking analysts’ forewithout them! course, an infinite number of posvolatility that we are all so familiar casts of dividends and earnings sibilities, even if I am right. I show Ron Bewley is executive director of for the top 200 companies - I can 100 of these simulations in Chart 2. with. On top of that, fundamentals Woodhall Investment Research Some of the simulations deviate far might change over the course of the use deviations from the thick line



Harnessing the growth in giving Krystine Lumanta reports on how planners are turning to Private Ancillary Funds (PAFs) to help clients meet their philanthropic goals.


he profile of philanthropy is increasing in Australia, with approximately 800 private ancillary funds (PAFs) and their forerunners collectively distributing $447 million since 2000, according to research conducted by The Australian Centre for Philanthropy and Nonprofit Studies (CPNS). However, the resources needed to enable financial planners to establish PAFs are lacking, says Greg Rundle, director and strategic adviser at 360Private in Adelaide. Rundle is establishing a PAF for a client and will be utilising the services of independent, notfor-profit organisation Social Ventures Australia (SVA) to assist with its final stages. “There’s quite a bit to it,” he says. “[PAFs] are essentially regulated by the Australian Tax Office, so they have all the information available but in a very disjointed way. “What SVA seem to have done is that they’ve spent so long getting all that information and now they can roll that out to people like us. “So I’d say the resources are not readily available and there is certainly a niche market here for SVA in terms of what they’re providing, because we’re not aware of a lot of providers like them in this area.” The opportunity to offer philanthropic advice came to Rundle when a client approached him with a personal interest. “Clients don’t really know what it is they’re asking for, but they do know they would like to help the community and I’m aware that there is a facility to enable them to do that,” he says. “What I see them doing is the administration for the PAF, while we or someone else does the administration for the money within the PAF.” SVA’s experienced in-house team provides administration service consisting of keeping

paperwork, arranging amendments to the trust deed to comply with the law, distributing the eligible grants with correspondence and responding to all trustee and director enquiries. SVA charges nothing to establish a foundation if a client then signs up to the administration service for two years, at a cost of $5000 a year plus GST. “This is the real value for me - the administration and its implementation,” Rundle says. “SVA do also offer the service [of lining up charitable causes] but my client had developed specific thoughts of what they wanted to do with the money, which was to effectively set up a charitable institution for overseas aid.” Rundle believes advisers shouldn’t force the idea of PAFs onto clients and should instead allow an interest in philanthropy to naturally develop, which may then emerge during conversation. “I don’t recommend that philanthropy be one of their thoughts,” he says. “If they bring it up as something they’ve thought of doing, I then say it’s possible to implement it by doing x, y and z.” Rachael McLennan, manager of SVA’s PAF service, says their service has started to make waves amongst financial planners. “We’ve been pleasantly surprised at how the advisory community has responded,” she says. “Philanthropy, globally, is on the agenda. Warren Buffett and Bill Gates have brought it to the front and centre. Also, it’s firmly on the Government’s agenda now.” For McLennan and the SVA team, their focus this year will be to inspire more Australians to contribute to the philanthropic sector. “We now manage 18 foundations, or private ancillary funds,” she says. “If SVA could help establish 50 new private

ancillary funds a year, we would be making a significant difference to philanthropy in Australia.” Rundle says PAFs are generating more interest, as “people like to control their money”. “It’s no different from a self-managed super fund - if they can control the charitable organisation themselves, it gives them a feel for where their money’s going,” he says. There is, however, a key difference between PAFs and similar investing vehicles - “once the capital goes into the PAF for whatever purpose, it can’t come out”. “So that money now has been allocated to something other than your client’s affairs,” says Rundle. “Clients need to be very aware of that.” Following this experience with his client, Rundle believes financial planners will benefit in the PAF space - and not just from the extra investment capital. “I think it’s an area where referrals will happen. Absolutely,” he says. In addition, communicating with clients about philanthropic issues becomes “an extra touch” and “something different to talk about, which makes clients feel good”. The opportunity in providing more accessible resources is another area that Rundle believes needs to be developed. “There’s work to be done in the administration side of the PAF,” he says. “So advisers could get involved in that role.”


T h e Fin al W or d

My battery is flat and I’ve gone stupid Fact or crap? Dixon says it’s getting harder to tell, and the Internet is to blame.


’m not sure if you’ve heard about it, but apparently there’s all these computers linked together like some virtual global electronic spider’s web (the web is electronic, I mean, not the spider) - a kind of a world-wide web, as it were. Every computer can connect to every other computer, and this enables the lightning-fast dissemination of all sorts of information. By “all sorts”, I mean mainly pornography and old jokes. I did some reading in a “book” last week, and it turns out that the Internet was originally invented for university academics (or was it the military?) to swap their jokes and porn and to write smutty messages to each other about the latest intake of grad students. But academics’ jokes generally aren’t really all that good (Q: What do you get when you cross an elephant with a banana? A: Elephant x banana x sin[theta]*), so they decided to let other people use their network so they’d have better gags for their staff parties. The rest is history. The jokes got better and better and now we have Google, and we have Facebook - the best method yet devised for insecure narcissists to pretend to the world that they’re really very popular. It turns out that sharing a lot of information really, really quickly, has led to some completely unintended consequences. It has, for example, been a total boon to every half-witted, crackpot conspiracy theorist; it’s now possible for the inane ramblings of a madman to reach millions, a fair proportion of whom won’t recognise them for what they are. But the really unintended consequence of the Internet is that it’s slowly but surely making us all stupid. I know whereof I speak. And it’s because all of the knowledge and wisdom that people once carried around in their heads is inexorably migrating onto the Internet. Think about it. Someone asks you a

themselves they “go to the cloud” and link up to their home PC and start watching videos and stuff? Very impressive - but what I learned from that ad is that third-world airports have better Internet connections than any airport I’ve been to in Australia.) But because we access all this information in largely the same way, and it all seems to occupy roughly the same place in the information “hierarchy” - type in an address, click on a few buttons and there you have it - I believe we’re losing the critical ability to distinguish between fact and crap. And that’s bad news for us all. Except for the purveyors of crap, of course. They’re rubbing their hands.

Dixon Bainbridge

question. How often is your first response to Google it? And then to read Wikipedia? I have a colleague who has edited Wikipedia pages on subjects he knows nothing about, usually when he’s drunk. The pages are funnier for it, or so we think, but not necessarily more accurate. But how would you know which are the bits he’s added to the page, and what’s actually true? Instead of learning stuff, remembering it and then applying it, we’re increasingly relying on the Internet as a repository of information that we can access anywhere and any time we need it. Among the geeks and nerds who think this stuff is cool (because they’re selling it), it’s called “the cloud”. This has led to the absurd situation where my iPhone battery goes dead and my IQ falls 30 points. (While I’m on the “cloud” - have you seen that Microsoft TV ad with the couple sitting in the third-world airport, who are told that their flight has been delayed/cancelled, and to amuse

* The cross-product of two vectors has the magnitude of the product of the magnitudes times the sine of the angle between the vectors. It’s true. It’s on the Internet. But to think this joke is funny you apparently have to accept that elephants and bananas are vectors; you would not believe the argument this has prompted among academics.

Dixon Bainbridge can be contacted via the Professional Planner HUB - www.professionalplanner. - and he’ll get back to you, unless his battery is flat again.

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