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October - november 2010


Are BDMs really supporting your business ?

What's over the horizon for financial planners ?

Why more planners are going for brokers

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Co nt e n t s


October - November 2010 04 06 07 08 11

Opinion and views From the editor Sanders Whiteley Slattery Practitioner perspective

Legislation 13 What planners think about opt-in

Cover story - page 14

Business development 20 BDMs winning new-found respect

SPECIAL REPORT Online broking

35 Planners going for brokers Risk 40 What's over the horizon for planners

Planner profile - page 26

Client case study - page 30


SPECIAL REPORT Exchange-traded funds

51 A new phase begins in ETF growth

Self-managed super

56 58

A refresher course on pensions Related parties lending to SMSFs

Practice management

60 Martin Mulcare 61 Rod Bertino 62 Peter Switzer Sharemarket 63 Triple dip just isn't on the cards

Managed funds

64 Private equity here be dragons

Property Why prosperity is our real problem

Technical 46 Are SMSF reserves worth the effort?

66 68

Responsible investing 48 What you need to know before you start

Philanthropy 69 Ancillary service inspires giving

Final word 70 He's called Charlie! He's got big knives!

43 There actually is a silver bullet

Private banking The value of advocacy in client acquisition

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



Odds shorten on consistent view W

hen the Prime Minister, Julia Gillard, announced her new-look ministry, one question immediately ran through the financial planning community: Who is Bill Shorten? For the past three years or so, the financial services sector has been well served by Chris Bowen. While proposals and reforms put forward by Bowen were not universally embraced, very few people really believed he’d done a bad job as Minister. They might not have agreed with the policies he formulated, but his approach was consultative and inclusive. You only had to be at the Financial Services Council (FSC) national conference in August to understand how much that approach was appreciated. FSC members aren’t necessarily the Labor Party’s natural constituency, yet there was widespread acknowledgement that Bowen’s ap-

proach to his portfolio had been highly effective. And there was a pronounced difference in the performances at the conference of Bowen and his Liberal counterpart, shadow Treasurer Joe Hockey. Bowen offered a vision and longterm policy framework for financial services; Hockey offered no long-term, coherent vision for financial services policy. The FSC conference heard a lot about what a Coalition government would not do, but not a lot about what they would do. Partly that’s a benefit of incumbency: it’s easier to outline what you’re going to do once you have all the tools and resources you need to actually do something. Even so, a change of government, and a radical change in policy, wasn’t something people in the conference audience were crazy about. Before the election, a member of the FSC

board told me he believed the worst outcome for policy continuity would be a change of government and a new minister; the second-worst outcome would be the Government returned, but a new minister; and the best outcome would be the Government returned, and Bowen remaining in the portfolio. So Bowen’s move to the Immigration portfolio has got the industry wondering what to expect from his successor, Bill Shorten. At least we have continuity of government, more or less. It remains to be seen how effective a minority government actually can be, but we can’t say we don’t know what the broad policy agenda is. Where Shorten may differ from Bowen is on his views of the details – things like commissions on risk products, the opt-in proposals, and the banning of all forms of volume rebates.


Strategic practical training for advisers

Self-managed super funds DBA Lawyers and Professional Planner present half-day SMSF seminars designed for advisers looking for a competitive edge in the SMSF, tax and succession planning fields.

Venues and dates State-by-State WA

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Hosted by renowned SMSF experts Daniel Butler and Bryce Figot, the seminars address complex technical issues using easy to understand strategies, employ practical examples, and allow ample time to allow interaction with participants.


Tailrace Centre


The Chifley on South Terrace


The Arts Centre Building


Canberra Rex Hotel

For more details and to register for the seminar nearest to you, go to and follow the links to the DBA/Professional Planner SMSF Seminars series.


The Menzies Sydney Hotel


Christie Corporate Conference Centre

Friday November 5 Wednesday November 10 Thursday November 11 Friday November 12 Tuesday November 16 Wednesday November 17 Thursday November 18


Shorten’s appointment has been received predictably by the industry. The Association of Financial Advisers (AFA) said his “experience during the Beaconsfield mine disaster in 2006 means he is likely to have exceptional insight into life’s uncertainties”. The subtext here, one supposes, is that the AFA hopes Shorten will be well-disposed towards life insurance. And the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) hopes Shorten will look favourably on superannuation: “We note and support Minister Shorten's comments that improvements to superannuation represent an opportunity to increase the quality of life of all Australians and deliver us a sustainable future,” SPAA said. “We are confident Mr Shorten's background as trustee of two superannuation funds will stand him in good stead in his new role developing policies to benefit the broader retirement savings sector.” Although Shorten appeared at the FSC conference, in a session opposite the Coalition’s Kerry O’Dwyer, we still don’t know a lot about how he’s likely to approach the job. Shorten represents Maribyrnong, in Melbourne’s north-west, and he was re-elected with 55 per cent of the primary vote there (translating

to 65 per cent on a two-party preferred basis). He was educated at Xavier College in Melbourne. He has a law degree and an MBA. He’s a former national secretary of the 135,000-member Australian Workers’ Union (succeeded by Paul Howes). He’s one of the “faceless men” that the opposition is fond of referring to as being responsible for the overthrow of Kevin Rudd. And, of course, he’s the son-in-law of the Governor General. Bowen will be a tough act to follow; but the fact that the Prime Minister has appointed to this portfolio one of the Labor Party’s rising stars shows that it’s certainly still being paid the attention it deserves. But the proof of any pudding is in the eating; in the weeks and months ahead, Shorten will be on a steep learning curve as he grapples with the intricacies of his new portfolio and with the reform agenda (and its reception). He has a relatively short time to win the trust and confidence of the industry.


Speaking of new faces, there’s one at Professional Planner. On September 6, Krystine Lumanta joined the magazine as a journalist. Krystine is currently completing a journalism degree, and has experience in superannuation fund administration. She’ll be writing for both the magazine and our website, Professional Planner Online. Krystine will be out and about, meeting people in the industry and attending conference events. Keep an eye out for her, and say hi. Simon Hoyle


October - November 2010 - Issue 26

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: Debbie Wilkes Subscriptions are $79 inc GST per year (6 issues) Cover Image : Saurav Aneja Planner Profile Photos: Paul Jones 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, Debbie Wilkes, Greg Bright

Circulation 9312




orporate collapses are a fact of life in the modern economy. Thankfully they don’t happen too often. But they do happen, and even the best financial planners may have to deal with this issue during the course of their professional career. It is particularly difficult when the collapse affects a financial planner’s clients who relied on the advice of their expert adviser to participate in the product. Retaining the client’s trust and confidence through a corporate collapse and bringing them safely to the other side is critical. A key but challenging part of this is in to put your own financial concerns aside to ensure your client’s financial interests are protected and that they get access to appropriate avenues of recourse. The first port of call for any avenue of redress is the product provider. Not only is it generally a requirement of industry external dispute resolution schemes that the complainant utilise the company internal dispute procedure first, but this will also assist in ensuring the client is identified for any future action that may arise through administration of the company. The next step is taking it to the appropriate external dispute resolution (EDR) scheme for the product. This might typically be the Financial Ombudsman Service (FOS), which doesn’t just deal with complaints against financial planners, but also handles complaints in relation to almost all forms of investments, insurance and superannuation. Whilst there are recognised monetary limits to FOS’s capacity to award compensation, they can at least respond to the complaint; and in doing

so, this will further enhance the client’s rights if any future administration action arises. However, claims brought after a company has gone into external administration may be barred from recovery. Client concerns should also be lodged directly with ASIC, because they obviously handle complaints where breaches of the law are evident. They are also likely to be the agency that formally triggers administration action, and so it is helpful for clients to be identified to them. By itself though, ASIC notification is not automatically a path to financial recovery. It needs to be accompanied either by creditor action, individual (or class-based) civil action or, in cases where ASIC thinks it is in the public interest to do so, they have the power to initiate their own Section 50 action. In all of these cases, the financial planner may be called upon to liaise with the administrators and investigators, and may have a role in referring their affected clients to lawyers with suitable expertise. Sometimes, of course, the financial planners themselves become the subject of investigations, in which case it may not be appropriate or ethical for them to be seeking to represent affected clients. In these circumstances their clients’ interests may be best served by seeking advice from another professional who can offer an independent view of the situation. It also pays for financial planners to understand the terms of their or their licensee’s professional indemnity insurance policy and how it may limit their capacity to communicate with

their clients. The planner’s ethical and professional obligations may be in conflict with obligations to their employer, their licensee, and/or the commercial interests of their insurer. When it all boils down, suffering financial loss from a product collapse is a tense and stressful issue that has the potential to destroy the client’s (and the financial planner’s) trust in the financial services marketplace. At times like this, living up to the promise of being a trusted professional requires the financial planner to draw on all their skills of professional advocacy and sensitivity; and, above all else, it requires us to focus on the needs of the client without regard to our industry’s or our own financial consequence. The fact that it happens at all suggests that we should consider developing an action plan to kick into place for affected clients. This should be designed around the specific needs of clients. Improving product regulation and gatekeeper regulation is a central part of our Future of Financial Advice (FoFA) taskforce considerations. In the meantime, financial planners who are confident in their original recommendation and the research strength behind it, and those who genuinely follow the FPA Code of Professional Practice, will have greater confidence that their recommendation was appropriate at the time it was made. To comment on this article go to . Deen Sanders is deputy chief executive and head of professionalism for the Financial Planning Association of Australia


Dealing with a collapse





foundation of any functioning market is the ability of participants to compare the cost and value of similar products or services. Transparency is critical both to protecting consumers and to encouraging competitiveness and innovation. Imagine a circumstance where the quality of a product or service diminished as price increased. In many markets, the ability to compare is complicated by product differentiation, the value attached to a specific brand by consumers, or the complexity of the product or service. The superannuation industry is not short of ratings agencies or methods to compare fund performance, and the recent Cooper Review has considered the issue at length. There are currently two broad approaches to. The first presents returns to members net of tax, investment management fees and implicit assetbased fees. This model is preferred by industry super funds. The second presents investment returns net of investment management fees and tax only. The emphasis here is on comparing products with similar risk profiles, rather than capturing asset-based administration fees or commissions for financial advice. This is the model preferred by retail super funds. APRA’s whole-of-fund rate of return (ROR) is more aligned with the first method, in that it represents the net earnings of superannuation assets towards funding members’ benefits, primarily for retirement. APRA’s ROR measures the combined earnings of a superannuation fund’s assets across all its products and investment

options. Notwithstanding the different merits of alternative rating methods, it is clearly time for the Government or regulators to determine a single method that fund members and financial planners can rely upon when comparing the cost and value of competing super funds. The Cooper Review gave this issue some thought, noting that while most members are not currently seeking this comparative data, there is a range of industry stakeholders who are. Their conclusion was that: “It is illogical and misleading for investment returns to be reported to members on anything other than an after-tax basis and after all costs have been deducted.” Industry super funds have long advocated a method called “net benefit to member” (NBTM). It is also called the “bang-for-your-buck” measure. This measure demonstrates the net interest received by a member for every dollar paid in fees over an agreed period (say, five years or longer). Tax is also deducted. The NBTM measure can adopt either standard industry assumptions (for example, those used by ASIC) or assumptions more applicable to the situation of individual members. The NBTM measure could be presented on each member’s statement with a comparison to the median NBTM achieved across the super industry, using modelling provided by the regulator. This comparison would of course be indicative, but alternative modelling (reflecting differences in the size of account balances) would be simple to provide for comparative

purposes. Supported by the publication of APRA league tables in newspapers and online, the NBTM would greatly enhance the ability of members to compare the relative performance of their super fund. This would in turn encourage member engagement. The NBTM measure is more consistent with existing and proposed regulatory requirements than other methods that exclude ongoing assetbased fees. ASIC already requires superannuation trustees to include the amount, frequency and negotiability of fees via a “fees and costs template” in their product disclosure statements (PDSs). Further, the Government’s proposed Future of Financial Advice reforms impose a statutory fiduciary duty on financial planners, which will compel them to recommend only those products that are in the best interests of their clients. If superannuation funds start to report returns gross of administrative and advice fees, it will be much more difficult for professional financial planners to calculate and disclose the dollar impact to clients of switching to an alternative product. The “net benefit to member” method will enable consumers to measure the “bang-for-their-buck” from both their fund and financial planner, increasing competition and ensuring that the best performers are rewarded. To comment on this article go to . David Whiteley is chief executive of Industry Super Network


Comparisons essential





he findings of a new SelfManaged Super Fund Professionals’ Association (SPAA) adviser survey shows SMSF professionals are strongly behind policy measures to raise professional standards and the quality of financial advice. The findings are not a surprise, as SPAA has long been an advocate of high professional advice standards in the SMSF sector. Our survey of more than 300 SMSF professionals, including accountants and financial planners, took place during the recent SPAA Technical Conferences and reflected strong support for SMSF/Australian Artists Association guidelines on ownership of artwork; a restricted licence for accountants who advise on SMSFs; and registration of SMSF auditors by ASIC. The survey findings also confirmed that many SMSF practices have already embraced the proposed new fee-for-service regime (ahead of a Government plan to ban commissions from July 1, 2012) with only 29 per cent of respondents stating that the Future of Finance Advice reforms would represent a significant change to their businesses. SMSF professionals also backed the raising of adviser competency standards through the proposed Future of Financial Advice reforms (93 per cent), while 60 per cent of respondents agreed SMSF auditors should be registered with ASIC. As a best practice measure, 93 per cent of our respondents said fee-forservice should be agreed with the client in advance while 79 per cent said different charging regimes should apply for different types of advice. Interestingly,

more than three-quarters (79 per cent) of respondents said advisers should be able to charge upfront fees from clients’ investment funds with the agreement and direction of the client. However, respondents rejected a model that involved charging all fees on an hourly basis only, with 73 per cent against. Summing up, SMSF professionals want a choice of remuneration methods agreed to by the client in advance. SPAA also supports this model, while opposing embedded fee arrangements. On the Government proposal to remove the current “accountants’ exemption” for advice on establishment of an SMSF, less than half (43 per cent) of our respondents agreed with this; but more than half (56 per cent) did support a restricted licence model favoured by SPAA, which would provide SMSF professionals with clarity around advice for set-up of a SMSF. Only one third (33 per cent) of respondents agreed that financial planners should become registered tax agents to provide incidental tax advice. With more than half the survey responses from financial planners, it’s pretty clear that planners see the tax agent measure as a backward and unnecessary step for their businesses. Most of those surveyed favoured a restricted tax agent registration for financial planners, which would cover their ability to provide incidental tax advice. The Australian Artists Association/SPAA art guidelines were a popular development, with more than 80 per cent of those surveyed believing the guidelines are necessary to ensure members do not derive a personal benefit from the assets of their fund.

These guidelines were designed so that SMSFs could continue to invest in artworks. Only 15 per cent said that the guidelines were too onerous and just under half (47 per cent) of respondents were undecided about the likely impact of the cost of holding artwork and personal use assets in a SMSF. Given SPAA’s view about the need for higher professional standards, SPAA has been an active contributor to the reviews that have affected the SMSF and broader superannuation sector over the past few years. These include the Superannuation System (Cooper) Review and the Future of Financial Advice reforms. Today, SPAA stands ready to work with all parties to provide policy support and solutions. Separately, I have undertaken to write to some of the key new independent members of Parliament. My purpose was to highlight SMSF issues, like the superannuation contribution caps, which may directly affect their constituents.

To comment on this article go to .

Andrea Slattery is chief executive officer of the Self-Managed Super Funds Professionals’ Association of Australia (SPAA)


Support for guidelines


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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.

developments in legislation and regulation, and in staying

With a new, cleaner look, easier navigation and improved

running their businesses, in keeping abreast of changes and on top of the latest industry developments.

grouping of content, Professional Planner Online represents

If you haven’t visited the website before, come and have a

a step forward in how Professional Planner will keep you up

look. If you have visited the site before, come and have a

to date with key industry developments and events. And it’s

look at the new one. We think you’ll like the changes.

simpler than ever before to get involved, to comment on the articles you read, and to respond to the opinions and views of your colleagues and peers. Professional Planner Online will continue to provide you with contributions from some of the industry’s leading thinkers, technical experts and investment management




From little things, big things grow Alan Cockram finds that even a small gesture can take you down a path to the extraordinary, and correct the work/life balance


or years I worked as a sole trader, operating my own business as a financial planner. I put in long hours and built a solid client base; and although I enjoyed the challenge and autonomy of working for myself, it was allconsuming. By the time I reached my 50s, my children were young adults and my involvement with the church and Rotary club kept me busy, but not enough to distract me from the office. In 1995 my wife Judi and I decided to sponsor a child. We chose to send our money to a seven-year-old girl living in Chennai, southern India. Her name is Asha. There is nothing extraordinary about helping out an individual in need, but our decision to visit her sparked a rather remarkable journey. We first met Asha when she and 60 other children appeared at the orphanage where we were staying, to sing us several welcome songs they had been rehearsing. I must admit, I wasn’t able to distinguish her face in the crowd at the time, but when she stepped forward I remember thinking how fragile she seemed, and so shy. She immediately captured our hearts, as did the other children who were so eager to meet us and enjoy our company. These children from impoverished circumstances - some without parents, others simply unwanted, and many whose families couldn’t afford to keep them - were not poor in showing their love and appreciation. On our return to Western Australia, Judi and I resolved to find a way to help other children in need in India, but not just through sponsorship. We eventually joined with two other Christians through the Indian Village Care Ministry (IVCM) in Chennai - Don Williams, who used to be a builder in Broome, and David Turkin, who is a computer wiz and entrepreneur. By

Alan Cockram and children at an orphanage in Andhra Pradesh

adding my skills as a financial planner, we had all the necessary components to start making a real difference. Our first venture working together was an orphanage we now call Eagle Base in Andhra Pradesh, also in southern India. We built it in 2006 and it now houses 30 children, with provision for the care of 13 elderly people. The children, most of whom are sponsored by generous Australians, receive three meals a day, tuition and medical care, provided by a doctor on site, who we employ to look after the children’s health needs and to service the wider rural community. Since the construction of Eagle Base, we have leased a building for an orphanage in Chennai and built a third orphanage in Kadambur, which accommodates 58 boys. We have a fourth orphanage in the pipeline, due to be built sometime this year. I see my contribution as an extension of what

I do as a financial planner. I specialise in planning for retirement, investment, superannuation, wealth creation and general financial planning. What I do in India is plan for the future of these children, who will hopefully benefit and someday be self-sufficient and be able to contribute back to their community as skilled, educated adults. We provide the leaders of the homes with financial advice, help them maintain a budget and step in to resolve money issues when necessary. We publish newsletters and actively encourage other Australians to participate in our projects. Each year I make several trips to India, sometimes taking a small group of visitors, some of whom are sponsors of children. We stay at the orphanages and spend time with the kids, teaching them English and computing skills. It’s always an enjoyable experience. My involvement with the orphanages has grown over the years, and increased to a point where I had to make a crucial decision about



my work here; and so I eventually stopped operating as a sole practitioner and joined AMP financial planning firm KeyPath in Osborne Park in Perth. I negotiated a four-day working week and took the fifth day for my charity work. My employer is very supportive of what I do. I don’t believe it’s just financial planners who can help those in need, but my background has provided me with the ability to see large, challenging projects through to their completion. I take solace in the fact that the work we do in India is sustainable for the long term. I think anyone who has something to give can benefit from donating their time or money to a cause of their interest. I will often advise clients that philanthropy is an important part of estate plan-

Judi Cockram and friends

ning, as there are many benefits to be had. And you never know where one small gift might lead. In March this year, I was invited to attend Asha’s wedding. She had done as I had asked and finished school before finding a husband.

The incentive for doing this was my promise to contribute towards the ceremony and to purchase a colour TV for the newly married couple. She is now expecting her first child, and so I will be a grandfather again.

Alan Cockram is an AMP financial planner at KeyPath Financial Planners in Osborne Park, Western Australia. More information about the work carried out by Alan and his family can be found at

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In, out … shake it all about The Government’s controversial “opt-in” proposals are likely to be a major hurdle, for more reasons than one. Simon Hoyle reports


f all the proposals contained in the Government’s Future of Financial Advice (FoFA) proposals, few have attracted more widespread opposition than the so-called “annual opt-in”. Along with banning commissions and the introduction of an explicit fiduciary duty for planners, the opt-in proposal was one of three key recommendations in the package of reforms released by the former Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen. (It remains to be seen if his successor, Bill Shorten, will pursue the reforms with the same enthusiasm.) The FoFA package unveiled an “adviser charging regime, which retains a range of flexible options for which consumers can pay for advice and includes a requirement for retail clients to agree to the fees and to annually renew (by opting in to) an adviser’s continued services”. The Financial Planning Association of Australia (FPA) has publicly and vocally denounced the opt-in proposals as being unnecessary in a regime where fees must be agreed to by the client, and paid directly by the client to the planner, thus enabling the client to opt-out of an advice relationship at any stage. But research by Tepana Associates has found that “advisers are united in the belief that the regulator and the major industry body have failed to understand the nature of the clientadviser relationship, the success of the current disclosure regime, and the level of comfort that many investors have with commission arrangements in the wake of reforms introduced nearly 10 years ago”. “While regulation is intended to provide better consumer outcomes, advisers believe it will reduce the time they spend with their clients and increase their administrative and compliance

‘The FPA has publicly and vocally denounced the opt-in proposals as being unnecessary’ workload,” says Kathleen Tepana, a consultant for research group Tepana Associates. “A significant number are yet to make plans and are looking to their licensees for assistance in transitioning to fee-for-service arrangements.” But opposition to the opt-in proposal runs deeper than just the effect it may have on the client/planner relationship. “Opt-in is considered a major business disruption, and while it is recognised as a high priority issue for planning businesses, it is one that the majority have yet to address,” Tepana says. The research also finds that the opt-in proposals are thought likely to affect business values; and if they’re introduced in their proposed form, may accelerate the exit plans of a proportion of advisers. “The larger licensees stand to benefit,” Tepana says. “A number of respondents raise concerns over the impact of future business values, with a number indicating an intent to bring forward succession or exit arrangements, while others fear an increasing consolidation of advice businesses. It appears the proposed reforms will most benefit the large institutionally owned licensees

who have large administration and compliance back office support.” Other beneficiaries may be platforms, Tepana says. “Opt-in is likely to drive a migration of clients from legacy products into more modern wrap-based structures that support fee for service,” she says. “However, this will not result in the client paying lower overall fees, but wrap and master trust providers [will increase their margins], further consolidating the nature of relationships between product manufacturer and the advice process.” Overall, Tepana says, there is “a high level of uncertainty over consumer benefits”. “Planners believe that the proposed reforms will not deliver any real benefits to consumers but will transfer business value away from the smaller independent practice, to the larger licensees, and the wrap and master trust sector.” For more details of the Tepana Associates research, go to the Professional Planner website:





hen the chief executive of the Investment and Financial Services Association (IFSA), John Brogden, announced that the association was both changing its name - to the Financial Services Council (FSC) - and radically broadening its policy agenda, it sent a ripple through the financial planning community. Members of the FSC own dealer groups - the FSC calls these groups financial advice networks, or FANs - that employ 80 per cent of all financial planners operating in Australia. It didn’t take too much reflection to realise that if the FSC plans to influence policy on a much wider front, and if the interests of its members and of individual financial planners are not always in perfect alignment, some sort of conflict is bound to arise, sooner or later. How the FSC, the Financial Planning Association of Australia (FPA) and the Association of Financial Advisers (AFA) all co-operate and compete to influence the development and implementation of legislation will be critical. Each organisation has its own perspective on the financial planning industry, viewed through its own prism; and each has its own ideas on how the final rules and regulations should look and work. The final form of the legislation is likely to be shaped over the coming 12 months, and it will undoubtedly be influenced by contributions from the key industry bodies. “There’s no doubt that the next two to three years will be dominated by working in the trenches on FoFA [Future of Financial Advice] and Cooper,” Brogden says. “The broad policy announcements by the Government have been outlined, but the level of detail is very [limited], and we’ve already estab-

lished, between those two reports, 10 working groups which have some 200 people from across our membership working on our responses. “It will take at least the next year before that sees the light of day, in terms of legislation. We’ve been told by Treasury that we’re not likely to see legislation on FoFA until the second half of next year. That’s 12 months from now - and that’s a massive undertaking. “The challenge that we’re finding is that this isn’t an area of expertise for Treasury. I’m not criticising Treasury, but this level of detail in policymaking hasn’t been required of Treasury before. “In the next two to three years, it’s all about being in the trenches with Treasury on the policy detail. “We will be very involved in setting the agenda on FoFA and Cooper.” The FSC is the 600-pound gorilla in this picture, and it obviously plans to use its size and its influence to get the best result for its members. “Our members directly or indirectly control over 80 per cent of the financial planning industry in Australia,” Brogden says. “We’ve got Professional Investment Services, Count and DKN in our membership. We have for the past five years been involved in the adviser space. “But we have no agenda and we have no desire to supplant the role that the FPA plays as a professional accreditation body for planners. They do a great job.” Brogden acknowledges that from time to time the imperatives of FSC members, as fund managers and product manufacturers, may conflict with the personal professional requirements placed on the planners that its members control. “My gut feel is that the only way it will shake out is if [our interests] are aligned,” Brogden says.


“Our members will not allow discrepancies with their individual advisers in an area like professional standards. That’s not meant to sound like one will rule over the other; there will be agreement. There has to be agreement. “We’ve already shown that at an FSC/FPA level by having joint standards. “We have joint standards so there are a handful of standards that apply to both FSC and FPA members. “We’ve worked together on the policy agenda before. We obviously have significantly larger policy resources than the FPA and the AFA combined, but it’s my intention to work together on issues. “It’s about highlighting the similarities, not exposing the differences.” With more than 12,000 members, the FPA is the largest body representing financial planners. It’s the FPA’s members who are at the forefront of unprecedented change, as financial planning seeks to leave behind the ghosts of the past and forge a new direction as a respected and trusted profession. But the FPA itself is not immune from change, and it’s not immune from criticism for how it has striven to shape the debate, influence changes and establish itself as a professional association. The FPA is morphing from a body that protected and promoted the commercial interests of its members to one that sets and polices the professional standards by which its members must conduct themselves. It’s a pivotal development in the industry - but not one that is necessarily understood by all its members. Commercial interests and professional standards are often uneasy bedfellows (as an accountant or an actuary); it’s this friction that has led to a segment of the FPA’s membership



becoming disenchanted. To a significant extent, those members have migrated to the AFA. The chief executive of the AFA, Richard Klipin, says the AFA’s aim is to “inform and educate, not just the industry but [to] go beyond that, go to the regulator, go to government and, increasingly, we see our mandate heading into the world of consumer, which is where the future lies for an association, clearly”. “The world of association is rich and diverse, and it’s often been said there should just be one association that represents the entire industry,” Klipin says. “I think whenever there’s a monopoly you end up a bit like Telstra has ended up - a bit in no-man’s land. You represent everybody and ultimately you represent nobody. “Clearly, at the margins, there are common interests, because there are common members. Within the AFA, half of our board are CFPs. Within the membership it’s probably not 50 per cent - it’s reasonably lower than that. I would have thought 20 to 30 per cent…would be common, I would think, between the associations. That’s my gut feel. “We have more in common than we have as differences. I think that unity piece becomes really important. I think it plays nicely when there’s friction - friction is a good story, generally. Over the last couple of years the differences in particular with the AFA and the FPA have been played up, and now there’s alleged merger talks, and so on. “But I think the pieces in common are far more powerful than the pieces that are different.” Klipin says the FSC is the “big uncle or aunt in the piece”. He says that under former IFSA chief executive Richard Gilbert and former deputy chief executive John O’Shannassy, the AFA and IFSA were “very closely aligned”. “There’s been a very clear changing in leadership of the FSC and, in a sense, a repositioning of their offer and their business,” Klipin says. “I think a) it’s smart, and I think b) it’s good, because I think where we as an industry, whether we’re on the manufacturing side or the advice

Mark Rantall

side, where we’ve failed collectively is [in] communicating and articulating the simple proposition on what we do for the community. “Is there overlap? Do we have common membership? Absolutely. Most of our major partners are members of the FSC; many of our licensee partners are members of the FSC FAN network; the question at the margins is the mandate that the FSC seeks to drive for its adviser- or FAN-driven members. At this point I can only see us continuing to work together constructively because we’re basically all after the same end - which is, get more people in the community with advice and with the products and services that those people bring to market. “That’s our common aim. Where the associations rub up against each other, where friction gets created, really is about some of the policy items or policy agendas; perhaps some of the services, and perhaps some of the positioning that lends itself to grandstanding. “But I think, in the main, it’s about the unity and commonality of the message, rather than playing up the differences.” Klipin says the FoFA changes are a case study of how industry bodies can work together, but also how the differences between them can be exposed. “There is the big FoFA project running

within the three associations at the moment and there is strong co-operation between the FPA, the AFA and the FSC on all of the FoFA working groups,” he says. “And whilst we might all end up in slightly different outcomes, the process has got a lot of commonality and a lot of working together built into it. “The AFA, because it’s the ‘by adviser, for adviser’ piece, what we’ve tried to bring to the table is the common sense, real-world, what’s-actuallyhappening-in-adviser-practices perspective to our policy stuff. “Sometimes that’s not popular - the whole commission debate is a good example of that. Sometimes it’s against conventional thinking and sometimes it’s not popular for some of the thought leaders in our industry; but we’ve been true to what the members are thinking and feeling and what they report is coming out of their relationship with their clients.” But FoFA and earlier changes, like the move by the FPA and FSC to ban commissions on investment and superannuation products, have also shown that not all financial planners think all representative bodies are created equal, nor doing an equally good job. But Klipin says a drift of members to the AFA is less about what the FPA has failed to provide to those advisers than

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“what it is the AFA delivers that its members like”. “We’re a voice by and for the adviser,” Klipin says. “That, in a sense, is a catchcry of what the AFA’s strength is. Its strength since its inception is that it’s very clear about who it represents, and it represents the voice of adviser to the industry, to the Government and the regulator, to the media and to the consumer. “Over the last three years, that voice has been critical, because the industry has been under intense scrutiny, advisers and their reputations and their ethical standing has been seriously called into question by some segments of the community, and advisers feel they need a representative body that’s going to stand up proudly on their behalf and articulate the value that they deliver into the community and into their client bases.” Klipin refuses to criticise the FPA directly for failing to represent planners’ interests. “I’m only articulating what members of the AFA say to me about why they joined the AFA and why they stay members of the AFA,” he says. “What other associations do, Mark will have different sleep-at-night factors; John will have different sleep-at-night factors. “But it all goes to the heart of relevance and value and being clear about why you’re there.” Deen Sanders, the FPA’s deputy chief executive and head of professionalism, says the FPA’s structure and objectives accord with the generally accepted definition of a “professional association”. “The [UK] Financial Services Authority’s retail distribution review clearly identified what it thought were the core requirements of a recognised professional body,” Sanders says. “Those requirements are exactly the same requirements that have been picked up in almost every other piece of legislation for professional recognition, around the planet. So they’re not unique or surprising. “We’re the only group in this entire marketplace that comes close to satisfying them. It’s not something you can award to yourself. You’ve often heard me say in the past that ‘professional’ is not something you can tag yourself with; it’s

‘It all goes to the heart of relevance and value and being clear about why you’re there’ something the community affords you with. In the same way, a professional association can’t automatically call itself a profession unless it has satisfied the objective measures and assessments around that. That’ a vital part of the puzzle that is often overlooked.” Mark Rantall, the FPA’s chief executive, says the AFA is more of “an industry association”. “It’s not unusual for somebody to be a member of more than one association; I’m a CPA and a CFP - I’m a member of two associations - and that’s not a threatening concept in its own right. “It’s just, where are you going to get your professional designation from, and your professional obligation from? And as we sit here today, it’s the FPA.” Sanders adds: “If I were to be slightly kinder to the AFA, you might stretch it and say it’s an association of professionals, as opposed to a professional association. “Those individuals are often members of the FPA. They gather under that banner, but it’s not a professional association. It’s a group that gets together, and their professional obligation, frankly, is to us, only because there’s no prosecution structure.” Sanders acknowledges that there are things the AFA does very well - most notably, giving a forum to those who believe their voice is not being heard. “What the AFA are absolutely about, and do well, is they capture that sense of professional community, in terms of shared ideas and shared dialogue,” Sanders says.

“We recognise the AFA have constructed their environment very well around that particular piece: come and have a conversation with us, we’re with you. That’s part of the community. We have a similar relationship with our members, but we’re not saying come and have a conversation with us, we’re with you; we’re saying come and have a conversation with your professional colleagues and grow - and be challenged by that; be challenged by each other; be challenged by the ideas of the community outside the FPA. “We’re not hiding in a cave, where you can all agree and have a fabulous time agreeing; we’re out in the open air, dialoguing with the community, with government, with media, with the external pressure points on the profession, with the global pressure points on the profession, with the concepts of ethics and professional standards. “All those factors at play do create a sense of some discomfort. And we absolutely acknowledge that the ‘professionalisation’ process can be discomfiting, for people who absolutely do not want to change. “The mistake we’ve made is that this market evolves fast, and the profession has evolved very fast, and arguably faster than we’ve been able to bring all our members along with us at a rate they’re comfortable with.” Rantall says the FPA welcomes a move by the FSC to focus on the financial advisory element of its membership. In particular, the FPA supports any moves to improve the quality and integrity of products manufactured by FSC members. Rantall says that while planners have copped plenty of flack over investor losses, some blame must be borne by the manufacturers of “faulty” products, and the FSC is addressing that. “We would absolutely support a raising of standards and quality in the product manufacturing world. If the ‘tick of quality’ serves that purpose, and there’s substance behind it, why wouldn’t we as an industry, let alone a profession, support it?” Rantall says the FPA works closely with the FSC “and we collaborate, and I think that’s an important thing, particularly around the volume of inquiries that are going on”.


“Where a conflict might arise, we’re very clear about our professional standards, and principle number one out of our code of ethics - which is putting your client’s interest ahead of your own, which also lines up with the fiduciary duty - clearly is designed to deal with any conflict that the financial planner might find themselves placed in the way of. “Regardless of what happens, the client’s interests have to come first.” If quality of product can be addressed by the FSC, and if the quality and professionalism of advisers can be addressed by the organisations that represent individual planners, then it will be a good result for all parties, Sanders says. “IFSA beforehand, and FSC [now]…are bringing to that space some sense of quality and standards,” he says. “In the absence of that there would be some real concerns in the marketplace, just as in the absence of the FPA you’d be a brave soul to be stepping into a financial planning engagement. “We need to be mindful that as organisa-

tions we’ve both evolved with a recognition that ultimately, consumers need the best outcomes. Their way of achieving that is through improved product, improved efficiency at licensee levels that’s absolutely a way; that’s not a professional way. The profession’s way is through client engagement, through professional advice. The two almost mirror [each other, but] at some point, there is possibly a conflict, where the efficiency and price issues or licensee structural issues impact on the obligation to the client. “At that point we entrust our professional members to be subject to their obligations as fiduciaries. “And frankly, I’ve got to say, we have overwhelming noise from them that they do that, and do that regularly. All our research shows us that whilst they have been confronted with conflict, they have resolved and responded to that conflict, not always in favour of their employers or licensees.” Sanders says consumer protection is “best served through a quality profession, and quality


products”. “That’s where the FSC stuff comes in. “Financial planners and clients should be able in legal terms to have good-faith reliance on the products that they are dealing with; that someone else up the chain did their job properly. We think that’s what they bring to it - that’s what the tick is all about. “But let’s not be confused about where they begin and stop. They begin at the issue of FSC membership, and they stop at the issue of FSC products, or members’ products. They cannot quality-tick advice, or quality-tick professional practice, or quality-tick professionals, because they’re not part of that framework. They do reach into those spaces, and want to influence that practice, but they do that from the issue of licensees - quite rightly - wanting to protect their risk and do other things. “There will always be a difference between how a licensee sees the world, and how a professional planner sees the world.”

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BDMs winning new-found respect Once derided as ‘beer-drinking machines’, or ‘brochure delivery men’, since the GFC the role of the business development manager has changed: life has got tougher, but also more rewarding. Nicholas Way reports


ichael Angwin, head of distribution for the research house van Eyk, knows better than most how the world has changed for business development managers (BDMs) post the global financial crisis (GFC). It’s a much tougher investment environment, but, at the same time, a more rewarding one; in volatile markets, good advice is like nuggets of gold. “Between 2003 and 2007, rising markets made investing easy,” Angwin says. “Financial advisers (and their clients) could rely on beta in almost any asset class. Today, these planners have to generate alpha for their clients, often in asset classes where they don’t have much knowledge. “In some regards, today’s investment climate is like 2001-02; they were difficult years for planners after the tech wreck and when retail property was going through the roof; but good planners with the right advice were able to establish their clients in good products for the boom that followed from 2003 to 2007.” For Angwin, who joined van Eyk five years ago as a BDM, it means much more is required of people in this position post the GFC. “It has gone far beyond selling product. In today’s market you have to know everything about the products you are selling, and how they sit in a financial planner’s strategic allocation. “By this I just don’t mean their strategic allocation as it applies to your products; I mean how it applies to all the products across their various portfolios. This means you have to have an intimate knowledge of the planner’s business, and this requires time and effort to build this relationship. “At van Eyk, this task is made easier by the fact our BDMs come armed with the intellectual capital that our research provides. It means we can give planners holistic advice that looks past

Michael Angwin

today’s market noise and gives a three- to fiveyear macro picture of portfolio management. It’s much more than just being about the merits of an individual product.” Gabriel Carey, a BDM at the boutique fund manager Instreet, concurs with Angwin’s view about the importance of understanding the financial planner’s business. “Product knowledge goes way past the product you are selling to understanding where it fits in with the broader investment strategy of an individual practice. Just as important is to know when it doesn’t fit the practice’s investment strategy and being prepared

to say so, even at the cost of a sale.“ In Carey’s opinion, there are four ingredients to being a good BDM: a broad macro view of the economy; a solid understanding of the financial services industry; intimate knowledge of your products; and understanding your competitors’ products. “Financial planners will quickly find you out if you don’t have the product knowledge, and they’ll quickly stop dealing with you if you can’t respond to their questions,” Carey says. “Today, planners are time-poor and don’t have time for BDMs who don’t have a sound knowledge of their products, how it would dovetail into the planner’s business, and the broader economy. Remember, too, that these financial planning practices are now under a significant compliance regime, and this limits the time they have for BDMs.” From a financial planner’s perspective, when a BDM knocks on their door, what do they expect, apart from the obvious - another product coming across their desk? As Angwin and Carey rightly observe, they are time-poor and they don’t want to waste time listening to a BDM extolling the virtues of the latest product devised in the fund manager’s back room - unless there is a better story to accompany the product pitch. Richard McLean, an adviser for the Melbourne-based practice Values Inspired Planning, has seen hundreds of BDMs come through his doors over the years. He says to get the best out of a BDM, it is important for the planner to state what his business is and at what stage of development it is. “To get the most out of them, first tell them about your business, so they completely understand how you operate. Then they can voice their opinion on what you are doing and perhaps



how it can be done better. They may be aware of things that we are not aware of, because they are out there in the market more than we are,” McLean says. That approach resonates with Carey, who believes BDMs should capitalise on their market knowledge to advise individual clients. “We’re in the market every day talking to different advisers, and that gives you the opportunity to get to understand the best elements of those businesses,” he says. “Then, when you are talking with a specific client facing a specific issue, you can draw on this bank of knowledge to help solve this client’s issue. “It’s all about having a genuine interest in the adviser’s business, having a thorough understanding of their operations and what business goals they have set themselves. Then you will appreciate what sort of issues they are facing and hopefully draw from a kitbag of solutions you’ve developed and present some of them to assist them.” How an astute BDM can help a financial planning firm is graphically illustrated by McLean. He cites the example of a BDM from Macquarie Bank who was in tune with his business challenges and was able to form a lasting impression because he understood the business. “It was the guy who looked after our CMT. He saw what we were trying to do with selfmanaged superannuation funds (SMSFs). He said, ‘you guys need to get on a plane and go to Sydney and talk to Richard Barber from Class’, a software provider that would help us with our back office regarding SMSFs. It was one of the best decisions we ever made, and it was because he understood our business. He could tell that we weren’t buying into whatever product he was talking about, and it took a while for that to come out, but in the end he realised we were more preoccupied with the challenges facing our business.” McLean says a good BDM has to approach advisers and planners not with just product, but with expertise as well. “If they can come and ask me what my big-

‘A good BDM has to approach advisers not with just product, but with expertise’ gest challenges in my business are right now and say, ‘hey, do you mind if I come back to you on those’, and go away and do some brainstorming on it, I’d be more interested to listen to them about their products,” he says. “Good BDMs should be able to help with problem solving, just like the guy from Macquarie. “In this way, they form bridges where they can help the business go to a new level by providing ideas and thoughts they have learnt from their industry experience. They may be aware of other strategies and markets that are very successful and perhaps pass that on to you. I don’t think they go about telling you what other advisers are doing, but they can give you a heads-up on what’s successful out there.” Gaining the trust of the planner or adviser is the key to a successful relationship for a BDM, as McLean attests: “BDMs should be open to the way an individual business is run and respond thoughtfully to that,” he says. “Completely understanding our business is important. Most BDMs find it hard to get to that stage where they can win the adviser’s confidence to the point where they open up and share how their business is going with them. If they can reach this stage, then it’s possible both parties can add value to the relationship.” McLean says it takes a special individual to gain that confidence from advisers and wonders why more isn’t done by fund managers to provide BDMs with the requisite “tools” for the job. “If they are just bringing in brochures, we

don’t want to know about it. But if they can see how they can solve a problem, or provide a solution to a challenge we’ve got, that’s what we want to hear about. We don’t want to hear a product flog. We know they are there to sell product - they get pushed by their bosses to produce results - but if they’ve done their homework as a company they should be coming up with products that are attractive anyway. “To resonate with us, the fund managers should provide the products best tailored for the type of approach we take as financial planners. They have to offer products that are appropriate for our clients.” For van Eyk’s Angwin, in today’s markets those products need to be “active, not passive”. “As a firm we’re a strong believer in active management; we argue that investors will have to take active positions to achieve outperformance, as it is quite possible markets will be going sideways for some time. Even if they rise, it will come with a lot of volatility,” he says. “By definition that’s a hard sell right now. Financial planners and, to an even greater extent, their clients, are gun shy. There’s no better evidence of this than the big demand for cash products. So it’s imperative you are a good communicator, that you could sell the positives of an active strategy. As we tell planners, with risk comes opportunity; but your arguments have to be rigorous.” Van Eyk’s experience to date is that many planners are interested in hearing solid arguments for active management; their difficulty is convincing their clients. Angwin says: “If we can help do this then we are playing a positive role in helping their business, as well as their clients. For me this means taking every opportunity to speak to planners’ clients; in my experience planners and their clients appreciate this. I suspect I have given more public talks on investment in the past two years than I did in the previous five.”

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The writing on

the wall John Hewison has seen plenty of change in his industry since 1985. He explains to Simon Hoyle why the latest wave is merely the logical extension of a process that began almost two decades ago


ohn Hewison pauses to find a word to describe the financial planning industry he entered in 1985. Twenty-five years is a long time, but it comes to him: “Cowboyish.” “There was no need to have any formal financial planning-orientated qualifications,” he says. “One applied to the regulator, which was the NCSC [National Companies and Securities Commission] then, for a securities representative’s licence - so everyone was licensed individually - and I got that without any trouble, which surprised, me, and away you went. “It was pretty wild and woolly, insurancedominated, dominated by ex-insurance people. Massive commissions, not much product. There were two rollover products: BT and Wardley. It was learning on the job.” Not being from an insurance background himself - he was a corporate consultant immediately before he set up as a full-time planner Hewison viewed the industry slightly differently

from many of his peers. “The thing that struck me when I first came out of corporate life was I could not understand why we were taking all the risks establishing the marketplace and the relationship, and then handing our client list over to a dealer group and a fund manager. It didn’t make any sense to me,” he says. So right off the bat he resolved to do things differently, and establish a direct and inviolate relationship with his clients. “So one of the advantages of having everything addressed, care of our offices, was that there was no dealer group and there was no fund manager owning our clients’ contact details,” he says. After a few hiccups in the early years - including discovering that a business partner had stolen more than a million dollars from clients - Hewison set up his own business, with his own licence, in 1993. The company employed

three people. Today it has 11 staff supporting six planners. Changing environment

Hewison professes bemusement at some of the anxiety being expressed about the changes sweeping the industry. And he’s unsure why the Financial Planning Association (FPA) seems to cop the brunt of planner anger. “Some of the stuff I’m reading about these days I smile about, because if we go back to the late 80s and into the 90s, when the FPA came into being, there was no education,” he says. “[The FPA have] driven the whole increase in the education standards and developing education programs, and eventually then developing other education institutions into delivering the programs; they’ve driven professional standards; they’re involved at an international level as a leadership group driving international standards; and I just think they’ve done an absolutely sensa-





tional job.” Hewison says the lack of entry qualifications for the industry is a real issue that needs to be addressed. He says, “if the general public really understood the lack of standard required by [RG146], they’d faint”. “It’s just a disgrace,” he says. “And the FPA is pushing that barrow with ASIC, trying to get them to increase the standard. “And I think the standard will naturally get increased. When I did my accounting - when I was a mere boy - you didn’t go to university, you went and got a job and you did it part-time. It’s exactly the same as the evolution of financial planning; and now we’ve got a degree-based entry point, we’re really going to be standing up and [being] counted. And I believe that’s what the general public expect; financial planning is a complex and important professional service, and people need to be properly educated.” Hewison maintains that no one who has worked in planning for any length of time can reasonably claim to be surprised about what’s happening today. “I remember when the Diploma of Financial Planning was first introduced, in 1991 or thereabouts, the writing was on the wall right then and there, and anyone who didn’t see it was just stupid,” he says. “So I did that, I did my diploma; and then I did whatever was required to do to get CFP in those days. In 2000 I started my Master’s and finished that in 2003. We’ve had a degree-based policy here for 10 years - so I figured that if I expected my colleagues to be appropriately qualified, I should be myself. “I’m now doing a Graduate Diploma in tax. “We don’t let a planner see a client, as a planner, until they have an appropriate degree plus the CFP standard. They’re not a planner until they get to that stage. We have a three- to fiveyear mentoring program. They work here under the other planners, and work closely with them while they’re learning.” Since so much of the proposed changes are not only inevitable but predictable, Hewison’s business has been shaped to accommodate, ahead of time, these forces of change.

Name: John Hewison Position: Chief executive officer/senior client adviser - Hewison Private Wealth Years in financial planning/financial services: 25 Qualifications: Master of Financial planning, Diploma of Financial Planning. Certified Financial Planner, Fellow Financial Planning Association of Australia, Fellow Australian Institute of Company Directors, Fellow Australian Institute of Management, Justice of the Peace Relevant industry background and experience: Senior corporate management; Hewison Private Wealth established 1993; director and chairman of the FPA; director FPSB and former member FSCRS adjudication panel; served on FPA committees; remains closely involved in industry issues; invited speaker at international financial services conferences.

What to make, then, of the resistance to change in some quarters? Some planners continue to argue for the status quo, claiming, for example, that provided commissions are disclosed, then they’re OK - and in any case, clients are happy to pay them. Hewison disagrees. “I think it’s a convenient argument. The clients aren’t happy about it,” he says. “You can survey existing clients all day long and they’ll all say yes, that’s fine. But the majority of people do not agree with commissions being paid by product manufacturers, and I think there’s a lack of understanding by consumers. “I believe that if we’re going to call ourselves professional advisers, and be seen as professional advisers, then we need to stand up and have our clients appreciate the value of what we’re providing, and pay us for it.” Hewison, for his part, charges an asset-based fee - a style of fee that is itself the subject of some debate within the industry - for the ongoing service his firm provides to clients. “It’s fully stated, it’s deducted out of the client’s account, they understand what they’re paying, they understand what they’re paying for,

and they understand they’re paying us,” he says. “The financial planner needs to be on the job every day, all the time, continuously. So if there are changes in a client’s circumstances, changes in legislation, jobs that need to be done on their accounts, the planner needs to have the ability to do that. “An ongoing fee - whether it’s a percentage of assets or a flat fee, it doesn’t matter what it is. It’s when the planner is paid by a product provider that it just doesn’t hold up.” Hewison says ongoing fees help to cement the relationship between planner and client, and that clients know only too well they can walk away if the planner underperforms. “We have a very close relationship and we’re accountable - we don’t carry all of the responsibility; we make sure our clients understand it’s a partnership - but we’re accountable to them,” Hewison says. “And if we don’t perform, they’ll sack us.” Which brings the conversation to the issue of the opt-in proposal. Hewison is not a fan, but is resigned to the idea that it might come into force anyway. “It’s a nonsense from our point of view,” he says. “We have a contract with the client, an advisory agreement that they sign. They understand what that’s all about. They understand they can terminate us any time they like and they understand the payments they’re making to us, because it’s coming out of their bank account. If they’ve got an issue they can change the arrangement and go somewhere else. “It’d be inconvenient to us and to the client, but if we had to have a contract renewal every year, then we’d do it. We don’t want to do it, but we’d do it.” The proposed introduction of a fiduciary duty for planners also “makes no difference to us at all”, Hewison says. What it means is that “everything you do has to have the client’s interests first”, he says. “There cannot be any conflict,” he says. “Where we have conflict, we declare it. We’ve had this debate about conflict. We’ve always been of the view that we do not have conflicts.


We do not accept payments or incentives or gifts or things like that; we don’t use much managed product, so we don’t get any benefits out of the products that we recommend. “But I suppose the conflicts arise where, for example, we use a particular online broking platform. It’s price-competitive and efficient, but we’ve contracted with this [provider] to do that. So, if you like, there’s some sort of conflict that it’s convenient for us to use that, [but] there could be a cheaper one. “I don’t think fiduciary duty goes that far, but we put it on our register just in case. It’s not really a conflict. Clients would not see that as a conflict. Everything we do is all about our client. That’s our job - that’s the business.” Strong relationships, ongoing advisory service contracts, and being paid by the client directly for services rendered are all “strengths of the business”. “Our long-term relationships with clients - our extremely close relationships with our clients, because we’re dealing with them on a day-to-day basis - and the fact that we control the revenue stream for our own business, make it more valuable,” Hewison says. Not that valuation is necessarily an issue, given Hewison’s succession plan and the fact that he has “no plans to retire at all”. “I’m enjoying myself,” he says. “It’s good.” “We’ve talked about appointing a CEO or a general manager to replace me, but we’ve come to the point of thinking that this business is pretty simple. It does not have stock and debtors; it’s a matter of the planners forming relationships with clients and servicing them so that we retain them. “The whole emphasis is on long-term relationships. So the planners do the planning and focus on the relationship, and then we have all of the internal administration responsible for doing all the day-to-day administration work. “The business could in the future get complicated enough so it needs a general manager, but right now we don’t believe it does. No need for it. It’s just not a complicated business. “All we do is look after the clients. Simple.” Hewison is a fiercely independent opera-

tor, and he believes this structure helps the firm avoid the worst of the potential conflicts of interest that can arise for planners who work for institutionally-owned dealer groups. “In some ways it’s a shame that the professional advice industry in this country is institutionalised, and in itself there’s a conflict because most of the institutions are product manufacturers in their own right, and there’s got to be a difficulty in juggling what is completely unbiased financial advice, and product manufacturers,” Hewison says.

‘The writing was on the wall right then and there; anyone who didn’t see it was just stupid’ “That’s not meant to be a criticism of the institutional bodies, because I know a lot of them are very dedicated to what they are doing, but I think it’s a problem. “The removal of conflicts is important - commissions and hidden payment arrangements like volume incentives, platform fees and all this stuff. It’s about time we stood up and accounted for what we do. But there’s always been this crossover of incentive payments for one reason or another.” Hewison says it’s not enough for planners to rely on - or, more likely, hide behind - a veneer of disclosure, and then to argue that this discharges their obligation to manage conflicts. As has been said many times before, Storm Financial was big on disclosure. Disclosure didn’t protect clients at all. “We have clients come in here and say, ‘We don’t pay any fees for what’s happening’, and we say, ‘Well, someone’s paying’. And then we dig


into it and they say, ‘Oh that’s where [the costs] are’ - and they realise they’re paying big amounts of money they didn’t know they were paying,” Hewison says. Hewison is an advocate, a self-confessed idealistic one, of a simple and straightforward system of charging clients for what they get. “If a fund manager charges the fee that they need to make a profit, and the dealer group charges their agents the margin they need to make a profit, and the professional adviser charges what they need to do to make a profit, then everyone would be happy,” he says. “Everyone would know what they are paying to whom, for what.” Hewison also believes the industry could clean up its act on an educational front. And he’s a big supporter of the FPA and its push to raise standards. “The next thing, in a perfect world, is to require everyone to be degree-based or equivalent, with some sort of transitional arrangements for people who have been in the industry for a long time; and get really, really serious about becoming a profession and standing up and being counted,” he says. As the industry matures, “the FPA is going to become more of a standards- and practitionerrelated organisation”, Hewison says. He says that since day one, “their main game has been driving professional standards and education standards”. “There’s been principal and practitioner membership, and that’s linked together harmoniously for most of the time, and not so harmoniously at other times. But probably now that the standards have been driven to where they are - and now of course the CFP has been de-linked from principal membership, so you don’t have to be a member of a principal member - there still is a requirement for financial planning practices to be involved. After all, they are administering or supervising the standards of their advisers, so there needs to be a linkage. “The really important role now for the FPA is to be a standards organisation, and that’s where their concentration ought to be, and be able to be seen by Government and consumer groups as being that sort of organisation.”





Meaty strategy Consolidating tax savings and diversifying their portfolio have put two baby-boomers back on track to achieve ambitious retirement targets. Mark Story explains how they did it


ith their faith in financial advice shattered after a former planner unexpectedly went bust, it took a friend’s referral many years later for Brisbane-based butchers, Madge (58) and Frank Oliver (60) to again seek long overdue financial guidance. In May 2008, a few years before they were ready to retire, the Olivers looked to financial adviser John Duncan for a wealth creation strategy that would help their transition from full-time work into a worry-free life of leisure. Having concluded early in their careers

that financial planners weren’t to be trusted, the Olivers spent the next 20-odd years cobbling together an eclectic basket of investments based on the recommendations of friends and acquaintances. And when they first approached Duncan, at face value they appeared relatively well set-up to be self-funded retirees within a few short years. Despite being self-confessed novices in the investment stakes, the Olivers had successfully managed to pay off the family home, held three personal super funds, life insurance bonds, whole-of-life policies and two rental properties. They’d also amassed $390,000, split between

direct equities and term deposits. These were held within a self-managed super fund (SMSF) set up earlier by their accountant as an appropriate tax structure for these assets. “Intuitively we knew we weren’t investing as professionally as we could have been. So it was uncertainty over retirement options and tax strategies that prompted our long overdue call to John Duncan for advice,” says Madge. Rebalancing act

Duncan quickly identified that unless the Olivers tax-effectively rebalanced their assets, their current - albeit ad hoc - investment strategy



would be a costly one. “Had Madge and Frank simply continued what they were doing, it’s a safe bet they would have never delivered on stated financial expectations,” says Duncan. With a four-year window before Frank planned to retire at age 64, Duncan was charged with helping to deliver on key outcomes, including: After-tax income of $100,000, an additional $130,000 to cover myriad travel expenses, new car purchases, and significant renovations to a family residence - plus $35,000 on call for unexpected expenses. Duncan’s best estimates suggested that to deliver this outcome within four years, the Olivers would need to amass around $2 million in assets. “Given that they already had existing capital of $1.65 million, they needed a sound strategy to deliver the shortfall - of around $147,000 annually - over the stated time frame,” says Duncan. “Given the expected returns of their existing assets, this meant that they needed to tip in $32,000 per annum.” Investment consolidation

With much of the Olivers’ expected growth wired to a super strategy, Duncan’s first recommendation was to redeem their existing Colonial insurance bonds and contribute the proceeds to the SMSF as undeducted contributions. This had the net effect of reducing the annual tax on earnings from 30 per cent to less than 15 per cent annually. It also enabled them both to qualify for the Government’s superannuation co-contribution. “Given that the crediting rates were above the 7 per cent annual earning rate required to reach their goal, the Olivers’ ING whole-of-life insurance policies were kept with the intention of converting to endowment policies,” Duncan says. “And to avoid a double-dipping of fees, their three personal super funds were then consolidated within the SMSF they’d set up for their direct equities and cash.” Asset class investing

Funds within the super fund were initially

‘Their current - albeit ad hoc investment strategy would be a costly one’ held in cash before being invested within a diversified portfolio using an “asset class investing”, or index investing, philosophy. According to Duncan, asset class investing should provide superior performance when compared to actively managed funds by avoiding exposure to unrewarded risk, transaction fees and tax costs. Having concluded that they no longer wanted the daily pressure of managing their financial affairs, Duncan also recommended that the Olivers outsource the data management to Macquarie Wrap. “While the Olivers are paying a 0.67 per cent fee for this service, a portion is rebated back as a volume discount,” advises Duncan. Investments were also moved from a direct portfolio to a more diversified approach using the same asset class investing principles. By employing the same diversification strategy, the Olivers’ eclectic basket of shares was also reviewed and certain stocks that no longer matched their investment profile were sold, with the proceeds going into short-term cash. International exposure

Given that their age still suited a healthy appetite for risk, Duncan recommended that the Olivers split their portfolio between 40 per cent defensive stocks and 60 per cent growth stocks. Part of the overdue rebalancing, adds Duncan, meant providing much-needed international exposure, which now comprises 12 per cent of the total portfolio. “By investing around $600 a week at an estimated 7 per cent growth, the Olivers were on

The Planner John Duncan Director/Financial adviser - Unity Partners Brisbane, Queensland

An authorised representative of FYG Planning, Duncan’s qualifications include a Diploma in Financial Planning and a Bachelor of Business majoring in banking, finance and accounting. A financial adviser since the mid 1990s, Duncan has been a CFP for more than 10 years and was admitted to the prestigious Personal Investor magazine “Masterclass”, which showcased the Top 50 financial planners in Australia. Duncan specialises in strategies for pre- and postretirement, wealth accumulation and wealth protection. He co-founded Unity Partners in 2007 following almost a decade as a senior financial planner with Wilson HTM. Advice structure The firm has gravitated towards a fee-forservice model. While commissions are still paid on life and income protection insurance, they’re typically dialled back to zero on all other products. “Our main aim is based on getting clients from A to B with the least amount of risk, and providing market returns after fees,” says Duncan. Clients pay a fee commensurate with the volume and complexity of advice being prepared. In the case of the Olivers, this is currently $4000 annually. History Madge and Frank Oliver made initial contact with Duncan in May 2008 following a referral from a self-employed friend who’d been an ongoing client of Unity Partners for some time. While they’d been using a share broker to buy/ sell shares on their behalf, it was concerns over how to prepare for pending retirement that led the Olivers to seek guidance from a financial adviser. While the Olivers were some years away from retirement, they wanted to know what their options were, and how they would be best structured around the family butchery they’d operated for more than 25 years. Strategy Having written financial planners off as useless, due to a bad experience many years ago, the Olivers needed to have their faith restored before they could proceed on two key elements: 1) Guidance on how to successfully transfer into retirement, and 2) the role that a diversified super strategy - within the right tax structure would play in delivering that outcome.


Financial situation Fee for advice in first year:


Annual fee for advice now: $4000 Net debt: Rental property


Family home: Macgregor


Other investments Rental property - Cleveland Business premises: $450,000 Coorparoo $800,000 Super Self-managed super fund: $530,000 NOTE: Net asset position at start: $1,676,000 (ex family home) Current net asset position: $1,806,000 (ex family home)

target to achieve their financial goals without the additional risk typically associated with a gearing strategy,” Duncan says. “So the degree of risk that the Olivers needed to take was ultimately qualified by the size of their financial gap.” Transition to retirement

As Frank had recently turned 60, Duncan also recommended that he incorporate a transition-to-retirement strategy into the bigger picture. “With Frank now at transition-to-retirement age, I recommended that he salary-sacrifice a large portion of his pay to super and then draw back from super the required amount to fund their lifestyle. Madge will adopt the same strategy when she too reaches age 60,” says Duncan. By moving the other assets into Frank’s SMSF - now in pension phase, since he’d turned age 60 - Duncan says it was possible to deliver an even better tax outcome. Consolidated tax savings in the first year were around $18,000 and Duncan expects similar savings in year two. Even with the turmoil over the past few years, Duncan says the Olivers’ net asset growth is still tracking well against stated goals. “I expect them to have $99,000 in annual

‘It also means they won’t have to sell any assets to maintain their income’ income - predominantly from super - when they plan to retire in June 2012,” says Duncan. “They’re now in a position where they can decide to keep working because they want to, not because they need to.” Integral to the Olivers’ overall transition-toretirement strategy are plans to sell the family home, and move into their rental property at Cleveland - following major renovations. Given that they’ll receive small business tax relief on the sale of their business premises, and avoid capital gains tax (CGT) on both the sale of the family home and future renovation work on the Cleveland property, Duncan say this is a highly tax-effective strategy. Embedded value

As well as valuing his ability to convert “financial speak” into everyday language that a butcher and his wife could understand, the Olivers equally appreciated the time Duncan spent ensuring they fully explored new ideas that were initially foreign to them. After further scrutiny of their planned lifestyle during retirement, Madge says Duncan showed them how they could live on a significantly smaller amount than originally envisaged. “We can do what we like once we’re fully retired, but it amazed me that we’re able to live comfortably on a significantly smaller amount during this transition-to-retirement phase,” says Madge. At the outset, she also admits to not fully understanding the added benefits of a transitionto-retirement strategy - notably its ability to pre-


serve other money from being spent elsewhere. “I’m now more aware of the need to get as much money into super as we can. Had we not been discouraged by a former adviser way back when, we would have done all this years ago,” says Madge. “John’s fees are always a bit of a shock, but we’re significantly better off financially for having brought more insight and structure to the planning process.” Easing pressure

While the Olivers have no immediate plans to stop working, Duncan expects them to start winding the business up within the next two years. When they finally call it quits and shut up shop, Duncan recommends the Olivers retain two years’ income in cash as a buffer against any future downturns. “It also means they won’t have to sell any assets to maintain their income,” says Duncan. With none of their three grown-up children remotely interested in taking over the reins of the meat business, he says a future exit strategy will be less about goodwill and more a question of maximising the sale of the business premises the proceeds of which will go into super. “But the beauty of a transition-to-retirement strategy is that it takes the pressure off selling the business,” says Duncan. “It allows them to finally take time off from the business without worrying about lost income.”

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Disclaimer: Share trading through Core Equity Services is a service provided by Australian Investment Exchange Ltd (“AUSIEX”) ABN 71 076 515 930 AFSL 241400, a Participant of the ASX Group. Core Equity Services is a trademark of the AUSIEX. AUSIEX is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia (“the Bank”) ABN 48 123 123 124 AFSL 234945. The Bank and its subsidiaries do not guarantee the obligations or performance of AUSIEX or the products or services it offers. AUSIEX is not an Authorised Deposit Taking Institution and its obligations do not represent deposits or other liabilities of the Bank. This information has been provided for Australian Financial Services Licence holders only. Please consider the appropriateness of the information provided in the PDS/ T&C’s in regard to your client’s individual needs and circumstances. Products under the Colonial Geared Investments brand are provided by the Bank. CSL0028/PPM/F/L



Planners going for brokers Lisa Pennell delves into the world of direct equity investing and reports on the latest trends and developments in products and services


he global financial crisis (GFC) wrecked more than just portfolio values - it shook consumer trust in the financial services industry overall. When the dust finally settled, many managed fund investors were left scratching their heads, asking why they had trusted and paid for expert advice from fund managers to end up losing out anyway. As part of the ensuing fallout, there’s been a surge in the use of retail online brokers. The number of Australians trading online rose by 50,000 over the past year to a new high of 650,000 in May 2010, according to the Investment Trends First Half 2010 Online Broking Report. And that’s just the beginning - the growth in underlying trader numbers should see future highvolume months set new records for the online brokers. Demand from their clients is thought to be driving a similar behavioural change in financial planners, who are increasingly turning towards direct equity investments for new client funds. Since 2008, advisers have been gradually moving towards direct shares and other including C Slisted L 0 0investments, 2 8 _ PPM _ F_ S1 hybrids, exchange-traded funds


(ETFs), real estate investment trusts (REITs), listed invested companies (LICs) and separately managed accounts (SMAs), but this year in particular, there’s been a dramatically larger shift. Managed funds have clearly been the biggest losers - the June 2010 Planner Direct Equities (& SMA) Report shows that just half of recent inflows were directed to unlisted managed funds, down from 62 per cent the year before. And the trend looks set to continue. Investment Trends say two-thirds of all planners now advise on direct shares and this group expects their allocation to direct equities to rise from the current level of 23 per cent of funds under management, to 34 per cent within the next three years. The move away from managed funds and towards direct listed investments is prompting another shift in the financial services industry - leading planners to look for alternative platforms. The Investment Trends report shows many planners are currently using multiple channels for direct equity transactions, with each planner using on average 1.5 different channels. p d fOf those, P a g 64 e per 1 cent 1 4currently / 0 9 / use an investment platform, 42 per

1 0 , 4 : 4 9 PM Arnie Selvarajah

The Core Trading platform.



Pete Steel

cent use a full-service stockbroker and 32 per cent use an online broker that’s not on a platform. Interestingly, how trades will be facilitated in the future is still not clear, although it does seem likely that most planners intend to trade electronically. When the planners were asked which channel they would prefer to be using for direct equity transactions in three years’ time, 45 per cent said an investment platform, 20 per cent said an online broker (not on a platform), 16 per cent said a full-service broker, 7 per cent said planning software and 6 per cent said they would prefer to use a white label platform. Among the investment platforms, BT Wrap, Macquarie Wrap and Asgard eWrap are the most widely used for share trading, and these are also perceived to have the best direct equities offering. On the other hand, there are no statistics C S L 0 0 2 8 _ P P M_ F _ S 2 currently available on the wholesale


market share of the online brokers. According to Investment Trends, just over half of online Australian retail investors use CommSec as their main broker. E*TRADE, owned by ANZ, has 17 per cent market share, Westpac Online Investing holds 10 per cent and NAB OnLine Trading is at 6 per cent. In what may yet shape up to be the David and Goliath battle of online broking, the biggest mover over the past year was Bell Direct, whose primary share doubled from 2 per cent to 4 per cent, driven by a combination of low price and high client satisfaction. Despite the lack of accurate market share data, anecdotal evidence suggests Commsec’s retail dominance is reflected in the wholesale arena. The acquisition of IWL three years ago gave CommSec significant market share in wholesale broking, leading to the pdf Pa ge 2 1 4 / 0 9 / launch of Core Equity Services in

March 2009. After six years’ experience with the Commonwealth Bank, most recently as Commsec’s CIO, Pete Steel was appointed general manager of Core Equity Services in November 2009. He says that at the time, he saw an opportunity to transform the wholesale online broking services on offer. He also believed no one was providing a good end-to-end solution for advisers whose value proposition had been challenged by the GFC. “We set out to provide a good, viable alternative to existing channels. The difference in the Core Equity Services offering is that it’s built for service, including the capability for data feeds, invoicing and a whole range of tools,” Steel says. “Most importantly, we have great people, a dedicated adviser desk and a world-class website with 1 robust 0 , 4technology. : 4 9 PWe M are able to provide guidance to planners on

‘The real question is, is the platform the hub or is the planning software the hub?’ exactly what to buy and sell via our para-planner portfolio construction service, which helps them look good to their clients. “We have the best research in the market and are focused on creating models that are more acceptable to advisers. The next step will be integrating those models to make them even easier to use as well as bringing out new services to improve the integration of information.” Steel says while we’ve already seen a big flow out of managed funds, he will not be surprised if between 60 and 65 per cent of client inflows are directed to direct listed investments within the next 18 months. “ETFs are going to become even more important for planners as a cost-effective and easy way to diversify their client portfolios,” he says.

Increase your advice offering…


“The challenge as the financial planning industry moves towards a fee-for-service model is for planners to figure out how to provide a good value proposition and attach the right fee structure.” Online broker Bell Direct was first launched in November 2007 and in May 2008, Arnie Selvarajah was appointed CEO. Sporting a resumé that includes executive manager at CommSec and a role at Bankers Trust, where he was directly involved with the development and launch of BT Wrap, he says the aim was to create a new paradigm in online broking with a strong client focus. Selvarajah says the Bell Direct website is easy to use and informative with several unique features, including multi-client trading, which allows a planner to place buy or sell orders for multiple clients at the same time. “Although the orders are placed separately with the ASX, they are placed almost instantaneously. The feature enables a planner to get a number of clients in or out of a particular stock with the press of one button, relieving the pressure of execution,” he says. “The functionality of the site makes it easy to find a client’s portfolio and instantly see any relevant news and announcements relating to that stock, giving the client the confidence [that] their adviser is on top of things. C“In S Lterms 0 0 2 _ PPM _ Fmod_ S3 of 8research and elling, after my previous experience

‘Trading outside a wrap allows the planner to make a variable margin on each trade’


will want their clients to be able to view or access their portfolios directly. “Today, the whole model is in question and it’s important for planners to get a clean business model to begin with,” he says. “Some of the new features available via online brokers could in fact create challenges for planners if they’re not prepared for them.” Selvarajah describes the move towards direct equity investment as a “quantum shift” and says that on top of a general dissatisfaction with managed fund performance post-GFC, investors are tired of seeing any positive returns whittled away by fees. in development of a wrap, I didn’t He says planners are transitionwant to create a closed model. ing from a commercial model based Rather than dictating what the on fees and trail commissions to a planner can do or where they can fee-for-service model, and direct access research and portfolio modequities trading outside a wrap alelling, we are focused on building lows the planner to make a variable links and integration with other margin on each trade. sources of information.” “There’s new consumer resentBell Direct also has the facility ment towards high fees buried in for client trading, either alongside managed funds, and in fact any lack the planner in one account or in of transparency on commissions or separate accounts, which can still be payments,” Selvarajah says. “With consolidated for reporting pura flat fee of $20 per trade on our poses. service, the planner can decide a “We’ve had a great response specific mark-up for each client, or to this feature. It’s a great way for even each trade if they want to. planners to demonstrate value and “The reality is there’s an arms allows for increased transparency,” race going on at the moment in onSelvarajah says. line broking. It’s all about technolSteel says that Core Equity ogy; who will get it out first, who Services expects to add a similar will offer it cheaper.” p d f P a g e 3 1 4 / 0 9 / 1 0 , Steel 4 :says 5 0Core P Equity M functionality by the end of the year, Services but points out that not all planners has a highly competitive rate card,


which calculates a fee based on the bundle of services a planner is using, rather than a flat fee-per-trade pricing structure. He adds that in the current environment, as well as wanting to manage costs, advisers want good integration of information to facilitate performance and tax reporting, leaving them less dependent on wraps. Selvarajah agrees, and says Bell Direct is also working on data feeds for all major planning software options to reduce the workload for planners in consolidating information. Within the world of investment platforms, listed investments are also attracting attention. Macquarie’s head of insurance and platform, Justin Delaney, says he’s seeing increasing demand and increased awareness from planners for direct equities via the Macquarie Wrap. Around 40 per cent of Macquarie Wrap’s holdings are direct equities around double that of its competitors - with the platform currently settling around 35,000 trades a month. Delaney points out that the liquidity of listed investments is also driving their increased popularity after many managed funds were frozen post-GFC. “Investors want to know they can easily access their money, if they want to, when they want to,” he says. Although Macquarie does operate a wholesale online broker arm offering, Delaney says it would be

…to meet your clients’ increasing demands.



“premature” to talk about specifically targeting the online segment at this point. He believes a wrap platform is not in competition with an online broker in any case, as he says the value proposition is completely different. “The wrap offers a full custodial service and so it’s a strong efficiency choice. The benefit of the wrap comes with settlement and planner access to overall information. We contain all the cost-based, income and trading information in one place, reconcile it and audit it,” Delaney says. “Even though interfacing can work, with any sort of feed of information there’s always the chance of missing pieces and at the end of the day, someone still has to perform the reconciliation. “Our research shows a planner can manage 120 clients within the wrap compared to 70 without it, which is a 70 per cent increase in efficiency via the wrap. The wrap enables the planner the time to provide advice to their clients. “It’s a case of horses for courses. If a planner is able to get a client a good deal with another option, go for it. But it doesn’t take long for the value of the wrap to become clear, particularly with any sort of volume or complexity - the administration has got to be done somewhere.” But Steve James, head of adviser trading solutions at Core Equity Services, says although the wrap is “a bigger universe”, many clients C S L 0 0 2 8 _ P P M_ F _ S 4 simply don’t want their shares held

in the name of the custodian. “In today’s environment, a lot of investors want to see their shares held in their own name. And with more and more clients pushing for transparency, the wrap holding fee can be a barrier too,” James says.

our sales reports show the hard truth. The trend towards online broking is definitely growing.” The online brokers say one of the big draw cards for planners using their service is the lower cost, but Delaney says the argument that

Justin Delaney


He says that with Core Equity Services' data feed capability with the major planning software, including Visy Plan and XPlan, the issue of consolidated reporting within a wrap is less relevant. “The real question is, is the platform the hub [of an adviser’s business model] or is the planning software the hub?” he says. pdf Pa ge 4 1 4 / 0 9 / “Whatever the research says,

wraps are more expensive is simply not true. “Planners can choose from 40 different brokers within the wrap to facilitate a trade, so the cost of the trade will be according to whichever broker they choose, and it’s clear and transparent. The other discrete fees involved in the wrap are based on each component in the chain,” 1 0 , 4 : 5 0 PM he says.

With the Core Trading Platform, you can easily trade Australian equities, ETFs and options & warrants, from one convenient platform. It will not just help you meet your clients’ growing demands, but help you grow your business, too. For more, call 1300 360 896 or visit

Delaney says as the Macquarie Wrap model is relatively advanced, the only significant new feature planned is the inclusion of model portfolios, which he expects to be available by the end of the year. “Every adviser has their own way to manage client portfolios. We want to offer options for the adviser while still allowing them to tailor the macro to the individual client,” he says. Selvarajah suggests that rather than planners making a channel choice for direct equity investments based on their own priorities, the key challenge today is to understand what clients are looking for. “It’s a new world and planners need to deliver what their clients want,” he says. “To do that, they need to ask their clients what they want; do they want to be advised? Do they want to place trades themselves? Do they want to review their own portfolio? Will they be using an accountant anyway, meaning reporting might be less important? “In the past three years there’s been more written about financial services than ever before, including the way advisers are renumerated and how fees can be hidden. “The client has changed in what they want and what they know - the average consumer is much better equipped and hungry for value. As an industry, we’re now dealing with a knowledgeable and discerning consumer. “I’d dare anyone at this point to ignore the client.”

Equities Trading Gearing Debt Consolidation Portfolio Administration Tax Reporting Cash Portfolio Construction IPOs & Placements

How to manage growth beyond managed funds. Whether driven by the rise of selfmanaged super, the increasing popularity of ETFs or simply the demand for greater transparency of advice, clients are increasingly questioning the value of managed funds. With our Core Trading Platform (formerly Virtual Broker), you can broaden your offering of advice and provide clients with timely portfolio recommendations. From one convenient platform, you can easily trade Australian equities, options, warrants and ETFs. Helping you not just to meet the requirements of the changing market but giving you an opportunity to grow your own business, too. For more, call 1300 360 896 or visit

Disclaimer: Share trading through Core Equity Services is a service provided by Australian Investment Exchange Ltd (“AUSIEX”) ABN 71 076 515 930 AFSL 241400, a Participant of the ASX Group. Core Equity Services is a trademark of the AUSIEX. AUSIEX is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia (“the Bank”) ABN 48 123 123 124 AFSL 234945. The Bank and its subsidiaries do not guarantee the obligations or performance of AUSIEX or the products or services it offers. AUSIEX is not an Authorised Deposit Taking Institution and its obligations do not represent deposits or other liabilities of the Bank. This information has been provided for Australian Financial Services Licence holders only. Please consider the appropriateness of the information provided in the PDS/ T&C’s in regard to your client’s individual needs and circumstances. Products under the Colonial Geared Investments brand are provided by the Bank. CSL0028/PPM/F/R



What’s over the horizon for the financial advice market? The acceptance that commissions were going to be removed as a form of remuneration for providing financial advice has sometimes been grudging. But Richard Weatherhead says the Ripoll report recommendations were bipartisan and the industry has responded quickly


hen Chris Bowen published the Future of Financial Advice (FoFA) in April this year, the package of Government reforms was not the initiator of change, but it has certainly been the catalyst to formalise this rapid evolution in the market. Since the FoFA release, I have been fortunate to talk to many dealer groups about the implications for their businesses and potential strategies for the next five to ten years. Developments already under way in the market have taken on a momentum of their own and Government policy, whilst important with regard to detailed implementation, is less likely to be the underlying driver of change - market forces have now taken on that role. In this article I discuss some of the themes emerging from discussions with dealer groups over the past few months. They are likely to be prominent in the strategic thinking of advice businesses in the future.

through shared back office, compliance, research and other services are often sufficiently attractive to make many integrations of this kind successful. Some industry observers have seen the seemingly inexorable growth of the institutionally-owned adviser groups and the dwindling number of independents (in ownership terms) as leading to too much concentration of market power and as a threat to genuine choice in the advice market. It would certainly be a poor outcome for consumers if market concentration led to advice becoming homogeneous and the market lacking competition. However, if dealer groups can make the transition to institutional ownership whilst maintaining their unique value proposition with tailored advice and services for their clients, the ultimate ownership of the dealer group is not important. Commissions and fees

Vertical integration

We have already seen a number of independent dealer groups merging into larger wealth management groups - particularly the bankowned advice networks. This clearly provides a strong financial foundation for those businesses, particularly if volume-based platform rebates are banned (see later on this point). Obviously, in mergers of this kind, the cultural fit between the two organisations is vitally important, as is the remuneration structure established for the former business owners going forward. However, the significant savings

The transition from commission to fees for superannuation and investment products is already well under way, with groups such as AMP Financial Planning, NAB Financial Planning and AXA Financial Planning, to mention but three, having now made the transition to a fee-based remuneration structure. A few, such as Godfrey Pembroke, are moving to a fee basis for life insurance too. Two key issues going forward will be: 1. Whether asset-based advice fees continue in their current form or whether market forces (whether or not they result from regulatory

‘The use of SMAs... is likely to increase, particularly for higher-net-worth clients’ change) will drive a shift towards “flat fees” - in other words, fees agreed with the client in dollar terms (albeit subject to indexation), rather than being based on a percentage of funds under advice; and 2. The details of any advice opt-in arrangements that may be imposed upon the industry. Irrespective of any regulatory changes, the market seems likely to move increasingly to flatdollar fee structures over time. Indeed, a similar move for risk insurance also seems inevitable, albeit in the longer term - notwithstanding the concerns expressed by some industry commentators that such a move could exacerbate the under-insurance problem. Some dealer groups appear to be relatively relaxed about a move to flat-dollar fees, regular opt-ins for advice and the removal of commissions in respect of risk insurance. However, these tend to be in situations where advisers have close ongoing relationships with their clients, reinforcing the value they add


through ongoing strategic financial and asset allocation advice, so that their clients are likely to be fully aware of the high levels of service they are receiving in return for the fees they are paying. One outcome of the move to flat fees is that more accountants will move into providing financial advice. The absence of conflicts and the alignment of remuneration with the client’s interests fits well with their existing model. Platform and fund manager rebates

The legitimacy (or otherwise) of platform rebates has perhaps ignited as much passion in the industry as advice opt-in arrangements and commission on risk insurance. Many industry participants have argued that platform fees are merely fees for a service - namely the provision of a platform upon which products such as investments, superannuation and risk insurance are administered. As such, platform rebates would be service fee rebates, unrelated to the provision of financial advice, and could continue in their current form. Others have countered that if this were the case then clients should have the ability to move from one platform (or “service”) to another at no cost. In practice this becomes difficult. For example, in relation to superannuation, when moving from one platform to another in a different superannuation trust, assets must be sold within one trust and repurchased within another, thus crystallising capital gains and possibly resulting in buy/sell costs. A perverse outcome of the

Future of Financial Advice, in its original form, might be that dealers groups establish their own superannuation funds, thus taking on trustee obligations within their own group. This would result in a significant increase in the number of APRA-regulated superannuation funds, increasing compliance costs for the industry as a whole. In some cases this might also be perceived as resulting in a reduction in member security, given the significant financial resources available to the large wealth managers which currently act as trustees for the major retail superannuation funds. A possible outcome in the longer term could be that volumebased rebates continue to be paid to dealer groups (which would require a relaxation of the approach proposed in FoFA) but that individual advisers would continue to be remunerated on a fee-forservice basis, unrelated to business volumes. This would clearly involve some complexity, as it would result in a number of grey areas, such as where advisers or advice practices are rewarded on a basis that reflects the dealer group’s overall profits. Investment advice

The provision of initial and ongoing advice on asset allocation and investment option selection is often seen as one of the key services provided by advisers to their clients. The use of separately managed accounts (within existing retail platforms, through SMSF platforms and using individually directed portfolio services) is likely to increase, particularly for highernet-worth clients. This is a natural progression

from the use of model portfolios, and the capital gains tax advantages can be seen as a quantifiable “value added” for clients as a result of the adviser’s services. Furthermore, regular reporting of the portfolio structure, asset allocation and portfolio investment selections and divestments (for example, under discretionary portfolio services) fits well with a remuneration structure based on fees at regular review dates. Products and services of this kind also serve as a good defence against competitors that offer SMSF platforms with flexibility to “self-direct” investments. Offering equally flexible and comprehensive platforms and products with the additional benefit of professional financial advice can be a winning combination.


Product research and approved product lists

Much has been written about the role of research ratings in some of the recent, high-profile financial collapses, such as Basis Capital and Great Southern. Advisers need access to deeper product research than simply the ratings set by external research houses. Research obviously costs money and this will be one of the many drivers of consolidation within the industry (as discussed above). However, it is also likely to lead to a more restricted approved product list (APL), with a focus on a comprehensive understanding of the relatively smaller number of products on the list, thus reducing the chances of a sub-optimal product being available for consideration by clients.

Contango Capital Partners Limited ASX Code: CCQ

Pre-tax NTA at 31/08/2010 $1.10 • 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 31/08/10: 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

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For further information contact Carol Austin on 02 9251 6490 * 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.



Long Term Forecasts 2010 – 2025 The Australian Economy: Industry issues, trends & long term forecasts Despite a strong phase of investment last decade, Australia’s infrastructure deficit has widened. Labour shortages, weak productivity growth, strong demand and a recovery in property markets will increasingly fuel inflation over the next two to three years. The mining investment boom has been a key driver of the economy’s strong run of growth, but leaves little room for other investment cycles to come through. In the absence of a major setback to growth, capacity constraints are set to remain a perennial problem for the economy. Along with detailed numerical forecasts, Long Term Forecasts 2010 – 2025 provides clear insight into what is happening in the economy, where it is headed and what developments are likely to influence its prospects.

Price: $2,145 for the hardcopy report or $3,300 inc GST for the full online service. Includes an update report in February 2011 and access to our team of economists to discuss the implications of forecasts to business.

Further Information Contact: Kirrily McNamara T: 02 9959 5924 E:


In practice, research provides the core information to an adviser and helps to select the APL. The selection of a product from this list by the adviser will always be done whilst having regard to the client’s needs. Rice Warner has a keen interest in the debate on research ratings as we provide risk insurance product research through COIN Inc and Midwinter Reasonable Basis. In our discussions with advisers who use this software, we have always been at pains to stress that our research provides a sound analysis of the risk insurance products provided by each insurer but that the key determinant of the most appropriate product for an individual client should be the client’s own personal circumstances. Modular services

The provision of holistic financial advice will continue to be the backbone of most dealer groups over the next five years. However, there will be a significant number of clients who will not need or wish to pay for a holistic financial plan. They may have a need for advice on one particular financial issue or strategy and be content to seek advice on that issue alone, albeit that they may be unaware of other needs that may come to light though a holistic advice process. For these clients, modular advice services will be developed, under which advisers and their clients can discuss the range of financial needs and challenges, and the client can then determine whether they need holistic advice or whether they wish to limit the initial advice to an identified area or areas, leaving other areas to be

considered at a later date. Critics of the modular advice approach say that it leads to sub-optimal financial outcomes for clients because not all the required financial arrangements are established after the initial advice is provided. However, it is likely to appeal to clients who would otherwise not seek advice at all or for whom consideration of multiple financial issues simultaneously is too daunting. The modular approach to the provision of financial advice is likely to extend the reach of financial advice services into a broader client base (such as “B” and “C” clients). It is also worth mentioning that superannuation funds (particularly industry and public sector funds) will become strong competitors in this market through the development of intra-fund advice services, particularly if intra-fund advice is extended to include retirement advice (as is proposed with FoFA). There is clearly still a high degree of uncertainty regarding the detailed outcome of regulatory changes affecting the advice industry, but the market is already moving in a number of innovative exciting directions which present significant opportunities for dealer groups and advisers to prosper over the next five years.

Richard Weatherhead is a director of Rice Warner Actuaries



There actually is a silver bullet to solve this problem Robert MC Brown says industry bodies that strive to promote the commercial interests of members are probably not going to win the battle for professional status


sk members to nominate what they believe should be the most important priorities of their professional body. The top of the list will invariably include thought leadership and the protection and promotion of the status of their professional designation. Of course, how members interpret what these priorities mean in practice varies a great deal. A common misconception is that the principal role of a professional body is to protect the commercial interests of its members. When their association acts in a manner that aligns with their commercial interests, members will approvingly refer to that action as their professional body showing leadership; but when they perceive that their association has acted contrary to their commercial interests, that action is likely to be criticised as exhibiting a lack of leadership. Faced with this political minefield, office bearers in many associations soon learn that making no decision at all on controversial questions has its attractions. Alternatively, decisions are sometimes based on compromised principles and the views of the noisiest or most powerful group. In that way, leadership of a kind has been demonstrated and the issue is neutralised. The recent debate about financial planning reform is one area where inaction or acquiescence to the status quo has its attractions. In the case of the accounting profession, the independent standard setting body (Accounting Professional and Ethical Standards Board) has shown considerable courage and leadership by issuing a proposed mandatory ethical standard for the delivery of financial planning services (APES230). The standard builds on the previous voluntary standard (APS12) and reflects the princi-

‘Making no decision at all on controversial questions has its attractions’

ples in the Institute of Chartered Accountants’ thought leadership paper, Reinventing Financial Planning (published in 2007). APES230 (which has been issued as an Exposure Draft) asserts the timeless professional principles of independence, avoidance (not just disclosure) of conflict of interest, and the supremacy of the public interest. As a result, all

forms of percentage-based remuneration, including commissions, asset-based fees, production bonuses and soft dollar benefits, are to cease from July 1, 2011 (or such other date agreed by the Board). All of that will sound eminently reasonable, unless you’re an accountant financial planner with a large book of trailing income that fails to satisfy the new standard. Such a planner might take APES230 as a personal affront to his integrity. He might suggest that his professional body is not showing leadership because it is not supporting his right to earn an income in a manner agreed with his clients. And he may even suggest that the manner in which he earns an income is none of his profession’s business, and that his professional body should not interfere with his career. Whilst understandable, these reactions reveal a misunderstanding of the principal role of a true professional body. That role is to adopt and enforce professional and ethical standards and the sometimes commercially inconvenient



consequences that flow from them (in this case, the removal of remuneration-based conflicts of interest). By so doing, the community will trust accountants to act in the public interest and accordingly will continue to allow the profession the privilege of self-regulation. Contrast this with the wider financial planning industry which faces the prospect of ever increasing legislative regulation due to a lack of community trust in the industry’s participants (whether or not that is a fair conclusion). This point is best illustrated by a simple analogy. Imagine going to your local medical practitioner who tells you that he’s changing the basis of charging fees to his patients. Instead of a flat fee for service per consultation, he says that from now on he will charge a fee calculated by reference to a percentage of the value of the drugs he prescribes. Would you agree to that proposition? After all, the new charging basis is a “fee for service” as understood in the financial planning industry; the fee is disclosed, it’s disclosed in dollars, it can be turned off at any time by the patient, and it’s not a commission paid by a product manufacturer. In addition, the doctor is well qualified, he is licensed to practise by the regulator, he is subject to a government-controlled compliance regime, he attends regular professional development activities and he’s committed to a Professional Code of Conduct and Ethics. Do you trust him to act in your best interests, or would you be suspicious that under his new “fee for service” arrangement, your doctor might be tempted to over-prescribe drugs? The answer is obvious. While you might continue to trust him to a point, you would not do so without doubting his motives and you’d always have an eye on his prescription book. The medical profession would not dare to suggest a “fee for service” like this, but most financial planners are suggesting it. That is, they are proposing to remove commission, replace it with a percentage-based fee, and then misleadingly call the percentage-based fee a “fee for service”. They claim that this will create unambiguous trust. It won’t. Calling it a “fee for

service” won’t make any difference, except that it will fool a few people into believing that planners are acting without a conflict, when they aren’t. Whether you’re a doctor, a lawyer, or an accountant, the fundamental ethical principle is the same. Trying to earn trust while acting with a remuneration-based conflict of interest simply won’t work, even if the conflict is disclosed. It’s not about disclosure of conflicts; it’s about avoidance of them.

‘Whether you’re a doctor, a lawyer, or an accountant, the fundamental ethical principle is the same’ Until the financial planning industry comes to accept that proposition, the industry will continue to suffer legislative regulation, and will never earn the professional trust and status that many of its members deserve. The implementation of APES230 may prove inconvenient for some accountant financial planners because they may have to unravel longstanding commercial relationships. That being so, the accounting bodies have an obligation to offer members a workable implementation process. However, adoption of the standard’s principles will transform financial planning into a trusted, legitimate, mainstream and growing segment of the accounting profession. The income of these financial planning practices will become predictable and sustainable and their value will grow because they will be built on solid commercial and professional foundations, not on the unpredictable movements of the stock market and

the imperatives to sell a product and accumulate funds under management. Unless the financial planning industry as a whole adopts the principles in APES230, the industry will soon fragment into a growing segment, consisting of those who have adopted the highest ethical standards (free of remunerationbased conflicts), and a contracting segment, which will continue to be heavily regulated and treated by much of the public as a product sales force. It’s often said by commentators that “there’s no silver bullet” to reform in the financial planning industry. Actually, there is. Remove remuneration-based conflicts and the industry will soon transform into the profession that it claims it wants to be.

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 Services Consumer Council and a member of the Government’s Financial Literacy Board.

T:200 mm

no.8 At T. Rowe Price, we believe our independence sets us apart. It’s why we’re free to focus on our most important goals – those of our clients. T:267 mm

Australia • Asia • Europe • Middle East • The Americas Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian Financial Services licence (“AFSL”) in respect of the financial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defined by the UK FSA, or as defined in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.

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Are reserves worth the effort? Louise Biti explores how reserves for self-managed super funds are set up, and when they might be useful


eserves can be used by self-managed superannuation funds (SMSFs) to provide flexibility for the distribution of benefits across members of the fund. In so doing, reserves may create taxation advantages or provide strategic opportunities such as: • Inject liquidity through the use of insurance policies to raise the cash to pay out death benefits without needing to sell certain assets; • Allocate contributions (made in June) across two financial years to avoid an excess contribution assessment; • Fund insurance needs without an external insurance policy; • Boost a death benefit payable through anti-detriment provisions; • Transfer wealth across generations and potentially minimise tax on death benefits to adult children. Setting up reserves can add complexity and expense to the fund. So before using reserves it is important to decide the purpose, whether other avenues exist to achieve the same advantage, and the costs or disadvantages. Just because a reserve is possible does not necessarily mean it is a good idea. How reserves are set up

Reserves are unallocated amounts and form part of the fund’s general assets - that is, the money in reserves does not belong to an individual member. Section 115 of the Superannuation Industry Supervision (SIS) Act 1983 allows the trustee of a super fund to maintain reserves unless prohibited under the governing rules of the fund. The Trust Deed does not have to specifically allow or mention the establishment of reserves; rather it just should not prohibit their use. However, it may be prudent to ensure the governing rules of the fund provide directions on:

Louise Biti

1. Allowing the creation of reserves. 2. Enabling the trustee to provide a purpose and rules around a reserve. 3. Policies for allocations to and from a reserve. Benefits cannot be transferred out of a member’s account into a reserve. Reserves need to be built up from insurance proceeds paid to the trustee or from investment earnings. These amounts can be added to a reserve account instead of a member’s account. Example Smart Family SMSF has set an investment crediting rate of 8 per cent for members’ accounts. Earnings above this rate are allocated to a reserve account. Therefore, if the SMSF earns 12 per cent for the year, 8 per cent will be allocated to member accounts and 4 per cent will be allocated to a reserve.

Amounts added to a reserve from investment earnings are still part of the fund’s taxable income and are taxed at 15 per cent. The exception

is for segregated pension reserves used to meet current liabilities, as these earnings are tax-free. Section 52(2)(g) of SIS requires that if reserves exist, the trustee must formulate and give effect to a reserving strategy to cover the prudential management of the reserves. The reserving strategy should be documented and reviewed at least annually. It should consider: • The purpose of reserves and how they will be created. • The investment strategy for the reserves - this can be a separate strategy for each reserve or a strategy to cover all reserves. It is separate to the investment strategy for the member accounts but should be consistent with that strategy. • The amount that is considered appropriate to be held within each reserve. • How allocations will be made from the reserve. The trustees also need to decide whether the assets of the reserves will be segregated or not and maintain appropriate accounting records. Set-up steps 1. Check that reserves are not prohibited under the Trust Deed or governing rules. 2. Develop a reserving strategy for reserves and decide if assets will be segregated. 3. Build reserves using investment earnings or insurance proceeds (contributions can be used temporarily). Accounting records should show the build-up of reserves.

The impact on contribution caps

Amounts allocated from a reserve to a member’s account will be assessed as a concessional contribution against the concessional contribution cap (ITAA97 sec 292-25(3)) unless: • the amount is allocated across all members (or all members in a particular class) in a


fair and reasonable manner; and • the amount allocated in the financial year is less than 5 per cent of the value of the member’s interest in the SMSF at the time of allocation. It is up to the trustee to prove that any allocation is “fair and reasonable”. This could be determined by: • equal allocations to each member, or • proportionate allocations to each member based on account balances or membership period. If the allocation is assessed as a concessional contribution, the whole amount allocated counts against the contribution cap, not just the amount above 5 per cent of the account balance. Two other exceptions apply: • Amounts allocated from reserves to satExample: Scott and Bec set up an SMSF and both became members at the same time. They are both over age 50. Scott has a balance of $400,000 and Bec has a balance of $100,000. Scott receives a $10,000 allocation from a reserve but no allocation is made to Bec. Although this represents less than 5 per cent of Scott’s account balance it may not meet the requirement to be a “fair and reasonable allocation”. If not, it will be deemed to be a concessional contribution and count against Scott’s concessional contribution cap. Assuming his other concessional contributions for the year are $30,000 he will still be under the cap and he will not create an excess contribution.

‘A question has existed over whether allocations can be made to a pension account’ isfy a pension liability (including a commutation) do not count towards any contribution cap. • Non-concessional contributions paid into a contribution reserve will count against the nonconcessional contribution cap when allocated to the relevant member’s account. These contributions need to be allocated within 28 days from the end of the month in which the contribution was made. A question has existed over whether allocations can be made to a pension account or whether they can only be made to accumulation accounts. A National Tax Liaison Group superannuation technical sub-group meeting in September 2009 supports the view that allocations can be made to a pension account. The allocation to a pension account is not deemed to be a contribution or rollover for SIS purposes and so can be added to a pension that has already commenced, but it can count as a contribution against the concessional contribution cap if the amount exceeds 5 per cent of T:200 mm the balance of the member’ s interest and is not allocated in a fair and reasonable manner.


Tips: 1. Limit allocations from reserves to less than 5 per cent of each member’s account if you wish to avoid the potential for an excess contribution. 2. The 5 per cent limit applies to each reserve. So building money across several reserves may help to increase allocations. This should be weighed up against the cost and administrative obligations of maintaining a number of reserves.

If a member has a pension account and an accumulation account, each account is deemed to be a separate interest and the allocation needs to be fair and reasonable across both interests, as well as across the interests of other members. Allocations made to an accumulation account will add to the taxable component. An allocation made to a pension account will be added in the same proportions that already apply to the pension account. Reserves are important as an estate planning tool to shift wealth across generations and provide taxation concessions, but they will add to the expense of the fund and may only add marginal value to some clients. Advisers and trustees need to be aware of the interaction with tax law in relation to allocations and the contribution caps.

Louise Biti is a Director of Strategy Steps, an independent company providing strategy support to financial planners. For more information visit

Australia • Asia • Europe • Middle East • The Americas

no.12 At T. Rowe Price, we believe it’s critical to research investment opportunities from the ground up. Our dedication to hands-on, fundamental research is just one way we seek to avoid unnecessary risks and find true long-term opportunities for our clients. Under here?

Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian Financial Services licence (“AFSL”) in respect of the financial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defined by the UK FSA, or as defined in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.

AS Strip - Australia Research



What you need to know before you start Investor interest in responsible investment (RI) is booming, so how can you integrate RI advice into your practice? Megan Lewis talks to some advisers who know


ffering responsible advice on responsible investing as part of your practice has some definite advantages. According to advisers who’ve elected to set up dedicated RI advice practices, it provides higher levels of job satisfaction and deeper adviser-client relationships. As more investors look for investments that are environmentally and socially sustainable as well as profitable, an RI advice offering can give you a competitive edge. Consider the benefits

“The great benefit of building a business about RI is that it engages clients at the level of their core values - so that it is a much ‘thicker’ relationship than one based on just financial objectives,” says Ethinvest managing director, Trevor Thomas. “For our staff as well as our clients, operating in the RI space has provided additional levels of satisfaction - not just the pleasure from doing something well, but the knowledge that what we are doing has value for our client and beyond them for the society and the natural environment.” Dealer group or independent?

Ethinvest has been operating as an advisory practice offering ethically screened investment portfolios since 1989. As such it was the first specialist RI practice in Australia and has been operating under its own licence since 1989. Thomas says having its own licence means Ethinvest can be “in control of its own recommended list and can move nimbly when required to adjust that list”.

“Ethinvest has always focused on direct equities and having our own licence has facilitated that. It also puts us in control of our marketing strategies and has allowed us to build a good niche brand. It has also allowed us to pursue broader goals, such as shareholder activism, without needing to seek approval from a licensee,” he says. Another specialist RI group, Ethical Investment Advisers, has been operating under its own licence since 2004 and offering RI advice since 2006. According to an adviser with the group, Karen McLeod: “Our founding directors wanted to have an independent licence. This removes any conflict of interest and allows us to recommend the most appropriate investments for our clients.” “When working as part of a larger dealer group I often found that clients with strong ethical values were not catered to on our approved product list (APL). By having our own licence we are able to cater to these investors because we research a much wider range of RI funds. “I also believe that by having our own licence we can act more swiftly than a larger dealer group to add or remove investments from our approved product list.” Other RI advisers are confident they can build their specialisation and stay part of a bigger, mainstream dealer group. Steven Putt, managing director of Viridian Wealth Management, has developed a practice that specialises in RI but has elected to stay under the umbrella of Charter Financial Planning. He’s been offering RI advice for a total of five

‘People who may have initially said that they were not interested have come around’ years - the first six months with another dealer group. “I left there due in part to the inability to offer RI advice, and the reluctance of the management to consider it. I was told at one point to ‘forget that hippy s**t’,” he says. Charter has a range of RI products on its APL, according to Putt, “and they allow us to use products that are not on the APL if they are in the best interest of clients, and have a quality history and research”. Rather than seeking to get additional RI products on the APL, Putt takes a case-bycase approach which gives him an “edge” when researching and deciding what to recommend to RI clients. “We can get one-off approval that is specific to individual clients and specific products. While it means that sometimes we need to go back to the research team, we are consistently having to justify the quality and why a product suits a client. “I think that we are always on our toes and


‘Ultimately you are there to give them advice that suits their objectives and values’ able to make an argument outlining why something is suitable [from] a morals standpoint and also financially.” Private and Priority Financial Planning is part of the BT Financial Group and senior financial planner Colin de la Nougerede says BT has encouraged the process of offering RI investments over the past five years. “As the investment and social environment is changing and investors’ attitudes regarding ethical, environmental and moral issues are becoming more aware, having the avenue to provide investment opportunities to cater for this change while meeting investors’ needs for wealth creating is important,” he says. Who do you talk to?

Trina Wood, from Green Associates (within the Axa dealer group) says it’s worth asking all new clients about their interest in RI portfolios. “The trick is finding how ‘green’ they are. Some clients want to add an RI fund to their ordinary portfolio while others want to invest

solely in RI funds,” she says. Putt concurs it’s worth talking to all clients about RI. “We have found that people who may have initially said that they were not interested have ‘come around’ as time went by. It is still not unusual to come across people who say, ‘I didn’t realise you could do that’, in regard to investing in line with your values.” Putt has found, however, that despite a greater “greenness” in society, that apathy can sometimes prevail. “We saw recently that 12 per cent or so of the population are happy to vote green, but only a small fraction of money invested is ‘green’.” Tips from the frontline

Thomas says he wishes someone had told him back in 1989 that “we were five or 10 years early”. Wood says she wishes someone had given them a secret formula for marketing their RI offering, particularly to existing clients. McLeod says the most important tip she could give to someone starting out in RI is to “really listen to what’s important to your clients”. “Ultimately you are there to give them advice that suits their objectives and values,” she says. “If your dealer group won’t allow you to recommend the product which best suits your client, be upfront with your client and tell them. Make sure you give your dealer group any feedback from both you and the client.” Putt’s tip is to “expect the unexpected”. “People you think would be really interested T:200 mm in ethical and responsible investment, who just are not, and people that would not appear to be,


who are,” he says. The upside

Irrespective of whether they have an independent licence, or offer RI under the banner of a larger dealer group, all the specialist advisers report healthy growth from their RI client base. Ethinvest has 60 per cent of its business in RI. Putt reports 20 per cent of his business is RI “and growing”. Private and Priority currently has between 5 to 10 per cent, “but we hope to increase this with more awareness”, de la Nougerede says. Wood, from Green Associates, which only started to build specific RI portfolios for its clients last year, says RI currently represents a very small percentage of their business. “However, we are looking to grow and develop marketing strategies around our RI portfolios,” she says. McLeod says 30 to 40 per cent of her total client base receives RI-related advice but “this is growing each year, as 90 per cent of my new business is RI-related”.

Megan Lewis is marketing and communications director at the Responsible Investment Association of Australia (RIAA)

Australia • Asia • Europe • Middle East • The Americas

no.15 At T. Rowe Price, we believe teamwork is essential. With a collaborative team of over 350 investment professionals* around the globe, our best ideas are shared across countries, sectors, and asset classes, for the benefit of all of our clients.

Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian Financial Services licence (“AFSL”) in respect of the financial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defined by the UK FSA, or as defined in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International, Inc., T. Rowe Price Global Investment Services Limited and T. Rowe Price (Canada), Inc. *As of 30 June, 2010.

AS Strip - Australia Teamwork

RDV. Higher Dividends ReDefined. The Russell High Dividend Australian Shares ETF (RDV) reDefines the way investors access Australian blue chip shares and franked dividends.

ReDefined by: diversification across 50 blue chip stocks the liquidity and transparency of an ETF a tax effective investment a new index tailor made to meet the needs of Australian investors Russell, world leaders in index design and portfolio construction.

It’s time to ReDefine Dividends. Learn more about RDV, visit or email The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market average, however high dividends cannot be guaranteed. Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. Any potential investor should consider the latest Product Disclosure Statement (PDS) for the Russell High Dividend Australian Shares ETF (RDV) in deciding whether to acquire, or to continue to hold, units in RDV. Only persons who have been authorised as trading participants under the Australian Securities Exchange (ASX) Market Rules can apply for units in RDV through the latest PDS. Investors who are not Authorised Participants looking to acquire units in RDV cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or financial adviser.



A new phase begins in ETF growth Growing confidence in the ETF sector is leading to a new round of product innovation. But as Simon Hoyle reports, there are still some misunderstandings about how these investment vehicles work


he first phase of the development of the exchangetraded fund (ETF) market in Australia is drawing to a close. While still small compared to other types of managed investments, ETFs are clearly here to stay, and will build on their toehold in the years ahead. The financial planning industry’s early adopters have moved, and there is close to $4 billion invested in the products. Now, ETF providers are starting to think about how to tailor the basic ETF structure to meet the growing demand from investors and advisers. In May this year, Russell launched the Russell High Dividend Australian Shares ETF. What sets this ETF apart from many of the others is that it was created to meet the specific demands of selfmanaged super funds (SMSFs), identified in extensive research carried out by Russell. That research found SMSFs wanted five things from an investment: income; a high level of franking credits; capital growth; diversification; and capital protection. Amanda Skelly, Russell’s director of ETF product development, says the company thought

it could satisfy four of those five requirements. In response, it commissioned Russell’s in-house index team to custom-build an index - the Russell Australia High Dividend Index - and then it built the ETF to track the index. Skelly says the index comprises 50 stocks taken from the 100 largest companies listed on the ASX. This ensures that the ETF tracks an index made up of very liquid securities - a critical element in how an ETF is structured and in its efficient operation. Exactly where liquidity exists in the ETF market is an issue that is still often misunderstood. Liquidity in an ETF exists at two levels: market liquidity, where shares in ETFs are traded between investors like any other shares; but a second layer exists where market makers and authorised participants operate to ensure an orderly market. This “dual-layer” liquidity profile is what helps set ETFs apart from unlisted managed funds and listed investment companies (LICs). Andrew Baker, managing partner of Tria Investment Partners, says an ETF is “different to both a managed fund and a LIC - so let’s look at it in those terms”.

Amanda Skelly

“It has the same fundamental structure as a managed fund: it’s a trust, it has a constitution, it has an RE [responsible entity], it’s open-ended, and trades at NAV [net asset value]. So in that sense it looks like a managed fund. But as we know, it’s listed on the stock exchange, it trades all day - instead of at a single price at the end of the day - and it’s liquid. “A LIC is a company, not a trust, so it’s taxed at the company

tax rate; it’s closed-ended and that means that the price is determined on the day by the number of buyers and sellers. There’s kind of a reference to NAV, but it’s indirect. It can trade at a premium - so AFIC and Argo tend to trade at a little bit of a premium - but most of them tend to trade at discounts, and those can be very deep. If you look at something like a Contango Microcap, 40 per cent discount. “And that’s the problem. There’s

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no certainty about what that number is going to be when you need to exit. That’s been a real problem; there’s been a lot of capital raised in LICs over the years, and there’s been an unfortunate tendency for these things to go straight to a deep discount, and they stay there, and we’re all trying to work out how we solve that, and it hasn’t been a great investor experience.” Baker says ETFs resolve a number of issues related to both unlisted managed fund and LIC structures. He says they are far more accessible and far more flexible in certain ways, and they overcome the premium/discount issue of LICs. One of the big questions often raised about ETFs is why they

trade so consistently at NAV, Baker says. “You’d be amazed - we get very long-experienced people at very senior levels in the industry who do not understand why these things trade at NAV,” he says. “It’s because the way money moves in and out of these is very different [to managed funds and LICs]. “There’s two ways of buying an ETF unit. If you’re a small investor, you log in to your CommSec account and you buy and trade it like any other stock. Exactly like a BHP share. You look on the screen, there’s buyers and sellers stacked up on either side, you put in your order and off you go. “If, however, you’re an institu-

It’s time to reDefine Dividends. The Russell High Dividend Australian Shares ETF (RDV) reDefines the way investors access Australian blue chip shares and franked dividends.

tion, with a big order, you don’t do it that way. Say you want to buy $100 million worth of an ASX 50 ETF, for example, you’ll call up your broker, and they will call up a market maker, who is an authorised participant, and say they want to buy $100 million. And what they do as a first step is go out into the market and buy $100 million of the stocks that make up the ASX 50, in those exact proportions. It sounds complicated, but for big instos it’s a no-brainer; they do it in two seconds. “So as a first step they’ve got $100 million of all the stocks in the ASX 50. Then they go to the ETF and say, OK, I want $100 million of the units; here’s $100 million of your portfolio. So it’s like an in

specie transfer at that point. “And that’s how new units are created. It’s completely different from your unlisted managed fund, where you write out a cheque, it goes in at the end of the day, at that day’s price, it gets processed in a few days, money kind of leaks into the trust and the manager decides whether to invest it or not. “That’s kind of critical, because that ultimately explains why these things [ETFs] trade at NAV, because exactly the same works in reverse. If I want to get out of this thing - I want to sell my $100 million - I can present those units, and I can obtain $100 million worth of stock, at NTA. The critical thing is you have direct access to the NTA, to the assets.





Robyn Laidlaw

“As soon as a price starts to deviate on the market from the NTA, there’s an arbitrage opportunity. If it starts to drift away, the professional market makers can go in and buy up all those units, present it to the ETF, and get the underlying stock at NTA. That’s why it works. “As simple as the concept is, you’ve got direct access to the assets of the ETF. As long as you’ve got that, this thing has to trade around NTA.” Robyn Laidlaw, ETF product manager for Vanguard, says the job of a market maker is “exactly what the name says: to make a market and to provide liquidity”. Liquidity is a very important element in enabling ETFs to trade closely to NTA, and in keeping the bid/offer

spread as narrow as possible. “Investors and advisers need to think about two levels of liquidity with ETFs,” Laidlaw says. “There’s a level of liquidity in relation to the volume that’s being traded, but in an ETF the real level of liquidity is the liquidity of the fund in which you’re investing. “The authorised participants are in the market, competing on price. So that provides some competitive tension in the marketplace around how it’s priced. If the market price moves out of line with the NAV, those authorised participants can go in and create new units.” Laidlaw says the liquidity of the ETF itself is related to the index it tracks. The more liquid the securities that make up the index, the

easier it is for the market maker to do its job. “ETF units are created by the exchange of the stocks in the fund, with the same value of ETF shares going back out to the marketplace,” Laidlaw says. “The ability of the market maker to deliver those shares to Vanguard also supports the liquidity of the product. “So there’s two layers. Advisers should remember there’s this other layer. “Liquidity is important, because it’s the ease with which investors can get into or out of an investment.” Laidlaw says that with any investment product, “advisers ultimately want to know, can my clients

get into and out of this product?”. “During the GFC, things we thought we could get into and out of easily, that wasn’t the case.” But even international ETFs listed on the ASX tend to be “very big funds” that track highly-liquid indexes. Baker says a key challenge for any ETF provider is to make sure the bid/offer spread remains tight. In the early stages of ETF development, spreads tended to widen, and that meant buyers were sometimes paying above NTA to get into the ETFs, and receiving less than NTA when they sold - the very shortcoming of the LIC structure that ETFs were meant to overcome. He says there are a number of factors that influence the spread. One is the nature of the assets the

diversification across 50 blue chip stocks the liquidity and transparency of an ETF access to income and growth a tax efficient investment a new index tailor made to meet the needs of Australian investors. Visit



Andrew Baker

ETF invests in, and that’s determined by the index that the ETF is built to track. Russell’s Skelly says that ETFs that track indexes comprised of large, liquid securities tend to have relatively narrow spreads. ETFs that track indexes made up of less liquid securities (including equities in emerging markets) tend to have wider spreads. “The more liquid, the better [narrower] the spread, generally,” she says. “People are concerned about, can I get my money out if I need to? It is [dependant] on the underlying liquidity. The second question is: Do I get the price I want?” Baker says spreads are also affected by whether the ETF that an investor buys invests in the market of their home country. “One of the big challenges has been for crosslisted ETFs,” Baker says. “That’s where the ETF is domiciled somewhere else, and it’s cross-listed here. The assets are being managed somewhere else, in a different time zone - that’s the important part. “One of the challenges that iShares experienced, in particular, [was that] its ETFs were foreign ETFs and during our trading day most

of those are closed. Therefore the market makers have a bit of a risk because if people are buying and selling markets during our day, they [the market makers] can’t actually move on that until the next trading day opens. “That means they are not going to run as tight a spread as they would for a locally-managed ETF. Certainly in the early days there were some real issues around the spreads in those iShares ETFs.”

‘There’s not a massive profit margin in these things; you need massive scale’ Laidlaw says Australian-listed ETFs that invest in offshore markets will always have greater pressure on their spreads. “For some of the international ETFs - which are trading during Australian hours, but investing in the US market, for example - what we’re seeing there is there’s less ability to know with such certainty what they’re worth, because the US market is shut,” Laidlaw says. Futures markets give authorised participants and market makers some idea of what the US market is likely to do when it next opens, but it can never be completely accurate. “Whenever anyone is making a market and taking a risk, that’s got to be reflected in the spread,” Laidlaw says. There are three main ETF players in the

local market, and they are likely to remain the dominant players for the foreseeable future. There are also smaller players in the market - notably ETF Securities, which offers a gold-based ETF and has found some investor support. The big barrier to entry is scale. Baker says that in all developed markets where ETFs are offered, there are three to five successful players, and in most markets the top three generally control about 70 per cent of the ETF assets. Baker says the average gross fee on an ETF is 35 basis points. Laidlaw says the fee on the Vanguard US Total Market Shares Index ETF is 7 basis points. Competition between ETF providers does not necessarily lead to innovation in fund management styles or techniques; ETFs passively track market indexes and so the result of competition is usually lower prices for consumers. “There’s not a massive profit margin in these things; you need massive scale - you need billions; lots of zeroes,” Baker says. The sheer volume of funds needed to run an ETF profitably means they will remain in the realm of major institutions, and it’s extremely unlikely that some of the things commonly done by dealer groups to capture some of the margin associated with managed funds will succeed in the ETF space. “It’s just too big a scale game,” Baker says. “Even things like white labelling and jointventuring look pretty tough. The skills are very different as well. It’s not worth dealing over revenue shares if the revenue pie is only 25 to 30 basis points to begin with.”

RDV. Access a diversified Dividend strategy in a single trade. The Russell High Dividend Australian Shares ETF (RDV) reDefines the way investors access Australian blue chip shares and franked dividends.


D D RDV. A new, smart choice for SMSFs. The Russell High Dividend Australian Shares ETF (RDV) reDefines the way investors access Australian blue chip shares and franked dividends.

RDV = diversification across 50 blue chip stocks the liquidity and transparency of an ETF access to income and growth a tax efficient investment a new index tailor made to meet the needs of Australian investors.

It’s time to ReDefine Dividends. Learn more about RDV, visit or email The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market average, however high dividends cannot be guaranteed. Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. Any potential investor should consider the latest Product Disclosure Statement (PDS) for the Russell High Dividend Australian Shares ETF (RDV) in deciding whether to acquire, or to continue to hold, units in RDV. Only persons who have been authorised as trading participants under the Australian Securities Exchange (ASX) Market Rules can apply for units in RDV through the latest PDS. Investors who are not Authorised Participants looking to acquire units in RDV cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or financial adviser.



A refresher course on selfmanaged super fund pensions In the second in a series of articles, Tony Negline examines rolling over and refreshing pensions


ensions, and the various different transactions which can occur with them, always present problems for superannuation fund administrators. This is particularly the case with self-managed super funds. (In drafting this article I have relied on a paper written by my colleague, Michael Hallinan, senior counsel at Townsends Business and Corporate Lawyers.) Before we delve into the specific issues that apply to these transactions, there are a couple of points common to both rolling over a pension and refreshing a pension. Rolling over or refreshing some part of a pension’s account balance to another super fund will affect future pension income payments. Obviously if all of a pension’s account balance is rolled over or refreshed then all future income payments from the original pension will cease. Before a pension’s account balance can be rolled over or refreshed, the super fund’s trustee must make sure that the pro-rata minimum pension has been paid. The account balance transferred cannot be used to satisfy this minimum income payment rule. From the financial services law point of view, the amount rolled over is deemed to be similar to the purchase of a financial product. This means that if a licensed financial adviser has recommended the rolling over or refreshing of the pension, then they should issue a Statement of Advice and detail why rolling over or refreshing a pension is an appropriate course of action, as well as all the costs involved in the transaction. Depending upon the relationships involved, some financial advisers might be able to rely on replacement product advice rules. Typically these

‘It’s important to understand how the tax-free component of the new pension will be calculated’ rules reduce the amount of material that has to be disclosed again to an investor. Rolling over pensions

The purpose of this transaction is to change pension providers, merge two or more pensions or to alter the features of a pension. Most pensions commenced in the past ten years can be rolled over to a new super fund, including Transition to Retirement (TtR) pensions. It’s important to make sure the rules of a super fund and the pension itself allow it to be stopped. Once the lump sum has been transferred, some people recalculate the annual required minimum pension payment. Ordinarily this minimum pension amount is worked out each July 1. The super laws, however, don’t allow the minimum pension to be recalculated. The amount rolled over will not be a contribution for super law purposes. This means that the super law contribution rules (especially relevant for those aged at least 65) do not need to be satisfied. The lump sum’s

preservation status however will remain unchanged. This means any preserved benefit used to pay a TtR pension will remain a preserved benefit. Some super commentators argue that before a pension’s account balance is rolled over to a new super fund, its account balance is technically moved from the 0 per cent pension phase and into the 15 per cent accumulation phase. This means that if the existing super fund has to sell any assets before paying the new super fund the rolled-over account balance, capital gains tax (CGT) might be payable on any gains. Super fund trustees should proceed carefully on this point and might want to consider getting a Tax Office private binding ruling to ensure that there are no nasty surprises. If CGT is payable, then the super fund should deduct this from the lump sum before it is rolled over. The originating super fund must tell the new super fund the “taxable” and “tax-free” components. Any untaxed element in the rolled-over value will be taxed in the receiving super fund. These untaxed elements typically arise from public sector and government employee pension schemes. In most cases, rolling over a pension to another super fund will involve the new super fund issuing a financial product. This means that the new super fund will need to receive an eligible application form from the new member and must also issue a Product Disclosure Statement. A nine-step process is used to implement this transaction in the originating super fund: 1. Member requests rollover or notifies that


Refreshing a pension

Tony Negline

they have the right under the terms of their superannuation pension; 2. The trustee confirms entitlement to rollover the pension; 3. The trustee issues a Pre-payment Statement - a specific ATO issued document 4. The Pre-payment Statement is completed and signed by the super fund member and returned to the trustee; 5. If required, the trustee works out what the pro-rata minimum pension payment should be just before the amount is rolled over; 6. The trustee sells/transfers assets to effect the rollover; 7. The trustee adjusts the original pension’s account balance; If required, the trustee issues relevant exit information to the member; 8. For SMSFs, if the member has left, then this will trigger a change in trustees. 9. In most cases the member must resign as a trustee and the ATO must be notified of this change in trustees. For individual trustees this would trigger changes in asset ownership.

Refreshing means rolling back one or more pensions and then commencing a new pension. Before the new pension starts the old pension money might also be merged with non-pension or accumulation assets in the super fund for the same member. There are three reasons to contemplate these transactions: injecting new capital into a pension; reducing the tax applying to the accumulation assets; and avoiding the additional costs of running two or more pensions. Most pensions commenced in the past ten years can be refreshed, including TtR pensions. It’s important to make sure the rules of a super fund and the pension itself allow it to be stopped. The amount transferred back to the accumulation phase will not be a contribution for super law purposes. This means that the super law contribution rules (especially relevant for those aged at least 65) do not need to be satisfied. Its preservation status however will remain unchanged. This means any preserved benefit used to pay a Transition to Retirement pension will remain a preserved benefit. It’s important to understand how the tax-free component of the new pension will be calculated. If the member doesn’t have an accumulation interest in the super fund then it would appear that the tax-free component of the new pension will be the original tax-free component of each rolled-back pension. If the member does have an accumulation interest in the super fund then the rolled-back pension account balance and the accumulation interest will form a single accumulation interest in the fund. The tax-free percentage of each income payment will therefore be based on the tax-free component of this single accumulation interest. If a super fund has used asset segregation,

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then the super fund’s financial accounts will need to accurately show the movement of assets between the pension and non-pension segments. A large number of assets can make this process quite messy. The new pension will involve the super fund issuing a financial product. This means that the super fund will need to receive an eligible application form from the new member and in most cases must also issue a Product Disclosure Statement. An eight-step process is used to implement refreshing pension assets: 1. Member requests commutation of existing pension(s) and commencement of new pension; 2. The trustee confirms entitlement to perform these transactions and election of member to take a lump sum payment out of the fund and not additional pension payments; 3. If required, the trustee works out what the pro-rata minimum pension payment should be just before the original pension is commuted; 4. The trustee commences the new pension; 5. The trustee determines new pension’s taxfree component and pension limits; 6. The trustee issues the pension documentation; 7. If required the trustee re-segregates pension assets; 8. The trustee closes out the existing pension account, opens new pension account and adjusts the member’s accumulation interest.



Related parties lending to SMSFs SMSF trustees should take care when borrowing money from related parties, says Bryce Figot


ore and more self-managed superannuation fund (SMSF) trustees are engaging in limited recourse borrowing arrangements (formerly called “instalment warrant” borrowings). Many SMSF trustees borrow from banks, but a sizeable number borrow from related parties. Related parties lending to SMSF trustees can be a very powerful strategy. However, it creates more potential for contravening various laws. This article provides guidance on how to ensure a related party borrowing arrangement fully complies with the key element of keeping the arrangement at arm’s length. Why bother?

The first question is: Why bother borrowing from a related party? Why not just borrow directly from a bank? There are several key reasons. The first is, it increases the wealth of the family group. Consider the following case study. Case study

Jack and Jill have $350,000 cash in their SMSF. The SMSF trustee wants to borrow $650,000 to acquire a $1 million property. Banks are offering to lend to the SMSF trustee at 7.5 per cent per annum. Jack and Jill own their own home. Banks are willing to lend to Jack and Jill at 6.5 per cent per annum. Accordingly, they are considering two different options: Option 1 - the SMSF trustee borrows the $650,000 directly from a bank at 7.5 per cent per annum. Option 2 - Jack and Jill personally borrow the $650,000 from a bank at 6.5 per cent per annum

Bryce Figot

(using their home as security) and then Jack and Jill on-lend that money to the SMSF trustee at 7.5 per cent. Make the following assumptions: • Jack and Jill are each on a personal marginal tax rate of 30 per cent; • Jack and Jill each receive $25,000 of concessional contributions into the SMSF each year; • the property increases in value by

7 per cent each year; • the property yields a rent of 3 per cent each year; • all loans are interest-only; and • in option 2, Jack and Jill would use the interest received from the SMSF to pay the bank. The table below shows Jack and Jill’s position after 10 years. Accordingly, by engaging in a related party lending strategy, Jack and Jill have increased their wealth by almost $50,000 over 10 years. This $50,000 is from the fact that the “SMSF loan premium” of 1 per cent has stayed in Jack and Jill’s family group. Naturally, the SMSF itself is indifferent to where the money comes from - this is of course because the related party borrowings are at arm’s length. It is important to note that the interest that the fund pays to Jack and Jill will be included in their personal income tax returns. However, generally speaking, the interest expense on the loan from the bank should be deductible to Jack and Jill. Accordingly, Jack and Jill do not receive any tax benefit - in fact, Jack and Jill personally pay more tax under option 2, but this is a happy result of Jack and Jill receiving more net income. OPTION 1


Net wealth in SMSF



Net personal wealth (excluding value of home)






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Another key reason for opting for a related party is administrative efficiency. Due to the bureaucracy of large SMSF lenders, even if everything is completely in order it can still take many weeks before a property can settle. Some SMSF trustees do not have the luxury of time; related party loans can be implemented in a fraction of the time (especially where the related party is already cashed up and does not itself need to borrow from a bank). What does the ATO say?

The Australian Taxation Office (ATO) acknowledges that it is allowable for related parties to lend to SMSF trustees. They make the following (non-binding) comments:

strategy can be allowable, but care must be taken to cross the “t”s and dot the “i”s. The test of arm’s length

It is vital that the terms of the loan be at arm’s length. From a superannuation law point of view, something is at arm’s length if a prudent person, acting with due regard to his or her own commercial interests, would have done it. It is vital to bear this test in mind when selecting a loan-to-value ratio (LVR) and the interest rate. It is also vital to ask how you would prove that this test has been met if audited by the ATO. The best proof is a written offer from a bank to lend to the SMSF trustee on the same terms (that is, documented evidence that you have benchmarked against what a bank would offer).

Is an SMSF allowed to borrow from a related party?

The law does not prohibit the lender from being a related party. However, SMSFs must continue to comply with other legislative requirements. For example, the SMSF must satisfy the sole purpose test and comply with existing investment restrictions, such as those applying to in-house assets and prohibitions on acquiring certain assets from a related party of the fund. On-lending to an SMSF

Can a related party borrow on a full recourse basis and on-lend the money to the SMSF under a limited recourse borrowing arrangement at a higher rate of interest? Yes, provided: • the limited recourse loan to the SMSF by the related party is appropriately documented; • the SMSF is not charged more than an arm’s length rate of interest for borrowing; • the arrangement under which the SMSF borrows from the related party otherwise meets the requirements of the super law. Accordingly, the ATO highlights that the

Loan-to-value ratio

Theoretically, a prudent person, acting with due regard to his or her own commercial interests, might lend with an LVR of 100 per cent. However, in practice this would be very rare and no doubt such lenders would charge a hefty interest premium. This would get an SMSF into a catch-22 because, if a related party is charging an SMSF trustee a hefty interest premium, then the arrangement might alternatively be construed as an early access scheme. Accordingly, from a practical point of view, it’s best to stay within the same LVRs that banks offer. As a rough rule of thumb in respect of real estate, any LVR less than 70 per cent is fine. An LVR between 70 and 80 per cent might be allowable, but the SMSF trustee would definitely have to have very strong evidence supporting this. Anything higher than 80 per cent starts to be fairly “on the nose”.


best practice is usually to benchmark against what the SMSF trustee could have received from a bank and retain written evidence of this. The next question is how to describe the interest rate. Consider the following different options to describe interest rates: • Option 1 - x per cent • Option 2 - Division 7A benchmark interest rate • Option 3 - the lender’s cost of finance • Option 4 - a rate agreed between the parties from time to time • Option 5 - Westpac’s variable home loan rate • Option 6 - RBA cash target rate + x per cent Best practice is often to use the option 6 (that is, RBA cash target rate + x per cent). Because the RBA cash target rate moves, the SMSF loan’s interest rate will automatically follow and should roughly approximate an arm’s length rate over time (unlike option 1). Assume that the “x per cent” in option 6 is calculated so that the total of option 6 is the same as what a bank is offering. In this case, it is very easy to show that the interest rate was indeed benchmarked, which of course helps to prove that it is at arm’s length (unlike options 2, 3 and 5). It is certain and easily observed by a third party (for example, the SMSF’s auditor), years after the relevant time period (unlike option 3, 4 and 5). Borrowing from a related party can significantly increase clients’ wealth. However, it is important that the key elements in a related party loan - such as being at arm’s length - are properly handled. With proper planning and due care, this is a straightforward process.

Interest rates

Interest rates should reflect the fact the loan is of a limited recourse nature, and thus a risk premium on the interest is charged. Again, the

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

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

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Take me to your leader The industry body you choose to represent you says a lot to your clients about who you are and what you stand for. Martin Mulcare explains


he importance of selecting a suitable person to represent your interests is very topical after the federal election. It is also the theme of the cover story for this edition. I might re-frame the challenge: Who is the most appropriate body (or person) to represent your interests as a financial adviser in Australia? There is a virtual industry built on the concept of leadership. And yet it is fascinating that there is little attention given to the criteria one might apply to selecting a leader or a representative. Why is that the case? Perhaps the prevailing culture is focused on becoming the leaders rather than selecting them. Perhaps it doesn’t suit special interest groups to define generic qualities when it is easier to pitch short-term gains. Perhaps there is a risk of insulting people if one has the temerity to provide some guidelines on what to look for in a leader or representative. I’m going to take that risk in this column. What is important to you when choosing a person (or body) to represent you as an Australian financial adviser? One obvious criterion is “what’s in it for me (WIIFM)?” It is traditionally the belief of political parties that this is the main consideration for voters. The offers might vary from party to party and election to election but the permanent feature of election campaigns has always been “pork barrelling”, or appealing to the “hip pocket nerve”. In the same way, particularly at a time of legislative change, your potential representatives may pitch for your support by promising short-term wins, like campaigning against proposed restrictions on commission payments. I hope that you agree that temporary gains are not the only valid criteria for making your choice. So what else might you take into account? One important criterion that you might consider is character. What do you know about

Martin Mulcare

the qualities of the person you are considering? Do you really trust them to represent your interests? The cynicism of the electorate has meant that politicians have not put much effort into establishing their credentials in terms of character. I would like to think that in a smaller community, like the financial advice industry, that one could make some assessment of character. Have you met them? Do you know someone who has worked with them? What does their track record indicate? Ideally your representative would share some of your personal values. For me the most important factor is alignment of long-term interests. In other words, what is the path that this person is intending to lead me along and is that the best path for me? This is similar to the WIIFM appeal but is based on long-term alignment, not short-term wins. It is also related to the consideration of character, because you need to think about whether you can trust them to deliver the long-

term promise and/or stick to their espoused path. However, this is really a different consideration altogether. And it’s a difficult one to apply because the foundation question is difficult: What is the best long-term path for you? I would encourage each reader to think about this question. I expect that individual responses may vary but here are some core beliefs that my clients share: • I want to be part of a respected profession; • I want an environment that makes it easy to provide valuable advice; • I want to work with institutions that support my desire to help people achieve what is important to them; • I want to be able to quote fees that I am happy to explain (and that my clients are happy to pay); • I want to work with talented and motivated people. If you share these long-term interests then perhaps you should be asking your potential industry representatives whether they share these interests - and what they will do to deliver them. And why stop there? What other “leaders” do you select in your business life? You may wish to apply the same considerations when selecting them, too. I would also suggest that when you are selecting a subject matter expert to work with (for example, an estate planning expert or a tax expert) that you look beyond their technical skills and assess both their character and their alignment with your desired future. These are the best of times to find somebody (or a body) to represent and deliver your longterm interests.

Martin Mulcare can be contacted on



Client reviews shouldn’t be opt-inal Rod Bertino says planners who already run an effective client review process should not be concerned about one of the proposed regulatory changes


ike most participants in the financial services profession, we have been intently following the opt-in/opt-out debate that has raged since Minister Bowen released his Future of Financial Advice discussion paper earlier this year. While the final form of this element of the reform package is still very much unknown, it did get us thinking about the importance of client reviews and the current state of play in the Australian marketplace. As the following extract from our recently released Future Ready IV white paper clearly shows, fewer than one in two Australian advisory practices achieved a “Fit” rating in the area of client reviews; and what’s more, there has been only marginal improvement over the past few years. This is especially surprising when you consider the impact the review process can have on practice profitability. One of the key findings arising from the Future Ready IV research was that, on average, the principals who had taken steps to address this issue were generating 145 per cent more profit than those who had not yet formalised their client review processes. So, given a) These profitability findings prove that it makes good commercial sense to regularly meet with clients and review not just their investments or product holdings,

but also their life situation; and b) The review service is such a critical element of any ongoing service offer, and an opt-in regime as outlined in the proposed Bowen reforms could well see practice remuneration more directly linked to a client’s satisfaction with the offer, intuitively we would think that going forward many advisers may be: i) Far more diligent in scheduling and conducting reviews; ii) More focused on ensuring the review process meets their client’s expectation (currently fewer than one in three advisers have a structured approach to seeking client feedback - so the potential for disconnect is enormous); iii) More aware of the real cost to deliver the review service and hence the fees they charge their clients. So with this increased focus on reviews, we thought it would be of value to share with you what

the 40,000-plus clients who have completed our CATScan satisfaction survey have told us about the services being delivered by their adviser and, in particular, their review process. While many practices have invested countless hours examining the various elements of their review procedures and agonised over the content and layout of their review reports, clients continually tell us advisers often lose sight of what is most important - the client! We hear all too often from clients that while their adviser is very good at investment updates and product evaluations, in their mind, this does not equate to a client review. First and foremost (and at the risk of stating the obvious), in the client’s eyes, a client review must be centred on the client. It should be all about them - their family, their business, their goals, their dreams and their aspirations. While their money and their policies are obvi-

ously important, they should not be the sole focus of the review. While there is no one “right” answer that is guaranteed to work with every client and in every practice, there are a few common attributes we see in successful practices, as detailed in the breakout box. While undoubtedly there will be changes made to the proposed reforms, regardless of the final details of any opt-in or opt-out provisions, perhaps these tips will add value as you consider your client review process and prepare your business for July 2012 and the implementation of the new regime.

Rod Bertino is a partner and director of Business Health



Expect only the unexpected With so many pundits predicting recession, Peter Switzer says it’s unlikely to happen


egular readers might recall that as a response to excessive negative reports on mainstream media over 2008, when the global financial crisis (GFC) was taking out the likes of Lehman Brothers, I created a “Good News Daily” section on our website - www.switzer. With my media mates being lured into the latest opportunity to spook ordinary Australians with constant references to a double dip recession in the USA, and a recent ABC “Four Corners” report suggesting that we were simply awaiting another market crash and severe recession, I thought it was time to put the other side of the argument. By the way, the ABC program, which was sourced from overseas - which means we can’t blame Aunty’s journalists, only their programmers - did zip to canvas the other point of view. Financial planners’ clients could have been easily worried by the warnings that were made in this program. I know I received a few emails from readers/viewers; but for my clients, I headed it off at the pass in my daily column on my site.

The reality is that a consensus of US economists expects a slowdown, but not a double dip recession. There are those who argue it’s a 25 per cent chance of a double dip recession, but the general view is that we are looking at a slowdown. And the first week in September - historically the worst week for shares - was a great start to proving my case. In that week, the S&P 500 Index put on around 3.75 per cent and pushed through an important resistance level. The market drive came from a better-than-expected US jobs report, where unemployment rose from 9.5 per cent to 9.6 per cent, but the rise in private employment was better than expected. Earlier in the week, there was much better manufacturing news than economists tipped, with the ISM manufacturing data raising doubts over the credibility of the fear mongers and double dip claims. Then China kicked in with another betterthan-expected Performance of Manufacturing Index, and global stockmarkets were off to the races. Meanwhile, the Aussie economy registered

a strong June quarter economic growth number - up 1.2 per cent. So, there are few economic worries at home, given our strong links to China and India. Hot on the heels of this manufacturing data came the latest retailers’ sales figures in the USA, which were better than expected in August. On that day, the consumer discretionary sector rose around 1.8 per cent on the New York Stock Exchange. Not bad for an economy heading for a double dip recession. My feeling is that the US will avoid another recession and will experience slow economic growth and then slow growth in stock prices until the balance sheet health of major companies results in jobs being created. This will power the US economy and then Wall Street. On my program on Sky News Business Channel, former ANZ chief economist Saul Eslake said investment-led recoveries are slow to spill over to jobs, but eventually it happens. We have an investment-led recovery in the USA, and that’s why they should avoid a double dip recession, but it is also why the stockmarket will have ups and downs until the doubting Thomases become “boom boom Bobbies”. When Anton Tagliaferro, the founder of Investors Mutual, appeared on my program, he put forward a view that I thought had relevance for anyone arguing that we should avoid a crash and burn of the stockmarket and the US economy. He says the US is not out of the woods and will be in a “bit of strife for a while”. On whether there will be a double dip, however, he makes the following point: “A collapse usually comes when you don’t expect it, but right now there are a lot of people expecting it.” That’s a great point.

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:



Triple dip just not on the cards There can’t be a triple-dip recession if we haven’t even had a single-dip recession; but if there is, says Ron Bewley, you read it here first


t the beginning of this year, the term “double dip” had almost left our lexicon. But now it is back in spades. Investors are worried, and those sidelines are brimming with cash. I show the harsh reality of the US recession (recall that we haven’t even had one dip) in Chart 1, from the 2007 November peak to the most recent (at the time of writing) May figure. US GDP fell 4.1 per cent to the low of May 2009, but has climbed back 3 per cent since. There’s only 1.3 per cent to go to get back to the top, but it would only take one negative quarter - not a return to the depths of last year - to have a double dip. Not good, but the media hype paints it as the end of the world. It is important to understand the psychology of forecasting to really understand how we got so excited about dip counting. In the academic literature there is the concept of “rational cheating” in forecasting: it often pays the forecaster to not reveal his or her true expectations. For example, if every other forecaster predicts the market will end the year in a range of 4800 points to 5000 points, and you think it will be 6000, there is little to be gained by telling your version of the truth. State your forecast to be, say, 5200, and you still get all the upside. If you are wrong, you are

Chart 1: US GDP in Recession

Source: Woodhall Investment Research

not too far from the pack. Of course the “herding instinct” of forecasters has already put the forecasts in too narrow a range, given market volatility. So now to dip counting. No one I listen to is actually saying there will be a double dip - just that there is an increased chance of one. And every forecaster I know puts that probability at well less than 50 per cent. So “for free”, every forecaster can throw in some probability of there being a double dip without ever risking being found out! There either will be a double dip or there won’t. With only one outcome, we can all say, “I told you so”, because we have covered both bases. Only with repeat forecasts can such a probability be assessed as being accurate. My question is:

How many forecasters have thrown in a double dip just so they can’t be wrong? Of course no one should assign a zero probability to a possible event, but why all the smoke and mirrors? There seems little doubt that the US has a long way to go to get out of its economic mess. It will be tough. But it doesn’t matter if we get one tiny negative quarter growth or a tiny positive one. There is no (very) good news likely to come from the US anytime soon and that has been priced in. Australia is not as dependent on the States anymore. Even their president keeps cancelling trips here. China is the bigger game in town, and they look great. Some say China is slowing down, but the world asked them to do that at the

start of 2008 - 10 per cent to 12 per cent growth was not sustainable; 8 per cent should be the target! When we get what we asked for, the double dippers cry: “It’s a slowdown!" Australian investors should always be ready for the unexpected, and that is called risk management. Always basing decisions on the outside chance doesn’t help investment performance. Interestingly, my interpretation of broker forecasts has the market producing an average of only 11 per cent total return for the 12 months ahead down 2 per cent or 3 per cent over the August reporting season. To me that means expectations have been sharply revised down because of double dip fears. And when the fears abate, companies will find it easier to beat expectations and the market can jump up. So why a triple-dip forecast? The main aim of most forecasters is to be noticed! Without a double dip there can’t be a triple - but if there is, I can claim to be the first to have predicted it.

Ron Bewley is executive director of Woodhall Investment Research



Private equity - here be dragons Dug Higgins says portfolio construction and asset allocation have been put through the wringer over the past two years, throwing more focus on alternative asset classes as a way of increasing the robustness of portfolios


rivate equity (PE) has developed into a major component of the alternative investment universe, and is now broadly accepted as an established asset class within many institutional portfolios, as well as becoming more accessible to retail investors. Private equity, when properly understood, can act as a useful diversifier in a well distributed portfolio and can provide access to substantial absolute returns. The trick for the average investor or adviser is gaining that understanding. The very nature of PE as an asset class means that transparency is limited, compared to other asset classes. And the potentially significant rewards come at the expense of challenging risks. Like many of the alternative asset classes, the role and characteristics of PE are still not well understood in retail markets. This is particularly the case when using direct funds, which tend to be the domain of institutional investors, as opposed to the fund-of-funds (FoF) approach, which is more common on the retail side. This article will hopefully shed some light on both the positive aspects and dangers of direct PE funds. As with all alternatives, the key reason for investing in private equity is to improve the risk and reward characteristics of a portfolio. Investing in direct PE funds offers the opportunity to generate high absolute returns whilst aiding portfolio diversification. There are, however, significant challenges involved for retail investors and advisers in selecting the right PE investments. Unlike the FoF approach, risk concentration is obviously significant at both the manager and asset level. This means correct investment selection is vital. PE involves systemic asset class risk as well as investment-specific risk. This should be recognised in an industry where the high standard

Dug Higgins

deviation of returns is at least partly driven by the concentrated nature of direct PE funds, which typically invest in fewer than 15 companies. While this suits the strategies of most PE managers in terms of focusing their expertise, underperformance or failure of investee companies will obviously have a greater impact. The returns driver in PE is the capacity to create value through the operational enhancement of an invested business. This needs the correct combination of experience and process by managers who have a repeatable formula for value creation; rigorous due diligence processes that yield proprietary insights; a proven model to recruit, retain and motivate management teams; access to specialist deep sector knowledge; and a strong proprietary deal flow. While such funds also tend to benefit from leverage, it is not leverage alone which drives

‘Like many of the alternative asset classes, the role and characteristics of private equity are still not well understood in retail markets’ success. Research has shown that approximately two-thirds of value generation is derived from operational enhancements in investee companies and one-third from the use of fund leverage. Therefore, while financial engineering is part of the equation and plays its part, the only sustainable source of driving returns in PE is increasing enterprise value. Accurate fund selection, however, remains challenging due to a shortage of data, long-term illiquidity, limited benchmarking ability and lack of an industry beta. These issues all combine to make manager selection more of an art than a science. This in turn ups the ante for investors because, in PE, selection of the right manager is all that really matters. This is particularly relevant because, although PE is frequently portrayed as an asset class that generates significantly higher returns, the truth is that, on aver-


age over the longer term, direct PE funds seldom beat public equities. However, all is not lost. Topperforming funds do provide substantial outperformance over public equities. Global research sources have shown that over the long term, top-quartile PE funds tend to generate about 500 basis points of outperformance over local public equity benchmark indices. By comparison, the performance of the average PE fund is either less than or about the same as public equity indices, which reinforces the fact that direct PE funds typically display a statistically huge dispersion in performance between the top funds and the rest of the pack. This has obvious implications in an asset class which should generate a robust risk and illiquidity premium to make investment worthwhile. Manager selection is still not easy, however. One of the oftquoted attributes in assessing PE as an asset class is the concept of positive performance persistence. Unlike most other asset classes, the phenomenon of performance persistence in PE managers is a documented reality. Persistence has obvious implications for portfolio construction, as long as investment discipline and management are constant. However, while performance persistence is useful, investors need to be careful not to make inappropriate investment decisions based on its expectation, as it is relatively imperfect. The issue is further muddied by recent studies of performance claims made by PE managers over a 20-year period, which showed

that two-thirds claimed “top quartile” performance. While this would normally (and rightly) raise eyebrows, it is as much a symptom of the state of imperfection in performance benchmarking in the PE industry where managers can select the benchmark of their choice, depending on dataset and vintage year (when the fund was created). However, this means that investors should be wary of the lure of “top quartile” performers, as obviously being in a top quartile somewhere is not necessarily a meaningful criterion for assessing the quality of a manager. Such benchmarks are necessarily constructed using funds that tend to be highly heterogeneous due to size difference, strategies employed, management styles and vintage years. Without some significant refinement in the future, it is difficult to make meaningful ongoing comparisions. When dealing with direct PE funds, asset allocation also needs to take into account several issues. While having diversification attributes, the ability to accurately judge the true correlation between PE and public equities is far from straightforward. It obviously has some positive correlation attributes, because public and private markets remain equity linked, but the correlation is not direct and the effect of valuation lag in assets can have a significant effect. Like investments in direct property, the impact of valuation lags has the potential to artificially mask “true” standard deviation of returns, which has implications for asset allocation strategies. At the very least, PE is

not strongly correlated to public equity, but it would rarely have a negative correlation over the longer term. However, the net effect to investors remains the same: this is an asset class where an allocation should only be made if investors believe they have the ability to identify (and gain access to) managers likely to be the top performers. Due diligence on manager track record is paramount and often extremely difficult in the retail space given the requirement for understanding how returns have been generated and what is being measured. Private equity remains an asset class which can be an excellent contributor to performance when done correctly and can offer aboveaverage returns. However, it is not


an asset class that will be suitable for all retail investors and should be approached with a high degree of caution. Sufficient due diligence to unearth top managers is vital to take advantage of the high absolute returns that the asset class is capable of generating.

Dug Higgins is a senior investment analyst at Zenith Investment Partners

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Prosperity, not austerity, is our real problem The horse has bolted, and now regulators are shutting the stable door. Frank Gelber asks: How do we get the horse back into the stable?


ompared with the rest of the world, Australia certainly has had a soft landing after the GFC-induced shock. The muchfeared recession never eventuated. Unemployment peaked below 6 per cent. That should come as no surprise. The situation facing Australia when the GFC hit was quite different from that in the rest of the developed western world. Even if we’d had a recession, it would have been a short-and-sharp collapse, a confidence-induced phenomenon, rather than anything fundamental. Indeed, it was precautionary saving that caused the Australian downturn. Strong Government expenditure and handouts cushioned the outcome. And it’s a return of confidence that’s driven the recovery. Australia is now well into a recovery phase that will build momentum over the next few years. By comparison, the US, the UK and parts of Europe had significantly overinvested. The falling asset values, which underpin much of bank lending, caused significant debt write-offs. They had a fully-fledged financial crisis, with economic outcomes exacerbated by a collapse of confidence and spending, and now face a long hard haul out of severe recession. They’re doing what we did in the 1990s, only worse. They face long periods of weak investment as they absorb the excess capacity created during the boom. Meanwhile, Government spending will be constrained as

‘There is no point looking at the GFC as the beginning, as an isolated shock. It wasn’t’ they attempt to cut the budget deficits created in an attempt to cushion their economies. It’ll take the US a decade or more to get its unemployment rate back down to 4 per cent. This is not a matter of a quick rebound. For much of the western world it’s a slow rebuild. There is no point looking at the GFC as the beginning, as an isolated shock. It wasn’t. The GFC itself was caused by the excesses of the preceding financial engineering (FE) boom. It was an unwinding of the excessive gearing, the overvaluation in the overinvestment leading to oversupply caused by the FE boom. Australia, too, went through a FE boom, but it wasn’t as advanced. The FE boom left Australia over-geared and, with the resultant weight of money, overvalued. But not overinvested. Had the cycle run its course, we would have oversup-

plied markets, but we were too slow into the game. In that sense, the GFC did us a favour, curtailing investment before we had a chance to oversupply. For investment markets, of course, the three Os - overgearing, overinvestment, oversupply constitute the major element of market risk. The first two can be solved with a financial market correction, and that’s what has happened in Australia. The third is more difficult and takes longer to unwind, and that’s what is happening in many other developed economies. In Australia, the GFC triggered a correction, removing the above three elements of market risk. Market risk is now low, not high. With limited bad debts, Australian banks remain strong. We had a credit squeeze, not a financial crisis. Yet debt and equity markets are both supersensitive to perceived risk, affecting financing and constraining recovery. The banks still want to reduce exposure to risk, and particularly to property, even at now much lower gearing levels. And the regulators are stress testing for another one-in-20-year event. That doesn’t make sense. We’ve just had the one-in-20-year event, and the preconditions that caused it are gone. Meanwhile, for small business and property markets, rationing and high cost of funds is creating a substantial difficulty. In equity markets, the flight to fixed interest is understandable - but not sensible - in behav-


The bigger risk is underinvestment, not overinvestment

ioural terms, with no one wanting to stick their neck out and take a position. Again, the GFC correction reduced market risk - it is now low, not high. The horse has bolted and they’re shutting the stable door, effectively preventing it from coming back in. Gearing has come back to reasonable levels. Prices are no longer overvalued. And, with the collapse of development finance, the risk is of underinvestment, not overinvestment. Both debt and equity markets are misreading risk. Some might argue that delaying recovery by constraining finance is, given the strength of the economy, a good thing. I would disagree. The current underinvestment, and the shortages that it will cause as demand recovers, is just setting us up for the next boom. Meanwhile, the Australian economy has rebounded. Employment has grown strongly, boosting household income. Consumers have regained confidence but remain cautious on expenditure, careful about again letting go of the purse strings. They will spend more as the

‘To me, asset markets present an extraordinarily lowrisk, high-return proposition’ recovery proceeds. Private investment remains weak, but will now start to recover. The residential recovery has begun. Buoyant minerals prices and profitability have sustained mining incomes and expenditure, with the next round of minerals projects set to boost activity. Non-residential building will be slower to recover, with financial constraints, plus a hangover of the GFC-induced price correction, leaving prices below replacement cost levels. But solid demand in the face of


leasing market shortages will drive up rents and underwrite the next round of building. As public investment winds down, the private sector will take over as the engine of growth. The momentum of the Australian economic recovery will be underwritten by rolling investment cycles. Meanwhile, the financial markets are still being driven by overseas conditions. Day-to-day movements in sharemarkets follow the US lead. Yet the prospects are quite different. In the press, and in commentary on the economy, fear rules. Fear of sovereign debt problems. Fear of a US double dip. How do those problems affect Australia? The answer is - very little. Australia is an Asian economy now. Exports into Asia are heading up towards 80 per cent of total. And Asia is strong. At some stage, both financial markets and economic commentary will have to disconnect from the US. For Australia, the medium-term outlook is strong. We’re looking at growth averaging 3.5 per cent over the next five years. Our problems will be problems of prosperity rather than austerity. It won’t be long before capacity and labour constraints in the face of solid demand lead to demand-inflationary pressure and tightening monetary policy. For asset markets currently underinvesting, that means tight supply, rising incomes and capital growth. There are risks, but they come later. The next five years of solid growth are pretty much locked in. To me, asset markets present an extraordinarily low-risk, high-return proposition. And my pick of markets is commercial property. I can’t remember a time, not even at the depths of the 1990s recession, when property was a better prospect.

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



The value of advocacy in acquisition Alan Shields says private banks, slow to recognise the power of advocacy, are now starting to catch on


any of the largest financial institutions in Australia currently use advocacy (in some form) to measure their performance. To date, private banks have lagged this trend but are beginning to realise the power of advocacy and are catching up. If one analyses the private banking relationship, it becomes clear that advocacy that is, being recommended to others by your clients - is important from the very beginning. Even “unbanked” high-net-worth individuals (HNWs) - those with no private banking relationship - place a lot of value on advice from family and friends. This can be seen in the large number of private banking relationships that started with a referral from a friend or colleague; and APBC research from March 2010 shows that word-of-mouth is a strong tool for acquisition. In fact, 16 per cent of private bank clients cite “recommendation from a friend or colleague” as the primary reason for becoming a client of a private bank. A further 12 per cent said they were given a “recommendation from another service provider”. It is therefore important for private banks to analyse what motivates their clients to recommend them, and the reasons for lack of recommendation or - importantly negative word-of-mouth. When examining what drives private banking clients to “promote” their bank, we need to look at the correlation of advocacy scores (likelihood of recommending their private bank) to satisfaction with a private bank and with a relationship manager (RM). When analysing correlation coefficients, the closer the value is to +1.0, the stronger the positive correlation is between the two variables. Both overall satisfaction and satisfaction with RM are highly correlated to advocacy, although satisfaction with the institution is slightly more highly correlated than that for

RM satisfaction. The results clearly show that providing a quality service that satisfies the client is the first step in effectively driving advocacy. Barriers to advocacy

It is clear that satisfaction is important when you look at the reasons private banking clients are unwilling to recommend their private bank. There are essentially two main reasons for this unwillingness: either they think it would be inappropriate or they are unhappy with the service. While it may not be possible to overcome clients’ feelings of the inappropriateness of recommending a bank, it is certainly possible to improve satisfaction; and this is what private banks need to focus on. Driving advocacy

The question is: “If satisfaction leads to advocacy, what attributes can private banks focus on to drive advocacy among their clientele?” Analysis of the correlation between satisfaction with various attributes of the private banking relationship and advocacy provides a better understanding of what drives private banking advocacy. The strongest drivers of advocacy revolve around personalised service - “the level of service received” and “understanding your financial needs” were the top two drivers of advocacy. Providing the right service is crucial in driving client satisfaction and advocacy, and key to that is asking questions in order to understand clients’ needs. The investment returns and pricing of products and services were the next most important aspects of a private bank’s offering, reflecting HNW concern about the value of a private banking offering. Strong service backed up by good investment returns is likely to lead to advocacy.

While “invitations to events” are the least correlated to advocacy, these events can add a “wow” factor that may attract unbanked HNWs to a private bank. Private banking clients in focus groups show interest in invitations to events and other “rewards”. While they might not drive clients to recommend, they are likely to be attractive to prospective clients. When the influence on advocacy of different service attributes is plotted against satisfaction with these attributes, it is clear that private banks are underperforming in key areas. For attributes that are very influential in driving advocacy, the ideal satisfaction score is between four and five out of five. If clients are satisfied with these attributes, they are likely to recommend the bank. The only attribute which had a mean satisfaction score greater than four was “confidentiality”, which was unfortunately not strongly correlated to advocacy. Further, the four attributes that are likely to greatly affect advocacy all received a score lower than four out of five. Of these, “the level of service received” had the highest satisfaction, while “the pricing of products and services” had the lowest. Focusing attention on delivering these four attributes is likely to increase client advocacy and have a positive effect on acquisition. A simple first step in increasing satisfaction in these areas is to have a conversation with clients around their needs and expectations. This will enable a bank to deliver tailored service that meets client expectations, as well as to better understand the financial needs of clients. Understanding clients’ financial needs can flow on to improved delivery of investment returns and pricing, and a conversation with clients will enable the bank to ensure expected risks and returns, as well as pricing structures, are transparent. Alan Shields is research director for Retail Finance Intelligence (RFI) -



Ancillary service inspires giving A new service aims to support planners who have clients with strong philanthropic leanings. Simon Hoyle reports


here were an estimated 175,000 highnet-worth individuals (HNWIs) in Australia at the beginning of 2010. The 2010 Merrill Lynch/Capgemini World Wealth Report (WWR), which tracks the fortunes of the world’s richest investors, says that the combined wealth of Australia’s HNWIs increased by almost 37 per cent during the year, from US$379.8 billion ($433.6 billion) to US$519.4 billion. The average wealth per HNWI reached $US2.99 million, or just more than $3.4 million, during 2009. And yet, Private Ancillary Funds (PAFs) number fewer than 800. PAFs are a vehicle that came into existence in 2009, to make the task of structured giving far simpler to set up and maintain. The lack of take-up of PAFs among wealthy individuals is something of a mystery; but one reason put forward is a general lack of understanding of the funds and how they work among the principal advisers to HNWIs - including financial planners and private bankers. Social Ventures Australia (SVA), a nonprofit organisation established with the aim of developing philanthropy in Australia, has set up a PAF advisory service to support financial planners who have clients interested in setting up a formal structure around their philanthropic activities. Planners who are already familiar with selfmanaged superannuation funds will find many of the concepts associated with PAFs familiar. They’re structured as trusts; they must have trustees; they must be efficiently administered (and audited); and there must be formal investment and giving strategies in place. Rachael McLennan, manager of SVA’s PAF service, says the recommended minimum amount needed to set up a PAF is about $500,000. The average size of the roughly 800

PAFs in Australia is about $3 million, and the largest single PAF is $300 million. The SVA PAF service is designed to be provided either directly to the client, or to the client via a financial planner. “It provides a bit of a one-stop shop, and you can add or subtract elements as you feel comfortable,” McLennan says. “You’d sign up to one of our workshops. That’s half a day, and we’d go through every element relating to a PAF, explain it all to you and then offer you the bits - if you have clients that want establishment and ongoing administration; if you have clients who want an audit done; if you have clients that want a grant-making strategy written and evaluated; and each of those can be sectioned out and charged for accordingly.” McLennan says SVA is “currently working on structuring packages for financial planners, so two or three financial planners could come in at once, or 10 or 15 financial planners could come in at once, the cost is X and they get telephone and e-mail access to us for 12 months”. SVA advises planners to focus on the “inspirational” aspects of PAFs, and then encourage clients to focus on the real and quantifiable differences a properly-structured program of giving can make to the recipients. Part of the service allows a planner’s clients to spend an hour on PAFs with two experts. “It’s an hour and it’s a really detailed presentation that focuses on ‘inspiration’, and that’s with [SVA directors] Chris Cuffe and David Ward - David wrote the handbook on these things for Philanthropy Australia. We’ve cherry-picked the PAF gurus. “This hour is a free chat around PAFs, but it focuses really heavily on the inspiration, and that’s a cognitive decision made, because we felt that if you were in a position to be doing something philanthropic, and you’d heard about PAFs

but weren’t sure where to start, and you went to your financial planner, they might provide information that was quite heavily based around compliance and taxation, which might frighten the pants off you and you might run a mile. “So the complimentary one-hour chat is all about inspiration. It just talks about benefits and family involvement and simplicity and how we can take the workload burden from you. “Some people may come to that meeting with their husband or wife, or with their kids who might become trustees, or even with their financial planner - if the financial planner hasn’t come directly to us.” McLennan says it’s “in our best interests” to respect the relationship that a financial planner has with a client, and to “perhaps provide support to the financial planner around their investment strategy”. “There are three parts to establishing and running a PAF, and the first part is all around the administration,” she says. “If the financial planner didn’t feel they had the expertise to carry out the administrative tasks, SVA could do that, and it would cost the client $5000 a year. I’d then assume the second part - the investment part - would be left to the financial planner. “But the third part is the grant-making strategy. That might then come back to us. The adviser could be party to the conversations, so everyone learned about grant-making as we go along.”


The Fi n al Word

He’s called Charlie! And he’s got big knives! As the 2010 election result was being decided, Dixon pondered some weird and wonderful elections held overseas


hanks to the editor’s preoccupation with early deadlines, at the time of filing this column I didn’t know who had won the 2010 Federal election. Depending on what source you relied on, the seat count was either 72-71 in favour of Labor, or 72-all, or 72-74 in favour of the Coalition. One thing most pundits could agree on, however, was that it would be some time before the result was clear. Some unedifying horse-trading was in progress, and the undecided independents were beginning to outstay their welcome. So instead of producing a pithy and enlightened insight into how the election affects the financial services industry, and financial planning specifically (as requested by the editor), I’ve decided to make jokes about other countries. In terms of electoral colour and drama, we’re simply rank amateurs. Look at Brazil, for example. (I am indebted to The Times’ “The Bugle” podcast for alerting me to this particular election, and to The Telegraph of the UK for its outstanding reportage.) In 2008, more than 200 candidates in local government elections changed their names to Luiz Inácio Lula da Silva, who was then Brazil’s president and had a popularity rating of 80 per cent. That’s a bit like a candidate for your local council changing his name to Julia Gillard. Who, exactly, do you think it might fool? Employing a variation on the same ruse, a number of Brazilian candidates changed their names to Barack Obama. This I found particularly puzzling; presumably success under this cunning plan depends on voters genuinely believing that the President of the United States of America might contest a Brazilian local government election.

Dixon Bainbridge

The logical flaw in this plan is that even if you live in Brazil, you’ve either heard of Obama or you haven’t. If you haven’t, then his name would not encourage you to vote for him; and if you have, it’s a fair bet you know who he really is. Of course, every candidate wants to stand out from the pack, and the Brazilians do it like no other nation (or none other that I could find easily). There was a Bill Clinton running for office, along with a localised version of another former US President, Jorge Bushi. There was a Chico Bin Laden, and a DJ Bin Laden (garnering the Muslim hip-hop vote, I’m guessing). There was the truly sinister-sounding Charlie Big Knives (Why? Cos he’s called Charlie! And he’s got big knives!), and several that must surely have lost something in the translation: The Second King of the Prawns; The German in the Lorry; Elephant Without a Tail; Kung Fu

Fatty. At least Brazilian elections are strange in a colourful way - much like the nation itself. US elections are strange, too, but in the way that only something that’s too complicated to understand can be. But in 2000 they staged an election that was odd for a whole bunch of different reasons. The Washington Post reported: “Something very strange happened on election night to Deborah Tannenbaum, a Democratic Party official in Volusia County. At 10 pm, she called the county elections department and learned that Al Gore was leading George W. Bush 83,000 votes to 62,000. But when she checked the county’s Web site for an update half an hour later, she found a startling development: Gore’s count had dropped by 16,000 votes, while an obscure Socialist candidate had picked up 10,000 - all because of a single precinct with only 600 voters.” And we all know what happened next: Al Gore went on to invent global warming. Of course, we are capable of a modest degree of pottiness right here at home. I’m particularly fond of the theory that says the swing against Labor in Queensland was a backlash against how the party treated the former Prime Minister, Kevin Rudd. That’ll show them: We’re so loyal to Kevin that we’ll throw his party out of government. See what we did for you there, Kevin? Kevin?

Dixon Bainbridge, Professional Planner’s resident amateur psephologist, can be contacted on info@

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Professional Planner Magazine - October / November 2010  
Professional Planner Magazine - October / November 2010  

October / November 2010 Edition of the Professional Planner Magazine.