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Vol.25 No.21 | June 9, 2011 | $6.95 INC GST

The publication for the personal investment professional


ASIC canvasses opinions on research By Lucinda Beaman T HE Australian Securities and Investments Commission (ASIC) has turned its attention to the inner workings of the investment research industry, including research houses’ remuneration relationships with fund managers and the quality of research being produced. Treasury has confirmed to Money Management that ASIC has recently been in discussions with research houses and a number of their ‘user groups’, including financial advisers. Treasury said ASIC had looked into “key issues such as business models, conflicts of interest, disclosure/transparency and the quality of research”. The regulator is now considering “what measures (if any) it should put in place as a result of this work”. ASIC has expressed its concerns about pay-for-ratings research

Rick Di Cristoforo models in the past. During the Ripoll Inquiry, ASIC recommended the Government consider whether fees paid by product manufacturers to research houses should be reviewed. This practice “creates an obvious conflict of interest and has the potential to distort the quality of research

reports often used by advisers in making product recommendations to clients”, ASIC said. The regulator suggested a “userpays model for research house remuneration might help improve the quality of the research used by advisers”. ASIC is likely to have encountered a wide range of opinions on this topic during its recent investigations. At one end of the spectrum are research clients such as DKN chief executive Phil Butterworth and Professional Investment Holdings (PIH) managing director Grahame Evans, who firmly believe any conflicts of interest in a pay-for-ratings model can and are being adequately managed – at least by the nowmarket-leading research house Lonsec. Neither Butterworth nor Evans would like to see fund manager subsidisation of the research process legislated against. Evans

believes this would unnecessarily place more financial pressure on advisers’ businesses and, ultimately, consumers. Butterworth argued that product manufacturers should share the cost of the research process with advisers. “From a commercial point of view, fund managers are as much a user of research as a dealer group, so they have a responsibility for paying for their role in that,” Butterworth said. At the other end of the spectrum are those including Matrix Planning Solutions managing director Rick Di Cristoforo and Australian Unity head of financial planning Craig Meldrum. They believe it’s time for the industry to move to a purely subscriber-pays model, a move which would remove any real or perceived conflict of interest and increase the confidence of both advisers and clients. Both Di Cristoforo and Meldrum believe advisers should be willing

Advisers shun capital protection By Mike Taylor

CAPITAL protected products, which received a boost amid the uncertainty of the global financial crisis, are now being shunned by financial planners as too expensive and inappropriate for their clients. New research undertaken by Wealth Insights into the market for capital protected products has found nearly threequarters of advisers do not use capital protected products and most are unlikely to do so any time soon. According to Wealth Insights managing director Vanessa McMahon, the main reason respondents cited for not using capital protected products was that they were too expensive. Indeed, the research revealed that 46 per cent of respondents said they were not using capital protected products due to cost, while 32 per cent said they were not doing so because they were not suitable for their clients. A further 29 per cent of respondents said they were not confident in the capital protected products, while 27 per cent said such products were two complicated. McMahon said the research painted a grim picture for the manufacturers of capital protected products because the number of advisers using them had not grown in two years, and seemed unlikely

73% 3%

Likely use in next 6 months

Reasons Advisers Do Not Use Capital Protected Products 46%

Too expensive


Not suitable for my clients


Unlikely use in next 6 months

Not confident in capital protected products

29% 27%

Too complicated



Not on APL


Wrong time in the market cycle


Do not use CPP



Source: Wealth Insights 2011

to grow in the future. She pointed to the fact that at the same time in 2009, 37 per cent of advisers were using capital protected products – compared to 27 per cent today. What is more, McMahon said few of the planners who used capital protected products recommended them to significant numbers of clients. “Half the planners that use capital protected products use them for fewer than 10 per cent of their clients,” she said. “And those planners place less than 20 per cent of a client’s portfolio in them,” she said. The Wealth Insights research detected some differences between the attitudes

For more on the research houses, see the Rate the Raters feature on page 14.

Industry lashes potential opt-in penalties

Graph Capital Protected Products (CPP) Use of Capital Protected Products (CPP)

to pay for a service their recommendations lean so heavily on. “It is intellectual property – if you want it, you should pay for it,” Di Cristoforo said. RI Advice Group chief executive, Paul Campbell, said while he doesn’t believe the pay-for-ratings model necessarily leads to conflicts of interest or a poorer quality of research, committing to a subscriber-pays model removes any question of those concerns. “I think it does raise questions when you see where the research is being paid from. We’ve removed that conflict,” Campbell said. “I wouldn’t stand here and say the research is unequivocally better as a result. But I think advisers need to know that the researcher is acting in their best interests and not anyone else’s.”

of aligned and non-aligned advisers when it came to the use of capital protected products, with 21 per cent of non-aligned advisers more likely to be concerned about it being the wrong time for their clients – compared to 8 per cent of aligned advisers. Similarly, non-aligned advisers (36 per cent) were likely to be less confident in using capital protected products than aligned advisers (22 per cent). McMahon said there appeared to have been little change in attitude on the part of advisers towards capital protected products over the last two years, with just 1 per cent of market flows going to such products.

By Chris Kennedy THE mooted penalties that could apply to breaches of components of the Government’s Future of Financial Advice (FOFA) reforms have drawn criticism from across the industry. There have been suggestions that the maximum penalties that apply to serious breaches, such as an adviser’s fiduciary responsibilities, could also apply to administrative breaches such as those pertaining to new opt-in requirements. Financial Planning Association chief executive Mark Rantall said that the penalties should match the crime, and some of the maximum penalties already in place would not be appropriate for optin breaches. “Opt-in should not be law and this is why,” he said. Much of the recent debate has been pushed by the Industry Super Network and consumer group CHOICE, but Professional Investment Services group managing director Graham Evans said he wasn’t too concerned with the threats and heavy handedness coming from that side of the debate. “A lot of this noise can go on – let’s deal with the facts and consider what the real issues are,” he said. He questioned the benefit of opt-in to consumers Continued on page 3


Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Jayson Forrest Tel: (02) 9422 2906 Managing Editor: Mike Taylor Tel: (02) 9422 2712 News Editor: Chris Kennedy Tel: (02) 9422 2819 Features Editor: Angela Faherty Tel: (02) 9422 2210 Journalist: Milana Pokrajac Tel: (02) 9422 2080 Journalist: Ashleigh McIntyre Tel: (02) 9422 2815 Melbourne Correspondent: Benjamin Levy Tel: (03) 9509 7825 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 Sub-Editor: Tim Stewart Sub-Editor: John Golledge Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2011. Supplied images © 2011 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

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FOFA needs a balanced approach


hen the Assistant Treasurer and Minister for Financial Services, Bill Shorten, last month released the Government’s latest Future of Financial Advice (FOFA) approach, most financial planners assumed they had seen the final iteration before the presentation of the draft legislation. Shorten’s announcement gave rise to a flurry of responses from the financial planning industr y with par ticular concern being expressed about the proposed two-year opt-in arrangement and the intended banning of all life/risk commissions within superannuation. However, in the weeks that have followed Shorten’s FOFA announcement and the handing down of the Federal Budget the battlefield dynamics have changed again with, on one side, the Federal Opposition signalling it will be opposing the FOFA changes in their present form and Independent, Rob Oakeshott expressing his concern about the opt-in arrangements. On the other side of the equation, however, a strong campaign has been waged by industry fund advocates to tighten the penal provisions flowing from the changes and the minutiae of the “best interest duty” in a way that

2 — Money Management June 9, 2011

The balance of power in the House of Representatives means that nothing Shorten takes into the Parliament represents a legislative fait accompli.

would increase the burden and the dangers confronting financial planners. Of course it is in the nature of lobbying Governments in Canberra that particular groups will selectively brief the media to portray their own arguments in the best possible light but the tenor of recent reports should place the financial planning industr y on its guard.

This is something that has been recognised by the chief executive of the Association of Financial Advisers (AFA), Richard Klipin who last week warned that the industry funds were seeking to drive policy formulation in Canberra “The financial advice industry is now looking to the Government to see past the hysteria being stirred up by the industry funds and consumer advocate g r o u p s a n d p r ov i d e i n d e p e n d e n t modelling which proves FOFA reforms w i l l re s u l t i n b e t t e r o u t c o m e s f o r consumers,” he said. Klipin is right in arguing for an objective and balanced approach, but he must also know that the balance of power in the House of Representatives means that nothing Shorten takes into the Parliament represents a legislative fait accompli. While the industry funds m a y, i n d e e d , h a v e t h e e a r o f t h e Government the final shape of the legislation will be a matter for debate and, probably, amendment. The current speculation and the manner in which particular positions are being promoted makes it imperative the Minister releases the draft legislation as soon as possible – Mike Taylor


Hold entire advice chain accountable: PIS By Mike Taylor ANY financial services statutory compensation scheme that fails to hold product providers, auditors, trustees, management and directors together with researchers and advisers equally accountable cannot be deemed appropriate or equitable, according to big dealer group Professional Investment Services (PIS). In a submission to the Government’s review on compensation arrangements, the dealer group said the Government needed to consider the reason for client losses, which very often stemmed from corporate failures and the insolvency of product providers rather than advice-based failures. “The current review, however, does not propose to deal with loss or damage suffered as a result of investment failure,

which has the potential to limit the effectiveness of any proposed compensation arrangements and is not likely to address the issue of client loss,” the submission said. PIS made clear it would not be able to support a statutory compensation scheme of last resort if it was intended only to cover loss or damage as a result of licensee misconduct. “We are concerned that a statutory compensation scheme for advice-based failures, or losses associated with licensee conduct, may simply be addressing a symptom instead of using the opportunity of assessing consumer protection and compensation arrangements to recognise and address the wider problems associated with corporate failures,” the submission said. PIS then went on to reference corporate failures and market failures, not least among

Where these key players fail to perform their role in accordance with their legal and professional requirements, they should be held accountable.

agribusiness managed investment schemes, along with the failures of directors and management and the role of auditors in signing off accounts shortly ahead of a business collapse. “Each of these components are key

stakeholders in the value chain which may in fact contribute to the loss suffered by consumers,” it said. “Where these key players fail to perform their role in accordance with their legal and professional requirements, they should be held accountable and liable for their involvement in the overall failures, similar to the measures taken by the Australian Securities and Investments Commission (ASIC) with respect to Westpoint in commencing compensation action against the directors, the auditor, trustee and financial advisers,” the PIS submission claimed. It said failure by the Government to provide such a regime would not provide consumers with adequate protection or provide appropriate compensation under the statutory compensation scheme for losses arising from licensee misconduct.

Industry lashes potential opt-in penalties Continued from page 1 and said it was important to arrive at solutions that are not going to cost the consumer more and put advice out of reach for the everyday person. With the FOFA reforms still to get through parliament, Evans said he had great faith in the independents to understand the issues and make a decision reflective of what their constituents were telling them – suggesting that the strict penalties being associated with opt-in were unlikely to become law. Matrix Planning Solutions managing director Rick Di Cristoforo also believed the penalties were unlikely to come into play. “I think that common sense will prevail. Treasury is aware of the practical implications of something that doesn’t make sense,” he said. “This is so far from common sense [and] it will be exposed that way. If it goes down that path it further threatens the credibility of FOFA. How is it in the client’s best interests?” Di Cristoforo said the appropriate course to rectify a situation where a client had been charged a fee without opting in would be to refund the fee. Association of Financial Advisers chief executive Richard Klipin said it was important that sanity prevailed. He was also concerned that FOFA had

Indy Singh lost sight of its original intent. “We think the current debate is playing to sectional interests, in particular to industry funds. Minister Shorten has a chance to demonstrate strong leadership and get the debate back on track,” he said. Fiducian managing director Indy Singh expressed concern that the FOFA debate was becoming an increasingly industry super fund driven agenda. CHOICE and the ISN were acting as if they were the Government, and were trying to take on the financial community, he said. If opt-in becomes law the industry will have to live with it, but it will do nothing to generate confidence in the small investor, Singh said. “Are we afraid? No. Let them bring it on. We’re compliant, we’re doing everything right, and we have nothing to fear. We only hope [the Government] will get the point without creating too much damage and fear among industry participants,” he said. June 9, 2011 Money Management — 3


‘Perfect storm’ brewing in salary pressure By Milana Pokrajac LONG-PREDICTED skills shortages in the financial services sector are finally emerging. When combined with other current market forces, the skills shortages are likely to create a ‘perfect storm’ in salary pressure for the financial services sector. This is one of the main point flowing from the 2011 Hays Salary Guide, which noted widespread salary increases were yet to be seen

despite positive hiring intentions and a shrinking talent pool, which has seen candidates starting to move back into a position of power in the jobs market. Senior regional director of Hays Banking Jane McNeill said only 11 per cent of employers in financial services had increased salaries above 6 per cent. Less than half of them had increased salaries between 3 and 6 per cent, McNeill added.

“Looking ahead, our survey data shows that 45 per cent of financial services employers intend to increase salaries in their next review by between 3 and 6 percent … but 41 per cent intend to increase salaries by less than 3 per cent,” she said. “Such low intentions are at odds with candidate expectations – particularly those of candidates in demand – and so we expect the gap between salary expectations to widen even further.”

Around three-quarters of financial services firms expect business activity to increase over the next 12 months, with more than half intending to increase permanent headcount. Bonuses are also back in play, according to the survey, with many candidates holding high expectations for more lucrative bonuses, which if not met “would likely result in higher turnover,” according to McNeill. Jane McNeill

GFC has created great economic divides




4 — Money Management June 9, 2011

By Ashleigh McIntyre

MAJOR economies once shared strong correlations, underpinned by stable growth and low inflation. But since the global financial crisis (GFC), different countries are going down very different paths, making it more difficult than ever for fund managers, according to a report by Standard Life Investments. Standard Life Investments’ Global Spotlight report has found that two key factors have contributed to this divergence in economies following the GFC. The first is the various states of disrepair economies were left in following the GFC. The US economy showed all the classic signs of a large output gap, while UK signs were less clear. The Eurozone was harder to pick due to its diversity, with core economies like Germany performing very well, while the periphery is still mired in crisis. The report found the second major contributor to this divergence was that much of what was driving inflation in major economies was now generated externally, such as rising food and oil prices. It said these influences were harder for domestic economies to control than internal factors, as it was difficult for central banks to respond to external price jumps. To take advantage of the current diverse environment, the report suggested investors should consider the global inflation backdrop and the rather different policy responses between countries. One avenue, it said, was to pick and choose between inflation-linked bonds issued by different countries to exploit moves in relative inflation and interest rate expectations.


Bullish Credit Suisse looks to long-term growth assets By Chris Kennedy

THE global economic recovery still has some distance to run, meaning long-term investors should remain overweight to growth assets, according to Credit Suisse Private Banking. An economic upswing usually lasts around five to seven years and there are plenty of reasons to think that the current economic recovery will mirror previous upturns, according to Giles Keating, global head of research for private banking and

asset management at Credit Suisse. In particular, low interest rates in larger economies such as the US and the large amounts of cash on corporate balance sheets are stimulative factors and more than offset the headwinds from the few instances of fiscal tightening, he said. Keating recommended that long-term investors should overweight equities and commodities and underweight bonds, although tactical short-term investors should remain neutral across these classes due to a recent softening in

global economic indicators. In particular, cyclical classes such as technology and consumer stocks and some resources would be appealing in the coming months, he said. Keating also expected the euro to rise modestly against the dollar, and added that emerging currencies would be an important currency diversifier. Keating tempered his positive outlook in acknowledging the risks posed by the end of the second round of US quantitative easing, an economic slowdown in China,

the European sovereign debt crisis and political concerns in the Middle East. While also acknowledging the dampening effect of the strong Australian dollar on export-reliant industries such as industrials, Keating was bullish on the local market overall. Keating said the ASX200 offered upside over the next 12 months, with long-term value supported by attractive dividend yields. These would appeal in particular to international investors facing interest rates close to zero at home, he added.

Big unions dominate Govt super fund By Mike Taylor THE Federal Opposition has questioned why a majority of appointees to the body responsible for running the key Commonwealth superannuation funds are former senior union officials, three of whom are directly appointed by the Australian Council of Trade Unions (ACTU). The Opposition spo-kesman on Financial Services, Senator Mathias Cormann, raised the issue of the make-up of the trustee board of the Australian Reward Investment Alliance (ARIA) during Senate Committee hearings and questioned why four of the seven members have union backgrounds. When told by an ARIA representative the trustee board appointments were made on the basis of equal representation and in accordance with the statutory provisions of the relevant legislation, Cormann expressed surprise and said Australian Bureau of Statistics figures showed that only 41 per cent of public sector employees were union members. “Yet unions have a majority on your board. Why is that a fair reflection of the employer/ employee balance?” he asked. Later during the committee proceedings Cormann pointed to the recent merger of the ARIA board with the various military superannuation schemes, and referred to unhappiness within Defence Force Welfare Association about inadequate representation for veterans on the ARIA board.

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*The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned February 2011) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria. Ausbil Dexia Limited (ABN 26 076 316 473) (AFSL 229722) offers financial products. This advertisement does not provide advice on investment and should not be relied on as such. The information contained in the advertisement does not take account of your investment objectives, personal needs or financial situation. You should consider the Product Disclosure Statement available from us and assess whether this product fits your investment objectives, personal needs or financial situation. Neither Ausbil Dexia or any member of Ausbil Dexia Limited guarantee the return of capital, distribution of income, or the performance of any of the Ausbil Dexia funds. Investments in Ausbil Dexia funds are subject to investment risk including possible delays in repayment and loss of income and principal invested. AUSD0011-MM01 June 9, 2011 Money Management — 5


Fixed and asset-based fees can co-exist Govt accused of By Milana Pokrajac

FIXED and asset-based fees can co-exist as adviser remuneration methods as long as each method is used for the appropriate product, according to OneVue chief executive officer Connie McKaege. McKaege’s comments followed the Industry Super Network’s (ISN’s) claims that investors would be much better off by paying fixed fees to financial advisers as opposed to asset-based fees. She said it would be difficult to disagree with the ISN’s arguments when it comes to listed securities, property or term deposits. “Term deposits are automated; there is no more work for somebody with $1 million or $10,000 dollars,” McKaege said. “They don’t transact any more, so why should somebody take 2.2 per cent going in with a $1 million versus a fixed fee?” However, separately managed accounts and

managed funds services should be charged with asset-based fees, she said. McKaege suggested the industry was already moving towards fixed fees. Investment Trends’ October 2010 Planner Business Model Report also noted a greater prevalence of fee-for-service in adviser remuneration, particularly non-asset-based fees. “By 2013, planners expect the proportion of their practice revenue coming from non-asset based fees to nearly double from current levels,” analyst Recep Peker said. OneVue has launched new products that will position the platform provider for the post-Future of Financial Advice (FOFA) environment. McKaege said that change in the way clients’ wealth is managed was inevitable, and that platforms needed to help advisers in adapting to the new environment. “When people are trying to resist some of the FOFA changes and volume bonuses, all it does is it allows advisers to live in hope that these things won’t transpire,” she said.

ATO warns of tax time crackdown By Ashleigh McIntyre THE Australian Taxation Office (ATO) is warning investors to steer clear of tax avoidance schemes and seek independent financial advice as the end of the financial year rolls around. Tax Commissioner Michael D’Ascenzo said there were many different types of tax schemes, from publicly listed marketed arrangements to specialist financial arrangements

offered by experienced advisers. “Doing your research and seeking independent financial advice from someone not involved with the arrangement before investing is your best protection against promoters of tax avoidance schemes,” he said in a statement to investors. Not getting the right information and advice could lead to a large tax debt, substantial penalties and in some cases even prosecution, he added.

THE Australian commercial property market has delivered 12 months of strong returns, but the pace of the recovery in the sector is slowing, according to the PCA/IPD Australia Property Index. The index returned 10.4 per cent in the year to March 2011 on the back of strong capital growth and income return from the hotel sector, which returned 13.6 per cent. Office and retail also performed well while the industrial sector lagged due to a slight retraction in capital values, according to the data based on 1535 property

Michael D’Ascenzo

assets worth $121 billion. Rolling annual nominal returns showed that while the commercial property market is still in the upswing phase of the cycle, the return profile shows that recovery is slowing. IPD managing director for Australia and New Zealand Dr Anthony De Francesco said the slowing recovery is supported by macroeconomic factors including employment and retail sales growth, which point to a softer economic outlook over the short term. The office sector will continue to outperform retail due to more favourable market conditions, he added.

Tria opens Hong Kong office TRIA Investment Partners has shifted its Asian base of operations from Singapore to Hong Kong, which the firm believes is becoming the preferred location for asset management activity for the region. Hong Kong is also a gateway to the emerging Chinese wealth management market, and Tria already has several important clients in Hong Kong, the firm stated. Tria said that developing a profitable business model in a market as fragmented as the region is – including developed markets such as Japan and Singapore and newer markets like Indonesia and Korea –

can be challenging. However the outlook is steadily improving as Asia grows rapidly as a retail fund market and also becomes a more important and outward looking institutional market, the firm stated.

6 — Money Management June 9, 2011

By Mike Taylor THE Federal Treasurer, Wayne Swan, has been accused of breaching the Government’s own guidelines on “transparent and merit-based selection” when appointing the new chairmen of the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC). The Opposition spokesman on Financial Services, Senator Mathias Cormann, said the Government had confirmed to a Senate estimates committee hearing that neither of the positions had been advertised according to the guidelines for such appointments. Cormann said the Coalition was not reflecting on the merits of the men appointed to chair ASIC and the ACCC –

Wayne Swan Greg Medcraft and Rod Sims, respectively – but believed the inadequate processes had been followed in breach of the Government’s pre-election commitments and its own guidelines. He said the Labor Government’s promise to strengthen transparency and merit-based selection was “not worth the paper it was written on”.

AFSL requirement for insurance rater

Commercial property recovery slowing By Chris Kennedy

breaching own rules

Tria said its initial research focus in the new location would include research and strategy development for Asian wealth markets and high impact implementation projects. It will also look at costing models for product development and management, as well as transferring its pension fund and exchange-traded fund analysis expertise to the local market. Tria said that client feedback suggested the region was not well served in terms of the consulting and project management services that Tria provides, and Tria said it aimed to plug that gap.

THE Australian Securities and Investments Commission (ASIC) has made clear that companies providing ratings services to financial planners need to hold an Australian Financial Service Licence (AFSL). The regulator’s position was revealed in its latest overview of decisions on relief applications, in which it said it had refused licensing relief to a life insurance ratings provider It said the ratings provider delivered a service to financial advisers that was a qualitative research tool and provided a rating of the terms of various life insurance policies. “We took the view that the provision of ratings constitutes the provision of general financial product advice and the ratings are intended to influence (or could reasonably be regarded as intending to influence) a person’s decision in relation to a life insurance product,” the ASIC documentation said. It said that holding an AFSL for the provision of ratings would require the applicant to comply with certain key obligations in the Corporations Act, including ensuring that adequate arrangements are in place for internal and external dispute resolution and for the management of conflicts of interest.

Many planners question ASIC’s effectiveness A SIGNIFICANT number of Australian financial advisers believe the Australian Securities and Investments Commission (ASIC) is doing a less than effective job. New research released by Wealth Insights has revealed that as many as 32 per cent of financial advisers regard the financial services regulator as being either ineffective or extremely ineffective. Asked by Wealth Insights how effective they believed ASIC was in its role as Australia’s financial services regulator, 45 per cent of the respondents rated the organisation as ‘average’ with only 20 per cent rating it as ‘effective’ and just 1 per cent rating it as ‘extremely effective’. The research was conducted in May ahead of the recent appointment of Greg Medcraft as the new chairman of ASIC, but in the wake of the announcement that the regulator would be conducting a further shadow shopping exercise.



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News Opposition to crimp super trustee power By Mike Taylor THE Federal Opposition has signalled it would significantly crimp the powers of superannuation fund trustees by making any fund mergers the subject of member ballots. The Opposition spokesman on Financial Services, Senator Mathias Cormann, has flagged such a move amid reports that a merger of two major industry superannuation funds – Vision Super and Equipsuper – had collapsed. Commenting on the merger breakdown, Cormann said

Mathias Cormann reports suggested trustees may have been putting their own interests ahead of the best interest of members.

“To scuttle a proposed merger because union-backed trustees don’t want democratic elections but want guaranteed union-nominated positions smacks of institutionalised selfinterest,” he said. Cormann said he believed there should be better regulatory supervision and review of merger arrangements and more adequate remedies for members when the handling of a merger by trustees ended up disadvantaging those members. “Superannuation funds hold the money of their members on

trust,” he said. “Those members should have a say as part of the merger process instead of relying on the trustees doing the right thing in satisfying their trustee fiduciary duties to act in the best interests of their members.” Cormann said the trustee fiduciary duty could become clouded and give rise to potential conflicts of interest, “especially where some trustees serve on multiple superannuation boards or where trustees have not directly been appointed by the members in the first place.”

Most Australians still unready for retirement NEW research commissioned by major insurer Metlife has confirmed that Australians are still ill-prepared for retirement, with only one in four saying they have achieved their retirement goals or are likely to do so. The new research, released at a Retirement Incomes breakfast hosted by Money Management’s sister publication, Super Review, confirmed that only four in 10 Australians have planned for retirement in terms of

utilising investments over and above those contained within their superannuation fund. “Sixty per cent of Australians are relying solely on their superannuation for their retirement planning,” Metlife’s chief marketing and distribution officer, Eric Reisenwitz told the breakfast. However, he said that most employees had not accumulated enough towards their retirement, with the average superannuation balance for Aus-

tralians aged over 50 sitting at $52,500 for men, and less for women. Reisenwitz said women were at greater risk due to longer life expectancy and less planning. The good news contained in the research is that those people who had actively planned for their retirement appeared confident in their ability to reach their goals in the next five years, with fewer than a third of such people feeling they were still behind.

Director liability changes a positive By Chris Kennedy FEDERAL Budget changes making company directors personally liable when their company fails to pay employee superannuation payments could have far-reaching consequences but will ultimately benefit employees, according to Holding Redlich Lawyers. The legislation, intended to target counter fraudulent and phoenix activity, could extend to all directors in a blanket approach, although we are yet to see the details, said Holding Redlich partner JennyWillcocks.

If the legislation does end up taking a catch-all approach rather than being limited to cases where there has been a phoenix scheme in place, then it will have a significant impact on directors’ risk of personal liability, she said. Even when there is no phoenix scheme in place a company director would usually be aware if their company is getting into trouble, and where super payments haven’t been passed onto the fund or wrongly used to pay company cash flow, she said. The end result will be a posi-

tive from an employee or trustee perspective if it makes directors more aware and more focused on their responsibilities concerning employee super, she said. The fact that there is discussion out there sends a positive message that the Government is taking the situation seriously from a deterrent point of view, meaning those tempted to use such schemes may think twice if they are more personally liable and there is greater capacity to go after the directors personally, she said. What the situation really

Macquarie shows interest in YBR offering By Ashleigh McIntyre THE newly transformed Yellow Brick Road Holdings (YBR) has successfully completed its capital raising of over $12.5 million, with Macquarie Investment Management showing a late interest in the group. The initial public offering was oversubscribed, with all 31,250,000 ordinary fully paid shares at $0.40 each being taken up by investors. YBR has since announced to the stock exchange that a further

1,000,000 shares have been allotted to Macquarie Investment Management as follow-on public offer, giving Macquarie a 7.06 per cent share of the company. Furthermore, the company has officially acquired Yellow Brick Road Group and issued over 84,000,000 shares to vendor shareholders. The company stated it has been working with the stock exchange to re-comply with listing rules, and expected to be reinstated to official quotation in early June.

8 — Money Management June 9, 2011

highlights is a need for an overhaul in the system of superannuation payments from employers to funds, with the lead time currently far too long and creating the potential for such dishonest conduct, Willcocks said. If super payments had to be paid in the same way as wages, that would close the loophole allowing phoenix schemes to take place and would also benefit members, who are currently missing out on having their own money invested while it sits in an employer’s account, she said.

Ascalon pushes into Asia WESTPAC subsidiary Ascalon Capital Managers has engaged a Hong Kong-based funds management specialist to support the firm’s push into Asia, Westpac has announced. Chuak Chan, who helped establish the Bankers Trust Singapore fund management business in 1996, will be based in Westpac’s Hong Kong offices and will work on the licensing process there prior to Ascalon’s launch. Ascalon Capital Managers chief executive Andrew Landman said the manager was looking to expand in Asia to source potential new investments into boutique managers and accelerate growth in the offshore investor base of its current boutique partners. The market will be critical due to the quality of absolute return managers and the access it provides to large US, European, Asian and Middle Eastern Investors, he said. “While Ascalon’s boutiques have successfully grown in Australia, the market for some of our partners’ strategies is far larger offshore and it’s important that we seek to provide active offshore distribution to our partners,” Landman said. “It’s our aim to take equity stakes in Asian boutique firms, with the objective of expanding our stable and offering prospective partners strong operational support and access to the ever-growing Australian funds management market.” Chan was previously chief operating officer of Segantii Capital Management in Hong Kong, and previously held roles at ING Investment Management, including chief risk officer for the Asia Pacific investment. Chan said Ascalon’s business model will be unique in Asia, as it will seek to partner with boutique firms through investing in their business, seeding funds, raising capital and providing operational support, while the large institutional support should reduce investor concerns. Ascalon, which is 100 per cent owned by Westpac, is an equity partner in some of Australia’s most successful investment management boutiques, Westpac stated.

MLC launches tool to help with client leads MLC has developed a new tool called My Client Leads, to help advisers who are struggling to market to their existing client base. The tool identifies client trigger events and gives advisers opportunities to make contact with a client to discuss a potential advice need. My Client Leads is available to advisers who use MLC platforms and insurance, with leads refreshed every night. It was developed after 50 per cent of advisers surveyed by MLC said marketing to their

own clients was their biggest challenge. Richard Nunn, executive general manager of advice and marketing for MLC & NAB Wealth, said the tool leverages life stages, regular events or circumstance changes to encourage contact with clients. Nunn cited examples such as change of name or address, withdrawal of superannuation funds or when income protection insurance cover hasn’t increased for five years.

Richard Nunn


Opt-in to reduce costs for consumers, claims ISN By Milana Pokrajac A TWO-YEAR opt-in proposal will reduce the cost of financial advice, with asset-based fees resulting in consumers paying up to 17 times more, according to the Industry Super Network (ISN). ISN chief executive David Whiteley said a research report conducted by Rice Warner Actuaries and commissioned by the ISN found consumers were up to 10 times better off paying set fees to financial planners as opposed to ongoing asset based fees. The report, entitled ‘Value of IFFP Advice’, looked at five common advice scenarios such as

retirement and pre-retirement planning, insurance and cocontribution, comparing the results of different fee-charging methods. The biggest disparity could be seen in the transition-to-retirement graph, showing set fees would amount to a little over $4,500 over six years, whereas costs of asset-based-fee-generated advice were assessed as $40,706 over the same period (the fee was 0.27 per cent on the accumulation account balance and 0.5 per cent on the retirement income product value). Whiteley said the financial planning industry favoured asset-

based fees, which were “typically the most expensive way to pay for financial advice”. “The report shows that, as proposed in the Government’s [FOFA] reforms, one-off and transparent charging for financial advice will reduce costs to consumers,” he said. “The opt-in measure will ensure that consumers are not paying for advice that they do not receive and this will make advice a lot more affordable and accessible for ordinary Australians,” Whiteley added. The Association of Financial Advisers chief executive, Richard Klipin, fully rejected the findings of

David Whiteley Rice Warner’s report, saying financial advisers knew the costs of running their businesses and were already factoring price increases in

positioning their business for the post-FOFA environment. “Financial advisers work with clients in all segments, they run a range of business models and a range of pricing models. It’s always been the AFA’s view that it’s up to the adviser and the client to determine what works best for them,” Klipin said. “We are also keen for the industry fund movement to start to disclose and fully unbundle their fee proposition so that their client understands what they’re paying and what they’re getting and can turn off the payment for services they don’t want or they don’t get,” he added.

Slater & Gordon’s new planner litigation product By Mike Taylor LAW firm Slater & Gordon has launched a new service which it claims is specifically aimed at assisting people who suffer loss as a result of receiving bad financial advice. The new service, carrying the trademarked name RECOVER, was launched by Slater & Gordon’s head of commercial and project litigation Ken Fowlie, who said it

would “fill a void in the Australian legal market by giving mum and dad investors options, including not having to pay upfront the ongoing legal costs of often expensive litigation to pursue valid claims against negligent advisers”. “It will give people the option of pursuing justice without worrying about throwing good money after bad investment,” he said. The Slater & Gordon announcement

claimed that for many individuals the upfront cost of legal action or the risk of adverse costs had discouraged them from pursuing their legal rights unless as part of a class action. Under the new product being promoted by the law firm, investors will be able to get a fixed price assessment on the merits of their case, with some eligible clients being given access to success fee arrangements. The company said that insurance could

also provide protection for eligible clients if a claim ultimately proved unsuccessful. Fowlie described the product as innovative for Australian investors with the prospect of a “no win, no fee” arrangement for their own legal fees as well as the potential to access insurance in relation to the other sides’ costs. He said the model was already widely available to claimants in the United Kingdom.

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WMP invests in property research By Chris Kennedy PERTH-based financial services group Wealth Management Partners (WMP) has acquired a substantial stake in property advisory service REaffirm. WMP describes itself as a ‘one-stop shop’, and the firm’s director Steve Beattie said that with the growing trend of self-managed super fund investors investing in property, planners can’t provide a total service by focusing only on investments such as managed funds and bonds. “Wealth Management Partners recognises that the financial advisory firm of the future must provide informed advice across all asset classes if we wish to place ourselves at the centre of our clients’ financial lives,” he said. REaffirm will provide specialised property research and advice to WMP clients while building its own client

base, according to REaffirm director Simon Moore. Moore, who has previously worked with Hegney Property Group and Plan B, said that much of the information published about property trends was generated by sellers and their agents and suited a particular agenda. REaffirm said that its client service model was similar to that of traditional financial advisers. “We assist with strategy, implementation through identifying particular properties, and look after the ongoing management and review going forward,” Moore said. “We’re trying to work on developing a financial planning-type model for direct property that’s not sales-based – we see that as an important gap to fill.” REaffirm already has another, larger firm on board that can’t be disclosed yet, and is in talks with two other firms, Moore said.

Fund targets philharmonic philanthropists THE Australian Chamber Orchestra (ACO) is targeting sophisticated philanthropic investors with a new wholesale fund aimed at benefiting from the appreciating value of rare musical instruments. With an Australian Financial Services Licence provided through JB Were, the other purpose of the fund is to provide high quality musical instruments to musicians in the ACO, with assets loaned from the fund trustee (the Australian Chamber Orchestra Instrument Fund) to the orchestra to be played by the musicians. The wholesale unlisted unit trust will feature a unit price of $50,000, with a target capacity of around $5 to $10 million and an investment horizon of 10 to 15 years, with limited redemption opportunities every three years, according to ACO director Brendan Hopkins. In the past 10 to 15 years the types of assets the fund will be targeting – which include a Stradivarius violin worth $1.6 million that the fund has already purchased – have returned around 7-10 per cent compound, he said. The fund is hoping to appeal to the philanthropic investor who would not only benefit

T. Rowe Price to launch Aussie equity capability

from the financial returns but also appreciate the musical aspect, he said. “While it is not unusual for musicians to receive rare and valuable instruments on loan, ordinarily they are lent by wealthy individuals or philanthropic organisations who retain ownership,” he said. “In this case, the instruments remain under the stewardship and control of the orchestra, and in the ownership of the fund. This is for the long-term benefit of investors, the musicians and the listening public.”

ETFs to become more attractive for advisers By Ashleigh McIntyre

By Milana Pokrajac T. ROWE Price has announced the launch of its Australian equity capability, which is likely to happen at the end of November, according to director for Australia and New Zealand Murray Brewer. Brewer said the company had $510 billion in funds under management, $70 billion of which came from non-United States-based investors. Launching the Aussie equity capability would help T. Rowe Price in its goal to grow the non-US client base. Brewer said there hadn’t been many players in the market who started up Aussie equity boutiques after the global financial crisis, which he said may have been caused by the increased number of boxes investors now wanted ticked. “People are looking at stability of the organisation, risk framework and debt; our view is that unless you are globally integrated with your research (that is, getting the information load daily) you’re not going

A $1.6 million violin is among the fund’s assets.

Murray Brewer to be able to cover those stocks as well,” he said. Brewer added that for the past year T. Rowe Price had been building its equity capability team, which is currently being integrated with the rest of the company. Viral Patel has recently been appointed as associate director of research in the new Aussie equities team, while Randal Jenneke, who moved from Schroder Investment Management, has been recruited as portfolio manager. Brewer said the launch of the company’s Australian equity capability had been four years in the making.

THE proposed Future of Financial Advice reforms could boost the use of exchange-traded funds (ETFs) by Australian retail investors, according to an industry expert. The proposed ban on upfront and trailing commissions to financial advisers will encourage advisers to look for solutions that do not carry these types of fees, said Deborah Fuhr, Blackrock global head of ETF research and implementation strategy. “ETFs will become the ideal solution,” she said. While the Australian ETF industry has lagged behind its American counterpart, Fuhr believes it is on track to follow global trends and increase by 20 to 30 per cent per year. Australian ETF assets are expected

to surpass US$10 billion by the end of 2013, growing from the current US$6 billion. According to Russell Investments director of ETFs Amanda Skelly, the Australian ETF landscape is the reverse of what is happening globally, with retail and self-managed super fund investors taking a lead in ETF usage. New research from Deloitte Actuaries & Consultants and commissioned by Russell found that while institutional investors have used ETFs in the past, obstacles such as cost and liquidity stand in the way of further use. Skelley said it was up to the ETF industry to meet the growing needs of the institutional market and educate institutional investors on the different ways they can use ETFs in portfolio management.

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Lonsec overtakes van Eyk Money Management’s Top 100 Dealer Groups survey reveals research house Lonsec has surged ahead of its competitors over the past year, taking the long-held industry-leading position from van Eyk Research. Lucinda Beaman reports.


onsec has taken the lead as the research house of choice for many of Australia’s top 50 largest dealer groups. The research house is now the preferred investment supplier to more than 16 of the top 50 dealer groups, including Professional Investment Services (PIS), groups owned by National Australia Bank (NAB), notable new clients including Count Wealth Accountants and ANZ Financial Planning, and numerous other independently owned groups. Over the past year Lonsec has more than doubled the number of top 50 dealer groups who point to the Melbourne-based group as their key research partner. Sydney-based Morningstar has also increased its number of top 50 clients, attracting new clients, including the Commonwealth Bank-owned (CBA) dealer groups, Commonwealth Financial Planning and Financial Wisdom, and Industry Fund Financial Planning, while retaining top 10 clients including Millennium3 Financial Services and RBS Morgans. Van Eyk Research retained its key contract with Australia’s largest dealer group, AMP Financial Planning, and a number of other

Many dealer groups are also working to improve their offer to advisers by boosting their internal investment research teams.

dealer groups owned by AMP, including Hillross Financial Services and Genesys Wealth Advisers, as well as Suncorp-aligned dealer groups. But client losses over the year meant the research house lost its long-held industry leading position. Standard & Poor’s (S&P) lost its CBA contract, but extended its relationship with rival bank Westpac. And while Mercer is working hard to break into the retail investment market, it still has a way to go. Mercer signed RI Advice Group as a new client, with the ANZ-owned group joining Charter Financial Planning and AXA Financial Planning as some of the only groups in the top 50 using the traditionally institutionally focused research house as their key provider. Van Eyk Research and Morningstar are now

Preferred investment research suppliers – top 50 dealer groups

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Lonsec Clients: Professional Investment Services, Count Wealth Accountants, NAB Financial Planning, Garvan Financial Planning/MLC Financial Planning, ANZ Financial Planning, Aon Hewitt Financial Advice, Lonsdale Financial Group, Australian Financial Services, Godfrey Pembroke, Apogee Financial Planning, Bendigo Financial Planning, Consultum Financial Advisers, Madison Financial Group, Capstone Financial Planning, Australian Unity Financial Planning, NAB Private Wealth Advisory Van Eyk Research Clients: AMP Financial Planning, Hillross Financial Services, Genesys Wealth Advisers, Guardian Financial Planning, Suncorp Financial Services, AAA Financial Intelligence, Lifespan Financial Planning, Gold Financial Morningstar Clients: Millennium3, Commonwealth Financial Planning, RBS Morgans, Financial Wisdom, Ord Minnett, Infocus Money Management, Shadforth Financial Group, Matrix Planning Solutions, Industry Fund Financial Planning Standard & Poor’s Clients: Westpac Financial Planning, St George Financial Planning, Futuro Financial Services, Magnitude Financial Planning

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Mercer Clients: Charter Financial Planning, AXA Financial Planning, RI Advice Group Source: Money Management Top 100 Dealer Groups

12 — Money Management June 9, 2011

neck and neck as preferred suppliers for the top 50 dealer groups. But the number of top 50 dealer groups pointing to Morningstar as their preferred secondary supplier places Morningstar in second place, behind leader Lonsec, in terms of overall market reach. It is common practice in the industry for dealer groups to use investment research as a differentiator in value propositions between advisers, with ‘premium’ advisers receiving research from the dealer group’s preferred supplier. Many dealer groups are also working to improve their offer to advisers by boosting their internal investment research teams, who provide an additional overlay to the output received by the traditional research houses. A number of dealer groups, including Centric Wealth, Perpetual Private Clients and Australian Unity Financial Planning make a point of noting their advisers rely primarily on the output of their own internal investment teams, who in turn rely on a variety of research sources. Some dealer groups, including Perpetual Private Wealth, have said this is the only way to ensure quality for advisers when even the top research houses have areas of strengths and weaknesses in their assessments.

Preferred secondary suppliers – top 50 dealer groups Morningstar Clients: Charter Financial Planning, ANZ Financial Planning, AXA Financial Planning, Bridges Personal Investment Services, Financial Services Partners, Guardian Financial Planning, Gold Financial Lonsec Clients: AMP Financial Planning, WHK Financial Planning & Prescott Securities, Infocus Money Management

First choice for top 50 dealer groups 1. Lonsec 2. Van Eyk Research and Morningstar 3. S&P 4. Mercer

Van Eyk Research Clients: Professional Investment Services, Commonwealth Financial Planning, RI Advice Group Standard & Poor’s Clients: Aon Hewitt Financial Advice, Hillross Financial Services, Australian Financial Services, Consultum Financial Advisers Mercer Client: Genesys Wealth Advisers

Overall market reach 1. Lonsec 2. Morningstar 3. Van Eyk Research 4. S&P 5. Mercer

Alternative research providers to the top 50 dealer groups

- AAG (Australian Financial Services) - Adviser Edge (Genesys Wealth) - Aspect Huntley (Shadforth Financial Group) - CPG Research and Advisory (Western Pacific Financial Group) - Dexxr (NAB-owned dealer groups) - eQR (Magnitude Financial Planning, Securitor) - Officium Capital (Western Pacific Financial Group) - Prescott Securities (WHK Financial Planning & Prescott Securities) - Rob McGregor (Matrix Planning Solutions) - Russell Investments (State Super Financial Services) - Shaws (Financial Services Partners) - Zenith (Futuro Financial Services)

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Rate the raters

Rate the Raters 2011 In Money Management’s annual Rate the Raters survey, Lonsec came out at the top of the pack, with Standard & Poor’s close behind. Ashleigh McIntyre analyses the results.

14 — Money Management June 9, 2011

Rate the raters

THE past year has proved to be an uncertain time for the financ i a l s e r v i c e s i n d u s t r y, w i t h research houses being no exception. The potential introduction of the Future of Financial Advice reforms has forced many companies to consider the possible consequences for their business. But while many changes have already been made in preparation for these reforms, the industry is still uncertain about what the final legislation will look like and the true impact it will have. With that in mind, 2011 will be the final year in which the Money Management Rate the Raters survey shines the light on research houses in the context of the current regulatory environment, since there is no doubt that things will soon change. As is the case every year, this year’s survey asked fund managers to rate research houses on a number of criteria rather than pitting houses against each other. In s t e a d o f n a m i n g a w i n n e r, t h e survey focused on the individual research houses to gain an insight into how fund managers felt about each research house and what they considered to be the valuable qualities in each business. This year’s survey revealed Lonsec to be the clear favour ite among fund managers, while Standard & Poor’s and van Eyk appeared to have reaped the rewards for investing in their service offering. Morningstar and Mercer were not far behind, with Zenith seeming to have fallen out of favour with fund managers over the last 12 months.

t h e f i r m’s t e a m , c o u p l e d w i t h i t s productivity, helped significantly reduce the turnaround time in the work it does. “It’s important to allocate the right amount of resources to produce the work required, and I think we are good at doing that,” Kennaway said. Kennaway’s high opinion of his staff was also reflected in the survey, with 63 per cent of respondents rating Lonsec staff as ‘above average’. The number of products rated by Lonsec from the same manager also leapt up this year, with the majority of respondents (60 per cent) saying Lonsec rated ‘two to five’ products, and 37 per cent stating the firm rated ‘more than five’ products. This, coupled with the fact that Lonsec rated 100 per cent of the respondents this year, shows strong support for Lonsec as the favoured research house for fund managers.

It’s important to allocate the right amount of “resources to produce the work required, and I think we are good at doing that. ” - Grant Kennaway

Figure 1 Have you been rated or reviewed by any of the following groups in the past 12 months?

Standard & Poor’s

Investment in turnaround time, transparency and quality of staff has paid off for Standard & Poor’s (S&P) in this year’s survey. The research house received one o f t h e h i g h e s t ra t i n g s f ro m f u n d managers and was considered to be the most improved firm over the past 12 months. Continued on page 16

Source: Money Management. Note: due to rounding, not all percentages will add to 100.

Figure 2 How did you rate the research methodology of these firms?


Once again the favourite research house among fund managers was Lonsec, which was made evident by the ratings house’s outperformance in almost every category. The firm did particularly well in the area of methodology, where 33 per cent of respondents considered it to be excellent, while 60 per cent said its methods were good. Lonsec general manager of research G ra n t Ke n n a w a y a t t r i b u t e d t h e favourable rating of its methodology to two things. “As a business, we are always trying t o i n c re m e n t a l l y i m p r ov e. So w e certainly do formal reviews of methodology on a regular basis,” he said. “The other thing we try and do is clearly articulate our methodology to our clients and the market, so that it is clear to people what Lonsec stands for and what we believe makes up a quality product,” he added. Another key factor that contributed to Lonsec’s success was its consistent turnaround time, which 77 per cent of respondents were positive about. It was also the only house not to receive a ‘below average’ or ‘poor’ rating in this category, which is a significant achievement considering the volume of products rated. Kennaway said the size and depth of

Source: Money Management. Note: due to rounding, not all percentages will add to 100.

Figure 3 Looking at the firms that rated your fund, how would you describe the rating they gave?

Source: Money Management. Note: due to rounding, not all percentages will add to 100. June 9, 2011 Money Management — 15

Rate the raters Continued from page 15 S&P Fund Services head of research Leanne Milton said improving productivity and turnaround time without compromising quality had been a focus for the team. “A lot of people were really looking for a 12-month cycle, and I know a number of houses haven’t been doing that. Clearly we were one of them a few years ago,” Milton said. Bu t f r o m 2 0 1 0 t o 2 0 1 1 , S & P h a s improved its turnaround time by 27 per cent, with part of that coming from increasing the size and depth of the team with three new hires, Milton said.

In certain situations where we lost one person we hired two, or if we lost a person we would hire someone with twice as much experience. - Mark Thomas

“ We a l s o i m p r ov e d o u r re p o r t templates and our back-office and IT development to help reduce the time analysts spend on non-analytical work,” she said. Another area in which S&P improved was transparency, with 39 per cent of respondents rating the transparency of the process as ‘above average’, while 57 per cent said it was ‘average’. Milton said introducing new research reports has helped to provide greater clarity for fund managers about S&P’s opinions. “We’ve worked hard on being more transparent with fund managers about our process,” she said.

Figure 4 How many products have you sought to have rated? Mark Thomas S&P also performed well in the ratings stakes, with 24 per cent of managers considering their ratings to be ‘excellent’ while 66 per cent thought they were ‘fair’. Milton said this shift to a more positive view of their ratings process could be a result of having a more open relationship with fund managers. “We’re not afraid to use our ratings scale and we make a point of explaining the strengths and weaknesses of a fund manager’s strategy after they receive their rating, and I think this promotes an open and honest dialogue about the ratings outcome,” she said. Source: Money Management. Note: due to rounding, not all percentages will add to 100.

Figure 5 How much time (on average) did you spend with the ratings house representatives?

Source: Money Management. Note: due to rounding, not all percentages will add to 100.

Figure 6 How would you rate the turnaround time?

Van Eyk

De s p i t e l o s i n g t ra c t i o n w i t h f u n d managers in last year’s survey, van Eyk staged a comeback this year, seeming to have reaped the rewards for investing in its offering. First off, it should be noted that van Eyk operates a different model to many of its peers, preferring a subscriber-pays model and not taking payments for research conducted internally. One area van Eyk improved on was the quality of its personnel, with 55 per cent of respondents rating them ‘above average’, while 41 per cent said they were ‘average’. Chief executive Mark Thomas said the firm had spent a lot of time reinvesting in its core research team and was now back to a full team after making some changes mid-year. “In certain situations where we lost one person we hired two … or if we lost a person we would hire someone with twice as much experience,” Thomas said. “I’ve taken a personal interest in most of the senior positions we’ve hired … because culture is important in our organisation,” he said. Respondents were also particularly pleased with van Eyk’s methodology of research, which Thomas said could most likely be put down to an increase in experience. “While nothing has changed in terms of methodology, the devil is in the detail and the interaction. Having people that are a bit more experienced involved in the process has made the methodology seem a bit more user friendly.” Continued on page 18

Source: Money Management. Note: due to rounding, not all percentages will add to 100.

16 — Money Management June 9, 2011

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Rate the raters Continued from page 16

Our relationships with fund managers are very important to us and we want to have a collegial relationship. - Marianne Feeley

Marianne Feeley

One category that received a mixed response from fund managers was turnaround time, which Thomas put down to the business model run by van Eyk. “We’ve made a conscious effort to make sure we’re back on track with our schedule of delivery, but at the end of the day advisers are our clients, not fund managers,” he said. Van Eyk has also consistently stood out as the research house that spent the most time with managers year-on-year. Thomas said the firm was not in the business of making a set time to spend with managers, but rather spent as much time as was required.

Figure 7 How do you rate the transparency of their ratings process?

Source: Money Management. Note: due to rounding, not all percentages will add to 100.

Figure 8 How would you rate the quality and experience of the ratings house personnel?

“It’s about getting engaged in discussions and asking questions rather than just receiving information, which makes it take longer,” he said.


High-quality and experienced personnel coupled with a sound methodology saw Mercer fare reasonably well in this year’s Rate the Raters survey. The research house lifted its game to become top firm for quality personnel, with 67 per cent of respondents rating Mercer’s staff ‘above average’ and 20 per cent giving an ‘average’ rating for the category. Fund managers were also particularly happy with the quality of Mercer’s research methodology, with 67 per cent of respondents giving a positive rating, while no negative ratings were received. Mercer principal Marianne Feeley said that while there had been no material changes in these areas, time and experience played a big role in the positive outcome of the survey. “We have great people and I think they work well together and enjoy what they do,” she said. Specialising by asset class was also an advantage for Mercer, Feeley said, as more time working together has helped to boost the firm’s performance. While Mercer performed well in most aspects of the survey, there is still work to be done in the categories of turnaround time, transparency and feedback. Feeley said this tended to be a result of having a different business model to other research firms, namely one that does not accept payment from fund managers for ratings. “O u r w o r k i s f o r o u r c l i e n t s [subscribers]. We’re available to provide feedback, but even then it is not going to be a detailed conversation,” she said. Fe e l e y s a i d t h e s h i f t t ow a rd s a response of ‘below average’ for transparency may have been driven by the f a c t t h a t Me rc e r o n l y t e l l s f u n d managers their rating, but does not share its output that it shows to clients. “O u r re l a t i o n s h i p s w i t h f u n d managers are very important to us and we want to have a collegial relationship … but it basically comes down to the fact that our work is for our client – they are paying for the research,” Feeley said.

Morningstar Source: Money Management. Note: due to rounding, not all percentages will add to 100.

Figure 9 How would you rate the feedback you received from the ratings house?

Source: Money Management. Note: due to rounding, not all percentages will add to 100.

18 — Money Management June 9, 2011

Although Morningstar has a different business model again – preferring to rely on funds from clients (ie, financial advisers) rather than receive payment for ratings – it still managed to perform reasonably well in the 2011 Rate the Raters survey. With that in mind, Morningstar did tend to polarise opinion in some categories. One aspect that had managers disagreeing was the quality of Morningstar’s personnel, which received both h i g h p ra i s e a n d c r i t i c i s m f r o m managers. Co-head of fund research Tim Murphy said the mixed response could be a result of his firm’s policy of not hiring people from the research industry. “We like to hire people who think differently. We think we have a somewhat different way of approaching things and therefore we need somewhat different people to

Rate the raters fulfil that capability,” he said. “Some fund managers can appreciate that, and some can’t.” Respondents were also positive about the rating handed out to them by Morningstar, with 72 per cent believing they were given a ‘fair’ rating. Mu r p h y s a i d t h a t although most fund managers would love an ideal rating on everything they run, managers are realistic enough to know that won’t always happen. “As long as they feel that we have been fair, reasonable and transparent in reaching the outcome that we have reached, then they haven’t got a reason to be unhappy with us,” he said. The survey also found managers were mixed on the issue of feedback given, with a wide spread of answers from ‘above average’ to ‘below average’. Mu r p h y s a i d b e i n g open and transparent was f u n d a m e n t a l t o Mo r n ingstar’s approach. “We try to be open and honest with fund managers when we deal with them and we try to be open and honest with dealer groups when talking about fund performance and the calls that we make,” he said.

Zenith Investment Partners

While Zenith performed extremely well in last year’s survey, the ratings house seems to have experienced a slight slump in popularity among fund managers this year. Director and joint founder David Smythe said that despite this decrease in manager’s sentiment, his firm had not changed its approach and was continuing to implement its ‘best of breed’ model. This model focuses on research depth and deliberately covers approximately half of the number of funds relative to its peers to ensure only funds worthy of consideration for client portfolios are rated. Smythe said it was probably this same model that contributed to the negative responses received for the feedback category, where 63 per cent of managers cited the feedback given as ‘average’, while 21 per cent thought it was ‘below average’. “Some fund managers don’t like being told they

f a i l u n d e r a ‘ b e s t o f b re e d’ approach, given that under a broad coverage ratings house model ‘everyone gets a seat on the bus’,” Smythe said. Zenith were also criticised for the quality of their personnel, with only 17 per cent stating they thought staff were ‘above average’. Smythe said that while there had been new additions to the team, these had been quality hires with lots of experience.

“Furthermore, we have operated the most stable research team in the marketplace for almost nine years now, ensuring consistency of approach and retention of intellectual property,” he said. In contrast, one aspect fund managers praised Zenith highly for was its turnaround time, with 3 7 p e r c e n t o f re s p o n d e n t s giving it a positive review, while only 8 per cent were negative – one of the lowest negative scores

in the category. Smythe said the global financial crisis had reinforced the firm’s approach to emphasise depth of research over volume. By spreading the ratings net too wide, you risk being underresourced for analysis and the review cycle blows out, Smythe said. “This means funds are being covered less regularly, in less detail and your turnaround times get stretched,” he added. MM

David Smythe

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Rate the raters

ASIC researching the researchers

The financial relationships between fund managers and research houses escaped scrutiny in the most recent round of regulatory reforms. But that may not be the case for long, writes Lucinda Beaman.


he pay-for-ratings model, in which research houses accept payments from fund managers to subsidise the investment research process, has long been accepted in the Australian financial services market. In fact, it is prospering. So m e m a j o r m ov e m e n t s i n t h e clients’ books of research houses in recent months has meant that, for the first time in many years, the majority of Australia’s top-50 dealer groups now rely on research that is heavily subsidised by fund managers. It’s a m o d e l t h e re g u l a t o r h a s expressed concerns about in the past. During the Ripoll Inquiry, the Australian Securities and Investments Commission (ASIC) recommended the Government consider whether fees paid by product m a n u f a c t u re r s t o re s e a rc h h o u s e s should be reviewed. In its submission to the inquiry, the regulator noted the common practice in the Australian research industry for re s e a rc h e r s t o b e p a i d by p r o d u c t providers. This situation “creates an obvious conflict of interest and has the potential to distort the quality of research reports often used by advisers in making product recommendations to clients”, the regulator said. ASIC s u g g e s t e d a “u s e r- p a y s m o d e l f o r research house remuneration might help improve the quality of the research used by advisers”. The recommendation was not picked up in the resulting Future of Financial

Advice package, but that doesn’t mean ASIC’s concerns have been forgotten. The regulator has recently been in discussions with representatives from research houses and dealer groups to discuss issues, including business models, conflicts of interest, and disclosure and transparency in the research market, as well as the quality of research being given to advisers. Tre a s u r y c o n f i r m e d t o Mo n e y Management that ASIC is “currently considering what measures (if any) it should put in place as a result of this work”. It’s clear that for many of Australia’s top dealer groups, the potential for conflicts of interest in a pay-for-ratings business model is not a serious concern – at least not for clients of the most predominantly used research house, Lonsec. But there are also many who believe the model is not the best solution for the financial planning industry, or investors.

Confident or concerned about conflicts of interest?

The financial services industry is under pressure to restructure its business models to remove any potential for, or even perception of, conflicts of interest that could create question marks in the minds of existing and prospective clients. There are some who believe this restructuring should extend to the investment research industry, one of the most integral and influential sectors of the market.

20 — Money Management June 9, 2011

“In an ideal world, there would be no subsidisation of the cost of investment research; it would be independent and based on a pure subscr iption fee,” Au s t ra l i a n Un i t y h e a d o f f i n a n c i a l advice, Craig Meldrum, said. “The industry should be coming to the realisation now that there is a philosophical as well as a physical decoupling of advice and product. In that respect, the better the research and the more independent the research from the actual product you’re recommending, the better the outcome for the client.” Matrix Planning Solutions managing director, Rick Di Cristoforo, is another who has concerns about any financial relationship between fund managers and research houses. In addition to an aversion to a pay-for-ratings model, Di Cristoforo is concerned about research p r ov i d e r s s u b s i d i s i n g t h e c o s t o f research by offering funds management products, a model employed by the group’s former research supplier, van Eyk Research. “ We want clean research without product provision or without payments being taken from fund managers,” Di Cristoforo said. “I don’t believe you can be a product provider and a researcher like that in the same entity. That was an issue for us.” Other dealer groups, however, believe the potential for conflict in these business models can be adequately

managed. Professional Investment Holdings managing director, Grahame Evans, agreed that dealer groups must be comfortable with the business m o d e l s a n d re s e a rc h m e t h o d s employed by their research suppliers, conclusions that can only be drawn after thorough due diligence is conducted. Based on the due diligence undertaken by his internal research team, Evans said he’s “very comfortable” with his research partners (Lonsec, van Eyk Research and Zenith Investment Partners) relying on a hybrid fee model. DKN chief executive, Phil Butterworth, is similarly confident. Butterworth believes there is an important distinction to be made between fund managers paying to be rated, and fund managers paying for ratings. “The pay-for-ratings model … it’s not paying for the ‘right’ ratings,” Butterworth said. There are significant-enough disincentives for researchers to avoid such a trap, Butterworth said, using DKN’s primary research supplier, Lonsec, as an example. “If Lonsec give poor products good ratings, they’ll lose subscribers. If they lose subscribers, fund managers won’t require their research because nobody’s using it,” Butterworth said. “As soon as they compromise a rating, they’ve just compromised their whole business model. They know that and I think that is a very powerful relationship.” This is an argument Lonsec and other researchers relying on both adviser and fund manager revenue streams have sought to make to the regulator in recent years. “We certainly have dialogue with Government when we have an opportunity. I know they’re still certainly interested in the sector and we have discussions on our model to make it clear how we operate,” Lonsec managing director, Grant Kennaway, said. “The model is only as successful as the quality of the work you do. You can’t compromise on quality or integrity or making sure your research is robust, because the industry wouldn’t tolerate that.” Bu t f o r s o m e, t h e p e rc e p t i o n o f conflict can be just as concerning as the real thing. RI Advice Group chief executive, Paul Campbell, said while he doesn’t believe the pay-for-ratings model necessarily leads to conflicts of interest or a poorer quality of research, subscribing to a user-pays model removes any question of those concerns in the minds of both advisers and clients. “I think it does raise questions when you see where the research is being paid from. We’ve removed that conflict,” Campbell said. “I wouldn’t stand here and say the

Rate the raters

research is unequivocally better as a result. “But I think advisers need to know is that the researcher is acting in their best interests and not anyone else’s. That’s the key to it.” Me l d r u m s a i d h i s g r o u p w o u l d welcome a research industry in which “you could rely on knowing the research you are receiving is unblemished and not bent towards a particular message because one fund manager is paying more than another, for example”. “We haven’t seen any example of that, it’s just one of those feelings in the industry, because fund managers are well funded and they do have a lot of sway with research providers, and some do take the cake,” Meldrum said. He pointed to the fact that some researchers had “publicly stated that they do not accept the sometimes lucrative offers from some product providers to favourably rate their funds”. W h e n t h e re p o r t s g e n e ra t e d by research houses shape the recommendations of the entire industry, “you can see why the fund managers are so motivated to throw everything they have at the research houses”. “We know all the bells and whistles and salesmanship that goes on between research houses and fund managers and

The gap between what research costs to produce and what dealer groups are willing to pay depends on what you’re trying to offer. - Grant Kennaway

Grahame Evans equities brokers and that sort of thing. We can’t be party to that, we need something that’s really open and transparent and independent,” Meldrum said. “The industry has been open to criticism for far too long. Anything that drives professionalism, we’re very happy with.” Di Cristoforo agreed that the pay-forratings model leaves the advice industry more vulnerable to criticism.

“Unless you charge the person that’s receiving the research, you’re always going to run that risk.”

Price pressures

One of the roadblocks to an Australian re s e a rc h i n d u s t r y f o u n d e d o n a subscriber-pays model is that many dealer groups and advisers aren’t willing to pay the full price of research.

“The Australian market, while it’s a strong financial services market, still doesn’t seem to be large enough for a pure subscription-only business to function without any other revenue streams,” Kennaway said. The gap between what research costs to produce and what dealer groups are willing to pay “depends on what you’re trying to offer”, Kennaway said. “We want to have a high quality and b ro a d re s e a rc h o f f e r i n g . T h a t’s a n expensive business to run.” Opponents to this argument say it is a poor excuse from advisers whose businesses, and the livelihood of their clients, lean heavily on the quality of investment research. “I don’t think that’s a valid excuse for taking money from a fund manager. I t h i n k i f p e o p l e a re g o i n g t o h a v e research, they should pay for it. It is intellectual property – if you want it, you should pay for it,” Di Cristoforo said. Meldrum is another who believes advisers should be willing to pay for research. “Research is absolutely necessary to what we do. We need it. And if it means paying more to ensure that our clients’ money is safe, then we’d be up for that, we’d do that,” he said. Continued on page 22

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Rate the raters Continued from page 21 “Professionalism and the best outcome for clients is what we’re all driven towards. If that means you’re looking at the research that’s out there and you’re going to get a better cost deal from one as opposed to another, and you have a feeling that the research you’re being given is not exactly transparent – and may be tarnished by fund manager subsidies, for example – then we’d rather pay more and have independent and transparent research.” Campbell, whose advisers use Mercer as their primar y research supplier, acknowledged that while subscriber-pays research is significantly more expensive than research subsidised by fund managers, he believes it’s a price worth paying. “You’ve got to put in the appropriate amount of time and money to get good quality outcomes,” Campbell said. Evans, meanwhile, argued that advisers, and their clients, should not be expected to bear the full cost of research. “If you took away that payment from the fund managers to the researchers, what you’re going to end up doing is pushing that cost onto the client, in some way or another. It’s got to go down there somewhere. And I think the whole industry business model is under enough strain as it is without putting another cost onto the client,” Evans said. “So I’d hate to see that go.” Evans said while removing payments from fund managers to researchers might “completely remove any potential for conflict”, he considers it an unnecessary additional cost in an environment in which he believes any potential conflicts of interest are being more than adequately managed. Butterworth also believes advisers should not have to bear the full burden of the cost of research in an environment where fund managers are just as reliant on research reports for their survival as advisers. “There are two parties that rely on

research. The adviser absolutely has to rely on research to ensure they’re investing their clients into the appropriate funds, but on the flipside, fund managers need their products to be researched to ensure they can get in front of an adviser,” Butterworth said. “From my point of view, from a commercial point of view, fund managers are as much a user of research as a dealer

savings elsewhere. “I think it would drive down [professional indemnity insurance] costs for the PI insurer to know that the research a licensee is depending on is unbiased and independent,” he said. “At the end of the day, if clients are not happy with the advice that’s been provided – if you’ve relied on research that’s substandard for example – there’s the

the market will “allowI think models where they see their research provider adding value to their business and their clients. - Grant Kennaway

Rick Di Cristoforo group, so they have a responsibility for paying for their role in that. A dealer group also needs research, and they should absolutely be paying a commercial fee for accessing that.” Meldrum acknowledged that while removing fund manager payments from the research value chain would “perhaps drive the cost of subscription up” for advisers, he said this would be a price worth paying for unquestionably independent research, and would “do so much to improve the advice profession’s view of and reliance on the research providers”. And while the price of research subscriptions may be driven higher by a move away from a pay-for-ratings model, Meldrum believes this could lead to cost

22 — Money Management June 9, 2011

potential for brand risk, the risk of ASIC coming in … I think it’s a small price to pay for the benefit that you’re getting.”

Quality of research

Di Cristoforo believes a pay-for-ratings model does place limitations on some research houses, and their dealer group clients, by restricting their potential pool of research. Di Cristoforo said this can particularly be an issue where investments outside the managed funds space, such as direct equities and ETFs, are concerned. Morningstar co-head of fund research, Tim Murphy, said Morningstar’s subscriber-pays business model means this doesn’t cause a concern for him. “We determine what we do and don’t

want to cover at the start of every sector review based on our own criteria, not based on what the fund manager’s marketing agenda is,” Murphy said. “That’s meant that there are heaps of products that some managers would love us to cover that we haven’t, and equally there are products that we do cover that fund managers have not particularly wanted us to cover in certain circumstances. Our agenda is dictated to by what our clients and investors want or need, and not what fund managers want or need,” Murphy said. Lonsec’s Kennaway argued his group is also focused on “meeting the needs of subscribers and focusing on the areas they want”. Kennaway said that while fund managers in traditional asset classes were being “more meticulous” in their processes before launching new products, there had been movement in other areas, including in the ETF and SMA spheres. DKN’s Butterworth, with the significant pulling power of dealer group Lonsdale and his network of boutique licensees behind him, said he can influence product providers to pay for a rating from his preferred research house, or alternatively request the research house to examine a new product – although it’s a demand not all advisers are able to make. For Campbell, committing to Mercer’s subscriber-pays model makes him confident the research house is focused fully on meeting the needs of its dealer group clients. From Kennaway’s perspective, this “healthy competition” between different models in the investment research market is vital in ensuring there is “choice for dealer groups and advisers”. “I think the market will allow models where they see their research provider adding value to their business and their clients,” Kennaway said. “The market will judge what the right model is.” But with ASIC making its investigations into the workings of the research industry, that decision may no longer rest in the market’s hands. MM

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The Messenger

Inflated fears There are widespread concerns that the large-scale quantitative easing by the US Federal Reserve will lead to a resurgence of inflation. Robert Keavney weighs up the evidence.


am not a trained economist – one of the many things I am grateful for in this life. I am a three-decade practitioner in financial markets who has noted the empirical failure of many orthodox economic and investment theories. As a result, whenever I confront a theory that I don’t understand – that is, most of them – I have acquired the habit of looking at the data. Currently, there is a widespread view that the massive ‘printing’ of money will lead to an outbreak of inflation. The theory goes that increasing the volume of money more rapidly than the increase in goods and services, must force prices upward. More money is chasing the same amount of goods, as it is sometimes put. This has prima facie credibility. If a lot of new money is thrown into an economy it must have consequences, and surely one of them will be upward pressure on prices. But

before we accept this idea we must look at the evidence. To do this we need to understand the concept of the quantity of money in a country. How much money exists in America depends on how you measure it. Certainly notes and coins are money, but are travellers’ cheques money? And should the value on money market funds be counted as money? Different measures of money (eg, the monetary base or ‘money base’, M1, M2, etc) include or exclude various items. If many items are included in a measure it is called a broad measure. If few items are included it is a narrow measure. Money base is a narrow measure. Figure 1 shows that from The Declaration of Independence in 1716 through to 2008 the US money base grew to almost US$1 trillion. In the three years since then it has approximately tripled – there has been

Figure 1 Fed-adjusted money base January 1959 to latest (billions)

unprecedented money creation. The Federal Reserve (the Fed) hopes that this will support the weak American economy. However, it happens that there is little correlation between changes in money base and inflation, as was highlighted in the 1970s. Annual inflation was more than three times its 50-year average for this decade, while the money base grew at a slower than average rate. Perhaps we should look at a broader measure of money, say M2, to see if there is a meaningful historical relationship between money creation and inflation. Bank reserves represent a large portion of money base, but they are not counted in M2. It is important, in what follows, not to confuse money base and M2. Figure 2 shows rolling annual changes in the consumer price index (CPI) and M2. It

Where is the cash?

Now we must note some unexpected facts. Over the last half century, rolling annual growth in M2 has averaged 6.9 per cent. But over the three years since the money base took off, M2’s growth has been below average. How can this be? Where is all the new money? Why hasn’t it hit M2? How can a broad measure of money growth be slower

Jan 1960 - Latest Figure 3 M2 & CPI (3-year lagged) January 1960 to latest 16.0%


y = 0.5422x + 0.0046 R2 = 0.2952




transpires that the correlation between the two is only 16.6 per cent. However, this weak relationship is not unexpected, as common sense would suggest that it would take time for changes in money supply to affect prices. If inflation is lagged by three years, allowing three years for changes in money supply to flow into prices, there is a correlation between changes in M2 and subsequent inflation of 54.3 per cent. This is shown in figure 3, which is a scattergram. Each dot represents CPI and M2 for a particular year. CPI is the vertical axis and M2 is the horizontal axis. In layman’s terms, a correlation of 50 per cent is halfway between a perfect one-toone relationship and no relationship at all. M2 is clearly related to inflation to some extent but not to the extent that changes in one will always be accompanied by changes in the other. Incidentally if we lag inflation for a greater or lesser period than three years, the relationship is not so strong.







6.0% 4.0%



Jan-59 Jul-61 Jan-64 Jul-66 Jan-69 Jul-71 Jan-74 Jul-76 Jan-79 Jul-81 Jan-84 Jul-86 Jan-89 Jul-91 Jan-94 Jul-96 Jan-99 Jul-01 Jan-04 Jul-06 Jan-09


0.0% -2.0% -4.0%

Fed Adjusted Money Base










Sources: CPI - Bureau of Labour Statistics (BLS), using their price index for all urban consumers (ie, everyone who lives in areas with a popula-

Sources: CPI - Bureau of Labour Statistics (BLS), using their price index for all urban consumers (ie, everyone who lives in areas with a popula-

tion of 2,500 or greater); Money supply and M2 - Federal Reserve Bank of St Louis. All data is since 1960.)

tion of 2,500 or greater); Money supply and M2 - Federal Reserve Bank of St Louis. All data is since 1960.)


Figure 4 Change in US money base velocity since 1947

Figure 2 M2 & CPI January 1960 to latest 15.0% 12.0% 9.0% 6.0% 3.0% 0.0%



Jan-05 Jul-07

Jan-00 Jul-02

Jan-95 Jul-97

Jan-90 Jul-92

Jan-85 Jul-87

Jan-80 Jul-82

Jan-75 Jul-77

Jan-70 Jul-72

Jan-65 Jul-67

Jan-60 Jul-62



Sources: CPI - Bureau of Labour Statistics (BLS), using their price index for all urban consumers (ie, everyone who lives in areas with a population of 2,500 or greater); Money supply and M2 - Federal Reserve Bank of St Louis. All data is since 1960.)

24 — Money Management June 9, 2011

Source: John P Hussman,

than average after massive money creation using another measure? Here we must touch on the question of velocity and liquidity traps. The Economist defines velocity as: “The speed with which money whizzes around the economy, or, put another way, the number of times it changes hands. Technically, it is measured as gross national product divided by the money supply (pick your own method of measuring money supply).” Dr J Hussman, of Hussman Funds, describes velocity as the dollar value of gross domestic product that the economy produces per dollar of monetary base, or the number of times that one dollar ‘turns over’ each year to purchase goods and services in the economy. Hussman points out that the Fed’s belief that the expansion in the money base will grow the weak economy relies on an assumption that velocity won’t decline in proportion to the increase in money. He concludes that “this assumption fails spectacularly in the data – especially at a zero interest rate”. He supports this with figures 4 and 5, which show money base and velocity in America over 47 years and in Japan over two decades, respectively. Both graphs show unambiguously that, as money base is expanded, velocity reduces. In simple terms, the new money doesn’t make it to the economy. This is called a liquidity trap. History suggests the Fed’s massive quantitative easing won’t produce the desired result. Mr Bernanke is trying to push a river faster than it flows. This won’t affect the river, but it can exhaust the one pushing. We have already seen that the recent increase in the money base is not making it to the economy because it has not appeared in M2. In fact, over the last half-century the correlation between M2 and the money base is close to zero. So where is the new money produced by quantitative easing? Sitting on bank balance sheets and in reserves (which, as noted above, are not included in M2). Why? Because Americans are deleveraging, not

borrowing. It doesn’t matter how much new money banks have available to lend if no one wants to borrow. Increasing the amount available won’t fix the problem, because the constraint is not a lack of available funds. But this leads us to a question: if the money doesn’t make it to the economy, how can it affect inflation? Let’s summarise where we are so far: • The money base is exploding but historically this bears no relationship with inflation or M2; • Historically, large expansions in money base do not necessarily impact the economy because velocity falls; and • M2 has a moderate correlation with subsequent inflation, but M2 is growing more slowly than average. At this point it could be tempting to dismiss fears about inflation outright. Nonetheless, there are some qualifications to this conclusion. Since 1959 M2 has, on average, been nine times greater than the money base, so the latter has been far less relevant to the overall economy. However, in the last few years this ratio has rapidly changed. M2 is now less than four times the money base. It is not clear what, if any, consequences this change could have. The last half-century also suggests that neither the money base or M2 ever materially contract. If this continues, the newly ‘printed’ money in the money base will remain there. If so, surely at some time in the future it must find a way into the economy. But when is ‘some time’? Testing does not reveal any identifiable lagging relationship between money base and M2 (ie, there is no known pattern for expansions in money base flowing into M2). Finally, Zimbabwe’s experience does suggest that there is a level of money creation that drives inflation to absurd levels – though fantastic money expansion was only one of many bad policies pursued in that country. Presumably, America’s money expansion will never reach those levels.

Inflation – why worry?

have many consequences for markets. The transition to high inflation in the 1970s created a crippling headwind for most asset classes. Conversely the transition back to low inflation in the 1990s created benign conditions for most markets. Significant and sustained changes to inflation are rare, but investors must be prepared for them when they occur. This is behind our interest in whether the explosion in the money base could herald a resurgence of inflation.


The Fed has been too active over the last dozen years, and the decisions it has made have been consistently wrong. Interest rates were at high settings leading into both of the last two recessions, which contributed to the slowdown. Rates were held so low after the recession that they contributed to the subsequent mania that culminated in the global financial crisis. The Fed recently vastly increased the money supply, blind to the reality it would simply result in a lowering of velocity and would not materially benefit the economy.

The situation would have been better if each of these actions had been less extreme. Undoubtedly there will be consequences from the Fed’s expansion of money. There is no free lunch, and if you conjure approximately US$2 trillion out of the air in three years, there will be a price to pay. However, they won’t be the consequences the Fed seeks. I fear they will be negative. Nonetheless, in a failure to recognise the lessons from Japan’s experience, there is a real possibility that there will be further quantitative easing. It would seem that little is being learnt from the past. It makes me glad I’m not an economist (with apologies to Dr J Hussman and all the other exceptional economists). We must acknowledge that recent events in America are unprecented, including the scale of the expansion in the money base. This must qualify any conclusions we draw from history. However, the fact is that history suggests that an expansion of the money base need not be inflationary. This does not guarantee that inflation can’t rise, but it will require other factors to bring it about. Robert Keavney is an industry commentator.

Figure 5 Change in Japanese money base velocity (last 20 years)

Source: John P Hussman,

Large and sustained changes in inflation June 9, 2011 Money Management — 25

Toolbox TPD insurance in super from 1 July Martin Breckon outlines the forthcoming changes to TPD insurance in super, including recent amendments to simplify the way funds can determine the deductible premium portion.


n 30 June this year, transitional relief that has enabled super funds to claim a full deduction for premiums on insurance policies with a range of Total Permanent Disablement (TPD) definitions will cease. From 1 July, super funds will only be able to claim a full deduction for TPD premiums where there is a liability to provide a ‘disability superannuation benefit’ as defined in paragraph 295-460(b) of the Income Tax Assessment Act (ITAA) 1997. Broadly, this definition requires that two medical practitioners certify that, because of ill health (physical or mental) it is unlikely the person can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. The ATO also stated in draft taxation ruling TR 2010/D9 that in order to provide a disability superannuation benefit, the relevant condition of release that must be met is ‘permanent incapacity’.

Implications for own occupation TPD policies

It is broadly accepted that the any occupation TPD definition is based on the same conditions required to establish permanent incapacity. Where this is the case, the super fund should meet the disability superannuation benefit definition and, therefore, should generally be able to continue to claim a full deduction for the TPD premiums.

Implications for other TPD definitions

If the trustee is uncertain whether the fund will always be able to meet the disability superannuation benefit definition, it will be necessary to determine the deductible and nondeductible portion of the premiums. This will generally be the case where the TPD policy has an own occupation definition. This is because, in some situations, while a fund member may not be able to perform his or her own occupation, they may fail to meet the disability superannuation benefit definition because they are able to be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. It may also be necessary to determine the deductible and non-deductible premium portions where the policy contains other

broader TPD definitions, particularly if a specific amount is included in the premium for these definitions.

Apportioning the premiums

The Government has stated that where broader TPD insurance cover is provided, super funds must obtain an actuary's certificate to determine the deductible portion of the premium, unless that portion is specified in the insurance policy. However, on 26 May 2011, the Government announced that legislation has been introduced that will streamline the way super funds calculate the deductible portion where broader TPD insurance is provided. These amendments: • allow the percentage of certain TPD insurance premiums that can be claimed as a deduction to be specified in regulations; and • will give many super funds the option of using a simpler method to determine the deductible portion without having to engage an actuary. The percentages to be prescribed in regulations will be finalised following consultation with industry.

Cost implications

Additional tax may be payable where the super fund is not able to claim a full deduction for own occupation (or other) TPD policies. Where this results in an additional cost to the members, it is anticipated that holding these policies in super will generally still be cheaper than insuring outside super, as the case study below illustrates. This is because the cost increase is likely to be relatively small and it will still be possible to benefit from some tax concessions generally not available when insuring outside super. For example, assuming certain conditions are met, fund members may be able to claim super contributions as a tax deduction or make pretax salary sacrifice contributions.

Case study

David, aged 42, pays tax at a marginal rate of 38.5 per cent (including a Medicare Levy of 1.5 per cent) and has a Self Managed Superannuation Fund (SMSF). He wants to take out a Life and own occupation TPD policy with a sum insured of $1 million. The premium is $2,000 in year one, comprising


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$800 for the Life Cover and $1,200 for the own occupation TPD policy. If David purchases this insurance in his own name (outside super), the pre-tax cost will be $3,252, after taking into account the tax he would have to pay on his salary. Under the current (pre-1 July 2011) rules, his SMSF will be able to claim a deduction for the total premium and the deduction could offset the 15 per cent contributions tax payable if he makes salary sacrifice contributions to fund the premiums. As a result, the pre-tax cost of insuring in super will be $2,000. Let’s now assume, for illustrative purposes, that the Government specifies in regulations that the percentage that can be applied to determine the non-deductible portion of own occupation TPD policies from 1 July 2011 is 33 per cent. In this example: • the non-deductible portion of the TPD premium will be $396 • 15 per cent contributions tax (ie, $60) will be payable in the fund on this amount; and • he chooses to increase his salary sacrifice contributions by $70 to make a provision for the contributions tax. As a result, under the new rules, the total pre-tax cost will increase from $2,000 to $2,070. So taking out the cover in super will still be considerably cheaper for David than insuring outside super.

Other issues

• It is anticipated that under the new rules, insuring in super will still generally be cheaper than holding the cover outside super if the sum insured is grossed up to make a provision for lump sum tax. • There is a risk (albeit historically small) that the super fund may not be able to release an own occupation TPD benefit under the permanent incapacity condition of release. • Provided the permanent incapacity (or other) condition of release is met, the benefit can be received as a tax-effective pension. Alternatively, the money could be kept in the accumulation phase, where it won’t be counted towards the social security income and assets test until the member reaches age pension age. Martin Breckon is a senior technical consultant with MLC Technical Services.

Briefs MLC has unveiled a new tool, which the company said would help advisers navigate clients through the complex superannuation contribution cap rules. The MLC Contributions Cap Decision Tool would give advisers a step-by-step guide on how to manage a client’s contributions and avoid incurring excess contributions tax. Gemma Dale, Head of MLC Technical Services said over two years the ATO issued 65,000 letters to investors for breaching the caps, which had resulted in a total cost to superannuation investors of $180 million. “Not only must advisers know what can be contributed to each category, they must also know how to administer the contributions. Failure to file the right forms changes the classification of a contribution and can lead to inadvertently breaching a cap.” MLC’s Contributions Cap Decision Tool had been developed in response to significant demand from advisers both inside and outside MLC’s network.

MASON Stevens has launched its Equity Insulator Instalment in partnership with UBS Australia, which is available to investors until 29 June, 2011. The new product provides leveraged access to a portfolio of 20 leading ASX-listed shares via instalment warrants. Managing director Thomas Bignill said one of the key features of the product is that investors get to keep the winning stocks (above the loan amount) and hand back the losers. He said this is possible because every instalment warrant in the portfolio is individually capital protected for the entire investment term. Bignill said it was likely to appeal to investors in the lead-up to the end of the financial year due to the possible tax deductions on pre-paid interest, as well as entitlements to dividends and franking credits.

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*Source: Wealth Insights 2011 Platform Service Level Report and survey of 867 aligned and non-aligned advisers, conducted Mar/Apr 2011. This is general information only. FirstWrap is operated by Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL). AIL is the Trustee of The Avanteos Superannuation Trust ABN 38 876 896 681. Colonial First State and AIL are owned ultimately by Commonwealth Bank of Australia ABN 48 123 123 124 through the Colonial First State group of companies. Commonwealth Bank of Australia and its subsidiaries do not guarantee performance or the repayment of capital of Colonial First State or AIL. CFS2027/MM 26 — Money Management June 9, 2011


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MACQUARIE Private Wealth has hired a new private client adviser to its Noosa office, expanding its Queensland team. Mark Inglis joins from RBS Morgans and brings more than six years of experience in the finance industry to the role. Macquarie stated Inglis would focus on advising clients on direct equities, making sure he understood their investment objectives and delivered strategies to help clients meet their financial goals. Head of Macquarie Private Wealth, Eric Schimpf, said Inglis’ appointment added further expertise to the Macquarie Private Wealth advice team in Noosa. “We are delighted to welcome Mark to the Noosa office as we expand on our highly-skilled team,” he said.

MACQUARIE Investment Management has appointed Andrew Savage as a senior adviser in its Australian Private Markets team, which currently has over $6.5 billion of assets under advice. Savage will focus on the Private Markets team’s co-investment strategy, and private equity and growth capital fund investments in Australia, according to Macquarie Investment Management. Savage spent 15 years with CHAMP Private Equity and co-

founded CHAMP Ventures prior to his new role. In welcoming Savage to the team, head of Macquarie Investment Management Private Markets Michael Lukin said that Savage “brings deep direct investment and portfolio company board expertise which will further strengthen our Australian private equity credentials”. “Our team of more than 30 professionals is committed to delivering direct fund and coinvestment as a means of adding value to client portfolios and, in the process, reducing the overall cost of private equity,” Lukin said.

BLACKROCK Investment Management has recruited a former National Australia Bank proprietary trader to manage one of its global funds. Evan Jones has been appointed senior portfolio manager for the BlackRock Asset Allocation Alpha Fund and will report to lead portfolio manager David Hudson. Jones joined BlackRock with 17 years of experience in financial markets, having previously worked for the Royal Bank of Canada, Macquarie Bank and Société Générale. Strategies adopted in the Asset Allocation Alpha Fund are thematic and concentrate on exploiting trends, likely develop-

Move of the week

BT Financial Group (BTFG) has recruited Bravura Solutions head of operations and former AMP corporate strategy executive, Wes Hall, as its new head of practice management. Hall’s appointment has been announced by BTFG’s general manager of advice Mark Spiers, who said the role would cover the development and delivery of key financial planner services to all of the company’s advice businesses, including BankSA, Bank of Melbourne, Magnitude, Securitor, St George and Westpac. He described Hall’s appointment as being part of BTFG’s continued commitment to developing market-leading capabilities for planners. Spiers detailed Hall’s responsibilities as being dealer services for bank channel and dealer group planner, technical support and services, paraplanning and advice documentation, research and investment strategy and practice and professional development.

ments and mis-pricing in global asset markets, BlackRock stated. Announcing the appointment, Hudson said Jones’ risk management philosophy was aligned with BlackRock’s, and that the company respected his fundamental approach to investing.

IN the first step of its strategy to build its business and administrative support capabilities following its acquisition by Nikko Asset Management, Tyndall Investments has established an enterprise risk, compliance and legal team. Craig Giffin has been appointed as head of risk, compliance and legal covering Tyndall’s Australian and New Zealand operations, and Nathan Harris has been appoint-

Opportunities PRACTICE MANAGER VIC – FINANCIAL PLANNING Location: Melbourne Company: ANZ Financial Planning Description: ANZ Financial Planning is a key area of ANZ’s Wealth business. ANZ is currently seeking to appoint a practice manager to lead a team of salaried financial planners. Reporting to the state manager, the practice manager will be responsible for growing business profitability, developing a high performing team and driving internal and external relationships to promote our services. You must have extensive knowledge of the financial planning industry and are an expert in the application of investment management and insurance strategies. Academically, you must have completed a recognised tertiary qualification in a businessrelated field such as Bachelor of Business, Commerce or Accounting. You must be RG146 compliant and ideally have completed your ADFS or CFP qualification. Please apply at quoting ref: AUS001265 or contact Sue Cusdin on (02) 9234 8034 for a confidential discussion.

PHONE ADVISERS Location: Sydney Company: Godfrey Group Description: An opportunity exists for capable and client focused individuals to join a new team

ed as risk and compliance manager for Australia. Giffin is a former executive director at Fortis Investment Management, also having worked with ABN AMRO Asset Management, Barclays Global Investors and St George Bank in various senior risk management and compliance roles. Harris has worked as an independent compliance and risk management consultant for over ten years, specialising in strategic advice and prudential program development and support for organisations in the financial services industry.

ANTON Allen has joined BetaShares Capital Limited as general counsel and head of

Wes Hall compliance. The appointment comes as BetaShares listed its fourth exchange traded fund (ETF) within six months. Allen has legal, compliance and risk management expertise and was previously head of legal at Macquarie Funds Group, part of Macquarie Bank. He has 18 years of experience in the legal profession, specialising in institutional and retail funds management. Allen’s experience also included providing legal advice for products in the equities, fixed income, currency, commodities and alternatives space. Alex Vynokur and David Nathanson, joint managing directors of BetaShares, said Allen’s appointment would further bolster the business as it continues to expand the range of ETFs available for local investors.

For more information on these jobs and to apply, please go to offering financial advice to existing customers. The primary focus is the provision of excellent client service and phone-based advice initially in the area of insurance. To be considered for an interview, you must be RG146 compliant and have previous experience in the financial planning industry. Alternatively, you may have gained experience in adviser services and wish to progress your career in financial planning. You will possess a thorough knowledge of appropriate advice processes and procedures including Statement of Advice production. Ideally you will have a strong sales background and expertise in direct sales through phone-based teams. Training will be provided in product knowledge and compliance. For more information and to apply, phone Mary O’Neill on (02) 8223 1314 or email

BUSINESS DEVELOPMENT MANAGER – WRAP Location: Melbourne Company: Praemium Description: This is a newly created role focused on selling and promoting SMARTwrap to the adviser market. An experienced wrap platform specialist is sought to drive sales and manage key relationships to expand the take-up of SMARTwrap.

The role will involve engagement with existing clients, working with advisers and dealer groups to encourage the inclusion of SMARTwrap on Authorised Product Lists and undertake analysis to identify new market opportunities. Some national travel and attendance at industry events to build awareness of SMARTwrap is required. Sound financial services sales management experience, strong dealer group contacts and a good understanding of the wrap market and competing wrap features is essential, along with a pro-active and well organised approach. Please email your application including CV and cover letter to

RISK SPECIALIST Location: Wollongong, NSW Company: WealthInsure Financial Services Centre Description: If you’re a Financial Planner who specialises in risk, then WealthInsure Financial Services Centre can offer you an opportunity in Wollongong where you’ll be rewarded for your contribution and results. You will work in a dynamic small business environment backed by AMP Financial Planning. Risk specialists will receive leads from the existing investment and mortgage client base and you will work alongside experienced professionals. To apply, you’ll need a Diploma in Financial Services, a track record in risk planning, excellent

communication skills and a capable manner that inspires confidence. Please contact Sean Butcher on 0418 243 159 or send an email to

FINANCIAL PLANNER Location: Sydney Company: Jonathan Wren Financial Recruitment Specialists Description: Our client is currently expanding and is seeking a financial planner to add to their wealth management and planning team. This is a newly created position where you will lead a team to deliver a broad suite of financial insights in order to drive strategic decisions. Your focus will be on servicing, retaining and providing ongoing advice to internal clients, developing relationships with referral partners and prospecting new opportunities. Your key responsibilities will include financial planning and structuring services and providing clients with individually tailored wealth management solutions. If you possess solid financial planning experience, business insurance accreditation and have superior communication skills then this is the role for you. For a confidential discussion regarding this role, please contact Kathy Bass from Jonathan Wren on (02) 8031 6224. June 9, 2011 Money Management — 27



An anti-smoking gun FROM time to time in his long career, Outsider has found himself playing at being a boss. Looking back, he likes to think he was not an unreasonable boss, but perhaps that is for others to say. Sure, he might have demanded his journos come to work every Wednesday wear ing a par ticularly patterned shirt, but sometimes one must do things simply because one can. However, after having a brief chat to one of the finalists for the Money Management’s Young Achiever of the Ye a r Aw a rd , Ou t s i d e r believes he’s been a model of reasonableness. This young chap, who is

the chief executive of a financial planning firm, has introduced a no-smoking policy during work hours, the mention of which got Outsider’s head spinning. Having enjoyed smoking both cigarettes and cigars in

his youth, at a time when smoking was considered cool and was welcomed indoors, Outsider must say he was quite surprised. “Not even a short ciggybreak?” Outsider asked him. “No. But, they can smoke on

the weekend!” the young chap replied proudly. While Outsider admired the youngster’s determination to promote a healthy lifestyle in the workplace, he also realised the young Outsider would not have cut the mustard in such an environment. Outsider has, after all, always been a rebel without a clue. Outsider also wishes to assure the young achiever that, if any of his financial planners smoke on the weekends, they are also undoubtedly smoking during lunchtime behind the office building. Such are the demands of the tobacco demons.

Out of context

“The ‘crap’ bit was off the record.”

When OneVue chief executive officer

Connie McKaege realised she uttered

the C word at a recent lunch function, she made sure journos didn’t quote her on it.

“There’s only seven more people to go on that table to ask questions.”

Six feet under OUTSIDER used to believe that owning a brewery was a sure way to wealth and happiness. Sadly, that belief was shattered back in the 1980s when the likes of Alan Bond proved that brewing did not constitute a licence to print money. However he has come across new data that has persuaded him that he must invest in one of life’s certainties: death. According to new data released by IBIS, funeral ser vices is a growth sector and is likely to keep growing as Outsider’s fellow baby boomers grow old and have little choice but to meet their maker. According to IBIS, “Australia’s ageing population is good news for the funeral services industry – which is

FSC chief executive John Brogden counts down the number of attendees at the Templeton table hogging question time.

“The Human Nature of funds

expected to increase its revenue from $931 million in 2010-11 to $1.08 billion by 2015-16. “What with the proportion of those aged over 70 year s expected to increase from 9.4 per cent (equating to 2.15 million) in 2010-11 to 10 per

cent (2.5 million) in 201516, the prospective number of clients for this industry is on the rise,” said Ibis general manager in Australia, Robert Bryant. Now there are any number of tasteless clichés that Outsider could choose to terminate this subject, but he is feeling a tad old and may be losing the plot. So he’s going to go for the deadset, obvious – “people are just dying to get into the funeral business”.

Unorthodox rewards AS recently as last week Outsider was on record once again outlining his profession’s shortcomings in the area of employee bonuses. And while the financial services industry is well known for occasional largesse when it comes to cash bonuses, Outsider is occasionally drawn to opine on the nature of other perks intermittently doled out throughout the industry. But even this humble scribe was given pause when he heard recently about the unusual perks reinsurance giant Munich Re lavished upon its top performing sales reps back in 2007. Readers of this column will no doubt have heard by now that the salesmen were flown to Budapest, Hungary, where they received services provided by, shall we say, the oldest profession on the planet.

Readers who have been isolated from civilisation for the past few weeks can read up on the details elsewhere, but suffice to say Outsider himself has never been rewarded for his services in any such manner. In fact Outsider generally considers himself lucky when, once a year in December, those who pull the purse string see fit to reward Outsider and all his hardworking colleagues with a couple of cold drinks and an afternoon off. At any rate it’s hard to say what such a risqué incentive regime would do to Outsider’s productivity levels – but it would be fairly easy to determine what Mrs O’s opinion would be of such a plan. Probably safer to stick with the Chrissy drinks and leave it at that then.

28 — Money Management June 9, 2011

management!” Fund Manager of the Year MC and comedian Peter Berner thought the under-30 Money Management Young Achiever of the Year finalists looked so good that they could have joined a boy band right there and then!

Money Management (June 9, 2011)