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Vol.26 No.7 | March 1, 2012 | $6.95 INC GST

The publication for the personal investment professional

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INFOCUS: Page 11 | BEYOND STRONGER SUPER: Page 12

Planners punt on volume rebates By Tim Stewart A PERCEPTION that volume rebates from product issuers to dealer groups will be allowed “in some shape or form” led to a turnaround in practice values at the end of last year, according to Forte Asset Solutions director Stephen Prendeville. But he was quick to warn that planners who are basing their business models on the continuation of volume rebates could be in for a nasty surprise. In the last six months of 2011, average practice valuations fell from 3.29 times recurr ing revenue on 1 July to 2.88 times by the end of the year, Prendeville said. However, valuations have since staged a recovery that began in late November, and are now closer to three times recurring revenue, he added.

Stephen Prendeville “Whilst the market sentiment was largely negative through the latter half of 2011, it did recover in November with the release of tranche 2 of the Future of Financial Advice Reforms and the belief – or

assumption – that volume overrides would be protected in some shape of form,” Prendeville said. Addressing Parliament on 24 November, Minister for Financial Services and Superannuation Bill Shorten stated: “If an adviser is confident that a par ticular stream of income does not conflict advice, then these reforms do not prevent them from receiving that income. “In the case of the receipt of income related to volume of product sales or investible funds, there is a presumption that that income would conflict advice. “However, this is a presumption only, and if the adviser can demonstrate that the receipt of the income does not conflict advice, then such remuneration will be permissible under the bill.”

Minter Ellison partner Chris Brown said it was very risky for planners to assume Shorten’s comments indicated a softening of the G over nment’s approach to volume rebates. “In reality, with institutional ownership and the requirements to change systems and protect reputations, I don’t think it’s something anybody working within an institutional dealer group would want to take on,” Brown said. Prendeville said that volume payments “must be considered a risk” due to the likelihood they would be deemed ‘conflicted’. “Any practice receiving volume-based payments needs to reduce their dependency on this revenue stream,” he added. Association of Financial Advisers (AFA) chief executive Richard Klipin said there was

Calls for standard label definitions in super By Milana Pokrajac TWO years after the Australian Prudential Regulation Authority (APRA) advocated better guidance on the appropriate risk levels for investment options within super, concerns have been raised that the industry has yet to properly address the matter. In its letter to trustees in June 2010, APRA stated that, at the time, there were no standard risk descriptors or industry-wide standard asset allocations for different labels such as conservative, balanced and growth, which “leads to confusion on the part of fund members and makes it difficult to properly compare investment performance”. “APRA is not, currently, suggesting guidance on the risk level appropriate for labels…this is something we would expect the industry to develop good practice material around over time,” the regulator wrote. Since then, the Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) have developed a ‘Standard Risk Measure’ framework, whereby super funds will be required to disclose the level of risk each option carries. While the solution has been endorsed by APRA and is due to kick off on 22 June

this year, creating standardised definitions of investment options has not been discussed. Recent analysis by Super Ratings found AustralianSuper, Cbus, REST and BT Bus Super all had similar exposure to growth assets in their default options (between 74 per cent and 78 per cent), but each fund labelled their option differently. Super Ratings managing director Jeff Bresnahan said the labelling inconsistency could sometimes mislead super members. “The overall picture is that there is no consistency in labelling in the industry, and that’s something we need because consumers quite rightly have an expectation that all balanced funds would be very similar, and they’re not,” Bresnahan said. “Let’s say for example that investor A placed their funds in a 50/50 [growthdefensive split] balanced option and investor B placed their funds in a 80-20 balanced option. Investor B – using historical returns – would retire with a lot more money than investor A, but they both thought they were in the same thing,” he added. Both Bresnahan and Chant West managing director Warren Chant have called for the regulator to step in and

little clarity about what would be permissible under the draft legislation. “At the moment we’re reading between and into the Minister’s comments, and while they appear clear on the face of it, it’s subject to a lot of interpretation,” Klipin said. From the AFA’s point of view, commercial arrangements that don’t conflict advice are “absolutely appropriate”, he said. He said that if the current agreements were deemed ‘conflicted’ it could disrupt the entire value chain, and practices would have to rethink their business models. “Where does the value come from, what’s their charging model, what services do they deliver, and where’s the profitability of their practice going to come from?” Klipin asked.

Social media a trap for unwary By Andrew Tsanadis

Jeff Bresnahan create standard definitions of investment labels. “The only way we are ever going to get consistency is for APRA to consult the industry, then come out and say ‘this is how you do it’,” Chant said. “If you want to educate people about investment and superannuation, you need some consistency,” he added. “By having common labels and clearly stating what they mean, it is going to be easier to communicate to members, but I don’t think it would change the way funds manage money.” Neither ASFA nor FSC were available for comment on this matter at the time of publication.

SOCIAL media such as Facebook, Twitter and LinkedIn are more about marketing the services of financial planners than about advice delivery. That is the assessment of industry experts, who have warned of the dangers of planners moving beyond the legal and regulatory confines applying to such media. They say that despite the benefits, advisers run the risk of using social media as an “education point” for general financial information – and clients may feel that they have the knowledge to potentially engage in an investment strategy prematurely, according to Synchron director Don Trapnell. “I think the law is quite clear – you can’t produce statements of advice online. In saying that, you have to try and balance the information you are pushing to clients with the advice you are giving.” Synchron independent chair Michael Harrison said most licensees have strict guidelines in place when advisers engage in web-based or mobile communication with clients. But the other potential problem with social media is that new communications technologies can be a significant time-waster for planners who do not Continued on page 3


Editor

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: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2239 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au 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 Graphic Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter 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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A tall order I

t is a reflection of the silliness which has beset the Federal Parliamentary Australian Labor Party this year that suggestions emerged last week that Kevin Rudd would offer Bill Shorten the Treasury portfolio in the event the party returned Rudd to the prime ministership. Given the importance of the Treasury to policy execution and the attention to detail required of the relevant minister, Shorten’s elevation to such a role would smack of factional expediency rather than ministerial competency or even runs on the board. Indeed, any examination of the policy execution debacles which dogged Rudd as Prime Minister and now Julia Gillard ought to suggest that, factional wheeling and dealing aside, Shorten is not the man for the job. If the Future of Financial Advice (FOFA) and Stronger Super changes were held up as the core elements of Shorten’s ministerial report card, then he would barely secure a pass mark. The number of legislative tranches involved in getting key bills to the Parliament suggest he is good at neither detail nor deadlines.

2 — Money Management March 1, 2012 www.moneymanagement.com.au

If this judgement seems harsh, then consider that the Government’s journey towards today’s FOFA legislation was borne of the bipartisan report which emerged from the Parliamentary Joint Committee (PJC) which focused on the collapse of Storm Financial and other planning sector mishaps – the Ripoll Inquiry. That’s right. Both sides of politics agreed on the recommendations contained in the PJC report, and for the most part, the financial planning industry embraced what it believed would be the consequent legislative changes. More than two years later, and under Shorten’s ministerial stewardship, any notions of bipartisanship have evaporated, the FOFA bills are the subject of another PJC process, and there exists no certainty about transitionary arrangements. Shorten has done slightly better with respect to the legislative implementation of the Stronger Super changes, but again, uncertainty lingers because the Productivity Commission has yet to even start dealing with the future of default funds

under modern awards. While Money Management tends to focus mainly on how Shorten’s efforts have impacted the financial planning sector, the not infrequent concerns expressed by the National Financial Services Federation point to a similar experience and a similar ministerial track record. It ought to be remembered, of course, that up until Prime Minister Gillard’s last Cabinet reshuffle, Shorten was regarded as a junior minister sitting outside of Cabinet. Since then, he has not only been elevated to the Cabinet but also been handed a mega-portfolio – Employment and Workplace Relations, Financial Services and Superannuation. The incumbent Treasurer, Wayne Swan, has been a Member of Parliament for more than 20 years. Bill Shorten has been sitting on the green benches of the House of Representatives for less than half a decade. Elevation to the Treasury portfolio clearly requires someone with a longer and more compelling track record. – Mike Taylor


News

Perpetual looks to future after tough half By Mike Taylor JUST weeks after announcing a parting of the ways with its chief executive, Perpetual Limited has announced a 25 per cent drop in net profit after tax attributable to equity holders of $22.931 million for the six months to the end of December. The company told the Australian Securities Exchange that the result included a $10.2 m i l l i o n a f t e r- t a x e x p e n s e re l a t e d t o t h e c l o s u re o f i t s Dublin global equities manufacturing capability, and the restructuring of the retail distribution and marketing functions. The result also included a

$2.2 million after-tax loss on market-linked investments. Commenting on the result, Perpetual chief executive Geoff L l oyd p o i n t e d t o a s t ra t e g y based on pursuing further efficiencies and cost reductions, including the outsourcing of its information technology arrangements. “I have formed a dedicated internal team to identify further meaningful cost reductions across our business units, commencing immediately,” he said. Lloyd said an international consulting firm had been appointed to provide the team with access to global expertise in the area of cost reduction and

“we expect to start implementing the outcomes of the cost review before the end of the reporting period”. Drilling down on its divisional performance, the company’s Private Wealth division reflected the decline in investment m a r k e t s a n d re d u c e d g r o s s inflows, recording a 7 per cent decline in funds under advice. “We executed the platform agreement with Macquarie and last month received the final regulatory approval for our new Super Wrap product, which we expect to offer late in the second half of this year,” Lloyd said. He s a i d t h e b u s i n e s s h a d continued to invest in non-

market-related service offerings and capabilities to further enhance its holistic offering to key client segments. Perpetual Investments exper i e n c e d n e t o u t f l ow s o f $3 billion during the half, but the company said the majority of these were in lower-margin channels and products. L l oy d s a i d s i g n i f i c a n t p r o g re s s h a d b e e n m a d e i n tackling some of the issues that were holding back the business’ ability to attract flows in what was a difficult market. “We created a new investment product distribution function to focus on key clients and decision-makers in the retail funds market,” he said.

Geoff Lloyd

Social media a trap for unwary Continued from page 1

understand how to manage it effectively. The negative effects of social media occur because many financial planners are not asking themselves fundamental marketing strategy questions, Harrison said. “I think a lot of advisers are getting hooked on social media and they haven’t got a lot to talk about. If you’re going to promote your brand, get to the point,” said The Humble Investor director Colin Williams. While social media is not designed to capture a lot of information, it is a key c o mp o n e n t i n beginning the financial planning process with clients. Planners can face a significant cost to reputation if they are not engaged correctly. “The mistakes I see advisers making with social media are that they’re forever pushing their stories in the face of their clients. It’s the ultimate turn-off,” Williams said. According to Experience Wealth Advice director Steve Crawford, it is important for practices employing social media to c o m m u n i c a te w i t h clients in mediums that they are familiar with. “Just because you can populate the same message on multiple sites, doesn’t mean the enduser is going to use it in the same way,” he said. C r aw fo rd s a i d h e

Don Trapnell

believed that by following what clients were following on websites like Faceb o o k a n d Tw i t te r, t h e adviser is able to focus more on what matters to their target market. S o c i a l m e d i a i s n ot about “pushing” but “pulling” clients towards your website, and eventually towards a financial planner, he said. “The whole premise around web-based communication tools is client referrals. If you’re going to use it as a soapbox, this can potentially turn customers away from the practice because they’ll think that the adviser is arrogant or over-confident,” he said. “Out of the 10 things yo u p o s t , o n l y o n e o f them should be a sales pitch – nine of them s h o u l d b e p ro m ot i n g things that a client may be interested in – and that doesn’t necessarily equate back to financial services,” Crawford said. www.moneymanagement.com.au March 1, 2012 Money Management — 3


News

Insurance dilemma in auto-consolidation By Mike Taylor

INSURANCE policies within low balance superannuation accounts will prove a challenge for the effective implementation of the Government’s auto-consolidation proposals within its Stronger Super policy. While research released by the Financial Services Council (FSC) strongly supported the need for auto-consolidation, it also pointed

to the number of small accounts carrying life insurance benefits. It said superannuation accounts were often linked to products such as life insurance which “could present a barrier to consolidation as individuals may rely on these accounts for protection”. “Of the 6.9 million inactive accounts eligible for consolidation, it was found that 1.3 million accounts are linked to life insur-

ance policies,” the research analysis said. “Even though members who own these low balance accounts may be unaware of their linkages to life insurance, these accounts present a challenge for auto-consolidation, as some of these members may wish to maintain their life coverage despite not making contributions to the fund,” it said.

“Additionally, given that Australia’s underinsurance gap stands at $972 billion, it is important that the desire to reduce duplicate superannuation accounts does not result in members losing existing insurance cover that may not be accessible to them in the future, thereby exacerbating the number of underinsured Australians,” the analysis said. The research was conducted

by the FSC and financial services technology provider DST Solutions, with FSC chief executive John Brogden saying it confirmed that auto-consolidation would lead to a considerable reduction in the number of accounts and would significantly improve the efficiency of Australia’s superannuation system, leading to lower fees for consumers.

Platforms spend on development

Some see investment as an abstract game of numbers.

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In line with our old-fashioned values, we treat money with a great deal of care, especially when it’s not ours. Your clients should particularly like our equity funds’ long-term returns and strong performance in turbulent times. If you’d like to find out more about Aberdeen’s Australian, Emerging Markets‚ Asian and Global Equities funds‚ call us on 1800 636 888 or visit our website.

www.aberdeenasset.com.au Issued by Aberdeen Asset Management Ltd ABN 59 002 123 364 AFSL 240263. You should carefully consider the relevant Product Disclosure Statement and seek advice which takes into account your own circumstances, objectives and financial situation in deciding to invest, or continue to hold an investment. 3CAB1MM

4 — Money Management March 1, 2012 www.moneymanagement.com.au

By Milana Pokrajac PLATFORM providers have invested around $130 million on new developments in 2011, with MLC Wrap and Navigator platforms receiving the highest ranking from financial planners. That is according to the Investment Trends December 2011 Platform Report, which also found the Government’s Future of Financial Advice (FOFA) reforms were both a catalyst and a hindrance to innovation. The new developments mainly focused on improving financial planners’ business efficiency, according to Investment Trends principal Mark Johnston. Johnston said the level of innovation pointed to the competitiveness in the platforms industry. “In spite of the consolidation witnessed over recent years, this remains an intensely competitive industry, with providers continuing to raise the bar,” he said. However, uncertainty over the final details of the legislation might compel some platforms to take a minimalist approach to development and hoard the so-called “development cash”. “Many fear that once the legislation is finalised, they will be forced to develop a lot of functionality over a very short period of time,” Johnston added. MLC Wrap and Navigator continued to rank highest in terms of overall functionality, while FirstWrap, netwealth, Asgard eWrap and Macquarie Wrap made up the top five, as voted by financial planners. AXA North was the one to increase its score the most over 2011. The report compared 26 master trust and wrap platforms across more than 455 aspects of their service offerings.


News

ANZ buys Optimix from UBSGAM By Milana Pokrajac

ANZ has purchased the OptiMix multi-manager business unit from UBS Global Asset Management (UBSGAM), the bank has confirmed. The acquisition of OptiMix is part of ANZ’s broader strategy to offer a suite of multi-manager single-sector and multi-sector funds. The business first came under the ownership of UBSGAM in June 2011 as part of its acquisition of ING Investment Management (INGIM).

With ANZ’s purchase of OptiMix’, its intellectual property, business assets and key staff will move to the bank. “The acquisition of OptiMix will not impact customer accounts or their investments,” ANZ’s spokesperson said in a statement. Furthermore, the purchase does not include the OnePath singlesector funds managed by UBSGAM through the purchase of INGIM. Research house Standard & Poor’s has issued a statement saying its rating of multi-sector products available through OptiMix would remain unchanged and on hold, pending the researcher’s formal review of these capabilities.

IOOF result down, but solid By Mike Taylor IOOF Limited has reported a six per cent decline in net profit after tax attributable to members to $46,089 million to the end of December, amid what its managing director Chris Kelaher has described as challenging market conditions. However, he said the result reflected the underlying resilience of the firm in circumstances where revenue had been impacted by markets, but IOOF’s margins had remained steady. The directors declared a fully franked dividend of 19 cents per share. As well, Kelaher said that during the period IOOF had acquired DKN Financial Group, which had now been fully integrated into the group, adding 270 advisers to the

distribution network and $6.8 billion to IOOF’s funds under advice. He said that since acquisition, DKN had contributed $100,000 in reported profit, or $2.3 million in underling net profit after tax pre-amortisation in three months. Looking to the future, Kelaher said that following on from IOOF’s simplification program, the company had a heightened focus on investment in organic growth initiatives, including new products, branding and the continuous improvement of the IT infrastructure. He said continuing market volatility made providing forecasts difficult, but IOOF was well-placed to meet the upcoming regulatory deadlines, with all flagship products already Future of Financial Advice-compliant with fee-for-service options available.

SUNCORP Group has announced a $389 million net profit after tax (NPAT) for the six months to 31 December 2011, with general insurance contributing $162 million despite the impact of natural disasters over the Christmas period. The company’s overall NPAT was up from $223 million in the prior corresponding period. However, the Christchurch earthquake on 23 December 2011 and the Melbourne hailstorm on Christmas Day meant that natural hazard claims were $149 million above allowances. Suncorp Group chief executive Patrick Snowball said the performance of the group amid ongoing “weather events” and natural disasters demonstrated the “resilience” of the company. “Although external challenges mean that our first half profit is not what we, and our shareholders, know the business is capable

AFA membership to require extra education By Chris Kennedy

Chris Kelaher

Suncorp profits despite natural disasters By Tim Stewart

Brad Fox

of, I’m proud of what Suncorp has achieved over the last six months, and am confident the transformation of the Group is on track,” Snowball said. The NPAT of Suncorp Bank improved to $102 million for the six months to 31 December 2011. The Core Bank NPAT was $156 million, largely due positive broker flows. However, the non-core portfolio took a $54 million loss, reflecting “lower impairment losses” and the $34.5 pre-tax profit on the sale of the Polaris data centre. Suncorp Life reported a NPAT of $133 million for the half, with new individual life risk business up 11 per cent from the prior corresponding period to $51 million. The company has announced a fully franked interim dividend of 20 cents for 2012. Suncorp group chairman Ziggy Switkowski said the company’s capital position remained healthy, with more than $1.18 billion identified as surplus to the group’s internal targets.

FROM 1 July this year the Association of Financial Advisers (AFA) will require all new adviser members to attain the Associate Chartered Financial Practitioner (AChFP) designation, AFA national president Brad Fox told a recent AFA partners briefing. The only additional study required to gain the AChFP for those already with a diploma of financial planning (DFP) is the AFA’s ethics unit. Advisers joining the AFA will be provisional members and will need to complete the ethics unit within 12 months of joining, he said. “The beauty of completing this one unit is you’ll be an AChFP. It’s got credibility and it’s got some standing around it,” Fox said. The AFA was currently at an inflexion point at the “pointy end” of the FOFA process and needed to switch from fighting to leading, he said. “We’ve got an enormous competitive tension that’s going to confront our advisers and some of the product players – between efficiency and customer intimacy,” he said. He said there was a margin squeeze on at the foot of the value chain, with a competitor in the market to traditional advice in the form of scaled advice. “We’ve got a big role to play in a leadership position to take people out the other side of FOFA,” he said, adding the AFA needed to be at the forefront of that process. Fox said the AChFP was one of the three levels of designation offered by the AFA, which also included the group’s premier designation – the Fellow Chartered Financial Practitioner (FChFP) – and the Chartered Life Practitioner.

ATO figures show SMSFs still growing THERE are more self-managed super funds (SMFSs) in operation than ever before, with 874,000 SMSF members in 458,000 funds at the end of December 2011, according to figures recently released by the Australian Taxation Office (ATO). There were also more total and net fund establishments in the 2011 financial year than in any previous year other than 2007, with almost 33,000 new funds and 3,200 windups – less windups than in any of the previous seven years.

In the two quarters since, there have been around 16,000 new establishments, with just over 200 funds wound up. At the end of the December quarter, the sector held assets of $400 billion – slightly down from the June 2011 peak of $407 billion. The ATO reported $122 billion was in listed shares and $115 billion in cash and term deposits. Close to $80 billion was held in listed and unlisted trusts and other managed investment schemes, while real property

(both residential and non-residential) accounted for $60 billion. Around a quarter of SMSFs fell into each of the $200,000$500,000 and $500,000-$1 million categories. The ATO said 6.8 per cent of SMSFs held less than $50,000 in assets. The average assets held per SMSF were just under $900,000. Around half of all fund members had current incomes between zero and $40,000 per annum, suggesting a large proportion of retired and semi-retired members.

The number of members per fund was steady over the past six years: around two-thirds of SMSFs have two members and just under a quarter of funds have one member. Three- and four-member funds each represent between 4 and 5 per cent of the overall funds. Member ages were also steady, with around a third of SMSF members in the 55-64 age range, a quarter each in the over-65s and 45-54 brackets, less than 15 per cent aged 35-44, and around one in 20 younger than 35.

www.moneymanagement.com.au March 1, 2012 Money Management — 5


News FOFA scaring away potential planners, says FSC

FSC attacks industrial judiciary on modern awards

By Tim Stewart By Mike Taylor REGULATORY uncertainty is causing the financial planning industry to contract and dissuading young graduates from taking up the profession, according to Financial Services Council chief executive John Brogden. Speaking at the SMSF Professionals’ Association of Australia conference, Brogden pointed to UBS analysis that showed a 1.7 per cent contraction in the industry over the past year (equating to the net loss of 250 planners). The average age of financial advisers in Australia is 55, Brogden added – and for a lot of those planners the current regulatory changes “are too hard, and the value of their practice is getting knocked about at the moment”. The only way to counteract the contraction in the sector is to attract younger people into the profession, he said. “But if you look at the financial advice industry and you’re a 22-year-old graduate who’s just left university, would you become a financial adviser? Right now you wouldn’t, because there’s too much uncertainty,” Brogden said. Financial Planning Association chair Matthew Rowe pointed out that new members of his organisation would be required to hold an undergraduate degree from 1 July 2013. Part of the “evolution” of financial planning must see it referred to as a ‘profession’ rather than an ‘industry’, Rowe added.

John Brogden “My vision would be that in 10 years time there will be a Bachelor of Financial Planning in every university. And the kids who are doing that would see financial planning the same way they would see engineering or the legal profession,” Rowe said. Australian Securities and Investments Commission chairman Greg Medcraft reiterated the regulator’s desire to introduce a national exam for individuals who provide general or personal clients on tier one financial products. “We initially proposed doing it from 1 July 2012, but that’s clearly very ambitious so we’re probably going to move that to a later date – probably July 2013 with a two-year transition period,” Medcraft said.

THE Financial Services Council (FSC) has urged the Productivity Commission to eliminate the industrial relations judiciary, in the form of Fair Work Australia, from the superannuation default fund process. The FSC said it was of the view that superannuation funds should "not be entangled in the Fair Work system" and accused the industrial judiciary of “abrogation of responsibility", such that "funds under investigation by the APRA (Australian Prudential Regulation Authority) [are] being prescribed as default funds". In a submission filed with the Productivity Commission last week, the FSC has urged a competitively neutral regime for default funds under which employers would be permitted to select any APRA-regulated super fund as a default fund. It said that if this were permitted, "a designated Fair Work process would not be required, as an employer would be free to select any APRA-regulated fund". "This approach has the benefit of removing conflicted industrial parties from selecting default superannuation funds which are approved without consideration by Fair Work Australia," the FSC submission said. The submission then goes on to recommend that the Fair Work Act 2009 be amended to eliminate the need to nominate particular superannuation funds by specifically stating that "a modern award must not include terms requiring employer contributions to be paid to named superannuation funds". The FSC submission also suggests that all

MySuper products should be capable of being utilised as default funds in awards approved by Fair Work Australia. The FSC submission makes clear it believes that Fair Work Australia erred from the Government's original intentions by becoming involved in the specific selection of superannuation funds.

It pointed to a letter written by the former Minister for Superannuation and Corporate Law, Senator Nick Sherry, which requested that if Fair Work Australia prescribed default superannuation funds in modern awards, it should establish an appropriate process and criteria for selecting funds rather than doing so on an arbitrary or non-transparent basis. "The Commission chose not to heed the Minister's request and instead prescribed superannuation funds into awards without adopting a process," the submission said. "The consequence is that neither a process nor review mechanism for the selection of default superannuation funds in modern awards exists."

Bendigo Wealth looks to Provisio for scaled advice

WHK transformation sees profit hit

By Chris Kennedy

DIVERSIFIED financial services group WHK has been impacted by continuing volatile markets, investor uncertainty and internal change costs, reporting a 51.6 per cent decline in net first half profit to $13.859 million. However, the company told the Australian Securities Exchange last week that while it had faced a difficult business climate and the ongoing implementation of a business transformation program, it had still managed to deliver solid revenue growth. "Business conditions continued to be challenging but the group's strategy is clear; transformation is underway and WHK is well positioned for continued growth," it said. However, the bottom line for the group was that while overall group revenue was up 1 per cent to $215 million, with business services revenue up 3 per cent, financial services revenue was down 5 per cent. WHK said the decline in financial services revenue was attributable to a significant fall in investment markets, and retail investors maintaining overweight cash positions or deferring retirement. Referencing the impact of its business transformation program, the WHK announcement said first half earnings had been impacted by $8.8 million of one-off costs, including a provision of $6.7 million encompassing all expected future costs. However, it said the successful implementation of remuneration models and group shared services projects in the second half, along with other improvement initiatives, would ensure the group was well positioned for continued growth. The directors said they expected second half normalised earnings to be broadly in line with the previous corresponding period.

BENDIGOWealth has formed a partnership with Provisio Technologies under which the software firm will help Bendigo form a scaled advice offering. Head of Wealth Markets at Bendigo Wealth Alexandra Tullio said the service would initially start off with five advisers. The bank would be looking to grow the service quickly, and it might also be used by other advisers in the field. Bendigo Wealth currently has more than 500 branches and the number is growing, with around 60 to 70 advisers in the advice network. Bendigo Wealth will continue to use XPLAN for its full advice services, she added. Tullio said that while the bank was currently set up for providing complex advice, there was a demand for a simpler and cheaper advice model, as evidenced by the rapid take-up of Bendigo and Adelaide Bank’s

new low-cost super offering, SmartStart Super. “We’re making it easier for people to apply and speak with a consultant,” she said. The new offering addresses Future of Financial Advice changes, which have forced the industry to rethink how it services the tail-end of its business, Bendigo stated. Tullio said the younger generations were typically coming into branches less and would not be looking for hour-long phone consultations – meaning a 15-to-20 minute simpler advice scenario would better suit their needs. Under the new arrangement, Bendigo Wealth will use Provisio’s underlying technology to create the document that is given to the customer, accessing Bendigo’s full range of advice templates. The service is Bendigo-centric, bringing all the relevant information together in a merged document in approx-

imately 20 minutes. Tullio said the service was aimed at the type of consumers who say they want advice but don’t want to pay $3,000 for a statement of advice, and at those who are more interested in “piece by piece” advice rather than full holistic advice . “Financial advice can now be provided in just 20 minutes, compared with the traditional model which can take days. This technology gives Bendigo Wealth the ability to offer advice on a larger scale at a time when branch-based planners are restricted in the number of clients they can physically see,” Tullio said. The new arrangement will mean that planners are better able to service existing clients in a market that has significant margin squeeze, and will be able to continue to service “C and D” clients while also providing cross-selling opportunity to advisers, according to Bendigo.

6 — Money Management March 1, 2012 www.moneymanagement.com.au


News

Securitor launches research website

More than 90 per cent of assets directly held by clients

By Milana Pokrajac BT-OWNED dealer group Securitor has launched a new investment research website which gives advisers access to product and thematic research, as well as market commentary. Selected information from the site will also be available to clients that will assist financial advisers with client education and information delivery. The reason behind the launch of this website is the changing adviserclient relationship and the need for advisers to access timely information, according to head of dealer groups at BT Financial Group Matt Englund. “Investors are closely tuned to market fluctuations, and as a result, are playing a more active role in their portfolios; advisers need insightful commentary at their fingertips,” Englund said. The key information available to advisers on the new site includes equity research via eQR Securities, annual capital markets review, monthly economic/market updates, sector papers, approved product lists and podcasts.

Matt Englund The way dealer groups and institutions provide research material and share insights has evolved since the global financial crisis, with a greater need for constant information flow, said Piers Bolger, head of research and strategy at BT Financial Group. “Now there is a bigger appetite for in-depth market and product information to assist advisers in their discussions with clients,” Bolger said.

Matchingg the Australian legal experts

,

MORE than 90 per cent of personal investments are held directly by individuals, rather than investment products and platforms provided by major wealth managers, according to a new Rice Warner report. This reflects substantial holdings in cash and term deposits (33 per cent), investment property (46 per cent) and shares (10 per cent), with other asset classes making up the rest. However, assets held on investment platforms will almost double by 2026, with wrap platforms to be the fastest growing market, according to Rice Warner predictions. “Assets held on wrap platforms and investment master trusts combined will grow to be more than two and a half times their current level (in 2011 dollar terms) in 15 years’ time,” the report predicted. The Rice Warner Personal Investments Market Projections Report 2012 revealed the personal investments market – which includes personal investments held in banks, shares and investment properties – sat at $1.9 trillion at 30 June 2011, which compares to $1.3 trillion currently sitting in superannuation assets. “Whilst superannuation will grow more quickly in the future due to the significant

compulsor y component, the personal investment market will become increasingly important as Australians seek flexibility of access to their savings and concessional contribution caps, and other tax changes dampen the attractiveness of investing in superannuation,” director of Rice Warner Richard Weatherhead said. The ease and simplicity of straightforward bank and term deposits might lose their appeal when the cost of investment platforms falls and their sophistication, along with reporting capabilities, increases.

with

,

the global legal experts

From 1 March Blake Dawson will be Ashurst, Australia’s new global law firm.

Blake Dawson and Ashurst – more than a match. ConA_MonM_160212

www.moneymanagement.com.au March 1, 2012 Money Management — 7


News

FOFA drives another practice to ipac

Challenger’s ‘excellent’ half-year result

By Chris Kennedy

By Mike Taylor

IPAC south australia has added the $70 million practice XPAL to its stable, with for mer practice director Keith Brenner citing a desire to get back in front of clients rather than dealing with more red tape created by Future of Financial Advice (FOFA) changes as a key reason for the move. XPAL star ted as an accounting practice in the mid-1990s and added financial planning in 1999. It has now added three advisers, one staff member and 400 private clients to ipac south australia. A fourth adviser chose to move on rather than stay with the business, Brenner said. “We were looking at succession planning, which was something we at least needed to start planning for sooner rather than later,” he said. “We started to have a look

and realised the business was more saleable than we thought, so we made a decision to sell the financial planning business.” Brenner said the directors of the business were keen to continue looking after their clients. However, they were finding that with industry changes, including regulatory reform, it was getting more

difficult to spend the amount of time they wanted with their clients, as well as making sure they ticked all the boxes from a compliance, administration and staffing point of view. “So we decided we would sell to ipac and just be faithful to our clients and spend a lot more time doing what we wanted to do, rather than working out how FOFA is going to impact us. Our clients deserved that as well,” he said. The directors were happy to have a larger licensee such as ipac to monitor the compliance side of things, enabling the advisers to spend the bulk of their time back in front of clients. There had been a noticeable improvement in the first six weeks following the sale, he said. ipac south australia now has $1.3 billion in funds under advice, and a staff of 54 with 26 advisers.

CHALLENGER Limited has announced a record normalised interim net profit of $127 million on the back of record annuity product sales during the six months ended 31 December 2011. In an announcement released on the Australian Securities Exchange (ASX), the company said annuity product sales had increased 74 per cent to $1.27 billion, with funds under management (FUM) up 27 per cent to $27.7 billion – a level not seen since before the global financial crisis. The company said that statutory net profit af ter tax had been $20 million due to negative investment experience following a further dislocation of debt and equity markets during the latter part of last year. Commenting on the result, Challenger’s newly appointed chief executive and managing director Brian Benari said it had been “excellent”. “Challenger continues to benefit from demographic tail winds as well as today’s consumer-driven ‘back to basics’ approach to investment,

which favours simple, regulated and guaranteed products,” he said. Benari said Challenger was also starting to reap the full benefit of reinvigorated distribution, advertising and marketing efforts, with annuities increasingly being used as a tool in retiree portfolios. This enabled client and adviser to build on age pension entitlements with a “bedrock” level of income. Reflecting Challenger’s bullish attitude, Benari said the company had decided to increase its full-year retail annuity sales growth target to 30 per cent. He added that “even at these levels there remained enormous long-term upside for those able to capture and keep a leadership position in the retirement incomes market”. Challenger’s ASX announcement said that its funds management operations – including equity partnerships with 10 independently branded boutique funds – recorded a 27 per cent increase in FUM to $27.7 billion. Benari said this had seen FUM returned to pre-GFC levels.

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8 — Money Management March 1, 2012 www.moneymanagement.com.au


SMSF Weekly Trustees anxious about retirement incomes By Tim Stewart SELF-MANAGED superannuation fund (SMSF) trustees are less confident about reaching their target retirement income than they were a year ago, according to a study by the SMSF Professionals’ Association of Australia (SPAA). The Intimate with SelfManaged Superannuation study, commissioned by Russell Investments in conjunction with SPAA and conducted by CoreData, found that only 17.2 per cent of trustees were confident about reaching their target income in retirement. In last year’s report the figure was 34.1 per cent. In particular, two-fifths of women are concerned they will fall short of their retirement income – despite the fact they have more moderate retirement income expectations than men. Only 27.1 per cent of male trustees hold similar concerns. The reduction in confidence was down to the local and inter-

national economic environment, along with trustee concerns about the Government’s superannuation policies, according to the report. Over the last 12 months 20.5 per cent of trustees reported a negative return, compared to only 1.5 per cent in 2010. The report also found that the high cash holdings in SMSFs were now part of a “deliberate risk reduction strategy�, rather than representing money “sitting on the sidelines� awaiting an investment opportunity. The number one reason for overweighting to cash is a desire to reduce risk (48.9 per cent), eclipsing concerns about cost and

return, according to the report. There is also a demographic shift underway in the sector, with SMSFs becoming more popular with younger people. The proportion of do-it-yourself funds with balances under $150,000 increased to 20.4 per cent from 8.2 per cent in the previous year. In addition, 13.7 per cent of Generation X respondents (3145) and 10 per cent of Generation Y respondents stated their intention to establish an SMSF within the next two years. Only 10.5 per cent of baby boomers intend to establish an SMSF within the same timeframe. A perception that it is not worthwhile to establish an SMSF without a large account balance is a barrier to future growth in the sector, according to the report. “Yet many of those who hold this perception have balances of at least $350,000, a level at which having an SMSF may indeed make sense,� said the report.

Limited recourse borrowing changes welcome By Mike Taylor

SPECIALIST self-managed superannuation funds (SMSF) company Cavendish Superannuation has welcomed the Government’s announcement that it intends amending corporations law to make limited recourse borrowing a financial product. In a bulletin issued last week, Cavendish said the move by the Government would give heart to those supporting limited recourse borrowing in the context of SMSFs. It said the Government intended to change the corporations law to make limited recourse borrowing arrangements a financial product – something which had been flagged back in March 2012, and which had been a long time coming. It said the exposure draft of the intended legislation represented an improvement on that first released in June 2010. “Essentially, this legislation will have the effect of bringing consumers under the protective mechanisms that apply to financial products,� the Cavendish analysis said. “This will require limited

recourse borrowing dealers and their associated advisers to hold a relevant financial services licence and provide a product disclosure statement and statement of advice to clients.� Cavendish’s head of education David Busoli predicted there would be considerable debate concerning which parties within a limited recourse borrowing arrangement must be licensed, given the number involved. “The ‘issuer’ requires licensing and is defined as a person who enters into a legal relationship that sets up the arrangement and includes each party to the arrangement,� he said. Busoli said the previous draft of the legislation had caused some confusion about the type of authority a licensee required, but the latest draft states that an Australian Financial Services Licence that provides a licensee with the authority to advise on derivatives or on securities is taken to also cover limited recourse borrowing arrangements. He said the draft also confirmed that a limited recourse borrowing arrangement is not a credit facility, so entities that merely provide finance are not caught by the new requirements.

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Top 10 Strategies

Tips and traps of the leading strategies used in the SMSF A rundown of the latest issues and legislative changes impacting space. SMSF advice in 2012.

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10 — Money Management March 1, 2012 www.moneymanagement.com.au


InFocus Don’t blame advisers for product failures

PERSONAL INVESTMENT SNAPSHOT

$1.9 billion Personal investments held in banks, shares and investment properties as at 30 June 2011

4.2% p.a.

Expected growth rate of the personal investment market over the next 15 years

33%

Held in cash and term deposits

46%

Held in investment property

10%

Held in shares

Mike Taylor writes that the failure of the industry’s critics to distinguish between the failure of product and the failure of advice is continuing to tarnish the reputation of the financial planning industry.

T

he continuing image problem confronting financial planners was last month reinforced by the chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, during a forum at the Self Managed Super Professionals’ Association (SPAA) conference in Sydney. When the chief executive of the Financial Services Council John Brogden conjectured what might have happened to the financial planning industry if Storm Financial had not collapsed, Medcraft quipped that there had been other issues involving financial planners such as Westpoint and agricultural managed investment schemes. In doing so, the ASIC chairman neatly encapsulated the inability of many of those driving current debate to differentiate between a failure of product and a failure of advice. Storm Financial was, indeed, a failure of advice. Westpoint and the numerous MIS collapses were a failure of product. This is not to say that all planners were blameless in terms of client losses with respect to Westpoint or the MIS collapses, but it is worth noting how many people were self-directed investors or, by their own acknowledgement, threw money at forestry and olive oil schemes at the behest of their accountants so they could access tax deductions. Brogden’s point to the SPAA national conference is therefore important, because it succinctly makes the point that Storm Financial was the only really definitively advice-related failure amid all the other financial services collapses of the past half-decade. It begs the question of what type of regulatory future would have been imposed on the

financial planning industry if Storm Financial had not collapsed. A report published in a major Sydney daily newspaper last week also revealed the degree to which lobby groups such as consumer group Choice have sought to leverage off the collapse of Storm to prosecute their agendas. In that newspaper report, Choice chairwoman Jenny Mack said that what had been seen in the financial planning industry had “been a sales force, not a professional advice service”. ‘’It’s these very conflicts that have caused huge consumer losses in Westpoint, in Timbercorp, in Rewards Group … these were commissionpaying products and advisers recommended them because they were getting a big cut from them,” she asserted to the newspaper. ‘’The business model of Storm [Financial] was driven by remuneration structures that paid advisers commissions every step of the way,” she said. It is, of course, well accepted that Storm Financial planners operated on a fee-for-service basis, but this does not stop the likes of Mack suggesting that the whole issue was driven by fat commissions. Nor does she seem to be unduly concerned about the amount of evidence surrounding the involvement of accountants and self-directed investors in the losses incurred from the collapse of Westpoint and Timbercorp. Financial planners and the now largely-defunct commissions seem to be her target. According to Mack, the Government’s Future of Financial Advice changes will represent a panacea for the ills of the financial industry, but in reality, the changes which will progress

through the Parliament over coming weeks will not serve to prevent consumers losing money in ventures such as those pursued by Westpoint or Timbercorp. Indeed, it is doubtful whether the FOFA changes will serve to prevent another Storm Financial collapse in circumstances where the losses incurred by clients were not the result of regulatory breaches, but a failure of strategy. Both Medcraft and Mack might care to reflect on the fact that where regulatory compliance was concerned, Storm Financial had ticked all the right boxes and only collapsed because the rapid tightening in liquidity which accompanied the onset of the global financial crisis served to rupture investment strategies based on too much leverage. Medcraft, who last week released ASIC’s policy on enforcement and investigations, might also reflect upon the fact that his organisation had received warnings about the strategies being promoted by Storm Financial but chose to look no further than meeting its statutory obligations. While the changes outlined in the FOFA bills extend ASIC’s power to act in circumstances similar to those surrounding Storm Financial, the degree to which the regulator utilises those new powers remains to be seen. It will certainly need to do more than simply be the policeman managing the scene after an accident has occurred. Then too, the current economic climate suggests it may be some time before the impact of FOFA and the extended powers of the regulator are put to the test. Few new products are being introduced to the market and most investors are showing an inclination to remain in cash.

Source: Rice Warner Actuaries – Personal Investments Market Projections Report 2012

What’s on The Great Reset – Adjusting to New Economic and Financial Norms 7 March 2012 Auditorium, UNSW, Sydney www.australiancentre.com.au

M&A Masterclass: Opportunities, Strategies and Risks 20 March 2012 Stamford Plaza Adelaide, South Australia www.finsia.com

Recent Estate Planning Issues 23 March 2012 Rydges, Port Macquarie http://www.spaa.asn.au/events. aspx

Financial Services Council Life Insurance Conference 2012 22 March 2012 Sydney Convention and Exhibition Centre www.fsclifeinsuranceconf.org.au

SMSF Essentials 2012 27 March 2012 Doltone House, Sydney www.moneymanagement.com.au /eventlist

www.moneymanagement.com.au March 1, 2012 Money Management — 11


Superannuation

Beyond

Stronger Super

Freya Purnell takes a closer look at what life after Stronger Super might bring to the superannuation sector.

12 — Money Management March 1, 2012 www.moneymanagement.com.au


Superannuation FOR the past few years, the Super System Review (known as the Cooper review) seemed to consume all the oxygen in the room around superannuation. But just as the Government released its response and began to move into implementation mode, many other issues began to rear their ugly heads – concessional taxation, a dearth of post-retirement options, prudential standards, default funds under modern awards and more. So what might life after Stronger Super hold for the Australian superannuation system?

Key points z

Despite the upcoming ban on planner commissions, the industry versus retail war is set to continue. z The use of term deposits within super accounts is one of the new developments over the past couple of years. z Super returns in the September 2011 quarter took a turn for the worse, according to APRA. z Research shows superannuation industry executives are quite unprepared for the new regulatory environment.

Stronger Super In September, the Federal Government released its response to the Cooper Review as the Stronger Super reform packaging, supporting 139 of Cooper’s 179 recommendations. In framing its response, the Government said it was particularly mindful of three issues identified in the review – that fees in superannuation are too high; that choice of fund failed to deliver a competitive market and reduced costs for members; and that there is too much tinkering in superannuation. The key planks of the Stronger Super reform package were: • The creation of MySuper as a default superannuation product with a single diversified investment strategy and single set of fees, to be available from 1 July 2013; • Providing the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission and the Australian Taxation Office (ATO) with the tools they need to improve their oversight of superannuation; and • Improving the administration and management of accounts through the SuperStream reforms, to make processing transactions easier, cheaper, and faster for members and employers. Other measures included the consolidation of multiple member accounts on an opt-out basis, as well as additional requirements for employers to provide better contribution information to employees. Taken together, the Government estimated the reforms would reduce the fees paid by members by up to 40 per cent. MySuper Though created as a ‘simple’ option, MySuper has drawn a chorus of misgivings which have dominated the Stronger Super reform discussions. Jeremy Cooper – chair of retirement income at Challenger and chair of the Super System Review – believes that the implementation of MySuper is one of the challenges now facing the sector. “The MySuper product is conceptual, and as much a philosophy as anything – it is not so tangible or practical as SuperStream,” Cooper said. “If it is merely a matter of complying with a checklist of items, and you don’t really get on board with the principles of it, then it may not be as successful; the challenge is that it doesn’t get bogged down in the prescriptive elements with the substance of it being lost.” Given the timeline, the clock is now ticking for funds to develop and offer this ‘no frills’ option. Despite the ‘one size fits all’ intention of MySuper, the addition of some flexibility has been seen as critical by some industry bodies for it to be successful. The Financial Services Council (FSC), for

Jeremy Cooper

The MySuper product is “conceptual, and as much a philosophy as anything – it is not so tangible or practical as SuperStream. - Jeremy Cooper

example, welcomed the addition of variable pricing and tailored investment strategies for large employers (those with 500 employees and over). “This is a great outcome for the 2.2 million Australians in corporate superannuation plans as it means their super strategy will continue to be tailored to their specific needs,” FSC chief executive John Brogden said. However, concerns remain about the impact of a single fee structure for funds using a lifecycle investment strategy, with Aon Hewitt calling the plan “inequitable”. “Lifecycle strategies that shift a higher weight to fixed income as a member nears retirement would result in lower costs associated with these members,” says Janice Sengupta, chief investment officer of Aon Hewitt. “If the fund has to charge all members the same investment management fee, then older members would be subsidising younger members in the more growth oriented strategies.” In addition, there remains considerable uncertainty around the provision of advice attached to MySuper products, which is being dealt with as part of the Future of Financial Advice (FOFA) reform process. SuperStream By contrast, the SuperStream initiative to increase back office efficiency has been uncontroversial and, in fact, welcomed with open arms. “SuperStream is a group of really practical measures that are going to save funds a

lot of time and money. It’s just been great to see how the industry has embraced it – the paperwork and clunkiness that the system has now will be gone,” Cooper says. SuperStream specifically included proposals to improve the quality of data in the system, allow the use of tax file numbers as the primary account identifier, encourage the use of technology to improve processing efficiency and improve the way fund-to-fund rollovers are processed and the way contributions are made. Again, 1 July 2013 marks the first deadline for implementation, with data and e-commerce standards mandated for super funds from this date, and the Government’s clear direction has given impetus to industry-led moves on electronic transacting. The Affiliation of Superannuation Practitioners (ASP) – a consortium of funds and administrators including AAS, AMP, BT Financial Group, Colonial First State, MLC, Pillar and Superpartners – last year piloted a program allowing ASP members to transact superannuation rollover data and payments electronically. The pilot was very successful, according to ASP spokesperson Nigel McCammon, with 12,000 rollovers with a collective value of $120 million completed, and a reduction in the average time member funds were out of the market from more than five days to less than 48 hours. However, the technology underlying the system meant it faced issues of scale. In February, the group agreed to take the project to the next level as a web-based system – a move which “supports fully the Government’s intention and direction in regards to services and data standards”. However, looking more broadly, the SuperStream initiatives are going to be less achievable for some players than others. “There is a lot of diversity in the industry around operating environments. There are some challenges for those that have not invested in technology, and they now face a greater leap than others,” McCammon says. In seeking to make improvements across the industry, McCammon also believes it is important that “we don’t derail efficiencies already in play”.

Is the industry ready for Stronger Super? Despite these initial moves, new research by the Association of Superannuation Funds of Australia (ASFA) in collaboration with Ernst & Young indicates that industry executives are quite unprepared for the new environment. The report, ‘Stronger Super Preparedness: Preliminary findings of study II’, builds on an earlier survey, and shows that industry preparedness has increased in eight of 12 business dimensions over the past six months, including fund governance, business strategy, and technology and data. However, in areas such as members and employers, governance and leadership, and processes and procedures, little headway has been made. ASFA attributes this to the dependency of Stronger Super to other reforms, including Future of Financial Advice and the introduction of prudential standards by APRA, as well as ongoing debate about the finer details. “Until the missing regulatory detail is Continued on page 14

www.moneymanagement.com.au March 1, 2012 Money Management — 13


Superannuation Continued from page 13 provided, the industry will struggle with this element of preparation,” the report says. However, ASFA warns that without a sense of urgency to assess and act on the new requirements, industry players could miss an opportunity to renew themselves. “Those players employing a wait and see approach may be making a terminal mistake. Without a robust understanding of key implications now, industry stakeholders will not have sufficient time to prepare,” the report says. The research also indicated a shift in the assessment of the costs involved in implementing the reforms. While in the first survey, SuperStream accounted for most of the anticipated costs, the second survey saw it level with MySuper, with each attracting 37 per cent of respondents’ estimated costs. “This is a fundamental shift in thinking from earlier this year, when the industry saw MySuper as ‘just another product’,” the report said. So while MySuper is pitched at reducing costs to members, initially at least, there will still be a considerable cost for its implementation.

Opening the default market to competition and creating a level playing field between all MySuper funds is crucial to ensuring fees continue to be driven down. - John Brogden

John Brogden

More super reform Despite the wideranging nature of the Stronger Super reforms and other measures such as increasing the superannuation guarantee (SG) contribution to 12 per cent, introducing the low-income superannuation contribution and abolishing the SG age

limit of 70, it seems there are still many other issues around super yet to be resolved. Treasurer Wayne Swan and Minister for Superannuation and Financial Services Bill Shorten announced a superannuation roundtable to work throughout 2012 and specifically address how to better target and

deliver current tax concessions and give retirees more product options in the postretirement phase. Tax concessions within super have long been debated in the industry, and while the remit of the roundtable is broad, Cooper says there is a clear message that any “tinkering” will have to be balanced from the superannuation system. “It won’t fly if people change concessions, and that is going to have fiscal consequences,” Cooper says. Also on the table this year is the introduction of prudential standards for superannuation by APRA, and a Productivity Commission inquiry into the selection and ongoing assessment of default superannuation funds in modern awards. Expected to last around eight months, the inquiry will seek to develop transparent and objective criteria for choosing a default fund – a step applauded by the FSC, who called the current process “anticompetitive” and “riddled with conflicts of interest”, due to the involvement of employer groups and unions in the decisionmaking processes. “Opening the default market to competition and creating a level playing field

Table 1a: Industry Super Platforms Features

Life Insurance

Salary Continuance

Maritime Super (Stevedores Division) Accumulation Standard

Health Super

Rest Personal Superannuation

AustralianSuper

Cbus Personal Super

UniSuper Accumulation Super (1) Members

Yes

Yes

Yes

Yes

Yes

Yes

Maximum level of cover

1000000

5000000

5000000

No maximum

1200000

No maximum

Maximum eligibility age

64

69

69

69

69

74

Cover expiry age

65

70

70

70

70

75

Salary continuance insurance cover

No

Yes

Yes

Yes

Yes

Yes

Benefit period

Not applicable

Two years or to age 65

2 years

2 years

2 years

2 years

Maximum cover - % of income

Not applicable

85

85

85

100

85

Life insurance cover

Death Benefit Nominations

Binding death benefit nomination

Yes

No

Yes

Yes

Yes

Yes

General

Contribution splitting between spouses

Yes

No

Yes

No

Yes

Yes

Pension Accessibility

Account Based Pension

Yes

Yes

Yes

Yes

Yes

Yes

Pension Accessibility

Non-Commutable

Yes

Yes

Yes

Yes

No

Yes

5

9

12

16

6

12

Switching between

Greater than 5

Greater than 5

Up to 4

Unlimited free switches

Unlimited free switches

Up to 1 free switch

investment options

free switches

free switches

free switches

Allocated Pensions Investment Options

Number of Investment Options

Investment Access

Direct share investments

No

No

No

Yes

No

No

Alternative or leveraged investments

No

Yes

No

Yes

No

Yes

Yearly

Half-yearly

Quarterly

Half-yearly

Yearly

Half-yearly

Yes

Yes

Yes

Yes

Yes

Yes

Communication

Statement Frequency

Online Access

Online transaction

Transactions

Minimum Initial Investment

No minimum

No minimum

No minimum

No minimum

250

No minimum

Minimum Regular Investment

No minimum

No minimum

No minimum

No minimum

No minimum

No minimum

functionality

Midwinter Fee Index*

0.94%

0.63%

0.65%

0.49%

0.98%

0.45%

Maritime Super Balanced

Balanced Standard

Balanced

Balanced

Core Strategy

Balanced

Growth/income split

65/35

42.5/57.5

46.5/53.5

74.5/25.5

71/29

63/37

One-year return to 30 June 2011 (after taxes and fees)

9.61%

10.65%

7.06%

10.27%

8.70%

8.88%

Investment Option

Source: Features and fee comparison, Midwinter Financial Services. Assumptions for MFI: current age 50, super balance $300,000; projections are to age 65, on a salary of $60,000 per annum, and 9% SG contributions. *The Midwinter Fee Index is a calculation that determines the average impact of fees on a platform over the project period, taking into account all the ongoing fees and entry fees to calculate the average cost.

14 — Money Management March 1, 2012 www.moneymanagement.com.au


Superannuation between all MySuper funds is crucial to ensuring fees continue to be driven down,” Brogden says. “The industry fund monopoly must be broken so that competition can flourish in the superannuation system.” Obviously, the endgame with this extensive reform process is to have a better, more secure, more efficient, and ultimately, more effective superannuation system. But do investors and advisers see it that way, or are they just losing patience with the endless change? SMSF Professionals Association of Australia (SPAA) chief executive officer Andrea Slattery, for one, believes confidence in the market is a critical issue at present. “Both sides of government had promised over the last four or five years that they would not make any further changes to super once the reforms were finished. Now here, we have already got people talking about tinkering with tax concessions postreform, and there are a lot of issues coming out of the implementation which will really affect people’s confidence in super as a system,” Slattery said.

Disappointing performance The current poor performance of many superannuation funds isn’t helping matters. APRA figures show that returns in the September 2011 quarter took a dramatic turn for the worse, with the overall rate of return -4.9 per cent. Public sector funds generated a return of -4.2 per cent, industry funds generated a return of -4.6 per cent, corporate funds -5.1 per cent, and retail funds -5.4 per cent. While the blame for this performance can be easily driven home to lacklustre investment markets, members may start to question the overall approach, given the volatility of recent years. “The philosophy on asset allocation that we have enjoyed for some time – being equities focused – is starting to test the patience of a lot of members. Particularly as it affects retirees and those approaching retirement – I think there is a lot of work to do in that area,” Cooper says. Research by ASFA bears this out – its research report, ‘Consumer attitudes to superannuation and super policy issues’,

Wayne Swan released in November 2011, shows that only 27 per cent of respondents were satisfied with the superannuation industry as a whole – down from 34 per cent in 2010. Levels of satisfaction with the main super fund of respondents are also now at their

lowest level in eight years – a period which includes the bloodbath of 2008 – which ASFA director of research Ross Clare attributes to continued volatility and negative investment returns in many asset classes. Countplus MBT principal Roy Massey agrees that amongst clients, superannuation performance is a big issue, but they are also becoming increasingly fee sensitive, and looking for an expanded range of options from their wrap account. “A new development over the last few years has been the use of term deposits within super accounts. Clients are now inclined to hold a substantial amount of cash in their portfolio. One thing we have been asked for quite a bit recently is wrap accounts that use a range of providers for term deposits,” he says. Performance issues have also impacted the levels of funds under management in the personal super sector, according to Mark Kachor, managing director, DEXX&R. Full year figures to the end of September Continued on page 16

Table 1b: Retail Super Platforms Challenger Guaranteed Personal Super

Life Insurance

AMP Flexible Super - Personal - Core Investment - Essentials Protection

IOOF LifeTrack Personal Superannuation

Zurich Superannuation Plan

CFS First Choice Personal Super

Super Personal Retirement Plan

No

No

Yes

Yes

Yes

Yes

No

Maximum level of cover

Not applicable

Not applicable

250000

No maximum

No maximum

No maximum

Not applicable

Maximum eligibility age

Not applicable

Not applicable

55

69

69

74

Not applicable

Cover expiry age

Not applicable

Not applicable

65

70

Greater than 90

75

Not applicable

No

No

No

Yes

Yes

Yes

No

Benefit period

Not applicable

Not applicable

Not applicable

2 years 5 years to age 65

1 year 2 years 5 years to age 60 or 65

Two years or to age 65

Not applicable

Maximum cover % of income

Not applicable

Not applicable

Not applicable

75

75

85

Not applicable

Death Benefit Nominations Binding death benefit nomination

No

No

Yes

Yes

Yes

Yes

Yes

General

Contribution splitting between spouses

Yes

No

Yes

Yes

Yes

Yes

Yes

Pension Accessibility

Account Based Pension

Yes

No

Yes

Yes

Yes

Yes

Yes

Pension Accessibility

Non-Commutable Allocated Pensions

Yes

No

Yes

Yes

Yes

Yes

Yes

Investment Options

Number of

6

1

2

201 - 250

21 - 30

126 - 150

9

Unlimited free switches

Not applicable

Unlimited free switches

Unlimited free switches

Unlimited free switches

Unlimited free switches

Unlimited free switches

Direct share investments

No

No

No

Yes

No

No

No

Alternative or leveraged investments

No

No

No

Yes

No

Yes

No

Yearly

Yearly

Yearly

Yearly

Yearly

Half-yearly

Half-yearly

No

No

Yes

Yes

No

Yes

No

Salary Continuance

Life insurance cover

AMP Eligible Rollover Fund

Salary continuance insurance cover

Investment Options Switching between investment options Investment Access

Communication

Statement Frequency

Online Access

Online transaction functionality

Transactions

Minimum Initial Investment

1000

No minimum

No minimum

No minimum

2500

1500

2000

Minimum Regular Investment

100

No regular contribution available

No minimum

100

No minimum

100

100

Midwinter Fee Index* Investment Option Growth/income split One-year return to

0%

1.64%

0.57%

2.37%

1.58%

1.55%

1.20%

Guaranteed Fixed Rate 4 year

No. 1 Fund

AMP Super Easy Balanced

IOOF Multimix Balanced Growth

Zurich Balanced

CFS Balanced

Balanced

0/100

13/87

67.5/32.5

65/35

49/51

47.5/52.5

55/45

n/a

n/a

6.70%

8.45%

5.09%

5.46%

9.33%

30th June 2011 (after taxes and fees) Source: Features and fee comparison, Midwinter Financial Services. Assumptions for MFI: current age 50, super balance $300,000; projections are to age 65, on a salary of $60,000 per annum, and 9% SG contributions. *The Midwinter Fee Index is a calculation that determines the average impact of fees on a platform over the project period, taking into account all the ongoing fees and entry fees to calculate the average cost.

www.moneymanagement.com.au March 1, 2012 Money Management — 15


Superannuation Continued from page 15 2011 show that total funds under management/advice in the personal superannuation market fell by 2.83 per cent, or $4.6 billion to $158 billion. The employer super market, by contrast, grew by 4.63 per cent to $88.5 billion – though this represented a 1.79 per cent drop on the June 2011 quarter. He believes this shift is reflective of the fact that fund flow for employer super is largely dominated by mandatory SG contributions, while personal super tends to draw discretionary contributions – which investors are less likely to make when balances are falling due to poor investment market performance. “What you notice particularly in the personal super market is that it tracks with about a nine-month lag on how the overall equities market is going,” Kachor says, adding that he believes this dynamic is more responsible for the decline of personal super than the rise of industry funds.

The retail vs industry fund war With a ban on commissions and intra-fund

Andrea Slattery advice imminent, the battleground between retail master trusts and industry superannuation funds seems set to continue – on features, returns, and of course, fees. In this comparison of retail and industry super funds (see Table 1), there is significant variability in the features available for the funds, but there is a clear trend for lower

fees among the industry funds, and generally higher returns (on a one-year basis). No surprises there, perhaps – but what may surprise some is that the most recent Roy Morgan Research Superannuation and Wealth Management report found that in the 12 months to June 2011, 10 per cent of all superannuation products that switched to industry super funds came through a financial planner – representing an increase from 7 per cent in the year prior. Massey believes much of this increase would come from planners employed by industr y funds, but says he would recommend an industry fund in certain circumstances. “Where the client does not require ongoing advice, they’re usually better off moving to an industry fund than staying in a retail product, where there is a fee being paid to an adviser and potentially a dealer group as well,” he says. According to Industry Fund Financial Planning (IFFP) – which provides advice services to 16 super funds, including Australian Super, HESTA, MTAA Super, Care Super, CBUS and Host Plus –

Table 2: Personal Super – Total groups by product Funds under management past 3 Years Group

Year Ending Sept 11

% of Total

% change

Year Ending Sept 10

% of Total

% change

Year Ending Sept 09

AMP

35,615.95

[ 1]

23.75

40.65

25,321.96

[ 3]

15.83

2.44

24,718.69

[ 3]

Commonwealth

27,875.09

[ 2]

18.58

-5.91

29,626.47

[ 2]

18.52

0.49

29,482.87

[ 1]

National

27,574.95

[ 3]

18.38

-7.69

29,871.37

[ 1]

18.68

17.79

25,359.33

[ 2]

BT / Westpac

20,380.31

[ 4]

13.59

-2.14

20,826.92

[ 4]

13.02

4.93

19,847.65

[ 4]

IOOF Group

8,073.92

[ 5]

5.38

-12.61

9,239.28

[ 6]

5.78

-1.93

9,421.16

[ 6]

ANZ

7,220.28

[ 6]

4.81

-9.34

7,963.83

[ 7]

4.98

-1.98

8,124.43

[ 7]

Macquarie

5,393.14

[ 7]

3.60

-4.51

5,647.69

[ 8]

3.53

0.33

5,629.30

[ 8]

Mercer

3,763.60

[ 8]

2.51

1.23

3,717.70

[ 9]

2.32

7.47

3,459.30

[ 10]

Oasis

2,659.75

[ 9]

1.77

-10.00

2,955.31

[ 10]

1.85

2.35

2,887.34

[ 11]

Tower

1,497.40

[ 10]

1.00

-6.18

1,596.02

[ 11]

1.00

2.01

1,564.64

[ 12]

Suncorp

1,406.71

[ 11]

0.94

-7.93

1,527.91

[ 12]

0.96

104.77

746.16

[ 18]

Perpetual

1,161.91

[ 12]

0.77

-10.76

1,301.99

[ 13]

0.81

-1.95

1,327.85

[ 13]

Jacques Martin Admin & Consult

982.81

[ 13]

0.66

-1.28

995.53

[ 15]

0.62

2.31

973.01

[ 15]

Count

975.78

[ 14]

0.65

-12.54

1,115.68

[ 14]

0.70

1.23

1,102.14

[ 14]

DKN Fin Group Ltd

698.53

[ 15]

0.47

-11.54

789.69

[ 16]

0.49

-8.23

860.49

[ 16]

Asteron Grp

616.12

[ 16]

0.41

-13.03

708.41

[ 17]

0.44

-7.44

765.31

[ 17]

Fiducian

605.88

[ 17]

0.40

-0.83

610.97

[ 20]

0.38

-1.43

619.81

[ 21]

Zurich

588.40

[ 18]

0.39

-14.56

688.65

[ 18]

0.43

-6.79

738.82

[ 19]

MBF

574.41

[ 19]

0.38

-10.85

644.31

[ 19]

0.40

-9.70

713.56

[ 20]

Tynan Mackenzie

427.63

[ 20]

0.29

-20.32

536.67

[ 21]

0.34

-10.91

602.36

[ 22]

NM Super

374.11

[ 21]

0.25

-1.28

378.96

[ 22]

0.24

2.31

370.38

[ 23]

AON

345.28

[ 22]

0.23

-5.79

366.50

[ 23]

0.23

3.46

354.23

[ 24]

Aust Ethical

294.38

[ 23]

0.20

-6.68

315.46

[ 24]

0.20

1.58

310.55

[ 25]

Sandhurst Trustees

243.82

[ 24]

0.16

-5.12

256.98

[ 25]

0.16

-5.16

270.96

[ 26]

Investec

167.49

[ 25]

0.11

-0.83

168.89

[ 26]

0.11

-1.43

171.34

[ 28]

Astarra

132.76

[ 26]

0.09

-5.54

140.54

[ 27]

0.09

3.58

135.69

[ 29]

Challenger Life

122.30

[ 27]

0.08

-3.39

126.60

[ 28]

0.08

-43.17

222.76

[ 27]

Plan B

71.23

[ 28]

0.05

-0.23

71.39

[ 29]

0.04

0.72

70.88

[ 30]

Trust Co Aust

56.66

[ 29]

0.04

-4.14

59.11

[ 30]

0.04

-0.97

59.69

[ 31]

Equity Trustees

40.90

[ 30]

0.03

-0.85

41.25

[ 31]

0.03

-2.27

42.21

[ 32]

Savings & Loans

25.27

[ 31]

0.02

0.40

25.17

[ 33]

0.02

-0.26

25.24

[ 34]

Rabobank Aus

22.06

[ 32]

0.01

-23.04

28.66

[ 32]

0.02

-7.55

31.00

[ 33]

[ 5]

7.67

-1.33

12,438.06

[ 5]

--

--

4,805.49

[ 9]

100.00

1.07%

AXA

--

--

--

12,272.84

Aviva Group

--

--

--

--

100.00

-6.22%

TOTAL

149,988.83 [ 32]

Source: DEXX&R

16 — Money Management March 1, 2012 www.moneymanagement.com.au

159,938.71 [ 33]

158,252.68 [ 34]

SMSF sector stays strong THE self-managed superannuation fund (SMSF) was also a target area for the Stronger Super reforms, and while Slattery says broadly the association was happy with the proposed measures, there are still some concerns about implementation – in areas such as asset valuations and off-market transfers, for example. For the most par t, though, she believes the SMSF sector will be largely unaffected, and recent ATO figures show that it certainly remains a force to be reckoned with. In the five years to 30 June 2010, according to ‘Self-managed superannuation funds: A statistical overview 2008-09’, the SMSF sector has been the fastest growing in the Australian superannuation industry, with SMSF assets growing by 122 per cent, compared with total super assets at 60 per cent. Slattery says there has also been steady growth over the past 12 years in the number of people starting their own SMSF, motivated by an interest in controlling their retirement savings. This greater knowledge and sophistication means that SMSF trustees are comfortable voting with their feet when dissatisfied with platforms, for example, according to Massey. “That’s where wrap providers and dealer groups to a certain extent need to be very cautious in terms of how they price their platforms. Because if they’re not seen as good value, people like SMSF trustees are starting to move towards dealing directly with a fund manager,” he says. Interestingly, the ATO figures show a trend for members of newly established SMSFs to come from younger age groups. At the other end of the market, Slattery also argues that the SMSF sector is managing the post-retirement phase better than the rest of the market. “The SMSF sector is actually the only one that doesn’t have a longevity or adequacy issue in retirement,” she says, though she concedes that account balances tend to be higher for SMSFs. “At the moment, you have got close to 90 per cent of people choosing to remain in a pension with their fund, rather than taking a lump sum.” This is the exact opposite of the APRAregulated sector, where 90 per cent take a lump sum. As the sector grows, there will also be an increasing need for SMSF advice specialists, and advisers are grabbing this opportunity with both hands – over the past 12 months, the number of SPAA SMSF Specialist Advisors or SMSF Specialist Auditors grew by 65 per cent. As well as raising their competency standards, Slattery believes this is an important vote of confidence in the sector – especially as the superannuation landscape evolves. “It is a more complex area, and consumers are seeking advisers they can trust and have a relationship with.”


Superannuation demand for financial advice by industry fund members is on the increase. The group is on a dramatic growth path, according to Frank Gayton, national practice manager for IFFP, with adviser numbers now up 15 per cent from the number at 1 July 2011, and negotiations are underway that could see adviser numbers up 50 per cent by the end of this financial year. With a huge increase in the number of members seeking advice – which Gayton attributes to “fierce resistance” from consumers to commissions as well as the baby boomers taking an interest in their superannuation – there is currently a four to six week wait for an appointment with an IFFP planner. On the issue of switching super accounts into an industry fund, he says in many cases it is logical for their planners to advise such a step – especially for an investor with multiple accounts. “It may be that someone has an account of $200,000 with Australian Super, for example, and a legacy account of $10,000 with Colonial First State. Logically, if someone is planning their retirement, you would consolidate them in one fund, and that would invariably be with the majority of the money,” Gayton says.

The post-retirement landscape Perhaps more significant than any ongoing tussle between industry and retail funds is the impending demographic shift as baby boomers begin to move into retirement en masse. With the first of the generation

There is no silver bullet solution – it is all very specific to the individual retiree about what their needs and concerns are. - Jeremy Cooper

Bill Shorten hitting age 65 last year, the move is already underway, but is the industry ready? According to Cooper, baby boomers hold approximately $850 billion of the $1.4 trillion held in superannuation assets, and this is the group which will be transitioning from accumulation to drawdown over the next 20 years. He predicts in future, many more will stay in the super system after retirement. “Today, 50 per cent of retirees just take the lump sum and then step out of the super system when they retire. That’s going to change very quickly, so within a relatively short number of years, 90 per cent will stay in the system in retirement, receiving some sort of income stream from their fund,” Cooper says.

This has implications for advisers, for whom retirees will form a larger part of their client base (with much larger superannuation balances than seen previously). And Cooper argues that the complexity of this phase is very different to the objectives of the accumulation phase. “There is no silver bullet solution – it is all very specific to the individual retiree about what their needs and concerns are, their tolerance for risk, and what they are seeking to get out of retirement. Accumulation is a one-trick pony – you’re seeking to maximise your returns so you have the largest amount on which to retire,” Cooper says. Crucially, to better meet retirees’ needs, the right products need to be available as

well, according to Actuaries Institute chief executive Melinda Howes – and this is the task ahead for legislators, product manufacturers and super funds. Cooper says that while the Government agreed in principle with the Super System Review’s recommendation that post-retirement products should be designed around a strategy that would deal with inflation risk, longevity risk and market risk, it ended up in the “too-hard” basket because it is a very different approach to that taken currently. He hopes that the superannuation roundtable will be able to provide a concrete plan on expanding the product options in the drawdown phase – including perhaps resolving the technical problems with deferred annuities, which help to address longevity risk for retirees. Howes agrees that there is insufficient choice available to retirees to help them manage key risks, and also believes roadblocks to product development need to be removed. “Over the last 20 years, people have been happy to be in account-based pensions in retirement because returns have been strong and consistent up until 2008. Back before that, interest rates were high, so people were happy to be in lifetime annuities and pensions. “But now you have got a situation where people don’t want to be exposed to market risks, so they are looking to lock in some MM protection,” Howes says.

www.moneymanagement.com.au March 1, 2012 Money Management — 17


OpinionRisk insurance

Weighing the benefits Macquarie Life broke new ground in May 2010 with the launch of Macquarie Active risk insurance product. Col Fullagar examines whether or not it is possible to establish an objective basis for an Active benefit amount.

S

everal months ago, Money Management discussed some of the pros and cons of the new Macquarie Active risk insurance product (Money Management, 30 September 2010). The verdict was that Active appeared to give the adviser access to some unique opportunities in various areas. However, in the end the article concluded, “it will come down to the adviser’s analysis of the client and the needs of the client”. And therein lay the problem. The unique design of Active made the identification of the client need and the subsequent reasonable benefit amount recommendation somewhat problematic, and thus the reason for this followup article, the purpose of which is to explore whether or not it is possible to establish an objective basis for an Active benefit amount. A specific client is not being consid-

ered, so a general approach will be taken. Term, trauma and total and permanent disability (TPD) – and their Active equivalents of term and health events cover – is where the challenge lies.

Term insurance The payment basis of the term insurance component of Active, while also identical to its equivalent traditional product, requires a slight variation of approach because of the structure of term within Active. Within Active, the term insurance cover can be established in two ways: Initial cover Initial cover is the amount of cover that is shared with the health events (trauma/TPD) insurance within the policy. If the first insured event to occur is the death or terminal illness of the life insured, 100 per cent of the initial cover is payable.

18 — Money Management March 1, 2012 www.moneymanagement.com.au

If, however, one or more health event payments occur first, the initial cover will be reduced by the amount paid. There is no buy-back facility within Active, so the amount that is subsequently paid on death or terminal illness may well be less than what is required. Additional cover Additional death cover can be purchased and this additional cover is not affected by payments under health events cover. Additional cover may therefore be used if: - The client needs death cover in excess of the initial cover, in which case additional cover would be the level of extra cover needed; and/or - The effect of health events payments on the initial cover needs to be offset, in which case additional cover would duplicate the initial cover. The need to duplicate the death cover in this way will increase the premium commitment required.

Trauma insurance The health events component of Active has a relatively complex set of payment triggers in that: • Benefit payment amounts differ based on the severity of the insured events; and • Multiple payments can be made over the duration of the policy. These complexities, however, do not preclude establishing an objective basis for a benefit amount recommendation. The health event cover recommendation within Active can be made to focus on Severity A health events, as it is these events that will have the greatest financial impact on the client. Traditionally, the initial focus of a trauma insurance recommendation is in the area of the costs associated with m e d i c a l c a re a n d re h a b i l i t a t i o n s. Generally, these costs will be severitybased and will be incurred each time a health event occurs; which appears to


fit in well with the structure of Active. A benefit amount recommendation in this area of trauma insurance cover can be arrived at by following a logical progression. Base cover Like most trauma insurance products, the number of insured events covered under Active is such that it would not be feasible for advisers to individually consider each of these insured events. It is therefore appropriate to initially consider only those events which are most likely to occur: ie, cancer, heart attack and stroke. In respect of the medical and rehabilitation costs associated with these conditions, research has shown that the average, gross costs (ie, prior to the impact of any medical insurance rebates) to the individual are as set out below: • Cancer : of the more common cancers, the most expensive on average is leukaemia at around $100,000. (Optimising Cancer Care in Australia, National Cancer Control Initiative February 2003. Access Economics – Cost of Cancer in NSW, April 2007.) • Heart attack: on average, the equivalent costs for a heart attack is $25,000. (Australian Institute of Health and Welfare publication, Health System Costs of Cardiovascular Disease in Australia 199899, indexed in line with CPI to 2011.) • Stroke: because of the higher rehabilitation component associated with a stroke, the equivalent average costs are around $125,000. (Lifetime costs of stroke subtypes in Australia, Melbourne, June 2003, indexed in line with CPI to 2011.) Thus, if providing general advice in regards to the personal medical and rehabilitation costs associated with the most likely-to-occur trauma-insured events, an amount around the higher figure above might be considered appropriate. Thus, a base cover amount of $125,000 will be assumed. Above-average health care allowance The base cover amount above – ie, $125,000 – is an ‘average’ amount. It may therefore be that a particular client would prefer financial access to a higher-than-average level of health care: eg, an additional $75,000. Provision for this can be enabled simply by increasing the recommended base cover amount to that required. Any increase in this way would effectively be arbitrary, in part driven by client affordability. Specific health events Also, a particular client may wish to give a greater focus to specific insured health events than the likelihood of those events occurr ing would other wise demand. Examples might be that the client wants to focus on: • Paralysis, because the client is young and very active; or • Dementia or multiple sclerosis because the client has seen the impact this disease has had on others.

If the medical and rehabilitation costs associated with a specific condition are greater than the base amount plus any above-average health care allowance, the difference would be added to the recommendation. In the example below, it will be assumed that the client wishes to protect against the personal costs that may arise in the event of Alzheimer’s disease being diagnosed. An allowance of $225,000 has been made. Health insurance rebate T h e t o t a l o f t h e a b ov e a m o u n t s, however, may be adjusted downwards by any amounts likely to be received through health insurance rebates. It is not the place of this article to mandate a specific adjustment, bearing in mind that it is unknown what health insurance cover a particular client will have in place. In the example below, however, a rebate amount of $50,000 will be assumed. Lifestyle changes Having considered the medical and rehabilitation costs associated with the trauma insurance recommendation, this amount may need to be supplemented if the client wishes to overlay some lifestyle changes. Whilst medical and rehabilitation costs might be severity-based and recurring, the costs associated with so-called lifestyle changes are generally not. For example, the following traditional lifestyle costs are neither severitybased nor do they recur: • Debt reduction; • Pre-fund children’s education costs; • Pre-fund early retirement; and • Discretionary home improvements. On the other hand, the following traditional costs are not severity-based but may recur: • Holiday; • Hire home-carer or cleaner; • Top up the 25 per cent income protection insurance shortfall; and • Time off work. Therefore, in the area of lifestyle changes, Active, while equally as effective as traditional trauma insurance, is not as appropriately designed as it is in the area of medical care and rehabilitation. As the cost of each of the lifestyle items is capable of being objectively estimated, the amount needed to implement the required lifestyle changes is simply the total cost of those changes required. In the example below, it will be assumed that the client wishes to make provision of $150,000, being the total cost of the following lifestyle changes: • Debt reduction – $130,000, and • An overseas holiday in Italy – $20,000. Thus, in regards to the trauma insurance component of the Active health events recommendation, the following flow can be followed: base cover, plus above-average health care allowance, plus specific health events, less health insurance rebate, plus lifestyle changes.

TPD provision Total permanent disability (TPD) insur-

ance makes funds available to provide for the needs and costs that arise as a result of the total and permanent inability of the life insured to work in their own occupation or an occupation for which the life insured is reasonably suited by training, education and experience. ‘Needs’ can be defined as the financial outgoings that were previously provided for by the earnings of the life insured. If revenue needs such as the payment

Whatever basis is used for “arriving at a recommendation, it must possess objectivity such that, if necessary, it can be actively explained and defended.

cover ongoing medical and home maintenance costs, for a total of $450,000.” Affordability will play a large part in capping the upper limits of the recommendation, and within this capped range the adviser can split the recommended benefit amount and provide objective purposes for each part of the total.

Personal insurance In regards to the personal insurance needs, a basis for arriving at an Active benefit amount can (using the figures noted above) be seen in Figure 1 below.

Figure 1 Base cover

$125,000

Plus above-average health care allowance

$ 75,000

Plus specific health events

$ 225,000

Less health fund rebate

$ 50,000

Plus lifestyle changes

$ 150,000

Plus TPD allowance

$ 450,000

TOTAL

$ 1,075,000

Business insurance

of debt instalments are covered under income protection insurance, additional cover under Active is not required. Capital needs would include: • Debt repayment or reduction; and • Pre-payment of school fees If capital needs are covered under the lifestyle changes component of trauma insurance, additional cover under the TPD component is not required. ‘Costs’ can be defined as the financial outgoings that arise as a result of the life insured’s sickness or injury. Revenue costs would include: • Cost of home maintenance; • Transport to medical facilities; and • Ongoing medical costs associated with the treatment of the sickness or injury. Capital costs would include: • Home and car modifications or even a new, more suitable home or car; and • One-off medical expenses. The ‘costs’ component is driven to a large extent by the nature and severity of the sickness or injury, which again aligns this component with the structure of Active. However, as the nature and severity are not known when the advice is given, it is in fact not possible for an objective benefit amount recommendation to be arrived at. Bearing this in mind, an adviser may make a recommendation in regards to this component in the following way: “You indicated that, were you to be permanently unable to work, you would like provision to be made for the following: • $150,000 to cover any possible home or car modification costs or one-off medical expenses not covered under your private health fund; and • $300,000, that could be invested to

Each of the business insurance needs has some things in common: • The financial impact is dictated by an agreed, theoretical formula; • The financial impact does not include any medical or rehabilitation costs; • The financial impact is linked to the total loss of the life insured to the business, not the partial loss; and • The financial correction mechanism will be handled in line with a signed agreement. Because benefit payments under the health events component of Active are geared to periodic, severity-based payments which can have the effect of dissipating any final payment, this component of Active is less suited to cover business insurance needs.

Summary There are acknowledged limitations to the above approach, for example: • The product design does not enable the one-off lifestyle provision to be separated and thus only paid once, therefore in making provision for them in the benefit amount there will be some potential for duplication of cover; and • If payment is made under a severity level lower than A, only a portion of the lifestyle provision will be paid – for example, 80 per cent or 65 per cent, etc – which will result in an inability to effect the full lifestyle change. Notwithstanding these limitations and the fact that some advisers may approach the benefit amount calculation in a completely different way, the important thing is that whatever basis is used for arriving at a recommendation, it must possess objectivity such that, if necessary, it can be actively explained and defended. Col Fullagar is the national manager, risk insurance at RI Advice Group

www.moneymanagement.com.au March 1, 2012 Money Management — 19


OpinionRisk

The risk factor For financial advisers, the need to be able to assess their clients’ risk is assuming far greater importance, according to Gabriel Carey.

20 — Money Management March 1, 2012 www.moneymanagement.com.au

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he financial services world as we knew it before the global financial crisis (GFC) has changed conclusively. This is evident in many ways, but three stand out. First and foremost, matching performance achieved through the 1990s and the naughties – at least up to when Lehman Bros imploded in September 2008 – will be difficult. It’s now more than three years later, and despite the market rally in equities in the immediate aftermath of the GFC, there’s no sign that investors (particularly in property and equities) have regained their nerve. The simple fact is any bullish news in the market (especially the Australian resources story) continues to be drowned out by what’s happening in Europe and the United States. For Europe, in particular, the public debt story seems to go from bad to worse to nearly apoplectic, with the recent resignation of Italian Prime Minister Silvio Berlusconi just the latest potent symbol of this ongoing crisis. Europe’s woes have taken some of the spotlight off the US, but no-one should doubt the world’s biggest economy has deep structural problems – of which unemployment (and the accompanying social ills) and public debt head the list. Second, expect more regulation of the financial services sector globally. In Australia, there are Future of Financial Advice (FOFA) reforms, and that’s unlikely to be the last of it. Governments are slowly responding to what’s perceived as the excesses of this sector before the GFC. The mass protests across the world – called Occupy Wall Street – might be the most extreme manifestation of this public angst, but rest assured, this anger extends (in a far less visible form) across the social spectrum in developed countries worldwide. What’s magnifying this anger, of course, is the amount of government support delivered post-GFC for this sector, and the perceived lack of social responsibility by the main players in response to this ‘public’ generosity. Investors are far more indulgent of bonuses and greed when markets are rising, and all are participating; they are far less forgiving when the game appears rigged in favour of one sector. Third, clients are more market savvy and less trusting of their financial institutions; crises like the GFC and the effect of individual corporate collapses such as Storm do (unfairly or not) leave a mark on how investors view institutions and advisers. These crises aside, it’s certainly arguable that the exponential growth in self-managed super funds – as well as the advent of 24-hour business television channels – reflects an investor sentiment that says they are wary of outside advice, as well as being more confident in making their own decisions. And in the same vein, so does the movement away from managed funds to direct investing. Pull these three factors together, and what emerges from the viewpoint of retail investors is a new paradigm about what they want from their financial institutions and financial advisers. It has

shifted quite dramatically from a world of returns and income to one far more focused on capital preservation. Financial advisors are becoming increasingly aware of this phenomenon, and are having to respond accordingly. In this brave new world, being able to quantify risk assumes far greater importance; clients paying more attention in trying to assess whether their portfolio will lose capital (irrespective of market conditions) than earning a return above the market benchmark means they will demand a different skill set from their advisor. In other words, traditional client discussions using rules of thumb for risk and concentrating on the return or dividend side of the equation – for example, using estimated returns to illustrate asset allocations such as a balanced fund should achieve a 7 per cent annual return – are assuming less importance for investors who understand that even a 7 per cent return goal can require significant risks to achieve. For many financial advisers who have relied on the rule of thumb, it’s a skill set they simply don’t possess. In many respects, that’s not their fault. It reflects a retail investor culture where the focus has been on returns rather than the risk/return balance. And as the GFC graphically illustrated, many institutional investors that had risk strategies built into their portfolios did not exactly cover themselves in glory when the financial markets imploded in 2008. In the first instance, what financial planners have to do is determine from their clients their risk tolerance – how much are they willing to lose. If, for example, the market falls 10 per cent in a month, how will their share portfolio look in such a downturn? Will it be off more, less, or simply match the broader market index? What if the market falls 20 per cent? Using statistical analysis tools, financial advisors can assess – to a fair degree of accuracy – how a client’s portfolio is likely to behave in such market downturns. As returns become harder to generate and the current economic environment in Europe and the US settles in as the norm for the foreseeable future, a focus on risk will be needed to meet retail investor needs. By quantifying possible losses and risks, a retail investor (who is well aware that investing means taking risks) will be able to understand the expected performance of their portfolio – and not only in good times. For some financial advisors, factoring in risk expectations of clients’ portfolios will require a significant rethink of how they explain and review portfolios for clients. But they have no option. In a post-FOFA world, and with returns unlikely to offer positive numbers with any degree of consistency, it needs to become an integral part of their service offering. Gabriel Carey is regional manager for Victoria, South Australia, Tasmania and Western Australia of the boutique investment house, Instreet Investment.


OpinionSuperannuation No love lost

in an industry fund, I would have to ask each client to give me their member log-in details and log in separately for each client query/report. This is time-inefficient compared with state-of-the-art platforms that enable reports to be run across a client base seeking to identify clients with specific characteristics or requirements. This encompasses both superannuation and non-superannuation assets, which are equally important. In many cases, industry fund websites do not provide ready access to important

Rather than criticising “financial planners for not using them, industry funds’ focus should be on building the functionality that assists financial planners to provide effective services to their superannuation clients.

There are several reasons why many financial planners avoid recommending industry super funds. Cameron Darrow outlines a few.

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here does not appear to be any meaningful ‘thawing’ in the relationship between the industry funds and financial planners. The most obvious manifestation of this standoff is the prolific industry fund advertising campaign promoting the central message that they “do not pay commissions to financial planners”. The fee differential is then projected over the lifetime of typical superannuation fund members to supposedly represent the benefit that an industry fund member stands to gain. This advertising also incorrectly promotes a perception that financial planners deal only with superannuation matters. The key assumption of the campaign is that planners charge fees but do not add any long-term value to a client’s portfolio or financial position. I am not aware of any research that supports this assertion. Ironically, I have personally seen a disclosure in a statement of advice (SOA) produced by an industry fund that acknowledges the payment of asset-based bonuses to their planners. There are also other industry fund websites that offer the opportunity

for their members to pay for their SOA directly from their super (which are arguably both forms of commission too). This highlights the hypocrisy of the advertising campaign and does nothing to encourage professional financial planners to engage with the industry fund sector for the superannuation component of their financial plan. The industry fund movement has focussed the debate on the commissions issue and claims that planners do not recommend industry funds to their clients because commissions are not (generally) payable. I believe that they are missing the real point. The financial planning industry is increasingly moving away from commissions and will continue to do so as the Future of Financial Advice reforms unfold. From my perspective, there are some very important reasons why industry funds are generally a poor option for my clients. • Industry funds do not generally provide a reporting capability for financial planners to cost-effectively manage client portfolios. If I had a large number of clients

taxation component information (for tax and estate planning) and Centrelink income schedule reports. This would require phone calls to call centres on behalf of clients to seek the required information. The additional time it would take to source the client information would inevitably raise the cost of providing ongoing financial planning advice (which could undermine much or all of the cost savings from using an industry fund in the first place). • Many industry funds only offer a very restricted, streamlined investment menu under the assumption that most members will direct their capital into one or two diversified funds (a ‘one size fits all’ approach). However, this is not how financial planners manage client capital. Most financial planners assess their clients’ risk profile and personal objectives before proposing a portfolio of assets tailored to suit them. These portfolios may include specific tilts into specialist sectors such as local smaller companies, global smaller companies, emerging markets funds, resources funds, geared funds and, at the other end of the spectrum, higheryielding defensive assets such as term deposits. The capacity for this level of portfolio management is beyond the scope of most industry funds. • A related investment issue is the fact that many industry funds provide poor visibility of the underlying assets within their diversified funds. Financial planners have a legal obligation to understand the nature of the investments that they recommend for clients (particularly when building portfolios). We cannot take a simple ‘leap of faith’ that many of the unlisted assets (including private equity and hedge fund investments) are appropriate for all clients. The extent of the unlisted assets was evident when industry funds dominated the performance ratings in 2008, deserted them in 2009 and stormed back to the top in 2011. This is not about superior returns but symptomatic of only infrequently revaluing assets when the market

values are changing significantly. It also raises the ethical question for industry funds of accepting contributions from their members at prices knowingly overvalued, prior to significant revaluations. • Some industry funds have poor fee transparency. Published research contends that some industry funds incur greater costs than they openly charge their members in management fees, with the remaining costs being garnished from fund earnings (the funding of the extensive prime time television advertising campaign is a case in point). This also makes it difficult for planners to accurately meet stringent fee disclosure requirements. Industry funds have been keen to promote ‘intra-fund’ and ‘scaled advice’ so that their staff can look after their members without involving independent financial planners. Intra-fund advice is limited and by definition does not take into account all of a client’s financial circumstances and needs. It also does not consider investment options not offered by the superannuation fund, and therefore could be criticised as being designed essentially to enable a superannuation fund to maintain existing assets. How this measures up to best interests advice is unclear. Simplistic, single-issue advice or scaled advice using a low frills industry fund platform will only appeal to a limited demographic within the financial planning market that may be apprehensive about paying the fees for more holistic advice. These are often the very people who most need comprehensive advice, yet scaled advice on a single issue like rolling superannuation into an income stream may not pick up important broader planning issues such as Centrelink eligibility, estate planning strategies, debt reduction, mortgage planning, gearing, cash flow, risk planning and lifestyle issues. Many of the people who have breached superannuation contributions caps and received harsh penalties have not had financial planners guiding them (our practice has prevented many clients from inadvertently making this mistake). If industry fund members accidentally breach these caps, then cheaper management fees can be a poor compensation for the penalties that can apply. Rather than criticising financial planners for not using them, industry funds’ focus should be on building the functionality that assists financial planners to provide effective services to their superannuation clients. Offering cheap, no-frills superannuation platforms will not address the client’s need for proper financial advice. Financial planners increasingly do not mind how they are paid and are looking for the best overall value proposition for their clients. As a financial planner I am looking to provide efficient services to my clients and to act in their best interests. Quite simply, industry funds have a way to go to provide a viable business option. Cameron Darrow is an authorised representative of Fiducian Financial Services.

www.moneymanagement.com.au March 1, 2012 Money Management — 21


OpinionSentiment

Music to their ears Mental accounting can help financial planners harmonise their client’s money by acting as their financial conductors, writes Barry Wyatt.

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or a while it looked as though the worst was behind us with the global financial crisis. But 2011 saw increased volatility, with markets going up and down like a yo-yo. So with all this going on, how are retirees feeling? And what does it mean f o r t h e a d v i c e yo u’re p rov i d i n g t o clients in pre-retirement and retirement phase? Many of your clients are opening the morning paper and scanning the news with a sinking feeling. Headlines like ‘Guess who’s back?’ over a snarling bear don’t make for happy reading, particularly for those with a nervous disposition. The relentless focus on doom and gloom is starting to take its toll. Clients who have just retired are entering a whole new world. Their final payday has come and gone. They’re living off a lump sum and have been told they need to stay invested in the stock market to beat inflation. But they lose money every time the market falls. The temptation is to give in to their immediate emotional response, to exit the market and take refuge in the relative calm of cash. It may not even be intentional – it turns out that our brains have been built to respond that way.

The limbic dance Our emotional responses are governed by our limbic system. It’s been around since Homo sapiens emerged on the plains of Africa about 200,000 years ago and means we’re hard-wired to go into survival mode when faced with danger. Our limbic system is the reason that we feel the pain of a loss more keenly than we feel the pleasure of a win by an estimated factor of two to one. The limbic system goes into overdrive in retirement, and we become even more loss averse. Retirees suffer

The key to your advice “proposition is understanding your client’s short-term, medium-term and long-term retirement goals, and allocating the appropriate amount to each account.

from ‘hyper loss aversion’ – they are up to five times more sensitive to losses than the average person.

with the prediction that a quarter of 65year olds will live to 100, makes the risk of running out of money in retirement a very real one. At the very least, it’s a recipe for a nervous retirement.

Brave new world Australia’s demography dictates there a re a b o u t t o b e a w h o l e l o t m o re retirees. As baby boomers approach retirement, millions of Australians are moving from accumulating assets to unlocking capital to fund their lifestyle. But as they march over the hill into retirement, new risks evolve. The old, safe world of defined benefits is gone forever. The rise of defined contribution plans has shifted the risk from governments and corporations, to individuals. No matter how carefully clients have planned their retirement, some things will always be out of their control. Current market volatility, combined

22 — Money Management March 1, 2012 www.moneymanagement.com.au

Shaking the tins Success comes from tapping into how your clients think. We’ve traditionally thought in terms of lump sums when it comes to retirement planning; now we need to consider individual accounts and income. Pe o p l e w h o u n d e r s t a n d t h e i r finances think in a series of mental accounts. One account might be an overseas trip, another might be for school fees, while another might be saving for a new car. Mental accounting has its roots in past generations when times were tougher. My grandmother’s pension money came through on Tuesdays and

she immediately divided the money between four tins: food, rent, electricity and ‘spoiling the grandkids’. Whenever I visited, I knew that my tin was the red one at the end of the mantelpiece. The same way a conductor brings disparate sections of an orchestra together into a symphony, bringing together these mental accounts, or tins, into part of a cohesive financial strategy is central to your client value proposition.

Tomorrow’s world of advice So how does the mental accounting theory work in practice? Let’s take a typical retired couple. They’re worried about retiring in a volatile period, but know they need to stay invested in growth assets to make their savings last. They are keen to maintain a comfortable lifestyle without


also depend on your client’s appetite for risk and personal preferences. Talking in terms of ‘tins’ of money addresses the need for control that many retirees feel. Despite the fear factor, many retirees are unwilling to fully trade off control for protection. The right advice approached in the right way can help them feel in control of their financial future. Together, the tins generate ongoing income as well as capital growth. Your clients remain exposed to growth assets but have a measure of protection to guard against market downturns. You’ve implemented a strategy to address key risks of retirement, and you’ve retained the flexibility to adjust money across the various ‘tins’ in response to changing circumstances.

Mastering the baton

compromising their need to save for the long term to keep pace with inflation. After years of hard work, they are planning the trip of a lifetime in 2012. In the meantime, the grandchildren’s birthdays are coming up and there’s w o r k t o d o o n t h e h o u s e. A f t e r discussing their concerns and aspirations, you create a series of separate accounts (within an allocated pension) for different purposes and distribute their funds between the ‘tins’. 1. Guaranteed income account – using a newer-style variable annuity or a traditional lifetime annuity, this a c c o u n t g e n e ra t e s a g u a ra n t e e d monthly income for your client’s lifetime to meet essential living expenses. 2. Regular income account – the investment profile of this account would be a moderately defensive strategy, mixing equities and fixed income, seeking to generate a higher income

By being the conductor of your client’s financial situation, you’ve put their limbic system in its shackles, freeing them to think rationally and enjoy peace of mind about the financial aspect of retirement.

yield. This helps meet your client’s discretionary retirement income needs. 3 . Ca s h a c c o u n t – s e c u re t e r m deposits to pay for short-term goals such as celebrations, home improvements and holidays. It can be easier for clients to spend money if they know it’s coming from an account created for that very purpose. 4. Future 2018+ account – a highergrowth strategy using managed funds, shares or exchange-traded funds. This account helps to combat inflation and longevity risk over the long term for goals later in retirement. Earmarking the account with a date helps manage concerns about short-term volatility. The key to your advice proposition is understanding your client’s short-term, medium-term and long-term retirement goals, and allocating the appropriate amount to each account. The proportion you end up allocating will

As financial planners, we conduct the orchestra for our clients. The four s e c t i o n s o f a n o rc h e s t ra ( s t r i n g s, percussion, brass and woodwind) come together in harmony under the guidance of a conductor. The success or failure of the composition depends on h ow t h e c o n d u c t o r b r i n g s a l l t h e sections together. The role of the conductor/financial planner comes to life at the annual review. This is where you take stock of the progress in the four tins and decide where next year’s income will come from. Rather than talking about investment returns, you can help clients focus on their monthly spending and future income needs. If markets are down at review time, you can still have a more reassuring conversation. Instead of focussing solely on the bottom line, you can emphasise the underlying value of the different tins, reminding your clients that they still have: • A guaranteed income account; • A lower-volatility account that still provides a high level of income; • A secure cash account as an additional buffer, and • A longer-term high growth account. While this account will have fallen in value, it’s labelled as a future-dated account, so it can be left alone to recover. Whether markets are up or down, your client conversation can be a positive one. You’re able to demonstrate the value that your advice has added by adjusting each account, crystallising gains into cash and fulfilling every retiree’s desire to lead a comfortable lifestyle in their golden years. By b e i n g t h e c o n d u c t o r o f y o u r client’s financial situation, you’ve put their limbic system in its shackles, freeing them to think rationally and enjoy peace of mind about the financial aspect of retirement. Getting closer to the way your clients process financial information and adjusting your approach to advice is the key to cultivating the advice business of the future. Barry Wyatt is the director of sales at AMP.

www.moneymanagement.com.au March 1, 2012 Money Management — 23


OpinionAnnuities

Annuity security

Challenger’s Aaron Minney provides his comparison of annuities and direct fixed income in a response to an article recently published in Money Management and authored by fixed income provider FIIG.

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xposure to corporate and government bonds and other fixed income securities can be obtained directly, via a direct bond or fixed income portfolio, or indirectly, via the purchase of either a term or lifetime annuity product. An annuitant’s exposure to fixed income is indirect because the issuing Australian Prudential Regulation Authority (APRA)-regulated life company is effectively wrapping a very large fixed income portfolio with a contractual guarantee, so it can provide a known, fixed rate of return upfront.

Different levels of income certainty and capital security An annuity in Australia is a policy issued by a life insurance company. It is a promise to pay a certain amount of money for either: • A fixed period of time; or • The remaining life of the policy holder. APRA regulates the life company and its statutory fund. The statutory fund holds the assets backing the annuity policies and the additional capital required by APRA. Policy holders have special statutory protection, based primarily on regulatory supervision of the adequacy of the assets in the statutory fund. Neither direct fixed income brokers/advisers nor the underlying issuers in a direct corporate bond portfolio make any promises as to capital or income certainty. Hence, a direct portfolio doesn’t need to hold any capital or liquidity buffers. It is also not subject to prudential oversight, but rather to a much less onerous regime administered by the Australian Securities and Investments Commission that is founded on disclosure, but with few other protections. The client is more exposed to the performance risk and return of the underlying assets.

Lifetime payment of income and inflation protection A direct bond portfolio doesn’t pay you an income for life, no matter how long you live, nor does it carry explicit inflation protection. Conversely, a lifetime annuity pays out for life and may continue to make payments to a surviving spouse. Typical24 — Money Management March 1, 2012 www.moneymanagement.com.au


ly, annuity payments will increase with inflation to protect against an increase in the cost of living. Because annuities with a fixed term are more analogous to a direct fixed income investment, the rest of this article will deal with these rather than lifetime annuities.

A direct bond portfolio can be a way of generating higher returns at higher levels of risk.

Risk and return A central tenet of finance is that risk and return are positively correlated; that is, if you want higher investment returns there is higher risk of capital loss. A direct portfolio may be higher risk, higher expected return than an annuity, or vice versa, because the investor can select whether or not they invest in highyielding, riskier ‘junk bonds’ or government bonds with lower returns and lower risks. An annuity would generally be regarded as lower risk because it provides exposure to a large pool of diversified financial assets through a statutory fund under the supervision of APRA. These will generally be fixed income assets with a range of credit ratings. Typically, the average rating will be relatively high (ie, well above BBB) because APRA would require the life company to hold more capital if it chose to invest in riskier assets than these. In addition, ratings agencies often rate the life insurer providing the annuity, and this rating will reflect the quality of the underlying assets as well as the capital buffers of the issuer itself.

Guarantees and defaults An annuity policy has a guarantee that is backed by the prudential framework developed and supervised by APRA. The aim of APRA is to ensure sufficient capital is available to meet obligations to policy holders, even under ver y unfavourable market events. These market events include the default risk for each bond in the portfolio as well as market volatility. Indeed, the regulatory framework expressly contemplates the

in a portfolio of 20 bonds would have a large impact on an investor’s portfolio.

Flexibility For annuitants, the benefits of capital buffers, risk management frameworks, and regulatory-backed guarantees come at a cost of flexibility to change exposures in the underlying portfolio – an option available to direct investors. Of course, such trading activity also gives risk to transaction costs, including research and execution.

Management time and peace of mind

statutory fund working to protect policy holders in the event of the failure of the life company. With a bond portfolio, neither the manager, nor the broker, nor the individual companies provide any sort of guarantee that capital or yield will be paid. A direct investor will be subject to losses with any bond that defaults.

Direct portfolio investors will need to consume considerably more time managing their investments than an annuitant, who can ‘set and forget’ their guaranteed income investment and spend more time on leisure activities or managing share or property investments. Also, because an annuity earning rate is fixed up front, annuitants don’t need to worry about the potential impact of economic and market events on the value of their bonds. These risks are laid off to the life company, which has the expertise, resources and risk management framework to better manage them.

Diversification

Liquidity

By virtue of the statutory fund and APRA’s regulatory framework, annuitants are protected by the underlying assets in the life company and are not simply taking single-name credit risk on the issuer. Buying an annuity policy – like investing in a managed fund – enables a high level of diversification due to the large balance sheet of the issuer. A direct investor simply cannot match this level of diversification. Indeed, it is questionable that (even with smaller parcels) many investors would be able to purchase a sufficiently diversified bond portfolio to adequately cover credit and default risk. Having a single default

Annuities are purchased for life or for a fixed term – as is the case with bank term deposits – and hence, cannot be described as liquid investments like listed shares or cash. However, much like term deposits, the annuities’ term can be ‘broken’ early at cost to the investor, and the balance of capital returned. Direct fixed income investments are generally more liquid than an annuity, but not as liquid as say listed equities. The capacity to sell a bond will depend on the number of market participants prepared to deal in that security at any particular time. In the depths of the crisis in 2008, this liquidity dried up completely in some fixed income markets.

Fees There are no product-related fees payable with respect to annuities (ie, no brokerage, establishment, entr y, management or performance fees). The headline or quoted rate for an annuity is what is actually paid to the policy holder, less fees they’ve agreed to pay their adviser – as is the case with any financial product. Any costs of the annuity provider, including capital, operating and distribution expenses are covered by the annuity provider out of their margin. There are no additional fees to the policy holder as long as they maintain the annuity. By contrast, there are ongoing costs in the management of any direct bond portfolio, which would reduce the net return to the investor, including brokerage fees and transaction costs associated with maturing bonds. Discussions of the historical and/or expected returns of bonds and bond funds should explicitly detail the costs and provide the after-fee returns so they can be appropriately compared with other fee-free fixed income investments like annuities.

Conclusion This article has briefly considered the relative merits of purchasing an annuity policy against an alternative of investing in a portfolio of direct fixed income assets. They tend to meet different needs, and both can be used by investors. For investors who don’t mind paying brokerage and other fees, and have the capability, knowledge and time, a direct bond portfolio can be a way of generating higher returns at higher levels of risk. For investors who want the security of fixed and guaranteed income, competitive earning rates, and regulatory oversight, an annuity may be the preferred option. Aaron Minney is head of retirement income research at Challenger.

www.moneymanagement.com.au March 1, 2012 Money Management — 25


Appointments

Please send your appointments to: andrew.tsanadis@reedbusiness.com.au

Move of the week IN line with the reorganisation of its retail distribution set-up, Perpetual Limited has appointed former MLC Wealth executive Matt Thompson as general manager strategic accounts. Thompson brings 23 years of financial services experience to Perpetual and has held a number of senior roles at AMP, Suncorp, Colonial First State and NAB/MLC Wealth. In his most recent role as MLC Wealth head of national accounts and research, he led a team of nine and was responsible for sales across platforms, insurance and investment. Perpetual acting group executive Perpetual private and head of retail distribution Nick Langton said that, with the addition of Thompson, all teams were now in place to start making an immediate impact on the retail funds market. “Matt’s team has a critical role to play in servicing our target segments, and his proven ability to create strong client relationships will ensure we can get our products in front of the people who hold the keys to a wider distribution footprint,” he said.

WEALTH manager Equiti Private Wealth has bolstered its financial advisory team with the appointments of Gregory Fuzi and Peter Sheather as senior financial advisers. Sheather has more than 30 years' experience in the financial services industry and has managed and expanded his own AMP financial planning business – Sheather Financial Services – for over 25 years. Since that time, he has worked for Integral Asset

Management, and most recently, Refund Financial Planning. Fuzi has worked in financial services for over 17 years, specialising in financial planning, corporate super, risk, and capital raising. He has previously worked at IPAC, Schroder Investment Management, AXA, and Staffordshire Financial Services.

To support the growth of its client base, Zenith Investment Partners

has appointed Quan Nguyen as an investment analyst and KeiraLouise Heasly as a client and sales administrator. Currently undertaking tertiary education in applied finance, Nguyen was previously a financial markets analyst at the Portland House Group, responsible for the research and implementation of investment strategies. He has also worked with State One Stockbroking as a proprietary trader. Heasly has two years of personal assistant experience and four years in an administrative capacity in which she has developed skills in dealing with customer and client relations within the services industry.

Macquarie Life has appointed Marcello Bertasso to the newly created role of national underwriting manager. With ten years' experience in reinsurance, Bertasso will take on a national role leading Macquarie Life's underwriting team. The South African-born Bertasso previously worked with global reinsurer Swiss Re before joining CommInsure in a senior

Opportunities MARKETING MANAGER Location: Melbourne Company: Lloyd Morgan Description: An industry superannuation fund is currently looking for a marketing manager to support its administration team. In this role you will be responsible for strategic planning and budgeting of marketing, implementing marketing campaigns, attracting new members to the fund and assisting management with decision-making and operations. The successful candidate will have a strong background in superannuation, ideally with an industry fund. You will also have strong marketing and management experience, and a business or marketing-related degree. This role is a great opportunity to strengthen and further develop your existing marketing, management and operational skills. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Stewart at Lloyd Morgan – (03) 8319 7888, sthomas@lloydmorgan.com.au

JUNIOR PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: A financial services firm is offering a qualified paraplanner an entry-level position to start their career in the financial services industry. In this role, you will assist in the preparation

underwriting capacity in 2008. Most recently, he served as head of underwriting at AMP. Bertasso's appointment reflects Macquarie Life's desire to strengthen its underwriting team and capabilities.

The Self-Managed Super Fund Professionals' Association of Australia (SPAA) has appointed Andrew Hamilton as chair for a two-year term ending February 2014. As the managing director of Cavendish Superannuation, Hamilton has been instrumental in growing the business' offering to now include self-managed super, portfolio administration, and actuarial services. Hamilton said SPAA is critical to the future structure of superannuation in Australia because it provides a broad representation of all of the trustees, advisers, accountants and auditors that make up the self-managed super fund (SMSF) industry. Commenting on his appointment, SPAA chief executive Andrea Slattery said Hamilton's experience in SMSF product design, software design and

Andrew Hamilton development, training programs, technical knowledge and understanding of compliance will allow him to offer unique insights and advice to SPAA members.

Australian Ethical Investment has appointed Ironbark Group executive director Louise Herron as a director of the board. With a background as a lawyer, Herron has worked as a corporate adviser with Wentworth and Associates, Macquarie Bank and Carnegie Wylie. As a partner with Minter Ellison, she previously led a team of 50 lawyers nationally in the practice of technology, communications and competition law.

For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs

of SOAs, maintain relationships with a network of financial planners and uphold compliance procedures. To be considered for this role, you will be DFPqualified and have a minimum of 12 months experience in paraplanning, or in a client services capacity within a financial planning practice. Experience with COIN would be an advantage. The successful applicant will be offered a competitive salary and a flexible and supportive working environment. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

SENIOR FINANCIAL ADVISER Location: NSW Company: Terrington Consulting Description: A well-established financial planning business is seeking a client-focused senior financial adviser. You will be working with an existing portfolio of clients, providing advice on direct investments, gearing, SMSFs, retirement planning, and personal and business protection strategies. To be successful, you have extensive experience in financial planning and a track record in successfully managing and growing a client base. CFP and/or CA/CPA qualifications will be highly regarded.

For successful candidates there exists the prospect for equity or upfront equity opportunities. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

RISK ADVISER Location: Western Australia Company: Terrington Consulting Description: A Western Australian business advisory firm is seeking a financial adviser – risk specialist to join its wealth management team. In this role, your main responsibility will be to offer detailed risk insurance advice to business clients. You will also be required to identify and capitalise upon business growth opportunities for the firm. To be considered, you will have excellent knowledge of tax structures, entities, estate planning and SMSFs. Successful candidates will also have a proven track record in a similar financial planning role, a demonstrated ability to build and maintain client relationships and a desire to grow a successful business. In return, you will be rewarded with state-ofthe-art facilities and a competitive remuneration package. To find out more and to apply, visit www.moneymanagement.com.au/jobs, or

contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au

HEAD OF SALES AND DISTRIBUTION – SUPERANNAUTION Location: Melbourne Company: Lloyd Morgan Australia Description: A boutique superannuation and financial services company is seeking a commercial expert to fill a national sales manager role. Reporting to the general manager of financial services, you will be responsible for driving the growth of the business' superannuation funds. You will achieve this by managing the national sales and distribution team, focusing on sales and retention, and identifying professional development where required. To be considered for this role, the candidate will have experience in a similar role within superannuation, specifically where you have been required to identify volume default and choice business and achieve growth targets by leading a sales team. You will also have relevant tertiary qualifications in business and be RG146compliant. For more information and to apply, visit www.moneymanagement.com.au/jobs, or contact Liz at Lloyd Morgan, 0418 385 809 / (03) 8319 7835.

www.moneymanagement.com.au March 1, 2012 Money Management — 27


Outsider

A LIGHT-HEARTED LOOK AT THE OTHER SIDE OF MAKING MONEY

A bit of a stretch for Shorten IF you're reading this on Wednesday 29 February or Thursday 1 March, 2012, then you'll know who is currently Prime Minister, because that person won Monday's ballot for the Federal Parliamentary Labor Party leadership. Outsider is hoping that it was not the Minister for Financial Services, Bill Shorten. This is not so much because your venerable correspondent doubts Shorten's tenacity or ambition, but

because he worries about the minister's ability to maintain a suitable work/life balance. As a gentleman of independent means who keeps something akin to bankers’ hours, Outsider almost felt a lump in his throat at last month's SMSF Professionals’ Association of Australia conference when he heard Shorten bemoan the hours he was being forced to keep as a member of the Gillard Cabinet.

Go ahead, make Daddo’s day!

OUTSIDER attended the SPAA conference in Sydney last week, hosted by the ever-affable Andrew Daddo. As Outsider was settling down for the final session, Daddo took a break from his introductory banter and the lights dimmed for the obligatory messages from two of the conference's sponsors. The first promotional spot was innocuous enough, with inspiring messages drifting across the screen set to the usual uplifting muzak. But the second presentation was particularly unimpressive by comparison. It consisted of a series of Powerpoint slides about the won-

Out of context

ders of index investing, accompanied by – wait for it – complete silence. Daddo glanced around anxiously for about a minute, apparently concerned that the audio department at the Sydney Exhibition Centre had gone to sleep at the wheel. But when it became obvious that no audio component was forthcoming, Daddo proceeded to ridicule the presentation mercilessly – much to the amusement of the audience. Outsider has his doubts that laughter was the reaction the marketing team was looking for. But then again, their soundless approach may have been deliberate. Perhaps they were hoping to replicate the recent success of the silent movie The Artist.

Why, it seems that Shorten is up and working before 5.30 am every morning and is lucky to get home before 10.30 pm. "Maybe I'll find a work/life balance one day," the minister pined. Outsider reflected that age and his prostate often sees him out of bed well before 0500 hours, and a convivial snifter or two at the club means he's lucky to get home before 11 pm. Then again, Outsider does not feel compelled

to count numbers in the caucus, or brief the media reptiles who inhabit the federal parliamentary press gallery. Finding a work/life balance just isn't easy when you're holding down two jobs – one as a minister covering a megaportfolio, and the other as a factional numbers man. The good news for Shorten is that Outsider understands that finding a work/life balance is much easier in opposition.

Three hotdogs from hell OUTSIDER acknowledges that, in the corporate world – especially in the financial services industry – image is everything. This is why Outsider is never surprised when he hears about a certain firm spending millions of dollars on rebranding, or creating new logos. He also found that financial services firms often like to put meaning behind their companies’ symbols, which often point to their strength and/or other virtues their marketing teams like to focus on. This is why Outsider was baffled when he realised a capital management firm based in the US, Cerberus Capital Management, based its company name and logo on a three-headed monster from Greek mythology. Sure, this Cerberus beast guarded the gates of the Underworld, which could be a metaphor for the ability of this company to guard its clients’ investments. But this three-headed hound was

“…I have one unique distinction: I am the only one who has never been promoted. That will give you some idea of the level of confidence you're dealing with today.”

“I engaged in a month-long study of the Greek and Italian debt crisis … along with my wife, I should say. I should say that if the Eurozone is in serious recession then it is certainly not her fault.”

BT Financial Group chief economist Dr Chris Caton reassures delegates at the 2012 Investment Administration Conference.

Caton does the hard yards in unravelling the state of world economies.

28 — Money Management March 1, 2012 www.moneymanagement.com.au

also known in mythology as a beast which cornered people and ate them alive if they tried to escape. Outsider is not sure what the latter could translate to, but he is sure he does not want to find out what happens when clients decide to pull their investments out of Cerberus Capital Management.

“I figure you’ve made it in this town when you get a cartoon made of you.” Chief executive of AVCAL Katherine Woodthorpe introduces the animated version of herself at a private equity breakfast in Melbourne.

Money Management (March 1, 2012)  

Money Management provides accurate and informative news coverage on finance topics such as FOFA, financial planning, funds management, SMSFs...

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