money management (november 24, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

LOW-cost products introducedover the past 12 months by majorproviders such as Colonial FirstState, BT and AMP may haveserved to undermine theassumptions and disclaimersunderpinning the Industry SuperNetwork’s (ISN’s) ‘compare thepair’ advertising campaign.

The Federal Opposition hasspecifically asked the AustralianPrudential Regulation Authority(APRA) to check whether the newproducts have changed theunderlying assumptionscontained in the advertisements.

If the assumptions areproved to be wrong, then theISN will be faced with the needto withdraw the advertisingpending any corrections thatneed to be made.

The key questions around theISN advertising assumptions

were placed on the SenateNotice Paper by Tasmanian

Liberal Senator David Bushby,who has raised a number ofissues with APRA over itshandling of industry superannu-ation funds, including whetherthe ISN advertising might be inbreach of the sole purpose testor give rise to the possibility offuture class actions.

In a written follow-up toquestions he raised duringSenate Estimates Committeehearings late last month,Bushby has asked APRA to“confirm that the assumptions(contained in the ISN advertise-ments) do not include thecurrent mainstream low-costretail super products whichcurrently account for approxi-mately 50 per cent of net flows”.

In doing so, Bushby cited AMPFlexible Super, FirstChoiceWholesale Super, and BT Superfor Life.

He asked whether on the basis

of the introduction of these newproducts, the assumptionsattaching to the ISN advertise-ments “therefore might overstatethe costs of retail funds whichgenerate the long-term projec-tion numbers included in theadvertisements”.

The Australian Securities andInvestments Commission hasalso been asked questions inthe Parliament relating to theindustry superannuation fundadvertisements.

The accuracy of the assump-tions attaching to the ISNadvertisements are crucial tothem being sanctioned by theregulators. Opposition Sena-tors have questioned whetherthose calculations havechanged to take account of thenewer retail products.

Last week APRA wrote to allregistrable superannuation enti-ties (RSEs) reminding trustees

that they remained responsiblefor the activities of third-partyfund promoters, includingmarketers.

While the APRA letter did notspecifically mention the televi-sion advertising campaign, it wasclear it fell within the fundpromoter criteria.

The letter said that APRAexpected fund trustees wouldexercise their own independentand informed judgement in rela-tion to decisions concerning thefund, including on such mattersas product design, investmentstrategy and the types of invest-ments that the RSE licensee is tooffer its members.

“RSE licensees should not beunduly influenced by the expec-tations or interests of thirdparties (which may possiblyinclude the expectations or inter-ests of Fund Promoters),” theAPRA letter said.

By Chris Kennedy

AMID a scramble from several major insti-tutions to acquire extra scale in terms ofdistribution, retaining and acquiring keyleadership personnel is also crucial tobusiness development, according to BT’sgeneral manager of advice Mark Spiers.

BT recently announced the appoint-ments of key DKN and Lonsdale execu-tives Phil Butterworth, Mario Modica, KonCostas and Andrew Rutter to lead a newbusiness unit, following the acquisition of

Low-cost products defy ISN campaign

Continued on page 3

Leadership teamscrucial to businessgrowth

FUNDS WARNED ON THIRD PARTY PROMOTERS: Page 6 | PLATFORMS: 4

Vol.25 No.45 | November 24, 2011 | $6.95 INC GST

By Milana Pokrajac

MAJOR platform providers have calledfor parts of the Future of FinancialAdvice (FOFA) reforms to be delayeddue to lingering uncertainty withrespect to grandfathering and opt-inarrangements.

Companies working in the financialservices sector will have until 1 July2012 to make final adjustments totheir business models, IT and compli-ance systems, but BT’s head of plat-forms Chris Freeman said the indus-try still hasn’t got clarity in terms ofwhat FOFA will bring.

“We’ve got the FOFA announcement,but we’re still waiting to see where weland with transition arrangements andalso grandfathering,” Freeman said.

Colonial First State (CFS) and IOOFhave been particularly vocal on thisissue, with both institutions lobbyingthe Government – directly and throughindustry associations – to extend theFOFA deadline.

IOOF general manager of distribu-tion Renato Mota said the Governmentwas underestimating the amount ofchange platform providers need to dealwith in terms of systems andprocesses.

“Six months, which is the timeframewe’re dealing with for some of thechange – and we’re yet to find out the

finer details for some of these compo-nents – is really an unrealistic time-frame,” Mota said.

Uncertainty around opt-in, transitionarrangements and grandfathering offees and volume rebates presents oneof the major challenges for platformproviders, according to CFS generalmanager for product and channeldevelopment Peter Chun.

But CFS is also hoping for parts ofFOFA to be delayed to 2013 so thefinal deadline can coincide with theintroduction of MySuper.

“It’s actually incredibly impracticalhaving two sets of changes being

forced upon existing clients; if there isjust one start date, it would be a muchmore customer-friendly outcome,”Chun said.

Mota agreed that synchronisingimplementation dates of some of theFOFA proposals and MySuper wouldmake sense.

“As a platform you cannot look ateach of the regulatory regimes in isola-tion,” he said. “To get the best possibleoutcome you need to look at all theregulatory change in aggregate and tryto implement something that’s hope-fully going to cover more than one ofthose requirements.”

Developing opt-in solutions presentsanother one of the challenges for plat-forms, because the current FOFA draftdoes not address many possible sce-narios, according to OneVue’s chiefexecutive officer Connie McKeage.

“If the client doesn’t opt-in within aspecified period of time, you’ve got toturn off the revenue for the adviser;but if you turn it off and the clientcomes back and says ‘I didn’t meanto do that’, can you then go back andpay retrospectively to the adviser?”McKeage said.

“It’s a very complex scenario to tryand implement in this market – andwith such ambiguity remaining, withthe time ticking.”

Platforms call for FOFA deadline extension

David Bushby

Chris FreemanMark Spiers

Mark Spiers

For more on platforms, turn to page 14.

Professionalism comes at a price

The moment members of theFinancial Planning Association(FPA) voted to become a profes-sional association, and in doing so,

dispense with the organisation's long-stand-ing principal member category, it became aforegone conclusion that the consequenceswould show up on its balance sheet.

There should therefore have been littlesurprise last week when the FPA annualreport revealed a before-tax deficit of$542,670 for the year ending 30 June 2011.

While the deficit revealed in the annualreport was due, in part, to some accountingchanges, it has been no secret within theFPA that the changes necessary to becomea professional association – the clear-cutseparation of advice from product – wouldleave a revenue black hole of sizeableproportions.

Simply put, by opting to dispense withthe principal member category, FPAmembers not only removed something thatcould be perceived as an obvious linkbetween advice and product, they also cutoff a lucrative source of revenue.

In many respects, the inevitable revenueshortfall encountered by the FPA must beseen as just a part of the cost of pursuingprofessionalism and breaking with theconventions of the past. It follows that the

organisation must find other ways ofsustaining itself that do not conflict withits professional ideals.

This will not be easy in circumstanceswhere, looked at objectively, the FPA is nowreliant on the support of its financialplanner members – most of whom couldbest be described as running small tomedium-sized businesses.

On all the available evidence, financialplanner members of the FPA are willing tosupport their organisation in pursuingspecific projects – something which wasevidenced by the money raised via a levy

to support the current round of print andtelevision advertising.

However, the FPA knows it must gofurther than simply relying on member-ship fees and raising specific levies. It knowsit must find sustainable long-term revenuestreams via the provision of products andservices that meet the needs of itsmembers. This is no easy task whenweighed against the attractiveness of thelarge-scale corporate support of the past.

That the FPA has no shortage of criticsis evidenced almost every day in commentsposted on Money Management's website,but if the events of 2011 have provednothing else, they have proved the goodsense of financial planners pursuing theideal of professionalism and eliminatingsome of the stereotypes of the past.

While financial planners have been rightto rail against many elements of the GillardGovernment's Future of Financial Advicechanges, they also need to recognise thebipartisan political support that exists for afinancial planning industry based onprofessionalism rather than product sales.

They also need to recognise that becom-ing a profession comes at a price that somemight be unwilling to pay.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

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2 — Money Management November 24, 2011 www.moneymanagement.com.au

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“In many respects, theinevitable revenue shortfallencountered by the FPAmust be seen as just a partof the cost of pursuingprofessionalism andbreaking with theconventions of the past.”

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Average Net DistributionPeriod ending March '1110,207

By Benjamin Levy

THE Financial Planning Association (FPA)has raised concerns about Treasury’sadmission that its failure to conduct aregulatory impact analysis on the Futureof Financial Advice (FOFA) reformsbreaches best practice regulations.

FPA general manager of policy andgovernment relations Dante De Goriplaced the issue under the spotlight atthe FPA conference in Brisbane.

In evidence to a Senate EstimatesCommittee hearing last month, Treasuryofficials admitted they had not done afull regulatory impact analysis on theFOFA bill and that this breached theFederal Government’s best practice regu-lations.

The Government’s Office of Best Prac-tice Regulation had found that changes

such as opt-in were not assessed asadequate for the decision-making stage,said Shadow Assistant Treasurer MathiasCormann last month.

Because the true impact to consumershasn’t been measured by Treasury, ques-tions need to be asked about the impactfigures that are being quoted and who

came up with them, De Gori said.Since Bowen announced the reforms

in April last year, through all the changesin policy, there has been no officialmodelling into a regulatory impact state-ment, De Gori said.

De Gori urged delegates to continueto go out and inform their local MPsabout the impact FOFA would have onconsumers.

At least talking to local MPs will meanthey will know what they’re voting forwhen the bills are passed, even if theyvote in favour of the legislation, De Goritold delegates.

“Your local MP may not understandwhat they’re voting for; with 235 pieces oflegislation [passed by the Government]they cannot understand the ins and outsof each of those pieces of legislation andwhat the impacts are,” he said.

www.moneymanagement.com.au November 24, 2011 Money Management — 3

News

Treasury asleep at the wheel on FOFA

Leadership teamscrucial to businessgrowth

“Treasury officialsadmitted they had not donea full regulatory impactanalysis on the FOFA bill. ”

the DKN Group by IOOF.Spiers said BT waslooking to build an Agrade team and wasprepared to invest in thebest people in the market,bar none.

“It comes back to thatold adage; people don’tleave organisations,usually they leaveleaders,” he said. “If youfind talented leaders,usually you find talenteddirect reports underthem; like breeds like.We’re prepared to investin the best people in themarket,” Spier said.

Matrix Planning Solu-tions managing directorRick Di Cristoforo saidthat i f an institutionviewed a potential groupas having value from adistribution point of view,then “you would think theskills around managingand handling distributionchallenges and the wayyou put groups togetherwould have to have somevalue as well”.

Institutions would haveto look at the teams interms of the group’soverall infrastructure andask how that infrastruc-ture was put together. Asfor whether the r ightleadership teams couldhelp attract quality advis-ers to a group, Di Cristo-foro said it was more

likely that a poor reputa-tion would act as a nega-tive screen.

If people have a repu-tation for not necessarilyfocusing on an adviser’sneeds they will find them-selves in a difficult posi-tion trying to put a grouptogether, he said.

If a leader had a repu-tation for being wonder-ful in terms of building ateam, in terms of distri-bution or of deliveringadvice, then an advisermay look at that. But amore sensitive issuewould be if they hadheard of that persondoing the wrong thing –which could cause advis-ers to steer clear, he said.

Di Cristoforo would notbe drawn on his future inthe event that Matrixacquires an institutionalbacker, and added thathis current focus was onthe Matrix advisers.

Spiers said wealthmanagement is all aboutpeople and knowledge.“Those two assets areabsolutely critical successfactors for any wealthmanagement business.Everyone should be closeto their people and knowwho their talent is; andhave strong development,engagement and leader-ship plans in place toattract clients, to retaintalent and grow talent,”he said.

Continued from page 1

Dante De Gori

News


FPA pushesprofessionalismBy Mike Taylor

THE Financial PlanningAssociation (FPA) haspointed to a future inwhich there are no Aus-tralian Securities andInvestments Commis-sion (ASIC) bannings ofprofessional f inancialplanners.

FPA chairman MatthewRowe made the call whenopening the FPA's nationalconference in Brisbane.

He pointed to a pro-fessional environment inwhich planners exactedtheir own standards ontheir peers.

Rowe and FPA chiefexecutive Mark Rantallboth used the confer-ence opening to restatetheir call for restrictingthe use of the term‘financial planner’.

Rowe reinforced themessage by saying notone of the p lannersbanned by ASIC this yearhad been a member ofthe FPA.

Their cal ls aroundexclus ive use of theterm ‘financial planner’came ahead of anaddress by AssistantTreasurer Bill Shortenscheduled for this after-noon.

ASIC revokes AFS licence from Mark Power FinancialBy Andrew Tsanadis

THE Australian Securities andInvestments Commission (ASIC)has cancelled the Australian finan-cial services (AFS) licences ofAdelaide business Mark PowerFinancial Pty Limited (MPF) andMark Raymund Power, effectivefrom 14 November.

According to ASIC, MPF’s busi-ness involved authorising individu-

als and companies to provide finan-cial services which include theprovision of financial productadvice and the trading of such prod-ucts as derivatives, foreignexchange contracts and securities.

ASIC’s investigation found,among other breaches, that MPFhad failed to carry out appropriatebackground checks before appoint-ing authorised representatives;failed to determine whether its

representatives complied with finan-cial services laws; failed to identifyand remedy various misleading ordeceptive statements on thewebsites operated by its authorisedrepresentatives; and failed to havein place a robust mechanism forremedying breaches.

The regulatory body deter-mined that, as the responsiblemanager for MPF, Power does notunderstand the obligations of an

AFS licence and lacks knowledgeof legal requirements relating tothe appointment of authorisedrepresentatives.

ASIC stated that no findings havebeen made in its investigationabout the conduct of any autho-rised representatives.

MPF and Power have applied tothe Administrative Appeals Tribunalseeking a stay and review of ASIC’sdecision.

Matthew Rowe

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Greencape Wholesale Broadcap Fund –5.49 –1.11 4.66 4.32 5.10

S&P/ASX 300 Accumulation Index –8.71 –4.14 –0.10 –0.71 –0.17

Outperformance 3.22 3.03 4.76 5.04 5.27

Greencape Wholesale High Conviction Fund –5.78 –2.21 3.08 5.11 6.02

S&P/ASX 200 Accumulation Index –8.56 –4.09 –0.11 –0.68 –0.13

Outperformance 2.78 1.88 3.19 5.79 6.15

Performance is calculated after fees.

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www.greencapecapital.com • 1800 621 009

* Inception: 11/09/06. Performance is calculated after fees and assumes reinvestment of distributions. Past performance is not a reliable indicator of future performance.The information in this document is current as at 30 September 2011 and is provided by Challenger Managed Investments Limited ABN 94 002 835 592 AFSL No. 234 668 the issuer of the wholesale units in the Greencape Broadcap Fund ARSN 121 326 341 and Greencape High Conviction Fund ARSN 121 326 225. The information is general information rather than advice and does not take into account the investment objectives, financial situation and particular needs of an investor. Each person should obtain and consider the Product Disclosure Statement (PDS) for the Fund and consider whether or not the Fund is appropriate for them before deciding whether to acquire, continueto hold or dispose of units in the Fund. A copy of the PDS can be obtained from www.challenger.com.au. 128

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News

Paritech licence suspendedTHE Australian Securities andInvestments Commission(ASIC) has suspended the Aus-tralian financial serviceslicence of financial softwareprovider Paritech for 12months after the companyfailed to comply with a numberof its obligations as a financialservices licensee.

ASIC found that Paritechfailed to lodge financial state-ments, auditor reports andauditor opinions over consecu-tive years, in breach of both itslegal obligations and licenceconditions, despite repeateddemands from ASIC to comply.It did not advise ASIC of thesebreaches.

Paritech develops computersoftware packages to providegeneral financial productadvice to retail clients. Accord-ing to their website, over200,000 investors, traders,brokers and finance institu-tions use Paritech online trad-ing and investment systemsand tools.

Major clients include IOOFPortfolio Online, JB Global Invest-ment Services, Menzies Securi-

ties, Martin Place Securities andHalifax Investments Services,according to the website.

According to an ASICspokesperson, suspension ofParitech’s licence means it hasto cease trading, includingservicing existing clients. ASICsaid it may consider revokingthe suspension period in theevent Paritech lodges the out-standing reports.

Paritech chief executive RickKlink said that the 2009 and2010 accounts had beenlodged, but not in the correctsequence due to a change inthe company’s auditors.

He said the suspension onlyaffects Paritech’s retail clientsrather than their wholesaleclients, and the firm would beissuing a press release shortly.

When contacted yesterday,one client who uses theirsoftware was unaware of thesuspension.

JB Global said they use oneParitech Pulse terminal that pro-vides a function that isn’t pro-vided through IRESS, and theimpact of the Paritech situationon JB Global clients will be zero.

Advisers need to dispel insurance mythsBy Benjamin Levy

THE advice industry is failing to do enoughto convince consumers of the need foradequate insurance cover, according to TimBrowne, general manager for retail adviceat CommInsure.

Speaking at CommInsure’s insurance road-show in Melbourne, Browne said financialadvisers had an obligation to make clientsaware of the financial and personal cost ofbeing underinsured.

Financial advisers need to arm themselveswith the facts to dispel myths that clients willnever fall ill, insurance was too expensive,and insurance companies never pay outclaims.

Advisers know about all the problems, and

yet talking about the issues of underinsurancewas becoming a lost art, Browne said.

Consumers also need to be warned awayfrom doing insurance themselves, as itwould still not solve their underinsuranceproblems, he said.

CommInsure has implemented a newwebsite for planners and increased theamount of data and marketing materialonline, and introduced a new range ofcourses within its Risk Sales Academy offeredto advisers to increase their insurance sales.

They also announced widespread upgradesto its life insurance offering, including lower-ing work thresholds on income protection forpart time workers, more cancer benefits, andadding 33 new occupations that are coveredfor income protection in the mining industry.


Bond ETFs need to be explainedBy Milana Pokrajac

ANoverwhelming majority of financial planners and brokersagree bond exchange traded funds (ETFs) need to be betterexplained before they are accepted and they can recom-mend them to clients, according to a survey commissionedby Russell Investments.

The survey found that more than half of financial advis-ers and brokers were ready to embrace bond ETFs, with36.5 per cent seeing this product as a substitute for termdeposits.

Director of ETFs at Russell Investments Amanda Skelly

said bond ETFs have experienced significant growth,accounting for 18 per cent of total ETF assets.

“However, this result definitely shows we as an industryneed to do more to educate people in Australia about thebenefits for advisers, brokers and the end investor,” she said.

When selecting which of their client segments theyviewed as most suited to bond ETFs, brokers and advisersgave the most votes to self-managed super funds with 77 per cent, while post-retirees came in second (61 percent) followed by high net worth individuals (42 per cent).

The survey was conducted by CoreData on behalf ofRussell Investments, involving 104 participants.

Tim Browne


News

Super funds warned on third party promotersBy Mike Taylor

THE way in which superannu-ation funds are marketed bythird parties has been flaggedas an issue by the AustralianPrudential Regulation Authori-ty (APRA).

The regulator has written tosuperannuation fund trusteeboards reminding them that, asRegistrable SuperannuationEntities (RSEs), they remain atall times legally responsible for

commonly outsourced activitiesand that “fund promoter” activ-ity including marketing must betreated as “material businessactivity”.

While the APRA letter doesnot specifically mention televi-sion advertising such as theIndustry Super Network’s (ISN)‘compare the pair’ campaign,such campaigns run by thirdparties fal l under the fundpromoter activity descriptor.

The regulator said it had

noted that despite the obliga-tions of superannuation fundtrustees to treat marketing andother fund promoter activity asa material business activity,there were many exampleswhere this was not occurring.

“APRA has obser ved thatthere are numerous examples inthe industr y in whichoutsourced activities to fundpromoters are not being treatedby RSE licensees as ‘materialbusiness activities’ that need to

satisfy the requirements of theOutsourcing Standard,” theregulator’s letter said.

It said that, specifically, therehad been cases in which therequirement to have in place amaterial outsourcing agreement– with the prescribed terms andconditions – had not been met.

The letter said that RSElicensees were reminded thatAPRA also expected that theywould at all times exercise theirown independent and informed

judgement in relation to deci-sions concerning the fund,including on such matters asproduct design, investmentstrategy and types of invest-ments that the RSE licensee isto offer to members.

“RSE licensees should not beunduly influenced by the expec-tations or interests of thirdparties (which may possiblyinclude the expectations orinterests of Fund Promoters),”the letter said.

Resources investorskeeping eye on ChinaCHINESE demand will be the keyfactor influencing the price of resourcestocks both in Australia and overseas,regardless of whether specific coun-tries trade with China directly, accord-ing to Perpetual.

Many countries are likely to put upthe price of the commodities exports(in response to China’s firm hold overits currency) in the form of new taxesand levies, which will increasinglybecome a task for investors tomanage, according to Perpetual’sglobal resources portfolio managerJames Bruce.

This could create both opportunityand risk, with the potential of higherprices across the board down thetrack, he said.

Investors will also need to watchthis political risk, he said. The likes ofPeru, Chile, Kazakhstan, Zambia andthe Democratic Republic of Congohave all added various taxes andlevies in the past two years, accordingto Bruce.

Australia’s carbon tax and mineralresource rent tax (MRRT) also repre-sent significant political risk, andBruce said the market may be under-estimating the long-term impact of theMRRT in particular.

There is also concern in theresources market that European con-tagion could impact China, which

consumes half the world’s commodi-ties, he said.

“What gives me confidence in Chinais the Government has the levers at itsdisposal to manage the economy.Those levers are many and varied,whereas the levers of governments insome of the Western world countriesare broken,” he said, referring to lowinterest rates and higher unemploy-ment in many western states.

“From our point of view, value iswhat we’re most interested in, andwe’re seeing some wonderful oppor-tuni t ies in the market at themoment to buy some high qualitystocks,” he said.

Value is driven by the extractionprocess and the access to markets,and that’s what Perpetual looks at;assessing the value of the ore body,how it is extracted, the cost of theextraction and how efficient the com-pany is in getting the product tomarket, he said.

ASIC asks research housesto manage conflictsBy Chris Kennedy

THE Australian Securities and InvestmentsCommission (ASIC) has released a researchpaper proposing research report providers,including research houses, separate theirbusiness units in order to manage conflictsof interest and improve confidence in theindependence and quality of researchreports.

This would involve strict physical andelectronic separation between units suchas the consulting and funds managementservices and the research business, ASICstated.

ASIC is seeking feedback on whetherconflicts of interest such as report providersaccepting payments from product issuerscan be effectively managed, or whetherthey should be avoided altogether.

ASIC is also proposing research houseslodge a biennial report addressing researchmethodology and processes, internalconfl icts management procedures,conflicts disclosure to users, and manag-ing research quality and transparency.

Consultation Paper 171, Strengtheningthe regulation of research report providers( including research houses) , fol lowsconversations ASIC had with financialplanning industry associations and theirmembers.

These conversations addressed theissues of real or perceived conflicts ofinterest arising from research houses’revenue models, the adequacy of skills and

experience of research analysts in produc-ing quality research, and the lack of trans-parency and comparability for researchmethodology.

There was also a disparity in the expect-ed role of research houses between theadvice firms and researchers themselves.Advisers thought research houses shouldcover less products in more depth, whilesome research houses saw it as their roleto provide coverage for a range of productsin each market segment, ASIC stated.

ASIC chairman Greg Medcraft saidresearch report providers are a significantgatekeeper and can influence which prod-ucts advisers recommend, and it is expect-ed they adhere to high standards ofconduct.

By Andrew Tsanadis

ELIGIBLE employees willeach be offered up to $1,000of ordinary shares underthe Macquar ie GroupEmployee Share Plan.

Macquarie stated thatthe shares will be allottedon or about 28 December2011 to around 6,024 eligi-ble employees. The exact

number of shares will beadvised after the allotment,the group stated.

“The ordinary shares willbe issued at the weightedaverage price at which ordi-nary shares are traded onthe ASX in the one-weekperiod up to and includingthe trading day prior to theal lotment date and wil lrank pari passu with al l

other ordinary shares thenon issue,” Macquar ie’srelease read.

Macquarie stated thatthe offer is subject to ASICClass Order ‘Employeeshare schemes’ and share-holder approval is notrequired for the issue ofordinary shares.

In the company’s annualgeneral meeting in July,

Macquarie chief executiveNicholas Moore said therewere challenging condi-t ions ahead for thecompany.

The latest announce-ment follows Macquarieposting a net profit after taxof $305 million for the half-year ended 30 September2011, down 24 per cent onthe same period last year.

Macquarie offers ordinary shares to employees

Greg Medcraft

Nicholas Moore

News

ATO focuses on high net worthsBy Mike Taylor

THE Australian Taxation Office (ATO) hasconfirmed it has identified and is moni-toring the compliance of 2,660 Australianhigh net worth individuals, including get-ting in contact with their accountants andadvisers.

The degree to which the ATO is lookingat high net worths has been revealed bythe Tax Commissioner, Michael D’As-cenzo, while addressing a conference inNew Zealand.

The Tax Commissioner referred to thecontinuing growth in international trans-actions associated with high net worthsand said data sharing, mining andmatching had proved particularly usefulin the ATO’s work.

He said that as at June this year, the ATO

had identified and was monitoring the2,660 high net worth individuals. Hedetailed the most common risks associ-ated with the group as being capital gainstax not being returned, access to companyprofits other than via dividends, overseasinterests and international dealings, andarrangements involving trusts.

“Our data analysis has become sophisti-cated to the point that we can not only betteridentify these individuals, but we can usuallylink them back to entities they control, inorder to provide a bigger picture of theirwealth,” the Tax Commissioner said.

“As with our other business lines, weapply a differentiated approach to thissector, so that our resources are usedto focus on those high wealth individualswho pose the greatest risk of non-compli-ance,” he said.

FPA in the minusBy Milana Pokrajac

THE Financial Planning Association (FPA) has recorded abefore-tax deficit of $542,670 for the year ending 30 June2011, according to the newly released annual report.

The closure of its Melbourne office, significant restructur-ing costs and advertising levies over the past 12 months,combined with the FPA’s revenue sliding down from almost$11.3 million in 2010 to $10.8 million in 2011, led to the asso-ciation incurring an overall loss.

The decrease in revenue, according to the FPA, couldbe attributed to a 6 per cent decrease in conference andseminars revenue and reduced enrolments revenuesfrom the previous year for the Certified Financial Plannerdesignation.

A very large revenue decrease came from almost half amillion dollars in lost sponsorship and contributions forthe Value of Advice advertising campaign made by FPAPrincipal members. The FPA no longer offers Principalmembership, as voted by existing members at last year’sannual general meeting.

The main reason the revenue was down, however, wasdue to the FPA removing its Chapter accounting from thereports, according to chief executive officer Mark Rantall.

“The Chapters run many events in their local regionand a decision was made to allow them to carry over anysurpluses from one year to the next, and therefore theywill no longer have an impact on the FPA operatingaccounts; other variances are minor and reflect fluctuat-ing operating conditions.”

Despite the revenue loss and a reported deficit, Rantallsaid the association’s financial position remained “verystrong”, with more than $5.8 million in member funds asreserves.


S&P

2011 AUSTRALIA

FUND AWARDS

Comfortable retirement costs increase, ASFA saysTHE amount needed for retirees to fund their post-worklifestyle continues to increase, albeit slowly, according to theAssociation of Superannuation Funds of Australia (ASFA)Retirement Standard.

A couple looking to achieve a comfortable retirement willneed to spend $55,316 a year, while those seeking a ‘modest’retirement lifestyle need to spend $31,767 a year, accordingto figures from the September quarter – an increase of 0.7per cent from June 2011.

Retiree households on average have somewhat differentspending patterns to the rest of the population, ASFA said.

“Along with generally owning their own home outright,they don’t tend to spend as much on education services,”ASFA stated. “In contrast, food, health, transportation andrecreation spending form a large part of retiree budgets.”

Despite a slight decrease in cost of food in the Septemberquarter, there was an increase of 6.4 per cent over the year toSeptember 2011.

Michael D’Ascenzo


News

WHK shuns vertical integrationBy Chris Kennedy

FUTURE of Financial Advice (FOFA)reforms will mean advice groups willeither move down the vertical integra-tion path towards a hybrid model orfocus purely on the professional advicemodel, according to WHK head of finan-cial services John Cowan.

FOFA changes have helped WHK focusits business model from a group ofdisparate businesses. WHK will nowfocus purely on an advice model ratherthan going down the increasinglypopular vertical integration path, hesaid.

The vertically integrated model hasbeen favoured by some larger groupssuch as Count and DKN, which wereheaded down that path even before theirmoves to al ign with CBA and IOOF

respectively. The vertically integrated orinstitutional advice model will suit thoseclients who do not wish to pay a “profes-sional” fee for advice and hope to receiveadvice for $300, Cowan said.

The sales of groups l ike DKN andCount to institutions will also provide anopportunity for the remaining non-aligned groups such as WHK to pick upquality advisers who do not wish to workunder the institutional model, he said.

WHK is looking at a measuredapproach to growth, and would be opento conversations with both individualadvisers and practices that would be acultural fit for the group, he said.

WHK now uses a badged wrap plat-form from BT that does not featurevolume rebates. This agreement is a clearsign of the group’s FOFA readiness andcommitment to lower fees, Cowan said.

IRESS launchesUK divisionWEALTH management sof tware providerIRESS has launched a wealth managementdivision in the UK following its appointmentas technology provider by Sesame BankhallGroup (SBG) – the UK’s largest financialadvice group with more than 3000 advisers.

The UK division has been set up with alocal management team including directorsfrom financial services consultancy groupAT8 Group, who will be responsible for deliv-ery to SBG and building a broader local team,IRESS stated. The team will wind down theircurrent operations and be retained as execu-tives of IRESS.

The UK market is undergoing wide-rangingreforms similar to Australia’s Future of Finan-cial Advice reforms, including a shift to fee-for-service. This will require many advisoryfirms to change their business models andwill also require a new generation of soft-ware, IRESS stated.

Iress and SBG have entered a long-termstrategic agreement where Sesame Bankhallwill deploy XPLAN to its adviser network.

IRESS managing director Andrew Walshsaid the UK represented a strategic growthopportunity for IRESS and the deal was sig-nificant for both parties.

Volatility dogs CommBank’s wealth managementBy Mike Taylor

MARKET volatility is continuing to chal-lenge the wealth divisions within theCommonwealth Bank, according to the bigbanking group's latest quarterly tradingupdate filed on the Australian SecuritiesExchange last week.

Commenting on the September quarterdata, the bank said market conditions had"continued to create headwinds for WealthManagement".

It said Funds Under Management andFunds Under Administration had declinedby 2.7 per cent and 3.7 per cent respective-ly during the quarter due to negative invest-ment returns, partially offset by foreignexchange gains as the Australian dollarpulled back from some of its recent highs.

However, the banking group saidFirstChoice and Custom Solutions hadexperienced positive net inflows of $408million and $321 million respectively duringthe quarter.

Looking at insurance, the quarterlyupdate said in-force premiums grew by 2.3per cent in the quarter, with good growth inretail direct life and general insurance.

While the overall quarterly updaterevealed unaudited cash earnings for thequarter were approximately $1.75 billion,chief executive Ralph Norris said operatingconditions remained challenging amid thecontinuing global economic uncertainty.

He said that given the continuing volatil-ity and economic uncertainty, theCommonwealth Bank would be maintain-ing its conservative business settings.

ASIC obtains ordersagainst AustraliaAFT Finance MarketBy Andrew Tsanadis

THE Australian Securities and Invest-ments Commission (ASIC) has obtainedinterim orders in the Federal Court inAdelaide against Australia AFT FinanceMarket Pty Limited (AFT).

According to ASIC, AFT is currentlyrunning an unlicensed financial servicesbusiness and previously operated awebsite that promoted trade in forex,metals and contracts for difference (CFDs)through the MetaTrader 4 platform.

The regulatory body also stated that itis concerned that the contents of AFT’swebsite contained false statements thatthe company was established as a resultof the merger between Adelaide FinanceMarket Co Limited and Brisbane Finan-cial Securities Co. Limited. No compa-nies with those names have been incor-porated in Australia, ASIC’s investigationfound.

The commission is also concernedthat while AFT is incorporated inAustralia, the company’s sole directorappears to have never been a resident ofAustralia.

The cour t orders obtained on 4November restrain AFT from marketingany financial product and providing anyfinancial product advice. The ordershave also frozen over $180, 000 current-ly held by the company in a foreignexchange account, ASIC stated.

ASIC stated that the matter wouldreturn to court on 8 December 2011.

John Cowan

Ralph Norris

By By Keith Griffiths

AN unconditional promise from theEuropean Central Bank (ECB) to be thebuyer of last resort for Italian bondswould provide reassurance to themarket, according to Russell Invest-ments chief investment strategistAndrew Pease.

However, i f the ECB does notcommit to large-scale Italian bondpurchase then the markets will contin-ue to freefall, he said.

“Rising bond yield make investorsworried about Italy’s ability to repay itsnear $2 trillion of outstanding debt. Asa result investors demand higher inter-est rates on Italian bonds, markingthem even more concerned aboutItaly’s ability to repay,” Pease said.

According to Pease, Italy’s mainproblem as opposed to Greece’s is oneof solvency. While Italy has a debt-to-GDP ratio of 120 per cent, its primary

fiscal position indicates revenues arealmost equal to spending. This makesthe debt manageable at current inter-est rate levels. However, i f yieldscontinue to rise beyond 7 per cent Italybecomes effectively insolvent.

Pease said if the crisis continues toescalate the ECB would have no other

option than to act as the buyer of lastresort. “While it won’t mean the end ofEurope’s problems by any stretch, itwill mean that the risk of an uncon-trolled illiquidity-driven crisis is effec-tively over,” he said

Russell thinks the biggest risk facingthe US is Europe pulling down thebanking sector. Going forward Peasethinks that eventually (sometime after2013) the housing market could be thetrigger for growth there and providethe kick-start to the rest of theeconomy, with demand stimulatingother parts of the economy such asinfrastructure and utilities.

Locally, Russell is more cautious onthe rationale for lower interest ratesand sees this as very much driven byemployment trends. “We’d expectanother cut if employment continuesto trend lower post the slowdown inGDP growth we witnessed in the firsthalf of this year.”

ECB bond buyout could relieve Euro debt drama: Russell

Andrew Pease

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News

Incentives, not compulsion, thebest path for super: CormannBy Tim Stewart

SHADOW Minister for SuperannuationMathias Cormann has reaffirmed thatthe Coal i t ion wil l not repeal theincrease in the superannuation guaran-tee (SG) from 9 to 12 per cent, despiteits in-principle opposition.

Rather than raise the SG, the Opposi-tion preferred to increase the retirementsavings of Australians by providingincentives for voluntary contributions,Cormann said.

“We have been concerned about theGovernment’s moves to dramatically cutthe concessional superannuationcontribution rates, which has severelyrestricted people’s capacity and enthu-siasm for making additional voluntarycontributions,” he said.

To explain the Opposition’s position,he pointed to the Henry Review, whichrecommended that the SG remain at 9per cent. He added that the Henr yReview found an increase in the SGwould hurt low and middle-incomeearners by reducing their pre-retire-ment quality of life.

With the increase in the SG projectedto cost $3.6 billion once fully phased in,Cormann said the Government would

be unable to fund it with the MineralsResource Rent Tax, which he said wasexpected to raise $3 billion.

The Opposition would also improvecompetition in the superannuationindustry, Cormann said.

“If the current Government has notacted to implement an open and trans-parent process for the selection ofdefault funds, we will act on that veryswiftly upon coming into Government,”he said.

HUB24 adds seven dealergroups to client listBy Milana Pokrajac

HUB24 has added seven dealer groupsand three separately managed account(SMA) managers to its client list, the plat-form provider has announced.

Ord Minnett, Paradigm, Financial Force,Avestra, Bristol Street, Gleneagles Securi-ties and Global Prime have selectedHUB24’s investment platform for theiradvisers and brokers.

HUB24 chief executive officer DarrenPettiona said the platform also addedthree more SMA managers, bringing thetotal to 31 portfolio managers and 67SMA funds which currently sit on theplatform.

Many platform providers have recentlymoved to secure their distribution net-works, ahead of the prospective ban onall volume rebates passed down fromplatforms and/or fund managers to dealergroups.

IOOF has recently acquired DKN, theCommonwealth Bank of Australia made amove on Count, and netwealth boughtParagem Dealer Services.

“With the imminent enactment of the

Future of Financial Advice reforms, anincreasing number of dealer groups areseeking ways to participate in the manu-facturing process,” Pettiona added.

He also confirmed the release ofHUB24’s retail superannuation and insur-ance options targeted for later this year,in addition to a self-managed super fundadministration service that is already inte-grated into the HUB24 Investment Service.

ETF investors return to riskBy Chris Kennedy

EXCHANGE-traded-fund (ETF) investorsreturned to riskier assets in October asfears eased on the European debt crisisand US corporations showed positive thirdquarter earnings, according to BlackRock.

Money flooded back into equity andhigh yield bond funds during October,according to the BlackRock InvestmentInstitute’s latest ETF Landscape report.

BlackRock managing director KevinFeldman said while flows into exchange-traded products (ETPs) suggested a pref-erence for safe haven assets in earlyOctober, this was overtaken by a move toequity assets and high yield bonds later inthe month.

“Flows during October demonstrate thatthe risk-on trade has definitely resumed,”he said.

Investors placed US$21.3 billion intoequity ETPs during October, particularly

in funds and products offering exposureto North American and German equities,according to BlackRock.

Emerging market equity ETPs attract-ed US$4.1 billion of new assets follow-ing two months of heavy outflows, whilehigh yield bonds attracted US$2.4 billionglobally during the month. Gold ETPsg a t h e re d U S $ 2 . 0 b i l l i o n d u r i n g t h emonth and $7.3 bil l ion year to date,while demand for commodities faltered,the report found.

In Europe, physically-backed productsgained market share from synthetic ETPsover the past three months.

“While the ETP industry had strongasset gathering overall, in Europe, thefortunes of physically- backed and deriv-ative-backed products have diverged overthe last three months, with investorsshowing a preference for funds and prod-ucts that purchase the underlying assets,”Feldman said.

AXA’s upgraded Northproduct doubles inflowsA COMBINATION of an expandedoffering and caution from investorshas helped AXA’s North platformdouble its net inflows in the Septem-ber quarter compared to the sametime last year.

“In a quarter where people havebeen reluctant to invest money dueto markets, our net cash flows havedoubled compared to the samequarter last year [to] $242 million,”said AMP director of sales BarryWyatt, who was previously AXA’s gen-eral manager of marketing and strat-egy prior to the merger with AMP.

But he said the North business hadreally expanded since developing it intoa full wrap offering, including directshare trading, 200 managed funds anda variety of term deposits, rather thanjust the guarantee.

Investors were also starting tosplit their accounts into four sub-accounts, he said. These included acash strategy to meet short-termneeds; an investment portfolio forgenerating income (including a com-bination of high-yielding stocks andincome securities); a high growthpor tion designed as a long-terminvestment based on equities; aswell as the traditional North guaran-tee component.

“That way clients can manageshort-term volatility because theyhave security. If markets drop 20 per

cent, it’s in the longer-term portion –which has time to recover,” he said.

North will continue as a stand-alone of fer ing separate to theSummit and Generations platformsand AMP’s Flexible Super – althoughSummit and Generations are still ontrack to migrate over to the sametechnology that currently underpinsNorth, Wyatt said. Summit and Gen-erations are still on sale, and serveas a complement to North, offeringslightly different things.

AMP Flexible Super also forms aninteresting combination to North,because its pricing makes it cheaperthan most industry funds and createsthe opportunity for clients to start offas industry fund-type accumulators inAMP Flexible Super, then move intoNorth closer to retirement, he said.

“They’re complementary, they’redifferent ends of the spectrum. Thegroup [AMP/AXA] is comfortable withthe two separate offers.”

Mathias CormannDarren Pettiona

Vow Financial launches Vow LegalFINANCIAL ser vicesgroup Vow Financial hasbranched out fur ther,launching a legal serviceto its broker network.

Vow, which earlier thisyear launched a financialplanning ser vice andinsurance ser vice, hasformed a joint venture

with national legal firmAstill Legal Group.

Astill offers onlineconveyancing, and thepartnership will allow Vowto roll out the service to itsbroker network, as well asservices around estate plan-ning, self-managed super,wills, business and corpo-

rate law, according to VowFinancial head of market-ing Matt Mitchener.

The service will featurestandard pricing nation-al ly, which for mostbrokers will be lower thanwhat their current solici-tor would be charging,Mitchener said.

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SMSF WeeklySPAA attempts to bust ‘overselling’ mythBy Tim Stewart

THE Self-Managed Superannu-ation Fund Professionals’ Asso-ciation (SPAA) has moved torefute the ‘myth’ that self-managed superannuationfunds (SMSFs) are being over-sold by financial planners andaccountants.

Speaking at the Association ofSuperannuation Funds ofAustralia (ASFA) in Brisbane,SPAA technical director PeterBurgess said there was a percep-tion in the industry thatunscrupulous advisers wereconvincing their clients to set upSMSFs in order to charge thema fresh set of fees.

“It seems to me that if we had

a problem with overselling, wewould expect to see a downwardtrend in the average balance ofSMSFs. That is clearly nothappening – the average balanceand the median is increasing,”Burgess said.

Another piece of evidenceagainst the ‘myth’ of oversellingwas the lack of any increase inthe number of compliancebreaches, he added.

SPAA chair Sharyn Long saidshe believed the SMSF sector hadchanged, and was addressing theissue of overselling.

“You can’t necessarily controleveryone out there, but I thinkthe level of compliance and therequirement to do the rightthing is increasing,” she said.

However, the ASFA audiencewas unconvinced that the mythhad been adequately ‘busted’by the SPAA speakers. Whenasked to raise their hands ifthey thought the myth hadbeen disproved, only one handwent up.

Burgess also tackled the myththat SMSF members tend to be“old and rich”. While heacknowledged the averagebalance of a SMSF was $900,000,he said a small number of veryhigh-balance accounts skewedthe data.

The median figure of$300,000 gave a better pictureof the state of SMSF accountbalances, Burgess said.

As for the ages of SMSF

members, he said 30 per centwere under 50 years of age. Headded that the average age ofSMSF members was decreasing.

Another ‘myth’ about SMSFswas that there would be aproblem when SMSF trusteesreached their mid-80s andcould no longer administertheir funds.

However, Burgess said thiswas not a problem, s inceunder Section 17A of the SISAct , SMSF tr ustees canappoint a person to adminis-ter the fund when they are nolonger capable. He added thatanother option was to covertthe SMSF into a small-APRAfund, which wouldn’t meanclosing the fund.

SMSF issues overblownBy Damon Taylor

ONE of the constant criticisms of self-managed super funds (SMSFs) is thenumber of gaps that persist in thesector’s overall framework, and yetaccording to Chris Malkin, principaland head of superannuation audit andconsulting for WHK, the issue is beingbuilt up as far more of a concern thanis warranted.

Speaking specifically to the preva-lence of dominant trustees and ensur-ing appropr iate insurance cover,Malkin said there were obviously clearadvantages to obtaining insurancethrough superannuation.

“Insurance from any superannua-tion fund, be it self-managed or other-wise, is obviously very good becausethe life component of its premium istax deductable to the fund,” he said.

However, according to Malkin, atrustee’s decision as to whether ornot to leverage that insurance advan-tage did not imply any particular gap.

“Personally, I don’t think there areany gaps,” he said. “Because I don’tthink it should be compulsory to haveinsurance through any superannua-tion fund, even though it’s certainlyadvantageous to do so.”

And as for a perceived prevalenceof dominant trustees in self-managedsuper, Malkin said the legislatedresponsibilities of being a trustee, andmore importantly education aroundthat, should void any such issue.

“As far as trustee arrangements andtrustee responsibilities are concerned,the law s imply says that what ’sexpected of a trustee of a super fundis that which would normal ly beexpected of a reasonable person inexercising their duties towards thatfund,” he said. “And I don’t think you

need any more education on that thanwhat is available at the moment.

“The ATO (Austra l ian Taxat ionOffice) has got some great publica-tions to educate trustees, but one ofthe really good things about self-man-aged super funds and the legislationthat surrounds them is the fact thatyou can’t escape the requirement tobe skilled in running your own affairs.”

According to Malkin, fund trusteesshould know that if they’re getting atax concession to put money into theirown superannuation fund, there is nosuch thing as a free drink.

“A, you can’t get the money beforeyou’re entitled to it and B, while themoney is in the fund, you’ve got to lookafter it in certain ways that are befittingthe tax concessions that you’re getting,”he said. “And one of those ways is ensur-ing that you’re educated enough to knowwhat you’re doing.

“You’ve got to realise that if yousign your life away as being a trusteeof anything, you’ve got a whole lot ofresponsibilities that you need to beaware of.”

Macquarie launches newSMSF-related productBy Mike Taylor

Macquarie Specialist Invest-ments has launched a newproduct aimed at helpingself-managed superannua-tion funds (SMSFs) andother investors migrate outof cash.

The new product,Macquarie Step, is describedby Macquarie as offeringinvestors access to sharemarket growth while deliv-ering 100 per cent capitalprotection at maturity.

Discussing the launch ofthe new product, Macquar-ie Specialist Investmentshead Peter van der West-huyzen said recent volatili-ty and uncertainty in the

market had left manyinvestors facing thedilemma of knowing thatwhile an investment in thesharemarket might deliver

higher returns, it might alsoincrease the risk of themlosing their capital.

“Many of our clients arenow looking for new invest-ment solutions which allowthem to use their owncapital without the need forborrowing; providing themwith market exposure andbenefits of capital protec-tion at maturity and portfo-lio diversification,” he said.

van der Westhuyzen saidthe new product mightprove useful for investorswho remained cautiousabout the sharemarket, butwere still heavily invested incash but at the same timeconcerned that their port-folio is under-diversified.

Key licensing deal deliversfor accountantsAXA and MLC have entered into anarrangement with the Institute of PublicAccountants (IPA) to help deal with thenew regulatory environment which hasevolved out of the removal of the account-ants’ exemption under the Government’sFuture of Financial Advice legislativeproposals.

Under the arrangement, members ofthe IPA will be able to choose from fivelicensing solutions provided by AXA andMLC.

Once qualified, members will have theability to advise clients in relation to the

establishment and closure of self-managed superannuation funds(SMSFs), advise on assets includingdirect property, life risk, and give generaladvice in relation to superannuation.

Commenting on the arrangement, IPAchief executive officer Andrew Conwaysaid the new service would enablemembers to provide a full range of finan-cial planning and financial advice servic-es to their clients”.

The benefit for AXA and MLC is that thecompanies will have greater access to theaccounting sector via the IPA’s membership.

Peter Burgess

Peter van der Westhuyzen

When the Financial PlanningAssociation (FPA) held itsannual conference in Bris-bane last week, it was the

proud claim of its chief executive MarkRantall that it was being attended by morepractitioner members than at any time inthe past.

Given the key decisions taken by the FPAearlier this year to become a professionalassociation, Rantall might have been disap-pointed if a larger number of practitionermembers had not been attending the confer-ence.

But for all that the theme of the conferencewas “raising the bar”, and that both Rantalland FPA chairman Matthew Rowe exhorteddelegates to embrace professionalism andearn the respect of the Australian public, theconference exhibition hall was still largelyinhabited by product manufacturers –making it difficult to argue that the linkbetween product sales and advice can everbe entirely broken.

What was clear from the words of Rowe andRantall is that their vision for the FPA is thatit will become the financial services equiva-lent of the Australian Medical Association(AMA) – a professional body fully supportedby a membership of professionals.

However, something which also becameclear from the words of both men is that theywere hoping they might extract from theGovernment’s Future of Financial Advice(FOFA) process legislation restricting the useof the term “financial planner” to those whoare appropriately qualified and who aremembers of a suitable professional body.

As Rowe told the conference, he wanted to

see the emergence of an environment inwhich the Australian Securities and Invest-ments Commission did not announce thebanning of financial planners because theethical standards of the profession were beingmaintained by the professionals themselves.

What Rowe wants to see is an environmentin which the discipline of professional finan-cial planners is maintained by the ethicalpressure of their peers.

Rantall, in exhorting those attending theFPA conference to support the organisation inits crusade towards professionalism, tolddelegates that the FPA “had their back”.

He said that during the process of theGovernment’s drive towards the implementa-tion of its FOFA legislation, representativesof the FPA had attended more than 100 meet-ings, and that this is reflective of the organi-sation “having the backs of its members”.

However, there is plenty of evidence tosuggest that while the FPA has worked hard tomaintain a viable relationship with theGovernment on FOFA, little of this effort wasreflected in the shape and content of the firsttranche of the legislation, particularly theeleventh hour inclusion of an exacting feedisclosure requirement.

Rantall has made clear to the Governmentthat the FPA cannot support the first trancheof the legislation, but it was evident that theorganisation was hoping it might be able tosupport most, if not all, of the second tranche.

Something which would secure thatsupport, and represent a major win forRantall, would be the Government deliveringnot only the legislative restriction on the term“financial planner”, but also the endorsementof the FPA as the professional organisation of

choice for the industry.While the FPA has followed a convention-

al strategy in dealing with the Governmenton FOFA, the Association of Financial Advis-ers (AFA) has adopted an approach so robustthat the Minister has made his displeasureclear.

However, in circumstances where both theFPA and the AFA have found themselvesrejecting the first tranche of the FOFA legisla-tion, there exists a perception that the moreconventional approach pursued by Rantalland Rowe has not entirely paid dividends.

This, of course, is unfair but Shorten nowneeds to deliver something tangible whichthe FPA can take to its members as absoluteproof that it does, indeed, “have their backs”.

The measure of the success or failure of theFPA’s lobbying approach will be contained inthe second tranche of the FOFA legislationand Rantall and Rowe will be hoping that itincludes a specific approach referencing theuse of the term “financial planner”.

In the event that the Government ultimate-ly delivers on the FPA’s agenda, the challengefor the organisation will be to deliver on itspromise to create a profession which carriesthe trust of the Australian public.

This will not be easy in circumstanceswhere the term “financial planner” or “finan-cial adviser” have become generic, and wherebodies such as the Industry Super Networkcontinue to pursue advertising campaignswhich question the value of advice and therole of financial planners.

With or without Government support, theFPA’s noble objective of creating a genuineprofession seems likely to be somethingachieved over decades, rather than a few years.

InFocus


The Financial Planning Association seems determined to “raise the bar” onprofessionalism in the industry, but as Mike Taylor reports, this might takemuch longer than just a few years.

Propping up the bar

Planners’ satisfactionwith insurers

77%

Financial Services CouncilDeloitte Lunch30 November 2011Four Seasons Hotel, Sydneywww.fsc.org.au

VIC GenXt Social NetworkingParty1 December 2011CQ Functions, Melbournewww.afa.asn.au

AFA Sydney Chapter Christ-mas Lunch8 December 2011Hilton, Sydneywww.fpa.asn.au

The Superfund ReformSummit 20127 February 2012CQ Functions, Melbournewww.superfundreform.com.au

Effective Business ForecastingConference 201214 February 2012Park Royal Darling, Sydneywww.cpaaustralia.com.au

Source: Investment Trends 2011 Planner

Risk Report

Rated their provider as goodor very good

34%Stopped using at least leastone insurer over the past year

23%Seeking new or additionalinsurers over the next year

What’s on

RISKSNAPSHOT


Platforms

Platforms are facing pressure from all sides, Milana Pokrajac writes. How will they deal withchanging adviser demands, low investor sentiment and fast approaching regulatory deadlines?

THERE is so much to do and solittle time to do it. With fast

approaching regulatory dead-lines and shifting investor/adviserdemands, these are definitely challeng-ing times for investment platforms. Bigor small, institutionally owned or not, theimpact of continuing market volatility,plummeting investor sentiment,proposed changes and the increasingfocus on cost will be significant.

The pressure is mounting from severalsides and platform executives are seeingboth challenges and opportunities pop upbefore their eyes. But just how will theycope with numerous changes?

Land-grab game As of 1 July 2012, all volume rebatespassed down from platforms to dealer

groups will be banned. Despite indus-try-wide support for this proposal, insti-tutions and platform providers now haveto secure their distribution networks.Although the AMP/AXA merger mighthave started the latest round of consol-idation, we have recently seen IOOF’sacquisition of DKN and CommonwealthBank of Australia’s proposed purchaseof Count Financial not long after that.

But for Connie McKeage, chief execu-tive officer of platform provider OneVue,the ever-growing market consolidationpresents a major challenge.

“We need the support of either institu-tionally owned planning groups who havesome independence left or the independ-ent financial planning sector,” McKeagesaid, adding OneVue does not ownproduct distribution channels. “Wheninstitutions buy up dealer groups they arebuying up our distribution because wedon’t own it the same way that the largefirms do.”

However, some non-institutionallyowned platform providers decided itwould be best to make a move. Just overtwo weeks ago, netwealth announced thepurchase of Paragem Dealer Services,while HUB24 added seven more dealergroups to its client list.

“We are not in a position, nor are wekeen, to buy a large dealer group, so we’vebeen looking at different ways to makesure we can increase our footprint,”

netwealth managing director Matt Heinesaid. “Through the purchase of Paragem[Dealer Services] we get access to a hugenetwork of independent financial plan-ners, which is a part of the market that wework very closely with.”

There is one major player, however,which hasn’t made a move yet, and that’sBT Financial Group. Apart from WestpacFinancial Planning, Securitor and Magni-tude (which are owned by the bankinggroup), DKN was a big supporter of BTWrap prior to its acquisition by IOOF.

“We are closely watching the consoli-dation in distribution at the moment,”said BT’s head of platforms, ChrisFreeman.

Freeman said the BT strategy before itwas bought out by Westpac was to buildthe best product and service, regardlessof who owned the distribution channel.“There is still an element of truth in that,and if you continue to invest in the plat-form and have the most functionality atthe right price, people will still use you,because they otherwise have to buildtheir own – and we all know how expen-sive that is,” he said. BT Wrap and Super-Wrap have generated by far the biggestinflows over the year to June 2011 andhave the largest amount in funds undermanagement (see Figure 1).

However, the company was quick tosnatch DKN’s former chief, Phil Butter-worth, following the buyout of the

dealer group.

Shifting market - shifting offerings Securing continued support for productsby way of acquisition alone will not cut itin today’s market environment. Platformproviders are realising that investors’ thirstfor cash and defensive assets is not just aquick fad resulting from the financialcrisis, and many are moving to introducemore attractive offerings than those ofmanaged funds. Term deposits, in partic-ular, are proving to be a hit.

Just under a year ago, ANZ-owned

Platforms are experiencing FOFAfatigueMost providers are moving to securedistribution networksThe number of platform owners in themarket was reduced from 16 in 2006 to nine in 2011Platforms are introducing new offer-ings to satisfy investor apetite forcash

Key points

Figure 1 Platform and Wrap analysis

Source: Plan for Life

ALL MASTER TRUSTS, PLATFORMS & WRAPS FUM Inflows YE Outflows YE Net Flows YE Investment Earnings YE FUMCompany Product Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-10

BT Financial Group SuperWrap & Wrap 40,612.8 21,694.8 17,053.4 4,641.3 1,006.3 37,236.0

MLC MasterKey 34,557.9 4,841.6 5,655.4 -813.8 2,285.3 33,565.3

AMP Financial Services Flexible Lifetime 27,420.3 4,506.7 6,102.3 -1,595.6 1,989.5 27,412.3

Colonial First State FirstChoice 24,844.5 4,577.1 4,811.8 -234.6 1,752.9 23,399.0

Colonial First State FirstChoice Wholesale 24,273.2 9,113.2 6,382.7 2,730.5 1,733.5 20,240.9

Macquarie Investment Man. Macquarie Wrap Solutions 22,163.0 6,085.5 4,314.1 1,771.4 1,226.0 21,001.9

Chris Freeman


Platforms

OneAnswer platform introduced six newANZ term deposits which have generatedmore than half a billion dollars in inflows,while BT has had $3 billion in term depositinflows on its platform since 2009. Colo-nial First State (CFS), too, is currentlypromoting its FirstRate InvestmentDeposit on FirstChoice.

“Given the demand for safer, moresecure investment options and basic,simple to understand products, we’vebeen developing income generating solu-tions,” said CFS general manager forproduct and channel development, PeterChun. While cash-style products areimportant, platforms also need to accom-modate other shifts in the market, such asthe increased use of exchange tradedfunds (ETFs) and separately managedaccounts (SMAs).

HUB24 chief executive officer DarrenPettiona said platforms will start to includea lot more of direct investment options.“What was the big traditional fundmanager and management expense ratiomodel will start to disappear in someshape or form,” he said. “We’ll see a lotmore things like bonds, partial bonds,fixed income instruments, direct equities,ETFs, SMAs, and a lot more cash.”

In April this year, AXA rolled out a two-tiered approach to pricing – a lower,discounted rate for certain investmentsand a full rate for others, Burgess said.

“Platforms have a huge role to play inhelping advisers demonstrate the value oftheir advice when they come to imple-ment their advice through a platform –being able to be confident about what

they’re putting in place and being able toshow it to the client either on the screen orthrough a printout actually really doesunderpin and support the whole approachto the client,” he said.

“We also know that pricing is raising itshead again, and a number of competitorsout there are putting competitive offersout on the table,” said AMP/AXA head ofplatforms, Steve Burgess.

For MLC, though, the platform marketis falling into two distinct categories:investment solutions needed for themajority of investors and the platformneeds of a high net worth (HNW) clientbase. “In HNW we continue to see thetrend towards self-managed super funds,direct shares, greater control and flexibil-ity in investment offerings and investmentchoice,” said Michael Clancy, executivegeneral manager of investment platformsfor MLC and NAB Wealth.

MLC Wrap, he said, was specificallydesigned for that market, while MasterKeyFundamentals caters for the masses. “Weare doing a significant relaunch in the nextfew weeks; in that market space we seeinvestors are looking for … more absolutereturn options, with markets being asvolatile as they have been,” Clancy said.

ASX AQUA - opportunity or threat? Competition in the platform space isfierce, and isn’t coming just from withinthe sector. The Australian SecuritiesExchange (ASX) hopes to launch thesecond part of its AQUA project in April2012, which will allow the listing ofmanaged funds and structured products,and provide electronic settlement servic-es through its Clearing House ElectronicSubregister System (CHESS).

“It’s about encouraging managedfunds to quote their prices on the ASX,so we can introduce the efficiency ofCHESS,” said Richard Murphy, generalmanager of equity markets at the ASX.“As you know, applications and redemp-tions at the moment are 100 per centpaper-based, fax-based, with chequesflying around Australia.”

However, the ability of investing inmanaged funds on the ASX will put pres-sure on platforms, according to formerchief executive officer of platform providerPraemium, Arthur Naoumidis.

“The platforms are owned by the bigbanks who own fund managers – fromwhat I hear, there is a lot of resistance fromthe big names,” Naoumidis said.

“Independent fund managers are happyto play, because all of a sudden they’re nottied to a platform, there are no shelf feesand they can be traded on the ASX.”

While some see it as a threat, Murphysaid AQUA would provide opportunity forplatforms in terms of adopting the CHESSsystem and dumping physical paperwork.

Colonial First State and AMP statedthey had been discussing the new AQUAframework with the ASX for some time,and considering potential opportuni-ties for the funds management side ofthe business.

“We see it as an alternative channel – itis going to be very attractive for stockbrokers and their clients to be able toaccess managed funds via the ASX,” saidPeter Chun, adding that platforms haveprimarily been supported by financialplanners, who will continue to use them.

A platform is about wrapping adminis-tration and reporting functions aroundwholesale investments – a service AQUAdoes not offer, according to Burgess.

“I could definitely see a continued rolefor the administration hub that is the wrapplatform to perform for advisers andclients,” Burgess said.

FOFA fatigue Just like every sector in the financial serv-ices industry which will be affected by theproposed Future of Financial Advice(FOFA) reforms, platform providers havealso been working on the new require-ments for more than two years. Volume-based payments to dealer groups will bebanned, and so will volume-based shelfspace fees coming from fund managers;there are compliance requirements to beimplemented, as well as the opt-in solu-tion to cater for planners. Many platformshave already developed different contin-gencies to implement (depending onwhere FOFA lands), but they cannot quiteget on with the changes.

“We also operate in the MySuper space,”said Peter Chun. “Given the staggered startdate (1 July 2012 for FOFA and 1 July 2013

Continued on page 16

“We also know that pricingis raising its head again, anda number of competitorsout there are puttingcompetitive offers out onthe table. ” - Steve Burgess

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CFS First Choice (incl.Wholesale) 17%

BT Wrap 15%

Macquarie Wrap 9%

Asgard 9%

MLC 5%

Figure 2 Market share(based on priaryadviser relationships)

Source: Investment Trends Planner Technology Report, July 2011;

based on a survey of 1394 planners

Steve Burgess


Platforms

for MySuper), it’s actually incrediblyimpractical having two sets of changesbeing forced upon existing clients.”

CFS has been involved in lobbying theGovernment both directly and throughindustry associations to extend someaspects of FOFA to coincide with theMySuper deadline. “If there is just onestart date it would be very beneficial and[there would be] a friendlier customeroutcome, as we won’t have to put themthrough two sets of changes,” Chun said.

ANZ Wealth’s head of OneAnswer andemployer superannuation MarkPankhurst agrees. “We are talking aboutvery big, complicated and complexregistry systems,” he said. “We could meetthe deadline, but I believe that withoutclarity and without legislation in place,that creates challenges and could meanthat you could spend far more money,time and effort building things you mightnot actually use if legislation changes.

“We would prefer to see an extension,and we would like to see a situation wherean implementation date could be 2012,but ultimately we would like an opportu-nity to actually implement over anotheryear,” Pankhurst added.

Opt-in deadline stress There is definitely a ‘wait and see’approach being adopted by platforms,especially with respect to the develop-ment of an opt-in solution for financialplanners. At a recent roundtableconducted by Money Management, CFSgeneral manager for strategy NicoletteRubinsztein said Colonial would adopta two-stage approach to future plat-form development.

The ability to capture the client infor-mation and the fee information, she said,would be developed in the first instance,while the next build – which only needsto happen in two years time – will bedeveloped afterwards.

The Government hasn’t provided muchcertainty as to how grandfathering willwork, and many claim there is just notenough time to make significant changesby the time opt-in is implemented in Julynext year. There are many questionsregarding opt-in yet to be answered.

“Even things like if [the clients] don’topt in within a specified period of time,you’ve got to be able to turn off therevenue for the adviser; but if you turn itoff and the client comes back and says ‘Ididn’t mean to do that’, can you or can younot then go back and pay retrospectivelyto the adviser?” OneVue’s Connie McKeagepointed out.

However, there is another, very obviousissue. Many clients have assets on multi-ple platforms, which makes it difficult fora single provider to collect all of the infor-mation and manage the whole process.OneVue has acknowledged this issue, andis looking to set up a stand-alone opt-insolution which is not limited to just theOneVue platform.

“By the t ime ever ybody sendsthrough their reports, clients will beinundated with infor mation, andthey’re going to be very confused unlessthere is a standard format in the indus-try,” McKeage said. “It’s a very complexscenario to try and implement in this

market, with such ambiguity remainingand with the clock ticking,” she added.

But whether platforms can come upwith a common approach to opt-in is yetto be seen. Over the past few years, therehas been a rationalisation of the numberof platforms planners use for their clients,and according to Matt Heine of netwealth,planners will have to pick a primary plat-form and potentially use it as a method toscrape their fees. “People are making surethat their back office is as tidy as possible,and FOFA is going to continue to drivethat back office efficiency requirement,”Heine said.

Some, however, have acknowledgedthat the real opt-in solution might sit atthe adviser technology level with some ofthe financial planning software providers.

Have conflicts been removed?Removing conflicted remunerationmodels across the industry is one of themost supported FOFA proposals. As of 1 July 2012, payments based on volumethat are paid from the fund manager tothe platform provider and from the plat-form provider to the licensee will nolonger be permitted.

But it seems most platforms have beenready for this change for some time now.

Many providers, such as AMP, HUB24and OneVue do not charge shelf space feesat all, but rather charge dealer groups aflat-dollar administration fee.

Others, like BT, do charge shelf-spacefees, but Chris Freeman says the volume-based component is gone.

“The total fund manager paymentamounts to 2 per cent of our totalrevenue,” he said. “What it means for us isthat it’s an administration clawback ratherthan a profit driver.”

“We would prefer to see anextension, and we wouldlike to see a situation wherean implementation datecould be 2012, butultimately we would like anopportunity to actuallyimplement over anotheryear. ” - Mark Pankhurst

Continued from page 15

Source: Wealth Insights

Figure 3 Consolidation in the platform market


Platforms

Preferred partner programs are part ofsome providers’ remuneration models,too. As part of some deals, fundmanagers pay additional fees to platformproviders that buy them greater accessto advisers via additional marketing anddistribution opportunities.

BT Advantage and Asgard PreferredPartners programs involve such deals,while AMP and netwealth also runsimilar programs.

AMP charges a voluntary additional fee,whereas netwealth selects fund managersfor its preferred partner program basedon ratings, and passes on the discount tothe end client.

Nevertheless, some industry partici-pants see this service as a clear conflict.

“Paying extra so you get access to youradvisers is really conflicted; charging[fund managers] fees is double-dipping– it’s platforms using their muscle tocontrol distribution,” said HUB24’sDarren Pettiona.

However, in an interview conducted byMoney Management in December 2010,Treasury’s general manager for the corpo-rations and financial services division,Geoff Miller, said eliminating paymentswith the potential to create conflicted

advice was the focus of proposed FOFAreforms — and that preferential dealsbetween platforms and fund managersweren’t causing much concern.

“They are getting so far removed fromthe advice that’s actually given to the clientthat we feel less [worried] with that typeof payment,” Miller said.

Treasury is more concerned with stop-ping conflicted remuneration methodsbetween platforms and dealer groups, anddealer groups and advisers, with furthersteps to be decided upon consequently.

A tale of two platformsAny debate about conflicts of interestleads to a debate about vertical modelsand consolidation in the financial servic-es industry. This consolidation was initial-ly driven by the global financial crisis, andthen (as some would argue) by theproposed FOFA reforms (see Figure 3).

Do platforms provide a product agnos-tic service or are they products them-selves? For some, it’s whether a platform isowned by a product manufacturer. Smallerplayers have been particularly vocal onthis issue.

“The reason we are not a product isbecause we don’t own any of the products

on the platform,” said OneVue’s ConnieMcKeage.

“I still think institutionally owned plat-forms are a service, but there needs to bea clear delineation between the serviceelements of it and the product elementsof it,” she said. “Maybe it’s time to disag-gregate platforms from advice, and fromother services.”

For others, it’s about managing conflictsof interest. In the eyes of the law, platformsare a product. “But there is no doubt inmy mind that we are an administrationservice,” said Chris Freeman.

Platforms provide administration, taxreporting and electronic execution for allproducts, amongst other services. But interms of product neutrality – apart fromnon-aligned platforms with open models– institutionally-owned providers alsoclaim they are product agnostic.

“We have over 850 different managedfunds offerings on our wrap platform,”said Freeman. “The proportion ofmanaged funds that are on the BT Wrapin total, in terms of dollars, is less than 10per cent – there is no bias, platforms haveto stand on their own.”

Colonial’s FirstChoice also lists funds fromclose institutional competitors such as BT,Macquarie, AMP and ING, amongst others.

Peter Chun added that Count’s APLmodel would remain the same.

“We don’t think there’ll be any changesto their model, they will still have an openAPL as all our dealer groups do – Finan-cial Wisdom has eight platforms on theirAPL,” he added.

But whether the current market is atale of two types of platforms is not aquestion of high priority for manyplayers in the sector.

Although most have acknowledged thenext 12 months and the implementationof FOFA will be challenging, they arelooking forward to the next period.

FOFA, and the increasing focus on cost,will give rise to cheaper platform solutionsin the new year for some, while others willlook forward to introducing modern ITsystems and ridding themselves of thelegacy burden. MM

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Darren Pettiona

“Paying extra so you getaccess to your advisers isreally conflicted; charging[fund managers] fees isdouble-dipping – it’splatforms using theirmuscle to controldistribution. ”- Darren Pettiona

The significantly positive returnsprovided by equities duringOctober were a welcome respitefrom the unfortunately familiar

declines. Ascertaining why confidence hasimproved and whether the market recov-ery is sustainable, is more problematic.

We cannot claim any insight whatsoev-er into the short-term direction of senti-ment. However, cursory observations onthe price of bonds, gold and otherperceived defensive investments (and I usethat term loosely in relation to gold) relativeto their riskier peers would indicate thatinvestors still aren’t positive. We are,however, far less sure that fundamentalsare likely to provide the reassurance forinvestors to become more optimistic.

For some time, we have believed that theinvestment landscape over coming yearswill be characterised by an environment ofdeveloped world deleveraging. This doesnot necessarily answer the question as towhether one should buy equities or bonds,but it suggests that investing on the basis ofextrapolating recent decades could provepainful.

We have never believed that growth –particularly gross domestic product (GDP)growth, as it is most popularly defined – isan important driver of investment returns.However, investor adherence to this delu-sional yardstick means its evaporation islikely to create headwinds.

The search for GDP growth has, in oureyes, been a significant contributor tocurrent problems. GDP is no more than anestimate of the value of goods and servic-es produced in an economy – it is not anindicator of economic wellbeing. Its valueis measured in monetary terms.

If more money is introduced into theeconomy – generally through individualsor governments borrowing it – the meas-ured value of GDP will generally increase,even if no more goods and services areproduced. It should not make us feel better.If we doubled the amount of money in theeconomy tomorrow, we could all get a bigpay rise, see our house prices double, andColes might even raise the price of milk –but we wouldn’t be any richer.

Measurement units don’t create wealth.Explosive credit growth has created the illu-sion of wealth whilst actually deliveringincreasing wealth disparity and dismalproductivity outcomes. Investment returnsare no different – they are about maintain-ing purchasing power, and must be thoughtof relative to the things we’re trying topurchase.

The centre of attention in this regardremains Europe. Rather than focusing onwhether the current shuffling ofdeckchairs on the Titanic which policy-makers have disguised as a solution tothe current Euro debt crisis will have any

impact whatsoever, it is probably moreimportant to step back and put the situ-ation into context. The key issue – whichoutgoing European Central Bank (ECB)president Jean-Claude Trichet has raised– is the restoration of credibility in sover-eign debt.

“If we don’t have the credibility of thesovereigns, we don’t have a backstop if wehave new possible crises”. The reason thecredibility of sovereign debt is progressive-ly declining across the world is two-fold.Firstly, there is too much of it. Secondly, theuse of it is abysmal. As observed above,levels of both government and individualindebtedness across most of the developedworld have been on a consistent trajectoryfor some time – and it’s not down. Thisdeterioration has occurred in peacetime,when demographics were favourable,publicly owned assets were rundown and

sold – rather than improved – and a goodportion of liabilities (significantly pensions)weren’t, and still aren’t, actually recordedas liabilities in government accounts.

Increased debt levels have primarilybeen funding bloated bureaucracies andwasteful spending. We are now supposedto believe that a voluntary haircut by somebondholders (not the ECB – they’re a publicinstitution and don’t need to mark assetsto market) on the government debt of theworst offender – together with a plan toleverage the little remaining firepower ofthe European Financial Stability Fund toprovide artificial confidence in those yet todefault – will solve the problem.

Not only that, having not generatedany meaningful productive growth whilstthey racked up all the debt, growth willremain almost unaffected as govern-ments pay off all the debt and fund

pensions for citizens not prepared towork anymore. The real hope of policy-makers in this latest deception is thatEuropean banks can convince Europeanbank shareholders to contribute largeamounts of new capital to an insolventbanking system to allow bondholders tomitigate some of their losses. It’s abouttime equity holders and taxpayers askedbondholders to fund their own losses.The only way debt issues are going to becorrected is for a lot of it to be written off.

Closer to home, the Qantas Airways saga– which dominated headlines during themonth – highlighted the increasing imbal-ances impacting the Australian economy,and why complacency is ill-advised. Froma company perspective, cost structureshave become untenable.

Fares are already high compared toglobal peers, with currency adding to thedifficulty in raising prices. Wages and condi-tions, also exacerbated by currencystrength, are uncompetitive.

The position of Qantas highlights thevulnerability of many Australian business-es. Unemployment, collapsing asset prices,and overcapacity are plaguing much of theworld. To expect that we can continue todeliver significant wage gains and main-tain almost full employment without signif-icant productivity gains is ‘cloud cuckooland’. The longer this situation prevails, themore vulnerable the domestic economywill become.

Outlook & strategyAs we’ve raised previously, sustainedconfidence and sustainable economiesand businesses will require some devia-tion in thinking from the currentlyadopted methodologies. Adding moreliquidity, deceiving investors and notacknowledging mistakes, is not therecipe for success. We credit investors,and citizens generally, with more intel-ligence than that accorded to them bypolicymakers. They will generally seethrough deception. It is for this reason,that despite apparently attractive valu-ations in equities, we remain somewhatcautious.

International equities are still at valua-tions below that of Australia – evidence thatsentiment can deteriorate further. The UKprices of BHP Billiton and Rio Tinto are ourreliable anecdotal benchmark. Billitonclosed the month at a 20.5 per centdiscount to the Australian listing, and RioTinto 25.3 per cent. It is for this reason, thatwhere possible, our preference is for thevast majority of the portfolio holding inthese stocks to be held offshore.

Martin Conlon is the head of Australianequities at Shroder Investment ManagementAustralia.


OpinionEuroDebtShuffling the deck chairs

Current shuffling of the deckchairs on the Titanic that is Europe will not solve the Euro crisis, according to Martin Conlon.

He who stops getting better,stops being good. This is themantra of all good underwrit-ers. However, good is a relative

term, and something that is interpreteddifferently by everyone. Yet when compar-ing something good to something bad, itgains a greater level of context.

As an example, a decade ago life insurersthought it was ‘good’ to fulfil a life policy inless than 30 days. Now it’s considered ‘notgood’ if it takes longer than two weeks.

Over the past 10 years a great deal haschanged for the average underwriter. Eachcomponent in isolation could be seen asrelatively small, but when aggregated pres-ents a more significant journey of change.

After all, this is what underwriters do –we consider all factors that influence theoutcome of the policy we are underwrit-ing. This includes factors that increase therisk of a claim, or reduce the risk of anearly claim.

While there has been a great deal ofchange in the industry, not all of it hasbeen on par in terms of impact. Someunderwriting changes receive more atten-tion, while others hit hard but are moretransient, and some just continue on apath of evolution.

One area that received a great deal ofattention was the 2003 bird flu pandemicand the more recent 2009 swine flu scare.As underwriters, we were asked to beready to adapt underwriting practices toassess potentially impacted individuals,for example persons who were about toembark on a journey to a high-risk region.

Health scares such as these are spread moreeasily with the advent of an increasingly

mobile world population. And withAustralians being a gregarious bunch, travelcomes as second nature to us.

This, of course, presented even moresignificant challenges for the underwriterin the last decade, especially since theSeptember 11 attacks, and subsequentLondon and Bali bombings broughtterrorism to our door.

These threats are an ever presentreminder for how underwriting continuesto evolve.

Fortunately for underwriters, not allchange results in an increased risk ofclaim. Advances in medical diagnosis andtreatment have improved mortality ratesand recovery from serious illnesses.However, this is a double-edged sword.

Consider cancer. Most will agree thatdiagnostic techniques and treatmentshave improved outcomes for the affected,with patients surviving in greater numbersthan in the past. Yet significantly, inci-dence rates (of newly diagnosed eventsand resultant valid trauma claims) haveincreased. This requires understandingfrom underwriters, product managers,actuaries and claims assessors.

These changes mean that the under-writing practices must keep pace with theburden of injury and disease that mayarise after an application has been accept-ed and issued.

Not all health issues are improvingthough. This is evident from the statisticsgathered in our annual risk report ClaimsWe Paid, covering life insurance payoutsby AMP in 2010. The report shows anincreasing trend in the number of cancerand mental illness claims, mirroring

national health trends and reinforcing theneed for adequate life insurance andprotection against trauma and disability.

The report showed mental illness as theleading cause for total and permanentdisability claims at 15 per cent, almostdoubling the previous year's figure. It alsoshowed that cancer remained the mostcommon form of trauma claims in 2010,representing 77 per cent of the $24.4 millionpayment figure. AMP paid almost $300million in claims to its customers in 2010.

Our ever-expanding waistlines and themultiple health issues that can result frombeing overweight, as well as mental healthissues, diabetes and increased rates ofcertain cancers are also an obvious causefor concern.

While underwriters have adapted theirview of what’s acceptable in these variousareas, they must work in partnership withproduct managers and actuaries tocorrectly assess the increased risks associ-ated with global health trends.

However, not all changes in the lastdecade have been influenced by healthmatters. A good underwriter is alwayslooking for greater efficiency andimproved speed, and some of thesefeatures have come from technologicalimprovements.

Technology such as automated under-writing ensures that customers are onlyasked questions relevant to their individ-ual profile and the type of insurance theyare applying for. By helping us deal withmore straightforward applications, it ulti-mately allows us greater scope to offeralternative solutions to complex situations– resulting in our ability to insure more

people with more cover.As an industry, we compete on many

facets. Even though price and service arekey, product differentiation is also essen-tial. This is a challenge for underwriters,as we must keep our assessment standardsin place to handle a constantly changingproduct set, maintaining consistencybetween the electronic rules and the deci-sions of the human underwriter.

Even though the last few years haveseen a number of significant changes,there is still one area that remains anunknown element with the potential fora huge impact in the future. I refer to thehuman race having mapped out thehuman genome.

As a result, thousands of new geneticchanges, mutations, interplays and ther-apies have been discovered. Its impact onunderwriting has been muted butsustained, but it’s what looms ahead whichis both exciting and daunting for theunderwriting industry.

On review, it has been a very rewardingdecade and underwriters have grown andevolved. We’ve met the challenges head-on and I believe responded appropriate-ly to them. Underwriters have alsoincreased their professionalism, techni-cal skills, social skills and improved theircustomer focus. We look at our processesend-to-end, always with the view of doingmore with less.

The next decade looks even more excit-ing, never boring and filled with multipleopportunities.

Marcello Bertasso is head of underwritingat AMP.

The evolvingunderwriter

Opinion Insurance


Underwriting is a continually evolving area and as a result insurers need to stay ahead of the gameif they are to understand the changing insurance needs of our nation, writes Marcello Bertasso.

It is not surprising that many investorsare dissatisfied with the performance oftraditional diversified (balanced andgrowth) funds and their model portfo-

lio brethren over the last decade. Part of thisdissatisfaction is probably unfair, given thevery difficult environment we have faced formuch of that decade, including an ongoing,once-in-a-generation global financial crisis.

However, I believe some of this dissat-isfaction and resulting criticism is fullyjustified, as traditional multi-manager andsingle-manager diversified funds andmost model portfolios have proved tooinflexible, too wedded to flawed financialtheory and too slow to recognise, let aloneadjust to, the dynamics of a challengingnew macro environment.

Fortunately, a quiet revolution is slowlytaking hold in the management of diversifiedfunds with the creation of a new category ofmore flexible, ‘multi-asset’ funds. Led bysome of the more innovative institutionalfunds locally and globally, but graduallyencroaching on the retail investment indus-try, it represents an abandonment of theconstraints of modern portfolio theory andstrategic asset allocation and a focus on –some would say return to – diversifiedinvestment options with true flexibility and,importantly, an emphasis on absolute or real(cash/inflation) investment objectives thatactually matter to everyday investors. Thismeans ‘making’ money versus cash and/orinflation, preserving capital over themedium-to-long term and moving awayfrom the unhealthy obsession with peercomparisons and business risks.

However, this is not just a simple returnto the more active balanced funds of the1980s when the BT Retirement Fund andseveral others were prepared to make largeasset allocation moves between equitiesand cash/bonds. Sure, much more flexi-ble/dynamic asset allocation is one keyelement of the new multi-asset approach,but it has many more dimensions thanthis. ( When both bonds and equitiesenjoyed sustained bull markets from theearly 1990s the limitations of the earlierapproach in some investment scenarioswere highlighted). Rather, the new multi-asset approach seeks to utilise the muchbroader range of tools available in themodern investment world to produce

robust, well-diversified portfolios.What, then, are the defining features of

this multi-asset revolution?• The proper incorporation of, and adher-

ence to, investment objectives that actuallymatter to clients – ie absolute/real ones(cash-plus or inflation-plus) over themedium to long term, and also attemptingto preserve capital in the meantime. Theseobjectives are integral to the way money ismanaged, and not just in there for market-ing/competitor reasons.

• Abandonment of the straightjacket ofstrategic asset allocation and adoption ofmuch more flexible and dynamic asset allo-cation, driven from a forward-looking, valu-ation perspective.

• Much more focus on sub-asset andsector selection, irrespective ofbenchmark/index weightings; ie asector/asset earns its way into the portfoliobecause of its future return/risk character-istics, not due to its past performance orcurrent market capitalisation.

• When using active managers, there is afocus on looking for those with anabsolute/non-benchmark mindset and theresulting flexibility to fully utilise valuableinsights.

• A willingness to use low-cost passivevehicles (including exchange trading funds)for expressing a short/medium-termasset/sector view, or for core exposures toattractively valued asset classes – but not fora ‘set and forget’ approach many are nowadvocating).

• Greater use of selected alternative assetsand strategies in the portfolios, particularlyto reduce risk.

• Greater consideration of adverse futurescenarios and the extreme risks in financialmarkets, and the inclusion of certain tail riskhedges in portfolios when they can bepurchased cheaply and efficiently.

Not all of the new multi-asset fundsembrace all of these elements. Some believethat certain of these elements are not neces-sary or even appropriate to deliver on thesereal/absolute objectives. Some even believegearing should be selectively employed.However, they all tend to be consistent inthe view that this new approach is neces-sary because we live in a world where justrelying on market beta alone is too unreli-able, and even if one is eventually rewarded

for taking this market risk, many investorscannot handle the rollercoaster rideinvolved.

It is also a long overdue recognition thatthe path of returns – and not just averagereturns – over time matters most for clientsin the real world, especially, but not only, forthose in the pension phase in retirement.Putting much of a client's assets into equitymarkets when they are expensive andvulnerable to a big drawdown, or drawingdown a client’s money during a bear market,are recipes for poor investor returns and ulti-mate disappointment. Conversely, at theother end of the spectrum, currently rigidlyloading up on the perceived safety of lowyielding bonds as occurs in most capital-stable funds/model mixes, as suggested bylifecycle approaches for retirees, is likelyanother recipe for disappointment. A morediversified and smoother path of returns isachievable.

Of course, the new multi-asset approach-es are not about eliminating volatility oravoiding any negative returns, but they doaim to avoid or limit the very large draw-downs that can destroy client portfoliosbecause they are almost impossible torecover from. It also aims to preventinvestors being slowly decimated in long-term bear markets that go on for yearsbecause they are heavily exposed to equityrisk and little else.

Part of the solution for retirees, I believe,is to shore up better the cash/liquidity needsof the next few years (three-to-five) by specif-ically allocating sufficient amounts to cash,term deposits and other low-risk fixedincome as the ‘liquidity’ or ‘preservationbucket’ of client portfolios. This enablesclients to be more objective about, andpatient with, the diversified/growth-orient-ed ‘bucket’ and be prepared to wear some(but not excessive) volatility.

A feature of the new multi-asset funds isthey typically offer only a couple or even justone option or ‘risk profile’. This makes sensegiven the features described above and is awelcome move away from the confusingmultitude of only slightly different diversifiedoptions and model portfolios some groupsoffer (sometimes as many as seven or eight).

Some fund managers are approachingthis ‘revolution’ by slowly revamping some oftheir old diversified options, while others

are launching totally new products and evenseparate investment teams. Both approach-es come with some significant issues. Thosegradually changing their existing diversifiedproducts are understandably implement-ing a process of evolution rather than revo-lution, with the result they may only achievepartial benefits of the new approach. On theother hand, those groups launching totallynew products are faced with the challenge ofexplaining where each product sits. If thisapproach is ‘new and better’, the averagefinancial planner and investor might ask,“Why is my money stuck in the old-stylediversified fund?”

Some of these new diversified funds aremulti-manager and some single-manager.And they include well-known brand namemanagers such as AMP, MLC, Perpetual andSchroder. Even some overseas managers arecoming into Australia to specifically tacklethe multi-asset market. Of course, whilethese funds are new as retail offerings, theapproach is not new in the investmentworld.

Endowment funds globally have longadopted some of these elements, as havesome of the more innovative institutionalfunds and super funds. In Australia, theFuture Fund is a clear example.

Some say that the ‘absolute return’ termsometimes used to describe such diversi-fied funds is just a meaningless marketingterm. I disagree. While the term has beenmisused and misunderstood, in my mind


Observer

Multi-asset revolution

Dissatisfaction with the performance of traditional managedfunds and the resulting criticism may see the rise of multi-assetsolutions, according to Dominic McCormick.

absolute return is primarily about a non-benchmark mindset and linking the actualinvestment strategy with the absolutereturn-oriented objectives. It does notpromise to always achieve positive monthly,quarterly or even yearly returns, but is aboutachieving reasonable absolute returns overthe medium- to long-term period of theobjectives (typically three-to-five years-plus)and avoiding large, sometimes ‘permanent’,drawdowns.

Because some of these new multi-assetfunds cannot be easily put into a box, someresearch houses have placed this new typeof multi-asset fund into the ‘alternative’

investment category, to be used as a non-core, small part of a client portfolio. Webelieve this view will be increasingly seen asprimitive thinking, and that this new styleof fund will eventually deserve a core rolerepresenting at least half and, in some cases,even all, of clients' portfolios. While an abilityto invest in hedge funds and other alterna-tive assets and strategies in meaningful waysis one component of this approach, it is justone element, and not all the new multi-assetfunds will use alternatives significantlyanyway. What is the point of having true flex-ibility if it is not utilised across the majorityof an investor’s portfolio?

Clearly, one cannot say that this newapproach is always better than moreconventional diversified approaches.Indeed, in raging bull markets for equities,multi-asset funds will almost certainly lagtheir more traditional peers. However, I amconfident that they can be more thancompetitive over the long term and, partic-ularly, can do better in most (but not neces-sarily all) difficult periods for equity markets.

But why bother with what is a morecomplicated approach to diversified port-folios now? Clearly, it is harder to fullyexplain to investors and harder to imple-ment for fund managers. Increasingly,however, investors and advisers trying tobuild or access truly robust portfolios willhave little choice. In the current challengingenvironment, applying the appropriatetools, expertise and flexibility is necessary.

And remember, the whole idea of fundmanagers implementing these is thatmuch of this complexity does not need tobe fully seen nor understood by investors,as long as they judge the manager to havethe appropriate skills and resources.

Meanwhile, some investors and advis-ers are reacting to the challenging envi-ronment by resorting to more passiveinvestment solutions which actually intro-duce more equity risk than conventionaldiversified funds. When excessive expo-sure to equity risk has been a majorproblem, many advisers have opted forsolutions that give their clients more ofthat same risk, no doubt partly blinded bya narrow focus on cost alone. They hadbetter get used to explaining volatility andlarge drawdowns to their clients.

Clearly, it will be extremely difficult foradvisers or investors to develop and imple-ment these more innovative multi-assetportfolios for their clients themselves. Mostlack the appropriate skills and focus and,even if they have these, there are someaspects of the new approaches that simplycannot be implemented easily by advisers,including timely asset allocation changes,use of derivatives for currency and markethedges, or access to some fund structuresand offshore managers that are not avail-able on platforms they use.

But isn't using such multi-asset funds asthe core of a portfolio taking away some ofthe adviser’s job? To an extent this is true,

although there are still plenty of elementsof the adviser’s job outside investments.Indeed, this is a broader industry trendthat is already well developed. Increasing-ly, dealer groups and owners of dealergroups are realising that letting the major-ity of financial planners loose on exten-sive approved product lists with littlecontrol is a recipe for disaster. Model port-folios have been a step in the right direc-tion, but with little of the flexibility or toolsof the more developed multi-asset diver-sified portfolios.

Therefore, while financial planninggroups are increasingly embracing theoutsourced investment model, some areresorting to passive portfolios while othersare moving to the other end of the spectrumand using truly active multi-asset funds.Both have advantages from a businessperspective. However, in the same way thatsome advisers are using a passive core andadding satellite investments, I believe usinga diversified multi-asset core also works wellfrom a business perspective. It makesadministration easier. It also ensures diver-sification. However, unlike the passive coreapproach which requires faith that themarkets will deliver appropriate risk premi-ums over time, and that clients will handlethe volatility that this will entail, the multi-asset approach is more diversified acrossvarious risks, although it does require confi-dence in the skills of the multi-assetmanager selected and their ability to selectattractive underlying investments over time.

The advantages of the more flexible multi-asset fund are likely to help renew interest indiversified funds generally during a time ofsignificant criticism of the fund manage-ment industry. Indeed, those adviser groupswho believe they are taking little or no ‘busi-ness risk’ by ignoring this trend or using acore passive investment approach maybecome increasingly exposed to deliveringclient returns and risks that deviate marked-ly from what more progressive investors andadvisers are achieving with such funds.

If you are convinced that traditionalmarkets are readying for new multi-year bullmarkets and the difficulties of the lastdecade are largely over, then the long-only,equity-focused approach at the heart of thetraditional or passive diversified approach-es will do well. Even then, the challenge willbe to keep investors invested over time giventhe volatility of this approach.

However, if you are of the view that globaleconomic deleveraging and other macrochallenges will continue to create a worldof high volatility and provide no certaintythat historical equity risk premiums will bedelivered, then the new multi-assetapproaches are much better placed todeliver for investors. This certainly doesn'tmean it will be easy for fund managers oper-ating them, but at least they are playing tothe appropriate rules of the game and withthe right goals in mind.

There is a lot of intellectual firepower inthe investment industry. Finally, it is beingdeployed in ways that are focused on trulymeeting clients’ real objectives, rather thanjust creating products with an appealingstory attached.

Dominic McCormick is the chief investmentofficer of Select Asset Management.


“But isn’t using suchmulti-asset funds as thecore of a portoflio takingaway some of the adviser’sjob? ”

When advising a client tocommence an accountbased pension, manyadvisers recommend that

a ‘bucket strategy’ is used as part of theclient’s asset allocation process for riskmanagement purposes. Theoretically, abucket strategy that successful lyprevents growth assets being sold attemporarily low prices should providea better outcome than a traditionalasset allocation approach over the long-term. However, little analysis has beendone to see whether this approach islikely to work in practice and the effectof differing market conditions anddifferent approaches to implementingand managing the strategy.

How does the bucket strategy work?Essentially, the bucket strategy involvessegmenting a client’s pension balanceinto two or more pools or buckets:

• A ‘cash bucket’ with safe invest-ments for pension payments expectedover three to five years; and

• An ‘investment bucket’ invested inaccordance with the client’s risk profilefor longer term growth.

The cash bucket is then replenishedperiodically, with enough funds to coverthe next three to five years of expectedpension payments. Depending on thestrategy approach taken, this could occur:

• At the end of the three to five yearperiod, or earlier if the cash bucket isdepleted sooner;

• Each year when the client’s situa-tion is reviewed; or

• Tactically, where the investmentbucket cumulative returns have exceed-ed certain benchmarks, or the invest-ment bucket appears overvalued.

Another important consideration iswhether income generated by theinvestment bucket will be immediatelyallocated to the cash bucket (minimis-ing the need to replenish this bucket)or reinvested (which may be the only

practical option available in non-wrapstyle super funds).

Historical returns have shown thatgrowth assets such as shares and prop-erty are very likely to outperform purelycash based investments over the long-term (the sort of t imeframe thatnormally applies to an account basedpension). In the short-term, however,the stock market can be extremelyvolatile, as anyone who has endured theglobal financial crisis would know.

The logic of the bucket strategy is thatregardless of the short-term perform-ance of the investment pool, pensionpayments can continue from the cashpool without the forced sale of growthassets at unfavourable prices. What isoften not discussed though, is that atraditional asset allocation approachautomatically benefits from a reverseversion of dollar cost averaging – a strat-egy often used to minimise risk wheninvesting by buying parts of theoverall investment at a range ofdifferent t imes and prices.Assuming pension paymentsare received on a

regular basis (eg, monthly), the saleprice of investment bucket assets on aparticular day is of reduced importancebecause many different prices are usedthroughout a financial year (and overmany years).

AnalysisWith this in mind, we have compared atraditional asset allocation approachagainst a bucket strategy approach usinghistorical returns from October 1998 toSeptember 20111. Our comparisoninvolves a client (age 65) who iscommencing a $500,000 accountbased pension. They willdraw pension payments


Is there a hole in thebucket strategy?

Opinion Strategy

Tim Sanderson puts the traditional asset allocation approach head to head withthe bucket strategy, with some surprising results.

$500,000

$550,000

$600,000

$650,000

$700,000

$750,000

77767574737271706968676665

— Traditional approach pension balance— Buck et strateg y pension balance

Note: Past performance is not a reliable indicator of future performance.

Figure 1 Traditional approach v bucket strategy approach – actual earnings

“The bucket strategyapproach involves alwaysholding a larger portion ofthe portfolio in cash assets,which are likely tounderperform growthassets over the long-term.”


of $25,000 per annum (paid monthly andindexed at 3 per cent annually – alwaysexceeding the required minimumpayment). Under the bucket strategyapproach, three years worth of pensionpayments were allocated initially to a cashpool, which was then run down over threeyears and replenished at the end of thethree year period (with the next threeyears worth of pension payments).

We can see that, although the accountbalances vary significantly throughout thetimeframe, the traditional asset alloca-tion approach provided for a higheroverall pension balance at all times. Bythe end of September 2011, the differencein account balance between the two was$6,304, with balances of $551,020 (tradi-tional approach) and $544,716 (bucketstrategy approach). Interestingly though,

the difference between the twoapproaches reached over $35,000

around age 73 and then reduced to$4,200 around two years later, indi-

cating that short-term market move-ments affect these strategies in

contrasting ways.We previously mentioned a variation

on the bucket strategy involving tactical-ly replenishing the cash bucket whereinvestment bucket returns exceededcertain benchmarks. To demonstratehow this would fare in this example, we

assumed that under the bucket strate-gy approach, the cash bucket

would be replenishedimmediately (with

three years worth of expected pensionpayments) once the investment buckethad returned 10 per cent (includingincome and capital growth). A furtherreplenishment would occur with eachsubsequent 10 per cent return. Whencompared with the traditional asset allo-cation approach, results were as follows:

Figure 2 shows that the tact icalbucket strategy was less successful thaneither the original bucket strategy($9,810) or the traditional asset alloca-tion approach ($16,113) over the periodof historical earnings. While once againthe difference varied throughout thetimeframe (determined by periods ofgood or poor market performance), itis clear that the tactical approach riskedreplenishing the cash bucket morefrequently than was really required (inthis case, it led to a sustained over-allo-cation to cash assets).

Rising and falling marketsIt is apparent from Figure 2 that thebucket strategy approach tended toperform relatively better during periodsof poor market performance (eg, age 74to 76) and relatively worse during timeswhen markets were performing strong-ly (eg, age 70 to 73). The simple reasonfor this is that, by design, the bucketstrategy involved a significantly higherallocation to cash assets, which gener-ally performed better over the short-term than a falling share market.

For example, using the above client, weanalysed the same pension over two six-year periods2. In the first six-year period(October 2005 to September 2011), a cashportfolio returned 5.4 per cent perannum, while a balanced portfolio

returned 2.1 per cent per annum.Unsurprisingly, the bucket strategy

approach outperformed thetraditional approach by

$4,246.In contrast, during a

second six-year period (November 2001to October 2007), a cash portfolioreturned 5.2 per cent per annum, whilea balanced portfolio returned 7.4 perannum. During this time, the tradition-al approach outperformed the bucketstrategy approach by $5,183.

While analysing short-term markettrends assists us to understand the wayeach strategy works, it is most importantto focus on the overall return profile aclient can expect over the life of theirpension. History suggests that over manyyears, an appropriately diversified port-folio invested in line with a client’s riskprofile is not enhanced by an artificiallyhigh allocation to cash assets.

ConclusionBased on the above analysis, we havesummarised some of the shortcomingsof the bucket strategy and why, as along-term strategy, it doesn’t comparewith a traditional asset al locationapproach:

1. Overweight in cash investments –the bucket strategy approach involvesalways holding a larger portion of theportfolio (than dictated by the client’srisk profile) in cash assets, which arelikely to underperform growth assetsover the long-term. During short-termmarket downturns, the bucket strategyapproach performs relatively well (dueto the higher allocation to cash), but ifthe long-term trend in markets is up,the long-term trend in the bucket strat-egy approach will be to underperformthe tradit ional asset a l locationapproach.

2. A successful bucket strategyinvolves timing the market successful-ly – the bucket strategy would likelyprovide a better long-term outcomethan the traditional asset allocationapproach if the cash bucket was onlyrefreshed (by selling assets in the invest-ment pool) at or near the top of themarket cycle, and never when marketsare at temporarily low levels. While itmight be possible to successfully timethis refresh some of the time, it is

almost impossible to ensure thatthis is always the case throughout

the life of the pension.3. No dollar cost averaging –

the traditional asset allocationapproach naturally involves dollar costaveraging out of growth assets as regularpension payments are made, reducingsome of the risk of short-term marketvolatility.

Under the bucket strategy, however,a relatively large amount (a number ofyears worth of future pensionpayments) needs to be ‘switched’ out ofthe growth portfolio periodically as alump sum, which (with the benefit ofhindsight) may or may not take place ata favourable price.

Tim Sanderson is senior technicalmanager at Colonial First State.

1 Monthly historical returns for Colonial First State Cash Fund and

Colonial First State Balanced Fund.

2 Six year periods were chosen to allow for two full cash-

bucket replenishing cycles.

$500,000

$550,000

$600,000

$650,000

$700,000

$750,000

77767574737271706968676665

— Traditional approach pension balance— Buck et strateg y pension balance

Note: Past performance is not a reliable indicator of future performance.

Figure 2 Traditional approach v tactical bucket strategy – actual earnings


FPA 2011 National Conference

Spruiking in Brisbane

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The end of this year’s conference season isonce again marked by the FinancialPlanning Association’s NationalConference, which was held at theBrisbane Convention and ExhibitionCentre in Queensland.Guests and speakers included FinancialServices Minister Bill Shorten, ShadowTreasurer Mathias Cormann, Delia Rickardfrom the Australian Securities andInvestments Commission and theIndustry Super Network chief executiveofficer, David Whiteley, among others.


1. Zita White, Griffiths University student of financial planning; Nigel Gralton, student; and Ian Chester-Master, chairman, FPA Brisbane Chapter; Ailoa Chong–Lee, student; Steven Ferry, student.

2. Kylie Paton, Abacus Property Group; Rene Daquino, APN Property Group; and Kim Kitchens, Abacus.3. Nicole Morrell, Perennial Investment Management; and Nick Parsons, BT Financial Group.4. Neil Heriot, Boston Private Wealth; and Grant Kennaway, Morningstar.5. Jamie Murrell, AMP; Sheldon Rivers, Orion Asset Management; Simon Beram, Maple Brown Abbott;

and Bryn Jones, AMP.6. Lauren Jackson, BDM of FIL Investment Management.7. Maureen Reynolds, MFR Financial Planners; Ben Phillip, E Trade; and Deborah Rognlien, FinancialCare Group.8. Meagan McNeill, AMP; and Len Whelan, Hillross.9. Bain Swanson, BT Investment Management; and Peter Mill, APN Property Group.10. Camille Giles, Equipsuper; Steve Perrell, Equipsuper; Renae Smith, MLC; and Ricky Morris, MLC.11. Scott Kilvington, Moneo, in chair; Margaret Green, massage therapist.12. Ruth Ferraro, The Tax Institute; and John Moore, The Tax Institute.13. Steve Trevisiol, GESB Financial Advice.14. Amanda Woodcock, Securitor; Greg Schapkaitz, Securitor; Paul Gaffney, Securitor; and Annick Donat, Securitor.15. Matt Brown, NAB; Andrew Shaw, NAB; and Brett Slattery, AMP.16. Johann Koch, IRESS; and Lance Meikle, ALPS.17. Amelia Constantinidis, AMP; and Craig Banning, Navwealth.18. Paul Robertson, Tynan Mackenzie; and Barbara Glover, AMP Capital.

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FPA 2011 National Conference

Reverse mortgages offer asset-richbut income-poor homeownersthe option to borrow against theequity they have built up in their

home to improve their standard of livingin retirement.

Whilst there are variations in the productfeatures in the marketplace, they all allowrepayments to be capitalised on the loan,therefore don’t require the borrower to makeany repayments (principal or interest).

Importantly though, once the homeown-er decides to sell or the last surviving borrow-er passes away, the outstanding loan (whichincludes compounded loan repayments)needs to be repaid.

The Consumer Credit and CorporationsLegislation Amendment (Enhancements) Bill2011, which was introduced recently, amendsthe National Consumer Credit Protection(NCCP) Act 2009 and relates specifically toreverse mortgage contracts. The proposedEnhancements Bill 2011 introduces new obli-gations for persons who engage in credit activ-ities in relation to reverse mortgage contracts.

The key elements of these requirementsare:

• Specific obligations will be introducedon credit providers and persons engagingin credit services in relation to reverse mort-gage contracts. This includes ensuring thehomeowner has received legal advice beforeentering into a contract; and using a websiteapproved by the Australian Securities andInvestment Commission (ASIC) to showborrowers projections of the potential effecta reverse mortgage may have on the equityof their home and also provide the borrow-er with a copy of these projections.

• Licensees must ensure the borrower isprovided with sufficient information to beable to make an informed decision beforeentering into a reverse mortgage contract.They must also ensure an information state-ment is available on their website or uponrequest by a consumer.

• Introduction of a no negative equityguarantee protection, through a prohibitionagainst credit providers requiring or accept-ing repayment of the loan for an amountwhich exceeds the market value of the mort-gaged property.

• New obligations will be introduced oncredit providers where they have given adefault notice to the borrower. The creditprovider will have an obligation to contactthe borrower in the event of default andensure they understand they are in defaultand therefore provide them with an oppor-tunity to rectify the default.

Who are reverse mortgagesappropriate for?As noted earlier, reverse mortgages may beappropriate for retirees who have equity intheir home and would like to increase theirstandard of living.

Reverse mortgages may also benefit thosewho:

• Need urgent access to money for aspecial purpose such as medical expenses,travel, home improvements or the purchaseof a vehicle;

• May be considering downsizing toimprove cashflow in retirement, but wouldprefer to stay in their home. It should benoted that by taking out a reverse mortgage,additional issues arise. Reverse mortgagescan impact the value of the estate leftbehind. It is possible that there would be noequity left in the property when it is even-tually sold. Therefore, it is important toinvolve the family when considering takingout a reverse mortgage.

• In an environment of rising interest rates,borrowers need to be aware that thecompounding effect of interest charges andfees capitalised can cause the loan to balloonto unforseen levels in a very short period oftime. For example, at an interest rate of 8 percent per annum a $50,000 loan could become$87,000 in seven years or $111,000 in 10 years.At 9 per cent per annum a $50,000 loan wouldbecome a debt of $93,000 in seven years and$122,000 in 10 years.

• There may be periods of time whereproperties actually decrease in value, whichwill result in a reduction of the value of theremaining equity.

Features of a reverse mortgageInterest rates on reverse mortgages aregenerally higher than standard home loanrates. The rate can be fixed for a term or forthe life of the loan or be a variable rate.Repayments may be made at any time, butsome providers may have additional chargesin such instances.

The no negative equity guarantee is a vitalfeature where a reverse mortgage loan isbeing considered as it ensures that thehomeowner (or their estate) can never owemore than the value of the home, no matterhow long they stay in the home. Howeverthe guarantee is dependent on borrowers’meeting the terms and conditions of theloan, such as keeping the home insured andwell maintained.

Another feature that is available is theprotected equity option. This feature allowshomeowners to ensure they retain a portionof the home's future value upon sale. This

feature can be particularly attractive wherethe homeowner is concerned about leavingan inheritance. The protected equity optionensures the family will receive a pre-deter-mined amount of the equity regardless ofwhat happens to the balance of the loan orproperty prices in the future. However bytaking out the protected equity option, themaximum amount that the homeowner canborrow will be reduced.

For example, if the homeowner wishes toensure that the beneficiaries of their estatereceive 20 per cent of the future sale priceof their home, they need to choose a protect-ed equity option of 20 per cent. However,this will reduce the maximum amount theyare eligible to borrow by 20 per cent.

Impact of reverse mortgages onCentrelink Age PensionIf an Age Pension recipient receives a reversemortgage, the amount drawn is not countedas income by Centrelink. However, theamount drawn may be subject to Centre-link means tests when the amount is heldas a financial investment.

In general, when the reverse mortgage isdrawn down in small amounts and used tomeet everyday living expenses, then itshould not affect the borrower’s eligibilityfor the Age Pension. If however it is accu-mulated or the entire amount is drawn, thenit may have an impact on the borrower’seligibility for the Age Pension.

Where a large amount is drawn, Centrelinkallows up to $40,000 be exempt from assess-ment for up to 90 days. After that period haselapsed the entire amount (if unspent) will besubject to Centrelink means tests.

For example, if a person takes out a homeequity conversion loan of $80,000 and leavesthe proceeds in the bank account, then:

• The first $40,000 is exempt from Centre-link’s means tests for 90 days

• The remaining balance of $40,000 wouldbe counted towards the Centrelink meanstests from the day the funds are received.

Once the 90 days has elapsed then thewhole balance of $80,000 (if it remainsunspent) will be subject to the Centrelinkmeans tests.

The homeowner status under the assetstest will not be affected by taking out a homeequity loan.

SummaryWhen a reverse mortgage is taken outagainst a client’s property, it is importantto be aware of the possible consequences,such as the compound effect of interestcharges, property prices, family and estateplanning issues and the impact of capitaldrawdowns on a person’s Centrelink AgePension assessment.

Anna Mirzoyan is a technical services officerat Fiducian Portfolio Services.


Proceed with care

Toolbox

Advisers will still need to be very cautious in recommending reversemortgages to their senior clients, despite the proposed protectionsaround this product. Anna Mirzoyan writes.

BriefsINVESTORS are entering a period inwhich market volatility will return as along-term factor, traditional safeinvestment havens will hide unex-pected dangers and alternative assetswill remain an important diversifica-tion tool.

That’s according to van Eyk’s latestStrategic Asset Al location (SAA)review, which sets out its recom-mended long-term asset allocation forinvestors over the next three to fiveyears.

van Eyk head of research JohnO’Brien said a relatively high expo-sure to alternatives should continueto of fer super ior r isk-adjustedreturns over the next three to fiveyears. He said the exposure tostocks in van Eyk’s SAA portfolio arerelatively cheaper and of fer taxadvantages that other investmentslike bonds do not.

INFLOWS for the Australian exchangedtraded fund (ETF) market continuedto increase in October, doubling to$56 million as the total market capi-talisation increased by 7 per cent.

That’s according to Betashare’sAustralian ETF Review, which foundthat the last three months haveseen investors return to markets asa result of the uncertainty surround-ing European debt issues, highlevels of net buying and increasedtrading volumes.

According to the report, investors areturning to blue chip stocks, interna-tional ETFs and Australian dollar ETFs.

“While last month saw investorsflocking to asset classes which wouldresult in gains from weakening Aus-tralian conditions, increased tradingvolumes and inflows suggest domes-tic equities returned to favour for Aus-tral ian investors this month,”BetaShares head of investment strat-egy Drew Corbett said.

CMC Markets has upgraded its moneyhandling arrangements in Australiaand New Zealand, announcing theimplementation of a fully segregatedclient money model.

CMC Markets Australian head LouisCooper said the company had beenworking towards the model for sev-eral months and that the movebrought the Australian operation intoline with the practices of CMC’sparent company in the UK.

Cooper acknowledged that thecompany’s use of client moneys hadcome into question following the cor-porate collapse of futures broker MFGlobal.

“Although the demise of MF Globalis not necessarily related to its CFD[contracts for difference] business,it’s important our customers feel safeand secure about the money theyinvest via CMC Markets’ market lead-ing platform,” Mr Cooper said.

Appointments


Please send your appointments to: [email protected]

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

RISK INSURANCE ADVISERLocation: MelbourneCompany: iSelectDescription: A leading provider ofcomparison and choice in the market forhousehold products and services iscurrently looking for a risk insuranceofficer.

Reporting to the sales and operationsmanager, your responsibilities will includeconsulting, advising, and selling a range ofpersonal insurance products to consumersover the phone.

In this role, you will conduct needsanalysis reviews for clients; provide adviceon life insurance products; maintainongoing relationships with clients; andachieve monthly sales targets.

The successful candidate will be workingwith an experienced team, and be offeredtraining and career developmentopportunities.

You will be RG146 qualified, have aclear understanding of compliance withinthe life insurance industry, and have aminimum of one years experience within arisk adviser or sales role.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orwww.iselect.com.au.

SENIOR FINANCIAL ADVISERLocation: AdelaideCompany: Terrington Consulting

Description: A leading financial servicesinstitution is looking for an experiencedsenior financial planner to provide adviceto a portfolio of high net worth clients.

Development of your own referralnetworks and access to an unlimitedproduct and platform range will provide anopportunity to grow your portfolio.

Successful candidates will have severalyears experience as a financial plannerdealing with HNW clients. You will alsohave exceptional, proven sales andnetworking capabilities.

Successful candidates will be rewardedwith a highly competitive salary packageand attractive incentives, as well asprofessional development opportunities.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting –0422 918 177 / (08) 8423 4466,[email protected].

SENIOR FINANCIALADVISER/EQUITY PARTNERLocation: AdelaideCompany: Terrington ConsultingDescription: A leading South Australianbusiness advisory company is seeking asenior financial planner for a long-termopportunity and a pathway to equities orequity upfront.

In this role, you will be working with anexisting portfolio of clients and the company’s

market reputation – and referrals from itsaccounting arm – will provide furtheropportunities to grow your portfolio.

Candidates will have experience insuccessfully managing and growing a clientbase, and will possess an understanding ofa range of financial planning strategies,services and products – including directinvestments, gearing and superannuation.CA/CPS qualifications will be highlyregarded.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting –0422 918 177 / (08) 8423 4466,[email protected].

JUNIOR PARAPLANNERLocation: AdelaideCompany: Terrington ConsultingDescription: A financial servicesorganisation is seeking an energetic,service-orientated junior paraplanner.

In this role, you will be responsible forassisting in preparing/amendingdocumentation for the production of SOAs;building and maintaining clientrelationships; and maintaining complianceprocedures.

You will be results driven and have astrong desire and passion for providinghigh quality customer service. You will alsobe RG 146 compliant.

This is a part-time position, with a view

to full-time employment as the work loadincreases.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting –0422 918 177 / (08) 8423 4466,[email protected].

FINANCIAL PLANNERLocation: Far North Coast, NSWCompany: Terrington ConsultingDescription: A financial services firm isseeking an experienced and establishedfinancial planner.

The firm has excellent brand and marketreputation, and you will be rewarded with a highlycompetitive salary package and incentives. Youwill also have access to research, professionalfacilities, established systems, and anopportunity to grow your portfolio.

In this role, you will be engaged in a rangeof financial services offerings – includingstockbroking, strategic planning,superannuation, SMSF, insurance, portfoliomanagement and fixed interest.

You will have several years experiencedelivering to a diverse range of clientele. Youwill also have proven sales skills andnetworking capabilities.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466,[email protected].

ANZ has appointedNigel Williamsas chief risk officer and member ofthe ANZ management board.

Williams will report to chiefexecutive officer Mike Smith, hisappointment becoming effectiveonce current chief risk officerChris Page retires.

Since 2008, Williams has beenANZ managing director, institution-al Australia, having previously heldthe role of managing director, insti-tutional, corporate and commercialbanking at ANZ New Zealand. Hefirst joined ANZ in 2004 followingthe acquisition of The NationalBank of New Zealand.

Commenting on the appoint-ment, Smith said that Williams isa career banker with internation-al experience and a strong trackrecord in credit and markets risk.

CHALLENGER’s f unds manage-ment business has appointedCathy Hales as general manager,boutique partnerships.

Commenting on her appoint-ment, Challenger’s chief executivefor funds management Rob Woodssaid that Hales has considerableexperience across the funds andwealth management business in

Australia and internationally.“This is a key role in our team,

driving strategic growth of ourpartnership model and manag-ing our relationship with ourboutiques,” said Woods.

Hales was previously chiefoperating officer, client relationsat RREEF in New York. Before thatshe worked at Deutsche AssetManagement, Colonial FirstState and BT Financial Group.

CLEARVIEW Wealth hasannounced the appointment ofScott Hodgson as chief under-

writer. In this role, he will beresponsible for ClearView’s lifeinsurance underwriting opera-tions, including underwriting poli-cies and procedures, and individ-ual risk assessment and selection.

Hodgson has previouslyworked with such providers asTAL, AMP, Tyndall Life Insur-ance, and PrefSure.

“His (Hodgson’s) skills and expe-rience will greatly assist us in intro-ducing new products to themarket, starting with our life adviceproducts, and expanding our busi-ness across Australia,” saidClearView managing directorSimon Swanson.

MIDWINTER Financial AdviceSoftware has appointed its exec-utive director, strategy and adviceMatthew Esler as director ofMidwinter Advice Solutions andnon-executive director ofMidwinter Financial Services.

As a result of Esler’s new role,Midwinter has also announcedthe appointment of DimitriDiamantes as head of technicalservices, Peter Burns as head ofdistribution, and Lew Howard asbusiness development officer.

Burns served as Midwinternational distribution manager for

three years and was previouslyAdvance Asset Management(AAM) head of key accounts.

Diamantes was formerlyZurich Australia head of techni-cal services, and prior to that wasAAM’s technical analyst. In hisnew role, he will be responsiblefor Midwinter’s upcoming releaseof AdviserTECH CPD.

Commenting on Esler’s newrole, Midwinter managing direc-tor Julian Plummer said thatEsler would continue to be“heavily involved in the strategicand commercial decisions at theboard level”.

CHARTER Hall Group hasannounced the appointment ofChris Freeman as researchmanager.

Charter Hall’s joint managingdirector David Harrison said thatFreeman will be responsible fordriving Charter Hall’s knowledgeacross the core property sectorsof office, non-discretionary retailand industrial.

Freeman has over a decade ofresearch experience, includingtime spent as national director atSavills Australia where he helpedcreate innovative research suchas the Savills Availability Report.

Move of the weekMLC has announced a number of key appointments across itsadvice and marketing teams.

Greg Miller will wind down his role as MLC Advice Solutions generalmanager and move full-time into the MLC Direct portfolio. Millerpreviously worked with Garvan, Apogee and MLC Financial Plan-ning and is well-versed in the financial advice industry. Tom Redda-cliff will step into Miller’s role as MLC Advice general manager.

Current Apogee general manager Wayne Handley will bereplaced by Fiona Navarro, who for the last five years has led MLC’sRisk Specialist Network.

Peter Smith has been appointed as general manager at GodfreyPembroke. Smith was previously general manager, distributionfor MLC’s UK business, and most recently worked on distributionat nabInvest. Tom Reddacliff

““

OUTSIDER was among the attendeesat the 2011 Association of Super-annuation Funds of Austral ia(ASFA) conference in Brisbaneearlier this month, and he walkedinto the Great Hall of the BrisbaneConvention Centre on the first dayexcited to hear East Timorese Presi-dent and former Nobel Peace Prize co-recipient José Ramos-Horta.

So it was with some disappointmentthat he learned from ASFA chief execu-tive Pauline Vamos that his ExcellencyRamos-Horta had to remain in EastTimor “due to civil unrest”.

But Vamos was quick to inform dele-gates that ASFA’s risk management policyhad “swung into action”, resulting in theconference organisers securing formerForeign Minister Alexander Downer todeliver the keynote address on leader-ship in Ramos-Horta’s place.

Downer opened his speech by talkingabout unsuccessful leadership – citinghis brief stint as leader of the opposition– as well as more successful leadership(with reference to his 12 years asAustralia’s Foreign Minister).

He also went to lengths to bemoan his

tempestuous relationship with themedia, and conceded that the best wayfor leaders to cope with the constantattention was to try and ignore it.

“There’s nothing worse than gettingup in the morning and reading in thenewspaper about what a complete idiotyou are. And then you listen to talkbackradio and everyone’s ringing in andsaying, ‘that Downer, he’s a real$#%@head’.”

Outsider wonders if José Ramos-Hortahas the same problem with the EastTimorese media.

Outsider


Out ofcontext

A good dressingdown in Bris Vegas

But where was the kitchen sink?OUTSIDER's award for most ostenta-tious stand at any conference goes tothe AMP stand at last week’s Finan-cial Planning Association conferencein Brisbane.

While the Money Managementstand boasted video and print exam-ples of Outsider's work, it was but a

pale shadow of the AMP effort.How could anyone compete with

an AMP stand that boasted a fire-place, a mantle clock, a waterfall,lounge chairs, a cold-water fridge anda bloody good barista?

Clearly times are good at AMP –and they have the decor to prove it.

A L I G H T - H E A R T E D L O O K A T T H E O T H E R S I D E O F M A K I N G M O N E Y

Fishing forsympathy

OUTSIDER has been to more than a few Financial Plan-ning Association conferences and well remembers onethat coincided with Schoolies week on the Gold Coast.

Brisbane represented a far safer venue for this year'sconference – until it was realised that the BrisbaneConvention and Exhibition Centre was also being usedfor some high school formals.

Thus as Outsider ambled through the foyer he was start-ing to believe that financial planning had become thedomain of leggy 18 year-olds in little black outfits.

It seems that FPA chairman Matthew Rowe was simi-larly distracted, because he welcomed guests to his chair-man’s dinner with the words "if you’re 18 and wearing avery short dress, you’re in the wrong room".

Outsider noted some short dresses in the room but,sadly, none worn by 18-year-olds.

“I thought I’d do something challenging foran economist and try to weave someoptimism into what I’m talking about.”

– Mark Thirwell, director, international economy

program, Lowy Institute for International Policy,

searches desperately for the silver lining in his speech

at the ASFA conference.

That’s me, oil and gas.”

– Perpetual analyst Andrew

Blakely may or may not be

wishing he had a title as cool

as fellow Perpetual analyst

Andrew “the metals guy”

Corbett.

“I’m very famous forarticulating ideas that areunpopular.”

– Downer again, sympathising

with those whose job it is to sell

the idea of compulsory saving to

the public.

money management (november 24, 2011)

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