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I N S P I R I N G A D V I C E

PROFESSIONAL PLANNER

ISSUE 52 - APRIL 2013

FOFA COUNTDOWNPeter Kell puts financial planners on notice as deadline looms

IN FOCUSAUSTRALIAN EQUITIES: A TIME TO BUY AND A TIME TO SELL

THE PROFESSIONWHAT CAN BE LEARNED FROM THE TRULY PROFESSIONAL

Bill Danaher’s membersprovide financial planning services

to more than 6.8 million Australians

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April 2013 | PROFESSIONAL PLANNER 3

04 from the editor Industry funds break cover

06 wrap A round-up of the month that was

by association38 Graeme Colley48 Mark Rantall49 Brad Fox

50 Final Word Built to last on a journey to the Dark Side

46

24

features regulars08 the FoFA countdown Peter Kell puts financial planners on notice as deadline looms

19 in focus - Australian equities A time to buy and a time to sell - and how to tell the difference

24 other people’s money How much money is too much: the issue of capacity constraints

26 sector spotlight Exchange-traded funds (ETFs) resume their strong growth

30 sharemarket Yield convergence: a race to the bottom?

32 best practice We’re not so different after all

34 best practice Fix it now or pay the piper

36 self-managed super Big changes to insurance in super

40 super fund awards Chant West and Conexus Financial join forces for new awards

41 hnwi Recruiting and developing talent in private banking

42 the big picture Why the Australian economy will look very different in 15 years

44 technical Why dealer groups need to make significant changes

46 philanthropy When more regulation is a good thing

47 the profession What can be learned from the truly professional

10 friend or foe? Bill Danaher’s members provide financial planning services to more than 6.8 million Australians

PROFESSIONAL PLANNER April 2013

Contents

IN THIS ISSUE

April 2013 | PROFESSIONAL PLANNER 3 www.professionalplanner.com.au

36

Has there ever been a more effective financial services advertising

campaign than the industry fund movement’s “compare the pair” series?

If I ever suggest that the message of the ads was not anti-financial planning but simply anti-commission, I’m almost guaranteed an argument. But let me tell you why I think I’m right.

At the same time that industry funds were campaigning against commission, they were building a financial planning capability. And it turns out they were building a very effective capability. It seems inconceivable to me that they would deliberately run such an effective ad campaign if it were to undermine the difficult and expensive work they were doing elsewhere.

Don’t forget that for many people, their superannuation is the largest asset they will own, outside of their family home. That being so, it’s natural that they would approach their super fund for advice and help on how to make the most of it.

These people do not necessarily form a captive market for super funds; anyone is free to seek advice from anywhere they so choose. But if the place you go to first – your super fund – offers a high-quality, relevant and affordable service, what are the chances you’ll then go and seek a second opinion? I reckon that number is likely to be quite low, given that 80 per cent of people

don’t even bother seeking a first opinion.Bill Danaher is no newcomer to the

financial planning space, but if you haven’t watched what he’s done in the past, it’s worth having a look. Professional Planner spoke to Danaher a full four years ago - in March 2009 - when he was general manager of Q Invest, the organisation that provided fee-based financial planning services to the members of QSuper and to the public-offer division of the NSW-based First State Super Fund.

Now he’s driving the development of financial planning services for industry super funds.

Last month I suggested in an article on Professional Planner’s website that industry funds might really be the enemy of the “mainstream” financial planning industry after all – but not because they don’t like financial planning. It’s because they not only like financial planning, they also do it very well.

The calibre and the quality of the people I met at Danaher’s Financial Advice in Super Symposium in Melbourne in February were a salutary reminder that quality is quality, and it’s as simple as that, and that professionalism resides in the individual, not the institution.

[email protected]

INDUSTRY FUNDS FLEX THEIR MUSCLE

FROM THE EDITOR

SIMON HOYLEEDITOR

4 PROFESSIONAL PLANNER | April 2013 www.professionalplanner.com.au

April 2013 - Issue 52

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4 PROFESSIONAL PLANNER | April 2013

Charting the courseTHE BASICS OF EQUITIES INVESTING

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One universe, many sectors: An equities view of the worldMarket directions: The best ways to get to sharesA day in the life of an equities manager

INSIDE

Everything you wanted to know about Equities ...

EQUITIES: ISSUE 1


INSIDE


EQUITIES: ISSUE 2

Global trends: long-term issues and implications for investorsActive portfolio management: a story of outperformanceNestlé: Food for thought

Understanding

IDENTIFYING THE FORCES THAT AFFECT SHARE PRICE PERFORMANCE

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INSIDE


EQUITIES: ISSUE 3

Asia: Compelling opportunities and lingering risksLong-term investing: Why holding stocks for the long term boosts returnsA Latin American story

THE ROAD TO SUCCESSFUL INTERNATIONAL EQUITY INVESTING

GlobalAdvantage



EQUITIES: ISSUE 4

INSIDEWhy small companies offer significant investment benefitsInvesting for income: how dividends boost long-term returns

The necessity of good corporate governance

PRINCIPLES OF SUCCESSFUL INVESTING

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Financial planners entering the industry after July 1 face the risk of inadvertently breaching the Tax Agent Services Act, with

many dealer groups unaware that they will potentially need to satisfy a separate regulator on tax issues.

With much of the industry predictably focused on being Future of Financial Advice (FoFA) compliant by mid-year, the Financial Planning Association (FPA) has warned members and the wider industry that the new taxation-agent-services regime applying to financial advisers from July 1 would potentially have significant consequences.

“Fundamentally this piece of legislation will impact financial planners just as much if not more than the FoFA reforms, and that has received very little airplay, and awareness out there in the industry is very low,” said the FPA’s general manager of policy and standards, Dante De Gori.

Financial planners providing tax advice within the context of financial advice were initially exempted from the Tax Agent Services Act 2009 (TAS Act), with industry bodies arguing they should be permanently excluded from an act that was not designed to regulate them.

While the exemption has been extended, most recently by the Assistant Treasurer, David Bradbury, the FPA has not been able to secure a further extension and advisers could be subject to regulation under the Tax Agent Services Act. Licensees will need to register each adviser with the Tax Practitioners Board (TPB) so they can continue to provide tax advice – even if this is a service that is only rarely required.

However, aside from potentially falling under the governance of another regulator that doesn’t have the experience of the Australian Securities and Investments Commission in dealing with the financial planning industry, there are several other

complicating factors. The first is that while financial planners currently operating under an Australian financial services licence will have three years to transition to the new regime, those starting in the industry post-July 1 will need to be registered immediately.

Secondly, the legislation appears to only include regulatory arrangements for financial planners who provide tax advice within the context of providing advice on a financial product, with no provision if this is broader, strategic advice.

Craig Meldrum, head of financial advice at Australian Unity Personal Financial Services and part of the FPA team that has made submissions to government on this issue, says more guidance is necessary, although it remains to be seen which regulator provides it.

“We need a much better idea of the look and feel of this legislation and how it will apply,” he told Professional Planner.

Last year the FPA was officially recognised as a tax agent association by the TPB, enabling members to apply for registration as a tax agent.

Tax threat to advisers could be bigger than FoFA

Griffith outlines degree path to peak association


WRAP • EDITED BY ANDREW STARKE • [email protected]


Griffith University is claiming a nationwide first with its new financial

planning program accreditation under rigorous new industry guidelines.

The Griffith Business School’s Department of Accounting, Finance and Economics was the first in the country to secure accreditation for its financial planning program.

The framework, launched by the Financial Planning Education Council (FPEC) late last year, defines the financial planning curriculum for degree qualifications, establishing uniform standards for content, modes of delivery

and assessment regimes across all university programs.

“For students, completion of an accredited degree program is effectively a pathway to professional membership with the peak body [the Financial Planning Association of Australia],” said associate Professor Mark Brimble.

“There is now unprecedented, across-the-board clarity about the graduate outcomes expected for financial planners.

“The broader mandate is about professionalising the industry.

“The FPA now has an enforceable code of conduct, and an approved degree will be

required for membership from July 1, 2013.”Brimble believes the new framework,

along with a renewed relationship between academics and the industry, will nurture a professional environment.

“Professional associations are critical to future careers,” Brimble said.

“Simultaneously, quality of graduate is vital to the trustworthiness and ongoing strength of the associated industry.”

Brimble said that with financial literacy programs now being pushed more strongly in schools, “a greater awareness of what financial planning is about can be anticipated in the community”.

The Australian Securities and Investments Commission (ASIC) has

given its clearest indication yet that reform is coming to the life insurance industry and that it is happy to police this sector.

However, some risk advisers are far from happy, accusing ASIC of double standards.

In a speech in March, ASIC Commissioner Peter Kell said he supported industry initiatives to deal with churning - the excessive switching of life insurance policies by financial advisers and brokers.

The Financial Services Council’s (FSC’s) attempt to self-regulate appears to have stalled after its decision to abandon an application to the Australian Competition and Consumer Commission (ACCC).

In February, FSC chief executive John Brogden announced his organisation had abandoned its application to the ACCC to obtain class order relief from sections of the Trade Practices Act.

This was a necessary step for the FSC to implement its proposed framework, including anti-churn measures.

“If you don’t think financial advice on life insurance is a problem area for ASIC and for industry, please think again,” said Kell. “A number of our major surveillances resulting in licensing conditions,

enforceable undertakings and, most seriously, licence revocations, involved evidence of significant amounts of inappropriate advice on life insurance.”

Kell said the regulator had identified four types of problematic advice on insurance policies, including two that raise red flags for churning: replacing a client’s life policy regularly with little or no demonstration of why the new policies are an improvement on the old; and replacing client life policies with more expensive life policies with little or no additional coverage.

However, director of financial planning group Synchron, Don Trapnell, believes it is impossible to take self-regulation further without accurate figures from life companies on replacement business.

“We are obviously very concerned that ASIC believes churning is a problem, and also a little bit baffled,” he said.

“One of the reasons Synchron was so opposed to the introduction of a Financial Services Council churning policy was that we believed there was no evidence to support that a culture of systemic churning exists among advisers.”

Kell comments reignite churn debate• MACQUARIE SETTLES ON STORMMacquarie Group has settled with Storm Financial investors for $82.5 million as part of an ongoing class action, which may yet have an impact on other firms. Commonwealth Bank of Australia, Macquarie Bank and Bank of Queensland have all faced ongoing legal scrutiny from both the Australian Securities and Investments Commission (ASIC) and groups of investors following Storm’s high-profile collapse in 2008.

• PLANNING BY DEGREEThe Financial Planning Association (FPA) has launched an advertising campaign reminding financial planners that from July 1, 2013, it will be mandatory to hold an approved degree to become a practitioner member of the professional association. The advertising campaign supports the announcement made by the FPA two years ago of an initiative to raise the standards of the financial planning profession. It also aligns with the Future of Financial Advice (FoFA) reforms being implemented by the government in July.

• WESTPAC TARGETS WOMEN Westpac and St George Financial Planning aim to double the number of women working in planner roles by 2015 to more than 700 planners. The initiative will see current female representation in Westpac Financial Planning and St George Financial Planning increase from 26 per cent to 45 per cent over three years. “We know women make great financial planners and it’s time we made it easier for women to work in our growing industry,” said Mark Spiers, general manager of advice at BT Financial Group.

IN BRIEF

BY THE NUMBERS


Follow us on twitter @planner_tweets • WRAP

1.2%7%

5.6%The anticipated

average increase in private health

insurance premiums from April 1.

Source: Moneytribe Australia.

“ IF YOU DON’T THINK FINANCIAL ADVICE ON LIFE INSURANCE IS A

PROBLEM AREA ... FOR INDUSTRY, PLEASE THINK AGAIN


Amount by which young women are more likely than men to go without meals after leaving home. Source: University of Melbourne.

94,000 copies of David Bowie’s new album, The Next Day

sold in the week ending March 18, sending it to No 1 in the UK.

Source: The Official Chart Company.

The proportion of global GDP that emerging Asian economies will account for by 2050. Source: IMF World Economic Outlook; Citi Investment

Research and Analysis; Aberdeen Asset Management.

a year; the additional return that can be generated by simply holding assets in the tax structure they’re

best suited to. Source: Private Portfolio Managers.

49%


FOCUS ON FOFA - PART ONE


With barely three months to go until the Future of Financial Advice (FoFA) reforms become law, the peak industry

regulator says it will do everything it can to ensure a smooth implementation of the new laws.

Australian Securities and Investments Commission (ASIC) Commissioner Peter Kell says the regulator’s approach “will not involve pinging people for technical breaches on day one if they are seeking to do the right thing, if they are seeking to get their house in order”.

“That’s one of the reasons why we provided several no-action regulatory positions, as part of our guidance on the fee-disclosure statement,” Kell says.

“It’s not in our interests, and neither do we have the resources, to chase people for relatively insignificant technical breaches.

“Where we will take tough action, however, is where we see new obligations wilfully ignored, and where advisers simply fail to seriously address conflicts within their remuneration models.”

Kell says ASIC will not hesitate to act against individual planners, where it is warranted.

“We know that most reputable players in the industry are frustrated about the ability of some advisers to seemingly move from shop to shop,” he says.

“We do have some new powers under FoFA to help us take advisers, who engage in misconduct, out of the industry. You’ll start to see these used more in cases where, for example, we seek bannings.

“The message we’re sending broadly is [that] where we see misconduct we will take an increasingly tough line; but for those who are doing the right thing and seeking to get the right sorts of systems in place, we’re going to do all we can to facilitate the smooth implementation of FoFA.”

Kell says he believes “many of the issues are fairly clear now”, following comprehensive consultation and guidance issued by ASIC in recent months. But if the issue that planners and licensees should focus on could be summarised in a single word, that word would be “alignment”.

“If I was to sum it up, it would be to make sure your business model aligns the interests of the adviser with the interests of the client,” Kell says.

“A key part of that is around remuneration – making sure your

THE FOFA COUNTDOWN

ASIC Commissioner Peter Kell says ‘alignment’ will be a key focus of the regulator when the FoFA regime comes into effect. Simon Hoyle reports.


FOCUS ON FOFA - PART ONE


remuneration structures going forward remove the conflicts that are no longer allowed; and that they focus on providing incentives for the advisers to act in the best interests of the client.

“In the past, and for that matter in a range of recent regulatory actions we’ve taken, we’ve seen far too much cookie-cutter advice, shoehorning clients into a one-size-fits-all. Now, ASIC appreciates that...licensees have to have systems and consistent compliance arrangements in place. But we’ve seen far too much advice where, irrespective of the circumstances of the client, they’ve ended up with the same outcome, the same product, and the same strategy.

“We believe there’s scope for listening to the client more effectively, finding out what they need and providing advice that fits those needs, irrespective of whether it’s full-scale advice or more targeted advice.”

Kell says that professions ultimately prioritise the interests of the client over all others, and business structures under FoFA should be directed at that objective.

“Structures where people are rewarded for having an effective ongoing relationship with clients, where the services they provide over time actually do add value [and] where they’re encouraged to revisit the client’s circumstances as they move through the different stages of their life, have to be a key part of the way this industry works going forward,” he says.

“Too often in the past we’ve seen ongoing service that’s virtually non-existent, with clients unaware in some cases that they’re paying. That encourages lazy advice, and doesn’t encourage advisers to demonstrate how they’re adding value. This is critical, because this is really what’s going to encourage more people to seek advice.”

Kell says some of the scaled advice solutions under development will be helpful in delivering “more targeted, cost-effective advice at different stages in the client’s life”.

“That’s an interesting area for ASIC as well – we want to make sure we can help firms provide more narrowly scaled advice while still ensuring it’s appropriate for the client,” he says.

“When you’re talking about alignment between the client and adviser, alongside remuneration is also best interests – prioritising the interests of the client. Again, what we’ve seen too often in some of our recent enforcement and regulatory actions, are situations where clients have been switched between products – whether it’s investment products or life risk products – with no apparent benefit at best, and outright negative impact at worst.

“That’s a situation that has to change. And that’s one of the areas where licensees will need to have given careful thought about how their businesses going forward can operate productively, without resorting to inappropriate product switching or churning.”

CODES A ‘POSITIVE STATEMENT’ ABOUT DELIVERING GREAT CLIENT OUTCOMESPeter Kell says licensees and financial planners should view codes of professional practice as a way to enhance the alignment of adviser and client interests, and not as a way simply to avoid legal obligations under FoFA.

“Typically where we have found problems in the past, it’s where there hasn’t been alignment between the adviser and the interests of the client,” Kell says.

“FoFA provides a number of structural changes to help facilitate that alignment. What we hope to see is that the industry takes the opportunity to build on that and run with the idea itself.”

Kell says codes provide an opportunity to set out clearly how planners can effectively engage with

clients and ensure true alignment of interests.He says ASIC will be very particular about the

codes that it approves.“The message we’ve been sending here – and

we’re pleased to see industry groups agree with this – is people should not be thinking about these codes in a purely negative way,” he says.

“If someone is thinking about joining a code purely to avoid the legislative opt-in provision then they’re doing it not only for the wrong reasons, but they are also likely to face a nasty surprise when they realise what codes actually require.”

Kell says the aim of the opt-in requirement is really about improving client engagement and in aligning the interests of adviser and client.

“That’s what these codes will need to focus on – how do you engage with your client upfront, how do you work out what you’re going to provide over time, how do you renew the relationship as the years pass?” he says.

“In other words, it’s really what a good adviser does as a matter of course –demonstrating how they provide a great service over time. That’s what codes will deliver, and they are a great opportunity for the industry to present a really positive picture of what they offer the consumer over time.

“Forget about avoiding this or that; codes will work well when they are positive statements about how an adviser is going to deliver a great outcome over time for their client.”


COVER STORY


In the middle of March, the chief executive of Industry Superannuation Network (ISN), David Whiteley, wrote an opinion piece in the Herald Sun explaining why the Future of Financial

Advice (FoFA) reforms are good news for all consumers.

In the article, “Financial advice is not only for the rich”, Whiteley gave the Financial Planning Association of Australia (FPA) a big pat on the back for its work in eliminating conflicts of interest. One of the key organisations to re-tweet Whiteley’s column was…the FPA.

It never used to be like this. For years, industry superannuation funds and the financial planning industry presented themselves as mortal enemies, each implacably opposed to the philosophies and actions of the other.

But at some point in the recent past, all that changed. And at the inaugural Financial Advice in Super Symposium, in Melbourne in February this year, it became clear perhaps for the first time just how the lines of conflict between the two sides had not only become blurred but arguably had been erased.

The symposium was the brainchild of Bill Danaher, chief executive of Industry Fund Services (IFS), the entity that provides financial products and advice services to members of industry super funds. Danaher has been with IFS for about six months; previously, he worked at QInvest, the entity set up to deliver advice to members of the Queensland-based super fund QSuper.

(IFS and its sister entity Industry Super

Network are both subsidiaries of Industry Super Holdings (ISH), which also owns Industry Funds Management (IFM).)

Danaher says the February symposium was in part driven by the FoFA reforms, “which we’re 100 per cent supportive of”, and partly because there wasn’t already a forum in which industry funds could actively discuss “what we’re doing, in terms of developing our own advice models”.

“But there was probably another even stronger element, and it was along the lines of the fact that there is a significant financial planning membership, if we can put it that way, within the profit- for-members sector of the industry,” Danaher says.

“There really never has been a dedicated forum to discuss [issues] with like-minded people with like-minded values and objectives.

“It was driven by some issues we have, which are current issues; but it was also driven by the fact that there is a group that has very similar values and objectives, and so, as a consequence, isn’t it a good idea that we pull everyone together and let us discuss issues that are topical amongst that group, rather than a broader industry representation across all sectors?”

Some issues discussed at the symposium were clearly industry-fund specific; others were generic to the financial planning industry. All of them provided a clear signal that in many respects the thinking and strategic insights of the leading industry funds are the equal of any financial planning organisation in the country.

INDUSTRY FUNDSBREAK COVER


COVER STORY


Long perceived as being anti-advice, industry super funds’ own financial planning operations are coming of age – and flexing their muscle. Simon Hoyle reports.

INDUSTRY FUNDSBREAK COVER

COVER STORY


PROFESSIONALISM IS EMPLOYER-AGNOSTICThe chief executive officer of the FPA, Mark Rantall, says that when it comes to highly qualified financial planning professionals – preferably those with the Certified Financial Planner (CFP) qualification – the FPA doesn’t care where they work.

“We start with the premise that consumers need more advice, and they will get that advice from a number of different sources, including superannuation funds, banks and financial planners more broadly,” Rantall says.

Rantall, who spoke at the Financial Advice in Super Symposium, says the FPA accepts that many consumers need only basic, general information about their financial affairs, and it supports the concept of scaled advice, but it also believes that at some point in their lives many of those same people will need more comprehensive, holistic advice.

“If that advice comes from a highly qualified Certified Financial Planner, all the better, because that at least is a quality overlay,” he says.

“There are CFPs in all areas, including in super funds, banks and the self-employed channels.

“What is important is ensuring that the people giving advice are properly qualified to give that advice.”

Rantall says the industry fund movement has employed financial planners “for a long period of time”, even though it was true to say that it harboured considerable disquiet about the remuneration structures prevalent in the industry.

“With many of those issues now being removed, I’m not sure that their strategies have changed so much, in terms of employing financial planners or outsourcing to [external organisations]; but I think there’s more confidence in outsourcing to external groups,” Rantall says.

“The important thing is, in whatever quarter financial planners are being recruited, that standards are high and these groups should be seeking out CFPs.

“Many of the industry super funds have the CFP as a standard.”Rantall says financial planners outside industry funds should not view the rise

of industry fund-based planning as a threat. He says that with only one in five Australians currently using the services of financial planners, “there is just so much growth potential in the market, and so many people whose needs are not being met by a qualified financial planner”.

“It would be great to see that number move up to something like three in five,” he says.

GRADUATED ADVICEThe planning structures employed by, for example, AustralianSuper are at least as elegant and intelligent a response to consumer needs and the demands of FoFA as any other institution’s. It graduates its advice from “one-to-many” – the mass provision of largely factual and general information – at one end of the scale to “one-to-one” - fully-holistic, comprehensive advice - at the other. (See breakout.)

“It is challenging, in fairness to all participants, isn’t it?” Danaher says.

“But that’s the main game. ‘Scalable’ doesn’t describe it right, but a multi-channel integrated model is the endgame that everyone I am sure is pursuing.

“A lot of people look at it from a ‘graduating’ process. And it does work a lot that way. A lot of people will put their toe in the water in relation to a single issue, or even, what we’ll see more of, self-help, online facilities.

How many years has your fund offered financial planning services to members?Major funds such as AustralianSuper, Cbus, HOSTPLUS, HESTA, and Health Super have been delivering financial advice to members over the past 10 to 15 years. Funds such as First State Super and Australian Catholic Super and Retirement Fund have provided advice for the last five to 10 years.

How many financial planners does your fund employ?Total financial planners: 213 (excluding AustralianSuper).

There are a variety of arrangements in place for providing advice services to members in terms of licensing and outsourcing of services. Most funds outsource some advice. This figure includes all advisers who are engaged to provide advice to fund members, including in-house and outsourced advisers, and face-to-face and phone-based advisers. In addition, AustralianSuper members have access to 200 accredited external planners.

Does your fund intend to increase this number?Most funds intend to increase planner numbers gradually over the next few years in accordance with demand. Major funds are intending to double or even triple planner numbers over the next five years.

Do you encourage fund-employed financial planners to belong to an industry association?Within industry super funds, most funds (who employ their own planners) and advice services used by funds encourage membership of the Financial Planning Association (FPA).

Do you encourage fund-employed financial planners to achieve a professional designation? Industry super funds seek to set high professional standards for their planning staff.Across the board,

Most planners have a minimum qualification of at least diploma level. Some phone-based advisers (who provide general advice) have an associate diploma.

(continued over page)

50-75% of planners hold a Certified Financial Planner (CFP) qualification and many are degree qualified.

At Industr yFund Financial Planning (IFFP)

76%of planners are degree qualified.

Survey says...


WHICH KIND WILL YOU BE?The future of financial planning is clear – there will be professional practitioners and the rest. The professionals will be distinguished by adherence to FPA’s Code of Professional Practice and by putting the client’s interests first. They’ll belong to a recognised professional body – the Financial Planning Association.

From 1 July 2013, you’ll need an approved degree to become a member. If you don’t have one, this is your last chance to join the ranks of professionals.

Don’t miss the cut-off date – to join the FPA, call 1300 337 301 or visit fpabestpractice.com.au

there will beAfter 1 july 2013

two kinds offinancial planners.

FP0

64

_PP_

FP_a

COVER STORY


“I think that’s just such a positive for the Australian community, frankly, and also for the industry, because it allows people to get into what is seen as for some people, ‘What is financial planning? I don’t really need it; I don’t have enough money’. All those sorts of things that you would have heard many times.

“But it allows them to get in at a lower level, and then graduate up through the process.

“But what I’ve found is that people will go through that graduated process, online, simple advice, intra-fund advice and then to some kind of limited comprehensive, then to comprehensive, and then to holistic, if they have the need.

“But the point I’m trying to get to is I think it’s much more dynamic than that. People will come from the more piecemeal levels of advice, and move to comprehensive, but then they’ll actually go back to the more piecemeal when they want to alter their portfolio in a manner. So they move between them.

“I think that, in terms of being able to say to a consumer of advice, you have this choice, and depending upon your circumstances and what stage of life you’re in, we can deliver it as comprehensive or as simple as you want, and we’ll understand the data behind that. I presume that’s what everyone is endeavouring to pursue.”

BUSINESS AS USUALDanaher says that industry funds will continue to develop financial planning services tailored to their respective fund memberships, but with renewed confidence under the FoFA regime.

And even though the industry funds’ conflicted remuneration “advantage” has been removed, he says there are still differences with commercial counterparts that industry funds can continue to exploit successfully.

“We believe that what we’ve been doing for some time, in an environment that has been commission-free, does align with what the intention of FoFA is, if I look at one aspect of it, for example,” he says.

“Our focus has been and always will be on member best interests, and I suppose if you’re looking at fundamental differences in philosophy – one is member value, [the other is] shareholder value – then there are significant differences between the two.

“That will be evident even in the culture of an organisation, down to even the terms and conditions that people are employed under.

“[When it comes to] people within this sector, in the time I’ve actually worked here, it is evident that there is only one focus, and the trustees of the superannuation funds expect that quality advice will always be given, and definitely always in the members’ best interests, as the ultimate goal.

“PEOPLE WILL COME FROM THE MORE

PIECEMEAL LEVELS OF ADVICE, AND MOVE TO COMPREHENSIVE, BUT THEN THEY’LL ACTUALLY GO BACK

In 2012, approximately how many members received advice from fund-employed financial planners?General – more than 93,000 general advice conversations delivered. (General advice figures only include general advice provided by an adviser. The funds deliver much more general advice through other channels (that is, web calculators and educational materials, workplace field staff) but this is not reflected in these figures.)Personal – more than 32,000 statements of advice delivered. This includes both fund-employed and outsourced financial advice.

Does your fund have referral arrangements with external financial planning firms (including IFFP) – and if so, who?Some funds have their own internal financial planning teams while others outsource either some or all of their financial planning functions to external firms such as IFFP or Superpartners. AustralianSuper also has arrangements with accredited financial planners over and above these arrangements.

How are financial planning fees calculated?Members of industry super funds can receive general and/or limited advice (intra-fund advice which is generally provided over the phone) as part of their membership. Comprehensive or more complex financial advice (delivered face-to-face) is usually provided on a fee-for-service basis and, after the introduction of Stronger Super, will definitely need to be charged to the member. This may be charged as an hourly fee or a service fee, according to the scope of advice required. None of the funds charge commissions or asset-based fees.

Is your fund public-offer? Yes, all of the funds are public-offer.

Note: Industry Fund Financial Planning and Superpartners are not superannuation funds but provide an outsourced external financial advice service. Source: ISN, superannuation funds responding to Professional Planner questionnaire.

LIST OF RESPONDENTSAustralian Catholic Superannuation and Retirement FundAustralianSuperCbus

First State Super (Health Super Financial Services)HESTAHOSTPLUSIndustry Fund Financial Planning

LUCRF SuperSuperpartnersSunsuper

TWU Super

Total number of members:

6.8 millionTotal funds under management:

$177 billion


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COVER STORY


“Is the emphasis the same in an organisation that’s about maximising shareholder value? [That question] highlights some of the differences between the two sectors.

“I would not want to be misunderstood - I have worked in that sector and there are some wonderful people who are definitely endeavouring to be professional and provide good service - but there is a fundamental difference in the fabric of the culture of the two sectors and the fabric of the organisations that make up both those sectors.”

Danaher likens the differentiation of industry fund planners from their broader-industry counterparts to the so-called “cola wars” between Coca-Cola and Pepsi.

“They’re both colas…and they both look the same and they taste the same and they cost the same; but they do appeal to different segments and they do that quite well,” Danaher says.

“It’s about us being able to find points of differentiation going forward. That will be about the quality of advice that is provided - and how effective that is will play a big part in being able to develop new points of differentiation to build competitive advantage.”

WHY OFFER ADVICE?Danaher says there is a range of reasons why industry funds want to provide financial planning services to members. One reason is it’s simply an extension of the “members’ interests first” ethos; the second is for strategic reasons linked to retaining members who might otherwise be lost to the funds.

“First of all, in terms of why a superannuation fund looks to financial advice, it is genuinely to make sure the member receives good quality advice, and therefore it’s in the member’s best interests,” he says.

“I think that’s first and foremost why a superannuation fund will go about developing a financial planning operation.

“In relation to retention, which is really the point you’ve raised, it would be certainly part of the strategy, but it would still be secondary, I suspect, to simply looking after members’ best interests.

“It is evident from statistics that are available, that there are dollars that go out particularly from the accumulation [phase] to drawdown [phase]; clearly that’s where the asset values are significant and it’s probably an area [where] we are working closely with the funds to make sure we have in place appropriate solutions to just make sure members are informed.

“That’s really what it’s about. If they make informed decisions and they still make a decision to possibly move their assets out of the superannuation fund then OK, that’s it, that’s their decision and we respect that. But is there enough in place in terms of allowing people to make that informed decision? That’s something we continue to work closely with the funds on.”

Danaher says funds are tackling the provision of advice in a number of different ways.

“Traditionally it has been the case that with the funds that IFS has dealt with – through the vehicle which is called Industry Fund Financial Planning [IFFP] – [planners] have been employed by IFS and then ‘embedded’ within the funds,” Danaher says.

A SHARED OBJECTIVE OF PROFESSIONALISMIn many respects, the objectives of industry funds are closely aligned with a profession striving for greater respect and status – namely, ensuring that the people who hold themselves out to be financial planners are properly and objectively qualified to do so.

David Whiteley, chief executive of Industry Super Network (ISN), says the industry fund movement has waged “a 25-year-long campaign seeking to ban sales commissions and other forms of conflicted remuneration”.

“We have had for some time, with Mark and with his predecessors, contact with the Financial Planning Association and what occurred over time were, I think, two things.

“In the first instance, [there was] a bit of a realisation that the kind of advice we believe many, many Australians need – and many of our members need – is simple, straightforward advice, often on a single issue.

“Quite often when we spoke to financial planners, they tended to be talking about the more holistic services – in fact typically, exclusively holistic services.

“So we were talking about two different groups of people and the kinds of advice they needed.

“And the second point was we realised that the FPA in particular had an agenda about achieving professionalism that was not at all inconsistent with what industry funds were seeking to achieve. So you had shared objectives; you just had different opinions on what was necessary to get there.

“And that most particularly came down to opt in. If you go back a year now, it was around the opt-in issue, with a view from industry super funds and ISN that it was a necessary part of the legislation to provide consumer protection and change behaviour; with the FPA taking the view that a financial planning professional would not charge a client for services that weren’t being received.

“Or to put it another way, that the cultural change would be achieved within the profession without legislation being required.”

Whiteley says that industry funds’ financial planning capabilities have not been created in a vacuum.

“Financial planners who work for industry super funds have typically worked at another financial planning business or as a financial planner elsewhere,” he says.

“These are people who want to be a member of their professional association; they have selected the FPA for that. And with regard to the CFP, these are also people who want to achieve the highest accreditation and qualification, and within that particular industry it’s the CFP.

“And I think also that my experience talking to a lot of the financial planners who work for Industry Fund Financial Planning [IFFP], and also [directly] for industry super funds, is that many of them were attracted to the proposition that industry super funds offered – which was that financial advice would be on a strictly fee-for-service basis.

“So I think there was a fair degree of self-selection of planners attracted by the ethos of industry super funds, wanting to offer people financial planning advice within that environment. And of course who are highly qualified, highly professional individuals who wanted the CFP or who had already attained the CFP.”

“IS THE EMPHASIS THE SAME IN AN ORGANISATION THAT’S ABOUT

MAXIMISING SHAREHOLDER VALUE? [THAT QUESTION] HIGHLIGHTS SOME OF THE DIFFERENCES BETWEEN THE TWO SECTORS


COVER STORY


“Then they will work within the funds - I mean literally, in their premises - and provide financial planning services to fund members, but they are employed by IFS.

“In more recent times we’re seeing a shift where some of the funds are looking

to take greater ownership in the financial planning services, and as a consequence will look to actually employ the financial planner themselves, but they will continue to operate under our licence, so they’re authorised reps. That’s the emerging model,

FLEXIBILITY THE KEY TO A FULL ADVICE OFFERINGLouise du-Pre-Alba, head of policy and public affairs for AustralianSuper, says the challenge for a big super fund is to find a way of delivering advice that is both flexible and compliant, so that irrespective of how a member first comes into contact with a fund, they can get what they need – or be referred to somewhere they can get it.

“Our focus in developing our advice offering is to make sure we develop an advice offering that’s built for our members; it’s not built to fit in with a particular business model that already exists somewhere in the industry – it’s actually built for our members, and that’s our first priority,” du Pre-Alba told the Financial Advice in Super Symposium in Melbourne in February.

“Firstly, they’re channel-agnostic – some would say adviser-agnostic. I would put it this way. It goes back to the Financial Services Reform Act [FSR], before FoFA.

“In a nutshell, the financial services reforms were about, it’s not…who you are, it’s…what you do.

“So that means if you provide personal financial advice, you need a licence, whether or not you’re a super fund [or] a financial planner, an administrator or a call centre. It’s the same level playing field for all.

“We provide phone-based advice, and we think that will provide members with

general factual information, general advice and sometimes personal advice.“Employers would provide factual information and general advice; on our

website we provide online tools – we have personal advice capacity, and we also provide general advice and factual information online.

“We use Industry Fund Financial Planning as a partner that provides personal advice, general advice and sometimes factual information for AustralianSuper members.

“We also have a group of accredited advisers through a panel of dealer groups that we have been using, and through that association we now have around 200 accredited individual advisers who work with AustralianSuper.

“There’s a number of ways we provide advice, through a number of channels, and you can see on the upper part [of the advice sepctrum] we’re talking about low-complexity factual information; and at the lower part [we’re talking about] high-complexity [advice] - and that’s where personal advice is.”

Du Pre-Alba says flexibility is critical, because if a member enters the advice matrix at a point designed to deal with a certain level of advice, but wants to talk about something at a higher level, “they don’t expect that conversation to stop where you think it should stop because of structural reasons”.

“IF IT MEANS WE CAUSE A BIT OF PAIN FROM A COMPETITIVE PERSPECTIVE, THAT’S NOT SO

MUCH THE PURSUIT BUT IN SOME RESPECTS IS AN ENDORSEMENT

Bill Danaher

and we will work with funds that have a desire to pursue that to support them as we can.

“That’s not a new model. It’s been around for many years, of course, but in this industry it is [new], as the funds feel it forms part of their strategic objectives.”

Danaher says an emerging model is for funds to outsource advice to external, existing financial planning licensees. That’s not a model that IFS works directly with funds on.

Danaher says industry funds have always been driven by what they perceive is best for members, and not by an explicit desire to compete with the broader financial planning industry.

“If it means that over a period of time consumers of advice decide they are better served and feel more comfortable with dealing with our financial planners, then clearly I would be delighted with that – that would demonstrate to me that we’re setting a high standard, and our objective is first and foremost to make sure we do the right thing for members, in terms of what is in their best interest.

“As a consequence of that, if it means we cause a bit of pain from a competitive perspective, that’s not so much the pursuit but in some respects is an endorsement of the values and the standards that we place in our business to provide good-quality advice.”

Prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. Neither Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. The Morningstar Awards 2013 logo is a brand mark of Morningstar Australasia and has been reproduced with permission. This advertisement contains general information only and is not intended to provide financial advice or take into account your objectives, financial situation or needs. You should consider the relevant PDS (available at www.perpetual.com.au) issued by PIML before deciding whether to acquire or hold units in the fund. Past performance is not indicative of future performance. PTR0086-1/03/13

PERPETUALWINS IN 2013

Perpetual Investments

At Perpetual Investments, we make active investment decisionsbased on a unique process that has been tried and proven over all market cycles since 1966. Our team of specialist investment managers are completely focused on producing the best outcome for clients. While it goes without saying that we don’t set out to win awards, we couldn’t be prouder of our recognition at the Morningstar Awards 2013.

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IN FOCUS – AUSTRALIAN EQUITIES

Making money in equities is simple. Buy low, sell high, and that’s pretty much all there is to it. But

this slightly facetious view overlooks two fundamental questions: What is low? And what is high?

Right now, more investors are wondering what is “high”, after a three-month period in which the performance of the Australian sharemarket has been pretty solid.Knowing when to buy a share is only half of the equation. The other half is knowing when – and having the discipline – to sell.

A share price on its own is an indication of nothing more than the price the share last traded for. To assess whether a price is “low” or “high” you need what Roger Montgomery, founder of Montgomery Investment Management, describes as an “anchor”.

That anchor, for many investors, is the intrinsic value of the company, and its shares. Only if an investor knows what a share is worth - its value – can they assess

whether it’s underpriced or overpriced.“The most important thing that I can

probably say is, don’t take your cues from price alone,” Montgomery says.

“Don’t let price determine your behaviour. It’s got to be price in relation to an anchor, and that anchor has to be value.”

Nathan Parkin, portfolio manager for Perpetual Investments’ ethical and socially responsible equity strategies, says a focus on the factors that determine the value of a company can help investors avoid the common mistakes of buying at the top of a market and selling when the price is depressed.

“What’s really important when markets are diving or rallying is to have a process to stick to, first and foremost,” Parkin says.

“We have four things that we stick to, and they include: we see management; we look at balance sheets and we have specific criteria around that; we look at the quality of the business; and we also look at recurring earnings.

AND HOW TO TELL THE DIFFERENCE

The past three months have

produced solid gains for investors

in the Australian sharemarket.

But now what? Simon Hoyle reports.

A TIME TO BUY

AND A TIME TO SELL


EMERGING MANAGERCATEGORY WINNER

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“Whatever the market is doing, that [process] doesn’t change. And that helps at the bottom of the market. When valuations are falling out of bed and you’ve got to find some conviction to invest, a good balance sheet really helps at that point. And when people get more lax or less worried about balance sheets and more worried about earnings momentum, we still look at that sort of thing.

“We don’t start including stocks at a market peak where quality is potentially compromised.”

Parkin says a successful investor will have strong buy and sell disciplines, so when the time comes to pull the trigger – whether to buy something or to sell something – there’s no emotion clouding the judgment.

“A couple of the biggest positions in the fund I run here, at the start of 2012 – so the calendar year, January - were completely exited by the time we got to December,” he says.

“For instance, Breville [was] my biggest active position at the start of last year. I had about 6 per cent overweight in the stock when it was at $3 and it was trading on sub-10 times [price/earnings ratio], had net cash on the balance sheet and was growing at 15 to 20 per cent. By the end of the year the stock had gone to 16 times forward earnings – that’s laughable now – but it got to $7 and we thought there was some risk around some parts of the business. That’s come to pass…where they have lost a contract for part of their business, so the market has paid 16 times what was the wrong earnings.

“The stock doubled, and then some, over the course of the year but we sold our whole position out over that time.”

ALL ABOARD?Research released by CoreData during March revealed that investor sentiment towards Australian equities had hit a two-year high, driven by the performance of the sharemarket since November last year.

Retail investors being what they are, it’s likely that this improved sentiment will translate into higher fund inflows – and if past history is any guide, that will happen close to what turns out to be a market peak.

In the second quarter of 2012, the investor sentiment index stood at -25.9. By March 2013 it had improved to 11.0 (see graph).

The research found that even though sentiment had improved, the likelihood of investors moving money into the market any time soon had not changed significantly.

But it noted that investors “may need yet another quarter or so of positive momentum in equity markets before they make such a move”.

“We do believe, however, that the reasons for maintaining large allocations to cash have changed – where previously this was due to investors simply being risk-averse, they are now parked, waiting for the right opportunity to stick their heads out,” it said.

The accompanying graph, which overlays the CoreData sentiment index and the S&P/ASX 200 Index, shows how sentiment and the value of the equity market index tend to move together. If the market continues to rise in the second quarter of 2013 and beyond then investor sentiment can be expected to improve considerably, which may be the trigger to invest.

The CoreData index is an aggregate of investor sentiment, market expectations, household financial security, investment satisfaction and intention.

Almost half (47.7 per cent) of the respondents to the CoreData survey said they believe equities will outperform the property markets in the coming quarter, and more than half (53.1 per cent) said they believe that the market for direct Australian equities will be better for investors in the June quarter.

MULTI-SECTORCATEGORY WINNER

Perpetual InvestmentsPe

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Montgomery says his firm is currently undertaking some research on how to refine its sell decisions.

“The big issue that we’re challenged by at the moment, and something that we’re investigating, is whether or not there’s some explanatory power in the path the stock price took to reach its overvalued level,” he says.

“For example, if it was slow and steady over the course of a couple of years, is that different to a very sharp rise over a very short period of time? That is something that we’re exploring and studying at the moment.

“We’re looking for answers to the question of how to behave once a company reaches a point that’s very close to our sell triggers. We have several rules for deciding when to sell.

“When a share price rises above our future intrinsic value – the higher of the intrinsic values for a company over the next two years – it produces what we call a negative internal rate of return [IRR]. At that point, we’re thinking about selling the entire position.

“But where it becomes interesting is where we think the company is a very high-quality business, we think it’s got very bright prospects, but it’s now giving us a negative internal rate of return over the next two years.

“Then it’s very subjective as to whether we sell or not. On one hand we really like the business, we really believe it’s got great long-term prospects, but it’s now at a price that’s reflecting some exuberance that may indeed be irrational.

“We’re asking ourselves this question at the moment: Does it matter the path it takes to get there, and can we define it? And once we’ve defined it, can we see some explanatory power in it that explains what happens to the share price next?

“My gut feeling is that if it’s a really short-term spike, an almost vertical trajectory to a point where it’s well above its intrinsic value - even if it’s on the basis of some new information - then that’s less likely to be sustained in the short run than a slow and steady appreciation [to a point of overvaluation].

“But we could be completely wrong on that. That’s the null hypothesis.”

Montgomery will sell stocks in his portfolio when their price exceeds their intrinsic value, and park the proceeds in cash for as long as necessary, before identifying new investment targets.

But for a fund manager whose mandate limits how much cash it can hold, the options are more limited.

Parkin says his fund can invest no more than 10 per cent of its assets in cash, but that’s just how he likes it.

“I probably wouldn’t like any more, to be honest,” he says.

“Sometimes it forces you to really dig deep and try and find something that is good value. That’s not always a bad thing. We don’t try to time the market. I think

FIVEGOOD REASONS TO SELL1. Share price goes well above current intrinsic value.2. You were wrong – if you have made a mistake, get out.3. The return on equity of a company starts to decline.4. The intrinsic value of a company stops rising or starts to decline.5. The quality of the company starts to decline.

ONE GOOD REASON NOT TO SELL1. Next year’s valuation is significantly higher than the current price

Source: Montgomery Investment Management

“I’VE GOT ALL MY SUPER IN THIS FUND. IF I CAN’T

BACK MYSELF I CAN’T EXPECT ANYONE ELSE TO DO IT

DOMESTIC EQUITIESCATEGORY FINALIST


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that’s very, very difficult. But looking backwards, it’s always apparent that when you are finding a lot of opportunities, the cash [in the fund] is very, very low…and within a market there are places where you can find some sort of solidarity in terms of value in an otherwise overheated market.

“We’re constantly trying to identify the trends of what’s expensive, because everyone’s chasing yield, or what have you. And we try to stay away from those areas. But even in a market that has run hard, you can still find some companies that are still growing, that are undervalued. Even in the last couple of months we’ve initiated a couple of new positions in the fund where the analysts have identified something interesting and the company has been overlooked because it’s illiquid or it’s too small – any number of reasons – but the management are saying, look, things are pretty good and we’re still growing.

“It gets harder. You’ve got to look harder, but sometimes that’s not necessarily a bad thing.”

Montgomery says that at a basic level, investors simply do not want to lose money, and “when you look at the volatility of returns of fully invested funds, there is some sound reasoning for finding that research companies and financial planners are now looking for funds that have the flexibility to move to cash when they can’t find anything of value”.

“If you can’t find an attractive investment, the only safe place to be invested is cash. Fund managers can push as hard as they like to find something attractive, but you can’t turn a dog into a cat. If there are only dogs and no cats, it doesn’t matter how hard you research, or how fast you get into the office, you can’t change that fact.”

Parkin says his cash holdings at any moment are not determined by a market view, but by the availability of opportunities at good valuations.

“We don’t hold cash necessarily because

the market is overvalued,” he says.“I won’t try to time the market. In fact in

the last few months there’s been a build-up of cash in the fund, but it’s because we’re selling what we consider to be overvalued, but we’re not finding a lot to reinvest in. So [it is] not as a design, but as a consequence of the fact that we’re not finding the opportunities that we were last year. At some points last year we were very low in cash – less than 1 per cent. But that was a reflection of the fact that we thought everything was quite cheap.”

Parkin says about half his time is spent monitoring stocks in the portfolio, and the other half is spent looking for new opportunities. He typically holds about 50 stocks. Of those, the bottom 20 tend to be stocks he is either building a position in or in the process of exiting, and “the top 30 are meaningful”.

“I can be plus or minus 8 per cent [compared to index weighting]. It’s pretty flexible,” he says.

“There are some ethical restrictions that

overlay the fund, and a consequence of that is there’s a reasonable amount of the market that I can’t buy – typical things that you would expect, like gaming companies, alcohol, coal seam gas, uranium and weapons. There are two filters on the fund, and one of them knocks out a lot of mining businesses. It’s rare that I’ll ever hold a mining stock.”

Parkin says most of Perpetual’s analytical grunt is focused on figuring out what a company’s value is today, what it will be next year, and the year after that.

“That’s where the real prize is in terms of making real money for our clients,” he says.

“Leaving out the current concerns or euphoria, that’s what we tend to concentrate on.

“That’s the real decision. The daily fluctuations in share price might help you enter at a better price or exit at a slightly better price, but the real investment decision is looking a couple of years out, and taking the time to meet with management, which is really key to our process.

“One of the things we’ve done well over the past year is [that] most businesses in this environment aren’t growing revenue, and we’ve been able to find a few that have had the conviction to grow their business, in terms of new capital, new expansion or indeed taking costs out of the business to grow earnings.

“They are the real opportunities that we’ve seen, and we just use the daily fluctuations in share price to improve our entry price or just finesse the exit.”

Ultimately, Parkin has just as strong an interest in making sure his fund performs consistently as his investors do – and not only because it’s his job.

“I’ve got all my super in this fund,” Parkin says.

“I figured that I was putting 100 per cent of my effort into this every day, and if I can’t back myself I can’t expect anyone else to do it.”

“FUND MANAGERS CAN PUSH AS HARD AS THEY

LIKE TO FIND SOMETHING ATTRACTIVE, BUT YOU CAN’T TURN A DOG INTO A CAT

FUND MANAGEROF THE YEAR


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Prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. Neither Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. The Morningstar Awards 2013 logo is a brand mark of Morningstar Australasia and has been reproduced with permission. This advertisement contains general information only and is not intended to provide financial advice or take into account your objectives, financial situation or needs. You should consider the relevant PDS (available at www.perpetual.com.au) issued by PIML before deciding whether to acquire or hold units in the fund. Past performance is not indicative of future performance. PTR0086-6/03/13

TALK TO THE FUND MANAGEROF THE YEAR


Visit perpetual.com.au/awards to fi nd out more,or contact your Perpetual BDM on 1800 062 725.

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OTHER PEOPLE’S MONEY


Fund capacity is an important consideration when selecting a managed equities fund. The

reason for this is simple: high levels of funds under management (FUM) can limit the ability of the manager to enter or exit a stock at the desired market price, which in turn impacts performance.

Excessive FUM is a particularly important issue in the small-cap sector, given the relative illiquidity of these stocks and the fact that managers may take substantial stakes in a company’s issued capital.

As a general “rule of thumb” Zenith believes that approximately 1 per cent of the market capitalisation of the S&P/ASX Small Ordinaries Index is an appropriate capacity target for an Australian small-cap strategy, and that above this level it becomes increasingly difficult to generate alpha.

Assessing FUM capacity as a percentage of market capitalisation is a relatively crude measure, given that capacity constraints can vary according to market-cap bias, investment style, investment approach, or the expected level of portfolio turnover.

Zenith assesses capacity limits for each manager and strategy on an individual basis and has a high regard for managers who assess their own capacity and aim to close a fund at the appropriate FUM level. By doing this, Zenith believes the manager is acting in the best interests of its investors.

Chart 1 shows the average daily value traded per stock, broken out by market-cap indexes. The graph highlights the significant decrease in liquidity as you move from the large-cap end of the market through the mid-, small- and micro-cap segments of the market. For the six months ending January 2013, the large-cap segment made up more than 80 per cent of the market’s liquidity. The small-cap segment, as measured by the ASX Small Ordinaries Index, accounted for less than 3 per cent of total market liquidity.

To a large extent, a fund’s market-cap bias dictates liquidity. For example, a fund that invests only in small- or micro-cap stocks will

most likely encounter significantly greater liquidity problems than a fund with a bias to large-cap stocks.

Highly concentrated funds take larger individual positions in each stock, and may hold significant proportions of a company’s issued capital, which will also impact potential capacity. Funds with a longer investment timeframe will generally exhibit a lower level of portfolio turnover, and therefore liquidity will be less of an issue.

THRESHOLDIn Zenith’s experience, once the capacity threshold is reached or breached, a manager finds it increasingly difficult to generate optimal returns for investors; and in order to do so, a manager will typically modify the investment process and risk management constraints. By-products of excess capacity include:• A fund may begin to tilt the portfolio towards the large- and/or mid-cap segments in order to access stocks with greater liquidity.• The average market cap of the stocks held in the portfolio may increase because of difficulties in being able to establish a meaningful position in the smaller-cap stocks.• Diluting holdings with stocks that have lower expected returns. That is, holding the top 40 stocks, ranked by excess return potential, rather than the top 30.

A more serious case would be a reduction in the level of portfolio turnover due to the fund’s inability to exit illiquid holdings.

Dug Higgins focuses on one of the key ongoing issues for the sector, namely, capacity constraints.

SMALL-CAP CAPACITY CONSTRAINTS:

HOW MUCH MONEY IS TOO MUCH?


OTHER PEOPLE’S MONEY


Zenith believes thatonce capacity limits have been reached, it is imperative that the manager restricts further FUM growth by limiting the level of new client investments. Chart 2 illustrates current capacity versus targeted capacity for each small-cap fund included in our 2012 sector review. (Note: only FUM from each manager’s underlying strategy have been included. Firm-wide allocation to small caps for other strategies was not included. For formatting reasons, only managers are listed, rather than the full fund name.)

Chart 2 shows that the majority of funds are below Zenith’s suggested 1 per cent capacity limit. The BT Wholesale Smaller Companies Fund is the only fund to exceed our assessed limit, albeit marginally. Given that this fund is currently soft closed to investors, Zenith believes the manager is acutely aware of the problem posed by high FUM.

The chart also shows that a number of funds are approaching their targeted capacity limits. The Pengana Emerging Companies Fund and the Invesco Wholesale Australian Smaller Companies Fund hold FUM levels that are nearest to their targeted limits. Pleasingly, the Invesco Wholesale Australian Smaller Companies Fund is closed to institutional mandates and the Pengana Emerging Companies Fund has a proven track record of closing the fund to new investments once limits have been reached.

Overall, Zenith is comforted by the prudence that our surveyed managers have shown with respect to FUM constraints, which provides the foundation for greater alpha-generation potential for existing investors in each of our rated funds.

Zenith recently released its 2012 Australian Small Companies Sector Review.

Dug Higgins is a senior investment analyst with Zenith Investment Partners - www.zenithpartners.com.au

“EXCESSIVE FUM IS A PARTICULARLY IMPORTANT ISSUE IN THE SMALL-CAP

SECTOR, GIVEN THE RELATIVE ILLIQUIDITY OF THESE STOCKS

CHART 1: AVERAGE DAILY VALUE TRADED PER STOCK AND PROPORTION OF MARKET (%) SIX MONTHS ENDING JANUARY 2013

CHART 2: SMALL CAP FUNDS: CURRENT CAPACITY VS. TARGETED CAPACITY AS AT NOVEMBER 2012

SECTOR SPOTLIGHT - EXCHANGE-TRADED FUNDS


Jim Ross, global head of exchange-traded funds (ETFs) for State Street Global Advisors (SSgA), has been visiting Australia

regularly since the company launched its first ETF here more than a decade ago.

In that time Ross has seen the market develop from one dominated by institutional investors, to one dominated by retail investors and, more recently, to a point where he believes the use of ETFs by financial planners is poised to take off.

Ross believes the development of the Australian market may follow the path taken in the US.

“From what I know about the Australian financial advice model and marketplace, it’s really in what I would call its early, early, early stages in the adoption of ETFs,” Ross says.

“I’ve been coming to Australia for 12 years now – I helped launch our first suite of ETFs here – but I’ve seen this marketplace shift from what is purely an institutional model…to a little bit more retail, and now I see the potential for the financial advice model here to mirror the growth that we saw in the US, and frankly it’s very exciting to me.”

Ross says he has seen advisers go from “understanding ETFs and not using them, to [ETFs] becoming the bread and butter of their business”.

“The majority of financial advisers in the US use ETFs alongside other products and have built models and portfolios that they are very comfortable using ETFs in,” Ross says.

“The variety of these models in the US is significant.”Research published in March by Plan For Life shows that the local

ETF and exchange-traded commodity (ETC) market suffered a blip in 2011, and asset values slipped. However, the sector experienced a resumption of growth in 2012, and ETF providers report that the growth has continued strongly in the first quarter of 2013.

The Plan For Life data shows that the market remains dominated by a handful of players, and that assets remain concentrated in equities (see accompanying graphs).

“Over the past 12 months – this is until the end of February – we had almost $1 billion of net cash flows coming into the ETF category, which is one of the highest 12 months we’ve had in a very long time,” says Amanda Skelly, SSgA’s Australian head of SPDR ETFs.

“And probably more interesting, 50 per cent of those flows happened in the last four months. In November, December, January and February we really have seen the dial start to turn.

“The cash rate coming down has been an important factor. Market uncertainty was always one of the reasons why the previous period was quite slow. People were not making big

20%

10%

43%

2%

11%

6%

25%

4%

2%

13%

3% 61%AUSTRALIAN

EQUITY

INTERNATIONAL EQUITY

VANGUARD INVESTMENTS

STATE STREET

GLOBAL ADVISORS

OTHER*

ETF SECURITIES

BETASHARES

iSHARES

RUSSELL INVESTMENTS

COMMODITY

Source: Plan For Life

FIXED INTEREST

AUSTRALIAN EQUITY

ASSETS OF ETFS/ETCS

BY ASSET CLASS

RESUMING AN UPWARDS TREND

* “Other” includes Chimaera Capital, Commonwealth Bank, Growth Equities Corporation, Market Vectors Australia, Perth Mint and UBS Global Asset Management

Source: Plan For Life

SHARE OF THE MARKET

ETFS ON THE CUSP OF REPEATING THE US EXPERIENCE

Exchange-traded fund (ETF) providers say growing interest from planners has the market set for strong growth. Simon Hoyle reports.

Source: Plan For Life Note: Figures rounded

Note: Figures rounded


The issuer of units in SPDR S&P/ASX Australian Bond Fund (ARSN 159 002 623) and the S&P/ASX Australian Government Bond Fund (ARSN 159 002 801) is State Street Global Advisors, Australia Services Limited (“SSgA, ASL”)(ABN 16 108 671 441, Australian Financial Services Licence “AFSL” number 274900). A Product Disclosure Statement (“PDS”) for units in the Funds is available at www.spdrs.com.au. Investors should consider the PDS in deciding whether to acquire, or continue to hold, units in an ETF. An investment in a Fund does not represent a deposit with or a liability of any company in the State Street Corporation group of companies including State Street Bank and Trust Company (ABN 70 062 819 630) (AFSL 239679) and is subject to investment

risk including possible delays in repayment and loss of income and principal invested.No company in the State Street Corporation group of companies, including State Street Global Advisors, Australia, Limited (ABN 42 003 914 225)(AFSL 238276) State Street Bank and Trust Company, SSgA, ASL and State Street Australia Ltd (ABN 21 002 965 200) guarantees the performance of the Fund or the repayment of capital or any particular rate of return, or makes any representation with respect to income or other taxation consequences of any investment in a Fund.ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.Diversification does not ensure a profit or guarantee against loss.“SPDR” is a trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. STANDARD & POOR’S, S&P, SPDR and S&P 500 have been registered in many countries as trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P. Standard & Poor’s S&P Indices are trademarks of Standard & Poor’s Financial Services LLC.“S&P” and “ASX”, as used in the terms S&P/ASX Australian Bond and S&P/ASX Australian Government Bond, are trademarks of the Australian Securities Exchange (“ASX”) and Standard & Poor’s Financial Services LLC (“S&P”) respectively, and has been licensed for use by State Street Global Advisors Australia Limited. SPDR products are not sponsored, endorsed, sold or promoted by S&P or ASX, and neither S&P nor ASX make any representation regarding the advisability of investing in SPDR products.IBGAP-0858

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SECTOR SPOTLIGHT - EXCHANGE-TRADED FUNDS

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investments, for a period of time, but sentiment started to change late last year – it might have been a little too late – and that’s where ETFs would have become a factor.”

Robyn Laidlaw, head of product and marketing at Vanguard, says the resumption of growth in the ETF market was helped by the launch of products over new asset classes.

“Fixed-income ETFs came to the market,” Laidlaw says.

“That really opened up a full range of portfolio construction opportunities for investors and advisers. ETFs became about more than just equities.”

Laidlaw says ETF providers are also seeing the fruits of “years of a lot of education going on, and there is a more short-term nature to the growth, which is around market performance having been very strong over the past 12 months, and that has encouraged investors as well to be thinking a bit more actively about their portfolios”.

Skelly says ETFs continue to be the domain of retail investors, but “we’re seeing

a shift in what ‘retail’ means”.“If I looked at our registry, we have a

decent sized registry here, you’d see a lot of SMSFs [self-managed super funds], a lot of direct investors,” she says.

“Now we see a lot coming through platforms, which implies a role by financial advisers. That’s been a really interesting area to watch over the past 12 months.”

Laidlaw says Vanguard has nine ETFs in its line-up, which is a broad enough range to cover the key asset classes, for portfolio construction purposes. Its philosophy is to offer broad market coverage, at the lowest cost possible. For example, its US-share ETF covers about 4000 stocks, with a fee of 0.06 per cent a year.

“I think we will build the products out over time, and that will be as we see the need and the demand increasing in the market,” Laidlaw says.

“We think, looking at the trading that’s going on, it’s more retail than it is institutional. We can’t really talk to direct investors…but what we hear from advisers is that they are more and more interested.”

“FIXED-INCOME ETFS CAME TO THE MARKET [AND]

OPENED UP A FULL RANGE OF PORTFOLIO CONSTRUCTION OPPORTUNITIES FOR INVESTORS AND ADVISERS

Robyn Laidlaw

SHAREMARKET


The performance of the sharemarket by sector since June 2012 has not been even, as can be seen from the accompanying table

for the market and four selected sectors – chosen because they are the typical yield plays. My exuberance measure is also shown.

My rule of thumb is to expect a correction – or a prolonged sideways movement while the fundamentals catch up – when exuberance exceeds 6 per cent. By that measure, the financials sector looks like an accident waiting to happen and the telco sector is not much better off. Property is very expensive and utilities moderately so.

The 2.3 per cent fall in the ASX 200 on February 21 grabbed my attention – especially as the market exuberance had hit the 6 per cent trigger two days before – while I was contemplating taking something off the table. My thinking is currently very influenced by the common opinion that cash has been coming off the sidelines in search of high-yielding stocks. For the sector price indexes to fall, money would have to leave equities and head for somewhere safer – say, cash, from whence it has just come.

At the top marginal tax rate and inflation at, say, 2.5 per cent, the tax and inflation-adjusted return on term deposits is negative, and rates may well fall further. So a prolonged sideways movement, like the one that occurred in late 2009-2010, might be the more likely course for the overpriced sectors.

My expectation of a bubble deflating slowly is reinforced by looking at the change in expected dividend yields since January 2012, in Chart 1. Yields have obviously been driven down as stock prices rose but they have done so in a particularly interesting way. Yields that ranged from 6.3 per cent for utilities to 8.4 per cent for telcos in January 2012 have been converging to a much tighter range of 6.0 per cent for telcos and 5.5 per cent for the other three sectors. At the top tax rate and inflation at 2.5 per cent, a fully-franked yield of 5.5 per cent translates to a tax and inflation-adjusted yield of just over 1.5 per cent - perhaps a reasonable equity (yield) risk premium over cash, which sits at just less than 0 per cent.

What I find really intriguing is the very wide divergence in the capital gains of these sectors over the past eight months, the large differences in current mispricing, but the amazing similarity in yields. Moreover, if we take the yields back to the start of 2002, as in Chart 2, one can see that today’s convergence is most unusual – and the next most similar period was during the 2007 bubble, with yields a fraction lower than we have today.

If this race to the bottom continues for telcos, then Telstra – by far the largest stock in the sector – could go a little higher in price, but the other three sectors may be levelling out in expected yield. If that indeed is the case, a big chunk of the market has already made its capital gains for the year. So I will sit tight for now and will instead focus on monitoring expected yields until the exit from cash has stabilised or yields dip too low.

Ron Bewley is executive director of Woodhall Investment Research - www.woodhall.com.au

YIELD CONVERGENCE: A RACE TO THE BOTTOM?

Ron Bewley says dividend yields have recently been driven lower in a particularly interesting way.

CHART 1: EXPECTED DIVIDEND YIELD SINCE 2012

MARKET STATISTICS

CHART 2: EXPECTED DIVIDEND YIELD SINCE 2002

SECTOR

Financials Property Telcos Utilities ASX 200Capital Gain - FY-to-date 30.9% 17.9% 24.9% 14.2% 23.0%

Yield - FY-to-date 5.2% 4.8% 8.5% 3.3% 4.0%

Exuberance - current 14.1% 5.7% 6.6% 2.9% 5.6%

Source: Woodhall Investment Research; Datastream

EXPE

CTED

YIE

LD

Source: Woodhall Investment Research; Datastream

Source: Woodhall Investment Research; Datastream; data as at close February 28, 2013


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BEST PRACTICE


I thought I should align this month’s contribution with the theme of the edition

and consider some of the challenges faced by the industry superannuation fund movement (“industry funds”) when it comes to providing financial advice to their members.

I did not have the pleasure of attending the Financial Advice in Super Symposium on February 4, but I read with interest Bernie Ripoll’s speech, as well as the media reporting. I also had a discussion with one of my colleagues who attended the symposium.

Some readers will no doubt chuckle about the industry funds’ search for

professionalism in the provision of financial advice – perhaps even more so when their sense of professionalism seems to be based on the ability to serve many clients in a compliant manner. Yet that is exactly what many dealer groups are aspiring towards: growth in the number of clients with a strong emphasis on compliant advice.

This is just a superficial example of why the industry funds’ challenges in financial advice are not really all that different from those faced by a typical Professional Planner reader.

More fundamentally, it appears that the strategic objective of the industry funds is to deliver financial advice very efficiently

to as many members as possible. There is a belief in the power of intra-fund advice, neatly summarised by Bernie Ripoll:

“The new rules on providing intra-fund advice, together with the FoFA [Future of Financial Advice] reforms, will ensure that members of superannuation funds have access to simple, low-cost financial advice about their retirement savings.”

The danger will be that there is such a focus on the superannuation component that the more important behavioural challenges that many Australians face will simply be ignored. Again, dear reader, be careful about scoffing about this narrow focus on retirement savings. How many financial advice businesses have a narrow focus on providing investment advice or advice on self-managed super funds or life insurance products? Their focus on these solutions is equally an impediment to providing sustainable, valuable advice.

I don’t think that we’re that different after all.

All financial planners – including those employed by industry super funds – are facing the same challenges, says Martin Mulcare.

SO WE’RE NOT THAT DIFFERENT AFTER ALL


BEST PRACTICE


Perhaps even more interesting is the path to the future that the industry funds seem to be forging.

The quest for the capability to provide efficient advice appears to be following a seductive road map – one that is based on the allure of technology.

Now, I’m certainly in favour of cost-effective advice and I am excited about the power of 21st century technology. However, I have two main concerns about any strategy based on low cost and high tech:

1. The 21st century technology and/or pipelines change so rapidly that today’s innovations quickly become passé. This means that customers/members soon look for something “new”, and yet another expensive “cost-saving” investment is soon demanded.

2. Low-cost delivery usually equates to supplying commodities that customers/members might (or might not) need. Bernie Ripoll, in his speech, complimented industry funds on “offering new, innovative,

simple and cost-effective products”. It is this latter issue that I would like to

expand upon. Again, readers might scoff at the products that Ripoll is referring to. But just because you have more sophisticated products at your disposal doesn’t mean that you are above this core problem.

I believe that real financial advice is based on understanding your clients and their challenges – not on delivering products, however sophisticated. I think that this is the problem that both industry funds and financial advisers should put their energies into: how to cost-effectively understand their clients and their problems. And only then can they demonstrate expertise at helping them to solve them.

These are the best of times to focus on quality advice, not quantity advice – whether you are an industry fund or a financial adviser.

Martin Mulcare can be contacted on [email protected]

“THESE ARE THE BEST OF TIMES TO FOCUS

ON QUALITY ADVICE, NOT QUANTITY ADVICE – WHETHER YOU ARE AN INDUSTRY FUND OR A FINANCIAL ADVISER


BEST PRACTICE


Since 2002, Business Health has released a series of white papers providing a comprehensive insight into the health of the

Australian advisory profession and its preparedness for the future. These papers have become known as the Future Ready analysis.

Future Ready V, which has been prepared in conjunction with Securitor, is the latest in the series and covers the period from January 1, 2010 to December 31, 2012. As with previous reports, it has been based on the consolidated analysis from Business Health’s HealthCheck data warehouse.

As is clearly illustrated in the following diagrams, the key finding arising from our Future Ready V research is the dramatic reduction in the business health of Australia’s advisory community. It must be acknowledged that the Business Health best practice benchmarks are unapologetically set quite high and, more so than in previous years, the firms in this Future Ready V data set represent an extremely wide cross section of the marketplace. (Our past research papers have tended to focus more on the top end of the profession.) Even so, these results are quite concerning.

IN NEED OF ASSISTANCEOne in two practices was assessed to be in “poor health” and less than a quarter of the firms achieved a “fit” rating. Not since early 2004 have we seen so many advisory businesses in need of assistance and guidance.

The prolonged effects of the global financial crisis, along with the continued instability surrounding the international markets, seem to have taken a heavy toll on many practices.

This - when coupled with the uncertainty and confusion associated with the passage of the Future of Financial Advice (FoFA) reforms, further industry rationalisation, and the continued aging of the adviser demographic - has created almost the “perfect storm” for the profession.

Although most principals (anecdotally at least) continue to acknowledge the importance of addressing the gaps in their operating models, it seems that their time, effort and money have been invested elsewhere over the past few years. And while this is understandable in one respect, it is difficult to ignore the fact that these gaps do exist and, as such, they weaken the practice overall. Unless proactive, remedial action is taken in the relatively short

FIX IT NOW OR PAY THE PIPERAdvisory practices that fail to take short-term remedial action could find themselves suffering long-term consequences. Ray Henderson explains.

31%

24%

65%

17%

45%

18%

2004 2007


BEST PRACTICE


term, the owners of these practices will find themselves “paying the piper” through poorer client retention and leverage, lack of effective succession planning and, eventually, lower than anticipated practice values.

While there were some very strong results recorded in many of the client facing areas, the deterioration in the more strategic/higher-level functions may well have a longer lasting impact. The percentage of firms with a documented value proposition and an effective business plan, along with the number of practice owners leveraging external advice/guidance, were all well down on the 2010 results.

Most of the external factors remain outside of the direct control of the advisers; and with no clear signs of improvement on the immediate horizon, practice principals will need to develop a very clear plan to address any flaws in their current business model and position their business for sustained success into the future.

The results contained in the paper clearly show that while most firms have done an admirable job of weathering the multiple storms that have engulfed us all over the past few years, many may now need specialist assistance to enhance some of

the critical areas that underpin their operations. It remains to be seen whether they look to their respective

licensee or other external source(s) to assist in the process.

Ray Henderson is a partner of Business Health -www.businesshealth.com

24%

26%

50%

60%

15%

25%

2012

2010

FIT

HEALTHY

POOR HEALTH

HEALTH WARNING FOR ADVISORY FIRMSSource: Business Health HealthCheck analysis Future Ready V

SELF-MANAGED SUPER

It has long been the practice of certain superannuation funds - especially self-

managed super funds (SMSFs) - to hold “own occupation” total and permanent disability (“TPD”) insurance policies.

Further, since the Australian Taxation Office (ATO) clarified in SMSFD 2010/1 that an SMSF could hold a trauma policy, SMSFs have been holding trauma policies accordingly. Similarly, certain SMSFs hold income protection policies in respect of their members.

The motivations for holding such policies range from partial tax deductibility of premiums for certain policies, to cash flow reasons.

However, all such policies have always had one significant drawback when held via superannuation funds: namely, an insured event under the policies did not necessarily “marry up” with a condition of release. That is, a fund member might suffer a specified insured event (for example, a heart attack in respect of a trauma policy), and although insurance proceeds might have been paid to the fund, the fund may well be unable to pay these proceeds to the member.

There is now another significant drawback. The Superannuation Legislation Amendment Regulation 2013 (No 1)

(Cth), made in March, has inserted a severe restriction on when a regulated superannuation fund - which includes almost all SMSFs - can provide non-core insurance benefits, such as “own occupation” TPD and trauma policies.

More specifically, it inserts a new regulation (reg 4.07D). The impact of this new regulation is that with effect from July 1, 2014 regulated superannuation funds can only provide insured benefits that are consistent with the following conditions of release:

• death;• terminal medical conditions;• “any occupation” TPD (not “own

occupation” TPD); and• temporary incapacity.Accordingly, for most regulated

superannuation funds, providing any other forms of insurance will be prohibited from July 1, 2014.

A WINDOW OF OPPORTUNITYA small window of opportunity does exist. Namely, the new law allows for certain grandfathering.

More specifically, if a fund provided other insured benefits (for example, held an “own occupation” TPD or trauma policy) before

July 1, 2014, it will be able to continue to provide that benefit even after July 1, 2014. This grandfathering is reasonably flexible and will allow the level of cover to be increased or decreased even after July 1, 2014. Similarly, the associated premiums can be adjusted accordingly even after July 1, 2014.

Therefore, those funds that are interested in holding such insurance policies should ensure that they put them in place before July 1, 2014.

ANOTHER WINDOW OF OPPORTUNITYStrictly speaking, the new law does not prohibit a regulated superannuation fund from holding insurance policies for other insured benefits. Instead, the law stipulates that only death et cetera insurance benefits can be provided to members.

Accordingly, even after July 1, 2014, it might still be possible for a regulated superannuation fund to invest in a brand new, for example, “own occupation” TPD policy. However, care would need to be taken to ensure such a policy is structured so that the insured benefit is not provided to a fund member. I suspect this will be most appealing to SMSFs with borrowings.

Consider the following example.

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Actuarial certificates for SMSFs

SELF-MANAGED SUPER

Cheyenne is an accountant whose SMSF engages in a limited recourse borrowing arrangement (LRBA) to acquire the premises where he runs his accounting practice. In order to pay off the borrowing in the future, the SMSF is relying on profits from Cheyenne’s accounting business being contributed to the fund. The SMSF establishes a reserve account. The reserve account is used to pay for a $300,000 “own occupation” TPD policy in respect of Cheyenne. The premiums are charged against the reserve account. The balance sheet might look as follows:

LIABILITIES AND ASSETS $ MEMBERS’ BENEFITS $

Real estate 800,000 Loan (LRBA) 300,000Bank 10,000 Reserve 20,000 Member benefits 490,000Total 810,000 810,000

Assume Cheyenne now becomes unable to work in his own occupation, but still is able to work in another job. The SMSF needs cash because Cheyenne’s business may well no longer be profitable and thus no longer able to contribute to the SMSF. The “own occupation” TPD policy should pay out, and the balance sheet might now look as follows:

LIABILITIES AND ASSETS $ MEMBERS’ BENEFITS $

Real estate 800,000 Loan (LRBA) 300,000Bank 310,000 Reserve 320,000 Member benefits 490,000Total 1,110,000 1,110,000

Accordingly, the SMSF could use the cash to discharge the loan. Because the insured benefit was not provided to members, the new law has been complied with. Naturally, the SMSF would then have the issue of how to deal with such a large amount in a reserve account.

NO MORE SELF-INSURANCEOne strategy that had some popularity was an SMSF maintaining self-insurance. Funds that self-insure - in certain circumstances - are able to claim a deduction for the value of the premiums that they would have had to pay to obtain the equivalent level of external insurance.

However, this has always been very problematic in an SMSF.

Firstly, most SMSFs would struggle to find the additional cash to fund such self-insurance. Secondly, if such cash were maintained in reserves, any allocations from the reserves to a member upon death or disability could give rise to a large excess contributions problem. Other issues also exist, regarding the anti-avoidance provisions of part IVA and more.

The law provides that from July 1, 2013, if a regulated superannuation fund does not engage in self-insurance, it will never be able to start to self-insure. However, if, on July 1, 2013 a fund does self-insure members, the fund will have until July 1, 2016 to stop self-insuring and arrange external insurance.

Accordingly, by July 1, 2016, there should be no more self-insurance in regulated superannuation funds.

INVESTMENT STRATEGIESThe new investment strategy requirements should be remembered.

Starting this financial year, as part of their investment strategies, trustees of SMSFs must also consider whether they should “hold a contract of insurance that provides insurance cover for one or more members of the fund”. Further, the investment strategy now must be regularly reviewed.

OWN OCCUPATION TPDIt’s also important to remember that from the 2012-13 financial year onwards, premiums in respect of “own occupation” TPD policies are typically only partially deductible. The exact deductible percentage varies. However, in a worst-case scenario, only 67 per cent of the premiums for an “own occupation” TPD policy are deductible.

Significant changes have been occurring in respect of superannuation and insurance. Importantly, the more peripheral insurances are being phased out. However, for those with a keen knowledge of the rules, opportunities still exist.

Bryce Figot is a director of DBA Lawyers – www.dbalawyers.com.au

“ SIGNIFICANT CHANGES HAVE BEEN OCCURRING IN RESPECT OF

SUPERANNUATION AND INSURANCE. IMPORTANTLY, THE MORE PERIPHERAL INSURANCES ARE BEING PHASED OUT

Level 9, 65 York Street, Sydney NSW 2000 P: 02 8296 6266 E: [email protected] W: supercentral.com.au

Backed by a law firm, not just a lawyer.

BY ASSOCIATION • GRAEME COLLEY • SMSF PROFESSIONALS’ ASSOCIATION OF AUSTRALIA (SPAA)


Barry was just sitting back, thinking about what he was told at a retirement seminar and how long he is expected to live now

that he has reached age 60. Should he be worried? First, the good news. Barry is likely to live a longer and healthier

life than retirees before him. According to the latest government statistics, Australians, on average, can expect to live well into their 80s, and many will reach their 90s. But the question he should consider is, how well will he live?

Assuming people retire at 65, it will mean they will live for more than 20 years without a wage; their retirement savings or pension will be their sole source of income. For many, it could see a reduced standard of living. It’s called longevity risk, and it’s an issue that’s simply not going away.

Before the global financial crisis (GFC), when equity markets were merrily bubbling along, longevity risk didn’t attract much interest. The odd actuary could be heard at superannuation conferences talking about it, but with people’s superannuation balances ticking over in the high single digits, it wasn’t a headline issue.

The GFC has changed the name of the game, as the recent SPAA-Russell Investments third annual Intimate with Self-Managed Superannuation report highlights. In a nutshell, the pre-GFC confidence in the superannuation system - in particular, in its ability to pay for our retirement - has been shaken. Badly. And it’s not just related to fund performance; the constantly changing nature of the superannuation legislation has taken its toll. Finally, the post-GFC market turmoil that has left large holes in member account balances has added to the gloom and doom.

As a result, retirees and those close to retirement are likely to rely on any combination of solutions for maintaining adequate levels of retirement income and standard of living, such as:• account-based pension;• postponing retirement;• phasing into part-time work, rather than full retirement;• relying on savings and other assets;• age pension (indexed to CPI);• changes to spending patterns.That’s the macro picture across superannuation. But the SPAA-Russell report highlights an interesting difference between self-managed super fund (SMSF) trustees and those who come under the APRA umbrella (the retail, industry, public sector funds).

The accompanying bar chart shows that confidence in the

system has waned across the industry. But it’s most noticeable with APRA-regulated fund members, with 20.2 per cent not confident at all in super as a vehicle for their retirement savings, and 47.6 per cent saying they could be more confident.

Although SMSF trustee confidence slipped over the past year, it is certainly nowhere near as low as that of non-trustees, with only 8.9 per cent of trustees not at all confident in super as a vehicle for their retirement savings and 33.9 per cent saying they could be more confident. The majority of trustees are confident in super (57.2 per cent, down from 64 per cent in 2011), compared to 32.2 per cent of non-trustees.

For many superannuants, account balances have only recently recovered the ground lost since their peak in November 2007, just before the onset of the GFC.

But is this sufficient, or even good enough? Overall, the confidence levels of SMSF trustees in meeting their

GRAEME COLLEY • SMSF PROFESSIONALS’ ASSOCIATION OF AUSTRALIA (SPAA) • BY ASSOCIATION

LIVING LONGER IS THE REAL REASON CONFIDENCE IN SUPER IS FALLINGGraeme Colley says more people are questioning how well they will live in retirement as they realise just how long they are likelyto live.

“PRE-GFC CONFIDENCE IN THE SUPERANNUATION SYSTEM - IN

PARTICULAR, IN ITS ABILITY TO PAY FOR OUR RETIREMENT - HAS BEEN SHAKEN. BADLY


GRAEME COLLEY • SMSF PROFESSIONALS’ ASSOCIATION OF AUSTRALIA (SPAA) • BY ASSOCIATION

8.9

33.9

37.5

19.7

7.7

28.2

41.2

22.820.2

47.6

25.8

6.4

23.5

43.2

25.9

7.4

0

20

40

60

Not confident at all Could be moreconfident

Quite confident Very confident

2012 Trustee 2011 Trustee 2012 Non-trustee 2011 Non-trustee

%

n = 1,555 (2012), 1,405 (2011)

HOW CONFIDENT DO YOU FEEL IN THE SUPERANNUATION SYSTEM AS A VEHICLE FOR YOUR RETIREMENT SAVINGS?

Source: SPAA-Russell Investments Intimate with Self-Managed Superannuation report (2012)

retirement objectives remain largely unchanged, with 63.5 per cent saying they are at least reasonably confident that they are on track to achieve their retirement goals, compared to 65.7 per cent in 2011.

A recovery in the sharemarket does appear to have lifted expectations for some, with 22.9 per cent very confident that they are on target, up from 17.2 per cent in 2011.

However, confidence in meeting retirement objectives still lags levels reached in 2010, when 34.1 per cent were very confident.

Far fewer non-trustees are confident about meeting their retirement targets, with 43.1 per cent saying they will fall short, compared to 28.6 per cent of SMSF trustees. In fact, more than double the number of non-trustees compared to trustees (23.2 per

“PRE-GFC CONFIDENCE IN THE SUPERANNUATION SYSTEM - IN

PARTICULAR, IN ITS ABILITY TO PAY FOR OUR RETIREMENT - HAS BEEN SHAKEN. BADLY

cent versus 11.3 per cent) think they will fall very short of meeting their retirement objectives.

Male trustees are slightly more confident than female trustees that they are on track to achieve their target retirement income (64.6 per cent versus 60.8 per cent).

There is a clear message in this data. More than two decades ago, it became bipartisan policy that compulsory superannuation was to be the main vehicle for Australians’ retirement income. That remains the stated policy of all political parties.

The only trouble is, a growing number of people don’t believe them. Considering Barry will be living longer, that’s the real issue for him and how he will live a comfortable retirement.

Graeme Colley is director of education and professional standards for the SMSF Professionals’ Association of Australia (SPAA) - www.spaa.asn.au

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The criteria include investments, member services and insurance (see table below).

Funds were scored on each of these criteria, applying the weights shown in the table to arrive at the funds’ overall scores.

“Our starting point in deciding the finalists in each award category was to consider the top 10 to 15 scores for the relevant criteria from our ratings process. So, for example, the finalists for the Best Fund: Member Services are those that scored highest on that criterion alone,” Chant says.

“Our research team then debated those scores to see whether they truly reflected our views of the funds given our experience and knowledge of them. In some cases, this subjective input caused us to revisit our scores, which resulted in a change to our rankings.”

The process was applied to each award category, and Chant says senior management also reviewed the entire process for “its robustness and consistency”.

Chant West will be meeting with all finalists, and will issue questionnaires relating to a range of forward-looking issues relevant to their award category.

“Based on the responses we receive and further internal debate, we will decide on the winners,” Chant says.

For a complete list of finalists and more information, visit www.chantwest.com.au


CHANT WEST/CONEXUS FINANCIAL SUPER FUND AWARDS


INVESTMENTS 35%MEMBER SERVICES 25%FEES 15%INSURANCE 10%ADMINISTRATION 10%ORGANISATION 5%

The finalists of the Chant West/Conexus Financial Super Fund Awards have been

revealed by the research house Chant West. The fund ratings firm has announced

finalists across 10 categories, including Super and Pension Funds of the Year and Master Trust of the Year.

The finalists for Super Fund of the Year are AMP Signature Super, AustralianSuper, CareSuper, HOSTPLUS, Plum Super, QSuper, REST, Sunsuper, Telstra Super and UniSuper.

The unique Asset Consultant of the Year category drew five finalists, namely Frontier Advisors, JANA Investment Advisers, Mercer, Russell Investments and Towers Watson.

Funds that have been nominated in five or more categories are AMP, AustralianSuper, MLC/Plum Super, QSuper, Russell Investments, Sunsuper and UniSuper.

The selection process is based on certain criteria and research-team consultation.

Apart from the Longevity Product Award, funds had to merit Chant West’s top rating – “5 Apples” – to be included as a finalist, of which there are either five or 10 in each category.

“We rated about 230 super funds and 150 pension funds in late 2012. For super funds, this involved scoring them on about 150 factors under our six main criteria,” says Warren Chant, principal at Chant West.

Amal Awad is editor of Investment Magazine online - investmentmagazine.com.au

Conexus Financial is the publisher of Investment Magazine and Professional Planner

SUPER FUND AWARD

FINALISTS ANNOUNCED

Chant West and Conexus Financial have teamed up to create the

Super Fund Awards. Amal Awad reports on the award finalists.

PROUDLY PRESENTED BY


HNWI


At its core, private banking is about providing a tailored service to meet individual client needs. However, in the wake of

the global financial crisis (GFC), clients are demanding more experienced relationship managers.

Tellingly, in the Australian Private Banking Council’s (APBC) March 2012 survey of 500 private banking clients, only 18 per cent of those surveyed strongly agreed that their private banker understands their needs.

The situation is further exacerbated by regulations, which stress the importance of knowing your client. And as the demand for seasoned relationship managers increases, recruiting, developing, and retaining successful relationship managers and planning for their succession have never been more important.

The relationship manager has always been the primary – and most important – contact between the client and the private bank. Where clients have moved to a competing institution, poor service level from their relationship manager is often cited as a primary reason for doing so.

Ultimately, private banking clients want to be served by an individual who they can trust; and trust appears to develop with the length of the relationship, as clients are least satisfied when they have had the same relationship manager for less than six months and most satisfied when they have been serviced by the same individual for more than 10 years.

However, therein lies the challenge for private banks, as they will need to balance their relationship managers’ natural ambition of career progression with meeting client needs. From the relationship manager’s perspective, the answer to getting the talent strategy right may lie somewhere between remuneration, development and, interestingly, an agreeable corporate strategy.

According to a 2012 APBC front-line staff survey of 200 private banking relationship managers, 27 per cent of those surveyed rated “an acceptable remuneration package” as the first priority in their career.

Interestingly, relationship managers also want to work in an environment where they feel there is an agreeable corporate strategy. This may be achieved through consultation with employees on key corporate strategy decisions, and by implementing a performance management strategy that encourages employee feedback.

THINKING ABOUT YOUR OVERALL CAREER, WHAT WOULD YOU RANK AS YOUR FIRST PRIORITY?

Remuneration package of acceptable size and structure 27%Agreeable corporate strategy 19%Ample training and development opportunities 13%Continuous challenge 12%Clear outline of career progression 11%Adequate ratio of support staff to front-line staff 10%Realistic targets for growth 8%

Source: RFi

When front-line staff were asked to rank their institution’s priorities, “staff/talent retention” and “staff/talent development” were at the bottom of the list, behind “growing revenue”, “client acquisition/retention”, and “reducing costs”. In other words, relationship managers believe they are the least of their employer’s worries. Although only 11 per cent of relationship managers cited a clear outline of career progression as their first priority, nearly 50 per cent agreed that changes needed to be made at their institution in this area, with “a clearly defined path” and “more communication on progression opportunities” being the most common suggestions.

In addition, identifying and recruiting next generation talent is important, as the established practice of poaching existing talent may not be able to be sustained. In the 2012 front-line staff survey, “ample training and development” was the most common career priority for associate or assistant relationship managers. While expensive training programs may be a relevant development strategy, there may be an even simpler alternative. Mentoring may be an emerging strategy for developing talent, as seasoned relationship managers can impart a wealth of knowledge to young talent. Consequently, private banks can plan for the succession of relationship managers through the transfer and retention of knowledge.

While client acquisition and client retention may be the end goal, it is the recruitment, development and retention of key talent that will allow private banks to achieve their objectives.

Alan Shields is a director of RFi – www.rfintelligence.com.au

RECRUITING AND DEVELOPING TALENT IN PRIVATE BANKINGAs clients begin to return to investment markets, private banks are again on the lookout for good people. Alan Shields explains. “RELATIONSHIP

MANAGERS ALSO WANT TO WORK IN AN ENVIRONMENT WHERE THEY FEEL THERE IS AN AGREEABLE CORPORATE STRATEGY


THE BIG PICTURE


Get used to cyclical volatility and structural change. We’ll have to live with a lot of those changes over the next 15 years as we

adapt to rolling investment cycles, another major structural change and, most likely, punctuated by internal and external shocks.

These influences are not new. Certainly, this is a much bigger mining investment boom than we have experienced before. But we’ve been living with internally-generated investment cycles for a long time. These are long cycles.

HOW DID WE GET HERE?The latest cycle, dating from the peak of Australia’s debt-driven investment boom of the 1980s, has yet to run its course. The excesses associated with that investment boom set up our very own financial crisis and recession in the early 1990s. This was followed by a long period when growth was constrained by weak investment as we absorbed the excess capacity created during the boom. That underinvestment was not limited to the private sector. Governments around Australia cut investment as they focused on fiscal responsibility and reducing budget deficits.

The emergence of capacity constraints in 2002-03 underpinned a phase of generalised business investment and solid (balanced) growth. That was before the resources boom began. And the emergence of infrastructure bottlenecks mid-decade drove a phase of increased government investment.

The resources boom changed everything. In a market economy, there is little choice. The extraordinary increases in minerals investment, which have continued until recently, provided strong stimulus to the Australian economy, albeit focused in industries and regions servicing the investment boom.

The associated rise in the Australian dollar triggered a process of structural change, with the decline in non-mining, trade-exposed industries “making room for the minerals boom” and allowing a shift of labour and resources to build capacity to service major investment projects. That process of structural change is ongoing as the impact of the high dollar on competitiveness works its way through the system.

Meanwhile, the global financial crisis (GFC) provided a substantial shock to the Australian economy. Despite fears to the contrary, there was no financial crisis or recession in Australia. Certainly, Australia had participated in a “financial engineering”

GET USED TO CYCLICAL VOLATILITY AND STRUCTURAL CHANGE

Frank Gelber explains why the Australian economy will look very different in 15 years’ time.


THE BIG PICTURE


debt-driven boom with weight of money driving equity prices too high. However, unlike most other developed Western economies, investment had not yet gone over the top. Australia had a correction rather than collapse, a credit squeeze rather than a financial crisis, and a downturn rather than a recession. Nevertheless, the subsequent economic fears, pressure and deleveraging changed the psychology. Australian business, including industries sheltered from the impact of the high dollar, remains in survival/cost-cutting mode, containing expenditure and underinvesting. Australia still hasn’t recovered from the impact of the GFC.

SOLID GROWTHThrough all of this period of uncertainty, Australia continued to experience solid growth on average, though there have been major disparities between the performance of different industries and regions.But now the economy is softening. The boost to government investment associated with the stimulus package is being wound back aggressively.

The extraordinary stimulus to GDP from minerals investment growth is rapidly receding as minerals investment peaks. That contribution will turn negative from

now on as minerals investment recedes from peak levels. Even so, minerals investment remains extraordinarily high, at a level adding substantially to our capacity to produce and export.

WHAT NEXT?Next cab off the rank is a phase of residential investment, with activity strengthening through the middle of the decade. That will be driven by strength in the undersupplied regions - notably Perth, Sydney and Brisbane. Oversupplied regions will miss this cycle. And that’s not unusual. They’ll probably lead the next cycle.

But residential alone won’t be enough to offset the decline in resources and government investment. Waiting in the wings, the main driver of growth will be non-mining business investment. We don’t think it will pick up for another year or two. However, given the extent of underinvestment, once it picks up momentum, it will constitute a long and strong upswing. Some sectors, notably commercial property, look like peaking around the end of this decade. The delay to the commencement of this investment is setting the preconditions for a strong cyclical upswing.

But let’s not get ahead of ourselves. The economy has hit a soft patch. Confidence remains weak. Companies remain focused on reducing costs. The residential upswing is fragile, despite reductions in housing interest rates. The RBA knows that it needs to reduce interest rates sufficiently to kickstart residential property and investment – and given that inflation is not currently a problem, we’ll probably see more cuts this year.

But the real problem is that there is still enough capacity to service demand in the non-mining business economy. That means that a significant recovery in investment is still one to two years away. Initially, it will be tentative, only building up momentum in the second half of the decade.

Meanwhile, the dollar remains high, continuing to drive structural change, further damaging the non-mining, trade-exposed sectors. That won’t always be so.

We don’t expect that resources investment can continue indefinitely at these levels. And we don’t expect commodity prices to remain this high indefinitely. Eventually, worldwide supply will catch up to demand. We don’t know how precipitately that will happen. Our forecast is for an orderly decline in resources investment. However, the risk is that a fall in commodity prices will precipitate a much sharper decline in investment, leading to a substantial negative shock to the economy. In any case, much of the boost to the economy from strong minerals investment growth will be reversed.

THE NEXT STRUCTURAL SHIFTThe next structural shift will come when the Australian dollar falls, most likely when commodity prices fall. Though the timing may not be precisely matched, it will offset the impact of declining resources investment. It will again involve a painful process of structural change at the industry and regional levels, and partially reverse the structural change we’ve been going through, with an improvement in the competitiveness of industries currently hit by the high dollar.

It means a boost to manufacturing, agriculture, tourism, education, finance and business services. But we are unlikely to go back to where we started. The question is how much of the damage done during the current episode is irreversible. Manufacturing may never recover lost ground – unless new highly capital intensive technologies change the game. Services are likely to be the major beneficiaries.

We are a long way from stable balanced growth. We’ll have to cope with significant cyclical and structural shifts into the future – just as we have had to in the past. This economy will look very different in 15 years’ time.

Frank Gelber is a director and chief economist for BIS Shrapnel – www.bis.com.au

“WE ARE A LONG WAY FROM STABLE

BALANCED GROWTH. WE’LL HAVE TO COPE WITH SIGNIFICANT CYCLICAL AND STRUCTURAL SHIFTS INTO THE FUTURE - JUST AS WE HAVE HAD TO IN THE PAST


TECHNICAL


The financial planning landscape is shifting rapidly due to a combination of changing client attitudes or expectations, industry reforms and financial market developments.

Dealer groups and advisers that make only marginal changes to their client advice proposition and advice process may find that the shifting ground reduces their stronghold on their clients and business. The rapid rate of evolution of our industry is unprecedented. It is time to either adapt or perish.

THE TUG OF WARChanging client attitudes and industry reforms are driving the financial services and advice industry in a new direction. However, many dealer groups and advisers are clinging to the historical and more familiar advice processes and client service proposition, hence steering them in the opposite direction. It is akin to a “tug of war” game where there is only one winner. As history often shows, the client drives the changes and will ultimately win the game. There will eventually be a breaking point for those dealer groups and advisers that resist the overwhelming changes.

The table below summarises the differences between the new direction and the current stance adopted by some advisers and dealer groups.

CHANGING CLIENT ATTITUDESThe attitudes and expectations of clients are driving a new approach to advice and services provided by advisers and fund managers. Clients are increasingly adopting a “do-it-with-me” rather than a “do-it-for-me” approach and want greater involvement in and control over their finances and portfolio. This is best illustrated by the increasing dominance of the self-managed super fund (SMSF) market. Advisers are missing out on capturing these clients because the focus (perceived or real) on products rather than strategy has meant advisers have largely failed to satisfy the preferences and needs of SMSF clients.

Clients are shifting their preference to direct and low-cost assets that are transparent and accessible to the retail investor. Managed funds may be considered expensive and in recent times, their average performance (relative to a benchmark) has not been sufficiently stellar to attract investors’ attention. Clients’ demand and appetite for advice is firmly grounded in strategic and tailored advice. The selection of product or platform is now three or four rungs down the ladder.

Clients at all levels along the wealth scale are increasingly looking for advice that deals with single issues that are currently at hand, rather than holistic advice. Dealer groups that predominantly offer holistic advice risk bucking this trend and marginalising their business and client base.

DEALER GROUP AND ADVISER COMFORT ZONE

NEW DIRECTION

Dealer group responsible for compliance and regulatory obligations

Higher focus on professionalism with greateraccountability by the individual adviser

Similar advice process for all clients Advice tailored to client circumstances

Advice process grounded in product sales Strategic advice

Compliant advice Quality advice

Clients “outsource” decisions to the adviser (“do-it-for-me” approach)

Client involvement and control(“do-it-with-me” approach)

Dominance of managed funds Preference for direct and low-cost assets

Predominantly “holistic” advice offering Varying advice propositions, including single-issue advice

TIME TO

ADAPT OR PERISH THE FINANCIAL SERVICES LANDSCAPE IS CHANGINGAssyat David explains why dealer groups need to make significant changes.


TECHNICAL


INDUSTRY REFORMSThe Future of Financial Advice (FoFA) reforms are built on developing a greater level of professionalism and transparency in the advice provided. Advisers will have an obligation to provide appropriate advice and prioritise the interests of the client where there is a conflict with their own interests. The regulators are stipulating very specifically what they expect from personal advice. “Quality advice” is the new catch phrase and its components are clearly defined by the regulators.

The “best interest” guidelines place greater accountability on the individual adviser to ensure that the advice provided is tailored to the client’s specific circumstances and needs. This extends to requiring that the adviser research external suppliers, such as research houses, for potential conflicts of interest and benchmark the products considered for the client. Dealer groups have a reduced ability to “centralise” and control key compliance functions relating to recommendations made by their advisers, which can put their Australian financial services (AFS) licence at greater risk. Furthermore, the legislation places greater onus on the dealer group and adviser to understand the limitations of the approved product list (APL) and the need to look at products that sit outside the APL, to allow advisers to meet the best interests of the client.

Dealer groups need to equip their advisers with tools and processes to enable them to tailor strategy and product recommendations for clients as a means of protecting the dealer group’s licence.

WHAT THIS MEANS FOR ADVICE BUSINESSESTo meet the challenges facing the industry, dealer groups and advisers need to take the following actions:• Access resources to train and support advisers (both new and

existing) to reduce the risk to the dealer group that advisers will fail the “quality advice” measures.

• Adapt advice processes for the delivery of strategic advice tailored to meet different client circumstances.

• Access and utilise practical tools, such as decision trees and advice steps, to ensure the consistency of quality advice.

• Access client communication and education tools, to help advisers explain the appropriateness and benefit of the advice to the client’s specific situation.

• Access client conversation guides, advice processes and marketing tools to enable advisers to expand their client value proposition with additional and enhanced areas of advice – for example, aged care, estate planning and SMSF strategy.

• Access checklists of client strategies based on their life stage, age and circumstances – to provide advisers with ideas for clients at review time.The changes mean that dealer groups and advisers need to adapt

to the new environment by revising their client value proposition and business delivery models.

Assyat David is a director of Strategy Steps – www.strategysteps.com.au

“THE LEGISLATION PLACES GREATER ONUS ON THE DEALER GROUP AND ADVISER

TO UNDERSTAND THE LIMITATIONS OF THE APPROVED PRODUCT LIST (APL)

PHILANTHROPY

46 PROFESSIONAL PLANNER | April 2013 www.professionalplanner.com.au April 2013 | PROFESSIONAL PLANNER 47

After decades of reports recommending the establishment of an independent

regulator for the not-for-profit sector and significant lobbying from the sector itself, the Australian Charities and Not-for-profits Commission (ACNC) has finally arrived, and is open for business.

The ACNC is the new regulator for the charity sector. Specifically, the ACNC has assumed regulatory responsibilities, as they relate to charities, from the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO); and it picks up as the regulator for other charities that were falling between the cracks. This is a welcome development that has implications for philanthropy on several levels.

The ACNC began operating on December 3 last year. Passage of the required legislation came after much public consultation, committee hearings, and several discussion papers - all of which improved the initial proposal - and despite opposition from the Coalition, who feared the ACNC would actually create another level of red tape for the sector.

Given that one of the objectives of the legislation is to “reduce red tape” this will clearly be the litmus test for the Commission’s success in the short term.

There is a five-year review clause in the ACNC legislation, but two federal elections before that expires. With many charities coming under state jurisdiction, and varying fundraising licences being state-

IMPACT ON INDIVIDUAL FOUNDATIONS • There are around 6000 tax-exempt charitable

funds that will be required to file information statements to the ACNC. This covers most foundations, although many ancillary funds are not technically charities and are not covered by the ACNC at this time, so must continue reporting to the ATO.

• Medium and large foundations will be required to produce financial statements (audited, for large foundations) and also file them with the ACNC, which they have not been required to do previously. Currently, only ancillary funds are required to file returns to the ATO. This is best practice anyway so should not be a burden for most large foundations.

• The ACNC will have minimum governance standards for all charities (including charitable foundations) to remain registered, and therefore tax-exempt. Again, these are based on current trustee duties and should not be an issue.

• The Assistant Treasurer has committed to appropriate regulation to protect the privacy of private donors. The details of these regulations should emerge shortly.

WHEN MORE REGULATION IS A GOOD THINGThe philanthropic sector has a new regulator, and it’s likely to be good for business. David Ward explains.

based, effective working arrangements between the ACNC and the states will be crucial.

IMPLICATIONS FOR PHILANTHROPYThe ACNC will have an impact on philanthropy in three key ways: on the overall sector; on individual foundations; and on the charities that philanthropists support.

The establishment of the ACNC is a welcome development in the Australian not-for-profit landscape. Both sides of politics want to see a reduction of red tape, allowing charities to focus on outcomes rather than administration. Is it too much to hope that policy rather than politics will be allowed to prevail to achieve that end? Despite this and other challenges ahead, the ACNC is a great opportunity, and for the first time the sector has a dedicated regulator.

David Ward is technical director of Australian Philanthropic Services - www.australianphilanthropicservices.com.au

IMPACT ON CHARITIES • Part of the ACNC function will be to have a public

register of charities containing governance and financial information, which will facilitate more effective due diligence by foundations when planning their grant-making.

• The application of minimum governance standards to all registered charities will also strengthen the confidence in organisations supported by philanthropists.

IMPACT ON THE OVERALL PHILANTHROPIC SECTORFor the first time, data will be gathered which will allow the assessment of the size and impact of the philanthropic sector. This has been missing for years.


PROFESSIONALISM: FREEDOM, CERTAINTY, INDEPENDENCE AND UNQUALIFIED TRUST

Robert MC Brown AM is a chartered accountant with more than 30 years’ experience in taxation, superannuation and financial planning. He is independent chairman of the ADF Financial Services Council, and a member of the government’s Financial Literacy Board.

If ever we needed solid evidence that the financial planning industry has a lot more work to do before it can reasonably call

itself a true profession, we need go no further than the ABC’s Four Corners program of March 4, 2013. The program presented a litany of shameful scams and financial disasters in the Australian managed investment scheme sector. It seems that many of these schemes and related products were sold by highly qualified financial advisers, including practising accountants, in return for handsome commissions and other incentives.

In response, some financial services industry leaders have sought to deflect criticism by suggesting that the examples presented in the program were simply the actions of a few bad apples operating at the margin. The unfortunate reality, however, is that the directors, promoters and sales people involved in many of these schemes were not marginal and shadowy figures of the nature of Nigerian email scam criminals. Rather uncomfortably, they included well-known and longstanding participants in the Australian financial services industry, including members of the accounting, legal and other allegedly respectable occupations.

Fortunately for the financial planning industry, the Four Corners program wasn’t long enough to delve into the scandalous activities of advisers, particularly practising accountants, who sold failed agribusiness tax schemes (proudly promoted at official accounting profession conferences) in return for commissions and fees of at least 10 per cent. That’s not to mention the many advisers who even now continue to earn or share in life insurance commissions of more than 100 per cent (with volume bonuses) and a growing number of advisers who enthusiastically sell mortgages and real estate, particularly to unsuspecting trustees of heavily geared (and accordingly risky) self-managed superannuation funds, in return for commissions from lenders, developers and real estate agents.

Unfortunately for consumers, the well-intentioned Future of Financial Advice legislation (FoFA) is unlikely to substantially improve this situation, at least in the short run, mainly because it is full of political compromises, inconsistencies and workaround solutions through which the proverbial “fleet of trucks” will be driven by some advisers. Of course, as with all political processes in a democracy, it was never a realistic expectation to believe that FoFA would complete the necessary reforms in the financial planning industry to establish a simple and consistent unconflicted structure that is appropriate for a true profession. The Financial Services Reform Act of the 1990s suffered from the same fate due to intense industry lobbying to dilute its objectives.

However, my hope has always been that leaders of the aspiring profession of financial planning would guide its participants in a sometimes-difficult journey of self-regulation and genuine reform, building on the minimum standards established by the law. Indeed, it is our willingness to undertake such a journey that distinguishes a true profession from an industry lobby group, which simply follows and defends the often conflicting commercial interests of its noisiest and most powerful members.

Therefore, what has been for some planners a tiresome, annoying, costly and repetitive debate since FoFA was first proposed some three years ago, has presented for others a positive opportunity to examine exactly what it means to be a member of a true profession. As a result, there is now a growing body of planners who are profitably offering their services without the remuneration conflicts that continue to beset and hold back the rest of the industry from achieving genuine professional status.

These planners have gained a previously unknown sense of freedom, certainty, independence, unqualified client trust and professional satisfaction which their colleagues in the rest of the industry - who are unwilling to take the journey - can only observe with considerable envy.

Robert MC Brown says there is a growing body of advisers providing services free from the conflicts of the past, and others could learn from them.

THE PROFESSION


STATS, POLLING AND DEFINING WHAT REALLY MATTERSReal policies and substance are what wins at the end of the day, says Mark Rantall.

SOUND FAMILIAR? PUTTING IT IN CONTEXTAs Australians prepare for the start of the Future of Financial Advice reforms from July 1 this year, our British counterparts (called retail investment advisers, or RIAs)are now operating under a similar regime known as the Retail Distribution Review. The UK regulator, the Financial Services Authority (FSA), has prescribed rules for remuneration disclosure (and related issues, including service propositions and charging structures); the definition of “independent” versus “restricted” advice; and what it means to be “professional”.

Sound familiar? Will the new regime drive wholesale improvement to the British industry and consumers? The FPA will be watching with interest. Early indicators are interesting. A 2012 study of the UK’s 36,000 RIAs by the FSA showed some 90 per cent were definitely or likely to remain an RIA. It seems the majority believe that professional, ethical financial advice delivered under a legally binding consumer protection regime with the oversight of accredited, professional qualifications and a strong code of practice is a system that works.

“AT THE END OF THE DAY, EVERY HARD DECISION IS MADE ON THE BASIS OF

APPLYING A FUNDAMENTAL PRINCIPLE

As the Australian population adjusts to the prospect of another 200 or so days of federal political jostling ahead of a

September election, it’s timely to reflect on the importance that the media and politicians place on perpetually analysing the mood of the electorate.

Expect an increasing volume of opinion polling as the days tick down to September 14. And from that seemingly endless electoral litmus testing expect more leadership debates, policy arguments and party-political catcalling.

Love it or loathe it, polling – and the consequential politicking – is an entrenched part of Australia’s modern democratic process. As vital as it may be, there is one thing the expert pollsters working for all sides of the political arena will agree on: opinion polls don’t win elections.

At the end of the day, the 2013 federal election will not be won on a trend or an opinion poll. It will be won primarily on the strength of each contender’s policies and substance.

The Financial Planning Association (FPA) has learned much about sentiment and the art of separating what really matters from the things that are politically expedient or poll-driven. Our years of advocacy on behalf of professional financial planners in Australia have required us to make many decisions – some of which have been pioneering calls.

Being pioneering can make you unpopular. Our 2009 decision to ban commissions was met with a range of reactions, not all positive. But the decisions – and all subsequent related FPA policy issues – were premised on thinking deeply about what really matters (while studiously ignoring the noise of pursuing an easy, popular vote).

At the end of the day, every hard decision is made on the basis of

applying a fundamental principle: what is in the best interests of our members and their clients?

Has the FPA found vindication in its 2009 and subsequent policy decisions? Yes. Independent research tells us that some 90 per cent of FPA members are aware of and support the FPA’s vision to transform the financial planning industry into a universally respected profession.

Yes, there are detractors. And yes, there are those who may yearn for the old days. But as a famous Australian political figure, former Prime Minister Bob Hawke, once wrote: “The essence of power is the knowledge that what you do is going to have an effect - not just an immediate, but perhaps a lifelong effect - on the happiness and wellbeing of millions of people; and so I think the essence of power is to be conscious of what it can mean for others.”

The conscious power of professional financial planning in this country is its ability to deliver to just that principle – effecting a lifelong impact on the happiness and wellbeing of millions.

Australia’s longest serving Prime Minister, Sir Robert Menzies, once remarked: “A man may be a tough, concentrated, successful money-maker and never contribute to his country anything more than a horrible example.”

There is much in the current world that can be learned from this leadership wisdom from one of Australia’s great statesmen.

BY ASSOCIATION • MARK RANTALL, CHIEF EXECUTIVE • FINANCIAL PLANNING ASSOCIATION OF AUSTRALIA (FPA)

48 PROFESSIONAL PLANNER | April 2013 www.professionalplanner.com.auApril 2013 | PROFESSIONAL PLANNER 49

“AT THE END OF THE DAY, EVERY HARD DECISION IS MADE ON THE BASIS OF

APPLYING A FUNDAMENTAL PRINCIPLE

48 PROFESSIONAL PLANNER | April 2013 April 2013 | PROFESSIONAL PLANNER 49

BRAD FOX • CHIEF EXECUTIVE OFFICER • ASSOCIATION OF FINANCIAL ADVISERS (AFA) • BY ASSOCIATION

Check any definition you like, codes of professional conduct are not designed to be law. The law regulates the way industries,

organisations and their participants operate. In our industry, the law is enshrined in the Future of Financial Advice (FoFA) legislation – the most prescriptive advice legislation in the world.

Claire Wivell Plater, managing director of The Fold Legal, recently said: “Codes can supplement the law in areas where it is lacking or where the industry wants to set a higher standard for itself. But in financial services, the legislative standards are already as high as they need to be.

“If an ASIC-approved code does replicate or extend the existing law, there could be considerable confusion and duplication in enforcement. Who should be primarily responsible? ASIC or the code’s enforcement agency?”

POTENTIAL CONFLICTIf, when an association is seeking to enforce its code, there is a potential conflict or duplication of process – with the regulator also performing its enforcement duty – this is a poor and potentially trust-corrupting outcome for financial planning and for the consumer.

So where can codes add value to financial advice in 2013? Wivell Plater suggests the following from Stuart C Gilman PhD, when he was working for the World Bank (2005):• Establish ethical principles and values.• Articulate acceptable (and unacceptable) behaviour to increase

the probability that people will focus on doing the right things for the right reasons, until ethical behaviour becomes a habit.

• Capture a vision of excellence.• Express the industry’s commitment to a specific set of moral

standards to give people joining the profession a clear set of values to which they are expected to subscribe. This can help people feel proud about belonging to a profession and motivate members to see themselves as professional.If an adviser provides product advice to a client from July 1, 2013,

the client is a new client and lives under the new laws, including opt in, for example.

If advisers want to obviate the need for opt in, they will have to belong to a code that allows them to do that (an obviating code). Although we think it is highly unusual for a code to obviate a legal requirement, there are other practical problems with this approach. Should advisers choose this route, the actions required to obviate opt in will likely apply to all their clients immediately,

whereas opt in itself only applies to new client arrangements from July 1, 2013. Choosing to belong to an obviating code is therefore likely to impose significant additional work on adviser businesses immediately. In contrast to this, the first opt-in notice is not required until July 2015.

Whatever the final format for the new AFA code, it will focus people on doing the right things for the right reasons; it will be based on principles and values; it will not dictate business models; and it will be able to co-exist with ASIC enforcement, licensee obligations and external dispute resolution schemes.

It will be an appropriate code to support the most regulated financial advice market in the world.

THE ROLE OF CODES IN A HEAVILY REGULATED ENVIRONMENTBrad Fox says codes of practice should supplement the law and not create an unwanted and unnecessary burden on business.

“IT WILL BE AN APPROPRIATE CODE TO SUPPORT THE MOST REGULATED

FINANCIAL ADVICE MARKET IN THE WORLD

TWO-PART CODEAn alternative the AFA is considering in consultation with advisers, licensees and ASIC, is a two-part code.PART 1 : A principles-based code that applies to all members and is not captured under ASIC’s RG 183 approval process. This part would not refer to opt in but would provide guidance as to minimum professional standards and articulate acceptable behaviour within ethical principles and values. PART 2 : A code that specifically prescribes what is required to obviate opt in and would require ASIC approval to be RG 183 compliant. A two-part code would allow a member to choose whether or not they wish to obviate the need for opt in. This is particularly relevant to risk specialist advisers for whom opt in does not apply. It also means that in the event of a change of government and the potential repealing of opt in, the entire code would not have to be resubmitted to ASIC for approval.

THE FINAL WORD


At 00.01am GMT on March 24, I, like untold millions of others, put Dark Side

of the Moon (DSOTM) into my CD player (the 1992 remaster - still the best digital version, in my view), put on my headphones, turned out the lights, made the appropriate preparations and dropped into the deep existential reverie that this album always induces.

March 24 marked 40 years since DSOTM was released; it’s almost as old as I am. It’s fared considerably better over the years, however; it sounds as good today as when it was first recorded.

DSOTM is the first album I ever bought on CD, in 1984, after comprehensively wearing out two vinyl pressings (ask your parents what vinyl is). The sole advantage of the CD over vinyl was that I didn’t have to jump out of bed to flip the disc - and that’s not a euphemism. I’d put DSOTM on as I went to sleep at night, trying to stay awake until Clare Torry’s incredible vocal gymnastics in “The Great Gig in the Sky”. (To my dismay,

made a long-lasting impression on people I know, but left me unmoved. So who knows? I suppose the distinction is moot.

It makes me wonder, though. What will my kids be listening to in 40 years’ time? What music is being created today that will still be listened to and loved four decades from now? There’s probably some, because every generation throws up something good, but I do know it won’t be Taylor Swift or One Direction or any of the artists currently in the iTunes Top 10 singles chart – and I know it will not be anything produced by those abominable TV “talent” shows.

Music, like all art, reflects the times in which it’s created. Only a fraction of what’s produced transcends time and place. But today’s society is characterised as ephemeral, fleeting. We’re apparently blighted by nano-second attention spans; we want what we want and we want it now – and what’s next? And that’s exactly what the music of today sounds like. Which is to say it all sounds like everything else…and like nothing.

I’m acutely aware that I sound just like my grandfather complaining about my music, and that my grandfather’s grandfather had exactly the same problem with his grandson. But it’s really not as good as it used to be, is it?

Dixon wants to know what you’re still listening to today that you first heard 30 or 40 years ago – and why. Email your musings to him on [email protected]

“THE SOLE ADVANTAGE OF THE CD OVER VINYL

WAS THAT I DIDN’T HAVE TO JUMP OUT OF BED TO FLIP THE DISC - AND THAT IS NOT A EUPHEMISM

BUILT TO LAST ON A JOURNEY TO THE DARK SIDEDixon knows only too well that not very many things truly stand the test of time. But there’s a notable exception.

Torry went on to be a backing singer for Culture Club, of all acts - ask your parents who Culture Club were.) But I stopped doing this the day I put the cassette on in the car (ask your parents what a cassette is), and fell asleep behind the wheel.

It’s impossible to tell, of course, whether this piece of recorded music is a genuine masterpiece or whether it was simply something I first encountered at an impressionable and formative age. I know people who heard it for the first time at the same time I did, and it made much less of an impression on them. But then, other music

Attendance is strictly limited to chief executives, general managers, managing directors and executive directors of Australia’s largest dealer groups. Professional Planner reserves the right of refusal over attendance.

That has profound implications for licensees and dealer groups, quite apart from the impact of the Future of Financial Advice (FoFA) changes.

June 3–4, 2013Lilianfels Blue Mountains Resort and Spa, Katoomba, New South Wales

REGISTER NOWdealergroupsummit.com

July 1, 2013 marks a milestone in the development of financial planning as an industry, business and profession. From that date, Australia – and the world – will have the first true professional association for financial planners.

It’s a rare opportunity to have dealer group leaders, industry experts and policy shapers come together in such an informative and interactive format. This conference is a must if you want to make a contribution to the industry, hear different perspectives and also keep yourself at the cutting edge of what you need to know as dealer group leader.”

Tom Reddacliff, general manager, MLC Advice Solutions

Licensees and those associated in working directly with planners seldom get the opportunity to take time away from the business in an environment that allows and promotes an open sharing of thoughts, ideas and opportunities. The Dealer Group Summit is that opportunity, and as a participant last year I found it an extremely valuable investment of my time. The format promoted quality discussion on many key topics facing planners and licensees today. I would highly recommend it to those who lead licensees.”

Steve Helmich, director, advice and client solutions, AMP

Professionals ARE different

““

OR CONTACT: [email protected] | 61-2-9227-5795

Deen Sandersexecutive officer,

Office of the Professional Standards Councils

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