money management (december 8, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

THE degree to which Australian financialplanners are looking for more optimisticsignals amid the current torrent of badnews has been revealed in new researchreleased by Wealth Insights.

The Wealth Insights Planner Senti-ment Index for December revealedsentiment plumbing levels not seensince the Global Financial Crisis, but thesurveying process also revealed thedegree to which advisers seem to belooking for better news.

Wealth Insights managing directorVanessa McMahon said that amid lastweek’s more positive news around Euro-pean Central Bank intervention and theconsequent improvement in sharemarkets, adviser sentiment had improvedmarkedly.

“Adviser sentiment is generally stilllower than when we last conducted oursurvey in October, but the result forDecember is markedly better than itmight have been – largely because of themore positive news around central bankintervention and the impact on share

markets,” she said.The Wealth Insights research has

consistently revealed a close correlationbetween Australian financial advisersentiment and the fortunes of theAustralian Securities Exchange, andMcMahon said this had been strikingly

confirmed by the spike recorded mid-waythrough the December survey process.

This was something that had beenevidenced by the significantly differentresponses from survey respondentsbetween Tuesday and Wednesday lastweek, and then Thursday and Friday.

Asked whether times were good or badright now, the survey revealed a 20 percent spike towards positivity on the lattertwo days, and after the more positivenews on Central Bank action.

Despite this spike in positivity,McMahon pointed out that the overallplanner sentiment remained at levels notseen since the depths of the global finan-cial crisis in late 2008.

She said that, in short, Australian finan-cial planners were closing out 2011 feelinggenerally pessimistic about the immedi-ate outlook.

By Andrew Tsanadis

AS debate heats up over theAustralian Securities andInvestments Commission’s(ASIC’s) proposed educa-tional guidelines for financialadvisers, training providersargue that a push for highereducation will not fix theinherent discrepancies ineducational standards.

In an effort to lift industryassessment standards, theFinancial Planning Associa-tion (FPA) is currently requir-ing all new advisers to havean approved degree from 1 July 2013 in order to berecognised as an associatefinancial planner.

Pinnacle managing direc-tor John Prowse believes akey element in raising thestandard of adviser educa-tion is recognising that theDiploma of Financial Planning(the current benchmark) hasbeen carelessly issued bysome recognised trainingorganisations (RTOs). Train-ing regulators often allowsome RTOs to use a “tickand flick” method for issu-ing diplomas and certifiedprofessional development(CPD), he said.

Under the proposed three-tiered approach outlined inASIC’s consultation paper(CP) CP153, financial advis-

ers will be required to com-plete a national examinationassessment, a 12-monthsupervisory period, and aknowledge review within twoyears of undertaking theexam – and every threeyears thereafter.

Prowse said he has longsupported ASIC’s proposednational exam because thereis an inherent conflict of inter-est involving educators whoset their own training require-ments. However, this issuedoes not get resolved bymaking university-level edu-cation the minimum require-ment for all financial plan-ners, he said.

“If you set a standard anddon’t police that standard, itdoesn’t do any good to setthe standard in the firstplace,” he said.

A three-year degree fol-lowed by a year of supervi-sion is too excessive for anormal financial planning job,he added.

According to CP153, theregulatory body does not cur-rently “have the expertise, orthe resources, to administer anational exam”. It has pro-posed “outsourcing theadministration of the examto a commercial examprovider, through a tender

Adviser sentiment cleaving to liferaft

Continued on page 3

Planner education needsconsensus

CBA SETTLES COUNT DEAL: Page 8 | 2011 TOP 5 LISTS: 3

Vol.25 No.47 | December 8, 2011 | $6.95 INC GST

By Chris Kennedy

Industry consolidation, particularlyinvolving large dealer groups, has thepotential to shift large volumes of fundsunder management (FUM) fromcurrent platforms into products alignedto the new institutional owner.

Questions were raised last week asto what will happen to the largevolume of FUM in white-labelled BTproducts through Count Financialonce new owner CommonwealthBank takes over.

Money Management understandsthere is also significant FUM allocatedto BT products through DKN adviserswho are now aligned to major platformprovider IOOF, while AMP has largevolumes of assets in BT products andWestpac-owned Asgard, which it

could theoretically begin to shifttowards newly-aligned AXA prod-ucts such as North.

News that BT had sent a communi-cation direct to BT Lifetime FlexiblePension members giving them theoption of setting up an advice fee forpersonal financial advice to replace theexisting fee arrangement (consisting ofan upfront and ongoing commission)drew more than 30 comments on

Money Management’s website.Several advisers expressed disap-

pointment that BT had contactedclients directly, and some suggested itwas a move aimed at disconnectingclients from their current advisers toeither reduce payments to non-alignedadvisers or to create “orphan” clientsthat it could then acquire.

But a BT spokesperson told MoneyManagement the sole reason BTcontacted clients directly was its disclo-sure obligations, and was completelyunrelated to the acquisitions of DKNand Count.

Mark Kachor, managing director ofresearch house DEXX&R, said that ulti-mately it would be reasonable to expectthat CBA would look to migrate the BT

Merger threat to platform FUM

Continued on page 3

Source: Wealth Insights

Figure 1 Financial planner sentiment index

Source: Wealth Insights

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This is the final print edition of Money Management for 2011.

The entire team at Money Management wish our readers amerry Christmas and a safe and prosperous 2011.

The first print edition of Money Management will bepublished on 19 January 2012. In the meantime, readers willcontinue to receive Money Management’s daily e-newsletterup to and including Friday 16 December 2011 before itresumes on Monday 9 January 2012.

Merry Christmas

Mark Kachor

Figure 2 Are timesgood or bad for you ?

Because this is the last print editionof Money Management for 2011, itis worth reflecting upon what achallenging year it has been for

Australian financial services generally andfinancial planners in particular.

The term ‘perfect storm’ has becomesomewhat clichéd but could quite appropri-ately be applied to Australian financial serv-ices in 2011, as financial planners not onlyhad to witness the uncertainty and conse-quent volatility generated by Europe's sover-eign debt, but also the political uncertaintygenerated around debt in the US as well asthe efforts of Australia's first minority federalgovernment in more than 50 years.

It is fair to say that Australian financialplanners started 2011 uncertain how itwould end. They will likely start 2012 withthe dynamic hardly changed.

Few readers will be surprised to learn thatan analysis of Money Management's newspages for 2011 reveals that the most talked-about issue was the Government's Futureof Financial Advice (FOFA) changes and themanner in which they were handled by theAssistant Treasurer and Minister for Finan-cial Services, Bill Shorten.

When the year began, Shorten remainedan unknown quantity for the industry, butthat quickly changed as his handling ofFOFA cast him as having maintained his

close links with the trade union movement– and therefore being allied to the views ofthe Industry Super Network (ISN).

The degree to which Shorten's unionlinks seemed to be reflected in the Govern-ment's policy approach appeared allied tothe occasions on which policy formulationveered away from the recommendations ofthe Ripoll Inquiry to embrace elements suchas ‘opt-in’, the banning of commissions onlife/risk sales inside superannuation, andannual product disclosure statements.

By the time the first tranche of theFOFA legislation had been introduced tothe Parliament, planners seemed justifiedin their suggestions that the Governmentwas pursuing an agenda to extend theinfluence of the industry superannuation

funds at the expense of the financial plan-ning community.

At the same time, the Governmentseemed oblivious to the fact that one of theunintended consequences of FOFA wasvertical integration and the re-emergenceof the old tied-dealer models of the past.

While some planners have been critical ofthe inability of the Financial Planning Asso-ciation and the Association of FinancialAdvisers to negotiate substantial changesto the FOFA package, such criticism is unfairin the context of the single-mindedapproach the Government chose to adopt.

With the balance of power in the Houseof Representatives having being altered witha change in speakers in late November,financial planners must now accept thatmost of Shorten's FOFA changes will flowthrough the Parliament unamended. Inshort, they will have to navigate the secondhalf of 2012 in a fully-fledged post-FOFAenvironment.

The polls and Australia's politicaltimetable mean that financial planners mustpush for the changes they want to occur viaa Coalition Government in 2013/14.

In the meantime, on behalf of the MoneyManagement team, I wish all our readers asafe and happy Christmas and New Year.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

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“The polls and Australia'spolitical timetable meanthat financial plannersmust push for the changesthey want to occur via aCoalition Government in2013/14. ”

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Average Net DistributionPeriod ending Sept '1110,207

Closing out a challenging year

By Chris Kennedy

SUNCORP has purchased AMP’s GeneralInsurance Distribution (AMP GID) busi-ness, securing the business for Suncorpfor the long-term, the two groupsannounced today.

Suncorp previously provided generalinsurance products to AMP through anational distribution network of more than700 aligned general insurance profession-als, or authorised representatives (ARs),Suncorp stated.

“This initiative is part of Suncorp’s strat-egy to strengthen its distribution footprintand grow its business, as well as providedistribution in line with clients’ prefer-ences,” said Anthony Day, chief executive ofSuncorp’s commercial insurance business.

AMP director financial planning, adviceand services Steven Helmich said the trans-

action will provide uninterrupted supportfor GID authorised representatives.

“Suncorp will continue to provideproduct, marketing and services under thesame terms and conditions as today. Withthis transaction, GID authorised represen-tatives will become part of a companycommitted to strong growth in generalinsurance and to investing in and develop-

ing general insurance professionals,”Helmich said.

When AMP sold the manufacturing sideof its general insurance business to Suncorp

in 2001, it kept the distribution agreementthrough AMP GID. The group’s focus in thatarea has lessened since the merger withAXA, with an increased emphasis on thefinancial planning, wealth managementand investments areas of the business,Helmich said.

From 31 December 2011, Suncorp willbecome owner of the GID business, thestaff will become employees of Suncorp,and the advisers will be licensed bySuncorp. Suncorp will retain preferredgeneral insurance provider status for AMPadvisers who want to deal in that area,Helmich said.

The transaction will have no effect onAMP’s financial planning operations orplanner numbers, he added.

The groups would not disclose theacquisition price, other than to say it is notmaterial for either party.

www.moneymanagement.com.au December 8, 2011 Money Management — 3

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Suncorp purchases AMP general insurance business

Merger threat to platform FUM

white labelled Count fundsto its own platform.

Those funds would beunlikely to dramaticallyshift in the short-termbecause advisers wouldhave to show the advicewas in the client’s best inter-ests, and funds in superan-nuation products wouldalso have to meet Superan-nuation Industry (Supervi-sion) Act requirements.

However, he saidimpending Future of Finan-cial Advice legislation mayadd a sense of urgencybecause as it stands, from 1 July 2012 new funds will besubject to the new remuner-ation regulations – but fundsalready in place will be

grandfathered in terms ofvolume-based payments.

Profit is in the productrather than the distribution– meaning there wouldseem to be strong incentivefor CBA to offer an equal orbetter proposition to clientscurrently in the BT versionof the wrap, Kachor said.

He added that while onewould expect Colonial FirstChoice investments to beavailable on the BT whitelabel product, if they weren’talready included they wouldbe soon enough.

When contacted byMoney Management, CFSprovided a statement thatread: “We’ve made it clearthat going forward weintend to maintain Count’sopen architecture model.”

process” involving industryrepresentatives, educationproviders and members ofthe Advisory Panel on Stan-dards and Ethics.

Prowse said that whilethe FPA has made someattempt at facilitating anindustry standard for edu-cation, it should ultimatelybe the responsibility of theGovernment, and heopposed having an industrybody gain legal status. Inregards to ASIC's proposed12-month monitoring of newadvisers, Prowse arguedthat an accreditationprocess for authorisedsupervisors was needed.

According to FPA chiefprofessional officer DeenSanders, however, the Gov-ernment should not provideadditional legislation inassessment and education

of planners. He said itwould be better for theindustry to take “an opti-mistic and positive” stanceon adviser education.

“When you seek to iden-tify yourself as a profes-sional, people assume youhave a degree qualifica-tion,” he said.

“There will be, we don’tdoubt, room in the market-place for people with voca-tional qualifications orother regulatory-alignedqualifications rather thanprofessional ones.”

Sanders said therewould always be adviserswho chose not to neces-sarily embrace the full pro-fessional identification orobligation that the FPA isseeking to enshrine withthe “financial planner”des-ignation – and this wouldbe the distinction in theindustry.

Planner education needs consensusContinued from page 1

Continued from page 1

Steven Helmich

“Suncorp will continue toprovide product, marketingand services under thesame terms and conditionsas today. ”- Steven Helmich

News

By Chris Kennedy

THE financial planning industry is starting tolook more like it did back in the 1970s, withmost advice tied to product; and conflicts ofinterest won’t be eliminated without a struc-tural separation of advice and product,according to Premium Wealth Management.

Premium general manager Paul Harding-Davis said the industry is looking more like itdid when he joined in 1978. And despitehaving moved through a number of chal-lenges since then, has now returned to a sit-

uation where around 85 per cent of advice istied to product manufacturers such asbanks, super funds and life offices.

There will be some interesting conversa-tions to be had around systemic conflict ofinterest and structural separation, but thefuture is bright for those in the niche andspecialist space servicing sophisticated andhigh net worth clients, Harding-Davis said ata roundtable in Sydney yesterday.

Premium Wealth Management director andprincipal of Premium Financial Solutions, PhillipLeslie, said at the moment reforms were

attempting to paper over the fundamental con-flicts of interest of having 85 per cent of finan-cial advisers working for product providers, andcompared the practice to having doctors work-ing for pharmaceutical companies. “Unlessyou put structural separation on the table, it’sall a terrible game,” he said.

Rodney Brown, director of Tristone PrivateWealth, said the consolidation within the indus-try leading to more advisers being tied to prod-uct manufacturers was terrible for consumers,but presented a great opportunity for up-and-coming advisers who had their clients as their

number one interest, because an ageing groupwould be leaving the profession.

Harding-Davis said he didn’t predict muchof a further increase in terms of more advis-ers becoming tied to product providersbecause as the larger groups continued tobuy up distribution, other advisers whowanted to provide independent advice wouldleave to start their own businesses.

He said he would like to see the Premiumbusiness grow from its current level of 20practices to around 40 or 50, with one prac-tice set to formally join the group today.

ASIC’sStorm caseto continueBy Milana Pokrajac

THE Storm Financialcompensation case broughtby the Australian Securitiesand Investments Commis-sion (ASIC) on behalf of twoinvestors is set to continue,after the Federal Courtrejected challenges from thecompanies involved in thecollapse.

In December 2010, ASICcommenced legal proceed-ings on behalf of Barry andDeanna Doyle against Bankof Queensland, Senrac andMacquarie Bank.

The case was in relationto the alleged breach ofcontract, contravention ofstatutory prohibitionsagainst unconscionableconduct, and the banks’liability as linked creditproviders of Storm underthe Trade Practices Act 1974.

Earlier this year, all threecompanies asked the courtto strike out and dismiss thewhole or part of ASIC’sstatement of claim, whichwas rejected by JusticeLindsay Foster.

The court has, however,asked ASIC to clarify certainaspects of the claims byfiling an amended state-ment of claim.

These proceedings areseparate from other Storm-linked legal cases broughtby ASIC, including the civilpenalty proceedings againstformer Storm chief and hiswife, Emmanuel and JulieCassimatis.

Structural separation the answer: Premium



News

By Mike Taylor

THE Association of SuperannuationFunds of Australia (ASFA) has told theParliamentary Joint Committee (PJC)looking into the Government’s Futureof Financial Advice (FOFA) bills that thenature of intra-fund advice means thelegislation must be viewed in the samecontext as MySuper.

In a submission filed with the PJC lastweek, ASFA said that given the degreeof interdependency between FOFA and

intra-fund advice, it was critical thatthe FOFA legislation be considered inconjunction with MySuper legislation.

“To consider the FOFA legislation inisolation, without consideration of itsinteraction with, and potential impactupon, the provision on intra-fundadvice risks there being unintendedconsequences which, at the extreme,may affect the viability of providingsuch advice,” the ASFA submission said.

ASFA has also joined those suggest-ing that the Government may not be

allowing enough time for the imple-mentation of its new arrangements.

It said that while ASFA supported theFOFA reforms, it was important to notethat implementation – especially bysuperannuation funds which will alsohave to implement changes resultingfrom the Stronger Super reforms –would “necessitate significant andcomprehensive changes having to bemade to what are mature and complexarrangements”.

“For financial advisers and trustees

to be in a position to be able to imple-ment the required changes necessi-tates a degree of certainly as to theregulatory requirements,” the submis-sion said.

The ASFA submission said a varietyof strategic and tactical decisionsneeded to be made, and given time-frames that would not see the Bil lpassed by the House of Representa-tives until May next year, there wouldneed to be a transition period of atleast 12 months.

PJC told howadvice costs varySUPERANNUATION fund mem-bers are generally unwilling topay extra for financial adviceprovided over the phone, overthe internet or via a mobiledevice, according to researchcontained in a submission filedwith the Parliamentary JointCommittee (PJC) reviewing theGovernment’s Future of Finan-cial Advice legislation.

The research, conducted byMercer and cited by the Associ-ation of Superannuation Fundsof Australia (ASFA) in its sub-mission to the PJC, suggestedthat 40 per cent of superannu-ation fund members would con-tact their super fund if theyneeded advice.

However, the submissionalso included the results ofresearch conducted for ASFAby actuarial consultancy RiceWarner, which suggested thecost per fund member ofadvice delivered through callcentres – and advice deliveredby a financial planner that ispaid for directly by the fundrather than by the member –was relatively low.

“The average cost permember per year for call centreactivities is $11.23, with aver-age cost of financial planning$2.99,” the submission said.“The average cost per callreceived is $17.00.”

The submission noted, how-ever, that there was a reason-ably wide variation across eachof the expenses. Significantcontributors to that variationincluded differences betweenfunds in the level and qualityof service, particularly inrespect of member contactcentre services, and the inci-dence of members takingadvantage of different services.

“The cost of operating callcentres ranged from a low of$4.47 a year per member to amaximum of $21.16 permember,” it said. “Expenditureon financial planning servicesvaried from $0.65 a year permember to $26.25.”

FOFA cannot be separated from MySuper

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News

Opposition attacks MYEFO super changesBy Mike Taylor

THE Federal Opposition sayscut-backs announced as part ofthe Government’s Mid-YearEconomic and Fiscal Outlook(MYEFO) have served to furtherundermine the incentive forAustralians to save for retire-ment.

The shadow Assistant Trea-surer, Senator MathiasCormann, said the MYEFOchanges were effectively punish-

ing those who were prepared totake responsibility for their ownretirement needs.

"By pausing indexation ofconcessional contribution caps,Labor is again reducing theincentive for people to savemore because the caps are notkeeping pace with inflation andwage increases," he said.

Cormann said he believed itwas absurd for the Governmentto force people to contributemore to compulsory superan-

nuation while on the other handremoving incentives for peopleto make additional voluntarysuper contributions.

"Instead of increasingcompulsion, the Governmentshould complement currentcompulsory savings levelswith appropriate incentivesfor people to make additionalvoluntary savings – in particu-lar at a stage of their l iveswhen they are most able to doso," he said.

Survey revealsconfidence atGFC lowsRECENT declines in financial planner sentimentmay be a reflection of the broader state of Aus-tralian small business, if a new CPA Australiasurvey is an indicator.

The CPA Australia 2011 Australia Asia-PacificSmall Business Survey has found Australian smallbusiness confidence mirrors that displayed atthe height of the global financial crisis and lagsbehind that of other regional players.

The survey, conducted among over 1500 smallbusinesses in six Asia-Pacific economies, foundAustralian small business operators were theleast likely to expect their business to grow inthe next 12 months, with just 57 per cent indicat-ing a positive growth outlook for the coming year.

CPA Australia noted that the 57 per cent figurewas identical with that recorded at the height ofthe GFC.

It also found that 41 per cent of Australianbusinesses borrowed for business survival in thepast 12 months, with 29 per cent borrowing tofund growth.

As well, the CPA Australia survey found that18 per cent of Australian businesses had indi-cated no intention of undertaking key businessmanagement activities such as stock control,sale of assets, marketing or promotion in thecoming year.

Commenting on the survey findings, CPA Aus-tralia chief executive Alex Malley said they painteda bleak picture of small business attitudes.

He said that while global economic volatilityhad played a part, the greater contributors hadbeen increasing expenses, higher borrowing costsand tighter lending conditions.

Government extends pension drawdown reliefBy Chris Kennedy

THE Government has announced anextension to the 25 per cent drawdownrelief for account-based pensions for the2012-13 financial year, which it saidwould benefit around 125,000 self-funded retirees.

The move continues the 25 per centreduction that was put in place for the2011-12 financial year, and acknowledgesthe impact of share market volatility onretirement savings. This was scaled backfrom the 50 per cent reduction that wasin place for the previous three years.

“The provision of drawdown relief forthe past four years has assisted account-based pension holders by reducing theneed for them to sell assets at a loss inorder to meet the minimum paymentrequirement,” said Assistant Treasurer andMinister for Financial Services and Super-

annuation Bill Shorten, in a statement.“The Government had indicated

previously the minimum paymentamounts would return to normal in2012-13. However, equity markets

continue to be volatile and prices remainsignificantly below the levels reachedprior to the GFC,” he said.

“Continuing the current limited draw-down relief for a further year will assistretirees to recoup capital losses on theirpension portfolios as equity marketsrecover over time.”

The move was broadly welcomed bythe Small Independent SuperannuationFunds Association (SISFA), althoughSISFA chair Michael Lorimer said theassociation would have preferred theGovernment retain the original 50 percent reduction.

However, Challenger’s chairman ofretirement incomes Jeremy Cooper saidthe move highlighted a shortcoming inthe nation’s retirement system throughits over-reliance on equities, which couldnot be relied upon to provide bedrock orlifetime retirement income.

Mathias Cormann

Capstone adds eightpractices, welcomes FOFANON-aligned dealer group Capstone haswelcomed a post-Future of FinancialAdvice (FOFA) world and has announcedthe recruitment of eight new practices.

Capstone managing director GrantO’Riley said he did not think the FOFAreforms would spell the end of a level playingfield for mid-tier practices. Capstone had 70authorised representatives in July this year,according to Money Management’s Top 100Dealer Groups survey.

Capstone’s business model will allow itto continue to be an independently ownedlicensee, regardless of what happens withFOFA, and many of its practices have oper-ated under guidelines similar to thoseproposed under FOFA for some time,O’Riley said.

The group is focused on improving effi-ciencies and adopting new technologiesto better support its practices, Capstonestated. In preparation for fee-for-servicerequirements, the group has developed itsown integrated client engagement modelthat “provides a structured methodologywith a technology base to assist practicesin building or amending a business modelfor the future,” Capstone stated.

The group said it is also fielding severalcalls per week from practices looking to

align with an independent group. Accord-ing to Capstone, these requests demon-strate that practices still value licenseesand their value proposition, and showmany advisers are not thinking the big endof town is the solution for the future.

The new practices recruited byCapstone include Victorian firms PCR Part-ners from Morwell, Equus Private Wealthfrom Malvern and BKM Financial Servicesand HGN Private Wealth from Camber-well. Also included are Brad Tilley fromMillicent in South Australia, Agbis Finan-cial Planning from Armidale in New SouthWales, Corpacc Financial Planning in Bris-bane and Gold Coast-based practiceCoastGuard.

Bill Shorten

Grant O’Riley

Govt removes SG age limitTHE Government hasamended its Superannua-tion Guarantee (Administra-tion) Amendment Bill 2011to abolish the superannua-tion guarantee (SG) agelimit, after recently raisingthat limit to 70.

Assistant Treasurer andMinister for Financial Servicesand Superannuation BillShorten said that from 1 July2013, eligible employees aged70 and over will receive thesuperannuation guarantee forthe first time.

“Making superannuationcontributions compulsory forthese mature-age employeeswill improve the adequacy andequity of the retirementincome system, and providean incentive to older Aus-tralians to remain in the work-force for longer,” Shorten said.

The recently-announcedSuperannuation Guarantee(Administration) AmendmentBill 2011 raised the age limitfor SG contributions from 65to 70, but shortly after thisShorten told Parliament the

Government would be abolish-ing the age limit altogether.

The changes will alsoensure that employers will beable to claim income taxdeductions for superannua-tion guarantee contributionsmade to employees aged 70and over from 1 July 2013,according to a Treasury state-ment.

It ensures employers willnot bear a higher cost inemploying workers 70 andover compared with otherworkers, the statement said.

HFA downgrades earnings guidanceHFA Holdings Limited has downgraded itsearnings guidance for the current half year.

In an announcement released on theAustralian Securities Exchange last week, HFAsaid it expected to report earnings beforeinterest, tax, depreciation and amortisationof between US$3 million and US$4 million,compared to US$10 million for the corre-sponding period last year.

It said the expected decrease was aresult of a significant drop in productinvestment performance fee revenue due

to volatility in global markets; an increasein non-cash equity settled transactionexpense; a one-off expense relating to areduction in staff following a restructureof the Australian Certitude business; and areview of the compensation structure toensure staff were remunerated in line withindustry standards.

It said group assets under management oradvice stood at US$6.03 billion as at October,2011, compared to US$5.13 billion for thehalf year ending 31 December, last year.

By Chris Kennedy

THE Commonwealth Bank’sproposed acquisition of CountFinancial will go ahead after receiv-ing court approval and overwhelm-ing support from shareholders,while chief executive Andrew Galehas announced his resignation.

Shareholders voted 94.82 per centin favour of the schemes of arrange-ment in a vote on Friday 25 Novem-ber – a week after the AustralianCompetition and ConsumerCommission announced it wouldnot oppose the move.

On Monday 28 November theSupreme Court of New South Walesapproved the acquisition, and thegroup also announced that founderand chairman Barry Lambert wouldstay on as a non-executive director.

Count officially ceased trading

as a separate entity last Wednesday30 November, and on the same daythe group announced the resigna-tion of chief executive and manag-ing director Andrew Gale.

CBA general manager for strate-gic development in wealthmanagement, David Lane, imme-diately assumed Gale’s role. Priorto joining CBA in 2010, Lane waschief operating officer for Neuberg-er Berman’s hedge fund business,and has more than 13 years’ expe-rience in investment banking inNew York, London and Sydney.

In a statement to the AustralianSecurities Exchange (ASX),Lambert thanked Gale for hiscontribution to Count over theprior 20 months.

“Count appreciates Andrew’swork during difficult market condi-tions and his leadership of the

company during the transactionwith CBA,” the statement read.

Lambert will remain chairmanof Countplus, which will remain asa separately listed company underindependent management –although the CBA will become itslargest shareholder.

Under the scheme of arrange-ment, all ordinary Count shares willbe acquired by a wholly-ownedsubsidiary of the CommonwealthBank. All outstanding options inCount will be cancelled for consid-eration in accordance with ascheme of arrangement, accordingto a separate statement to the ASX.

Entitlements of $1.40 cash perCount share (or $1.40 worth ofCommonwealth Bank shares perCount share) and consideration ofbetween two and 10 cents perscheme option will be determinedon Tuesday 6 December, accord-ing to the statement.

The payment and issue of thescheme consideration will be madeon the implementation date of theschemes (Friday 9 November), thestatement read.

“As Count’s life as a publicly

listed company will soon come toan end, as the founder of Countyou may well ask if this is a sad dayfor me and Count,” Lambert toldthe company’s annual generalmeeting on 28 November.

“In different circumstances,that may well be the case.However, in view of the certaintyof the CBA offer versus the uncer-tainty surrounding the proposedregulatory change, the prevailingglobal economic conditions andthe political uncertainties inAustralia, the directors unani-mously recommended accept-ance of the CBA offer,” he said.

Lambert said he believedCommonwealth Bank would begood owners of Count and providea safe and secure home for its staff,franchisees, financial advisers andclients.


News

Change of speaker changesodds on FOFABy Mike Taylor

THE recent change in thebalance of power in the Houseof Representatives is likely tomean the Government’sFuture of Financial Advice(FOFA) legislation will bepassed into law with little orno amendment.

While both the FinancialPlanning Association (FPA)and the Association of Finan-cial Advisers (AFA) last weekfiled their submissions withthe Parliamentar y JointCommittee (PJC) reviewing theFOFA legislation, significantchange is no longer expected.

With a Coalition backbenchernow sitting in the Speaker’schair, the Government has onemore vote in the Parliament,effectively changing the equa-

tion for the major financialplanning lobby groups.

Previously, it had beenbelieved that the lobbying ofNSW independent RobOakeshott and Tasmanian

independent Andrew Wilkiemight have garnered theirsupport for some amendmentsto the legislation.

However, Wilkie has subse-quently acknowledged thathis influence has been under-mined by the change inspeakers. Financial plannerswho had been lobbyingOakeshott had expresseddoubt about his position evenbefore last week’s parliamen-tary announcement.

AFA chief executive RichardKlipin acknowledged that, onthe face of it, the changes hadplaced the Government in abetter position to secure thepassage of its legislation.

However, he said his organi-sation would be making its posi-tion clear to the PJC and arguingfor change.

BT offers fee-for-advice option to super membersBy Andrew Tsanadis

BT FINANCIAL Group has announceda new fee-for-advice option which willbe made available to a number of BTRetail Personal Super and Pensionfunds.

According to a letter sent to BT Life-time – Flexible Pension members on14 November, members will be giventhe option to set up an advice fee forpersonal financial advice, effectivefrom 14 December 2011.

The fee-for-advice option, or ‘OptionB’, will replace the pension fund’sexisting fee arrangement, which cur-rently charges members an upfrontcommission of 0 to 4 per cent and an

ongoing commission of 0.6 per centper year based on the value of amember’s investment.

As part of the new option, mem-bers can either sign up to a one-offadvice fee or an ongoing advice fee,which members can opt-out of on adate specified or after a period of twoyears – whichever is earlier. Mem-bers can either fill out an Advice FeeCancellation form to cancel ongoingpayment to advisers, or extend thatarrangement by filling out a com-pleted Advice Fee form, the letterstated.

According to BT, if a member com-mences either one of the advice feearrangements, they will receive a fee

rebate to their account of up to 0.6per cent per year.

“Increasingly, advisers have beenrequesting this flexibility to charge aspecific fee-for-advice rather than abundled commission. Given levels ofdemand, BT will be progressivelyintroducing this across its entire retailproduct range,” said BT Financialhead of superannuation MelanieEvans.

Apart from Flexible Pension, thenew option will also be available to anumber of other BT superannuationfunds including BT Lifetime – Per-sonal Super, BT Retirement Selection– Personal Super Plan, and BT Super-annuation Investment Fund.

ASIC warns on upturn ininvestment fraudINCIDENCES of investment fraudappear to have increased over thepast nine months, according to theAustralian Securities and Invest-ments Commission (ASIC).

What is more, the companiesbehind that fraud have been pre-dominantly based on the GoldCoast – albeit, often registeredelsewhere in Australia.

ASIC and State and Territorypolice services have issued awarning about the increased inci-dences of fraud, warning thatinvestors are being targeted allover the company.

It did so at the same time asobtaining orders against a GoldCoast company for operating an unli-censed financial services business.

According to ASIC, the fraudstersusually contact their victims by tele-phone and convince them to investin schemes involving the purchase

of shares or investment in indexfunds or currency trading schemes.

It said once an investment wasmade, the fraudsters providedaccess to a website that showedprojected returns, however thosereturns were completely fictitious.

“These fraudsters operate with-out Australian Financial Services(AFS) licences and use falseaddresses and phone lines oftenrouted to another address. In thevast majority of cases, investorslose all of their money,” the ASICwarning said.

Specialist SMSFaccreditation on the riseTHE number of people holding self-managed superannuationfund (SMSF) Specialist Advisor and Specialist Auditor statusis continuing to grow.

The Self Managed Super Fund Professionals’ Association ofAustralia (SPAA) said the number of people holding thespecialist status had increased by 65 per cent, with a numberof practitioners holding both accreditations.

Commenting on the data, SPAA chief executive AndreaSlattery said the organisation had experienced strong inter-est from financial planning dealer groups and accountantswho were entering the marketplace and interested in ensur-ing their SMSF advisors had the SPAA designation as aminimum education requirement.

She said that along with accreditation, SPAA also offeredfinancial planners the opportunity to apply for a registeredtax agent status.

Barry Lambert

Richard Klipin

Count/CBA deal proceeds as Gale departs

News

Guardian Advice unveils newsuccession planBy Chris Kennedy

GUARDIAN Advice has overhauled itssuccession planning strategies, with afocus on bringing new advisers into thebusiness.

Guardian said it will aim to proac-tively identify an appropriate succes-sion strategy for practices using a three-pronged approach.

This will consist of a standardisedsuccession and purchasing executionprocess, including legal documentation;providing better access to finance foradvisers to use through parentcompany Suncorp and other accredit-ed banks when acquiring new clientregisters or buying equity in an existingpractice; and an equity partnershipmodel to support the goals and succes-sion plans of larger practices.

The offer is part of Guardian’s valueproposition to prospective buyers,according to Guardian Advice execu-tive manager Simon Harris. Guardiancontinues to aim to increase fromaround 150 to 200 advisers over the nextthree years, and is currently in discus-sions with around 40 to 50 practices,Harris said.

The new strategy was developedfrom March this year when formerCommonwealth Bank national head offinancial planning Ian Anderson joinedthe group as business acquisitionmanager.

Harris said the changes were basedon adviser feedback, and althoughFuture of Financial Advice reforms hadcaused some uncertainty around prac-tice valuations there are still plenty ofbuyers waiting in the wings until thereis some more certainty.

The changes will make it easier foryounger advisers to buy into a practicewhen an older adviser is looking to getout, and will also allow for a moreorderly transition, Harris said.

There has also been no change to thegroup’s buyer of last resort policy(BOLR) since the 2007 decision to movefrom a BOLR arrangement to a practicebuyout facility based on current marketvaluations, according to Harris.

Those practices with a grandfatheredBOLR policy will retain that, with thosethat are in place usually done on arecurring revenue valuation basis;although the exact number varied frompractice to practice, Harris said.

Harris described two BOLR transac-tions that had taken place recently. Inone, Guardian had acquired 100 percent of the practice, then sold that backto another adviser allowing that adviserto join the group and take over thoseclients. In the other, Guardian enteredinto a four year servicing agreementwith an existing practice on a “try beforeyou buy” basis, allowing that adviser topurchase the practice any time in thenext four years at the agreed price – withthe potential to improve the value of thepractice over that time.

Shorten’s retrospectivetax law criticisedBy Milana Pokrajac

BUSINESS taxpayers are concerned about being retrospec-tively penalised for complying with previous tax laws, accord-ing to the Institute of Chartered Accountants in Australia.

These concerns have been raised following the AssistantTreasurer Bill Shorten’s announcement of major changes tothe tax treatment of the residual tax cost setting and rightsto future income rules, which the Government said wouldhelp return the Federal Budget to surplus in 2012-2013.

The changes would reduce deductions available to tax-payers under the operation of the consolidations regimethat was originally introduced in 2002.

However, the Institute’s tax counsel, Yasser El-Ansary, hascriticised the retrospective tax law changes, claiming suchlaws should only be used in extraordinary circumstanceswhere genuine integrity risks exist.

“Retrospective laws should not be used to correct policydeficiencies in the tax system or shortfalls in budget rev-enues,” El-Ansary said. “We need to recognise that everyretrospective law change puts another dent in the percep-tion of Australia’s brand in the international marketplace.”

El-Ansary named amendments to the petroleumresource rent tax (PRRT) as an example of retrospective taxlaws.

“Changes to the PRRT regime will result in a back-datingof the tax law to 1990, while the Government has pro-posed enacting seven-year retrospective transfer pricinglegislation which has the potential to raise billions in addi-tional tax revenues from multinational organisations,” theinstitute stated.

Simon Harris



SMSF WeeklySMSF growth threatens institutional fundsBy Mike Taylor

THE rapid growth in self-managed superannuationfunds (SMSFs) may beconstraining the level ofgrowth in institutional assets,according to new researchreleased last month.

The research, conducted byKPMG and the AustralianCentre for Financial Studies(ACFS), also suggested SMSFs’

growth would continue tocrimp the level of growth inassets within superannuationinstitutions.

The research, ‘Superannua-tion trends and implications’,found the growth of the SMSFsegment since 2000 – and theageing Australian population –provided the greatest threat tothe future of superannuationinstitutions.

It pointed out the SMSF

segment had increased by 461per cent, and the industryfunds segment by 410 per cent,against a more sombre growthin retail funds of 177 per cent,and public sector funds, 100per cent.

Commenting on the find-ings, KPMG’s superannuationgroup head Sean Hill saidmany superannuation institu-tions faced increased rolloversto SMSFs and increased

benefit payments at the sametime their contribution inflowswere slowing.

“This perfect storm poten-tially threatens their futureviability,” he said.

The report found that super-annuation institutions that failto adapt and respond to achanging landscape face theprospect of negative fundsflow, diminishing assets andterminal decline.

Bartering does notcircumvent SIS Act

SELF-MANAGED superannuat ion fund(SMSF) trustees have been warned againstentering into arrangements such as barter-ing which may be deemed to breach the leg-islative provisions around superannuation.

The warning has come from CavendishSuperannuation head of education DavidBusoli, who pointed to a recent interpretivedecision handed down by the Australian Tax-ation Office.

Busoli said the interpretive decision madeit clear that arrangements needed to belooked at as a whole, because while theircomponent parts might not give rise to abreach, the total product might well lead topenalties.

The ATO interpretive decision 2011/84looked at a trade exchange or barteringarrangement and held that it did contravenethe anti-avoidance provision in subsection66(3) of the Superannuation Industr y(Supervision) Act 1993 (SISA).

It said this arrangement, taken as awhole, was “structured with the intentionthat the acquisition by the SMSF of units ina unit trust from a party that was not arelated party to the SMSF, avoided the prohi-bition (in subsection 66(1) of the SISA) ofthe SMSF acquiring assets from a relatedparty. The parties to the arrangement aretherefore guilty of an offence under subsec-tion 66(4) of the SISA”.

The interpretive decision found that whilethe trustee of the unit trust was not arelated party of the SMSF, nor was the unittrust a related trust of the SMSF. The com-pany itself was a related party of the SMSFbecause a member of the SMSF, togetherwith her relatives, having a majority votinginterest in the company in accordance withthe definition of 'related party'.

Post-retirement a key focusBy Damon Taylor

THOUGH self-managed super funds(SMSFs) may currently excel when itcomes to providing an income streamduring retirement, the developmentof viable post-retirement alternativesis set to become a key area of focusfor all superannuation providers,according to David Lees, generalmanager – Super and Investments forthe BT Financial Group.

“As an industr y, I think we’vefocused very heavily – especially inthe last decade – on the accumula-tion side of the (retirement savings)system, and I think the next big areafor the industry to focus on, the nextbig area for Government to focus on,

is fundamentally around the retire-ment part of that retirement savingssystem,” he said. “It’s come out of theglobal financial crisis, because we’veseen people getting into that retire-ment red zone, not wanting to takeas much risk and wanting to try anddeleverage some of that risk.”

Particularly concerned about theretirement red zone – those 10 yearspre- and post-retirement – Lees saidthat a lot of current product sets werelargely asset-based, and therefore stillquite exposed to market variations.

“What we’ve seen people do isreally start to get to grips with thisconcept of a stream,” he said. “Sowhen they’re working, it’s almost likea stream – there’s income coming in

and you can spend it, and when wetalk to them, they all see retirementas being like a bucket.”

“You have a bucket of money andthat’s it,” Lees continued. “And whenthey see the GFC, that bucket washalved in one blow, so they’re very veryconscious around how to manage that,through what type of product and whatkind of income stream they can get.”

According to Lees, retirees are lookingfor something like an overlay, if not a fulllayer, on top of the age pension.

“Something that’s far more accept-able to their standard of living,” hesaid. “And that’s what the industry’sresponding to and obviously we seethis as a huge opportunity within BTand we’re responding to it as well.”

SMSFs in advance of Stronger SuperTHE one key change set to comethrough on the back of the Govern-ment’s Stronger Super reforms lies inboth the information available andsuperannuants’ interest in it, accordingto Andrea Slattery, chief executiveofficer of the Self Managed Super FundsProfessionals’ Association (SPAA).

Slattery said the reason the StrongerSuper reforms had come out sofavourably for self-managed superfunds (SMSFs) was that the sectoralready undertook the majority of theproposed changes as a matter of course.

“So we’re not going to see a lot ofdifference in the way in whichspecialised advice, engaged clients,genuine decision makers and informa-tion is going to change,” she said. “But

I think where there is going to be changewithin super itself where there’ll bemore information about super as awhole.

“The clients and members of fundswill have more information, the advicewill be improved and this is across theboard.”

Slattery said that it was also herexpectation that members’ engagementwould lift, as well as their ability andcapacity to make decisions about theirown personal circumstances.

“I think we’re talking about some ofthe things that were perhaps not allow-ing the system to move forward as effi-ciently and effectively as it could, andintroducing things that are basicallycreating the capacity to do that.”

Parliamentary committee examines tax billA PARLIAMENTARY Committee will examine the Govern-ment legislation aimed at making it easier for people toseek the conso l idat ion o f the i r superannuat ionaccounts.

The House Economics Committee will inquire into andreport on the Tax Laws Amendment (2011 Measures No.9) Bill 2011 which, in part, is designed to enable cer-tain super fund members to electronically request theconsolidation of their super through the Australian Taxa-

tion Office, particularly with respect to lost accounts.The legislation also makes technical changes to the

way in which the capital gains tax applies to businessrestructures, and amends the Goods and Services Taxtreatment of financial services.

The Chair of the Committee, Julie Owens, said that thecommittee would be examining the adequacy of the Billsin achieving the policy objective, and where possibleidentify any unintended consequences.

Andrea Slattery

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With the release of its Mid-YearEconomic and Fiscal Outlook(MYEFO) in late November, theFederal Government seemed to

confirm the analysis of many of its critics –that it is more about the political façade thangenuine economic substance.

Rather than acknowledging that Australianeeded to accommodate a world economy thathad entered a phase more dangerous than thatwhich prevailed during the global financialcrisis, the Treasurer, Wayne Swan, insisted ondelivering a strategy based on the continuingexistence of a Budget surplus.

By almost any analysis, Swan’s $1.5 billionBudget surplus is more about maintainingpolitical capital than economic reality. Giventhat the Government promised a return tosurplus in the next financial year, the Treasur-er wants to be able to argue that it delivered onthat promise. It goes to the heart of being ableto prove the Gillard Government’s credentialsas an economic manager.

There exists a belief in the Australian LaborParty that if the Government can assert itsability as an economic manager over the first sixmonths of 2012 and deliver the promisedsurplus, then it can utilise this as the basis fora turnaround in the polls ahead of a 2013Federal Election.

Why is this important for the financial plan-ning community?

Because the more successful the Govern-ment’s strategy proves to be, the sooner it islikely to go to a federal election.

What financial planners need to recogniseis that with the surprise change in speakersfrom the ALP’s Harry Jenkins to former Coali-tion backbencher, Peter Slipper, the GillardGovernment has not just obtained an extra votein the House of Representatives – it hasobtained the stability necessary for the Govern-ment to run a full term.

To remain in power, the Government nowneeds only the support of two of the independ-ents, and is much less reliant on Tasmania’s lessthan predictable Andrew Wilkie.

Where financial planners are concerned, thismeans the Assistant Treasurer and Minister for

Financial Services, Bill Shorten, is much morelikely to secure the passage of his Future ofFinancial Advice (FOFA) bills through theHouse of Representatives with little or noamendment.

While both the Financial Planning Associa-tion (FPA) and the Association of FinancialAdvisers (AFA) had exhorted their members tolobby both Wilkie and NSW independent, RobOakeshott, with a view to extracting amend-ments to the FOFA bills (particularly aroundopt-in), these efforts may prove to have been invain.

Indeed, even if Oakeshott and Wilkie wereto support the Opposition’s expected amend-ment to the opt-in provisions, the vote wouldbe tied.

This fact makes the suggestion by Shortenthat he will accede to some of the concernsraised by the FPA by moderating the Govern-ment’s approach to the annual fee disclosurestatement even more crucial.

Indeed, with the benefit of hindsight, thereis the suggestion that Shorten was aware ofimpending events in the House of Represen-tatives when he asserted at the FPA Conferencein Brisbane that his FOFA legislation would bepassed intact.

It is little wonder then, that as Novemberturned to December, both the FPA and the AFAwere focusing on putting arguments before theParliamentary Joint Committee (PJC) hearingsconvened to examine the FOFA legislationbefore it is ultimately voted on in the house.

While the PJC hearings provide yet anotherforum via which the FPA and the AFA canoutline their continuing concerns around theFOFA legislation, the committee process is nowunlikely to give rise to anything that would

discomfort Shorten or his ambition to have hislegislation passed.

While the PJC in the form of the RipollInquiry produced a bipartisan report-backingreform in the financial planning industry, thecurrent PJC processes seem more likely to giverise to two reports - one from the Governmentsupporting the FOFA bills and a dissentingreport from Coalition members.

The major industry organisations will alsobe aware that there are key elements of theFOFA changes which have yet to hit the Parlia-ment – not least, a compensation scheme andstandards of professionalism.

Then, too, there is the question of whetherthe FOFA bills will be passed in sufficient timeto allow the industry to put in place the neces-sary back-office changes or whether theGovernment will allow an extended period oftransition.

Planners might also care to reflect upon thedegree to which, over the past four years, theGovernment has wound back incentives forAustralians saving for their retirement beyondthe superannuation guarantee.

Contribution caps were wound back underthe Rudd Government and (including lastmonth’s MYEFO) there have now been signifi-cant cuts to the attractiveness of the superan-nuation co-contribution and cap indexation.

Which brings us back to Australia’s politicaltimetable and the Treasurer’s insistence thatthe Government can, and will, ultimatelydeliver a Budget surplus.

Economic conditions in Europe and the USand their impact on China suggest the first sixmonths of 2012 will provide some of the great-est challenges ever encountered by anAustralian Government – something that willfocus the minds of the Government’s mostsenior Treasury advisers.

The Treasury will be preparing the 2012–2013Budget at much the same time as the FOFAlegislation is being subject to a vote in theHouse of Representatives, but it seems likelythat the Prime Minister, Julia Gillard, and theTreasurer, Wayne Swan, will be focused onformer US President Bill Clinton’s old admoni-tion – “It’s the economy, stupid”.

InFocus

The political clock is ticking and, as Mike Taylor writes, global economic realitymay overtake the Government’s policy agenda before it can deliver proof of aBudget surplus in May, next year.

“The Government has woundback incentives for Australianssaving for their retirement. ”

Year ended 30 September 2011

24th Australasian Finance &Banking Conference14-16 December 2011Shangri-La Hotel, Sydneyhttp://www.asb.unsw.edu.au

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

Effective Business Forecasting Conference201214 February 2012Park Royal Darling, Sydneywww.cpaaustralia.com.au

ASIC Summer School 2012:Building Resilience in Turbulent Times20-21 February 2012Hilton Hotel, Sydneywww.regodriect.com.au/asicss2012

CFO Strategy ResourcesSummit20 May 2012Burswood IntercontinentalHotel, Perthwww.cfostrategy.com.au

Source: APRA - Quarterly Credit union and

Building Society Performance September

2011.

Net Profit After Tax

$55.3b

Total Operating Income

WHAT’S ON

CREDITUNIONSNAPSHOT


The folly ofdenying global

economic reality$363.9m

$2b

Total Assets


Money Management Top 5 Lists

1. Industry Super NetworkIt seems as though the Industry SuperNetwork (ISN) won where the financial plan-ning industry lost. Not only does the ISN stillrun its fairly successful and well known“Compare the Pair” advertising campaign,the body also had the Government’s ear withrespect to crucial parts of the Future ofFinancial Advice reforms, such as theremoval of adviser commissions and theintroduction of the controversial opt-inproposal.

Despite the financial planning industry’sopposition to research and argumentspresented by the ISN for the introduction ofsuch proposals, Prime Minister Julia Gillardstill praised the ISN chief David Whiteley for

standing “with us from the earliest days inour determination to secure a better retire-ment for all Australians”.

2. BT Financial GroupThe reason why BT Financial Group grabbeda spot on this year’s Top 5 winners list isbecause it was the only wealth managementdivision owned by a major banking group –the other three being MLC, Colonial FirstState and the relatively young ANZ Wealth– which did not struggle over the year,despite the ever volatile markets and fallinginvestor sentiment.

In fact, it was BT’s strong performanceover the year that drove Westpac to a strongfull-year finish.

According to the banking group’s chiefexecutive, Gail Kelly, the division welcomedover 70,000 new customers onto the BTSuper for Life platform over the year, andthere had also been a strong uplift in thecross-sell of wealth and insurance products.

3. Marianne PerkovicCareer woman Marianne Perkovic wasanother winner this year, as her career atColonial First State keeps blossoming.Perkovic moved from her position as chiefexecutive officer of Count Financial to Colo-nial First State in 2009, where she firstperformed the role of general manager,distribution.

She rose through the ranks earlier this

year and was promoted to general managerof Colonial’s advice business following PaulBarrett’s departure.

As her role involves responsibility overCommonwealth Bank-aligned dealergroups, Perkovic was reunited with Countfollowing the bank’s successful acquisitionbid, and she will also serve as a director onthe dealer group’s board.

4. Avoca Investment ManagementIn April this year, John Campbell and JeremyBandeich left their roles at UBS’s AustralianSmall Companies Fund, and after a month’sbreak, emerged with Avoca InvestmentManagement – the most high profile newboutique fund manager on the market.

They took with them another UBS teammember, Michael Vidler, and gained addi-tional backing via their partnership withboutique incubator Bennelong FundsManagement.

Campbell and Bandeich, after leavingUBS, are now majority owners of their ownboutique, and this brave move scored thema spot on this year’s winners list.

5. Barry LambertWhile the independent dealer group sectorjust lost one of its major players to an insti-tution, one clear winner has emerged fromCBA’s acquisition of Count Financial – itsformer executive chairman and founder,Barry Lambert.

When the transaction between thebanking group and Count is finalised,Lambert will walk away with around $249million in his pocket.

He founded Count Wealth Accountantsin 1980 after 19 years spent at the Common-wealth Bank. Lambert will remain on theCount board as a non-executive director.

- By Milana Pokrajac

1. Industry Super NetworkWhile the ISN’s methods in fighting the waragainst adviser commissions have longbeen questioned by the financial planningindustry, the matter was recently taken toFederal Parliament.

The Federal Opposition directed the ques-tions towards two corporate regulatorsabout the assessment of some of theprudential and legal risks the “Compare thePair” advertising campaign carries, afterwhich the Australian Securities and Invest-ments Commission has agreed to review thepopular campaign.

Meanwhile, at the Association of FinancialAdvisers national conference, the ISN chiefDavid Whiteley declined to specify precise-ly how much his organisation and its indus-try fund constituents were spending on tele-vision advertising.

2. APRA/MTAAEarlier this year, Liberal Senator DavidBushby asked the Australian PrudentialRegulation Authority (APRA) a series ofquestions relating to problems associat-ed with MTAA Super, including the regu-lator’s decision to appoint a specialcounsel and whether APRA had sufficient

resources to conduct investigations.Instead of answering the questions,

APRA cited section 56 of the AustralianPrudential Regulation Authority Act 1988,which it said precluded it “from disclosinginformation disclosed or obtained underor for the purposes of a prudential frame-work law and relating to the affairs of aregulated entity”.

After effectively avoiding answering ques-tions about MTAA Super, APRA was remind-ed of its accountability to the Parliament,which oversees the role of regulatory bodies;however, the answers were not provided.

3. CHOICEConsumer group CHOICE was another oneof the harshest critics of commissions andasset-based fees. However, CHOICE’s

secrecy around its relationship with One BigSwitch was widely criticised, and some evencalled the group hypocritical.

The criticism centres on the apparentdouble standard of CHOICE receiving refer-ral fees, and not disclosing the full details,after it was critical of the planning industry’slack of transparency.

Eureka Financial Group managing direc-tor Greg Cook pointed to the group’s “part-nership” with One Big Switch – somethingwhich, while not publicly disclosed, “indi-cates some kind of financial relationship.”

4. MF GlobalOn 25 October 2011, derivatives broker MFGlobal reported a $191.6 million quarterlyloss as a result of trading on Europeangovernment bonds.

Not long after this announcement(which was preceded by a number of otherincidents), the company filed for Chapter 11 bankruptcy.

The collapse of MF Global affected anumber of Australian companies, includingMF Global Australia, MF Global SecuritiesAustralia Limited and Brokerone Pty Limited.

The Federal Government said MF Global’scollapse highlighted the need to strengthenclient money protections, announcing itwould consult with the industry on regula-tions around over-the-counter derivatives.

5. PraemiumPlatform provider Praemium had takenlonger than anticipated to gain the desiredscale in its Australian and UK operationsover the past couple of years.

The company reported a loss of $5.7 million last financial year, which was animprovement over the previous 12 monthperiod when it reported a loss of $10.9 million.

Praemium announced two capital rais-ings between December 2010 and February2011 which would fund the improvement ofthe company’s financial performance.

The decision to raise capital also followsthe resignation of founder and former chiefexecutive Arthur Naoumidis in earlyAugust, who is still involved with the busi-ness as a consultant to new chief MichaelOhanessian and the rest of the Praemiumboard.


Wins

Fails


Money Management Top 5 Lists

1. FOFAThe Government’s Future of FinancialAdvice changes have dominated thenews for nigh on two years now and westill don’t seem much closer to a resolu-tion. There have been endless submis-sions from all sectors of the industry,and varying degrees of opposition toalmost every aspect of the parts of thelegislation that have been made publicso far. That now consists of two of threeproposed tranches following Novem-ber's tranche 2 release. The first tranchehas already undergone several amend-ments and more are likely, with Assis-tant Treasurer and Financial ServicesMinister Bill Shorten conceding theGovernment may reassess the surpriseinclusion of retrospective fee disclosurerequirements. With each delay theGovernment’s proposed 1 July 2012 startdate becomes increasingly unlikely.Par ts of the legis lat ion have alsogarnered less than eager support fromkey independents who hold the balanceof power of this minority Government.Long after the industry would haveexpected cer tainty around theseproposals, a huge question mark stillhangs over almost every aspect of thesecritical reforms.

2. MLCThe wealth management division ofNational Australia Bank has been one ofthe most proactive in its attempts toincrease its distribution network amidstthe current round of industry upheaval.The group publicly made a grab for AXA-aff i l iated practices that may havebecome disenchanted during the group’s

merger with AMP. This followed anunsuccessful bid from NAB itself forAXA’s Asia-Pacific business when theAustralian Competition and ConsumerCommission deemed such a movewould be anti-competit ive. MLCapproached a large number of AXA prac-tices, with several publicly confirmingthe switch, while a number of AXA exec-utives also moved over to MLC during2011. It will be interesting to see to whatextent MLC continues this acquisitivedrive in 2012.

3. Matrix Planning Solutions2011 was the year of the merger, as

uncertainty over the shape of impendingFuture of Financial Advice reforms sawDKN join the IOOF family and Countjoin forces with the CommonwealthBank of Australia, while Snowball andShadforth Financial Group also teamedup. Late in the year Matrix PlanningSolutions managing director Rick DiCristoforo announced his group wouldbe looking for an institutional backer toacquire 100 per cent of the business. Thegroup has already commenced discus-sion with potential buyers – although DiCristoforo has yet to reveal any detailssurrounding the future of the group orhis own career direction. Given thedepartures of Count chief executiveAndrew Cole, DKN CEO Phil Butter-worth (to BT Financial Group) andSnowball chief executive Tony McDon-ald, there is no guarantee Di Cristoforowill remain with the group when a buyeris inevitably found. Matrix appearsalmost certain to announce the futureowner of the group some time in 2012,

while the rapidly-dwindling non-aligneddealer group market could well takefurther hits.

4. Lonsec and van EykTwo research houses, both servicing theretai l f inancial advice sector : one striding away from a period of disrup-tion, and the other headed for the uncertainty which goes with a changeof ownership.

When van Eyk founder and chief exec-utive Stephen van Eyk departed thecompany in 2009, new CEO MarkThomas oversaw a period of high volatil-ity with a number of prominent depar-tures, including head of research NigelDouglas. The uncertainty may havecontributed to van Eyk’s mixed resultsin Money Management’s 2010 RatingsHouse of the Year award (which is basedon feedback from fund managers andfinancial planners). However, underThomas and new head of research JohnO’Brien the firm moved up to outrightsecond in 2011. Could it be the start ofbigger and better things for van Eyk?

Meanwhile it was announced thisyear that Lonsec, a clear winner in boththe 2010 and 2011 awards, would besold by Zurich to the Mark Carnegie-linked Financial Research Holdings,parent company of superannuationresearcher SuperRatings. Almost imme-diately, Lonsec’s general manager ofresearch Grant Kennaway announcedhe would be departing the company forrival Morningstar. It remains to be seenhow ties between the Industry SuperNetwork (ISN) and SuperRatings(SuperRatings supplied the research for

the ISN’s controversial ‘compare thepair’ advertising campaign) affect thefirm’s standing with retail financialplanners – traditionally philosophicalopponents of the ISN.

5. Commonwealth FinancialPlanningOne year ago Commonwealth FP wasone of Money Management’s ‘Top 5’dealer groups of 2010, due to significantgrowth in adviser numbers and fundsunder advice (FUA). At the same timethe group was one of our ‘Top 5’ badapples, thanks to the actions of rogueplanner Don Nguyen – although CFPwas proactive in cooperating with theAustralian Securities and InvestmentsCommission (ASIC) and reimbursingaffected clients.

One year on and Nguyen has beenbanned for seven years by ASIC, whileCFP has entered into an enforceableundertaking with ASIC to improve itsrisk management framework. Just a yearafter joining from Count Financial,Marianne Perkovic succeeded PaulBarrett as general manager of Common-wealth’s advice division, Colonial FirstState. In November, head of Common-wealth Financial Planning Neil Youngerleft after little more than a year in therole to join ANZ. No replacement has yetbeen named. All the while CFP contin-ues to be one of the largest advicegroups in the country in terms of advis-ers and Funds Under Administration.Can Commonwealth put the negativeheadlines behind them in 2012?

- By Chris Kennedy

Onesto

watch


Money Management Top 5

1. LonsecEarlier this year, Zurich announced thesale of the research and ratings house,Lonsec.

Zurich had been entertaining bidsfrom interested parties in the monthsleading up to the announcement, withthe researcher finally going into the armsof Financial Research Holdings (FRH).

FRH, led by private equity specialistMark Carnegie, also owns SuperRatings,which was referenced in the IndustrySuper Network’s controversial ‘comparethe pair’ advertising campaigns.

Not long after the acquisition ofLonsec was announced, the then chiefexecutive officer Grant Kennawaydeparted the research house for its rivalMorningstar, while Amanda Gillespiefilled Kennaway’s role.

2. Count FinancialAs an independent dealer group withmore than 700 advisers and a huge clientbase - but more importantly as a groupdelivering positive profit results over theyears – Count Financial was an institu-tion’s dream purchase.

The dealer group was certainly ahighly sought-after acquisition, withnet-profit after tax growing to $51.6million, up 113 per cent over the year to30 June 2011.

Count was courted by the Common-wealth Bank for more than a decadebefore it finally caved in for a price of$373 million.

Count founder Barry Lambert alludedto the uncertainty surrounding theFuture of Financial Advice (FOFA)reforms as an important element for thetop-down consolidation. Count itself hasbeen quite vocal in its opposition to opt-in requirements.

3. DKN Financial GroupAnother independent dealer groupwhich was lost to the institutional

market is DKN Financial Group. Follow-ing the approval of IOOF’s proposal toacquire the group for $115 million, chiefexecutive officer Phil Butterworth leftDKN. With substantial changes in seniormanagement and a fairly challengingyear ($13.95 million loss in net profitafter tax), it will be interesting to seewhat 2012 will bring for the group.

4. ING Investment ManagementAnother significant acquisition was thatof ING Investment Management. In Julythis year, ING Group agreed to sell itsinvestment management business toUBS Global Asset Management(UBSGAM).

The takeover (for an undisclosedamount) was finalised in October, whichled to the redundancies of 36 of the 120ING IM staff.

The acquisition, however, saw thedoubling of UBSGAM’s funds undermanagement, and has placed the Swissbank in the top 10 largest investmentmanagers in Australia.

5. Shadforth Financial GroupThe Australian dealer group market wasfurther consolidated when SnowballGroup and Shadforth Financial Groupdecided to become one.

Snowball intended the new group tobecome ‘Australia’s leading dedicatednon-aligned financial advice and wealthmanagement group’.

In addition to an executive reshuffle,the group signalled its intention to inte-grate the Shadforth and Outlook advicebusinesses into a single-focused operat-ing model concentrating on high-networth and mass affluent clients.

The merged entity, under theproposed name SFG Australia, report-ed a net profit after tax of $25.4 millionin August.


AcquisitionsMoves1. AXA executivesSince its establishment in February thisyear, MLC’s retirement solutions team hasgrown to 10 people; of those, eight wererecruited straight from AXA.

The moves occurred following thecompletion of the AMP/AXA mergerand started with the appointment offormer AXA head of structured solutionsAndrew Barnett.

Other moves to MLC included threeNorth executives – Paul Stratton, MichaelTobin and Remi Bouchenez, as well as threeother members of the group’s seniormanagement – Shaune Egan, Stuart McGre-gor and Joachim Lumbroso.

2. Neil YoungerAlthough financial services executives haveplayed musical chairs for much of the year,financial planning executive Neil Youngerhas notched up a rare achievement. In thelast 14 months, Younger has held seniorroles at three of the big four banking groups.

For most of last year, Younger was incharge of BT Financial Group’s dealer groupbusiness before moving to CommonwealthFinancial Planning in October, where hewas appointed new general manager.

He spent just over a year at Common-wealth FP, when it was announced that hewas moving to ANZ to head up practice-based financial planning. He was welcomedto the team by his former colleague atCommonwealth Bank (CBA) Paul Barrett.

3. Paul BarrettOne of the more significant moves in thefinancial planning world was Paul Barrett’smove from Colonial First State (CFS) toANZ, where he heads the group’s wealthmanagement division.

Barrett first moved to CFS as distribu-tion general manager from a CBA-owneddealer group Financial Wisdom. He waslater promoted to head of advice busi-ness, but made a move to ANZ Wealthearlier this year.

Following in his footsteps is MariannePerkovic, who was quickly promotedfrom distribution general manager toCFS head of advice business followingBarrett’s departure.

4. Grant KennawayFunds research and ratings houses haveseen quite a bit of executive movement inthe past 12 months.

Soon after Lonsec was sold to FinancialResearch Holdings, its then chief executiveofficer (CEO) Grant Kennaway announcedhe was leaving the company. Only weeksafter that announcement, the news got outthat Kennaway had found a new home atMorningstar, where he heads fund researchfor the Asia Pacific region. Following hisdeparture, Kennaway’s colleague AmandaGillespie was promoted to chief executiveofficer of Lonsec.

Another significant departure withinthe funds research space was that ofMark Hoven, who left his position as chiefexecutive officer of Standard & Poor’sFund Services and is yet to announce hisnext move.

5. Phil ButterworthAlmost immediately after DKN wasacquired by IOOF, its CEO Phil Butter-worth left the group for a senior positionat BT. His departure saw three morehigh-level DKN executives leave thedealer group – Lonsdale CEO MarioModica, Lonsdale executive director KonCostas, and DKN executive director ofdistribution Andrew Rutter.

Butterworth, however, was not the onlyexecutive to leave a company acquired byIOOF. If we go back to 2009, former Scandiachief Andrew Black was made redundantafter the company was purchased by IOOF.He has found a new gig this year as chiefexecutive officer of a Western Australiandealer group Plan B.


AND


1. Guardian AdviceGuardian Financial Planning recently cele-brated its 10th birthday, and announced aslight rebrand in an effort to reposition thebusiness as a risk-focused boutique, chang-ing its name to Guardian Advice.

In the past 12 months, Guardianmanaged to secure Commonwealth Bank’snational head of financial planning IanAnderson, and began leveraging an in-house paraplanning team to provide freestatements of advice (SOA) for risk insur-ance for advisers.

In June, the boutique joined the Associ-ation of Financial Advisers’ Licensee Part-nership Program in order to give it repre-sentation before the Government andregulators on policy issues and the oppor-tunity to work with advisers Australia-wide.

In a growth strategy echoed by a number

of other dealer groups in Money Manage-ment’s survey, Guardian Advice executivemanager Simon Harris recently said thatthe business was hoping to expand itscurrent adviser base of around 150 to 200over the next three years.

2. ClearViewAfter changing its name from ComCorpFinancial Advice this year, ClearView Finan-cial Advice’s rapid growth in plannernumbers has reflected a strong year for thedealer group. Although it sits at 51 on thedealer group table, ClearView’s acquisitionof Bupa Australia has been the driving forcebehind the growth of its distributionnetwork. The acquisition also sawClearView report net profit after tax of $19.3million, and increase its surplus capitalabove internal target requirements from $40

million to $53 million, according to thegroup’s end of financial year results for 2011.

As a supporter of scaled advice,ClearView managing director SimonSwanson added that the group is well-placed to deliver such advice going forward.

3. AMP Financial PlanningAMP Financial Planning (AMPFP) came outon top in the institutional category in theMoney ManagementTop 100 Dealer Groupsof the Year survey based on a combinationof its recruitment and retention strategy,including its popular traineeship program,Horizons Academy.

In the second half of the year, AMPFPunveiled a one-stop shop financial plan-ning centre in Parramatta to provide poten-tial clients easy-access to financial advice –which precedes the launch of a secondwalk-in business in Camberwell,Melbourne.

Meanwhile, the corporate mergerbetween AXA and AMP in March saw exec-utive leadership at AMPFP remainunchanged, but the significant addition tothe team was the appointment of CommIn-sure executive Todd Kardash as nationalsales manager.

4. Count FinancialA successful 2011 saw Count Financialpost net profit after tax for the year endedJune 2011 of $51.56 million, which wasmore than double the previous years’results.

Count Financial senior executive ofadvice Dean Borner said the solid driveby investors into services such as cash-flow management and income genera-tion has been a focus for the group in thepast year, compared to the significantinvestments made by clients prior to theglobal financial crisis. Borner added thatCount has had an estate planning focusfor some time, and the group has beenenhancing adviser training to providethem with more estate planning supportservices.

In a significant industry acquisition,Count Financial officially agreed to atakeover bid by the Commonwealth Bankworth $373 million.

5. SynchronOne of the more openly vocal dealergroups opposing various aspects of theFOFA bill was risk-focused financialadvice licensee Synchron.

The dealer group’s director Don Trap-nell said that as of April, around 80 percent of Synchron’s 195 authorised repre-sentatives were risk writers.

Around this time, the dealer group alsolaunched the Synchron MentoringProgram to provide in-house support toup-and-coming advisers, plannersmoving into managerial positions, as wellas planners retiring from the industry.

In June, the dealer group’s policy ofenhancing its technological offering sawit partner with online personal insuranceportal MultiCover.

- By Andrew Tsanadis

1. FirstChoiceEarlier this year, Colonial First State radi-cally revamped its FirstChoice platformarrangements, which resulted in it offer-ing lower fees than industry superannu-ation funds.

CFS chief executive officer Brian Bissak-er said at the time that the new offering wasaimed at putting an end to a “fruitlessdebate” about the fees charged by industrysuperannuation funds and retail offerings.

The independent specialist superannua-tion consultancy Chant West confirmed thatFirstChoice Wholesale Personal Super in facthas lower fees than both the average indus-try fund and the average retail fund, based

on an average account balance of $25,000.Actions certainly speak louder than

words, and Colonial’s move to revampthe product has earned FirstChoice a topspot on Money Management’s Top 5 Plat-forms list.

It is also worth mentioning thatFirstChoice has the largest number ofprimary adviser relationships in the market,with $49.1 billion in funds under manage-ment (FUM) as at June 2011 (includingFirstChoice Wholesale).

2. BT Wrap and SuperWrapBT Wrap and SuperWrap platforms haveachieved positive net flows in the year

ending June 2011 ($4.6 billion), which wasmore than could be said for the majority ofbig players in the market.

The platform had recently announced a$150 million investment into a new infor-mation technology system, which will allowBT’s platforms to rid themselves of theancient technology implemented in 1997– the year they were created.

Apart from dealer groups owned byWestpac, DKN was a big supporter of BT’sWrap platform prior to the acquisition byIOOF. BT has confirmed it was watchingthe distribution land grab game closely, butstated it was confident it would remain thelargest platform in the market.

3. NorthEarlier this year, AXA unveiled its new Northplatform, which is the first full wrap ownedby AMP.

Its impressive revamp and performanceover the year have earned this platform aspot on the Top 5 Platforms list in 2011.

Its net inflows in the September 2011quarter ($242 million) were double whatthey were the same time last year, withthe platform introducing new optionsto investors.

Since developing into a full wrap offer-ing, North has included direct sharetrading, 200 managed funds and a varietyof term deposits, rather than just theguarantee.

4. MasterKeyMasterKey has around $34.6 million in FUMcompared to $33.6 million during the sameperiod last year, according to data from Planfor Life.

In November, MLC announced a majoroverhaul of its MasterKey Fundamentalsplatform, including the lowering of admin-istration fees for balances up to $200,000 andthe introduction of new investment options.

For MLC, the platform market is fallinginto two distinct categories: high net worthinvestors and the majority investors.MasterKey Fundamentals caters for themasses, the company said.

5. Macquarie WrapMacquarie’s new portfolio-priced versionof wrap released in May, Macquarie Consol-idator, hit $1 billion in net inflows and hasattracted over 900 new clients.

Macquarie is a big supporter of the independent financial adviser sector andhas allowed smaller providers to access itsplatform, finishing the year to June 2011 ina positive territory.

Macquarie Adviser Services head ofinsurance and platforms Justin Delaney saidthe reason for the platform’s success hasbeen due to the company’s propositionaround administration, custody, and theuse of technology.

- By Andrew Tsanadis

Platforms

Dealergroups

No one would reasonably denythe importance of the claimsassessor’s role, nor could it bereasonably denied that asses-

sors need to have access to a wide range ofinformation in order to effectively under-take their role. Information can be derivedfrom sources such as doctors’ reports andmedical examinations, tax returns andother financial statements and, on occa-sions, claimant interviews.

There is one source of information,however, that has a tendency to give rise toemotion and controversy, typified by thestatement from the claimant that it is ‘aninvasion of privacy’, or the concern andconsternation typified by the insurer thatit’s ‘expensive and not always reliable’.

That information source is of coursesurveillance and it, no doubt, would benefitfrom itself being placed under scrutiny.

Basis of surveillanceSurveillance involves the obtaining of filmor photographs by an investigator eitherfrom a vehicle or a covert position. Thefocus of surveillance can be almost anylocation, with the most common being:

• The claimant’s home;• The claimant’s place of work;• The claimant’s neighbours – for

example to observe a social function;• A public venue such as a sports oval or

shopping centre; or• The surgery from which an inde-

pendent medical examination is to beundertaken.

Surveillance might even be undertakenby way of:

• Someone making contact with theclaimant on the basis of a pretext – forexample, pretending to purchase a car orboat from the claimant, although someinsurers are reluctant to use this facility;

• Following the claimant’s car in order to

identify the destination; • Checking the claimant’s actual activities

against a recently completed insurer’s activ-ity log; or

• Undertaking overseas surveillance onthe basis that the further the claimant isfrom home, the more they will let downtheir guard.

On occasions surveillance may bedetected by the claimant, so the surveil-lance will be stopped but then recom-menced several days later when it wouldbe least expected.

There are, however, rules that must befollowed under the law generally, andprivacy in particular. Examples of restric-tions to surveillance include:

• The person undertaking the surveil-lance cannot represent themselves as agovernment employee, for example amember of the police force or fire brigade,nor can they represent themselves incor-rectly as a member of a legitimate companyother than their own;

• Entrapment techniques cannot be used– for example, leaving a pile of soil in theclaimant’s drive to see if the claimant is ableto shovel it clear;

• Surveillance cannot be undertakenfrom private land without permission; and

• Whilst film can be obtained withoutpermission, audio cannot.

To be effective, surveillance should beundertaken in an environment where theclaimant will not be directly aware it isoccurring. Logistically, it is more difficultto achieve this in remote and rural areascompared to the city.

Reasons for surveillanceThe use of surveillance may be consideredby the assessor if the claim appears in someway unusual, for example:

• Where the nature of the disability andthe physical condition of the claimantappear to differ – for example, the claim isin respect of a frozen shoulder but the armshows no signs of wasting;

• The duration of an income protectionclaim is materially longer than the averagefor similar causes, occupations, etc;

• The cause of the claim is subjective, andthere is some other concerning factor suchas the policy having recently started or thebenefit amount being relatively large.

On rare occasions surveillance has evenbeen undertaken overseas where a suspi-cious ‘death’ has occurred.

Surveillance may also be considered ifthe assessor, based on their experience, isin some way unsure of the validity or other-wise of the claim – ie, there may be no onemajor factor, but a series of small issuesadding up to a general disquiet.

Whilst the reasons for arrangingsurveillance may be reasonable, whetheror not an appropriate outcome is reachedis, in part, dictated by the attitude of the assessor.

If the assessor has made up their mindthat a claim is not valid and is simply usingsurveillance as a tool to prove it, the resultsof the surveillance and actions subsequent-

ly taken can be tainted by bias. Also, logical-ly, if the assessor has reached a decision inregards to the claim, sufficient proof shouldalready be available such that surveillanceis unnecessary.

Surveillance should be approached froma neutral position and in line with the previ-ously described role of the assessor – ie, ifreasonable uncertainty exists, additionalinformation should be obtained in orderto remove the uncertainty.

Case studyMinnie is a real estate agent who owns asuburban real estate firm that also employstwo other agents. Minnie is on claim fordepression.

Surveillance is undertaken and thisshows Minnie attending the office for anhour, once or twice a week.

The response from the assessor to thismight be:

• Immediately assume Minnie is workingand take action in line with this – forexample, close the claim, or

• Appreciate that Minnie’s attendanceat the office does not necessarily meanshe is working, and thus seek clarificationfrom Minnie.

The adviser and surveillanceAdvisers who are experienced in claimsprocedures will recognise that the useof surveillance by an insurer can be avalid tool that will assist to manageclaims, serve to confirm the validity ofgenuine claims and reduce the rate offraud, and thus reduce overheads thatcan drive up premiums.

Experienced advisers viewing surveil-lance in this way may see that a naturalextension of this would be to inform clientswho are on claim as to the facts surround-ing surveillance, and also that it may beused in certain circumstances.


OpinionRisk

Col Fullagar looks at the issue of surveillance during claims management and theadviser’s role in making sure the client is treated fairly. Is surveillance an invasion of a client’s privacy, or perhaps the insurer’s right to better understand a claim?

Surveillance under scrutiny

“The use of surveillance byan insurer can be a validtool that will assist tomange claims. ”


Taking an open and natural approachgives the adviser and the claimant theopportunity to discuss other aspects of theclaim, in addition to surveillance, in aninformative and non-threatening way. Thisin turn should mitigate any subsequentconcerns the claimant may have if theybecome aware of surveillance when it isoccurring, or if they subsequently learn thatit has been undertaken.

To the extent that surveillance is a validclaims management tool, the insurer andthe adviser should not avoid the fact that itexists and may be used. Discussionsconcerning it should be open and honest.

The claimant and surveillanceA number of insurers were recently askedthe following questions in regards tosurveillance:

If surveillance was being undertaken andthe claimant asked the assessor if it was –would you tell the claimant?The majority of insurers responded with“Yes”, noting that this applied in regards toa direct question from the claimant ratherthan proactively advising the claimant thatsurveillance is being undertaken.

This would appear to be the appropri-ate response. To avoid the question orworse still, to misrepresent the position,would endanger the insurer’s credibilityin future dealings with the claimant andthe adviser.

If, however, confirmation wouldcompromise a situation where there isstrong evidence to suggest the presence offraud, there may be merit in the insurerseeking to tactfully avoid a direct answer.

If surveillance had been completed and theclaimant asked the assessor if it had beenundertaken, would you tell the claimant?Again, the majority of insurers answeredwith “Yes”.

In a situation where surveillance hasbeen completed, confirmation wouldappear not only reasonable but, in somesituations, reasonably necessary. Forexample, in the case study above, by

confirming to Minnie that surveillance wasundertaken and that it showed her attend-ing the office, she is given the opportunityto explain the position such that the insurercan make an appropriate decision.

If the claimant requested a copy of thesurveillance tape,would you provide a copy?Once more the responses varied in linewith those above. However, insurers whorefuse to provide a copy of the surveillancetape may be falling foul of their duty to actfairly – ie, in good faith, and also of privacylaws.

It seems only fair that if evidence hasbeen obtained that may influence theinsurer’s assessment of a claim, theclaimant should be given the right of reply.

The court appeared to agree when ithanded down its judgement of a caseseveral years ago.

The insured submitted a claim whichwas denied, based on medical examina-tions the insurer arranged. A question thatarose during the trial was whether theinsurer had acted unreasonably and unfair-ly in failing to disclose to the claimantdetails of the medical reports.

The court ruled the insurer had a dutyof good faith and that “the failure by aninsurer to disclose medical reports adverseto the claimant, with the result the claimantwas not given an opportunity to answerthem, could be sufficient to justify the courtin saying that the (insurer) did not act fairlyand reasonably in coming to a decision onthe (claimant’s) claim.

“Fairness required the appellant to begiven the opportunity of answering the newmaterial before the respondent made itsdecision”, the court said.” (61-453 Beverleyv Tyndall Life Insurance Company Ltd.ANZInsurance Cases Vol.10. 1998-1999)

Under privacy laws a person is able tohave access to personal informationconcerning them unless an exceptionapplies. Potentially relevant exceptionsmight be:

• Providing access would be likely to prej-udice an investigation of possible unlaw-ful activity;

• Providing access would be likely to prej-udice…the prevention, detection, investi-gation, prosecution or punishment of crim-inal offences, breaches of a law imposing apenalty or breaches of prescribed law(Information sheet – Private Sector, 1ANational Privacy Principles 6.1 (i) and (j)).

The insurer and surveillanceSurveillance would generally be consid-ered as one of a number of claims manage-ment tools at the disposal of the insurer. Itwould be the exception to the rule forsurveillance alone to be used as a basis ofdenying or closing a claim.

Claim payments might, however, besuspended on the basis of doubtsarising from surveillance so that theclaimant is given the opportunity toclarify the position.

The frequency with which surveillance isused appears to belie the controversy itcauses. Estimates have it used in fewer than5 per cent of claims.

For every 100 times surveillance wasundertaken, estimates show:

• On 50 occasions the result was neutral; • On 10 occasions doubt was cast on the

validity of the claim;• On 35 occasions the claim appeared

genuine; and• On 5 occasions surveillance was

compromised. The numbers should be taken as

indicative only, as the results will no

doubt vary between insurers.Surveillance can be expensive, costing

around $3,000 a day. A standard approachis to commission one or two days surveil-lance, and then extend the duration basedon the results obtained.

Prudent claims management proce-dures would likely dictate that the insurerwill have written guidelines as to whensurveillance might be considered.

Further, it should have similar guidelinesas to the qualities and standards it wouldrequire of an organisation to be used toundertake surveillance.

SummaryFraudulent and exaggerated claims areexpensive both in the cost of payment ofunwarranted benefits , and also in the costof detection.

These costs are simply added to theoverall outlays that insurers recoup by wayof premium payments: ie, the honestclients fund the less than honest.

Responsibility for cost control does notonly rest with the insurer; advisers andhonest claimants have a part to play as well:ie, to be understanding and supportive ofthe reasonable processes insurers need toput in place in order to reduce the burdenof unwarranted claim payments.

For its part, the insurer should appreci-ate that not all claims that appear unusualwill be fraudulent or exaggerated; thus theyshould, wherever possible, give theclaimant the benefit of the doubt and theright of response to surveillance that isundertaken.

If all parties take an open and respect-ful approach, the use of surveillance willbe not only be an invaluable source ofinformation for the assessor seeking to gainan improved view of a claim, but also abasis for the important building of trustand understanding between the insurer,claimant and adviser.

The matter of surveillance certainlydeserves scrutiny.

Col Fullagar is the national manager forrisk insurance at RI Advice Group.

“Responsibility for costcontrols does not only restwith the insurer; advisersand honest claimants havea part to play as well. ” t

Everyone who thinks about thefuture of the world's economy mustform a view on China. The prevail-ing view is that China will roll on

inexorably, even if at a lower growth rate.I have dissented from that view, even going

so far as to call the Chinese economy a Ponzischeme. Today I will go further and suggestthat, in certain respects, the best indicator ofChina’s future could be Japan's present. Lestyou consider this to be an irresponsibleattempt to be controversial, I will shortly quotethe views of the Governor of the Bank of Japanin support of this position.

The first step in this process is to under-stand what has caused Japan's malaise.

Western economists and politicians arefond of pointing out what the Japaneseshould be doing to fix their economy. It isclaimed that they need to overcome cultur-al issues, reduce their savings surplus, fixtheir mismanagement, stop the deprecia-tion of the yen, print more money, etc. Every-one explains the solution according to theirpet theory.

However, there is one fundamentalproblem faced by Japan which cannot befixed – short of genocide of the elderly.

DemographicsWe have heard a great deal about the baby-boomers and the forecast impact their retire-ment will have on Australia’s future depend-ency ratio.

The term ‘dependency ratio’ refers to theratio of adults of retirement age to those ofworking age. This is often measured as those65 or older as a ratio of those aged 15 to 65.We will adopt this formula in what followsand express it as a percentage.

Of course this is an imperfect measure ofthe number of the elderly needing to besupported by those working: some ofworking age could be unemployed; someretirees could be self-funded; some under65 could be retired; some over 65 could beworking; some over 15 may be studying full-time and not working, etc. Nonetheless it iswidely used as it is a reasonable indicator ofthe ratio of those too old for work comparedwith those working.

No one knows quite how the ageing ofAustralia will affect our economy, but it willcertainly bring challenges. With a larger andlarger proportion of the population retiredand thus reducing both labour supply and

consumption – leaving a smaller percent-age of the population working – pressuresmust emerge.

But this lies in our future; it is currentreality for Japan today. According to theWorld Bank, the global average dependen-cy ratio is 11 per cent (ie, 11 of retirementage to 100 workers.) In North America theratio is 19.6 per cent, almost identical toAustralia’s. The ratio is 25.9 per cent for theEuropean Union.

In Japan there are 35.5 people of retire-ment age for each 100 workers. This ratiohas increased inexorably and at an increas-ing rate, and will continue to for many years(see Table 1). The rate has doubled since1990, the end of their boom years.

This ever-increasing number of non-working people creates a growing weight forthe economy to handle – typically retireesreduce both consumption and the laboursupply.

The view from JapanThe Governor of the Bank of Japan (Japan’scentral bank), Masaaki Shirakawa, present-ed a paper to the Bank of Finland’s 200thAnniversary Conference in 2011. In it heexplored the reasons for Japan’s economiccollapse and explored whether there maybe any lessons in it for China and India.

Mr Shirakawa reminds us that Japan’saverage rate of growth over the 15-yearperiod from 1956 to 1970 was nearly 10 percent per annum. He notes this is very similarto China’s average growth rate over the 15years from 1990 to 2005.

Japan's growth reduced from these levelsthrough the 1980s but remained above thatof most advanced economies. China'sgrowth since 2005 has been stronger thanJapan in the 1980s.

Shirakawa explores the reasons for Japan'sspectacular growth from 1956. The firstcause he points to is favourable demograph-ics. Not only was the population relativelyyouthful, supporting both production andconsumption, but also, he adds:

“The migration of surplus labour from therural areas to the cities enabled the rapid

growth of a high productivity manufacturingsector.”

But wait! That is exactly what's happeningin China: double digit growth, fuelled bymigration to the cities. Perhaps there aresome similarities… (Naturally, other factorswere also described as contributing to theboom period, but they lie outside thepurpose of this article.)

Then Shirakawa turned to the causes ofJapan's subsequent struggles. He noted thebursting of Japan's bubble created prob-lems. Next he noted that Japan's superioroperational efficiency was lost as competi-tors caught up. He then turned again todemographics, referring to the growth independency ratio, noting:

“Such rapid aging has never been seen inpast economic history.”

In short, Shirakawa says that Japan had a“population bonus” during its boom years,which has since become a “population onus”.

Then he went on to point out that Chinais on a similar path.

One-child ChinaThe one child per family policy was intro-duced into China in 1978. This policy hasone unintended demographic consequence:it guarantees that at some time the depend-ency ratio will be horrific. To understandthis, consider a family of two parents andone child. When the two parents retire onlyone child will be left in the workplace.

We therefore need to consider the futureof China's dependency ratio. The UnitedNations (UN) has done this, making fore-casts using a range of assumptions. We willconsider their ‘medium variant’ forecast, asthere is historical as well as forecast data forit. This data is presented in Graph 1, ‘China'sdependency ratio’ (see page 21).

You can see that China's dependencyratio begins to accelerate from around 2010,and is forecast to reach and then surpassJapan's current rate.

It must be acknowledged that long-termforecasting is an uncertain business, so theactual figure may be above or below theseprojections. For this reason forecasts beyond2050 have not been shown (though we cannote in passing that, under the UN’s worst-case scenario, a dependency ratio of 76 percent is forecast by 2100). Even though it isnot possible to forecast with precision, wecan say for sure and certain that, like Japan

before it, China faces a seriously deteriorat-ing dependency ratio which will create chal-lenges for the economy.

This time it’s different, againThere are many similarities between theover-confidence in Japanese equities in the1980s, the over-confidence in technologystocks in the 1990s, and the prevailing atti-tude to China in recent years. In each caseinvestors mistook a phase in a cycle for anenduring trend. Investors persuaded them-selves that the fundamentals were sofavourable that prices would continue torise. In other words, they extrapolated therecent past into an ever more favourablefuture. In short, they believed that ‘this timeit's different’.

A dangerous tendency to make the samemistake has emerged with regard to China.Many people are utterly persuaded that itwill sustain strong growth for the foresee-able future, and that strong long-term equityreturns will follow. Once again, this time isdifferent – nothing will go wrong.

This form of thinking does not have a goodtrack record: the Japan and technologybubbles resulted in savage losses for investors.

In order to counsel caution about this, I


The Messenger

China: frombonus to onus

Japan’s economy has been a basket case for two decades, whileChina’s has boomed. Yet Robert Keavney suggests that China mayface some of Japan’s problems.

1990 16.62000 24.32010 35.5

Table 1 Dependency ratio in Japan

have devoted a series of articles to explor-ing China as an investment theme. Histori-cal evidence was examined demonstratingthat there is no correlation betweeneconomic growth and equity returns inemerging markets. In other words, the merefact that China is growing strongly is notevidence that it will produce a superiorequity return.

We also reported that 50 per cent ofChina's gross domestic product (GDP)consists of investment. This has no histori-cal precedent and would appear to be a formof artificially propping up the economy. It isnot sustainable.

Yet this is a good part of the argument forthe China growth story: look how manyroads, cities, power stations, etc they arebuilding. We pointed out that China hadbuilt a number of brand spanking new ghostcities, with virtually no residents.

I recently heard further anecdotalevidence of over-building, in a report by atraveller in north-west China, driving forhours on a six-lane highway and hardlyseeing another car. If large road building isseen as evidence of a healthy China, thenwe would be twice as impressed if thishighway was expanded to 12 lanes. Never

mind that no one uses it.We reported an acknowledgement by a

leading figure in China’s government thatthere is an element of public relations (ie,spin) in China’s published growth figures.

In this article we have explored the new‘great wall’ of China: ie, the demographicwall that China will need to climb whileattempting to grow its economy.

There are serious risks to the China

investment story. These need to beweighed fully before allocating an expo-sure to, or allocating an overweight expo-sure to, resources on the basis of China'sever-growing demand.

IndiaIncidentally, Shirakawa notes that India isat a very different demographic stage.

“India has yet to enter the population

bonus stage,” he says.India’s dependency ratio is becoming

favourable and is forecast to keep improvinguntil around 2030.

EuropeIt may be interesting to cast a demographiceye towards Europe. Germany has theworld's third highest dependency ratio, at30.8 per cent. This rate is also growingmarkedly, having increased by 29 per centover the last decade (compared to a 41 percent increase for Japan). Over two decades,German dependency has grown by 43 percent, compared to more than doubling inJapan (source: United Nations).

Germany does not appear to face thescale of demographic problems which Japandoes and China will. Nonetheless, at a timewhen Germany is seen as the possiblesaviour for all of Europe, it is worthwhilerecognising that it faces issues of its own.

There are 15 countries beside Japan witha dependency rate of 24.9 per cent or higher.These are: Austria, Belgium, Bulgaria,Croatia, Denmark, Estonia, Finland, France,Germany, Greece, Italy, Latvia, Portugal,Spain and the United Kingdom. (Specialmention goes to Italy with the secondhighest level of dependency at 31 per cent.)All these nations except Croatia are in thetroubled European Union.

It should be expected that advancedeconomies would have a higher dependen-cy ratio due to a longer life expectancy anda generally lower fertility rate (ie, number ofbirths per woman). However, the situation inmuch of Europe is worse than Canada, theUSA and Australia.

On a per capita GDP basis, Bulgaria,Croatia, Estonia, Greece, Latvia and Portu-gal are not nearly as wealthy as the leadingEuropean states. Nor are Italy and Spain,though the margin is not so great. Thoughtheir dependency is not growing as rapidlyas in Germany, the standard of living ofthese nations will remain under pressurefrom their high dependency ratio. Inpassing it can be noted that immigrationcould provide relief from a difficultdependency ratio. It may therefore beunfortunate that Europe is experiencingan anti-immigration phase, especially ofIslamic immigrants.

The point being made is that demograph-ics will not help Europe grow out of itscurrent difficulties, though they don't facethe challenges of Japan and China.

ConclusionChina’s dependency is only beginning toaccelerate more quickly. Their dependencyproblem will only develop slowly. Andcertainly there are differences between Japanand China. Dependency is only one factor ina complex modern economy. Nonetheless,an excessive dependency ratio has thepotential to stifle China’s economic growth,as it did in Japan.

Shirakawa said that there were concernsabout Japan’s demographic trends in the1980s, but they were “considered vaguelyas an issue for the distant future.” It wouldbe easy to take the same attitude to Chinatoday.

Robert Keavney is an industry commentator.


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Graph 1 China’s dependency ratio

We live in a world of instantgratification. Wonderingwhat the final score was atthe game? Google it, or

subscribe to have it texted to you within60 seconds of the final siren. Need a map?Click on the application on your phoneand you’ll get directions, a traffic updateand estimated time of arrival. We’re notjust referring to Generation Y here: whenwas the last time you checked your bankbalance in the branch, or looked at thebalance in your passbook? Of course, youcheck your bank balances and transac-tions online – in most cases you don’t evenneed to wait until you get to a computer,you can do it from your mobile phone.

Wealth creation, on the other hand,doesn’t occur immediately. The tremen-dous positive impact that a great financialadviser can have on the health of theirclients’ wealth and lifestyle is best demon-strated over time. Initial financial plans cansave clients a great deal in tax, fees, incomeand benefits, and yet the true benefits ofquality advice are only fully realised overthe long term.

The impact of investment returns, long-term tax savings, the avoidance of makingpoor decisions, a quality risk managementplan and the discipline of investing regu-larly and consistently compounds overtime, and is best demonstrated five, 10,even 20 years into an advice relationship.That is, of course, if the client has main-tained the services of their adviser, andallowed them to keep their financial planand actions up-to-date with the changesthat continuously occur in the legislativeand economic environments, as well as thepersonal life of the client.

How, then, do you keep your clientsengaged for the long term when they canobtain such fast results in other aspects oftheir daily life? It is imperative that anadviser can demonstrate the value of this

long-term relationship through a consis-tent and meaningful ongoing service, sothat the client recognises the importanceof its existence and continues to opt-in yearafter year, despite market volatility, mediascrutiny, and short-term negative returnsin their portfolio.

Clients make these decisions based ona variety of factors, including the tangibleresults that are demonstrated in their netwealth and lifestyle, and importantly, theemotional benefits they receive from theknowledge that they have an expert theycan trust who is looking after their affairsand assisting them to make educated deci-sions about their financial affairs.

Over 25,000 clients of financial planningfirms in Australia have completed the Busi-ness Health Catscan client satisfactionsurvey; and surprisingly, clients continual-ly rate the review service delivered by theiradvisers as by far the worst-performingarea. Compare this feedback with the factthat over 80 per cent of the participatingpractices state that they have a regular anddocumented review process in place.

Clearly, clients value having a ‘review’with their adviser, and yet the quality of thatreview is paramount. It’s not enough tosimply provide a report and/or discussionon portfolio performance. Successfuladvice firms who will continue to havelong-term relationships with their clientsin the future will need to provide a reviewservice that is powerful and meaningful fortheir clients.

Whilst an ongoing service packagecontains more than just a review meeting,this article focuses on this very importantinclusion in your client’s annual calendar.

Let’s consider why a client engagedtheir financial planner in the first place.We often find that great financial plan-ners take their abilities for granted. Theiryears of education, knowledge and expe-rience allow them to understand finan-

cial concepts, rules and strategies, andthey often forget that these skills are notcommon in the greater population. Howoften have you heard statements like “I’mnot good with numbers”, “I hate money”,and “I was never good at maths/econom-ics”? Essentially, clients come to youbecause they wish to outsource theirfinancial planning to an expert; for manyof them money is ‘boring’, planning is‘boring’. Of course, there are also thosewho have the ability to plan for them-selves, but choose to outsource it anyway,so as to allow them to focus on what theydo best, or enjoy more – this discussionis equally relevant for them too!

Across the profession, we use the term‘client review’ when referring to a meetingheld after the initial on-boarding processwith a client. Let’s think for a momenthow a client looks at that term. If thefinancial analysis is ‘boring’, how excitingdoes a ‘review’ sound? Sure, they want toknow what has been happening with theirmoney – but do they really want to‘review’ the economy, investment marketsand legislation, or is that what they payyou for? Does a client really care thatmuch about the performance of theirinvestments, or are they more interestedin whether their portfolio and financialactions will still allow them to achieve thecurrent and future lifestyle they want? Yes,historical returns will be a factor but,consider this: should a review be aboutthe client and nothing but the client? Intimes of market volatility, advisers toooften focus on our fears instead of gettingback to the relationship we've alreadybuilt and continue to build on it by under-standing the client, their family and whatthey want to achieve; we somehow forgetthat a product and its performance is ameans to an end.

Many advisers use a client review in aretrospective manner – taking a look at

the client’s investments and superannu-ation, with a focus on the performance offunds. Realistically it should be aboutrestoring perspective, reviewing theclient's circumstances and understand-ing what changes should be put in placein response to any changed circum-stances, and how the client is feelingabout their situation.

Right about now you're asking if a clientreview is not an investment update. Whatis it? Simply, it's a chance to celebrate, re-evaluate and update! It's a chance for youto really let your client know that youunderstand them and where they areheaded; model where they are placed onthe journey towards their goal(s), andreview what you can all do separately andtogether to have a further impact on theirfuture. So would it be more appropriate,and perhaps even more engaging to aclient, to change the name of a ‘clientreview meeting’ to a ‘strategic updatemeeting’, a ‘forward planning meeting’, oreven an ‘on-track meeting’?

Review your ReviewsTake the time with your staff to revisit theprocess you use to conduct reviews inyour business. If you are not convincedthat your clients truly value this service, ifyou’re not convinced that the way youconduct your reviews results in betterfinancial outcomes for both you and yourclients, take action. Ideally, ask your mostvalued clients what they would like toexperience, and embed a rock-solidprocess in your business that fits withyour client value proposition and willallow you to hold onto your clients for thelong-term.

Lana Clark is a business coach withElixir Consulting, based in Brisbane. SueViskovic is managing director of ElixirConsulting.


OpinionClientService

How do you keep your clients engaged for the long-term in an age of instant gratification andcontinuing market volatility? The answer may lie in the client review process, according to SueViskovic and Lana Clark.

Review your reviews

LonsecA good question to ask would be: “Whydo you believe you can meet or exceedthe fund objectives?”

This is a catch-all question, but shouldprovide a consistency check, particularlyin terms of answers the manager wouldhave already provided around people andresources, research approach, corporatestructure and the ability to deliver anappropriate reward for risk. Linking thisquestion back to current portfolio posi-tioning should also provide an indicationof how insightful the manager has beenover the period since the last review, andwhether the manager is adhering to itsprocess and remaining true to label.

Of course, the reality is that there is nosingle last question that will determinethe decision to recommend an interna-tional equities fund. Ultimately, Lonsecaims to make an assessment of whether afund can provide consistent long-termperformance above that of its benchmarkand peer group. We believe a manager’sability to do this can be distilled down tohaving the right people, in the right envi-ronment, supported by a logical androbust process.

MercerThe final question to be re-asked is: “Canyou identify what your competitiveadvantage is and how your investmentprocess exploits this opportunity?”

The reason we ask this question is that itis nearly as important that a managerunderstands where they have an edge (andwhere they are directing their efforts) ashaving an edge in the first place. If themanager does not understand this featureof their investment proposition, they arejust working hard but without a clear focus.

There are a number of ways in whichMercer believes it is possible for amanager to add value, including:

• Superior knowledge to other marketparticipants;

• The willingness to take a long-termview when other market participants arenot, and are overwhelmed by the noise ofmore recent news flows. (Does notpreclude strategies with a shorter-termtime horizon being rated highly), and;

• A better understanding of behav-ioural factors than a typical marketparticipant.

MorningstarThe question would be: “What is yourcompetitive advantage?”

The reason for asking this is that it isan open question, and gives themanager great scope to answer on anumber of levels should they so choose.The approach taken to responding, andthe answers they give, can be revealingand instructive. It is also instructive ofour qualitative approach to research indel iver ing an hol ist ic v iew of amanager’s capability.

Each manager should be able to clearlyexplain the areas of particular strengththey believe give them an edge. This couldbe across a number of areas such asanalyst insights, team tenure and experi-ence, portfolio construction, proprietarymodels, investor alignment, or a combi-nation of these and other factors. In theabsence of a sound rationale, we wouldquestion whether they have the belief inthemselves to deliver excess returns overthe medium to long term. Some fundmanagers also mention their weakness-es in the same response, which may high-light a balanced approach and a desire toimprove. Therefore, it will highlight anydifference between their perception ofthemselves and the reality in which theyoperate in. It gives an insight into theirculture.

Standard & Poor’sFrom an investment strategy selection

perspective, the key considerations arecovered off in the manager due diligence

review, and strategy review processes.However, assuming all is satisfactory andthe due diligence review validates thestrategy, we would revisit the followingquestions:

“Does the strategy have an alpha-generating thesis that can be validatedin at least one economic cycle; has themanager demonstrated consistent andreliable alpha generation through theimplementation of a repeatable invest-ment process; and is the alpha oppor-tunity being considered the one thathas actually produced the alpha for thestrategy?”

All other things being equal, theanswers to these questions are the coreconsideration in the fund/strategy selec-tion process. Consequently, it is impera-tive for portfolio construction to fullyunderstand and have confidence thatthese aspects of a fund/strategy are ableto generate alpha as intended.

van EykThe final and most important question toask is: “Can you communicate your strat-egy to clients in such a way that they willstick with you in sickness and in health(at least in terms of performance)?”

The obvious attributes of strongpeople, process and business are by nowminimum investment grade criteria. Itshould also be taken as a given that ahighly rated manager has a tangibleedge in the market (a surprisingly rareattribute).

Much better investment outcomesare generally achieved when clients areplaced with managers they identifywith at a level deeper than implied bybranding, past per for mance or aweighty research report. We all stand amuch better chance of making sureclients have the patience to let themanager exploit the investmenthypothesis if the thesis can be commu-nicated to and inter nal ised by

investors. I f they lack bel ief in amanager, they will find it even moredifficult to stick with those who have amore active investment strategy. Itshould also be noted that the impact ofill-timed switching can easily swampthe potential added value from goodmanager selection.

Zenith Investment PartnersThe short answer, after reviewing all otheraspects of the manager and fund, isaccountability – who is ultimatelyaccountable for the investment portfolioand performance of the fund?

In Zenith’s opinion, it is critical thatthere is a single person, usually the port-folio manager, who is responsible for thefund, and therefore is ‘on the hook’ forits performance. It is quite common,particularly with large, US-based globalequities managers, for stock selectionand portfolio management to bemanaged by a committee. In our view, acommittee or multiple portfoliomanager approach rarely works, as noone person is fully responsible oraccountable for the management of thefund. In many instances, the Australian-registered global equities fund investsinto a portfolio of global equitiesmanaged for US or other globally-basedinvestors. We prefer to see an experi-enced portfolio manager responsible forthe fund managed for Australianinvestors – and on top of and account-able for its performance. This tends notto be such an issue with the Australian-based global equities managers, wherethe investment team is much smaller.Nonetheless, it remains critically impor-tant that there is a dedicated portfoliomanager responsible and accountablefor the performance of the fund.

ResearchReview


Research Review is compiled by PortfolioConstruction Forum in association with MoneyManagement, to help practitioners assess the robustness and disclosure of each fund researchhouse compared with one another, given the transparency they expect of those they rate. Thismonth, PortfolioConstruction Forum asked the research houses: “You are making the finaldecision as to whether to recommend an international equities fund – what is the one lastquestion you would ask (or ask again) of the fund manager, and why?”

Analysingthe raters

In association with

This is a very good question, andone we get asked regularly. Thereasons put forward as to whynot to focus on real estate

investment trusts (REITs) as a separateasset class are many and include:

• They seem to behave like equities,not property;

• The index is dominated by one name– Westfield;

• There is very little diversification,with a few entities dominating the index;

• It is virtually all retail, and retail isdead because of online shopping;

• The expected returns aren’t attrac-tive either; and,

• The farrelly’s allocations are too lowto make any difference.

A glance at Figure 1 showingAustralian REIT (AREIT) price move-ments over the last two years wouldseem to suggest the patient is dead –certainly if this was a heart monitorchart, that would be the conclusion.

Despite this, REITs are worth perse-vering with as an asset class, even if allo-cations within a portfolio are low for thetime being.

What makes a worthwhile asset class?Farrelly’s criteria for a assessing whetheran asset class is worthwhile arepredictability, investability and differen-tiation. REITs tick all three boxes.

PredictabilityREITs are quite predictable over the longterm. Rents grow at around inflation, andvaluation multiples are mean reverting.The shocks over the past few years high-light the risks that exist with all forecasts– sometimes they can be wrong, partic-ularly if the fundamentals shift dramat-ically and unexpectedly. In the case ofthe recent debacle, the villain of the piecewas excessive gearing and abysmalmanagement of that gearing. The diffi-cult-to-predict aspect was just howmuch damage that poor managementcould inflict. Now we know.

Investing is easyInvesting in REITs is simple. Managedfunds, exchange-traded funds and

direct investment are all straightforwardin big amounts and small. While farrel-ly’s would prefer to invest in propertydirectly or by way of unlisted vehicles,the investability criterion is difficult tomeet. Illiquidity, excessive gearing,excessive fees and too lumpy sizes allmake direct unlisted investment diffi-cult. And, given the long-term returnprofile of direct investment is not thatdifferent from the listed alternative, weremain happy to stick with the listedvehicle.

REITs are differentThe fact that the question as to whetherREITs are a worthwhile asset class isbeing asked is evidence of how differ-ent they are. Right now, Australian equi-ties look a far more attractive proposi-tion than AREITs. On the other hand,AREITs looked more attractive thanequities from around 1998 through to2004. During the period 2000 to 2007,AREITs outperformed equities; sincethen, equities have greatly outper-formed. AREITs do march to a differentdrum. They have become highly corre-lated with equities in the short term,which gives rise to the feeling that theyseem to behave just l ike equities.However, in the short term, most assetsare positively correlated, so if taken toits logical conclusion, this argumentwould have us with just two assetclasses; equities and debt. For ourpurposes the main question is: are theydifferent in the long term? The answer isclearly yes.

Are AREITs too undiversified torepresent a viable asset class?This is another tricky question, and oneultimately dominated by a discussion ofgearing. AREITs have been variouslyreported to own somewhere between 30per cent and 50 per cent of the totalinvestment grade property in Australia.On this basis, it is clear that buying theindex of AREITs gives an incredibly diver-sified exposure to Australian commercialproperty. The index is clearly not undi-versified from a property perspective.

Excessive exposure to retailproperty?This seems to be a bit of a furphy. Retailproperty is probably the most resilientof all the main commercial propertycategories, and so a higher exposure tothat is like having a corporate bond fundwith an excessive exposure to AAA-ratedcompanies. It will not help your long-runreturns but may not actually increaserisk.

Excessive manager concentrationThis is another furphy. The real issue ismore about whether having that proper-ty in too few hands creates another set ofrisks. The two Westfield funds plus Stock-land and GPT represent almost 60 per centof the index. Throw in Goodman andDexus and we are at over 70 per cent ofthe index, with half of that represented bythe two Westfield entities. This representsa concentration of management ratherthan a concentration of too few underly-ing properties. Do we need managementdiversification? Maybe. Given theappalling track record of the industry inmanaging debt, it could be argued that theanswer is a categorical ‘yes’. We disagree.

The problem with excessive debt isthat all the managers tend to take it on atthe same time, driven by the samefactors. Manager diversification offerslittle real protection.

Current expected returns andallocations are low, so why bother?Allocations are low because forecastreturns are low, not because there isanything irredeemably wrong with theasset class. Prices are simply too highcompared to the fundamentals. But thiswill not always be the case. There maywell come a time when AREITs appear tobe a once-in-a-generation bargain thatproduce wonderful long-term gains forinvestors. Markets often go through long-term cycles of euphoria followed bypanic, followed by premature bargainhunting, then disappointment, beforeloathing and finally utter boredom setsin. In our view, REITs are in the loathingstage. Boredom is probably still a fewyears away, and they are certainly notbargains yet. But that time may wellcome.

Some notable examples of unlovedasset classes becoming standout invest-


ResearchReviewREITs – still aworthwhileasset class?REITs are worth persevering with as anasset class, even if allocations within aportfolio are low for the time being,according to Tim Farrelly.

Figure 1 Australian REIT price movements

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ments include Australian governmentbonds which, after a decade of negativereal returns, could be locked away in1982 at 16.4 per cent per annum for 10years. Gold spent 20 years in a bearmarket between 1980 and 2000. Sincethen, it has been one of the best-performing asset classes. Emergingmarkets had become popular in the early1990s before producing nine years ofawful underperformance between 1994and 2003. Since then, they have strong-ly outperformed developed markets.There is every chance that this patternwill be repeated with AREITs some timein the future.

Have the problems been sorted out?Despite being tidied up over the last fewyears, AREITs are still not without theirproblems. The two major ones are theongoing potential for excessive gearing,and the continuing presence of manage-ment that seems to be oblivious to theinterests of unit holders. But it seems topale into insignificance when compared

to the issue of gearing. In fact, withoutgearing, even poor management wouldbe of only passing concern to investors.

Gearing needs to be brought downand kept downGearing results in negligible increasesin returns on the net amount invested,and it actually reduces returns on a port-folio basis. It increases correlation withequity markets, increases the impact ofpoor asset management, and dramati-cally increases risk of poor capitalmanagement.

Because expected returns on realproperty are around 8 per cent to 9 percent per annum, borrowing at 7 per centper annum has very little impact onreturns. With 30 per cent gearing,returns on a property fund could beincreased by about 0.3 per cent to 0.6per cent per annum before managementfees and transaction costs. An allowancefor these would remove much of thatincremental return.

In any event, even this gain is spurious.

If an investor wanted a $100,000 expo-sure to property in a portfolio, they couldinvest $100,000 ungeared or $50,000 ina geared portfolio that effectively gavethe investor $100,000 property exposureand $50,000 debt. This would leave theinvestor with $50,000 to invest in cash tooffset the debt in the A-REIT. Assumingthe investor receives 4.5 per cent perannum on the cash and pays away 7 percent per annum on the debt, the neteffect on the overall portfolio return isthat the investor in the geared productgets exactly the same return as theungeared investor, less $1,250 perannum, which is the interest rate differ-ence between what is earned on the cashand that which is paid away by the fundon its debt.

While not increasing returns, gearingdoes dramatically increase risk. Itincreases the correlation betweenreturns on AREITs and the broaderequity markets, as both respond to thesame factor – rising borrowing costs.Back in the distant past, when gearing

was much lower, so too were correlationsbetween AREITs and equities muchlower, and diversification was enhanced.

Gearing also increases the risk ofbone-headed investment decisionsaimed primarily at increasing the remu-neration of the managers. Without debt,the key errors management can makeare bad acquisitions and bad develop-ments. Both are hard to do in an envi-ronment where they have to be financedby raising equity capital from sharehold-ers, who naturally want to be convincedthey are getting a good deal. Contrastthat with a deal financed by bankers,who are only concerned that they gettheir loan repaid, which will happen aslong as the manager hasn’t bought aproperty that is about to lose more than50 per cent of its value. Even an acquisi-tion that is 20 per cent overvalued is agood deal for a banker who only lends50 per cent of its value.

Without excessive debt, the ability ofmanagement to destroy significant valueis also limited because the size of deals islimited. By way of illustration, a pooracquisition valued at 10 per cent of thecapital base of the fund will only reducefund net asset value by 2 per cent, if itproves to be 20 per cent overvalued.Unpleasant, but not catastrophic.

But the most significant risk intro-duced by gearing is the risk of poorcapital management, as was so vividlyillustrated in the debacle witnessed in2008 and 2009. During this time, asshown in Figure 1, the average A-REITfell in value by 68 per cent. Investors wereleft with just 32 cents in the dollar.Contrast this with the average fall of 10per cent to 20 per cent in underlyingproperty valuations. Capital manage-ment is a huge risk factor.

Will gearing be brought permanentlyinto line? Eventually, perhaps. Mean-while, we watch and wait. Even with theissues associated with gearing andmisalignment of management incen-tives, there will be a price at which theseassets again become attractive.

Tim Farrelly is principal of specialistasset allocation research house,farrelly’s.


In association with

The taxation treatment of lumpsum benefits from superannua-tion is widely understood andtaken into account when advis-

ing clients. However, advisers may beunaware of the hidden costs which canresult in a client losing Government assis-tance payments and paying more person-al income tax.

When advisers speak to clients aboutlump sum benefits from superannuation,the amount of tax payable (if any) is calcu-lated and taken into account. However, itis not widely known that the taxablecomponent of a lump sum benefit(including a lump sum death benefit paidto non-death benefits dependants) isincluded within the client’s taxationreturn as assessable income for the finan-cial year in which the benefit is received.

The full extent of the true costsbecomes apparent when the client’s taxreturn is completed and lodged with theAustralian Tax Office. Playing a proactiverole in the lump sum death benefit paid inthe case study below demonstrates onemethod which ensures sufficient cashreserves to repay Government assistancepayments and pay additional taxes andlevies.

Case study: Mike and AliciaMike (age 39) worked full time for the2010-2011 financial year and he earned$61,000. Alicia (age 34) worked one dayper week and she earned $7,680.

Mike and Alicia have two children, Ben(age 9) and Emma (age 6), who are inprimary school. Alicia had their thirdchild, a baby girl, in July 2011. Aliciaensured she satisfied the eligibility crite-ria for the new paid parental leave schemeby working one day per week across the2010-2011 financial year.

Alicia’s mother passed away in Decem-ber 2010 and her super account of$210,000 was paid as a lump sum deathbenefit to Alicia. Even though Alicia hada close relationship with her mother, sheis classified as a non-death benefitsdependant for taxation purposes. Thelump sum death benefit was received byAlicia in May 2011 and comprised ataxable component of $210,000 (with notax-free component).

Mike and Alicia might want to retain acash reserve of at least $15,000 to pay forthe additional costs outlined below.

What impact will this have on Mike andAlicia’s situation?

The taxable component of the lumpsum death benefit ($210,000) will be clas-sified as assessable income for taxationpurposes for the 2010-2011 financial year.Consequently, this will have an impact onAlicia and Mike’s personal situation (assummarised within the following table).

The additional costs will reduce the

lump sum death benefit to $159,935.These additional costs add a further 7.34per cent of transaction costs to the lumpsum withdrawal. As a combined amount,the total transaction costs are 23.84 percent as a percentage of the gross lumpsum benefit.

The following information outlines thedetailed analysis of table 1.

Family Assistance payments Mike and Alicia claimed family assistancepayments for their two children, Ben andEmma for the 2010-2011 financial year.

Impact: Alicia’s adjusted taxableincome for Family Tax Benefit purposeswill increase to $278,680. Mike and Aliciawill need to repay $5,840.36 in familyassistance payments.

Parental Leave Payment Scheme Alicia satisfies the eligibility criteria forthe new parental leave payment schemeduring the 2010-2011 financial year andshe is planning to claim the payment fromSeptember 2011.

Impact: The lump sum death benefitincreases Alicia’s adjusted taxable incometo $217,680 for the 2010-2011 financialyear, and this will exceed the limit of$150,000 or less in the financial year priorto the date of the birth. Alicia will notreceive parental leave payment schemepayments of $10,609.20 ($589.40 per weekover the 18 week period).

The baby bonus of $5,437 will bepayable if Mike and Alicia’s estimatedcombined adjusted taxable income is$75,000 or less in the six months followingthe birth of their child. Mike and Alicia’s

combined adjusted taxable income forthis period within the 2011-2012 finan-cial year will be less than the $75,000income threshold ($61,000 x 50 per cent =$30,500).

TaxationMedicare LevyNormally, Alicia’s employment income of$7,680 for the 2010-2011 financial yearwould not be subject to the Medicare levy.

Impact: Alicia’s taxable income forMedicare levy purposes will increase to$217,680. This means Alicia will pay theMedicare levy of $115.20 on her employ-ment income ($7,680 x 1.5%).

Medical levy surchargeMike and Alicia did not have privatehealth insurance with private patienthospital cover for the 2010-2011 financialyear. The lump sum death benefit will beincluded within Alicia’s assessable incomefor surcharge purposes. Mike and Alicia’scombined income for surcharge purpos-es for 2010-2011 is $278,680.

Impact: Both Alicia and Mike will besubject to the Medicare levy surcharge.Mike will pay $610 (1% x $61,000), whilstAlicia will pay $2,176.80 (1% x $217,680).

Low income tax offset The inclusion of the lump sum death

benefit within Alicia’s taxable income forthe 2010-2011 financial year means thelow income tax offset will not apply.

Impact: The low income tax offset willreduce from $1,500 to nil, and Alicia willpay personal income tax of $7,680 on heremployment income. In dollar terms,Alicia will be required to pay $252 ($7,680– $6,000 x 15%, assuming no otherdeductible expenses or tax offsets).

SummaryFinancial advisers need to be aware of thefull impact that lump sum benefits fromsuperannuation can have on a client’soverall financial situation when they areunder age 60. It is essential to includeappropriate disclaimers within your state-ments of advice and ensure the clientseeks taxation advice from a registeredtax agent.

The most important issue is to play aproactive role to ensure you manage yourclient’s expectations and highlight theimpact that the lump sum benefit couldhave on their overall financial situation.

Damian Hearn is the technical servicesmanager at IOOF.


Toolbox

Advisers may be unaware of the hidden costs with regards to the taxation treatment of lump sumbenefits from superannuation, according to Damian Hearn.

Determining the hidden costs

Table 1

Gross lump sum death benefit $210,000

Tax payable on lump sum death benefit (including Medicare levy) -$34,650

Net lump sum death benefit $175,350

Other payments

Family Tax Benefit -$5,840

Parental Leave Scheme* -$10,609

Baby Bonus $5,437

Medicare levy: employment income -$115

Medical levy surcharge -$2,787

Low income tax offset -$1,500

Subtotal additional costs -$15,414

Total transaction costs -$50,064

Adjusted lump sum death benefit $159,936

Note: Assumes no personal income tax will be paid by Alicia during the 2011-2012 financial year.

Table 2

Fortnight Per annum

Family Tax Benefit – Part A $148.87 $3,870.60

Family Tax Benefit – Part B $75.76 $1,969.76

Total $224.63 $5,840.36*

* Excluding the annual supplement payment.

Appointments


Please send your appointments to: [email protected]

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

FINANCIAL ADVISERLocation: Brisbane/Port MoresbyCompany: Fortune ConsultantsDescription: An opportunity exists for afinancial adviser to join a financialadvisory firm based in Port Moresby.

The company will offer qualified leadsand training to candidates with experiencein financial planning or sales.

The position boasts 3-hour air-linksbetween Brisbane and Port Moresby, aswell as giving applicants the potential toearn a significant wage based on acommission-based benefits structure.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Rick at Fortune Consultants –0408 819 398,[email protected].

AMP HORIZONS ACADEMYLocation: Australia wideCompany: AMP Horizons AcademyDescription: AMP is accepting applicationsfor its 2012 AMP Horizons Academy 12-month training program.

The paid traineeship begins with a 10-week course at the AMP’s academy inSydney. Graduating as a competent

financial planner, you will be provided witha position in your home state and receiveadditional on-the-job training for ninemonths in an AMP Horizons practice andbe mentored by experienced financialplanners throughout the year.

The successful applicants will have aDiploma of Financial Services (FinancialPlanning) or be RG146 compliant.

You will be rewarded with a fast-trackedcareer in the company and a competitivetraining salary.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact AMP – 1300 30 75 44.

SENIOR DEALER/ASSOCIATEDIRECTORLocation: PerthCompany: Terrington ConsultingDescription: A firm offering a fixed incomebrokerage service is seeking a highlymotivated senior dealer/associate director.

In this role you will report to the existingdirector while managing all sales andbusiness development activities forWestern Australia. As part of the foundingteam in Perth, the successful candidatewill receive an attractive remuneration

package and have access to a bonusstructure.

You will have experience and knowledgeof fixed income markets and products, andhave a strong desire to develop your clientrelationship, business development andleadership skills.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs

FINANCIAL PLANNERLocation: MelbourneCompany: National Australia BankDescription: National Australia Bank is lookingto take on a financial planner to service, retainand provide ongoing advice to clients, as wellas seeking new business opportunities.

The successful candidate will be offered acompetitive remuneration package, uncappedbonus incentives, ongoing professionaldevelopment, and paraplanning andadministration support. You will also be offereda initial support by utilising NAB’s referralrelationships and an established fee for advicemodel.

To be successful in this role, you will ideallyhave completed your ADFS or equivalent, andpossess solid planning experiencedemonstrating a proven sales ability. Tertiary

degrees in a business related field will also behighly regarded.

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

CLIENT SERVICES MANAGERLocation: AdelaideCompany: Terrington ConsultingDescription: An Adelaide-based financialservices firm is looking for a relationship-focused and highly professional client servicesmanager.

In this role you will be assisting planners tomaintain and build client relationships;become the key contact for clients; provideadministrative support as needed; preparefinancial planning documentation and clientreviews; and manage compliance procedures.

You will have experience with financialplanning processes, and have the ability tomaintain client relationships. Previousexperience using Xplan or similar planningsolutions would be a distinct advantage.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0422918 177 / (08) 8423 4466,[email protected].

THREE more AXA executiveshave been appointed to MLC’sretirement solutions, whichhas grown to 10 memberssince i ts establ ishment inFebruary 2011.

Shaune Egan will take on therole of MLC Retirement Solu-tions head of segment manage-ment, Stuart McGregor movesto MLC Retirement Solutionsmanager of pricing and riskanalysis, while Jo a c h i mLumbroso has been appoint-ed MLC Retirement Solutionsmanager of hedging and riskreporting.

Egan was most recently AXAhead of integration – sales,marketing and advice stream;McGregor joins MLC from theAXA North Risk Managementteam where he was managingdirector of pricing and riskanalysis; and Lumbroso waspreviously head of hedgingservices Asia for Singapore-based AXA Services.

COLONIAL First State GlobalAsset Management (CFSGAM)has announced the appoint-ment of Angus McNaughton asmanaging director (MD) ofCFSGAM Property.

Replacing current MD Darren

Steinberg, McNaughton stepsinto the new role having comefrom the position of CFSGAMProperty’s head of wholesaleproperty funds. The firm addedthat he will retain responsibilityfor driving long-term strategyand performance across thewholesale property business.

DIXON Advisory Group Ltd hasappointed Kevin Smith to thenewly-created role of chiefinvestment officer.

Smith has moved from HongKong to work out of Dixon’sMelbourne and Sydney offices.

He moves into the positionat the independently-ownedfinancial advisory firm afterholding previous roles as chiefinvestment officer, equities atABN AMRO Asset Managementin London, and chief executiveofficer at Standard Life Invest-ments (Asia) Limited in Edin-burgh and Hong Kong.

At ABN AMRO, he wasresponsible for the globalinvestment team that managedin excess of 75 billion in equity,listed property and alternativeinvestments.

ALTIUS Asset Management

has appointed Va n e s s aThomson to the role of head ofcredit research.

With over eighteen yearsexperience in f inancial services, Thomson was mostrecently senior research analyst– income assets in the fixedincome department at INGIn ve s t m e n t Ma n a g e m e n t .Prior to this, she worked atMacquarie Bank in London inproject and structure finance.

Alt ius’ senior portfol iomanager Chris Dickman saidThomson’s new role wasconsistent with the fundmanager’s approach in takingadvantage of credit opportuni-ties in the market to optimisereturns for investors.

“Vanessa has a diverse rangeof sector experience bothacross investment and sub-investment grade levels, andtremendous quantitative skills,which will prove very useful toour investment activities,”Dickman added.

WILLIAM Buck has bolsteredits audit team with theappointment of Matthew Kingas director of the company’saudit and assurance division.

The chartered accountingfirm now boasts 17 directorsand more than 130 staff, andK ing’s appointment hasfulfilled a longstanding goal ofthe f i r m to continue to

develop its audit and assur-ance arm.

King br ings more than adecade of experience to therole, specialising in auditingASX-listed companies, largeprivate companies, not-for-profits and cooperatives.

Commenting on hisappointment, King said thelevel of technical audit andfinancial reporting expertisein Adelaide was a considerableattraction in taking on theposition.

Wil l iam Buck managingdirector Jamie McKeough saidKing’s range of skills in bothaudit and commerce comple-mented the firm’s position asa multi-disciplinary offering.

Move of the weekFORMER Commonwealth Bank of Australia executive David Lane has been appointedchief executive officer at Count Financial after current CEO Andrew Gale made the deci-sion to resign from his post.

Gale’s decision to step down comes days after Count shares officially ceased tradingon the Australian Securities Exchange (ASX).

Set to take up his new position effective immediately, Lane joined CBA in March 2010as general manager, strategic development wealth management. He has more than 13years experience in investment banking and was most recently chief operating officer forNeuberger Berman’s hedge fund business.

money management (december 8, 2011)

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