Financial Planning magazine

VOLUME 24 | ISSUE 7 AUGUST 2012 | $10.00

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FINANCIAL PLANNING WEEK 20-26 AUGUST

encouraging, educating and empowering consumers

Th is issueCapital protection: the name of the game

Are REITs worth reconsidering?

MDAs: a new horizon or false dawn?

Hearts and Minds

THEY MAY NEED

MORE THAN $600,000

TO RETIRE

Issued by Challenger Life Company Limited ABN 44 072 486 938, AFSL 2346670. Not intended to be fi nancial product advice. Investors should consider their circumstances before making an investment decision. Past performance is not a reliable indicator of future performance and actual outcomes can differ from those predicted as they can be affected by inaccurate assumptions or known and unknown risks and uncertainties. *Refers to a comfortable lifestyle according to the ASFA (Association of Superannuation Funds of Australia Ltd) Retirement Standard. The concept and assumptions underlying the statement that retirees may need more than $600,000 to retire are explained in the research paper mentioned above.

You’d think that more than $600,000 plus the age pension would assure you of a very comfortable retirement. But $720,000 is actually what’s needed in a balanced portfolio to deliver $40,297 p.a., the ASFA comfortable standard*, for 25 years with 80% certainty.

To better understand why managing market volatility requires more capital than you may think, view ‘Why betting on long term ‘average returns’ is a gamble in retirement’ at challenger.com.au/averagereturns

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14 If the glove fits Self-Managed Super Funds are not for everyone.

However, there are times when they can be of great value to clients who own specific assets, as MICHAEL DALE discovers.

18 Financial Planning Week This month, the FPA will celebrate its 12th

consecutive Financial Planning Week from 20-26 August. We uncover some of the initiatives the FPA will be rolling out to raise consumer awareness of financial planning.

20 The wizard of Oz With 30 years as a planner and 25 years as a

commentator in the media, Noel Whittaker is well placed to understand the financial needs of everyday Australians. He spoke to JAYSON FORREST about financial literacy and Financial Planning Week.

22 The name of the game Jitters over the GFC and sovereign debt issues have

caused many investors to retreat to the relative safe haven of fixed interest investments. But with yields in fixed interest falling, JAYSON FORREST asked a panel of practitioners what the alternatives are for clients.

32 Slow and steady Today’s A-REITs are a far cry from their pre-GFC

relations, with good yield on A-REITs again catching the eye of many global investors. As JANINE MACE writes, with a turnaround in the sector, now might be a good time for planners to re-evaluate REITs.

38 The quiet achievers In a post FoFA world, Managed Discretionary

Accounts offer planners a fee-for-service model and an investment platform capable of offering almost any investment, writes JASON SPITS.

Regulars4 CEO Message

6 News

10 Opinion

13 New CFP® Professionals

14 CFP® Practitioner Strategy

44 Centrelink

45 Chapter Event Review

46 Event Calendar

47 Directory

EDITOR Jayson Forrest Locked Bag 2999, Chatswood NSW 2067 Phone: (02) 9422 2906 Facsimile: (02) 9422 2822 [email protected]

EDITORIAL DIRECTOR Lindy JonesPhone: (02) 9220 4532 [email protected]

PUBLISHER Zeina KhodrPhone: (02) 9422 2198 Facsimile: (02) 9422 2822 [email protected]

ADVERTISING Jimmy GuptaPhone: (02) 9422 2850 Mobile: 0421 422 [email protected]

ADVERTISING Suma DonnellyPhone: (02) 9422 8796 Mobile: 0416 815 [email protected]

© Financial Planning Association of Australia Limited. All material published in Financial Planning is copyright. Reproduction in whole or part is prohibited without the written permission of the FPA Chief Executive Offi cer. Applications to use material should be made in writing and sent to the Chief Executive Offi cer at the above e-mail address. Material published in Financial Planning is of a general nature only and is not intended to be comprehensive nor does it constitute advice. The material should not be relied on without seeking independent professional advice and the Financial Planning Association of Australia Limited is not liable for any loss suffered in connection with the use of such material. Any views expressed in this publication are those of the individual author,

except where they are specifi cally stated to be the views of the FPA. All advertising is sourced by Reed Business Information. The FPA does not endorse any products or services advertised in the magazine. References or web links to products or services do not constitute endorsement. Supplied images © 2012 Shutterstock. ISNN 1033-0046 Financial Planning is published by Reed Business Information Pty Ltd on behalf of the Financial Planning Association of Australia Limited.CFP®, CERTIFIED FINANCIAL PLANNER® and CFP Logo® are certifi cation marks owned outside the U.S. by Financial Planning Standards Board Ltd. Financial Planning Association of Australia Limited is the marks licensing authority for the CFP marks in Australia, through agreement with FPSB.

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Financial Planning is the offi cial publication of the Financial Planning Association of Australia Limited (ABN 62 054 174 453)Web: www.fpa.asn.au | E-mail [email protected] | Level 4,75 Castlereagh Street, Sydney NSW 200 | Phone (02) 9220 4500 | Facsimile: (02) 9220 4580

Average Net DistributionPeriod ending Mar’1210,519

www. fi nancialplanningmagazine.com.au | financial planning | AUGUST 2012 | 3

Features August 2012

4 | financial planning | AUGUST 2012 | www. financialplanningmagazine.com.au

CEO MESSAGE

Additionally, research from Investment Trends late last year revealed that 52 per cent of Australian seniors are very concerned that the value of their savings and investments is not keeping up with inflation. (Source: Investment Trends November 2011 Retirement Income Report.)

As FPA members, these figures will not be surprising to you. What is important to remember, however, is the critical role that FPA members continue to play in serving the public interest. Indeed, when formulating policy positions in our submissions to government and other stakeholders, we highlight to government the fact that financial planning from qualified professionals is in the national interest.

It is the FPA’s unwavering conviction that financial advice from professional, qualified experts can make a dramatic difference and bring peace-of-mind to all Australians. You will now be familiar with our national advertising campaign which promotes the higher standards of FPA members. This campaign is key to helping Australians identify where they can turn for advice they can trust. The high level of traffic generated to our website from this important ongoing initiative tells us that Australians are clearly looking for trusted advice from professionals.

To supplement our national advertising activity, we are delighted to announce our 12th annual Financial Planning Week from 20 to 26 August this year. Many members have had a long history in supporting this vital national event where Australia’s professional

financial planning community comes together to encourage, educate and empower Australians to discover the positive difference that financial advice can make in everyone’s lives.

This year, we are taking the event to a new level with a wide-ranging campaign to raise awareness, provoke conversation and generate buzz about financial advice.

In addition to an intensive social media campaign, we will launch a new and improved Ask an Expert online forum where FPA practitioner members can answer questions from Australians, a new consumer website at fpadifference.com.au including real-life video stories that bring to life how financial advice is vital to securing a better future, new consumer guides explaining the benefits of financial advice in plain English, and an innovative two minute consumer manifesto which we invite you to post on your website and share with your networks.

To celebrate Financial Planning Week, this month’s edition of Financial Planning magazine brings you up to speed on how far financial literacy has come over the years, and where we are yet to break some ground. We canvas the views of our CFP® practitioners, as well as one of Australia’s leading commentators and FPA supporters Noel Whittaker. We invite you to join us on LinkedIn in discussing how we can contribute further to this mission, and to sign up for Twitter at @AustraliaFPA so you don’t miss a beat on the activities we have lined up for Australians.

Bridging the trust gap between professional financial planners and the public is vital if we are to improve the national standards of our retirement savings and security, and we will continue our drive to unify the profession in achieving this goal. To this end, Financial Planning Week is sure to be a highlight of the year that will make a mark in the hearts and minds of many Australians. We encourage all our valued members to engage in the activities of Financial Planning Week.

Mark Rantall CFP®

Chief Executive Officer

RESTORING TRUST AND CONFIDENCE IN AUSTRALIANS’ FINANCIAL FUTUREMore than half of all Australians are concerned they won’t have enough money to retire on.

–– “Bridging the trust gap between professional financial

planners and the public is vital if we are to improve the

national standards of our retirement savings and security,

and we will continue our drive to unify the profession in

achieving this goal.”

We see it as your clients do; ultimately‚ it’s about losing money.

www.aberdeenasset.com.au

The world of investment is filled with all kinds of mathematical formulas measuring risk. The trouble is that, like in so many areas of finance, an excess of data can distract you from the main game.

At Aberdeen, we hold risk management sacred and we wouldn’t want to diminish its importance, but we like to put things in perspective: do your clients perceive risk as a statistical equation or as the danger of losing money? We suspect it’s the latter, and we couldn’t agree more.

Aberdeen has been around since 1983 and our long-term equity returns have consistently outperformed the market. This has been particularly notable in volatile times, which attests to our prudent approach to risk: we do complex calculations too, but we never forget that we are managing real people’s money.

If you’d like to find out more about Aberdeen’s Australian, Asian and Global Equities funds‚ call us on 1800 636 888 or visit our website.

Issued by Aberdeen Asset Management Ltd ABN 59 002 123 364 AFSL 240263. You should carefully consider the relevant Product Disclosure Statement and seek advice which takes into account your own circumstances, objectives and financial situation in deciding to invest, or continue to hold an investment. 3CAB3FP

Some see risk as a function of complex calculations.

Investors will face a “rocky road” in the second half of 2012, with continued weakness and uncertainty in Europe, and a potential US$600 billion fiscal drag in the US due to year-end tax hikes and spending cuts, all weighing heavily on global markets.

This was the view of Russ Koesterich, the global chief investment strategist for BlackRock’s iShares business.

“At mid-year, the global economy is in roughly the same position as it was six months ago – an anaemic recovery threatened by a European crisis,” he said.

Koesterich added that with Europe’s continuing issues and the uncertainty surrounding US fiscal policy, he expected volatility to remain elevated, thereby advocating for a relatively conservative portfolio composed of high-dividend paying stocks.

“With markets likely to remain on edge throughout the remainder of 2012, I prefer the relatively low beta of high dividend stocks – both in developed and emerging markets

– and using any market weakness as an opportunity to add to longer term positions in emerging markets,” he said.

Koesterich said in addition to offering attractive yield, dividend stocks are generally less volatile than the broader market. He also advocated overweighting emerging markets, due to their longer term trend towards less volatility, stronger economic growth, falling inflation and more compelling valuations.

In the fixed income space, Koesterich favours municipal bonds as “yields are still at a significant premium to comparable Treasuries and there is little evidence of the feared meltdown in municipal finances”. He also likes US corporate bonds, particularly investment grades.

“While high yield was the flavour of the month in the first quarter, I believe historically high spreads and less risk favour investment grade in the coming months.”

To read what local FPA practitioner members think about fixed income, go to p22-30.

Markets on edge

NEWS

This month, Financial Planning Week takes place over 20-26 August. FPA members and participants share their thoughts on this important week for the financial planning profession.

“Financial Planning Week provides opportunities to inspire trust and confidence in the community and for Australians to find out exactly how financial advice can safely help them take control of their financial future.”

– Greg Tindall CFP®

“Financial Planning Week should be the pinnacle of financial planning, as it should be the one week where the industry visibly reaches out to the public.”

– Mark Reeson CFP®

“Financial Planning Week is an important part of the FPA’s efforts in raising consumer awareness about the benefits of receiving quality financial advice.”

– Julian Place CFP®

“I think Financial Planning Week is a great way to celebrate the value of advice that members provide to hopefully emphasise the professionalism and caring service we make available to help Australians meet their life goals.”

– Paul Bilson CFP®

“Financial Planning Week is extremely important in the continued development of our industry into a profession. It’s also an opportunity to demonstrate our contributions as a profession in helping Australians achieve their strategic financial goals.”

– Chris Elliott CFP®

“Financial Planning Week is an important opportunity to celebrate our participation in the financial planning profession, and to show the community how financial advice can enhance their wealth and enrich their personal lives.”

– Michael Farmer CFP®

“ASIC strongly believes in helping Australians to better manage their money and create a brighter financial future. The FPA’s Financial Planning Week is an important initiative and we support efforts to increase the community’s understanding of the benefits of good financial advice.”

– Greg Medcraft, ASIC Chairman

“We believe that Australians need professional financial advice and education about how to find good quality advice. We support the FPA’s Financial Planning Week and the FPA’s initiatives to raise professional standards in financial planning for the benefit of all Australians.”

– Alison Maynard, Investment Ombudsman, Financial Ombudsman Service

To read more about the FPA’s initiatives for Financial Planning Week, go to p18-19.

Contributions in an average SMSF were up $6,833 for the 2011-12 financial year, an increase of 14.5 per cent from last year to $47,533, while cash holdings increased in the June quarter by 4 per cent.

These were some of the key findings to emerge from the latest Multiport SMSF Investment Patterns Survey.

Multiport Head of Technical Services Philip La Greca said the bulk of this year’s additional contributions were made in the June quarter, where the average contribution inflow for

the quarter increased to $12,350, compared to $6,911 the previous quarter.

“We usually see people make the majority of their contributions during the June quarter as it’s their last opportunity for the financial year, but this year these contributions were up considerably,” La Greca said.

“It seems that many people over the age of 50 were keen to make use of their last chance to contribute up to $50,000 in concessional contributions before the $25,000 concessional cap

was applied to all ages.”

However, SMSFs will come under greater scrutiny by the Australian Taxation Office (ATO) this financial year as part of its compliance program.

The ATO has confirmed it will analyse the top 200 SMSFs based on total assets and select 25 of these with the highest levels of risk for a compliance audit.

This will be in addition to the ATO’s ongoing monitoring and investigation of SMSF compliance with income tax requirements.

SMSF contributions up but ATO scrutinises

Financial Planning Week


The FPA has officially launched its Professional Leadership Series of luncheons, with legendary AFL coach Mick Malthouse kicking off the series in Melbourne on 1 August, followed by a presentation to FPA members and guests the following day in Perth which has already sold out.

Malthouse will speak about the qualities of leadership, gained over 40 years at the elite level in VFL and AFL football. His coaching record stands at two premiership flags with the West Coast Eagles, one premiership at Collingwood, and a combined seven grand final appearances.

Other speakers in the Professional Leadership Series, which is sponsored by IRESS, include three Australian Olympians - swimmers James Magnussen and Jessicah Schipper, and cyclist Anna Meares. All

three will be freshly returned from having competed at the London Olympics and will reveal their winning strategies for success – hopefully, gold medal success.

Magnussen will be speaking in Sydney on 29 August, Schipper in Brisbane on 3 September, and Meares in Adelaide on 5 September.

Tickets for FPA members are $65. For more information or to book your tickets, go to www.fpa.asn.au/events. The Professional Leadership Series supports the Future2 Foundation.

The winning formula for success

www. financialplanningmagazine.com.au | financial planning | AUGUST 2012 | 7

52% 60% 59%

The percentage of Australians concerned they won’t have enough money to retire on.

The number of working Australians expecting to be totally or partially dependent on the age pension – an 11 per cent increase from 2010.

The proportion of Australians about to retire who are either behind or not sure if they are going to meet their financial goals for retirement – a 20 per cent increase from 2010.

Source: Investment Trends November 2011 Retirement Income Report.

James Magnussen


A STEP BACK IN TIME

RETROSPECTIVE

The FPA has accomplished much in its 20 years. Financial Planning takes a wander down memory lane to look at the first FPA Board meeting and the formation of the FPA.

The birth of the FPAIt was an historic moment and one that marked the true beginnings of the FPA as we know it today. On 19 December 1991, and preceding the official merger of the International Association for Financial Planning (Australia) (IAFP) and the Australian Society of Investment and Financial Advisers (ASIFA) on January 1, 1992 to form the FPA, the FPA Board of directors officially met for the first time at The Bowlers Club of NSW. Present at this meeting were Greg Devine (President), Bernie Walshe, David Catchpole, Max Weston, Graham Reeve, Geoff Catt, Martin Kerr (Chief Executive Officer) and Ken Breakspear (Executive Officer).

Three points of business were discussed at the first Board meeting.

1. Acceptance of donations and contributions Greg Devine and Geoff Catt both moved that ‘The FPA accept donations and contributions from the International Association for Financial Planning (Australia) and the Australian Society of Investment and Financial Advisers in accordance with resolutions put to members of both organisations at an extraordinary general meeting held at The Bowlers Club of NSW on 19 December, 1991.’

The motion was carried.

2. Deeds of guarantee and indemnity Greg Devine and Geoff Catt both moved that ‘A Deed of Guarantee and Indemnity between the International Association of Financial Planning (Australia) Limited and Financial Planning Association of Australia Limited, and a Deed of Guarantee and Indemnity between the Australian Society of Investment and Financial Advisers and Financial Planning Association of Australia Limited be signed and sealed.

The motion was carried.

3. Confirmation of appointment of staff All staff from ASIFA and IAFP who were invited to serve under the FPA would carry leave and other employment entitlements into the FPA.

Martin Kerr was appointed as chief executive officer from 1 January, 1992 with a two year contract to be renewed on a 12 month revolving basis. Notice of termination of the contract to be given at least three months prior to expiry of the contract with an option of taking three months termination payment in lieu of notice. That he be granted six weeks remuneration for every year (or part thereof) service with IAFP/FPA in the event of early termination of employment by the FPA other than for matters of a criminal or serious disciplinary nature. Overseas study/training and travel concessions to be negotiated.

1983 • Formation of the Australian Investment Planners’ Association (AIPA), later known as

the Australian Society of Investment and Financial Advisers (ASIFA).

1985 • Formation of the International Association for Financial Planning (Australia) (IAFP).

1990 • IAFP becomes an affiliate member of the Certified Financial Planners’ Board of

Standards.

• A deal is brokered with the US International Association of Financial Planners to

bring the CFP® mark to Australia – the first country outside of the US to be granted

this designation.

1992 • Merger between ASIFA and IAFP to form the Financial Planning Association (FPA).

• First FPA National Convention held in Hobart.

• Release of the FPA Code of Ethics.

• Paul Clitheroe elected FPA Vice President from Ivan Price in November.

1993 • Paul Clitheroe appointed President in November taking over from Bernie Walshe.

• Board members consisted of Russell McKimm (Vice President), Tony Beal, Geoff Catt,

Ted Thacker, Warren Aitken, Graham Reeve, David Catchpole and Geoff Taylor.

1994 • Jock Rankin made a significant impact on the growth of infrastructure and

implementation of Board policy after joining the FPA in January 1994 as CEO.

1995 • Establishment of the Complaints Resolution Scheme (CRS).

• DFP1 becomes the FPA’s minimum education requirement for all proper authority

holders.

• The FPA Board of Directors consisted of Tony Beal (President), Ted Thacker, Kevin

Bailey, Phil Basche, Clive Herrald, Peter Lewis, Wes McMaster, Laura Menschik, Brian

Nankivell and Ken Breakspear (Acting Chief Executive Officer).

1996 • Adoption of competency standards for financial planning in Australia and New Zealand.

1997 • Incorporation of FPA recommendations into the Wallis Financial System Inquiry.

• The FPA Board of Directors consisted of Ted Thacker (President), Wes McMaster

(President-elect), Robin Brosnan, Peter Dunn, Clive Herrald, Peter Lewis, Laura

Menschik, Brian Nankivell, Kate Stephenson and David Butcher (CEO).

• Introduction of the revised Code of Ethics and Rules of Professional Conduct.

• Public awareness program commences.

1998 • Launch of the FPA website – www.fpa.asn.au.

• Expansion of CRS to cover non FPA members and change in name to the Financial

Services Complaints Resolution Scheme (FSCRS), later known as FICS.

• The FPA Board of Directors consisted of Wes McMaster (Chairman), Peter Dunn,

FPA TIMELINE

Greg Devine Tony Beal Ted Thacker


Kate Stephenson, Clive Herrald, Paul Brady, James Doogue, David Elsum, Ray Griffin,

John Hewison, David Middleton, Terry Waddell and Michael McKenna (CEO).

• The title ‘President’ changed to ‘Chairman’ to better reflect the non- executive nature

of the role.

• Practice Guidelines on Risk Disclosure were released for members’ review and comments.

1999 • Introduction of the CFP Professional Education Program.

2000 • FPA launches the National Quality Assessment Program (NQAP).

• Launch of the CPD Online program.

2001 • Federal Government amends provisions in the Alienation of Personal Service Income

Bill as a result of FPA lobbying efforts.

• Set up of the Financial Services Reform (FSR) taskforce.

2002 • Professional Partnership Program introduced.

• Dollarsmart – a financial toolkit for teenagers in CD format is launched.

2003 • FPA exits from the provision of entry level financial planning education to focus on

CFP® certification and continuing professional development, and accreditation of

external financial planning education.

2004 • Joint FPA/ISFA Code of Practice on Alternative Remuneration and Guide on Rebates

and Related Payments is adopted, as part of a program to improve clarity of payment

and remuneration in financial planning.

2005 • The Value of Advice Campaign is launched.

2006 • The Value of Advice Awards are launched.

• Principles to Manage Conflicts of Interest were adopted, taking effect from 1 July, 2006.

• Westpoint collapse putting the spotlight on the financial planning profession. The

FPA responds with investigations and prosecutions that shows the strength of the new

Disciplinary System.

• The Professional Division of the FPA is born with Deen Sanders appointed as the

FPA’s first Head of Professionalism.

2007 • First worldwide CFP® promotional campaign launched and started in Australia.

• Introduction of the FPA Professional Frameworks to showcase the FPA

professional difference.

• The FPA introduced the new Conduct Review Commission (CRC) as a professional

private tribunal with 15 members and an independent chair.

2008 • The launch of the FPA’s new CPD policy to enrich the education available to members

from across the entire education community.

• The Future Financial Planners Council is established, which plans for the long-term

future of new entrants into the profession.

• The first Small Principals’ Conference is launched in Canberra.

• Launch of the new LRS® Life Risk Specialist professional designation.

• The first tranche of AML/CTF legislation kicks in and the FPA (along with IFSA) negotiates

an industry-wide standard for identification that gains the support of government.

• Introduction of the FPA national roadshow series, with visits to all 31 Chapters

across the country to discuss legislative, business and professional issues.

• FPA Pro PI service launched to provide members with competitive PI offerings.

• The GFC takes its toll on clients and member confidence.

2009 • Storm Financial turned the GFC into a battle about financial advice, with the launch

and finalisation of a Parliamentary inquiry into Financial Products and Advice.

• Introduction of the FPA’s Remuneration Policy as a leadership piece to demonstrate

the commitment of the professional community to progress without the need for

government intervention.

• Introduction of the complete Codes of Professional Practice as a single suite of

professional regulation that govern good financial planning practice and sets the

benchmark for the global financial planning community.

2010 • Launch of the new AEPS® Accredited Estate Planning Strategist professional designation.

• The FPA is the first financial planning association in the world to launch a full suite

of professional regulations, including ethical principles, practice standards and

conduct rules that underpin professional planning practice.

• The launch of the CFP Professional Ambassador Program.

• Successful Australia-wide radio advertising campaign promoting ‘The Right Advice’.

• Increased student membership.

2011 • The FPA puts in motion a major restructure, restricting voting membership

exclusively to financial planning practitioners as part of its new membership structure.

• The FPA approved and implemented a new Board charter, a new constitution, and

updated and relaunched the Code of Professional Practice.

• Lifted educational standards for the future – from July 2013 all new members will be

required to have an approved tertiary degree.

• Reviewed and reaffirmed the FPA’s core purpose, values and vision.

• Developed a new brand with a new logo.

• Launched a high profile multimedia advertising and branding campaign.

Peter Dunn Peter LewisJohn Hewison Wes McMasterLaura Menschik David Middleton

What do you think should be done to improve the financial literacy of Australians and who do you think should play a role?

FOR THE GREATER GOODQ

OPINION

Want to have your say? Join the debate at www.fpa.asn.au/linkedin

Financial literacy is an important foundation to allow individuals to take greater interest and control over their financial situation. An understanding of finance and financial matters can be a daunting task that requires an understanding of the core principles of investing and other financial issues, as well as keeping on top of the changes in markets and legislation. Only in this way can individuals make informed judgements about the use and management of their money.

Many individuals need help in keeping track of

their finances, undertaking budgets and sticking to them, understanding the different products and investments they can put their money towards, understanding the best means of saving for their children’s education, and protecting themselves and their families through insurance to name a few issues.

The responsibility to improve financial literacy should be shared between all those who communicate with individuals on financial issues, including the Government, professionals, media

and website content providers.

The modern marketing catch cry is ‘content is king’ and the secret to increasing financial literacy by all responsible participants lies in ensuring that information presented is useful to the reader and enables them to apply it to their situation. This particularly applies to financial advisers.

People think and absorb information in different ways, so advisers and other responsible participants involved in improving financial literacy need to cater for these differences. This can be achieved by providing the information in words, diagrams, case studies and calculators. The best way for individuals to learn about finance is to apply the information to their personal situation and then act on this information to improve their situation. That’s the ultimate objective of financial literacy.

The issue is to focus on the objective, and the objective is for people to understand sufficiently to know they need to seek advice. This should start in schools that incorporate in the curriculum the concept of budgeting, managing debt and cash flow, building assets for financial independence, as well as the importance of thinking about what it is you want to achieve in life.

This allows young people leaving and moving into the workforce to acquire some incentive and understanding about establishing their plan of action early in life and not perpetuating the mistakes of previous generations. It also helps in reducing the risk of people being entirely dependent upon welfare at various stages of life, particularly retirement given that life expectancy is increasing.

Beyond this I believe it will become increasingly important to qualify the levels and expertise of people working as financial advisers and protecting the use of titles. This is particularly so with scaled advice, as it provides a means for more junior, inexperienced and less qualified advisers to work in the industry. This is a dangerous situation and not only has the potential for keeping many solicitors in full-time employment, but it’s confusing for people who do not understand the difference. In this case, these people simply see it as the same service for lower cost without realising that you are dealing at completely different extremes of the spectrum, just as a legal clerk is very different to a barrister, and a GP to a brain surgeon. It’s all relative.

Any profession, no matter how regulated or well intentioned, consists of the good, the bad and the ugly and always will. We have to realise this is a fact of life. What members of the public need to be made aware of is what they should expect and what questions they need to ask in order to understand the extent and quality of the service offered.

Assyat DavidCo-founder, Strategy Steps

Alison Williamson CFP® LRS® AEPS®

Senior Financial Adviser, Fiducian Financial ServicesLicensee: Fiducian Financial Services


Would you like to join our panel of FPA members willing to give their opinion on topical issues? Email [email protected] to register your interest.

The biggest influence on the financial literacy of children are their parents – a four-year-old is quick to see an endless supply in mummy’s purse, the ‘hole in the wall’, and even shops that give you money when you pay by card.

Just like healthy eating, not everyone is lucky to have a family that teaches them the value of money, the interaction of work and reward, and the benefits of savings. While meaningful conversations about budgets, savings and long-term financial plans are not exciting or fashionable, financial planners know the biggest driver of wealth is how much our clients save.

To improve financial literacy for all Australians there needs to be a cohesive plan – the influence of family and social networks, the education system, employers, super funds and government all have a role.

The first priority must be the basics of budgets, savings and practical issues, such as mobile phone plans, cash flow and debt management.

Professional bodies and their members are in a unique position to lend their professional skills and experience to encourage a broader discussion about money in a

practical manner, and get involved in a grass roots level where help is most needed.

As individual financial planners, we each play a part to further financial literacy. Encouraging our clients to talk about budgets and savings with their children will help them develop good money habits.

It’s important to seize the opportunity now to ensure the practical lessons from the GFC are remembered, and a real dialogue is started about what it means to be financially secure, so good habits can be established for all Australians.

Financial literacy is more than understanding compound interest; it’s about arming yourself with the confidence that your family can live a happy and content life without fear and anxiety about money issues.

Claire Mackay CFP®

Principal Wealth Adviser, Quantum Wealth AdvisorsLicensee: Quantum Wealth Advisors

Financial literacy is a life skill and should be included in the schools’ curriculum. Interestingly, in March 2011, ASIC outlined a national literacy strategy partly in response to the assessment of financial literacy in the ranking of education across OECD member countries. The Government initiatives, including the teaching of financial literacy in schools, are being phased in over the coming years.

The Government, with the help of the FPA, should work together to establish a course about basic financial planning covering such areas as:

• the art of budgeting; • savings and investing plan; • managing debts - good and bad debts; • superannuation; • Centrelink entitlements – Family Payment and Youth Allowance; and • mechanism of income tax.

The course would be pitched to Year 11 and 12 students and be run as a workshop with case studies and practical exercises. It could be a component of the personal development program and linked to goal setting. For example, planning and financing a gap year travelling through Europe. Schools

should also be encouraged to enter teams in the ASX Schools Sharemarket Game, whereby they can test their understanding of the mechanism of the stock exchange.

While this approach will have a long-term effect on the financial literacy of Australians, some measures are required to address financial literacy among adults in the short term. The establishment of the ‘Moneysmart’ website by ASIC is a step in the right direction, however, the professional body should be more proactive in working at a community level. For example, workshops could be promoted to associations like BPW (Business and Professional Women Australia) to improve women’s financial literacy.

Children are taught by example; when parents are regularly buying on credit, they learn that it is alright to borrow rather than save. Basically they acquire the wrong set of skills and attitude towards money. This is the reason why education is so important to break the cycle of ‘financial ignorance’. It may well lead children to help and teach the parents how to better manage their money, in the same way as children being mentors to their parents in the computer technology field.

Brigitte Julien CFP® Principal, Paraplanning Direct


–– “It’s important to seize the opportunity

now to ensure the practical lessons

from the GFC are remembered.”

OPINION


Would you like to join our panel of FPA members willing to give their opinion on topical issues? Email [email protected] to register your interest.

Financial literacy is just as important as health to all Australians. Financial problems when they arise have a direct impact on people’s health and wellbeing. Therefore, ensuring Australians are financially literate will make Australia a better country.

Financial literacy should be taught in schools. It should be part of the curriculum as early as possible and then maintained for as long as possible, so that a fair number of students will adopt the financial prudence that will be needed to avoid financial crises that many people endure at some point in their lives.

Ideally parents should also have a role in teaching their children how to manage money. However, many parents don’t have the skills to do this successfully. Hence the need for schools to be involved.

Fundamentally, financial literacy boils down to people living within their means and apart from a mortgage, not borrowing too much money. In a broader sense, it involves understanding financial concepts and being able to read contracts, but it also involves personal behaviour and being able to control short-term impulses which could have long-term consequences.

Apart from not borrowing too much money, people also need to invest for their financial future and not rely purely on their employee super contributions and their Age Pension if they want a great standard of living later in life.

There are some people no matter how literate they are about money, who still need guidance to achieve their goals. Some people despite realising how important good money management is, can’t do it themselves. If they are able to recognise this and get the required support, their finances will be all the better for it.

Making sure Australians are financially literate is a great goal but even if people are financially literate, it’s the successful implementation that generally is difficult for most people. This is where accountability comes in and where good financial advisers can ensure financially literate people can meet their dreams no matter what hand life deals them.

Daryl LaBrooy CFP®

Financial Adviser, Hillross Financial ServicesLicensee: Hillross Financial Services

Assisting to improve the financial literacy of Australians is an important role that the financial planning profession needs to embrace. All respected professions contribute to the ongoing development of communities as a whole and as the pre-eminent body of people qualified in this area, we need to take the lead. For example, many members of the legal profession either work on a pro bono basis or act for legal aid clients where the financial returns are significantly lower than other areas of practice.

Financial literacy has always been important for members of the public as it helps to

ensure they budget and manage their income effectively, reducing their reliance on third parties such as governments and family members. This is in the interests of all Australians.

To improve financial literacy, the financial planning profession either individually or through the peak industry associations need to work on a regular basis in conjunction with the Government and semi-government bodies (including schools). This work would involve participating in activities such as running programs, seminars, workshops, writing

ebooks, developing online interactive games, videos and iPhone applications.

Unfortunately, a large percentage of the population is simply not interested in financial matters and this lack of understanding is often reflected in their financial position. A radical change is needed to make financial literacy ‘fun’ and part of life’s essential lessons, such as ‘sex education’ now is. Every child upon leaving school should be equipped with the basic financial skills, such as understanding what a bank account or financial product is, the consequences of borrowing money, how to budget and the main asset classes.

Financial planners have a pivotal role to play in the community in improving the financial literacy of Australians. In the words of Peter Drucker: “Today, knowledge has power. It controls access to opportunity and advancement.”

Charles Badenach CFP®

Private Client Adviser and Principal, Shadforth Financial GroupLicensee: Shadforth Financial Group

For Hobart-based planner Sally Hales, removing industry jargon and speaking in everyday language that clients can understand is one of the fundamental steps towards improving the financial literacy of Australians.

INNOVATING AND ADAPTING

Name: Sally Hales CFP®

Educational Qualifications: BEc, BBus, Grad Dip App FinPractice: Shadforth Financial GroupLicensee: Shadforth Financial Group Date of receiving CFP designation: December 2011No. of years as a financial planner: 1 year (Head Associate Adviser for 3 years prior)

VICAnne-Marie Tassoni CFP®

Cameron Harrison Private

Raymond Nghia Tran CFP®

Westpac

Jin Wei Shi CFP®

Superpartners

Prashane Soysa CFP®

ANZ

James Silverstein CFP®

Total Super Solutions

Scott Jamieson CFP®

National Australia Bank

Beena Mathew CFP® Westpac

Tamara Carman CFP®

Muirfield Financial Services

Christopher Dazkiw CFP®

McClean Delmo Financial Services

Alan McCurry CFP®

Westpac

Melanie Plymin CFP®

Uni Super Management

Tarik Oguz CFP®

Paul Moran Financial Planning

Ho Yan Ada Lau CFP®

Arthur Roe & Associates

TASDuncan Forbes CFP®

Collins SBA

Patrick Fagan CFP®

Shadforth Financial Group

Luke Roberts CFP®

Shadforth Financial Group

NSWSvetlana Jovanovic CFP®

Rhush Planning

Lisa Girardin CFP®

UBS Wealth Management Aust

Paul Haddon CFP®

King Financial Group

Luke Cooper CFP®

State Super Financial Services

Brett Seet CFP®

Woodbury Financial Services

Kathryn Pilat CFP®

Commonwealth Financial Planning

Richard Taylor CFP®

HSBC Bank Australia

Jessica Micale CFP®

Commonwealth Financial Planning

Daniel Mikhail CFP®

Guild Financial Services

John Hollyman CFP®

R K Financial Planning

Maria Tritsaris CFP®

Principal Edge Financial services

James Brescia CFP®

WB Financial

Ingrid Stoker CFP®

Fiducian Financial Services

Diego Gonzalez CFP®

ANZ Financial Planning

SATristan Barnes CFP®

Perks Wealth Management

QLDValentino Pikoulas CFP®

Dalle Cort Financial Services

Martin Webb CFP®

Graham Financial

Nigel Roy CFP®

DKM Investment Services

ACTBrett Billington CFP®

King Financial Services

WARachel Yi An Chen CFP®

Citi Group

Nigel Ivor Owen CFP®

Lifegro Financial Planning

Jamil Elrifai AFP® AEPS® LRS®

Westpac Banking Corporation

The FPA congratulates the following members who have been admitted as CERTIFIED FINANCIAL PLANNER® practitioners and who have recently achieved the AEPS® Accredited Estate Planning Strategist designation.

AEPS Practitioners


1. What motivated you to become a fi nancial planner?I was drawn to financial planning as it offered me the opportunity to use my analytical and problem-solving skills in order to create real value for people. I particularly enjoy coming up with solutions to challenges that many people face and need help with. I also enjoy being in an industry which allows me to innovate my service offerings to adapt to my clients’ ever-changing needs.

2. What motivated you to pursue the CFP® designation compared to other qualifi cations?I believe that the CFP designation goes beyond being just a signal of knowledge and skills in an adviser. It also plays an important role in setting and maintaining a high professional standard within the industry. I knew attaining the CFP mark would differentiate me from the broader adviser pool, and would provide clients with a greater degree of confidence in my abilities due to the continual professional development requirement. I genuinely believe that, as the industry matures into a more recognised profession, people will increasingly seek out the CFP designation.

3. What do you think should be done to improve the fi nancial literacy of Australians?I think cutting out financial planning jargon to

clients and speaking in everyday language is really important, and skilled advisers have a crucial role to play in this.Attitudes towards money start to be formed from a young age. As such, I think school curriculums should address financial literacy to supplement the lessons kids learn at home from their parents. A lot is taught in classrooms which will never be used again, so some everyday money skills would be invaluable. Government and industry associations, such as the FPA, should work together to facilitate this to ensure a balanced approach in developing the next generations’ financial literacy.

4. As a fi nancial planner, what do you enjoy most about your job?Building long-term client relationships is the key for me. I enjoy being able to empower clients to make informed decisions and take control over their financial affairs.

5. How did you fi nd the four ‘Es’ to CFP certifi cation (ethics, education, examination and experience)? The four Es provides an optimal blend of technical advancement and practical know-how within an ethical framework. The certification program is a comprehensive course that provides a solid foundation for advisers. Completion of the course has given me confidence in my ability to truly add value to my clients.

Flo and Billy had recently inherited a $780,000 commercial property in NSW from Billy’s father.

After deductions, the property generated approximately $60,000 in net yearly rental income for Billy, and when added to his current taxable income, his gross yearly taxable income was around the $100,000 mark, which was mostly generated from his investment properties, and a small salary from employment. Billy said he’d love to reduce his tax bill. Wouldn’t we all?

Billy (60) and his wife Flo (61) said they were ultra conservative investors, and by no means, ideal SMSF candidates.

Funnily enough, 95 per cent of their assets were invested in direct property, which is not what you would describe as ultra conservative.

Over the course of 12 months, my financial planning colleague (who has done, and is still doing, all of the leg work, which is substantial) and I had many meetings with Billy and Flo, mostly around issues in regards to their impending retirement, income requirements, superannuation pensions and estate planning issues.

SMSFDuring one of these meetings I mentioned that one option Billy might consider would be to establish an SMSF. Neither Billy or Flo were quite sure what an SMSF was.

“Why would we do that?” Billy said.

“Well,” I said, “while the commercial property is in your name Billy, the rental income you currently receive is taxable, and if you sold the property, there would be capital gains tax implications to consider. Transferring the property into an SMSF is one way of keeping the asset, receiving tax-free income and eliminating any capital gains tax if you sold the property while in the pension phase.”

Basically, a change of ownership structure could

save Billy and Flo quite a lot of money in the long run, even though the initial transfer into the SMSF would trigger a capital gains event (which was only minimal at this stage).

I told Billy that the current superannuation rules allow the transfer of commercial property (Business Real Property in superannuation jargon) into an SMSF, and if the rental income was taken in the form of a pension, the income would be tax-free because Billy and Flo were both over 60. Not only that, there would be no capital gains tax to consider if he sold the property whilst in the pension phase.

Well, Billy’s interest picked up remarkably at this, and from that day on he became extremely interested in self-managed super funds and how establishing one could benefit him and Flo.

Pros and consWe discussed in some detail the pros and cons of running an SMSF and the duties and responsibilities of trustees, as well as risks such as the possible lack of liquidity and diversification.

I explained to Billy there are limitations to the amount


Name: Michael Dale CFP®, DFP, Dip Tch Title: Financial PlannerPractice: Fiducian Financial ServicesLicensee: Fiducian Financial Services

IF THEGLOVE FITSSelf-Managed Super Funds (SMSFs) are not for everyone and most certainly not for the majority of investors. However, there are times when they can be of great value to clients who own specific assets, as Michael Dale CFP® discovered.

CFP® PRACTITIONER STRATEGY

that an individual can contribute to super – either in cash or by way of transferring assets in specie (meaning ‘for no consideration’). At the current value of $780,000, Billy’s commercial property exceeded those limits for one person, so the first step would be for Billy to transfer a percentage of the property to Flo. We discussed how tenants in common worked, and how they could each own a portion of the property within the super contributions limits. They could then simultaneously transfer their respective portions into their new Billy and Flo SMSF without exceeding the contribution caps.

In order to avoid confusion or surprises later on, I explained to Billy and Flo that it was so important they fully understood every aspect of what we were discussing before even thinking of proceeding with such a strategy.

If they were to proceed without exceeding the contribution caps, Billy would need to transfer around 25 per cent of the property to Flo.

They would then co-own the property as tenants in common – Billy with a 75 per cent share (worth $585,000) and Flo with a 25 per cent share (worth $195,000). Billy and Flo also were aware there would be capital gains tax (CGT) implications with the transfer of ownership, and it would be determined based on the fair market value of the property. Billy was of the opinion that the value of the property had not changed much since it was inherited and CGT would be negligible.

We discussed the strategy with a conveyancer who advised that a contract of sale would not be necessary, but the property transfer would need to be stamped. Stamp duty would be calculated on the market value of the share given to Flo - $195,000 if the value of $780,000 was still current, and would invoke NSW stamp duty of $5,315.

In explaining the SMSF strategy, no stone was left unturned. We also made the point to Billy that

he could give Flo more than 25 per cent of the property, but the greater the portion transferred, the larger the stamp duty bill. For example, if Billy gave 50 per cent to Flo, the stamp duty on $390,000 would be $13,040.

They understood that once the property was co-owned by both Billy and Flo they would be ready to contribute it to their SMSF. However, the contribution to super would also be a CGT event and it would also attract a nominal rate of stamp duty. We expected Flo’s CGT to be nil as it was unlikely that the value of the property would change in the time between when it is acquired and when it was contributed to super. Billy’s CGT would be determined on him owning 75 per cent of the property because he would have already transferred the other 25 per cent, and was estimated at $4,000. The stamp duty when they transferred the property into an SMSF would be a nominal $50 each, given the concession available for this transaction.

The strategyOnce Billy and Flo understood fully the implications, we reiterated the strategy and steps, which were as follows:

1. Billy to transfer 25 per cent of the property to Flo.

2. Billy and Flo to establish an SMSF and corporate trustee (explained in detail to Billy and Flo).

3. For future liquidity purposes, Billy and Flo’s combined existing super benefits of around $136,000 from their employer super funds, which were mostly in cash, and had no insurance benefits attached, would be rolled over into their SMSF.

4. Transfer the commercial property (Business Real Property) into the SMSF as an in specie super contribution.

5. We recommended that Billy and Flo transfer the

property into their SMSF as a non-concessional contribution, with Billy taking advantage of the $450,000 non-concessional contribution limit, which applies to rolling three year periods for persons under the age of 65 (see table below).

Client outcomesBilly and Flo have gone ahead with the strategy with their eyes wide open and fully aware of what they are embarking on. They will establish an account-based pension each in their SMSF, which now has one commercial property, a cash management account and several term deposits, and the minimum pension payments will be more than sufficient.

What has this strategy achieved for Billy and Flo? While the total costs, fees and charges for everything, including transfers and CGT was around $19,000, the strategy will save Billy and Flo approximately $22,000 per annum in income tax with no CGT implications if they sell the property while in the pension phase. Imagine how much that could be in 20 years time.

Could they have done this without the help of a financial planner? No.

Has value been added to their situation by using a financial planner? Yes.

Are they happy with their new structure? Yes.

Are they happy to pay a fee for the service? They certainly are.

In fact, I’m not even sure if ‘Self-Managed Super Fund’ is an accurate description, as most of the work will be outsourced to others. Perhaps ‘Privately Outsourced Superannuation Entity’ (POSE) would be a more apt description for Billy, Flo and many others who require the expertise of financial planners in the running of their super funds. •

Are you a CFP® practitioner using unique financial planning strategies for your clients? If so, Financial Planning magazine would like to hear from you. Please send your details to [email protected] or phone (02) 9422 2906.

Share your strategies


Contributions

Billy $150,000 $435,000 $585,000

Flo $195,000 0 $195,000

Total $780,000

Contributor

Before 30 June 2012 After 1 July 2012 Total

COMPLAINTS AND DISCIPLINE

The Financial Planning Association (FPA) is committed to informing members and the community of the trends and outcomes of complaints and disciplinary action in the financial planning profession. It is important for members and the community to be confident that the profession takes a strong position on the protection of the reputation of financial planners by responding to breaches of its professional expectations.

As well as communicating the activities of professional accountability, our goal is to assist members in appreciating the types of complaints received, to encourage members to consider their own practices, and to provide guidance for complaint protection.

Disciplinary Activity SummaryIn the June 2012 quarter (April to June 2012), the FPA received five new complaints, finalised five investigations and currently have 22 ongoing investigations. Of those ongoing investigations, seven are continuing matters that have been referred to the FPA’s Conduct Review Commission (CRC) as being potential breaches of the FPA’s professional expectations. CRC panel hearings have been held in relation to four of those matters and determinations are expected to be finalised early in the coming quarter.

CASE STUDYThe FPA investigated a complaint against a member in relation to the suitability of the member’s recommendation for a client (the complainant) to invest via a platform in consideration of the complainant’s modest and short-term goals.

The complainant was aged in their early 50s, contemplating retirement in the not too distant future and intended to sell their home to move interstate and find new employment. The complainant’s financial goals were:

• Purchase a new home within 3-6 months;

• Maintain access to sufficient cash until resuming employment; and

• Agree and implement a retirement plan.

The member recommended the proceeds of the sale of the complainants’ home be invested in a cash investment fund on a platform ($350,000 into an accessible cash component and $50,000 into a three-month term deposit) and the rollover of the complainant’s superannuation ($52,000) from an employer fund to a fund on the same platform as the cash investment fund.

All the disclosure documents and the SOA and investment applications were presented to the complainant for signing during a half hour meeting with the member, and the complainant had no opportunity before the date of signing to consider them. Later the complainant received a statement on their investment from the platform and was astonished to find that the member’s fee for the cash component of the investment was $10,000 (plus an ongoing fee). The complainant later discovered that the member’s fee for the superannuation rollover was $2,000.

The complainant ultimately made a complaint to the FPA which, due to the timing of the conduct, was investigated under the former Rules of Professional Conduct. The FPA’s Code of Professional Practice (the Code) is the current key document detailing the obligations on FPA members in the financial planning profession.

The central question was whether, in light of the complainant’s goal of using the proceeds of the sale of his home to purchase a new home within a short period, and the modest amount of superannuation he had, the member’s recommendation of a platform was suitable.

The Australian Securities and Investments Commission (ASIC) considers a recommendation to use a platform or IDPS to be ‘financial product advice and may be personal advice as defined in the [Corporations] Act.’ (RG 148/Consultation Paper 183, June 2007, 18). This means that the suitability of advice requirement in section 945A of the Corporations Act would apply to a platform recommendation.

Platforms are usually thought appropriate for high-net-worth clients with many investments, because

the benefit that the services supplied by platforms add is mostly the enablement of investor selection or direction in relation to a portfolio, and the provision of investment administration services – again for the support of a portfolio. A platform was neither desirable nor necessary to support the complainant’s investing goals.

The short duration of the investment of the cash component of the complainant’s funds was another contra-indicator for a platform recommendation. This is because of the reduction to yield on the investment resulting from the high entry fees to the investment. It is true that the superannuation investment was for the longer term, but it was very modest in amount, could have stayed in the existing account and again, the reduction in yield from fees was a factor against a platform recommendation.

Given the simplicity of the complainant’s investing aims, it would have been very easy to do a comparative suitability assessment of a ‘non-platform’ recommendation. Bank term deposits were offering interest at 5.25 per cent per annum and the return on the platform product the member was recommending was only 4.74 per cent per annum. So it would have been very easy for the member to have conducted a simple and effective ‘non-platform’ comparative suitability assessment, which the member did not do. Similarly with the superannuation recommendation, the member did not undertake a comparative

QUARTERLY COMPLAINTS


Ongoing Investigations as at 1 April 2012 22

New investigations 5

Investigations closed 5

Investigations ongoing as at 30 June 2012 22

Members suspended 0

Members expelled 0

Members terminated (Constitution) 0

Other sanctions (Summary Disposal) 0

Table 1: Complaints and Disciplinary Report – April to June 2012

APRIL TO JUNE 2012

suitability assessment and this would have been very easy to do.

The complainant says that if he had been told the cash investment was going to cost $10,000 to set up, he would have walked away. The complainant freely admits that he did not read the SOA or the disclosure documents. However, the obligation to explain is not on the complainant, it is on the member. The member arranged matters so that the complainant was presented with a lot of paperwork and the expectation that the documents would be signed up there and then and in a short period of time.

Notwithstanding that fee disclosure was made in the SOA, the member put the complainant into an unsuitable investment and failed to explain it in terms the client could understand. Setting out the fees in a table or in text, is not sufficient. Risks must be explained in a fashion that allows the client to understand the practical effect of the recommendation on a client’s investment.

Members are encouraged to read the Code in the context of the case study in order to reinforce their level of understanding of the standards expected of them in the provision of professional services. Relevant (and enforceable) areas of the Code

include: Code of Ethics Principle 1 – Client First, Rule 4.2 (& 4.3), Rule 4.5, Rule 4.7 (& 4.8), Rule 4.10 and Rule 4.11.

Use of the FPA brandThe last month has seen involvement from the Financial Planning Standards Board (FPSB) with two Australian CFP® practitioners using the FPSB trademarks in domain names for the Internet. Regulation 02/04 (4.8) specifically states that the “CFP and CERTIFIED FINANCIAL PLANNER® marks may not be used as part of a domain name”. FPSB will always step in for serious breaches of the marks.

The CERTIFIED FINANCIAL PLANNER mark, CFP mark and the CFP Logo® are collectively known as the CFP Marks. The FPA strictly controls the correct usage of these registered trademarks. The CFP Marks are solely owned by the Financial Planning Standards Board Ltd (FPSB) in the United States and used and administered by the FPA under licence. Any instance of misuse of the CFP Marks compromises the validity of the marks and the FPA’s licensing arrangement with the Financial Planning Standards Board Ltd (USA).

The FPA brand represents a seal of quality and professionalism for financial planners. It is important that the FPA brand is consistently applied at every

interaction to preserve the distinctiveness and integrity of the brand and the valuable reputation flowing from membership of the FPA.

The FPA brand is defined (for the purposes of Regulation 02/04) as the FPA name, logos, membership category descriptions, professional designations (post nominals), and the CFP marks.

Use of the FPA brand by members is a privilege, which if misused may seriously prejudice the interests of all members and cause an offending member to be liable to disciplinary action which may involve censure, expulsion or in extreme cases or cases of repeated misuse, legal action.

Regulation 02/04 can be found on the FPA website and gives specific guidelines on all the trademarks and use of the FPA brand. All FPA members and affiliates should ensure they are:

• Using the FPA brand correctly.

• Not using the FPA brand in a manner they are not entitled to.

No-one should be still using the old FPA logos or holding themselves out to be a principal member.


AND DISCIPLINE REPORT

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the FPA’s membership renewals season which sees thousands of CFP professionals having just received their new 2012/13 CFP designation certificates, making it easy to identify themselves to consumers.

These CFP ads will be rotated in the media with new ads that continue to promote the higher standards of FPA members, albeit with new images and catchy headlines. These additional concepts will ensure that the advertising retains consumer interest over the 12-month period of the latest campaign.

“As with all of our advertising, we engaged with FPA members of our Marketing Committee and also tested them with over 450 consumers in our target market,” Jones says. “Like the first ‘helicopter’ print ad and our TV ad, the new ads also resonate with consumers. The ads we’re running scored highly for comprehension, relevance and favourability, so we are once again confident that we will hit the mark.”

Traditional and social media blitzAn intensive media campaign will feature during Financial Planning Week targeting key consumer media. The campaign will highlight the FPA’s initiative and raise awareness about financial advice. FPA supporter Noel Whittaker will promote Financial Planning Week in his syndicated newspaper columns and radio programs.

The FPA has a growing presence in the Twitter-sphere with over 400 followers and updates provided daily from @AustraliaFPA. As part of Financial Planning

Week, the FPA will be ramping up its social media presence with a range of new strategies to engage in social media conversations already taking place about financial planning, and to lead new conversations to shine a light on the benefits of seeking financial advice.

‘New and improved’ websiteThe highlight of Financial Planning Week will be a new online hub for consumers to visit at the FPA website. Completely re-vamped with a new design, navigation and content, the site at www.fpadifference.com.au will provide a wealth of plain English information, FAQs, video content, real-life stories, a new consumer guide to download, as well as showcasing the work of Future2 where FPA members make a positive difference in the community.

As well as the ever-popular Find-a-Planner directory, which attracts over 30,000 hits a month, the website will also feature a new ‘Ask an Expert’ online forum where consumers can put their financial planning questions to FPA members. Consumers will see profiles of FPA members who contribute to the forum and they can also search for a particular topic at ‘Ask an Expert’. The FPA invites interested members to contact [email protected] if they wish to participate in ‘Ask an Expert’.

A round-up of what some of the Chapters are doing during Financial Planning Week.

Sunshine CoastOn 23 August, the Sunshine Coast Chapter is running a business luncheon with the local Mayor as guest speaker. Clients and business partners of Chapter members will also be in attendance.

MelbourneOn 23 August, the Melbourne Chapter will be running an interactive information session for students and others considering a career in financial planning. An expert panel will provide insight into career options in financial planning, what to expect, what it takes to be successful and how to get started. They will also share their experiences and take questions from attendees.

SydneyThe Sydney Chapter will be conducting its highly successful Careers Expo on Tuesday 21 August. The expo is an opportunity for students and people thinking of pursuing a career in financial planning to talk to a range of experts, including education providers, dealer groups, researchers

and recruitment specialists. In addition, attendees are also invited to attend keynote presentations at the expo.

South AustraliaA Future Planner Evening will be held on 22 August to educate those interested in a financial planning career. Chapter members and industry experts will be on hand to present on various topics, such as a financial planner’s pathways and recruitment. A planner forum will discuss ‘A day in the life of a financial planner’.

Northern TasmaniaThe Northern Tasmanian Chapter is running a lunch on 23 August which will highlight the work of the Future2 Foundation to FPA members and invited guests who work in areas that could benefit from funds raised by Future2 via a grant. The Chapter is organising one of the trustees of the foundation, David Haintz, to present at this lunch.

AROUND THE CHAPTERS

• Campaign runs for 12 months from June 2012.• The objective is to raise awareness of the higher standards of FPA members, including CFP® professionals, to consumers.• Sky Business TV channel, Financial Review, The Australian, selected magazines, finance websites.• Google Search and Ad Words campaign to drive website traffic.• Metropolitan and regional newspaper advertising coinciding with Financial Planning Week.• CFP and FPA member versions are alternated in the media.• Four new ad concepts will be rotated from August 2012.• Campaign funded by FPA members for FPA members.

FPA consumer advertising at a glance


FINANCIAL PLANNING WEEK

Noel Whittaker needs no introduction. The co-founder of Whittaker Macnaught some 30 years ago, the chances are you’ve either read one of his many books, watched him on television, listened to him on radio or read his syndicated column in the Fairfax media. But take away his media profile, and this CFP® practitioner remains a true-to-label financial planner – and that’s where his passion remains.

This month, Whittaker is one of the FPA’s supporters promoting Financial Planning Week (20-26 August). It’s a position that sits comfortably with the industry veteran who says his goal today is the same as it always has been – to educate everyday Australians in a simple, understandable way.

Whittaker’s first foray into publishing was 25 years ago, when in March 1987 he released Making

Money Made Simple. His book set sales records across the country, selling two million copies, and was recently named in the top 100 most influential Australian books of the last century.

Whittaker attributes the success of Making Money Made Simple to its approachable and easy to understand style. Since then, he has written for almost every major Australian newspaper – spanning the last 25 years.

He confesses his surprise at the success of his first book, saying it filled a void by Australians who wanted to better understand and manage their own financial circumstances. Yet it was this interest to further educate consumers and improve financial literacy that spurred him on to write a further 20 bestselling books that have sold over two million copies worldwide.

As a media personality writing about financial issues for a quarter of a century, Whittaker is well positioned to comment on financial planning, literacy and consumer confidence in the take-up of advice. Thankfully, during this time he has seen a noticeable change in the role of financial planners, which is having a positive effect on consumers seeking advice.

“I think today’s financial planner is much better educated than even a decade ago,” he says. “And there’s definitely more transparency around products. The high fee funds are all gone. When I started off in the industry, the entry fees ranged from 5-8 per cent but there were no ongoing fees.

“When there are no ongoing fees, you can’t keep your business going unless you get new clients, and every new client you get means more work for the planner, which reduces your ability to properly service the clients you’ve already got. So, in my lifetime there has been a huge switch from a high upfront fee and no ongoing fees, to a much smaller upfront fee and ongoing fees.”

Financial literacyWhittaker believes that most Australians still don’t know enough about the fundamental principles

With a pedigree including 30 years as a planner and 25 years as a commentator in the media, Noel Whittaker is well placed to understand the financial needs of everyday Australians. He spoke to Jayson Forrest about financial planning, consumer literacy and his support of Financial Planning Week.

THE WIZARD OF OZ


of financial planning, such as budgeting and investments, despite the efforts of the Consumer and Financial Literacy Taskforce. He says more needs to be done about improving the financial literacy of consumers.

“Financial Planning Week is an important FPA initiative that helps to get the word out about how important it is to get good advice,” he says.

“The whole trouble with our industry, and it’s going to be hard to change, is that people need shares-based investments. However, if you have a shares-based investment, the market will invariably fall. Therefore, a client can go to you today and invest $100,000 and next week it may be worth $90,000.

“And it’s common to get a couple where one loves property and one loves shares, and of course, if you talk them into shares and the market falls, then you’ll get the other partner saying: ‘I told you I was right and we should have bought a property’. As a profession, we need to do a better job of educating our clients and managing their expectations.”

Whittaker adds that Australians have a fixation with property, so education remains the key to better and more informed financial decisions by consumers.

“As I’ve been saying in my columns for many years now, if you buy shares you’ve got to have a long-term timeframe in mind.”

It’s a fundamental that Whittaker says people still don’t get. “It’s human nature that they want to buy when the boom is on and they don’t want to buy when things are cheap. It’s the herd mentality that Warren Buffet speaks about.”

He adds that countering this ‘herd mentaility’ revolves around addressing the issue of trust, which many Australians lack when it comes to seeking advice.

“That’s why Financial Planning Week is so important. It’s an excellent opportunity to engage with the public and get them thinking and talking about financial advice.”

That said, Whittaker believes the financial literacy of consumers is getting better. He points

to compulsory superannuation as one of the reasons for an improvement in financial literacy but still worries about a growing trend amongst Australians who think they can do better by doing it themselves.

“The trouble with superannuation is that for the last five years, super has generally fallen in value. As a result of this, there’s a mentality amongst some consumers that they would have been much better off doing their super themselves; that they would have been much better off buying a property; or much better off leaving their money in the bank. It’s a worry.”

Whittaker says it’s ironic that the most questions he gets from people are from those with their own SMSF – the very people he believes need specialised advice from a financial planner. “And they tend to be silly questions about their self-managed super fund.”

“Unfortunately, when the markets fall, they think they could have done better themselves. The accountant says ‘Yes, start an SMSF because I can get some fees out of this’. But then the consumer comes back to the same decision – do they invest themself or do they use managed funds? Effectively, they end up where they started from.

“And despite what you might think, most people in an SMSF do not do as well as a professional fund manager.”

Whittaker credits individuals like Paul Clitheroe, who chaired the Government’s Consumer and Financial Literacy Taskforce, for doing a fine job in raising awareness of financial literacy, although he concedes this is a long, slow process.

When asked if it’s the sole responsibility of the Government to improve the financial literacy of Australians, Whittaker is circumspect.

“To me, a good financial planner will educate their clients. We always took the view that we were the educators. However, over-regulation is a problem. I think one of the bad things about all this new regulation is the Statement of Advice you have to give clients now. Planners are forced to give clients a 100-page document which is expensive and time-consuming to produce, and invariably the client

doesn’t read it. It seems the more information you give people, the less inclined they are to read it.”

So, how does the profession tackle the future of financial literacy and the take-up of advice by consumers?

Whittaker momentarily pauses and reiterates an earlier point.

“There’s no easy answer or quick fix. I think you need to just keep plugging away. It’s a long, slow, ongoing process,” he says. “I’ve been plugging away in my columns for 25 years. I’m always advising readers to ‘get advice’ and ‘talk to a financial planner’.”

FoFAAs for the FoFA reforms and whether they’ll have any impact on improving consumer trust and the take-up of advice, Whittaker is pragmatic in his response.

“I think if you ask a room full of people what FoFA means, they wouldn’t have a clue.”

It’s a blunt response.

“To be frank, I can’t see what all the fuss is with Opt-in. If you’re not talking to your clients at least once a year, there’s something wrong. If you talk to Bernie Ripoll and the politicians, I think they want Opt-in to be a fairly simple process.”

And despite the improvements to financial literacy and adviser transparency, Whittaker believes there are still some barriers to the take-up of advice by consumers, with cost still being the main factor.

“At the moment, I don’t think people are prepared to pay for advice. At Whittaker Macnaught, we used to charge $95 for an initial consultation when talking to people. Now to get anything done you need to charge a minimum of $2,500. That’s the way the profession has gone. Cost is a factor which will probably drive many consumers to bank-salaried planners. I guess it’s better than nothing,” he says.

“Ultimately, it’s about ensuring consumers have access to advice, enabling them to make informed decisions. And that’s what financial planning is all about.” •


ROUNDTABLE

Jayson Forrest: With the widespread flight to cash, how are you rebalancing your portfolios and weightings for clients?

Tim Mackay: All our client discussions start with the risk and return discussion and then we come up with their appropriate asset allocation. Once we determine that for the client it becomes the stake in the ground that we can compare back to over time. And as part of our ongoing relationship with clients, the rebalancing of their portfolio becomes one of the most important discussions we have with our clients. Typically over the last couple of years, clients have wanted to become more conservative in their investments. They have seen what has been happening around them and have expressed less desire to take on risk. Typically that has been the right decision for their portfolios, as has been proven over the past couple of years.

Andrew Jones: We have two client review processes – an annual strategic review and a quarterly review of portfolios. Since the GFC, we have been a little more active in rebalancing portfolios. So where we have a view that things are uncertain, the composition of the portfolio may change. For example, the introduction of hybrid securities as opposed to a full allocation to Australian equities for a more income related result. I agree with Tim, that in a crisis you see risk profiles move down a notch, while in bull markets we see them move up a notch. That’s just human nature. What we are seeing now, it’s all about capital stability. We made a conscious decision a few years ago that we would provide a more ‘smoothing effect’ on portfolios, which meant we’ve tried to cut out the highs and lows, and try and get a smoother outcome for clients. The challenge is to try and position the portfolio so it can still grow when there is

growth, but not fall off a cliff when things turn sour.

James Gerrard: At the beginning of the financial planning relationship, we sit down and talk about goals and we look at asset allocation. We set that in place with a view that it’s a longer term strategy which we’re going to agree to and follow. Over the past four and five years, the equity markets have been very volatile and it’s not something that investors have been used to, going back 10-15 years before that. Where we have been doing reviews for clients, we’ve been mindful that they have to sleep comfortably at night. So, even though they’ve had a strategy in the beginning, it may be something they’ve become uncomfortable with given year after year of bad returns. So, where in the plan we may have originally invested dividends, we’ll look at other options that are slightly more defensive.

Louise Lakomy: We’ve primarily got a retiree client base, so we’re probably sitting on about 60-70 per cent cash and fixed interest at this point in time. We do benchmark similar to the other planners here, but we take an active position on being overweight or underweight in the asset class depending on what the market does. Prior to the GFC, we took a position about listed property that it was too expensive, so we reduced our weightings there. At the moment, we’re overweight on fixed interest. The issue now is we’ve been sitting on great returns with term deposits but now that term deposits are moving south, we need to look at other options, like shares that are focused on income. We don’t think there will be any capital growth in any assets over the next couple of years, so we’re telling our clients we need to focus on income that continues to grow. That means deciding when to go back into the markets just a little bit, in order to put a little more emphasis on good income earning stocks.

Over the past five years, jitters over the GFC and sovereign debt issues have caused many investors to retreat to the relatively safe haven of fixed interest investments. But with yields in fixed interest falling, Jayson Forrest asked a panel of FPA practitioners what the alternatives are for clients.

THE NAME OF THE GAME

CAPITAL PROTECTION:

Louise Lakomy CFP® Principal – Investment Advice, Yellow Brick Road

Andrew Jones AFP® Partner, Eureka Financial Group

Tim Mackay CFP® Principal Wealth Adviser, Quantum Financial Services

James Gerrard CFP® Partner – Financial Adviser, PSK Financial Services

Justin Tyler Senior Investment Manager, Aberdeen Asset Management

Jayson Forrest Editor, Financial Planning magazine

Participants


JF: Do you define term deposits as fixed interest or cash?

LL: If it’s less than 12 months, it’s cash. If it’s more than 12 months, we classify it as fixed interest.

Justin Tyler: One thing term deposits don’t give you, and this is even the case if you lock them away for three, four or five years, versus a bond or bond fund of a similar duration, is that they don’t give you that defensive or protective insurance style return profile that you get from bonds. I think that’s important to bear in mind. Obviously, term deposits have a role to play. If you have a liability that you need to fund in one or two years, or you need liquidity for something, then that’s fine – term deposits are the ideal vehicle for that. But if you are looking to use fixed income to protect your portfolio against the ups and downs of equities, as you pointed out Louise, then I’d say that term deposits aren’t the way to do that.

LL: We’ve got bonds as well as hybrids. I’m just saying that normally we would never hold as much money in term deposits as we do today.

TM: With my theoretical financial hat on, I don’t think term deposits are cash, but in our clients’ eyes they view them as a fixed income product and so, we go with that because it suits their needs. What our clients are looking for is capital stability. Bonds don’t have capital protection, so if interest rates go up, the bond values are going to go down. Our

clients are aware of that. Whereas with term deposits they know that there is capital stability and they’re getting high yields relative to what else they can get. It’s that combination of capital protection and income, and tax-effective income if they’re in retirement or approaching retirement.

JG: And also to add to that, they still have the Government guarantee.

AJ: If you asked the average client what a bond is, they wouldn’t be able to tell you what it is. They still don’t understand them. The challenge for the fixed interest managers is that clients still don’t understand how bonds work, they don’t understand the duration risk, they don’t understand they can make a negative return on that type of fixed income asset. Hence, the natural adoption of term deposits for soaking up that equity risk.

That said, I like both bonds and term deposits because clearly there are times where you’ll add good capital growth on a bond portfolio.

JF: How do you define fixed interest to your clients?

AJ: I see fixed interest as quite a range. I’ll include term deposits because if I look behind where term deposits are invested, I might find that it’s actually in fixed interest type

Continued on p24

L to R: Andrew Jones, James Gerrard, Louise Lakomy, Justin Tyler and Tim Mackay.


ROUNDTABLE

investments. Now, I could be wrong in saying that, but I don’t think it’s all just cash at call.

In terms of what is fixed interest, we look at the whole range – bonds (government and semi-government), corporate securities, debt securities, floating fixed rate notes.

Hybrids are an interesting area. Some of the preference shares do behave like fixed interest, while others don’t, so in that space, it’s more on a case-by-case basis. For example, a floating rate note or a preference share on a major bank, I’m quite happy to call that fixed interest even though that can still move around, whereas on a poorer quality issue, I would have that in the share category.

JT: I think client education is incumbent on all of us, particularly for planners who are client-facing. I know that’s a challenge. OECD data had Australian pension funds performing second worst in 2008 because we were massively overweight to equities, and Ireland was the only country behind us on that score. So clearly some structural reallocation needs to happen and it does sound like that’s happening.

On hybrids, I’d say that the planner role is even more important. There were people in the GFC who were very disappointed in that they [the people] held hybrids but the products didn’t do what they [the people] expected them to do. I think these people expected a defensive asset but they were anything but.

AJ: Yes, those hybrids did fall in value and they didn’t perform the defensive role they should have but interestingly, those assets that had credit worthiness were perhaps one of the earliest to rebound because once the market understood the world wasn’t going to end, then you had a maturity date and that yield to maturity starts to drop very quickly. One thing we noticed was that the preference shares rebounded faster than the equity market because that fear of collapse had dissipated.

TM: Notwithstanding that they may have rebounded faster, I think the time that you really need them is when economic conditions turn for the worst and if they don’t perform as clients expect them to do, then that’s a very bad situation for clients. We typically classify those hybrids as alternative because sometimes they fit into equities and sometimes into fixed interest, but in times of stress, they don’t necessarily provide the defensive nature [you’re looking for].

On the education side, I think Australia is in a unique position relative to the rest of the world with regards to fixed income. From an historical perspective, we don’t have a consumer acceptance of fixed income investing as being a standard part of an investor’s portfolio. In the United States, they do.

Historically, because [fixed income] has been a wholesale investment, it’s hard to get diversification for $500,000 with one investment. So, we’re coming from behind the eight ball to start with. That’s why education from product providers and advisers is so important. And to be brutally honest, I think there are a fair few advisers out there that don’t really understand fixed income.

JT: Fixed income is quite difficult to define because there are so many different assets, with so many different risk return profiles. For us, we just tend to split the universe into four roles that fixed income is expected to play in, and it’s up to us as managers to choose the investment that fits that role.

The first role is ‘defensiveness’. For us that’s Australian fixed income or it could be global, but you have to be careful of the sovereign risks.

The second role is ‘inflation protection’. That’s inflationary bonds, which is a very underappreciated asset class, particularly for those at the beginning of their retirement phase.

The third role is ‘capital preservation’. Term deposits have a role to play but that’s also in the context of the portfolio and the liabilities. It’s not much good to have cash there in the expectation of capital preservation when your whole portfolio tanks because it’s got 90 per cent equities in it.

And the fourth role is ‘yield enhancement’. Only after you’ve considered the first three roles do you think about yield enhancement. Do you want to start putting your fixed income into more credit related assets? Are you comfortable with your base strategic allocation or do you want to tilt it a little bit?

We find that by thinking about it in that way helps in explaining the asset class to advisers and to investors.

JF: What type of fixed interest are you recommending?

TM: Well, coming back to the point again about wholesale investment being a minimum of $500,000, it’s hard to get diversification, so historically we used managed funds because that was the easiest way for investors to get access to fixed income investments. Now we are increasingly turning to ETFs. I see ETFs as effectively being almost the democratisation of fixed income products by making them more accessible to DIY investors and investors who are being advised by a planner.

JG: On a tactical basis, I’m very underweight fixed interest at the moment. Ten

Tim Mackay, Quantum Financial Services


year US Government bonds are trading at about 3 per cent at the moment, which is about the lowest they’ve been in 100 years. Interest rates around the world have been falling over the past two years. So, a client said to me the other day should we invest in one of these fixed interest funds that yielded about 13 per cent last year. I said ‘no’, now is probably the worst time to get into it, because the majority of that term was from a capital movement and as interest rates are falling, the value of those bonds will go up. But I think that in the foreseeable future when things start to recover, interest rates will start to go back up again and that will be very negative for the capital value of bonds. So where I am investing in this cash/fixed interest sector is in floating rate investments as opposed to fixed rate.

JT: We’ve had institutional clients who have done the same thing over the last two years. Some of them got the timing more right than others but none of them have got it totally right because bonds have just kept going. Some of our competitors have had short duration positions at times and held them. We’ve had short durations and cut them. It’s a very difficult market to play. I think it’s important to think about whether to allocate to fixed income long duration or short duration. In terms of a macro economic view, it’s very easy to look at low yields and think they can’t get any lower.

AJ: That’s right but if yields keep on going lower then what that is saying is that we’re not really happy with the equity market and the global macro position, and when you think yields can’t get any lower, well, they can get lower. And that’s the challenge. When you think sovereign yields are at all-time lows, therefore incredibly expensive, if bond markets stay or go lower, it means there will be more downside on equities and growth assets. I find it a real struggle to understand when the bond yield is going to rise because you would want to get out of it. But, we’ve been hearing about that for three years. Hence, you come back to comments about term deposits like, why is there so much money in term deposits at the moment? While clients in term deposits may have missed out on the appreciation of capital value, if their biggest fear is the loss of capital, then they’re not going to buy into that position. I find that a real challenge for advisers.

LL: And you know what, at this point in time, they don’t care that their money is not growing with inflation.

JT: When I’m talking inflation protection, I’m not talking about inflation over the next two years, I’m talking inflation over 10 to 20 years. It’s still a hard conversation to have. Even for me, I spend most of my time in the inflationary bonds asset class and people say, ‘Well, we haven’t had inflation for 20 years,

why worry?’. Frankly, my view is that we’re in a low yield environment. We’ve got governments in developed nations basically undertaking financial repression to help with the deleveraging process wherever it’s taking place.

AJ: I’d love to see more inflation-linked bonds in client portfolios. But I don’t think there is a lot of transparency or visibility around inflation-linked bonds either.

TM: You can get inflation-linked bond products directly from the RBA. I think for some of our older clients who have lived through inflationary times and remembered them, for them, as long as they have a long-term investing view, that is something they want as part of their portfolio. But for most people, inflation is not on their radar, if anything it’s deflation. So, I think that’s a discussion that clients are going to have in a year or two.

JT: By which time the cost of inflation will have skyrocketed.

AJ: Isn’t it the adviser’s role to say when is the best time to buy those assets and don’t you want to buy them in a low inflation environment?

JT: A good scenario conversation to have with your clients is, ‘If you have a $1 million portfolio and have 60 per cent equities and 40 per cent bonds, and you drew down 6 per cent each year, how long will your retirement savings pool last? If you had retired in 1930, it would have lasted in excess of 30 years. If you had retired in 1970, it would only have lasted 13 years. The inflation impact is just so much worse than the negative returns you might get from various assets because it lasts for such a long time.

AJ: We still do have inflation, even if it might be 1 or 2 per cent, so there are still rising prices. With floating rate notes, we’re probably close to the bottom of the cycle. So with term deposit rates coming down and floating rate note income coming down, what do you then use to offset this?

JT: You’ve got to be careful about using inflationary-linked bonds to offset rising interest rates because they do have a long duration. They are a long-term asset and in fact, they’re probably worse than other assets in terms of short-term capital appreciation, which will make the discussion with clients harder to have.

AJ: I agree but what I’m saying is that the biggest issue at the moment is that the real income of the assets is falling and so, retirees need money to survive – they can’t wait for the share market to improve. So, as a fixed interest manager, if we’ve got yields in one part of the fixed interest sector falling, then what’s the counter for clients?

JT: Inflationary-bonds are part of it but again, it’s an insurance asset. And because inflationary-bonds are a form of insurance, they’re going to be expensive. So if you hold your whole portfolio in inflationary-bonds, you’re not going to get much capital appreciation, so you won’t be able to support your living standards. In terms of balancing that out, you only really

Continued on p26

–– “We’ve got governments in developed nations basically undertaking financial repression to help with the deleveraging process wherever it’s taking

place.”

– Justin Tyler


need a smallish allocation of around 10-15 per cent.

Leaving that aside, we think a more sustained, cyclical recovery does seem quite some way off. And so we think it’s a good environment for credit.

Something more niche that we’re looking at is Asian fixed income. There’s been a lot of interest in the Australian bond market from offshore. Why? Because the Australian market is a proxy for the Asian story. And of course, the Australian dollar has appreciated massively. If you’re an Australian investor, obviously you don’t get the currency uplift. But if you look to Asia, there is the potential there because these are economies that have moved from an export-led growth cycle and are moving towards a more domestic demand driven growth cycle.

So what’s happening is that you’re getting some loose policies as part of the mix. There is an inflation threat and that’s being controlled in places like China by the rationing of credit. It’s also being controlled from an imported inflation perspective by trying to rationalise the exchange rate and let it float a little bit. So, you’re starting to get some currency appreciation, but when you’ve got productivity of 10 per cent per annum, clearly there’s a lot further to go in terms of currency appreciation. So Asian fixed income is a good fiscal and currency appreciation story.

As far as the bulk of the portfolio, we still think that the defensiveness argument is very important. We think it’s not a good idea to just delete all of the duration out of your portfolio at the moment. This notion of strategic versus tactical allocation is important. If your strategic review says you need to have 30-40 per cent in fixed income but you decide that tactically it’s not a good idea at the moment because of the valuations – well, that’s fine. You would move it to 10-20 per cent. You wouldn’t jump out of fixed income entirely. There’s a danger of knee-jerk reactions in the current environment with yields being so low.

LL: We’re in uncertain times. None of us have ever lived through these times before, so that’s why you have to seek capital protection at the moment.

JT: And that’s what fixed income is ideally for. But you have to use it properly. There are so many different types of assets out there. As a wholesale investment house, we still worry that when the next crisis comes along, people will again have unintended consequences from fixed income that has not been constructed properly. A good example is chasing past performance.

But conversely, there are areas that progress is being made. I think ETFs are a good thing. They provide transparency and get people thinking about fixed income.

JF: Do you think ETFs will change the way people invest?

LL: I’m unconvinced. I think it’s also about demand. Australians aren’t yet big demanders of ETFs.

TM: We had an issue with the ASX on the bonds. Until December last year, the ASX rules didn’t allow it to launch these products. That’s why they have only just

recently come to market.

LL: But I’m talking about ETFs in general. There just isn’t a huge demand for them. Most advisers still aren’t using them. A lot of adviser education is still required around ETFs. The reality is the majority of advisers still don’t properly understand them. So if fund managers don’t get the demand, they’re not going to produce the product.

TM: The other reason why planners aren’t using ETFs is they like to use platforms. Platforms make their business scalable. ETFs don’t sit nicely on a platform. Why would you have it on a platform and add another layer of fees for something you can get via an online broker for virtually nothing? So, it doesn’t fit into the way most advisers run their business. That’s why they’re not demanding it. They don’t know how to make money out of it; they don’t know how to run a profitable business without having all of their investments sitting on a platform.

JT: You’d expect SMSFs to be the main channel of demand for ETFs. But I think in fixed income, one thing to be wary of is their low cost. Why are they at a low cost? Partly because they are passive.

AJ: I agree, there are risks with fixed income ETFs. You need to be entirely sure what’s in them and how they are going to behave, and whether you like everything that is in there. For example, part of the MER you’re paying a bond fund manager for is their expertise; for them to make the call. However, with your passive ETFs on the fixed interest side, that’s what you get. I think the challenge for the adviser is that they need to be across this and whether they understand the implications.

JT: It’s a value proposition, not a cost proposition. I think that’s true for any active management versus passive management debate.

AJ: I think the SMSF market will embrace ETFs because most of them are more engaged with their super. So those trustees and planners who are advising those trustees will probably spend more time looking at ETFs. I think this market will

ROUNDTABLE

Continued on p28

Louise Lakomy,Yellow Brick Road


embrace ETFs. However, there will probably be a big lag effect for the broader market. There will be a whole group of advisers out there who will not engage in ETFs because they see that as the role of the bond or fixed interest manager.

TM: If Australians decide to allocate more to ETFs, then it will benefit all the players within that asset class. I think there is scope for both active and passive management. We’re big believers in the core and satellite approach to investing, so we don’t say active or passive is right or wrong. We effectively take a passive core to our portfolio and then seek outperformance from active investments, whether it be via a fund manager or whether it be direct via a particular share or a particular investment. We think active and passive are complementary rather than in competition.

JG: I agree with that. I think it’s about blending them together. You have to understand what the advantages and disadvantages of both styles are. So the ETFs may be low cost with an index exposure, but when you blend them in with, say, an Aberdeen which is an active manager, it’s great because they are pulling the leaver and making the investment decisions. But you also have to understand that fund managers have mandates, so they generally have to stay within certain levels for different types of assets and investments.

What I’ve experienced over the past few years is that although you invest with the fund manager, we haven’t had the degree of investment decision-making that we would have ideally liked, because they are still staying within their model portfolio to a large degree and just making small tactical decisions here and there.

JT: Well, that’s always going to be an accusation levelled at active managers for not being active enough. And I do have some sympathy with that.

TM: Having said that, cost is one of the few things that investors can actually control right now. And so, that is one thing that the Industry Super Fund advertisements have drilled into consumers quite successfully – about focusing on the fees that you’re paying. So, for our clients, they are cost aware. If investments come out that are comparable but cheaper, then certainly that’s something we’ll look at on behalf of our clients.

JT: Cost aware, absolutely. As I said I think it needs to be cost aware and value aware. If you look at the cost and then work out that you’re going to be better off with the value add than somebody offering a lower cost, then that’s what needs to be considered. For example, if you’re convinced your manager is going to reliably kick off 50 basis points per annum then you may as well go the

active manager who is charging you a 15 basis point fee rather than the passive manager charging you a 5 basis point fee.

AJ: You can put together a real low cost, real cheap MER portfolio, but it’s not necessarily going to deliver what you’re after, depending on the asset allocation. One of the best performing investments in our portfolio is managed futures. I’d loved to have an ETF on some managed futures, which is more dynamic asset allocation.

Cost alone is not the answer. It’s cost and value in how you put that portfolio together.

JF: What are your thoughts on hybrids?

TM: Hybrids can play a role in some clients’ portfolios. You have to understand the risk and return characteristics of the products before you get into them. That’s a big barrier for most people because they are quite complicated products to understand, and so they only suit well-informed clients. Not withstanding they are very well marketed, my issue with them is when economic conditions turn for the worst, they don’t perform as clients would expect them to. That is, they are not as defensive when you need them to be. So, they’re problematic in that respect. If they are meant to be there for a defensive nature, then choose something that is defensive.

JT: I agree 100 per cent. We do analysis on these hybrids as they come to market and we’ve found that with some recent issues, they are really equity-like. They have been deeply subordinated, ranked more with preference shares, and the direct demand from retail seems to be based on name recognition and margin over term deposits. That’s a dangerous way to be thinking about these things.

LL: We actually grade our preference shares one and two. The four banks are typically our one and the recent ones like Origin and Woolworths got scaled as a two, which means they are classified under Australian equities.

Stockbrokers just love these hybrids. The recent ANZ one was oversold, yet it was much worse than the ANZ CPS2 (convertible preference shares). I mean, the rate was even worse and they were selling out of the CPS2s to go into CPS3s, whereas we actually said to clients, ‘No, hold what you’ve got and we’ll buy more of what you’ve got’, because people were selling what they had and the price dropped on the CPS2. There’s a lack of education in the marketplace.

JT: And the structures can be complex. It just isn’t a case of buying a bond, which is relatively easy to explain to a client. A hybrid isn’t so easy to explain to a client, and not something you can describe in one sentence to give it justice.

AJ: You either have the specialisation and skills to understand what hybrids are or you don’t. We’ll use a separate firm of stockbrokers who review every hybrid and floating rate note. So, there will be some that we participate in and some that we don’t.

ROUNDTABLE

Continued on p30

–– “Hybrids can play a role in some clients’ portfolios. You have to understand the risk and

return characteristics of the products before you get into them.”

– Tim Mackay


Lately our trend has been moving out of the lower ranked preference shares and moving higher up the capital structure. It’s certainly well and truly about the quality.

TM: You need to look at the small print of every hybrid. My colleague and sister used to design these structured products. They’re always designed in favour of the issuer. And so, if clients don’t understand the fine print and what could potentially happen, then they should probably not be going into these types of products.

LL: But is that the role of the client or the adviser? I would argue that on all products, it’s the role of the adviser to properly understand them. Whether it’s bonds or any product, clients generally have no idea what they are and what they do.

TM: Of course the adviser has to understand the product being advised 100 per cent but the client has to understand the risks too. If they don’t understand the risks they’re going to get into, then the adviser shouldn’t be placing the client in the product.

JT: It makes for very difficult client conversations if they don’t understand the risk they’re taking. They need to have some notion that if equity markets go down then their hybrid isn’t going to go up in value. It’s just basic things like that.

JF: What about annuities/traded policies? Have you considered these products as part of a defensive strategy?

LL: Not annuities. I’ve found them to be bad performers.

TM: We’ve looked at them. They’re not typically suitable for our clients. They are expensive products. Effectively, if you’re getting certainty, you’re lowering your risk. So by definition, you are lowering your return. It’s simple finance. And so, for most of our clients, it’s not an appropriate position for them to take long term.

JT: Longevity risk is something that needs to be considered. In a retirement portfolio there’s space for an annuity but in moderation. After all, what is an

annuity’s role – it’s a longevity insurance product, and it certainly won’t give much else. The returns are low and the pricing tends to be opaque.

TM: But it’s a conversation that should be had with clients. Because clearly with them it’s the capital preservation, it’s the surety of income through retirement. And most of them have ageing parents that are looking to go into aged care and so forth. They are seeing their parents live longer. They know they are going to live longer. So, you need to have that discussion with them and explain to them what the product is, and how it could potentially meet their requirements but also explain they’re going to have to pay for it. You’re going to have to give up returns plus you’re going to have to pay for it. So, is an annuity right for a client and does it fit their circumstances? Most of the times the answer comes down ‘no’. But occasionally it will be the right thing for them to do, and as Justin said, not putting all of their wealth into it but a portion of their wealth.

JG: I’ve had an increase in enquiries about annuities from clients. I think it’s because of term deposit rates falling. So they want to know what other options are out there. As such, I’ve been advising them on things like hybrids, but you need to understand how they work. For example, there are some that are in perpetuity which are more equity-like and others that are more debt-like because they have a fixed conversion date or where they step up.

But back to annuities, I think they have a small place to play in a portfolio if somebody wants to secure a certain fixed cost. So if they want to generate $10,000 a year to pay their rates and meet basic living expenses, then sure they can consider an annuity. But the risk is that you are placing money with an annuity company but what if that annuity company isn’t there in 20 years time but you are? There’s still a risk there with the annuity and the longevity of the company where you place the money with.

AJ: I agree there is a role for annuities in part of a client’s portfolio. We liked one of the Challenger short-term annuities – it was a three year annuity effectively paying just over 6 per cent. Now, for some of our clients that was a good hedge against falling term deposit rates. The problem is they’re not on offer all that often.

We’d love to place more money with annuities but to date it’s all been in favour of the issuing company. However, if they would come up with better pricing, then the floodgates would probably open. Because longevity risk is real and it’s a huge issue because other asset categories are failing.

JT: I think better pricing is difficult to hope for in the current environment with yields being just so low.

AJ: There you go. Yields are falling. The pricing of yield and the cash rates are one of the biggest issues for our retirees. Everything else is set off that – dividend yield, bond yield, it drags everything down.

JT: In the current environment, if someone was offering a lifetime annuity at a 5-6 per cent rate, then I’d be starting to worry about what risks they were taking in the underlying portfolio to pay for that.

JF: Thank you for participating in today’s roundtable discussion. •

ROUNDTABLE

James Gerrard, PSK Financial Services


SLOWAND STEADY

PROPERTY

Are you looking for some yield? How about a little real estate action to give your portfolio a lift?

As interest rates fall away, Australian listed property is starting to look very appealing for clients seeking yield. And for those who like their yield combined with a bit of growth, there is a wide variety of global real estate investment trusts (G-REITs) to choose from for some diversification.

With current yields for local REITs hovering around 6 per cent, Australia’s property sector is finding itself attracting some serious offshore attention.

As AMP Capital investment analyst, James Maydew, explains: “The market is hungry for yield and defensive assets. A-REITs are getting the attention of global investors who are yield hungry and we are seeing lots of interest and doing lots of presentations.”

Alastair Gillespie, the Singapore-based portfolio manager for Principal Global Investors’ global REIT funds, agrees there is growing interest and believes A-REITs now represent an attractive investment option.

“The sector is offering a 6.2 per cent dividend yield and has just returned to parity with net asset value (NAV) after being at a discount for the past few years. It is now fair value and relatively attractive,” he explains.

Luring offshore dollarsIn 2011, international investors made quite a splash in Australia’s property market, with the Colliers International


Continued on p34

Today’s A-REITs are a far cry from their pre-GFC crash relations, with good yield on A-REITs again catching the eye of many global investors. And as Janine Mace writes, with the sector’s turnaround, now might be a good time to re-evaluate REITs.

Global Capital Investment in Australia Research & Forecast Report for the first half of 2012 noting there was around $7.7 billion in foreign investment. The report found foreign buyers made up 42 per cent of all commercial property transactions last year.

According to Colliers, foreign investors are searching for higher yielding investments outside the low growth economies of

Europe and the US, and are entering the local property markets via investments in non-performing loan portfolios, privatisation of troubled A-REITs, joint ventures and mezzanine loans.

SG Hiscock director Grant Berry agrees the yield on A-REITs is catching the eye of many global investors.

“The return outlook is good, with a 6 per

With carbon pricing finally in place in Australia, sustainability issues are now an important issue for both A-REIT managers and investors.

Commercial property indirectly contributes an estimated 20 per cent of Australia’s greenhouse gases, according to the Department of Climate Change and Energy Efficiency, and A-REIT managers are increasingly taking the issue into consideration in their investment decisions.

According to S&P fund analyst Peter Ward, A-REIT managers are now scrutinising compliance with Australia’s National Accredited Building Environmental Rating Scheme (NABERS) and Green Star sustainability ratings.

“From a revenue generation perspective, they can influence tenants’ leasing decisions (which influences occupancy rates) and rental rates. From a cost perspective, they can influence capital expenditure, energy costs, and government regulatory costs. Consequently, from an investment perspective, such ratings are not a ‘nice to have’ accreditation, they can influence financial performance,” he said.

Environmental considerations and energy efficiency are likely to come under an even harsher spotlight in an era of carbon pricing. An October 2011 Property Council of Australia report by The Allen Consulting Group on the impact of carbon pricing, found the new regime was “expected to impact the property sector and increase the costs of building and operating buildings by more than the average price change in the economy”.

The Property Council believes this new regime is likely to see energy efficiency become an increasingly important issue for property investors: “More energy efficient buildings will be cheaper to run and are likely to attract higher rents and property prices in the future.”

However, the emphasis on sustainable design and a property’s green credentials is being driven by more than just carbon pricing, according to the Colliers International 2012 Office Tenant Survey. It found 95 per cent of tenants said they wanted to occupy a ‘green’ building, up from 75 per cent in 2010.

According to Simon Hunt, Colliers International managing director office leasing, green credentials are now influencing leasing decisions. “Where sustainable building design used to be an issue for those at the top of a business, it is now being driven from the bottom up,” he says.

This is likely to have important implications for the office market and A-REITs investing in this area.

“Green is now the norm – where it used to be a bonus in a building, it is now expected,” Hunt says. “Tenants don’t necessarily know the ins and outs of green building ratings systems, such as NABERS and Green Star, and aren’t fixated on becoming experts in this area – they just want to be able to say their businesses are based in sustainable premises.”

Technology is also having an impact. According to Colliers’ national director corporate solutions, Doug Henry, both factors will lead to an overall reduction in the demand for office space in the longer term.

“We are likely to notice a much greater need for flexibility in the use of space, with implications for the underlying structure, technological platform and management of buildings,” he says.

“Space which genuinely conforms to sustainability standards – be it NABERS, Green Star or an alternative – will become a must have. In particular, energy efficiency will be a critical component of meeting demand.”

34 | financial planning | AUGUST 2012 | www. fi nancialplanningmagazine.com.au

PROPERTY GOES GREEN

PROPERTY

cent plus dividend yield over five years,” he says. “People are now looking for yield and boring is the new black.”

However, the disastrous crash in the A-REIT market means many local investors and planners have missed the sector’s turnaround. “The sector was absolutely horrible through the GFC, but the flipside is the change that has occurred since,” Berry notes.

“People should be getting interested, but they are still sitting in cash and term deposits. This market has been going up for years, so it’s hard to see what it will take to get people involved.”

Maydew agrees relative performance has been attractive: “Surprisingly, the performance of A-REITs on a one, two and three-year basis has outperformed general equities.”

In Gillespie’s view, 2009-11 were “lost years” for the A-REIT sector due to a combination of massive recapitalisation, high local interest rates and a strong Australian dollar. However, declines in both the currency and interest rates have made it far more attractive, especially to foreign investors.

“The sector is now in a position where it has delivered and recapitalised and has good balance sheet positions. REITs are back in fashion as they are offering an attractive yield and increasingly predictable returns,” he says.

Berry believes many local investors are missing out. “A lot of financial planners are looking at what the sector was in the past. They need to look at what the sector is, not what it was.”

On top of their good relative performance, Maydew believes A-REITs are well positioned to cope with either of the likely economic scenarios in the next few years. If the global economy continues its fiscal ‘muddle through’ and low growth, yield will be an important part of total returns. “In this scenario,

REITs are more defensive than general equities,” he explains.

Alternatively, an abandonment of austerity and increased money printing will lead to inflation and A-REITs are again well positioned. “In inflationary environments, the only things that do well are inflation-linked bonds, precious metals and real estate,” Maydew notes.

“It’s important to remember the underlying leases in A-REITs are inflation-linked, with managers like Westfield having CPI plus 2 per cent inflation clauses in their leases.”

Changes in the A-REIT sectorThe strong yield story for A-REITs is being played out against a backdrop of significant change in the sector.

As Standard & Poor’s director and fund analyst Peter Ward explained in his recent Australian Listed Property Sector Report, A-REITs are now “generally more conservative, with stronger balance sheets, less reliant on equity-like cash flow sources and have lower exposure to offshore real estate. They have greater reliance on rental cash flows and more sustainable dividend payout ratios.”

The report found today’s A-REITs are a far cry from their pre-crash relations.

“The sector is being driven more by real estate fundamentals than the balance sheet, liquidity and credit-related issues which were more dominant through the GFC,” Ward noted.

According to Maydew, planners need to understand the changes which have occurred. “The REIT sector has gone back to basics, as it had stepped away from what it was meant to be. Listed real estate is now a proxy for real estate.”

Much of the complexity which characterised REITs prior to the GFC has also been stripped away.

“Simplification has increased, as the sector was horribly complex with lots of financial engineering and income from risky income streams, not rents,” Maydew notes.

The S&P report notes dividends are now comprised of almost 90 per cent rental income. “This provides high earnings certainty and should continue to be sustainable, due to the lower payout ratios which average about 80 per cent of earnings,” Ward says.

Gearing has also declined. “The gearing level in the A-REIT sector is at the 2002 level, or at 28 per cent throughout the sector. Many REITs completely lost their way, with too much gearing and onerous banking covenants,” Berry explains.

A-REITs are focusing on sound capital management, Gillespie says. “There is greater confidence as there has been no equity issuance by A-REITs in the past year and a number of groups have done buy backs, increasing confidence in management’s ability.”

Another significant change has been a greater emphasis on domestic real estate, rather than international forays in search of growth. Overseas assets now make up a much smaller percentage of A-REIT assets, with the pre-GFC level of 37 per cent now down to around 20 per cent, Maydew notes.


–– “The sector is now in a position where it has delivered

and recapitalised and has good balance sheet positions. REITs are back in fashion as they are

offering an attractive yield and increasingly predictable returns.”

Alastair Gillespie

Continued on p36


He believes the outlook for the sector is positive, even in a low growth environment. “As global growth contracts, general industrial equities have earnings risk, but in REITs the earning risk is on the upside. The yield spinning off the sector is 6.2 per cent and not many sectors can provide that securely.”

When it comes to valuations, Berry believes they are currently good. “REITs are now trading slightly above their NTA. The long-term trend is to trade at a high single digit premium, so it is fair value,” he says.

But what to choose?While many property experts believe the A-REIT market looks attractive, there are differences of opinion when it comes to which sub-sector offers the best prospects.

Maydew favours retail, even though he acknowledges it’s going through a structural shift. “For retail REITs, the pricing was for -20 per cent in re-leasing spreads and this has not happened, which is beneficial for investors,” he explains.

“The good centres are still doing well, but the secondary ones are finding it difficult.”

Berry agrees some sectors of retail are attractive. “With retail, investors should be in either the very, very high quality dominant malls such as the Westfield malls, or in centres with a Coles or Woolworths and a few specialty shops – not what is in between,” he counsels.

Gillespie believes there are headwinds for retail sector performance. “Among retail REITs, the big managers such as Westfield have pushed rents up to a position where it will be difficult to generate growth in the current environment. Managers such as Centro on the other hand, have been very out of favour and have not been as

aggressive on the management front, so their rents are less stretched.”

While Maydew favours food-based and other non-discretionary retailers, he is also warming to the office market. “The yield and spread between the capitalisation and risk-free rate is the largest in 15 years. This means managers can access debt and with valuations improving and cap rates likely to compress, asset values will increase,” he explains.

Berry agrees the office sector offers good prospects. “Office is probably the best sector on fundamentals, with a low vacancy rate and tight space availability. The GFC truncated building, so we should see a good upswing in office due to a lack of developments.”

Although residential is unappealing for Maydew, Berry believes it offers opportunities. “Residential is interesting, as long-term there is an undersupply of affordable housing. Stockland is well-placed in creating affordable stock and is good at master plan communities. It also

has the necessary balance sheet to do it,” he explains.

“Residential has challenges, but we believe it is where the deepest value is.”

Gillespie agrees some parts of the residential market look appealing. “Diversified REITs with residential property exposure have more upside if the market picks up.”

Leaving homeAlthough A-REITs present an attractive alternative for clients seeking yield, their global cousins also have something to offer.

“On a global basis, real estate post-GFC is much more defensive and we are seeing increasing interest in G-REITs. The yield is 4 per cent, which is lower than for A-REITs, but it comes with more growth opportunities. G-REITs are complementary to A-REITs as they have a growth kicker,” Maydew explains.

Gillespie is seeing increasing interest in G-REITs, particularly in the institutional market: “Most new money into the property sector is going into global, not the A-REIT market. The primary reason for this is sector consolidation.”

This is an important point. Following the market crash, Australia’s REIT market is now highly concentrated by manager, with only 20 stocks in the index and the top eight stocks representing 85 per cent of the market.

Maydew believes diversification is one of the primary benefits of G-REITs. “They give you a bit more risk in the portfolio and exposure to growth elsewhere, such as in the Singapore and Hong Kong markets.”

Berry agrees the opportunity set is much wider. “Australia is the second biggest

–– “With retail, investors should be in either the very, very high

quality dominant malls such as the Westfield malls, or in centres with a Coles or Woolworths and a few specialty shops – not what

is in between.”

Grant Berry

PROPERTY


REIT market outside the US, but there is so much more depth in the REIT market globally.”

According to Maydew, the wider than normal spreads between long-term bonds and cap rates in many countries is sparking significant interest in global property.

“The spread between the risk-free rate and the cap rate exists in a lot of markets and global insurance companies and sovereign wealth funds are seeing that and are looking to grow their exposure to real estate, so we expect to see asset values increase,” Maydew explains.

“Many of these funds and insurers do not want direct real estate exposure, so they will go via G-REITs.”

The zero interest rate policy in the US is allowing G-REIT managers to take advantage of the opportunities on offer.

“In the UK, they have access to 15-year leases to global corporations which are very secure. This means real estate offers a bond-like return, but at better than

current low bond rates,” Maydew notes.

He believes global property is an attractive alternative to international equities for Australian investors. “On a performance basis in the year to June 2012, the return for G-REITs is 13.3 per cent, but only 3.7 per cent for global equities. Also, in global real estate the earnings part of the P/E is secure, but in equities the earnings in the P/E are not secure.”

Maydew points out only gold and spot oil have outperformed global real estate (excluding developers) over the past 10 years with a compound return of 9.75 per cent (see Figure 1).

Who looks most attractive?When it comes to the most appealing sectors among G-REITs, opinions vary.

“We see opportunities in Europe, as they have very long leases for very good tenants. We focus on the underlying value of the real estate, so even if you have problems, the asset remains,” Maydew says.

“We are also attracted to parts of Japan as a lot of the REITs there were sold off after the earthquake, and also the US, although it is somewhat expensive.”

He believes there are “pockets of value” in the US, such as shopping malls and homebuilders. “US homebuilders in the past six to 12 months have done well – despite the sell-off after the GFC – and we are seeing the first signs of recovery in areas such as Texas due to the energy boom there.”

Gillespie agrees the US REIT market looks attractive due to the ‘flight to quality’ and its strong fundamentals. For a market with slightly higher risk but the potential for higher return, he favours the Hong Kong office market.

“We are underweight Europe and overweight the US and Australia. Within Europe we have a preference for the UK and the West End of London,” Gillespie notes.

“There are also some opportunities in the emerging markets that are less well correlated to developed markets such as Brazil, South Africa and Thailand.” •

Figure 1 – Compound asset class return over 10 years (2002-12)

Source: UBS and AMP Capital. 10 years to May 2012.

38 | financial planning | AUGUST 2012 | www. fi nancialplanningmagazine.com.au

THE QUIET ACHIEVERS

Managed Discretionary Accounts have worked their way into the local financial services landscape but are not renowned for making a big noise about it. While the first offerings were available around 2004, it has taken close to a decade for the sector to come to the attention of planners in general.

The Institute of Managed Account Providers (IMAP) chair Toby Potter says

that despite the progress that has been made in the development and promotion of managed accounts, the sector is still emerging from its cottage industry phase. However, he believes its movement will begin to accelerate.

“The growth of managed accounts has been driven by the focus on direct investments, firstly in equities and later in fixed interest and cash. The other issue

has been that the technology to deliver managed accounts in a scalable way has only become available in recent years as well,” Potter says.

Multiport Technical Services Director Philip La Greca says managed accounts are also being driven by concern among planners and their clients for greater transparency and control over investments, as well as interest from the

Managed Discretionary Accounts are not the new kids on the block but in a post Future of Financial Advice (FoFA) world, they offer financial planners a fee-for-service model and an investment platform capable of offering almost any investment. Jason Spits examines what it takes to advise on these quiet achievers.

MANAGED ACCOUNTS


burgeoning self-managed superannuation fund (SMSF) sector.

“For engaged clients, some products have become too complex in recent years and SMSFs have not usually had an appetite for traditional asset classes. They tend to gravitate towards direct investments and given that SMSFs make up a third of all superannuation balances, often without managed funds exposure, then we can expect to see more movement in the managed accounts space,” La Greca says.

This growth in presence also seems to be leading to confusion as to what managed accounts are according to Mason Stevens chief executive officer, Thomas Bignill.

“If you asked five different people, you would get five different answers as to what a managed account is and how it works. As a catch-all definition it is an account where discretion is given to a manager to administer assets which can include equities, managed funds or even gold,” Bignill says.

And while definitions may still be hazy, Bignill says managed accounts have moved on from being used by those considered innovators and are now being used by early adopters.

“These are the types of financial planner who are looking beyond the FoFA reforms at how they can add value, scale their business and reduce cost, while maintaining a fee-for-service planning practice,” Bignill says.

“To date, wraps have become the catch-all product for all clients but not all clients are suited to a wrap. For these people, managed accounts provide a better result and better fee structure and can offer access to a wide range of investments that many of the platforms cannot offer.”

Crystal Wealth executive director Tim Wedd uses managed accounts across his advice business and says they are also about taking a view of what works for the

client and not considering what product works best for the planner. According to Wedd, this approach can deal with clients who have direct holdings, non-standard holdings, as well as mainstream investments.

“I wanted to be able to both advise and report on that type of situation, as well as being able to construct a pricing structure that would stand up under FoFA. Clients can look at both the advice and the investment decisions and pay for each piece, and I can accommodate clients on fees by offering a full service, part service or basic hand-holding service as they make their own decisions,” Wedd says. “In deconstructing the pieces and how much they cost in pre-packaged funds, it was clear they couldn’t function in the same way or at the same cost.”

Implementation at the front-endFor financial planners wanting to move into the managed account space, there is some work involved and not least of it is ensuring that the appropriate conditions and authorisations are held within your Australian Financial Services Licence (AFSL).

Potter says the Australian Securities and Investments Commission (ASIC) maintains a close watch over the managed accounts space, as it’s careful in exposing investors to them by restricting those who can offer and advise on them.

However, there are two other key areas to consider. Firstly, front-office: how to provide advice with managed accounts and communicating that to clients. And secondly, back-office: what planning systems need to be in place.

Yellow Brick Road Investment Services principal investment adviser Louise Lakomy CFP®, also a proponent of managed accounts, says planners using managed accounts must be able to handle the difficult times when the portfolio has underperformed.

“There is no hiding behind a fund manager when a stock goes bad because the portfolio is transparent to both the planner and the client. This is probably the biggest change planners need to make. They need to understand direct shares and how they move and can impact a client’s portfolio,” Lakomy says.

“The other change is that client communication becomes a constant series of messages informing and educating them about what is going on within the managed account. This removes the sting around issues of stock performance and educates clients on other factors such as yield, value, growth and franking credits. It is the same conversation as with managed funds but the difference is it’s about stocks and takes place more often.”

Implementation at the back-endLa Greca says that planners making the move to managed accounts will also need to present the benefits of the vehicles to clients and be certain they see the direct benefits on offer such as transparency of the portfolio, being able to time capital gains tax events, and the direct holding of the assets.

At the same time, planners will need to be careful they do not focus only on the financial side of charging an advice and investment management fee. While this may sound like a solid economic model to switch to in tough times, planners should be fully aware that the back-office transition may be difficult for the uninitiated.

Fiducian Portfolio Service investment manager Conrad Burge says planners need to ask what role do they wish to have when

Philip La Greca,Multiport

Continued on p40


Bignill says it should not be a recurring feature in every managed account because the underlying performance of each fund will differ and will rely heavily on the skill of the investment manager, who may be the planner giving advice or a contracted third party.

La Greca says alpha may be part of the value proposition managed account providers and financial planners present to clients, but the only way to prove this is to benchmark each client’s portfolio every year.

Given that, Potter says while time may tell a different story – “returns are based on the investment manager and not the investment vehicle” – planners interested in deriving alpha through direct investments within a managed account should be fairly confident of finding it for their clients.

Th e search for a clear pathAnd that ability to read the future and set a clear direction is something Lakomy says is holding back some planners from adopting managed accounts for use with clients.

“Is it possible to evaluate managed accounts at present? It is possible but there is some confusion as to where to head in business as a financial planner. It is still not clear which business models will survive under FoFA and whether it will be implemented if there is a change of Federal Government. The biggest issue around managed accounts is the uncertain political environment,” Lakomy says.

However, Wedd says the adoption of managed accounts is part of the evolution of financial services investments and while they may not be fully understood,

nor applicable for every client, they will increasingly take their place on the desktops of planners.

“We had unit trusts and then the multi-trust, which was followed by the master trust and the platforms of today, yet they still struggle to deal with non-standard investments, which is where managed accounts will come into their own,” Wedd says. •

Although managed accounts are not a recent development (ASIC released Regulatory Guide 179 dealing with the sector in March 2004), it has only been in recent years that their use has begun to increase. While many planners are keen to find new ways to service their clients, not too many are keen on adding to their licensing requirements. Yet when it comes to managed accounts, the licensing hurdles may not be that high but they can be confusing.

ASIC’s Regulatory Guide 179 states, “Because of the individualised nature of the range of financial services involved, we will regulate persons contracting with retail clients to provide MDA (managed discretionary accounts) services as providers of financial services rather than issuers of a financial product”.

So far, so good, right?

How does this work at the licensee and planner level? Given that ASIC considers managed accounts to be a specialised product, it is no surprise then that additional authorisations need to be held within a financial planner’s Australian Financial Services Licence (AFSL).

These additional authorisations can allow a licensee to provide product advice about investments held in an MDA service or buy, sell and trade financial products (eg, equities) under an MDA service or do both – provide advice and enact the trades deriving from that advice.

What does this look like at the level of the desktop advice offering? Following the order of the authorisations above, a financial planner could provide external advice on a managed account to a client but not engage in the trading of the underlying assets which would take place through the managed account provider.

Alternately, a financial planner could operate a managed account service, including portfolio management, record-keeping and the trading of assets but use an external advice provider to set the investment program directing the managed account. This route seems to offer little benefit to planners unless they can retain the advisory aspect in-house in some form.

The final option is for a financial planner to operate the managed account service and provide the investment advice directing the managed account, thus maintaining control over the entire investment process and being able to charge a fee for both the advice and investment components of the service.

Any advice generated in the course of setting up a managed account will still require a Statement of Advice and financial planners who have no interest in managed accounts should still be wary. If they have not been granted appropriate authorisation under their AFSL, they are restricted from recommending a client withdraw from a managed account service.

Licensing: Easier to explain than to understand

Tim Wedd,Crystal Wealth

Bankruptcy lawyers and family lawyers deal primarily with two different and distinct pieces of legislation. Bankruptcy lawyers deal with the Bankruptcy Act 1966 (BA), whilst family lawyers refer to the Family Law Act 1975 (FLA).

The introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (BFLAA) substantially changed the landscape in respect to bankruptcy and family law. The BFLAA gave the Family Court jurisdiction to deal with matters relating to a bankrupt’s property and a bankrupt spouse in circumstances in which previously the Family Court’s role was limited once a party became bankrupt.

The BFLAA permitted concurrent bankruptcy and family law proceedings to be brought together in the Family Courts to ensure that all the issues are dealt with at the same time. The BFLAA allows clarification of the competing rights and interests of the creditors and the non-bankrupt spouse where bankruptcy and family law issues co-exist.

The BFLAA gives the Family Court power if there were property proceedings on foot to make ‘orders’ about property which had vested in the trustee in bankruptcy.

Bankruptcy disputes between married and de facto couples are now dealt with under the FLA. A non bankrupt spouse or de facto can make a claim in the Family Court for property vested in the trustee in bankruptcy. However, before doing so, the bankrupt will need to join the trustee in bankruptcy to the proceedings or have the trustee’s permission to apply to the court.

What property is protected?The BA provides that property owned by the bankrupt vests in the trustee in bankruptcy. However, superannuation, some household goods, motor vehicles to a value of approximately $6,850 and tools of trade of approximately $3,400 cannot be clawed back. However, payments made to a superannuation fund in order to defeat creditors can be clawed back.

Claw back provisionsTransfers of property made by a bankrupt spouse to a non bankrupt spouse to defeat creditors can be clawed back for the period from six months prior to the bankruptcy. Mistakenly, some spouses likely to go bankrupt have transferred property that is in their name to their spouse believing this will avoid the trustee in bankruptcy having a claim to the property. Unfortunately for the bankrupt spouse, the trustee in bankruptcy can claw back any transactions made from six months prior to the act of bankruptcy.

Transfers of property are void if the main purpose of the transfer was to defeat creditors or to prevent the transferred property from becoming divisible among creditors or to hinder or delay the process of making property available for division among the creditors.

A transfer by a person who is insolvent to a creditor is also void against the trustee if the transfer gave the creditor a preference, priority or advantage over other


BANKRUPTCY AND FAMILY LAW

Financial planners dealing with issues of bankruptcy and family law with their clients need to be aware of some fundamental legal issues, writes Sanaz Naimi.

LEGAL

creditors and was made within usually six months before the bankruptcy commenced.

Further, transfers of property by a bankrupt may be void against a trustee if made within five years of the start of the bankruptcy and there was no consideration, or the transfer was for less than market value. Market value consideration does not include family relationship, marriage or de facto relationship, promise to marry or partner, and love or affection.

Transfers are not void against the trustee if they were made more than four years before the commencement of bankruptcy for related entities and two years before the commencement of bankruptcy for all other cases, and the transferee proves that at the time of the transfer, the transferor was solvent.

The trustee in bankruptcy has to be joined as a party to the Family Court proceedings as they are

not automatically a party to the proceedings. If the trustee in bankruptcy is joined, the trustee steps into the shoes of the bankrupt and the bankrupt loses the right to make submissions with respect to the property which has vested with the trustee. However, the bankrupt continues to have the right to make submissions about property which has not vested in the trustee, such as superannuation. The bankrupt trustee may choose not to remain in the proceedings and may give the bankrupt spouse permission to litigate in the Family Courts.

What about Financial Agreements or Consent Orders? Consent Orders are approved by the court and therefore a transfer of property of a person who is bankrupt is protected and cannot be clawed back unless the parties did not inform the trustee of the bankrupt spouse and did not make full and frank disclosure of their assets and liabilities to each other and creditors. However, a Financial Agreement (FA) is a private agreement between two parties and therefore it can be set aside.

Creditors have standing to apply to set a FA aside and the claw back provisions in the BA can be used by the trustee in bankruptcy to recover property transferred in accordance to a FA. It is also an act of bankruptcy if a person becomes insolvent due to a transfer of property in accordance with a FA.

What about Spousal Maintenance Orders?Generally, a maintenance order can be registered with the Child Support Agency (CSA). The CSA will enforce the order by garnishing the bankrupt’s

wages or intercepting their tax returns. Any amount outstanding or not paid by the bankrupt will accrue and be recovered before, during or after the bankrupt is discharged from bankruptcy unless the court orders otherwise.

A bankrupt can generally earn and retain approximately $46,018.70 per annum (the threshold) if he or she has no dependants. This amount increases with the number of dependants.

If a bankrupt earns more than the threshold, the trustee in bankruptcy is entitled to $0.50 in every dollar earned above this. However, maintenance orders have priority over the trustee in bankruptcy unless the Family Court orders otherwise.

If the bankrupt encounters financial difficulties post-bankruptcy, it may be possible to petition the court for a modification of spousal maintenance. However, the bankrupt will more than likely have to demonstrate a substantial change in circumstances or some sort of hardship.

What about Child Support?Section 139N of the BA allows a bankrupt spouse to enter into a Binding Child Support Agreement (BCSA). The BCSA may allow a bankrupt to meet preferentially, certain expenses for their children from their above threshold income.

Sanaz Naimi is a lawyer at Berry Family Law. For a free 30-minute consultation on bankruptcy or any other family law matters, phone (03) 9321 3116 or [email protected]


–– “Mistakenly, some spouses likely to go bankrupt have

transferred property that is in their name to their spouse

believing this will avoid the trustee in bankruptcy having a

claim to the property.”


BABY BONUS AND PAID PARENTAL LEAVE

CENTRELINK

The Baby Bonus helps with the costs of a newborn baby or adopted child. It is paid to eligible families following the birth of a child. The Baby Bonus can also be claimed for adopted children who enter a person’s care before they turn 16 years old.

A person may be eligible for the Baby Bonus if they:

• are the primary carer of a newborn or adopted child; • are an Australian resident; • meet the Baby Bonus income test; • have care of the child for at least 35 per cent of the time; and • have not received Parental Leave Pay for the child.

From 1 September 2012, people with a child born or adopted after that date who claim and are eligible for the Baby Bonus will receive $5,000. People who claim on behalf of children born or adopted before 31 August 2012 can continue to receive the current rate of $5,437.

The Baby Bonus is paid in 13 fortnightly instalments. If a person is eligible for the Baby Bonus, they will receive a higher amount in the first instalment than in the subsequent 12 fortnightly instalments.

The child must also meet the above requirements and must be living with the person. The customer must meet the residency requirements within six months of the child’s birth or entry into care.

An income test applies to the Baby Bonus. This is based on the family’s income for the first six months after the child is born or adopted. The Baby Bonus is payable if the family’s estimated combined adjusted taxable income is $75,000 or less in the six months after the child is born or enters the family’s care.

To receive the Baby Bonus, a person must submit their claim and provide an income estimate to the Australian Government Department of Human Services no later than one year after the birth of their child or the adopted child’s entering their care as part

of an adoption process. If the family’s circumstances change, they should tell the department immediately so their claim can be reassessed.

If the family does not qualify for the Baby Bonus and the customer is a working parent and becomes the primary carer of a child, they may be eligible for the Paid Parental Leave scheme. This entitlement provides a maximum of 18 weeks of government funded Parental Leave Pay at the rate of the National Minimum Wage.

If a family is eligible for both payments, the customer can choose which payment is the best financial decision for their family by using the Paid Parental Leave Comparison Estimator available at humanservices.gov.au. Most eligible families will be better off receiving Parental Leave Pay rather than the Baby Bonus.

To find out more about Baby Bonus visit humanservices.gov.au/babybonus.


CHAPTER EVENT REVIEW

On Saturday 23 June, the South Australia Chapter, in conjunction with the Rotary Club of Adelaide, held its second Bulls and Bears Ball at the Adelaide Oval Members Dining Room. With 332 people attending, guests enjoyed a fun filled and memorable evening. And with the added bonus of champion mare Black Caviar racing at Ascot in London at 12.15pm on Sunday morning, most guests stayed on to watch her record an exciting 22nd consecutive win.

A significant amount of funds were raised for charity on the evening. Time for Kids was the principal beneficiary of the night, with $10,000 being granted to the charity which helps disadvantaged children and young people by matching them with volunteer carers or mentors on a regular part-time basis. The balance of funds raised was then distributed evenly between the Future2 Foundation and the Rotary Club of Adelaide for their community projects.

A special thank you to Challenger and Lanyon Asset Management for their generous sponsorship and support, and to the many other groups and individuals who contributed auction items and assistance on the evening.

Next year’s ball has been scheduled for Saturday 29 June, 2013.

The Sydney Chapter Chair, Scot Andrews attended the recent St George TAFE College Graduation and Awards presentation evening on Wednesday 16 May to celebrate those students who graduated from the Diploma of Financial Planning. Among the many high quality students graduating, Andrews presented Joel Zhiheng Feng with the Financial Planning Association Award for the Highest Achievement in the Diploma.

St George TAFE College is now offering matriculation to its new Bachelor of Applied Finance (Financial Planning) degree program to further students’ professional education and to meet industry requirements. This degree program is part of TAFE NSW Higher Education.

Bulls and Bears for charity

REGIONAL ROUNDUP

DFP graduates at TAFE

The Chapter Committee: Richard Dahl, Garth Craig, Kathryn Casey, Barry Strapps, Tony Brosnan, Darren Abbott, Tania Sweet, Rob Falconer and Kerrin Falconer.

John Molnar, Jan Wilkinson, Andre Haidar, Robyn Hayward and Lachlan Kennett. MC Brett Dalton.

Valerie Wilson, Christine Leetham, Scot Andrews and Russell Scott. Joel Zhiheng Feng and Scot Andrews.

AMP Financial Planning

AET

Australian Unity

BT Financial Group

Challenger

IOOF

Lifeplan

Lonsec

Magellan

MLC Sales WA

Plato

TAL

Vanguard

Thank you to our Chapter supporters

For more information about Chapter events, contact Di Bungey on 02 9220 4503 or [email protected]

EVENT CALENDAR


EVENTS AND PROFESSIONAL DEVELOPMENT CALENDAR: AUGUST 2012

Presenter: David Williams Date: 22 August, 11.00am – 12.15pm (AEST)CPD: 1.25 points

Despite the significant implications of living longer, many clients remain under-prepared for retirement. New research by Investment Trends found planners anticipate one-third of their clients aged under 75 will be dependent on the Age Pension for more than half their income when they cease work, growing to more than half by the time they are aged between 84-95. The December 2011 Retirement Planner Report also found 36 per cent of planners expected non working clients to make up a greater proportion of their client base by 2014.

With the increasing focus on people no longer working, planners must provide more advice on specific needs for this group and their families, especially aged care. By being properly aware of longevity issues, planners can open many doors with clients and build a more holistic and longer term advisory relationship.

In this informative session specially tailored for the FPA, David Williams will assist you to:

• Develop awareness of the impact of increasing longevity on the community and the advice you give to your clients.• Understand the factors driving significant

differences in individual longevity and how these impact on personal advice.• Use your longevity awareness to consolidate long-term and regularly-reviewed relationships with your clients.

David Williams began longevity research in 1986 and has been published widely on retirement issues during his executive years with RetireInvest (as a director) and Bridges (as its chief executive officer). He founded My Longevity in 2008 to draw together the rapidly growing body of authoritative information on personal longevity.

Longevity Risk: Managing Clients and Advice StrategiesCPD LIVE AND ONLINE CHAPTER EVENTS

6 August Geelong: Member Lunch

8 AugustHobart: Member lunch

15 August ACT: Member Lunch Seminar Wollongong: CPD Breakfast

21 August Sydney: Careers Expo

22 August South Australia: Future Planner Evening Goulburn Valley: Half Day CPD Seminar Bendigo: Member Breakfast Northern Tasmania: Member Lunch

23 August Townsville: Member Lunch Sunshine Coast: Business Lunch Ballarat: Morning Tea Melbourne: Young Planner Evening

24 August Northern Territory: Golf Day Albury Wodonga: Member Lunch Toowoomba/Darling Downs: Member Breakfast Mid North Coast: Charity Golf Day

30 August Western Australia: Member Breakfast Hobart: Member Lunch

David Williams

CHAPTERS

NEW SOUTH WALESSydneyScot Andrews CFP®

ChairpersonTel: (02) 8916 4281Email: [email protected]

Mid North CoastDebbie Gampe AFP®

ChairpersonTel: 1300 425 943Email: [email protected]

NewcastleMark Reeson CFP®


New EnglandJohn Green CFP®


RiverinaPat Ingram CFP®


Western DivisionPeter Roan CFP®


WollongongMark Lockhart AFP®


ACTCanberraClaus Merck CFP®


VICTORIAMelbourneJulian Place CFP®


Albury WodongaWayne Barber CFP®


BallaratPaul Bilson CFP®


BendigoGary Jones AFP®

ChairpersonTel: (03) 5441 8043 Email: [email protected]

GeelongBrian Quarrell CFP®

Chairperson Tel: (03) 5222 3055Email: [email protected]

GippslandRod Lavin CFP®


Goulburn ValleyJohn Foster CFP®


South East MelbourneScott Brouwer CFP®


SunraysiaMatt Tuohey CFP®


QUEENSLANDBrisbaneIan Chester-Master CFP®


CairnsDanny Maher CFP®


Far North Coast NSWBrian Davis AFP®


Gold CoastMatthew Brown CFP®


MackayJames Harris CFP®


Rockhampton/Central QldDavid French AFP®

Chairperson Tel: (07) 4920 4600 Email: [email protected] Sunshine CoastGreg Tindall CFP®

Chairperson Tel: (07) 5474 1608Email: [email protected]

Toowoomba/Darling DownsJohn Gouldson CFP®


TownsvilleDeidre Walsh CFP®

Chairperson

Tel: (07) 4775 5703

Email: [email protected]

Wide BayNaomi Nicholls AFP®

Chairperson

Tel: (07) 3070 3066


SOUTH AUSTRALIAAdelaideMichael Farmer CFP®

Chairperson

Tel: (08) 8218 8249


NORTHERN TERRITORYDarwinGlen Boath CFP®

Chairperson

Tel: (08) 8941 7599


WESTERN AUSTRALIAPerthSue Viskovic CFP®

Chairperson

Tel: 1300 683 680


TASMANIAHobart Todd Kennedy CFP®

Chairperson

Tel: (03) 6233 0651


Northern TasmaniaChris Elliott CFP®

Chairperson

Tel: (03) 6323 2323


FPA CONTACTS AND CHAPTER DIRECTORY

DIRECTORY


Member Services: 1300 337 301Tel: (02) 9220 4500 Fax: (02) 9220 4582Email: [email protected] Web: www.fpa.asn.au

FPA BOARDChair Matthew Rowe CFP® (SA)

Chief Executive OfficerMark Rantall CFP®

DirectorsMatthew Brown CFP® (QLD)Patrick Canion CFP® (WA)Bruce Foy (NSW)Neil Kendall CFP® (QLD)Louise Lakomy CFP® (NSW)Julie Matheson CFP® (WA)

Peter O’Toole CFP® (VIC)Philip Pledge (SA)

BOARD COMMITTEESMember Engagement Board CommitteeMatthew Rowe CFP®


Professional and Policy Board CommitteePeter O’Toole CFP®


FPA COMMITTEESMarketing and Member GrowthPatrick Canion CFP®


Education and Member Services

Julie Matheson CFP®


Professional Conduct

Guyon Cates


Policy and Regulations

Mark Spiers CFP®


Professional Designations

Martin McIntosh CFP®


Financial Planning magazine

Documents

Transcript of Financial Planning magazine