Money Management (19 May, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

MACQUARIE Wrap has finally brokenthrough to take out the top position on theWealth Insights Platform Service LevelReport Rankings, with Colonial FirstWraprated second.

Despite running second with respect toplatforms, Colonial FirstWrap was rankedfirst with respect to the Wealth InsightsFund Manager Service Level report for thefourth year in succession – somethingColonial First State (CFS) chief executiveBrian Bissaker attributed to the company’songoing investment.

Importantly, the Wealth Insights researchwas carried out before CFS announced keychanges to FirstWrap earlier this year, includ-ing fee structures among the lowest in theindustry.

Commenting on the findings, WealthInsights managing director VanessaMcMahon said the research had beenconducted among 870 financial plannersin April.

Last year’s top ranked platform in the

service level survey, IOOF’s Pursuit platform,was ranked third this year – with McMahondescribing the rankings as being very close.

“Macquarie Wrap, Colonial FirstWrapand Pursuit are a dominant top three, andColonial was only just pipped at the post,”she said.

In the Fund Manager Service LevelReport, Colonial FirstWrap was followed byPerpetual and MLC.

Bissaker said that while he would haveliked to have seen Colonial FirstWrapemerge at the top of the rankings with

respect to both planner service levels andfund manager service levels, he was satis-fied that it was a leader in the field.

He said that, importantly, he believedColonial FirstWrap had been highly rankedby advisers with respect to service level satis-faction – something that represented animportant measure to the company.

McMahon said the importance of thesurvey was that it had been a part of theAustralian financial services industry for thepast 20 years and, for some companies, hadbecome a part of their internal performancemeasures.

She said that a key mistake for some plat-form providers was to only survey amongtheir own planners – something that gaverise to the risk of skewing results.

Macquarie’s head of insurance and plat-forms, Justin Delaney, said he was delightedwith Macquarie Wrap topping the ServiceLevel Report rankings in circumstanceswhere it had been among the top-rankedplatforms for five years in a row.

“We have a strong service level proposi-tion across a wide range of attributes and Ithink this outcome reflects that,” he said.

Delaney said Macquarie was constantlyseeking to maintain Macquarie Wrap’s posi-tion, including running its own service levelsatisfaction research and acting upon thefeedback provided by advisers.

“That means we are continuing to investwhere it’s needed,” he said.

By Caroline Munro

THE happy days of all-expenses-paid trips and free tickets to thecountry’s top events will end shouldcertain Future of Financial Advice(FOFA) reforms relating to soft dollarbenefits be legislated.

Treasury has proposed a ban onsoft dollar benefits that involveentertainment or gifts valued over$300. The alternative remunerationregisters of some of the country’sbiggest financial services groupsrevealed that the cost of entertain-ing individuals most often exceededthat threshold, with some packagesto sporting events costing nearly$4,000.

MLC’s register revealed that over-all the value of event packages andtickets for its guests to the Aus-tralian Open in January 2010neared $370,000. MLC also spentnearly $110,000 on packages andtickets for the last Melbourne Cup.OnePath spent over $61,000 ontickets for advisers to the U2 con-cert last November. On its 2010register, IOOF spent nearly $16,000on tickets to the Caulfield Race Day.These companies are not alone

when it comes to significant expen-diture on entertainment, but theirspending does raise the question:what is appropriate?

“The FOFA package brings intostark focus the intent of these activ-ities and events, and whether theyin fact distort advice outcomes,”said Association of Financial Advis-ers chief executive Richard Klipin.“There’s clearly a place right acrossthe Australian business communityfor relationship management witha marketing focus – the question iswhat is reasonable?”

Klipin said the $300 ceiling perperson per event was not unrea-sonable.

Mark Rantall, chief executive ofthe Financial Planning Association(FPA), said his association, alongwith the Financial Services Council(FSC), had long advocated for thethreshold as part of its joint Indus-try Code of Practice on AlternativeForms of Remuneration. However,Rantall doubted that advice wasactually being influenced by advis-ers attending events. This viewpointwas supported by Klipin.

Macquarie tops platform rankings

Continued on page 3

Entertainment expensesin the spotlight

FEDERAL BUDGET ROUND-UP: Page 6 | ALTERNATIVE INVESTMENTS: 4

Vol.25 No.18 | May 19, 2011 | $6.95 INC GST

Brian Bissaker

1 – Macquarie Wrap2 – Colonial FirstWrap3 – Pursuit

Wealth Insights Platform ServiceLevel Report Rankings:

1 – Colonial First State2 – Perpetual3 – MLC

Fund Manager Service Level Report Rankings:

By Milana Pokrajac

THE unbalanced discussionabout the proposed Future ofFinancial Advice (FOFA)reforms could be a largecontributor to poor investorsentiment, which keepspushing the managed fundsector inflows further down.

According to AustralianUnity head of investmentsDavid Bryant, both the Govern-ment and the industry havefailed to acknowledge the goodcomponents of the financialservices sector during the FOFAdiscussions.

The Government announcedthe reforms in April last year,promising increased transparen-cy in hopes to oust the badapples and prevent events suchas the collapse of Storm Finan-cial and Westpoint Group fromhappening again.

Bryant argued that Australiaalready had a good superannua-tion system, a strong regulatoryenvironment and a well func-tioning funds managementindustry, and that FOFA neededto be seen as a way to improve

the system. “A lot of the noise around

FOFA, MySuper and other things– while they are very good publicdebates to have about managedinvestments, advice and super-annuation – I think what a lot ofthe people hear is that there issomething wrong with thesystem,” Bryant said.

“At the moment, FOFA issimply contributing to poorsentiment because it is beingheard as ‘there are problems tofix’ rather than ‘there areimprovements to make’,” headded.

Plan for Life figures revealedthe December 2010 net inflowsfor managed funds amounted toonly $152 million, which is instark contrast to almost $1.2billion in the previous quarter or$20 billion from the June quarter2007, before the global financialcrisis (GFC) hit the markets.

While the researcher is stillin the process of analysing thenumbers from the March 2011quarter, AXA’s general managerfor platforms, Steve Burgess,said the company had seen a“sluggish and slow” first

quarter of the year, eventhough there appeared to havebeen a slight recovery in thesecond half of 2010.

However, Burgess said hedidn’t believe the FOFA talks hadan effect on largely disengagedinvestors as yet.

“It’s putting a burden onplanners and dealer groups,but from the client perspective,I think they are really notengaged in that debate or thatargument as we speak rightnow,” Burgess said.

The Association of FinancialAdvisers chief, Richard Klipin, saidthe declining net flows should beof concern to all members of the

David Bryant

Continued on page 3

FOFA debate hurtinginvestor sentiment

More Budget loose endsM

emo: Treasurer, WayneSwan. CC: Assistant Treasur-er, Bill Shorten. When youdiscover, more than two

years after the event, that you’ve stuffed upa policy initiative such as Stronger Super,you really owe it to the electorate to fix itproperly.

However, the critics are right in describ-ing your Federal Budget effort to fix theexcess contributions tax unintended conse-quences from the 2008 Stronger Superinitiative as a ‘band-aid’ solution.

The band-aid descriptor seems highlyappropriate in circumstances where theBudget provides that people can accessonly a one-off refund of their excess contri-butions – and only if those contributionsamounted to less than $10,000.

By any objective measure, that repre-sents a very limited concession on the partof the Government and one that will notprevent many well-meaning superannua-tion fund members finding themselvesinnocently caught up in a highly punitivetax regime.

The Government’s Budget measure willnot stop people being exposed to an accu-mulative tax rate of 93 per cent – rather, itwill simply reduce the numbers likely to beexposed. Further, no one will be allowed to

err more than once.In circumstances where Shorten was,

himself, unwittingly caught by the excesscontributions rules and where even the TaxCommissioner, Michael D’Ascenzoexpressed concerns about the punitiveconsequences, the industry had every rightto expect the Government to do moreabout fixing a problem of its own making.

The best that can be said for the Budgetis that, at first blush, it would not appear tohave unduly added to market uncertaintyaround Government policy with respect tofinancial services.

However, the financial services contentof the 2011-12 Budget needs to be weighedagainst the still undelivered financial serv-ices content of the 2010-11 Budget – notleast the absence of any specific legislationaround higher contribution caps for over50s and the progressive lifting of the super-annuation guarantee to 12 per cent.

The reality confronting the financialservices industry is that it needs to work inthe knowledge that Australia has a minor-ity Labor Government that is currentlycarrying two successive years of Budget-related financial services policy, plus a raftof intended changes flowing from theFuture of Financial Advice (FOFA) reforms.

Lifting the superannuation guaranteeremains inextricably linked to the imposi-tion of a Mineral Resource Rent Tax, whilethe FOFA changes will undoubtedly be thesubject of horse-trading with the majorindustry stakeholders and within the Parlia-ment.

A recent Wealth Insights index revealedthat sentiment among financial plannerswas in decline even before the Governmentannounced its latest FOFA intentions.Given the loose ends and uncertainty, it islittle wonder.

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2 — Money Management May 19, 2011 www.moneymanagement.com.au

[email protected]

“ The best that can be saidfor the Budget is that, at firstblush, it would not appear tohave unduly added tomarket uncertainty. ”

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By Chris Kennedy

A TRIAL arrangement between industryfund giant AustralianSuper and severalfinancial planning dealer groups could leadto questions about the way advice servicesare structured.

Association of Superannuation Funds ofAustralia (ASFA) chief executive PaulineVamos said the arrangement could lead to afurther division between the level of generaland intra-fund advice that funds provide thatis covered by administration fees and fullholistic advice.

Vamos said that the question forAustralianSuper and any other funds thatenter this type of arrangement will be: willthey pay for single-issue scaled advice, or willthey offer it themselves? But the panelarrangement still represents the next step inthe maturity of how super funds provideaccess to advice for members, she added.

Not appearing on Approved Product Lists(APLs) has been a big issue for industryfunds, but with greater transparency provid-ed by reporting and ratings agencies there isimproved visibility of these funds. As such,planning groups are more confident aboutplacing industry funds on their APLs, shesaid.

If further deals of this type eventuate, thestringent requirements AustralianSuperplaced on the dealer groups (which includeMatrix Planning Solutions and GodfreyPembroke) would be copied by other funds,which already happens with associatedfinancial planning groups, Vamos said.

Money Management understands theserequirements to include: that the dealergroups must operate strictly under a fee-for-service payment structure; have suitablyqualified advisers; and have a robust compli-ance and audit process.

Matrix managing director Rick Di Cristo-

foro said industry funds did have a placewithin the overall industry framework, andcould be an efficient super platform for arange of clients.

“The industry has been focused oncommissions and fees for too long, andindustry funds versus advisers has been over-done,” he said.

AustralianSuper and Matrix have beenlooking to break down that wall and takethings purely from an advice, platform andproduct perspective, he added.

Godfrey Pembroke managing directorTom Reddacliffe said that he was not inter-ested in the so-called ‘war’ between industryfunds and advisers, and that anything thatled to more clients receiving quality advicewas a positive thing.

Association of Financial Advisers chiefexecutive Richard Klipin said that financial-ly it made sense for industry funds to lever-age a retail planning firm’s resources and

experience rather than go to the expense ofsetting up an in-house planning arm. Thistrial will likely be a forerunner to a lot morecollaboration across the market, he added.

Di Cristoforo said Matrix would look at asimilar proposal from another industry fundif it came up, but questioned whetheranother fund would be likely to enter the mixnow when they haven’t previously. Redda-cliffe said Godfrey Pembroke was not indiscussions with any other funds at this time.

www.moneymanagement.com.au May 19, 2011 Money Management — 3

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AusSuper deal creating questions

FOFA debate hurtinginvestor sentiment

financial services industry, but added a combination of factorsaffected the investor sentiment, such as the hangover fromthe GFC, as well as Australia’s multi-speed economy.

“There is no doubt that the media commentary aroundFOFA and product and advice failures are obviously weigh-ing in the mind of consumers, but I wouldn’t set it as a majorfeeder,” Klipin said.

Plan for Life senior manager Daniel Morris said the figureswere not particularly worrying as yet despite the low netinflows, due to the market volatility which was present eversince the GFC recovery began.

Klipin said that relation-ship-building was invaluablefor advisers who wanted toensure they had strong sup-plier relationships – a keycompetitive advantage inthe marketplace, heexplained.

IOOF general manager ofdistribution, Renato Mota,felt there was a lack ofacknowledgement in thereforms as to the role thatrelationship-building playedin this industry. Nonethe-less, he said the industrywould find other ways tobuild relationships withadvisers, adding that IOOFwould support removingperceived soft dollar benefitbias if it improved the per-ception of the profession.

Rantall suggested therewas likely to be a biggerfocus on education-basedevents in the future.

An MLC spokesman saidthe group was unable tostate whether more moneywould go towards educa-tional initiatives until furtherdetails of the legislationemerged. MLC welcomedclarity on soft dollar bene-fits, the spokesperson said,adding that while the indus-try disclosed soft dollar pay-ments under the FPA/FSCcode, there had been somemisunderstanding aboutthese benefits and how toclassify them.

Entertainment expensesin the spotlightContinued from page 1

Continued from page 1

Pauline Vamos

Richard Klipin

News

By Caroline Munro

OVER half of advisers surveyed haveneutral feelings towards the FederalBudget announcements, with only24 per cent positive and 18 per centnegative,stated Midwinter.

The survey revealed that therewas some disillusionment with thepolitical nature of the Budget, saidMidwinter executive director strategyand technical services Matthew

Esler, referring to an adviser com-ment that described the relief frominadvertent excess concessionalcontributions as “token at best”.Nearly half (46 per cent) of advisersfelt that the excess contributions taxrefund would have no effect on theirclients, 34 per cent stated it wasunlikely and only 6 per cent believedtheir clients would have any excesstax refunded.

When asked if the Budget

announcements would mean thatadvisers would need to contact theirclients to review their financial plans,85 per cent said no, although 62per cent stated that the changes tothe low income tax offset (LITO) rulesfor minors would have some sort ofimpact on their trust advice busi-nesses.

When asked what percentage oftheir clients would be impacted bythe phasing out of the minimum pen-

sion drawdown relief,advisers statedthat 35 per cent of clients weretaking advantage of the reduction.

“It is interesting to note that thispercentage was higher for clientswith a transition to retirement pen-sion,as they can keep more moneyin the superannuation environmentwhile they are still working,” saidEsler.

Only 12 per cent of advisersthought that the majority of their

clients would be impacted.Adviser sentiment before the

Budget announcements was suchthat 58 per cent thought the Transi-tion to Retirement strategy wouldremain unchanged. However, Eslernoted that 16 per cent had beenunsure and 19 per cent felt it wouldbe abolished, highlighting the needfor Government to reassure plan-ners and their clients of ongoing sup-port for this legislation.

Westpac’sEvans toretire

By Angela Faherty

WESTPAC chairman TedEvans has announced his retirement. Evansannounced he will leavethe bank following the2011 annual generalmeeting which is due tobe held on 14 December2011. He will be suc-ceeded within the boardby the current audit com-mittee chairman, LindsayMaxsted.

Evans will leave thebank after four years aschairman. He joinedWestpac’s board in 2001and was appointed to theposition of chairman in2007.

“With the success ofthe St George mergernow assured, and thegroup performing verystrongly under our tal-ented and stable man-agement team, I judgedthe time right toannounce my retirement.Lindsay is an enormouslyexperienced and capabledirector and I know I willleave the chair of thiscompany in the very besthands,” he said.

Maxsted joined theboard as director andchairman of the auditcommittee in 2008.

Advisers ambivalent when it comes to Federal Budget

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News

By Chris Kennedy

ALL Australians who have previ-ously inadvertently breachedtheir concessional superannua-tion contribution caps should begiven the opportunity to correcttheir mistakes without incurringheavy penalties, according toShadow Minister for FinancialServices and Superannuation,Senator Mathias Cormann.

After finally addressing theissue of inappropriate penaltiesfor unintentional excess contri-butions, the Government shouldgive those who have made thebreaches the same opportunityto correct them that they wouldhave in other parts of the taxsystem, Cormann said.

Australian Tax Office figuresshow 65,000 people had been hitwith extra taxes after inadvertent

breaches of their concessionalsuper caps during the 2009-10financial year, according toCormann.

The problem is being madeworse in the current financialyear due to the halving of thecaps from $50,000 to $25,000, hesaid.

“One of the many real lifeexamples of the problem is apart-time schoolteacher who

inadvertently paid $700 aboveher contribution cap into hersuperannuation funds, trigger-ing a penalty tax bill of $70,000,”he said.

“This lady and the thousandsof people like her deservedbetter than to be ignored byLabor as it reaped the windfallrevenue from effective rates ashigh as 93 per cent,” Cormannsaid.

ASIC bansadviser forfour yearsBy Ashleigh McIntyre

THE collapse of a managedinvestment scheme has ledthe Australian Securitiesand Investments Commis-sion (ASIC) to ban a Victo-rian adviser for four yearsand suspend the licence ofthe firm he worked for.

Kevin Whitting of Morn-ington worked as an autho-rised representative ofSouth Gippsland-basedfinancial services firmKedesco while he adviseda number of clients to puttheir money into the nowcollapsed scheme, BlueDiamond Deposits Trust.

ASIC found Whittingfailed to comply with finan-cial services law when heprovided advice to anumber of clients betweenMay 2007 and February2009.

The regulator said Whit-ting made false statementsby describing the Blue Dia-mond Deposits Trust asfixed interest when thatwas not the case, and thathe failed to determine thepersonal circumstances ofhis clients when givingadvice.

ASIC also suspendedthe licence of Kedesco forthree months for failing totake reasonable steps toensure its representativescomplied with financialservices laws and wereadequately trained.

Kedesco must meet anumber of conditionsduring its suspension or itslicence will be cancelled.Namely, it must replace thekey person for the Aus-tralian Financial ServicesLicence and document pro-cedures it will adopt toensure compliance in thefuture.

Fix concessional cap breaches, says Opposition

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Federal Budget

Poor remedy forexcess caps taxBy Mike Taylor

THEFederal Government has run into flakfrom a wide cross-section of the financialservices industry with suggestions that theBudget measures to address the excesscontributions tax problem do not go farenough.

Those critical of the extent of theGovernment’s approach included theAustralian Institute of SuperannuationTrustees and major accountancy andconsulting firm Deloitte.

Deloitte Superannuation partner JohnRandall described the Budget initiative onthe excess contributions tax as “only atemporary band-aid”.

“In our view the Government hasmissed an opportunity to provide a work-able solution to the excess concessionalcontributions tax problem,” he said. “At anindustry level it is like using a band-aid fora severed artery – it won’t stop the bleeding,as many breaches of the concessionalcontributions caps on an ongoing basisare due to circumstances that are usuallyoutside an individual’s control.”

Randall said that, at the very least, theGovernment should have extended therelief to every year, rather than just the firstyear, in which a breach of the cap occurred.

He said the situation would onlybecome worse for affected individuals assalaries increased and the compulsorysuperannuation contribution rateincreased to 12 per cent.

Earlier, AIST chief executive, FionaReynolds said her organisation also heldconcerns that the measure would only beavailable once and that her organisationwould be pressing the Government toallow for the measure to be ongoing.

Lukewarm response to ‘bits and pieces’ BudgetBy Chris Kennedy

RESPONSES from throughout the financialservices industry have so far been luke-warm on last week’s Federal Budgetannouncement, with some measures wel-comed but some opportunities alsomissed.

Reforms to promote greater private infra-structure investment have been broadlywelcomed, with measures such as theremoval of tax impediments for institutionalinvestors drawing support from theAssociation of Superannuation Funds ofAustralia (ASFA) and Mercer.

The Commonwealth Bank praised sev-eral positive measures that would aid smallbusiness, such as the extension of theasset write-off to motor vehicles, the earlycut to the company tax rate for small busi-ness and changes to Pay As You Go taxinstalments.

Several measures around superannua-tion were criticised, however. ASFA expresseddisappointment the Government superannu-ation co-contribution was not being indexed,but supported changes to excess contribu-tions cap penalties and the $80 million allo-cated through Stronger Super.

The Self-Managed Super Fund Profes-sionals’ Association of Australia (SPAA) sup-ported the move to allow for the $25,000in additional concessional contributions toapply to the indexed $25,000 concessionalcap for the over-50s from July 2012, butwas disappointed the $500,000 thresholdwould not be indexed, which SPAA chiefexecutive Andrea Slattery described as“short-sighted”.

The SPAA was also critical of thechanges to excess contribution cap penal-ties, which Slattery said were a positivestart but fell way short of a sensible solu-tion.

The Institute of Actuaries of Australiaexpressed disappointment that the issue oflongevity was largely ignored.

Institute chief executive Melinda Howessupported the allowance for pensioners toearn an extra $250 per fortnight withoutaffecting pension payments, but said therewere more solutions available to addresslongevity.

These include allowing development offlexible ‘new generation’ annuities that pro-tect against the risk of outliving your retire-ment savings and the market risk of losingsuperannuation capital in retirement, shesaid.

Mercer described it as a “bits andpieces Budget” and said that although itwas economically responsible, annual tin-kering with the superannuation systemwould serve to undermine confidence inthe system, and added that the continuedfreeze of the superannuation co-contribu-tion limit of $1000 without indexation wasdisappointing.

Tighter regime for SMSFs

THE Federal Government has surprisedmany observers by flagging a range ofchanges to the self-managed superannua-tion funds (SMSFs) regulatory regime.

In doing so, the Government has provid-ed extra Budget funding to both theAustralian Taxation Office (ATO) and theAustralian Securities and InvestmentsCommission (ASIC) totalling $40.2 millionto implement what it describes as “a range ofmeasures relating to the self-managed super-annuation fund sector”.

The Government also expects SMSFs tohelp fund the changes, announcing that

the “cost of this measure will be offset by a$30 increase to the SMSF levy with effectfrom the 2010-11 income year, raising $47million over four years”.

It said it would also be introducing SMSFauditor registration fees from 1 July, 2012,raising $1.8 million over four years.

The Budget papers said the package ofSMSF reforms were designed “to improvethe operation, efficiency and integrity of thissector and increase community confidence”.

The Government said the reforms includ-ed the introduction of administrative penal-ties that the ATO could apply in cases of non-compliance by SMSF trustees and theintroduction of knowledge and competencyrequirements on SMSF service providers.

This included the registration of SMSFauditors and tightened legislative restrictionson SMSF investment in collectables andpersonal use assets.

The initiative also requires SMSFs to valuetheir assets at net market value in the contextof the ATO publishing valuation guidelines.

Commenting on the move, Assistant Trea-surer and Minister for Finance Bill Shortensaid in a statement that the reforms would“boost Government and public confidencein the SMSF sector”.

Investment Manager Regimearrangements extended THE Government has used the Federal Budget to confirm its extension of the InvestmentManager Regime arrangements, something it claims will give foreign managed funds andtheir investors more certainty for the 2010-11 income year.

The Assistant Treasurer and Minister for Financial Services, Bill Shorten, said the Gov-ernment would be introducing amendments to the income tax laws to prevent the Aus-tralian Taxation Office (ATO) from raising assessments for certain investment income offoreign managed funds for the 2010-11 income year, where the fund has never lodgedan Australian tax return.

He said such funds were “an important source of mobile capital” and that providingtax certainty would enable them to comply with US reporting requirements and minimisethe risk of them withdrawing from investing in Australia.

Shorten said the measure represented an extension of the arrangements announcedin December last year, and which had applied to the previous financial year.

“Tonight’s announcement will provide tax certainty for foreign managed funds and theirinvestors, which invest around $57 billion in Australia, for the 2010-11 income year,” hesaid.

Shorten said the Board of Taxation was currently examining the design of an invest-ment manager regime as part of its review of the tax treatment of collective investmentvehicles.

“To address the issue of the ongoing tax treatment of these investments, I haveasked the Board of Taxation to report to me on an investment manager regime as itrelates to foreign managed funds by the end of the third quarter of this year,” the min-ister said.

He said that extending the previously announced measure would allow the Govern-ment to consider the board’s report prior to making a final decision on the tax treatmentof this investment.

Gillard Government commits to MySuper THE Government has used the Federal Budget to cement itscommitment to the introduction of the MySuper regime.

The Budget papers reveal the Government is committing $26.2million (including $2.1 million in capital) over four years to theAustralian Prudential Regulation Authority (APRA) and $3.7 millionover four years to the Australian Securities and InvestmentsCommission to introduce a simple, low-cost default superannua-tion product called MySuper.

It said the measure would be funded by an increase in the levyon APRA-regulated superannuation funds.

At the same time, the Government said it would provide $14.6million over two years to the Australian Taxation Office (ATO) todevelop a business case and initial capital related expenditure toimplement a mechanism for members to view superannuationaccounts that have been reported to the ATO, and establish gover-nance and project teams during consultation to undertake detaileddesign of ATO IT systems to support the SuperStream measures.

It said the Department of Finance and Deregulation would alsoreceive $0.4 million over six years from 2010-11 to undertake aGateway review of the project.

AndreaSlattery

BillShorten

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News

ASIC set to tighten rules aroundover-the-counter derivatives

By Caroline Munro

THE Australian Securities andInvestments Commission (ASIC)has proposed a tightening of therules around the financial require-ments for issuers of over-the-counter (OTC) derivative products.

ASIC stated that a review of(OTC) derivative products, suchas contracts for difference(CFDs) and margin foreignexchange, came about as aresult of the increase in interestfrom retail investors. ASIC statedthat in light of this growth itwanted to ensure that issuershad adequate financialresources to manage their oper-ating costs and risks, and that

the owners of issuers were com-mitted to the viability of the busi-ness.

“Increasing numbers of mumand dad investors are trading inthese complex and risky prod-ucts and it’s important the inter-ests of all parties are aligned,”said ASIC commissioner, GregMedcraft.

“We want issuers to berequired to address operationalrisks with good cash flow fore-casting and by holding sufficientliquid funds against losses andexpenses that could arise fromthese risks.”

ASIC’s proposed changesinclude the requirement thatissuers create rolling 12-month

cash flow projections, andreplacing the current require-ments to hold surplus andadjusted surplus liquid fundswith the requirement to hold nettangible assets of at least thegreater of $1 million or 10 percent of average revenue.

CFD provider Capital CFDs haswelcomed the proposedchanges, stating that retailinvestors would ultimately bene-fit. Capital CFDs managing direc-tor, Andrew Merry, said ASIC’sproposals were in step with theissue of segregated client funds,adding that issuers being suffi-ciently capitalised had the addedbenefit of providing retailinvestors with greater confi-dence.

“Currently, under the Corpora-tions Act, Australian financialservices licensees dealing inOTC derivatives are legallyallowed to use client funds tohedge positions,” said Merry.“This sends a confusing mes-sage to trading clients and wehave long advocated for changein the law.”

He added that the proposedchanges would create a levelplaying field among issuers andalign Australia with global stan-dards.

By Ashleigh McIntyre

THE levy to cover the $55 million finan-cial assistance package for victims ofthe Trio Capital collapse has beenannounced by the Government, withfunds to pay a maximum of $500,000.

Assistant Treasurer Bill Shorten previ-ously announced investors in fundsregulated by the Australian PrudentialRegulation Authority (APRA) for whichTrio was trustee would receive compen-

sation by way of a levy on other regu-lated funds.

The Government has now announcedthe levy will be calculated by multiply-ing the rate of 0.0001977 by a fund’sassets, with the maximum levy set at$500,000, while the minimum will be$50.

At the time, Shorten said thatinvestors in APRA-regulated fundsdeserved to be compensated by theGovernment if they lost their invest-

ments through fraud. The assistance wil l help those

investors in the Astarra SuperannuationPlan, the Astarra Personal Pension Plan,the My Retirement Plan and the Employ-ers Federation of NSW SuperannuationPlan.

Those 690 direct investors, of which285 were self-managed superannuationfunds, are not eligible for the compensa-tion payment since no levy scheme is inplace to recoup costs from fraud.

Trio compensation set to cost funds up to $500,000

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The collapse of Trio Capital costsmall investors millions of dollars.

By Milana Pokrajac

ACCOUNTING firm CroweHorwath has expressedconcerns about the Govern-ment’s handling of the trustincome taxation reform,claiming it is not allowingenough time for consultationwith the industry.

The Government hadrecently released an exposuredraft legislation which wouldremove capital gains andfranked dividends derived bytrusts from current taxingarrangements and subjectthem to a different taxingregime.

While releasing the draftlegislation, the Assistant Trea-surer and Minister for Finan-cial Services and Superannua-tion, Bill Shorten, explainedthe early release of the legisla-tion was “to ensure that inter-ested stakeholders have themaximum opportunity tocomment on the core changes

proposed in this legislation”. However, Crowe Horwath

national tax director, TristanWebb, said contemplatingcomplex new legislation thatrelates to the current financialyear was not appropriate.

“The draft explanatorymemorandum is filled withstatements that the final legis-lation will clarify matters, butthis is not good enough fortaxpayers who need certaintyfor this financial year,” he said.

Webb said the one-yearamnesty provided by theAustralian Taxation Office inMarch last year for all taxpayersutilising trusts was an effectiveway of solving this problem.

“The easy way to fix thecurrent problems is to extendthe amnesty for another twoyears,” Webb said.

“This will provide the timeneeded for further consulta-tion and allow the Govern-ment to provide for a completeoverhaul of the existing rules.”

Trust income tax reformworries accountants

FOFA reforms create vehicle for platforms to manage opt-inBy Milana Pokrajac

PLATFORM providers will have anideal opportunity to manage andrun the opt-in requirement onbehalf of financial planners, oncethe Government’s Future of Finan-cial Advice (FOFA) reforms pack-age is implemented.

According to AXA’s general man-ager for platforms, Steve Burgess,and netwealth executive director

Matt Heine, the introduction ofthis service would make sense,given that platforms had alreadybeen administering most of advis-ers’ businesses.

“The number of times that aplatform, on behalf of the adviser,touches the customer during thecourse of the year is quite sub-stantial in terms of standard andannual reports, as well as provid-ing a portal for clients to log on to

a website and check their bal-ance,” Burgess said.

Heine said that platformproviders would know what feesare being charged to a client,allowing them to become a ‘collec-tion point’ for those fees.

“Therefore clients will need toopt-in and authorise us to actu-ally continue to pay [advisers],”Heine said.

Both Burgess and Heine

flagged plans to build a mecha-nism for running the opt-in in thenext two years. However, the exactdetails around the requirementare still unknown, which Burgesssaid would delay plans of build-ing such an administration tool.

“We’re waiting to see what thedetail of the regulations meansand therefore exactly the scopeof what we need to build anddesign actually is,” Burgess said.

Commbankweathersthe stormBy Mike Taylor

THE Commonwealth Bankis on track for a solid profitdespite reporting relativelysubdued market conditionswithin its wealth manage-ment divisions.

In a March quartertrading update released tothe Australian SecuritiesExchange (ASX), the bigbanking group said thatunaudited cash earnings forthe three months ended 31 March were approxi-mately $1.7 billion.

Commenting on theresult, CommonwealthBank chief executive RalphNorris said operating condi-tions remained challenging.

“While the Australianeconomy continues toperform relatively well,consumer and businessconfidence remains fragile,resulting in subdued spend-ing patterns and mutedsystem credit growth,” hesaid.

Dri l l ing down onwealth management andinsurance, the tradingupdate said relativelysubdued market condi-t ions had resulted involume growth beingbroadly flat through thequarter, with funds undermanagement increasingby just 0.2 per cent.

It said subdued net flowshad been offset by positiveinvestment returns.

The update saidFirstChoice had continuedto perform relatively well,with net flows of $440million for the quarter, withFirstWrap also growingsolidly with net flows of $317million.

The update said insur-ance in-force premiums hadgrown 1.1 per cent driven bysolid growth in retail life.


News

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Harbour Pilot

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News

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RI Group forges Tasmanian allianceBy Mike Taylor

RI GROUP, formerlyRetireInvest Group, hasgrown its presence inTasmania, forming analliance with Tasmanian-based B&E PersonalBanking to provide finan-cial advice.

Announcing the alliance,RI Group chief executivePaul Campbell said itformed part of the group’scontinued focus on busi-ness growth.

B&E Personal Bankinghas more than 36,000Tasmanian members andis described as offering a

comprehensive andcompetitive range ofbanking products and serv-ices ranging from termdeposits through topersonal loans and generalinsurance.

RI Group is seen as fillingthe financial planning gapin the B&E service offering.

UK shares shortfall problem with AustraliaAUSTRALIANS are not theonly ones facing a retirementincomes shortfall,with a newreport issued in the UnitedKingdom suggesting thatcountry faces a £9 trillionshortfall.

The report, developed bythe Chartered Insurance Insti-tute, warns that many pre-retirees have little savings and

carry the burden of significantdebts just at a time whentheir incomes are about tofall.

Commenting on the report,a spokesman for the Institutesaid a lot of people weregoing to have their assetsdepleted by their parents’long-term care costs.

The UK Minister for Pen-

sions, Steve Webb, wasquoted in the UK media assaying the next generationwould be faced with increas-ing life expectancy, a declinein final salary schemes andlower annuity rates.

“They are going to have totake greater responsibility forsaving for their retirement,”he said.

Industry backs recommendation to scrap ban on exit feesBy Ashleigh McIntyre

A SENATE committee on competition inAustralia’s banking sector has recommend-ed the Government reconsider its proposedban on exit fees, with much industrysupport.

The Senate’s Economic ReferencesCommittee stated that rather than abolish-ing exit fees, it recommended the Govern-ment give the recent ban on unreasonableexit fees by the Australian Securities andInvestments Commission (ASIC) a chanceto work.

It also said it was notable that the onlyfinancial intermediaries that openlywelcomed the ban of exit fees were themajor banks.

Mortgage Choice chief executive MichaelRussell strongly supported the committee’s

recommendation on exit fees due to theunperceived adverse effects it would have

on competition. “Should the Gillard Government unilat-

erally ban exit fees, then it will unwittinglyhand over on a plate the heads of the non-banks to the major banks.

“Why? They are reliant upon this feeto be able to remain competitive at thefront end, where real competit ioncounts for the consumer,” Russell saidin Mortgage Choice’s submission to theTreasurer.

Mortgage provider FirstMac alsowelcomed the recommendations, withmanaging director Kim Cannon stating aban on exit fees would likely create a classof ‘rate shoppers’ which would increasecosts for all lenders, with costs passed onto consumers.

However, Cannon said he did not agreewith the senate committee’s further

recommendation that if a ban were to beimplemented, it should only apply toauthorised deposit-taking institutions.

Cannon said he did not think it wouldcreate a truly level playing field, and it woulderode the benefits of competition forconsumers.

The Mortgage and Finance Associationof Australia (MFAA) chief executive PhilNaylor disagreed, stating if a ban on exit feeswere to be introduced, small lenders shouldbe exempt.

“The deferred establishment fee (whichwas considered an exit fee) brought downthe margin on home loans for thousands ofAustralians,” he said.

“Lenders such as Aussie and Wizard usedthe deferred establishment fee to reducemortgage costs and compete with thebanks.”

Phil Naylor

News

By Mike Taylor

THE Australian Taxation Office(ATO) has been accused of takinga ‘hard line approach’ to compen-sating tax practitioners for thecost and frustration involved by aproblematic computer systemsupgrade last year.

The Institute of Public Accoun-tants (IPA) has strongly backedthe findings of the Inspector-

General of taxation’s review of theso-called ‘Change Program’,which it said had vindicated thecall for compensation.

It said the Inspector-General’sreport had confirmed what laterbecame evident – that at the timeof the deployment of the newsystem “it was not in an ideal statein terms of the number of exist-ing defects or defects likely toarise”.

Prosecuting the IPA’s case, itschief executive, Andrew Conway,said the organisation was disap-pointed that the ATO haddisagreed with the Inspector-General’s recommendation forcompensation.

“Our members have every rightto be outraged for not beingcompensated for the economicloss they have suffered,” he said.

Conway said members of the

IPA had incurred serious damageto their reputations as well as losttime in dealing with the ATO andtheir clients while attempting toresolve problems during theimplementation of the ChangeProgram.

“Some of our members evenhad to resort to obtaining financeto maintain cash flows during thisperiod due to refund delays,” hesaid.

NGS andUCSuperto mergeTHE trend towards consoli-dation is continuing in thesuperannuation industry,with Non-GovernmentSchools Super (NGSSuper) announcing itsintention to merge with UCSuper.

The merger, if it pro-ceeds, will create a single$4.4 billion super fund cov-ering non-governmentschools and Uniting Churchemployees.

The two funds said amemorandum of under-standing had been devel-oped to proceed with dis-cussions around themerger.

NGS Super chief execu-tive, Anthony Rodwell-Ballsaid one of the most impor-tant considerations wasthat both funds had com-plementary membershipprofiles.

“NGS Super’s heritageas a fund for non-govern-ment schools meansmany of our memberswork in faith-basedschools. Similarly, UCSu-per’s membership baseconsists of Uniting Churchemployees, so there’s anatural affinity between thefunds and a strong focuson values.”

UCSuper chairman,Bruce Binnie said thefund had undergone adetailed and rigorousprocess in selecting amerger partner.

“After a strategic reviewin 2010, it became clearthat our members’ inter-ests would be best servedby merging with a like-minded partner. We believethis is the most effectiveway to manage costs,deliver a great memberexperience and gainaccess to the best fundsmanagement,” he said.

ATO takes ‘hard line’ against accountants


AndrewConway

I’ve heard footballers describe a bittersweetexperience as ‘like kissing your sister’. Myexperience with the Future of FinancialAdvice (FOFA) and Stronger Super changes

and their precursor inquiries, if not so crudelybittersweet, has at least taken me from ambiva-lence to anxious equivocation.

The problemThe financial services industry certainly contin-ues to have a significant minority of pretenders.Individuals who fall short on technical compe-tence, cruisers who would prefer not to provideongoing advice to their clients, and to a lesserdegree, ‘unprofessionals’ who elevate their owninterests well above their clients’ interests.

A booming economy inevitably brought in aconga line of opportunists – and accidentaltourists too. Amateur property developers, daytraders and financial engineers begin to thinkthey have developed their own magic formula,when in fact they are simply being swept along.As the saying goes, a high tide raises all boats.

Each in their own way, the global financialcrisis (GFC) wash-up and the improving educa-tion, professional and disciplinary standardshave all moved to shrink the disease in the lastthree years. One consequence of FOFA shouldbe to drive this significant minority from tippingpoint to a non-representative pimple.

I’ve been involved in the Financial PlanningAssociation’s (FPA’s) new remuneration guide-lines which are set to apply from 1 July 2012 –specifically regarding the continuation of liferisk commissions. The committee that I chairedrecommended to the board that these beallowed to continue beyond 2012.

The journey from an advice industry to aplanning profession cannot be made by indi-viduals and their professional bodies alonethough. Whether we like it or not the catalystwill be Government regulation.

When shortcuts abound, people take them.Most people are reluctant to embrace change,especially where it is set to make their profes-sional life harder and potentially less profitable,or shine the light on the shortcomings of theirbusiness model.

The interventionPrior to Easter I attended the somewhat infa-mous FPA lunch where Assistant Treasurer andMinister for Finance Bill Shorten was the speak-ing guest. The speaker invited questioners to

stand and indentify themselves, and Shortenwould answer their question. Neither thenoccurred. Shorten declined to answer the firstquestioner, saying he would like to take notesand answer all the questions and comments inan ‘omnibus’ fashion.

Shorten then returned to the lectern bridlingwith a collective response. Fiducian managingdirector Indy Singh’s mildly cheeky and amusingquestion about the Government consulting likeBruce Lee fights in Enter The Dragon (fightingwithout fighting) was admonished. The sourconclusion did not bode well for the upcomingFOFA announcement!

A question about the increasingly slopingplaying field of intra-fund advice was misun-derstood by Shorten to be referring to generaladvice that might be given at a workplaceseminar. That was particularly unfortunatebecause it was a question hungry for an answer.The self-described industry fund ‘movement’is, by all accounts, on a path of subsidisingadvice from the revenue of management fees.I recently heard firsthand from a leading recruit-ing executive that our friends in not-for-profitare aggressively recruiting planners with pack-ages as high as $220,000 per annum. The free-marketeer in me would normally think that is agood thing, albeit a long way from the costlyanti-advice campaign (not just anti-commis-sion) over the decades.

Only problem is the advice cost is apparent-ly not being passed on commercially. Advicethat probably costs thousands of dollars todeliver is charged to the member at a fraction ofthe cost. At least in the current low-cost milkwar the small outlets and the supermarketchains operate commercially, and the super-markets haven’t got the Government alteringthe rules to their advantage! The majority ofmembers who receive little or no advicesubsidise this advice through a giant internaltrail commission. More than a little ironic? Theyare certainly a progressive movement, but herethey are moving in the wrong direction.

The question I am now asking is: CouldShorten be accused of over-egging the pudding?To paraphrase US president Barack Obama, myanswer is: ‘Yes he can’.

Shorten is what the commentators call aconviction politician. It’s warming to see aperson of principle, considering the poll-drivenflip-flopping of many of his political contem-poraries.

Former senior Labor Minister Lindsay Tannersays that at the last election Australia voted for‘none of the above’. The path of conviction canbe a hard road when you are running a minor-ity Government. In this case though, to wringout the last of my metaphor, it may save Shortenfrom marching across a bridge too far.

Or is the tactic to put out an ambit proposal,and retreat to implement only what is necessary?

The intended consequences?As the many unanswered FOFA questions beginto find an answer, the industry can begin to takecomfort that life will go on. For example, theproposed grandfathering of remunerationstructures will mean that business values willnot decrease overnight.

Regarding opt-in, my position is that profes-sional planners are happy to have their clientsregularly reminded of the advice fees that theyare paying, but why should the default positionbe that the advice relationship ceases every twoyears?

Many of us are scratching our heads though,wondering what major problem the banningof superannuation risk commissions will solve.Certainly not the endemic underinsurance onein Australia. And the Storm and Westpointvictims weren’t taken down with too much terminsurance in their portfolios.

If it is really young part-time workers unwit-tingly having unwanted insurance premiumsdeducted from their small account balances (astory that News Limited newspapers ratherconveniently ran on the eve of the post-EasterFOFA announcement), then we are in sledge-hammer and walnut territory.

Regardless of fiduciary responsibility, withnon-super contracts continuing to pay commis-sions, both the public and the industry will becompletely skewed. I understand too that theintention is to include members of self-managed funds in the net. We will be the onlycountry on the planet that has such an adviceenvironment.

Planners who want a purer risk advice modelare free to do this now – being paid only by theclient in every transaction, rather than by aproduct.

From the advent of the four-page CustomerAdvice Record of the late 1990s, to the resultingoverblown disclosure documentation of JoeHockey’s Financial Services Reform Act, finan-cial advisers have mostly been reluctant partic-ipants. My experience is that when confrontedby new regulation though, good advisers canlift and adapt quite readily to a new landscape.Let’s continue to work to make sure the resultsare not unintended ones.

Greg Cook CFP is managing director of EurekaFinancial Group.

FOFA:Bring iton?

PointofView


While people are generally reluctant to embracechange, the more proficient financial advisers willadjust swiftly to their new landscape followingproposed FOFA amendments, writes Greg Cook.

The total number of fina-cial advisers in Top 100Dealer Groups:

Source: eJobs Recruitment Specialist

13,0002001

What’s on

TOP 100SNAPSHOT

FPA Careers Expo24 MayCommonwealth Bank ofAustraliaLevel 20, 201 Sussex St,Sydneywww.fpa.asn.au

Money Management FundManager of the Year Awards26 MaySheraton on the Park, Sydneywww.moneymanagement.com.au/FMOTY

Leadership Series –FSC/Deloitte lunch27 MayPark Hyatt, 1 ParliamentSquare,Melbourne 3000www.ifsa.com.au

Financial Ombudsman Service National Conference2 JuneMelbourne Convention andExhibition Centrewww.fosconference.org/fos/

Investor Roadshow – SMSFs7 JuneCrowne Plaza,16 Hindmarsh Square,Adelaide www.asx.com.au

12,0002004

14,5002007

16,0002010


Alternatives

DEFENSIVE assets should be thecornerstone of an investors’ port-

folio coming off the back of bearmarkets. With an uneven share marketrecovery and different sectors of the marketunderperforming, the alternative invest-ments business should be booming. So whyare significant numbers of financial plan-ners ignoring it?

And the planners who are trying to accessalternatives through the simplest method,a platform, are being caught out by plat-form requirements, restricted to productswith enough liquidity and daily unit pricing– like hedge funds or commodities – to fiton the platform, without any opportunityto gain real, direct exposure to other moreilliquid alternatives.

The result is a very low penetration ofalternatives among the planner commu-nity, a typical portfolio allocation of only3 per cent or 5 per cent, and substandardproducts.

Continuing liquidity concerns are alsocausing a decline in the use of illiquid strate-gies, despite efforts by fund managers toshowcase their benefits. This is leaving fundmanagers divided about what alternativesare remaining popular among both retailand institutional investors and how theyshould plan any future developments.

Platform restrictionsAlternatives should be an important partof investors’ portfolios right now, butinstead some financial planners seem to

be ignoring the sector.“We’re just not convinced; we don’t have

them on our recommended list; we don’thave any approved products at this point.We don’t have a closed mind to them, butwe haven’t been persuaded with a strongenough case to include them in our port-folios,” says Fiducian head of financial plan-ning Alan Hinde.

A number of financial planners contact-ed by Money Management for this featuredeclined to be interviewed but neverthe-less confirmed that they were not usingalternative investments in their portfolios,or that alternatives were not included ontheir dealer group’s approved product list.

But that may not be the fault of advisersat all. The majority of advisers rely on plat-forms to provide single-point access toinvestment products for their clients,meaning that unless alternative productsare provided on the platform, adviserswould have a hard time getting access tothem.

Credit Suisse’s Pension Coverage Grouphead of third party distribution, Josh Peel,blames the structure of the investment plat-forms for the slow penetration of alterna-tives among planners.

“From the experience we’ve had, theplanner community largely has had a slowtake-up with the quality of alternative prod-ucts [that] fits within the framework thatmost planners operate within. If they use aplatform, or they use a managed discre-tionary account, it’s very hard to fit a quality

alternative product into that platformuniverse,” he says.

Much of the difficulty comes down to theplatforms’ requirements of daily liquidityand daily unit pricing. Because many alter-natives on offer are not liquid, the platformsare skewing the availability of alternativeinvestment products towards those that canfit within their requirements.

“Planners who might be selecting alter-natives from a platform are restricted tothose alternatives that have sufficientlyliquid pricing to be on that platform. Andso that reduces that alternatives world downquite considerably, to generally liquid alter-natives,” says head of alternatives at AMPCapital, Suzanne Tavill.

“There continues to be interest in thespaces of hedge funds and commodities,but that needs to be seen against the factthat it is a restricted interpretation of whatalternatives is, more broadly.”

The narrow focus on liquid, platform-friendly strategies is being followed acrossthe industry.

Standard & Poors’ January review of thealternatives sector noted that there werelarge inflows into commodities, indexexposures, and actively managed alterna-tive products, while at the same timeliquidity terms for many retail alternativefunds had improved, including recentlyintroduced daily unit pricing andincreased redemptions.

Credit Suisse has also seen renewed inter-est in commodities and hedge funds, all

strategies that have liquid characteristics orintroduced daily liquidity and redemptions,post-GFC.

Platforms requirements could partlyexplain why hedge funds, commodities, andfixed income funds are so highly favouredamong those planners who do use alterna-tive investments.

The result is that aside from a select fewalternatives with long traditions of useamong financial planners – like fixedincome funds, bonds, and private equity –the greater universe of alternatives remainsunexplored.

• Select groups (including income funds, bondsand private equity) have a long tradition ofuse among some financial planners, but thegreater universe of alternatives remainslargely unexplored.

• Many planning industry professionals remainunconvinced about investing in alternatives,believing them hyped-up solutions to periodsof uncertainty.

• With alternatives usually derived from prod-ucts not easily identified with the share market,planners and investors both need educationon their benefits, and how they work.

• When implemented, Foreign AccumulationFund rules should lead to a more competi-tive investment market, with a significantimpact on alternatives.

Key points

Looking to thealternatives Fund managers remain divided regarding the merits ofalternatives, with some financial planners ignoring the sectorentirely, writes Benjamin Levy.


Alternatives

“Everyone would love to be able to offersome of these illiquid alternatives on a plat-form. But there’s no way of really doing it;you can’t pretend these illiquid strategiesare not illiquid,” Tavill says.

AMP Capital got around the problem bycreating a suite of multi-manager funds –the Future Directions Funds (FDF) range –that contain within them a more completerange of alternative strategies, and offeringthe funds themselves on a platform. AMP’sbenchmark allocation to illiquid alterna-tives in the FDF range is 7 per cent. It’s notdirect access to illiquid strategies, but it’sbetter than nothing.

Finding the perfect alternativeLingering concerns from the GFC arepartly responsible for fuelling interest inmore liquid alternatives from industryplayers still using the sector.

“There is an increased focus, post-GFC,on transparency, liquidity, risk manage-ment, governance and fees, so that has ledto certain sectors or products becomingmore popular than others,” says CreditSuisse’s head of the Pension Coverage GroupMatthew Perrignon.

Rob Graham-Smith head of portfoliomanagement at Select Asset Management,says there is a strong desire for very liquidalternative products among retail investors,while interest in illiquid alternatives hasbeen on the decline since 2008.

The trend is the same even among insti-tutional investors like super funds where

they can afford to hold more illiquid invest-ments for longer periods of time. Despitealternative allocations of 5 per cent to higherthan 20 per cent in the institutional space,most of that is directed towards liquid alter-natives.

Direct infrastructure and private equityhave been the ones to suffer from that trend,Graham-Smith says.

Fund managers believe advisers shouldn’tbe too quick to dismiss illiquid alternatives.

“Illiquidity is not necessarily a dirty word.There is definitely still room in portfoliosfor longer-term illiquid assets, like in closed-end funds,” Perrignon says.

AMP Capital divides their alternativesportfolio into liquid and illiquid assets andcombines them to get the best mix of theirdifferent risks and returns.

“It’s ‘the sum is more than the cost’ typeof effect. We think you can do quite well inthat space,” Tavill says.

Infrastructure, timber, agriculture andaircraft leasing are some of the more illiquidassets that AMP Capital include in theirportfolios.

Tavill believes the inflows they are receiv-ing indicate that financial planners areinvesting in direct liquid alternatives as wellas investing in their diversified fundapproach to gain access to illiquid alterna-tives.

“They like using the diversified fundapproach where the diversified portfoliomanager makes allocations to alternativesand manages the liquidity, and you contin-

ue to have planners who have interest inwanting to pick specific, more liquid expo-sures,” she says.

Peel believes that investor focus on theability to get daily liquidity is making it diffi-cult for advisers to match their clients’requirements for long-term assets.

“We should be focusing on the realhorizon, which should be well into retire-ment – 20 to 40 years from when theyinvest,” he says.

But many in the planning industry needto be convinced that they should invest inthe alternatives space at all. Hinde warnsthat many advisers, including Fiducian,believe alternative investments are hyped-up solutions to periods of uncertainty,leading them to treat the productscautiously.

“Often, when things go wrong, peoplecast around for silver bullet solutions; theycast around for some ‘magic’ that they’veoverlooked previously, but alternativesaren’t delivering proven benefits to portfo-lios, in Fiducian’s view,” Hinde says.

“Do the potential rewards give a benefitthat will overall deliver something to client’sportfolios, given the unknown andunproven nature of many of these areas?”he asks.

The association between the alternativesasset class and hedge funds may be behindplanners’ reluctance to rely on some of themore ‘out-there’ alternative products. Manyfinancial planners still see certain hedgefunds as opaque and not easily understood,

and it appears that they are readily trans-ferring those blemishes to include the wideralternatives asset class.

“People think of alternative investmentsas different to the normal asset class ranges,whether it’s water futures, or things that arereally not classified in the normal asset classboxes,” Hinde says.

Advisers’ experiences with hedge fundsdo make things difficult, Peel acknowledges.

“They haven’t been exposed to them.Alternatives tend to be a very big universe,and if you mention hedge funds you maybe frowned upon for even mentioning it,”he says.

Financial planners have to be educatedon the use of alternatives and their bene-fits before they will take them on morebroadly in their portfolios, Peel says.

Investors also need to be educated onhow alternatives work. Because returnsfrom alternatives come from products thatare not correlated to the share market, itnecessitates moving away from whatinvestors themselves know about investing,leading to even less enthusiasm for thesector.

Graham-Smith warns that investorsshouldn’t invest in fund managers that havehigh levels of tail risk involved.

“They have an incremental sort of gain,gain, gain – and then they fall off a cliff!That’s something we’re not interested in,”he says.

Continued on page 16

“ Financial planners haveto be educated on the use ofalternatives and theirbenefits before they will takethem on more broadly intheir portfolios. ”- Josh Peel


Alternatives

Where is the alternatives spaceheaded?The continuing interest from planners andinvestors in liquid and transparent alterna-tives is splitting the funds managementindustry, with several industry playersmapping out different future trends andtheir response.

Investors would do well to remember thatthe broader alternatives asset class aremuch like hedge funds in at least onerespect: investors have to know when in themarket cycle to hold them.

Russell Investments’ multi-managerportfolios started rotating back into alter-natives in late 2009 as concerns over possi-ble inflationary pressures in commodityprices mounted.

They bought in global-listed infrastruc-ture, commodities, and opportunistic expo-sures like high yield emerging markets debt.Each of these asset classes delivered returnsin excess of 20 per cent in 2010. Those threeexposures will still play key roles for RussellInvestments in 2011, but commodities arebeginning to be pared back.

“We’re happy to hold alternatives, we justwant to hold them at the right point in thecycle,” says Russell portfolio managerAndrew Sneddon.

Select Asset Management is continuingto see ‘decent interest’ in the alternativesspace as a result of concerns surroundingthe bailout of Greece and other Europeanmarkets last year, according to Graham-Smith.

“We have seen a big turnaround ininvestor attitudes towards alternatives,” hesays.

Graham-Smith expects investor interestin soft commodities like oil and energy, aswell as rising food prices, to continue toexpand off the back of unrest in Egypt andLibya.

Select Asset has been working overtimeto get more exposure to agriculturalcommodities in their portfolios to takeadvantage of that thematic.

“Food is particularly large component ofemerging market consumer price indexes,particularly in Asia,” Graham-Smith says.

Agricultural commodities is an under-appreciated area, considering there havebeen very strong rises in the sector, he adds.

AMP Capital has seen some hesitancyamong the large superannuation fundstowards the alternatives space, with liquid-ity and types of returns being chief amongtheir concerns.

“There is concern about the liquiditynecessary within a [super] fund, plusconsidering the types of returns that arecoming out of the space, I think there is afair bit of evaluation of the alternativesector going on,” Tavill says.

Investors are also evaluating whether themethod they adopted to gain exposure toalternative investments in the past is thebest approach to take in the coming year,Tavill says.

Russell has taken the opposite approachwith institutional investors. Their globalalternatives team is exploding with growth.They spent most of last year shifting expertsinternally into the alternative investmentsspace, and announced plans to hire morethan 25 new specialists.

The move was then part of a strategy toprovide investors with opportunities to

increase exposure to illiquid alternativeinvestments. The company forecast in themiddle of last year that institutionalinvestors would increase their alternativeinvestments from 14 to 19 per cent expo-sure over the next two or three years.

Russell’s director of alternative invest-ments for the Asia Pacific region NicoleConnolly was very optimistic in her assess-ment of the sector during last year.

“Alternatives have proved their role asportfolio diversifiers and risk-mitigatorsduring volatile markets, and we expectcontinued demand from institutionalinvestors, even if the global recovery wereto falter,” she said.

Insurance-linked strategies have seenbig growth among institutional investorsin Credit Suisse’s Pension Coverage Group,thanks to their non-correlation benefits, as

well as capital starvation strategies,Perrignon says.

Credit Suisse expects investors to try toexploit the effects of increasing costs ofcapital of regulatory requirements fromBasel III which will be implemented in thenext couple of years.

Those alternative providers of capital areemerging as a direct result of the GFC. Theafter-effects of the GFC are causing manychanges in the way the industry works,including driving the development of new,different sectors – like capital providers – sothat institutional investors can cast a fresheye over for new investment opportunities.

“The increase in regulatory require-ments and increasing costs of capital aregoing to mean that it’s harder for banks tokeep loans on their balance sheets, and asa result, alternative providers of capital

are stepping in to take the place of banks– and that is creating opportunities,”Perrignon says.

Some fund managers openly disagreeover future trends of particular alternativeproducts. While Russell’s Global Survey onalternative investing last year found privateequity, real estate and hedge funds werethe big three preferred alternative typesamong investors, Graham-Smith believesprivate equity is struggling.

“Private equity has struggled from acapital-raising perspective in the last fewyears,” he says.

Graham-Smith also questioned whetherreal estate should be placed in the alterna-tive asset space.

“In terms of real estate, we tend to carveout real estate as a non-alternative inAustralia. I know it’s regarded as an alter-native in the United States, but Aussies havea particularly high exposure to propertyand for that reason we regard it as a main-stream investment,” he says.

Some financial planners are alsobemused by the choice of label.

“I wouldn’t put the real estate sector intoalternatives, unless it was structured insome particular way that was unusual. Wesee them as mainstream,” Hinde says.

Simon Wu, chairman of PremiumWealth, believes the label ‘alternative’ isitself ill-defined, and warns that terminol-ogy can be ‘contagious’.

“There are a lot of misnomers in thisindustry. Is China an alternative or not? Ifnot, then why is there so little money putinto it when it’s growing much faster thanthe rest of the world? In this country, 30per cent to 40 per cent of every portfolio isput into Australian equities and that’sconsidered orthodox. Who defines ortho-dox?” he asks.

The whole investment industry’sapproach to defining certain categories andpigeonholing them is wrong, Wu says. MM


THE repeal of the Foreign Investment Fund rules (FIF) shouldhave a significant impact on the alternatives space in thecoming months.

FIF, which was repealed in July 2010, required any overseasfund manager selling an investment to advisers to have a localtrust set up to manage the tax treatment of those investmentsbeing offered in Australia.

The impact of FIF was to stymie the introduction of qualityoverseas alternative products by burdening any joint venturewith the overhead costs of a local trust structure.

During the 2009-2010 budget, the current governmentproposed to replace FIF with a specific anti-avoidance rule, theForeign Accumulation Fund (FAF) rules.

The intentions of the new provisions will apply where aninvestor holds an interest in a foreign accumulation fund, andentered into the fund with the intention of receiving a tax defer-ral benefit.

While FIF hasn’t yet been finalised, it is expected to significant-ly reduce the compliance and administrative burden placed onAustralian investors.

The repeal of FIF is a critical turning point for Australianinvestors looking for access to quality products, according toCredit Suisse head of third party distribution Josh Peel.

“If you look at what has been available to Australian investors,it has been somewhat sub-optimal fund structures, if I can sayit that way,” Peel says.

Once the new FAF rules are implemented, there will be anexplosion of competition from overseas fund managers, leadingto an even more competitive investment market, he adds.

However, the introduction of FAF will only be beneficial forfund managers who are finding it difficult to offer overseas prod-ucts directly to Australian investors. For investment companieshere who are already exposed to global fund managers – suchas AMP Capital – FAF will make little difference.

“In my world … less than 5 per cent of our exposure [in privateequity, for example] is to Australia because of how we’ve structuredour program. We are accessing, globally, managers and deals, sofrom my perspective of what’s specifically offered in Australia. Idon’t really focus on that because it’s not really a constraint,” sayshead of alternatives at AMP Capital, Suzanne Tavill.

Some of the other illiquid alternatives exposure in AMPCapital’s alternatives asset allocation are only slightly highertowards Australia, Tavill says.

Despite the exposure towards global fund managers amongsome companies, overall retail investment towards alternativesis very low. The introduction of new, quality products as FAF isimplemented may go some way towards boosting the size ofasset allocations.

Currently, investors allocate roughly 3 to 5 per cent of theirportfolio to alternative assets. The small size makes it difficultfor the alternative funds managers to hold the attention of advis-ers for long.

In contrast, overseas investors have roughly 30 per cent oftheir assets in alternatives. While that large allocation may havesomething to do with the precarious state of the share marketand the generally gloomy nature of overseas investors, it is agood indication of the work fund managers have to do here toclose the gap.

“Often, when things gowrong, people cast aroundfor silver bullet solutions,some ‘magic’ that they’veoverlooked previously, butalternatives aren’tdelivering proven benefitsto portfolios. ”- Alan Hinde

Foreign investment rule change

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As financial services lawyers, weget asked a lot of compliancequestions. Here are threecommon ones. They are:

• Are there any restrictions on a financialplanner providing tax advice when advis-ing a client?;

• How do I shorten my Statement ofAdvice (SOA)?; and

• How do I meet my continuing profes-sional development obligations if I am aresponsible manager under both anAustralian Credit Licence (ACL) and anAustralian Financial Services Licence (AFSL)?

1. Are there any restrictions on a finan-cial planner providing tax advice whenadvising a client?Financial planners are currently able toinclude tax advice when advising a client,as long as:

• They are an authorised representative ofan AFSL holder; and

• Their advice is accompanied by a state-ment that they are not a registered tax agentand the client should request advice from aregistered tax agent if they intend to rely onthe advice to satisfy obligations or claimentitlements under taxation laws.

Of course, any included taxation advicewould still be subject to the general conductand disclosure obligations (such as the lawspertaining to misleading and deceptiveconduct ) applying to the provision of finan-cial product advice under the CorporationsAct 2001.

There has been increasing tension inrecent times over the regulation of the provi-sion of financial advice and taxation advice.It is difficult in practice for a financialplanner to provide financial advice withoutconsidering taxation implications and fora tax agent to provide tax planning advicewithout considering the types of financialproducts to use as structuring vehicles.

Historically, each area has had its ownsystem of regulation. But there has beenincreasing overlap due to the broadening ofthe reach of each regulatory system throughthe introduction of the Financial ServicesReform and the Tax Agents Services laws.

Until 30 June 2012 the overlap has beenresolved (at least in so far as financial plan-ners are concerned) by exempting financialplanners from the Tax Agent Services lawssubject to the conditions set out above. Afterthat time it is intended that financial plan-ners will need to obtain some form of taxadvice authorisation and meet competen-cy requirements before being able toprovide tax advice. Supervision of theserequirements will be through the AustralianSecurities and Investments Commission(ASIC). However, specific details of thescope of tax services that can be providedand the competency requirements arebeing considered by a working partycomposed of representatives from Govern-ment agencies and professional bodies.

David Court is a lawyer with HolleyNethercote commercial lawyers.

2. How do I shorten my SOA?Preparing a Statement of Advice (SOA) takestime. It’s one of the reasons providing finan-cial advice isn’t cheap.

If you can provide shorter SOAs to yourclients, you can cut the cost of doing busi-ness.

An SOA is also an opportunity to show-case the value that you’ve provided to yourclient in providing your advice. The moresuccinct your SOA, the more likely yourclient is to understand it, perceive the valueof your service, keep coming back to you,and recommend you to friends.

As a firm, we’ve seen thousands of SOAs.When we compare notes, a recurring themeis that SOAs are far longer than they needto be.

In fact, failure to provide short, clear SOAscan indicate breaches of the following obli-gations:

• That “statements and informationincluded in the Statement of Advice mustbe worded and presented in a clear, conciseand effective manner” – section 947B(6) ofthe Corporations Act 2001; and

• Financial services licensees must “do allthings necessary to ensure that [the finan-cial services they provide] are provided effi-ciently, honestly and fairly” – section912A(1)(a) of the Corporations Act 2001.

We think one of the reasons that SOAs

are so long is that advisers (and theirlawyers) take an unnecessarily broad inter-pretation of the legislative obligation to give“information about the basis on which theadvice is or was given” (section 947B(1)(b)of the Corporations Act 2001).

This obligation doesn’t mean a SOAneeds to include all information about thebasis of the advice. It may be appropriateto include this information for some clients,but in most cases it’s not. It’s an AFSL obli-gation to keep your workings on file (for atleast seven years), but a simple explanationabout why you’ve made a recommendationis usually enough. Some other tips are:

• Be careful about the scope, and stick toit. Only include information in the SOA that’sdirectly relevant to the scope of your advice;

• Take advantage of your ability to incorpo-rate information by reference. Refer to detailsfrom your Financial Services Guide and rele-vant Product Disclosure Statements, and evencost structures set out in your initial terms ofengagement with the client. If you must referto educational material, refer to it within theSOA, and provide it as a separate resource;and

• Invest resources into refining your SOAtemplates to a bare-bones, legally solid skele-ton. (Over time, a template can grow into anunwieldy beast that is no longer clear andconcise.) The investment in refining the


OpinionLegalA problem shared

Frequent changes in the law meancompliance issues can often be a legalminefield. Here, lawyers David Court, SonnieBailey and Kathryn Wardrobe answer threefrequently asked questions.

template will pay off with efficiencies in themedium- to long-term.

The ASIC and Financial Planning Associ-ation (FPA) SOA examples are valuableresources which demonstrate how SOAs canbe concise and effective (although they’renot perfect).

Finally, the shortest SOA is the one youdon’t need to prepare:

• Know when you can prepare a Recordof Advice (ROA) rather than a SOA;

• Have a clear grasp of the exact defini-tion of “personal financial product advice”.Knowing this doesn’t just make for goodafter-dinner conversation. It can mean thedifference between preparing a SOA (orROA) and providing a simple general advicewarning.

Sonnie Bailey is a lawyer with HolleyNethercote commercial lawyers.

3. How do I meet my CPD obligations ifI am a responsible manager under bothan ACL and an AFSL?Responsible managers of ACLs are requiredto undertake 20 hours of continuing profes-sional development (CPD) per year. In ourexperience, it is also common for AFSLholders to require their responsiblemanagers to undertake 10 to 20 hours ofCPD per year (although no prescribed

minimum number of CPD hours has beenset by ASIC). So, if you are a responsiblemanager of an ACL and an AFSL, does thismean that you need to undertake 40 hoursof CPD per year?

It will be of little consolation to suchresponsible managers that the matter is notclear one way or the other. However, as willbecome evident, we do not think that a dualresponsible manager must complete doublethe CPD.

Responsible managers exist to demon-strate that the holder of the licence (ACLand/or AFSL) is competent to engage in thecredit activities and/or provide the financialservices authorised by its licence. To demon-strate such competence to ASIC, the respon-sible manager must have the necessaryqualifications and experience. Competenceis an ongoing obligation for licensees, whichmust be demonstrated at all times.

Responsible managers of AFSLsASIC has not specified the minimumnumber of CPD hours that responsiblemanagers of AFSLs are required to under-take each year. Nor does it outline whatactivities can be counted towards CPD.What we do know (from ASIC’s RegulatoryGuide 105) is that an AFS licensee isrequired to:

• Maintain and update the knowledge andskills of its responsible managers; and

• Keep records showing the steps it hastaken to maintain its organisational compe-tence.

The CPD activities should cover the finan-cial services and products to which theresponsible manager’s role relates and alsoknowledge of the regulatory environment.

Some common examples of CPD activi-ties undertaken by responsible managers ofAFSLs are:

• Attending relevant seminars and work-shops;

• Having access to adequate resources(Internet and newspapers);

• Subscribing to relevant newsletters; and• Internal and external training and

assessments.

Responsible managers of ACLsFor responsible managers of credit licensees,ASIC has set a minimum of 20 CPD hoursper year. It is also a standard condition(number 6 of ASIC’s Pro Forma 224) of everycredit licence that CPD activities must:

• Be relevant to the role of the responsiblemanager with the licensee;

• Include product and industry develop-ments relating to credit; and

• Include compliance training on regulato-ry requirements applying to credit activities.

Records of the CPD activities must alsobe maintained. ASIC states (at RegulatoryGuide 206.66) that the following activitiesmay count towards CPD:

• Attendance at relevant professionalseminars or conferences;

• Preparation time for presenting at rele-vant professional seminars or conferences;

• Publication of journal articles relevantto the credit industry;

• Viewing DVDs of recent (within the lastyear) professional seminars or conferences(up to 10 hours per year); and

• Completion of online tutorials and/orquizzes on recent (within the last year) regu-latory, technical or professional develop-ments in the industry.

Striking a balance for the dual responsiblemanagerIf, for example, the AFS licensing regimerequires responsible managers to complete20 CPD points, our view is that it does notmean that the dual responsible manager hasto complete 40 CPD points.

The challenge for a responsible managerof both an ACL and an AFSL is to find theright combination of CPD activities coveringappropriate topics that will allow the respon-sible manager to demonstrate they aremaintaining competence under bothregimes.

Here are some tips that will help dualresponsible managers strike a balancebetween meeting their regulatory require-ments and the practical difficulties ofcompleting 40 hours of CPD per year.

• Consider the options and the overlap:

check out what activities are available froma range of sources. For example, severalindustry magazines and newsletters willcover regulatory developments under bothregimes. Also, the ACL and AFSL regimesimpose broadly similar obligations onlicensees under section 47 of the NationalConsumer Credit Protection Act 2009 andsection 912A of the Corporations Act 2001.When considering potential CPD topicscheck for overlap between the obligations.For example, both licensees are required tohave risk management systems in place thatcomply with AS/NZS ISO 31000:2009. There-fore, in our view any CPD activity relating torisk management would count as CPD forboth regimes;

• Plan your CPD year carefully andcreatively: we recommend that you or yoursupport teams develop a forward-lookingtraining plan which focuses on what youneed to do to enhance your relevant knowl-edge and skills. A training needs analysis isa useful tool to help you target your train-ing. Also, think creatively as to what consti-tutes training. As mentioned earlier, ASIChas made some suggestions in relation tothe ACL CPD activities but this should notlimit the range of CPD activities that mightbe undertaken, particularly in relation to theAFS licence. The actual number of hours ofCPD you will need to undertake each yearwill vary depending on the various CPDoptions available. However, if you can onlyundertake a few activities that cover bothregimes you may end up completing closerto 40 hours of CPD than 20; and

• Document your activities: this is a clearrequirement of both regimes. If you’ve devel-oped your training plan as outlined above,you can add the details to your training planas you complete each activity. It is fine tohave combined CPD training records thatcover specific credit related and financialservices related CPD.

Kathryn Wardrobe is a lawyer with HolleyNethercote commercial lawyers.These three questions were submitted towww.complianceforums.com.au


Investors considering their expo-sure to the resources industryshould take note – strong globaldemand for resources wi l l

continue for some time.The urbanisation of China and the

associated need in that country forinfrastr ucture development arepower ful st imuli for resourcesdemand – a process that will extendover decades.

There will inevitably be pauses andshort-term interruptions along theway as inflationary pressures aremanaged, but the long-term trendwill continue to support resourcesdemand growth.

But it isn’t just China’s economicdevelopment that is driving globalresources sector growth. There isdevelopment across a spread ofemerging economies, many in theAsian region. India is moving along agrowth path, similar in many respectsto China’s but with characteristicsunique to India’s pol i t ical andeconomic structure.

In the developed world post-GFC,resources demand from the US andEurope is slowly picking up and theircontribution to demand growth isexpected to be gradual but increas-ingly positive.

Set against strong growth indemand, the supply response hasbeen muted, with a range of factorsconstraining development of newmajor projects.

Slow recovery in the global finan-cial sector has had an impact on newproject funding and a repricing of riskhas added to these constraints.

A lag in major infrastructure devel-opment in transport and ports hasalso been a drag, particularly in thebulk commodity sector wheredemand growth has been strongest.The lead t ime to br ing on newproduction has been l imited byshor tages in ski l led labour andconstruction inputs and a moreaggressive approach to economicnationalism and fiscal settings hasraised the development risk profile,both in Third World countries andthose in the developed world.

Not surprisingly, with continuingstrong demand growth and a mutedsupply response, commodity prices


OpinionResourcesStrong growthfundamentals thatfavour commodityprice growth point tosolid investor returnsfrom global resources.John Robinsonexplains why globalresources exposureremains compelling.

A case for resources


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have trended stronglyupward, with a relativelybr ief , though markedinterruption during theGFC.

The daily movement inmetal pr ices can bevolatile and at times rela-tively sharp with corre-sponding daily adjust-ment in the share pricesof resource companies.

Investors with amedium to long-termhorizon need to differen-tiate between daily move-ments that reflect specu-lative trading in metalderivatives and theincreasing influence of commodity-basedexchange-traded funds(ETFs), as well as the more fundamentalsupply/ demand relation-ship that governs longer-term price trends.

For many Australianinvestors, direct access tothe global resourcessector is limited to thosecompanies with an ASXlisting. Most seek thisexposure through BHPand Rio Tinto, withperhaps only peripheralawareness of other majorglobal miners active inAustralia, but not locallylisted.

Xstrata, for example, isa major globally diversi-fied mining company andthe world’s largestthermal coal exporter. Ithas a high prof i le inAustral ia , but beingbased in Switzerland andwith a London stockexchange listing it is notreadily accessible to localinvestors.

Other major globalresource companies activein Australia include:

• Anglo American: one ofthe world’s largest miningcompanies and thesecond-largest exporter ofAustralian coking coal. Ithas its primary listing inLondon;

• Brazil’s Vale: a majorglobal diversified miner.It is the world’s largestiron ore exporter withcoal operations inAustralia’s Bowen Basinand Hunter Valley; and

• Canadian companyTeck: the world’s second-largest coking coalexporter and third-largestzinc producer, an activeexplorer in Australia.

For local investorslooking to gain exposureto these major global

players, as part of a diversifiedresource sector portfolio, thereare two primary options:

Open-ended Managed Fundswith specialised products inglobal resources. The ColonialFirst State Global ResourcesFund is the largest in terms offunds under management, butothers in this category includethe Pengana and PerpetualGlobal Resources Funds. All have

a unit trust structure and operatein the same manner as thebroader Managed Fund sector.

The second option is to investthrough an ASX Listed Invest-ment Company, or LIC, thatspecialises in global resources.

There are 47 LICs in the ASXComposite Index but only threespecialise in the global resources

“ For many Australian investors, direct access tothe global resources sector is limited to thosecompanies with an ASX listing. ”

Continued on page 22


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sector: the Global ResourcesMasters Fund (GRF), the LinQResources Fund (LRF) and GlobalMining Investments (GMI), thelargest of the three.

ETFs can also provide investorswith resource sector exposure, butthere are no locally listed productsthat offer a global resourceperspective. There are ETFs that

replicate the local ASX 200Resources Index and there are anumber of locally listed commodi-ties-backed ETFs in the preciousmetals sector.

In developing an investmentstrategy to provide exposure to theglobal resources sector the argu-ment for diversity acrosscommodities, geography, marketsand companies presents a prudentstarting point. An investment in

BHP and/or Rio certainly providessome of this diversity but there aremany other substantial and glob-ally diversified miners that can beadded to the investment mix togenerate a broader spread. This isbest achieved by selecting fromLICs and/or Managed Fundsspecialising in the global resourcessector.

Some investors will prefer theLIC option with real time buy/sell

pricing, a feature of all ASXlisted stocks and thesimple and transparent taxtreatment of dividendincome. Attaching frank-ing credits can also add tothe appeal of LICs, partic-ularly for SMSFs with theirinternal income tax levelsat either 0 per cent or 15per cent. The closed struc-ture of LICs can also be advantageous, withbuy/sell investment deci-sions made at a time andlevel to suit the investmentmanagement strategy,rather than being dictatedby inflow or outflow offunds that result from anopen-ended ManagedFund structure.

Some investors will bemore familiar andcomfortable with ManagedFunds and their unit truststructure. Both investmentoptions have similar feestructures with individualvariations according tofunds under managementand performance drivers.

The role of selectedETFs is narrower but canprovide an addedelement to por tfol ioconstruction, particular-ly where a specif iccommodity exposure issought. ETFs typicallyhave lower fees and aregeneral ly designed toreplicate either the ASX200 Resources Index orthe particular commodi-ty market price move-ment. But they are notdesigned to outperformthe market.

Whatever the invest-ment avenue, the reasonto invest is compelling.

The global resourcessector is underpinned bystrong growth fundamen-tals and a supply/demandbalance that favourscommodity price growth,particularly in the bulkcommodities sector of ironore and coal (thermal andcoking). The major globalresources companies arewell placed to provideinvestors with goodreturns, given their strongprofits and operating cash-flows. Continuing mergersand acquisitions in theglobal resources sector willprovide additional benefitsfor those investors withbroad exposure to theglobal mining sector.

John Robinson is chair-man of Global MiningInvestments.


“ Some investors willprefer the LIC optionwith real time buy/sellpricing. ”

When the Ripoll enquiry find-ings were released, a keyrecommendation was the

introduction of statutory fiduciary dutyfor financial planners to act in the bestinterests of clients. This means an obliga-tion to place a client’s interests ahead oftheir own. The fiduciary (or best inter-ests) duty would be on the licensee(dealer group) and apply to authorisedrepresentatives.

What is the ‘best interests’ duty?A fiduciary duty is not solely about thequality of the advice. Instead, for finan-cial planners it is about putting theclient’s interests ahead of their own.Effectively, this means avoiding conflictsof interest and not taking paymentswithout the client’s active consent. Ifpayments are made that breach the duty,the fiduciary must ‘account for profits’to the client, which means the clientactually owns the payments unless theyagree to the fiduciary receiving it.

In a number of cases the courts havefound a fiduciary duty does apply tofinancial advisers in the particularcircumstances under examination.However, inserting the duty into theCorporations Act will mean it willbecome an express obligation and ASICwill have greater powers to becomedirectly involved to prohibit conduct itregards as breaching the duty.

The Government has advised in theFuture of Financial Advice (FOFA) Infor-mation Pack released on 28 April 2011that the best interest duty will be subjectto a reasonableness test and an adviserwill not be obliged to trawl through theentire gamut of financial products on themarket. However, the Government alsodirects:

“If the adviser cannot recommend aproduct that is in the best interest of theclient from their own ‘approvedproduct’… then the fiduciary duty mayrequire them to search beyond the‘approved product list’ or recommendthat the client should see anotheradviser… If a person considers that they

cannot provide advice that is in the bestinterests of the client in accordance withthe duty, they must refuse to provide theadvice.”

Best interests or best advice? Thatis the questionActing in the best interests of a client isnot the same as providing the best adviceto a client, although each action impactson the other. In providing advice a profes-sional financial adviser already has anobligation to provide appropriate adviceand to exercise reasonable care and skill.The quality of advice is also coveredunder the advice contract, with theseobligations remaining unchanged.

The Government has made clear thatthe best interest duty is about the processof providing the advice, not the qualityof the advice itself. Advisers who get theprocess right, but whose actual advice isnot appropriate, reasonable or is negli-gent, will remain accountable for the costof client loss.

Who is responsible?As outlined in the FOFA InformationPack, the ultimate responsibility forcomplying with the duty to act in theclient’s best interests falls to the licens-ee, who will be financially responsible forany breaches. Individual authorisedrepresentatives may be subject to admin-istrative penalties, such as banningorders. Making the licensee ultimatelyresponsible is consistent with otherrequirements in Corporations law andalso ensures that licensees put into placesystems and procedures to ensure repre-sentatives comply with the new duty.

Stakeholders and the fiduciary dutyLicensee/dealer GroupLicensees will need to streamline theservices they provide to authorised repre-sentatives. Licensees may need to reviewwhere there may be gaps in products ontheir approved product lists and wheretraining and administration proceduresneed to be updated and enhanced.Licensees will find this difficult whenthere is no draft legislation to work fromand a start date of 1 July 2012.

The administration cost of operatinga financial advice business is likely toincrease. At the same time, financial plan-ning group revenue streams are underthreat (with items such as rebates fromfund managers). Increased costs will fall

to authorised representatives and then,inevitably, clients will pick up the tab.

Licensees may also feel the impact ofincreased insurance costs as profession-al indemnity (PI) premiums may rise toreflect the greater statutory obligationsenvisaged by FOFA. Consequently, from1 July 2012 PI insurance will need to coverthe best interest duty as well as otherstatutory changes.

Authorised representatives/advisersFrom 1 July 2012 financial advisers willneed to put their client’s interests aheadof the interest of themselves and theirlicensee. Although the Government hassaid financial advisers will not need totrawl the length of the market to find thebest possible product for a client, practi-cal problems will still arise. If a product isnot on the advisers approved productlist, advisers will have to seek individualapproval. In some instances, thatapproval may not be forthcoming. Inaddition, advisers who are authorisedrepresentatives may not be aware of theprincipal’s interest in a particularproduct.

ClientsWill clients notice their adviser is undera statutory duty to act in their best inter-est? Probably not, but if and when thecost of advice increases, they will defi-nitely notice that. They will also noticesome of the structural problems with thenew FOFA regime, including:

• The lack of tax concessions for advice;• The inefficiencies of having to opt

into advice every two years; and• The inevitable problems clients will

encounter if they forget to opt in.

ConclusionAs with all FOFA reforms, the devil maywell be in the detail. How this new statu-tory fiduciary duty will work and thedetails advisers and licensees need won’tbe available until draft legislation isreleased after June 2011. Many advisershave already factored in a ‘best interestsduty’ into their advice remunerationstructures from 1 July 2012. However,increasing the key concern for advisersover this and other FOFA reforms is theincreasing cost of advice, a cost whichwill inevitably be borne by clients.

Pam Roberts is technical services managerat IOOF.

Toolbox


BriefsMIDWINTER has made a range of changes toits Client Manager and Reasonable Basis soft-ware in response to the Government’s recentlyannounced Future of Financial Advice reforms.

Midwinter added new scaled advice soft-ware developments within Cashflow & Capi-tal, which the firm said would enable finan-cial advisers to illustrate a client’s currentposition and a range of multiple alternativelimited advice recommendations.

The firm also added a ‘best interest’ fiduci-ary matrix to its financial planning modellingtools.

“The new best interest fiduciary matrix willquickly demonstrate what the existing and rec-ommended funds cost, and what their fea-tures and benefits are,” said Midwinter’s exec-utive director – strategy and technical, MatthewEsler.

In response to opt-in requirements, the firmintroduced a new ‘Traffic Light’ complianceframework to Client Manager, providing finan-cial adviser practices and dealer groups withalerts regarding whether a client’s financialservices guide, privacy policy and fact find hasbeen provided or is up-to-date.

MACQUARIE Wrap has launched a new rangeof investment, superannuation and pensionaccounts called the Consolidator Series.

The group stated the portfolio value pricingstructure complements Macquarie Wrap’sexisting holding-based pricing structure, allow-ing clients to consolidate their managed invest-ments and direct shares in one place, withoutany automated transaction or transfer-in fees.

Efficiently administering direct shares is agrowing area of importance for adviser prac-tices, with approximately 30 out of every 100advisers already including direct shares in theiradvice model. This number is expected toincrease to 43 out of every 100, according tohead of insurance and platforms at Macquarie,Justin Delaney.

Delaney said Macquarie Wrap’s latest addi-tion was designed to help advisers respond tothe shifting expectations both of clients andregulators, which is particularly timely followingthe release of the Future of Financial Advicereforms.

RUSSELL Investments has launched RussellPractice Management (RPM), which aims tohelp Australian advisers enhance their advicemodel and increase practice revenue.

The program provides tailored front-office andback-office support in the areas of businessmanagement, operations, human resources andclient servicing, covering topics such as clientengagement, fees and pricing, client valuepropositions, leadership, change managementand business structuring, Russell stated.

“As the FOFA reforms are implemented, it’smore important than ever for advisers tofuture-proof their businesses to ensure theyevolve and grow, rather than simply survivethe raft of changes approaching,” said Rus-sell’s managing director for retail investmentservices, Patricia Curtin.

The program will help advisers articulatethe value they bring to clients as they moveaway from portfolio construction to focus onquality advice while ensuring the potentialimpacts of FOFA are factored in to pricingmodels, Russell stated.

What does ‘bestinterests’ advicemean for advisers?Pam Roberts reports.

Fiduciary duty – best interests or best advice?


ResearchReview

Research Review is compiled by PortfolioConstruction Forum in association with MoneyManagement. PortfolioConstruction Forum asked the research houses: An issue that confusesadvisers is widely different ratings for the same fund. The Five Oceans Wholesale World Fund is acase in point, with ratings from investment grade to highly recommended. What rating has yourfirm assigned it? What does that signify generally? What are the strengths and weaknesses of thisfund that result in this rating?

The world intheir hands

Lonsec RatingHighly recommended. This rating indicates Lonsec’s highconviction that the fund can achieve its objectives and, ifapplicable, outperform peers over an appropriate invest-ment timeframe. The manager or product has strong compet-itive advantages in people, process and product design andhas no areas of material weakness. The investment is apreferred entry point to access this asset class or strategy.

RationaleThe fund is a benchmark unaware, concentrated, long-biased long/short global equity product. The investmentteam is centrally located in Sydney and Lonsec considersit to be high quality and suitably resourced to implementthis investment strategy.

Key strengths include the considerable investmentknowledge and experience of the portfolio managers ChrisSelth, Kim Tracey and Piers Watson, who each average 16years of portfolio management experience.

The investment process is logical, thorough and wellimplemented. The research and portfolio constructionprocess is based on leveraging off the knowledge, intu-ition and skills of the lead portfolio manager and support-ing key portfolio managers. The investment processfocuses on bottom-up fundamental research with a strong

emphasis on valuation. Research is a rigorous processfocusing on a business’s position within its market, marketpricing, and the broader economic and social environ-ment in which it operates. An important component ofFive Oceans’ research process is the focus on the identi-fication of catalysts to release value. Lonsec believes thisprovides a strength, not only in terms of a robust sell disci-pline, but also with the timing of stock purchases (ie, avoidbuying too early).

Given the absolute nature of the strategy, the fund issuitable for investors who are seeking some downsideprotection and capital preservation via the manager’sability to reduce the fund’s net equity market exposure(beta) and its ability to exploit shorting opportunities.Shorting can be implemented within the portfolio by wayof standalone shorts, stock hedges or pair positions, aswell as futures and options hedging. Another strategy thatthe manager brings to the fund is the ability to activelymanage currency as a way to reduce risk and protectcapital. Five Oceans can hedge the full gross exposure ofthe fund back into Australian dollars, or currencies that itbelieves offer better value.

In addition, Lonsec believes the firm’s culture, boutiquenature and high alignment of interests via co-investmentin funds and equity participation bodes well for investors.

Standard & Poor’sRatingFour stars. This rating reflects S&P’s highconviction that the manager will consistent-ly generate risk-adjusted returns in excess ofrelevant investment objectives and relativeto peers.

RationaleThis global equities fund employs a high-conviction fundamental stock-pickingapproach qualified by macro views. It aimsto add value by exploiting structural shiftsand changing market dynamics. The invest-ment process is clear and rigorous, andsupported by industry-standard systems.The portfolio manager and risk manager

have a good grasp of global macro themesand efficient hedging mechanisms.

The fund has been in operation since July2006, allowing S&P a high-conviction viewon risk-adjusted performance. The fund’sabsolute return focus and high-convictionstyle allows it to make bold allocationchoices, which produced mixed results forinvestors in the early months of its life.However, results have improved in theperiod since the last review. Recent overallportfolio positioning and hedging decisionshave revealed the manager’s considerableskill from the top-down as well as from thebottom-up. This is emerging as a significantpoint of difference among peers.

Five Oceans is staffed by a mid-sized, high

quality, and seasoned team ofanalyst/portfolio managers, in whoseabilities S&P has confidence. The team isimpressive relative to peers in terms ofthe experience and calibre of its members,although it is relatively small comparedwith peer funds. It exhibits a strong andindependent boutique culture, and ismajority owned by the six senior execu-tives. Team members are provided incen-tives and fund performance fees arecalculated with reference to an absolutereturn benchmark. This aligns the inter-ests of investors with those of the invest-ment team.

The fund does display some weaknessesand risks.

The main weakness is its use of a tradi-tional prime broker model, which intro-duces asset custody risk due to securitiesbeing commingled with other clients’ assets.S&P views this as less than best practice,which provides for asset segregation andidentification held separately from theprime broker so client assets are notcommingled.

There are also certain risks associatedwith the fund that investors should under-stand. It can take short positions which haveunlimited loss potential and introducecredit risk; it may make long/short pairstrades where money can be lost in bothpositions; it uses derivatives; and, there isforeign exchange risk.

Van EykRatingBB. This rating indicates that van Eyk has identified strengths withregard to people, process and business management, but has lessconfidence in the manager outperforming its benchmark incomparison to A-rated managers, on an after-fees basis. Only 29per cent of strategies were awarded a higher rating in the rele-vant review.

RationaleThe portfolio manager, Christopher Selth, is experienced andable to effectively combine detailed stock knowledge with a strongawareness of global trends.

Selth is supported by competent senior investment teammembers, although the team is slightly small when compared tosome other, more highly rated managers. The team travels lessextensively than some of its higher rated peers and may lag inidentifying insights into local consumer trends and marketdynamics. The team of supporting analysts has expanded in recentyears, which is a positive development.

A competitive strength in the investment process is the integra-tion of top down insights and collaboration with industry expertsto identify themes.

A key drawback is the base fee of 1.25 per cent, which is highrelative to peers. In addition, a performance fee of 20 per cent ofreturns over 5 per cent is charged.

Distinct moments in time definecountries. For India, there havebeen two key moments inhistory in recent decades. First,

there was the collapse of the Berlin Wall inNovember 1989 marking the failure of thecommunist model, with which India hadbeen associated, and that model’s subse-quent demise across most of the world.Secondly, there was Dr Manmohan Singh’sreform budget in 1991, in response to thecountry’s economic crisis. That budget, byturning India away from its communisteconomic management of prior decadesand towards an opening up of the Indianeconomy, began the process of liberalisingthe Indian economy and the reformmomentum which has led to economicgrowth rates which are today close to 10 percent per annum.

On a purchasing power parity basis, Indiaaccounts for 5.1 per cent of world grossdomestic product (GDP) – almost as muchas Japan. In nominal GDP terms, in 2009India was the eleventh largest economy andin 2010 overtook Spain’s economy. By 2012,its economy will be larger than Canada’s,and by 2015, it will have overtaken Italy. IfGoldman Sachs’ forecasts are right, by 2050India will be the third largest economy inthe world, after China and the US. Moreimportantly, given its rapid growth rate,India’s contribution to global growth issignificant.

The question of whether India is able tosustain high economic growth rates and forhow long is therefore a critical one forinvestors.

In many ways, India’s story is similar toChina’s – just 10 to 15 years behind, given itsreform process started 10 to 15 years later.Like China, India is a populous, yet poor,nation with over a billion people. LikeChina, it is an urbanisation story with rapidgrowth rates driven by a marshalling ofpreviously unmarshalled resources – ie,moving workers from the fields into thecities; educating the population; expand-ing the infrastructure. With these changescomes the emergence of the middle classand the release of pent-up demand forhousing, cars and other durables, accompa-nied by financial deepening and increas-ing access to consumer finance.

The differences are starkChina is industrialising under an autocrat-ic regime where property rights and indi-vidual civil liberties are not respected. Assuch, clearing land to make way for newinfrastructure is easy. Shifting millions ofworkers thousands of miles is considerednormal (witness the tens of millionsChinese migrant workers) while the deci-sion as to where to build new roads, rail-ways and airports doesn’t require extensiveconsultation and is therefore a relatively

quick process. Indeed, almost all newlyindustrialised Asian economies industri-alised under some form of autocracy.

“It is startling that nearly all of theeconomies that experienced the Miracle (ie,rapid industrialisation) either had dictato-rial regimes (South Korea, Taiwan, China,Indonesia), periods of military rule (Thai-land), or systems with limited freedomsdominated by one political movement(Singapore, Malaysia). Even Japan was akind of one-party state. Though the countryholds free elections, the same party hascontrolled the government since the mid-1950s (save for a short period in the early1990s),” writes M Shuman in his 2009 book,The Miracle – The Epic Story of Asia’s Questfor Growth.

In contrast, India is industrialising as ademocracy and alongside that, has strongcivil liberties and property rights laws. So,while India is in some sense following theChinese and Asian model, in many ways,its approach is unique.

In short, there are three key risks to Indiacontinuing its rapid economic growth.

Fiscal deficit risk For the past two decades since reformbegan in 1991, India’s government hasconsistently spent more each year than ithas raised in tax revenues. In other words,its fiscal deficit is high – and has been fortwo decades. Government spending hastracked between 23-28 per cent of GDPwhile tax revenue has been between 16-20per cent since 1991. As a result, the govern-ment’s fiscal deficit (according to IMF data)has tracked between 4-10 per cent of GDP(9.2 per cent in 2010). To date, India hasbeen able to offset these deficits by sellingassets, so government debt to GDP is atbroadly similar levels as in the early 1990sat just above 70 per cent. Clearly, however,this policy has a limited shelf life.

It is of some macroeconomic comfort thatdespite a 9-10 per cent fiscal deficit, India’scurrent account deficit is only expected to be

3 per cent of GDP this year – that is, most ofthe government’s fiscal deficit is funded inter-nally. Given India’s high household savingsrate, this is not surprising. Household creditlevels are very low, reflecting limited finan-cial deepening to date. For example, only fiveper cent of Indian households have mort-gages, while total household debt is only 10per cent of GDP.

Commodity price riskIndia is also vulnerable to commodity price(and especially) oil price spikes. India haslimited oil production relative to its needs,with just 0.5 per cent of the world’s provenoil reserves. A decade ago, India importedjust over 1.5 million barrels of oil per day(MBPD). By the end of 2010, it was consum-ing over 3.5 MBPD, but producing just 0.75MBPD internally. Consequently, Indiaimports just under 3 MBPD, up from 1.5MBPD a decade ago. In aggregate, this costsIndia approximately US$98bn per annum,accounting for the majority of India’s tradedeficit. And it creates vulnerability for Indiato oil price shocks.

Democratic riskAs noted, unlike most of its Asian neigh-bours, India is a strong democracy. Whilethree to four parties dominate nationwidepolitics in India, there are thousands ofactive political parties campaigning andwinning power at the different national,state and local levels. A key risk to India’scontinued growth is that we see a changeof government away from a reform-mindedgovernment to a more left-leaning, non-reform minded party, which could halt orindeed reverse the reform momentum.

Chris Watling is CEO of London-basedLongview Economics and a regularspeaker at the PortfolioConstructionForum Conference.

India, the elephant in the room India’s industrialisation of the past 15 years is a compellingstory that has drawn inevitable comparisons with China, butthere are several risks to watch for, writes Chris Watling.


MercerRatingNot disclosed. Mercer was unable toparticipate in this question due to a globalpolicy that its ratings cannot be disclosedto non-subscribers.

MorningstarRatingInvestment grade. This rating indicatesMorningstar’s view that it is a competentstrategy that either fails to stand out, or hasoffsetting positive and negative factors.While not a strategy Morningstar wouldrecommend, it should get the job done.

RationaleThe strengths of this strategy are the expe-rienced and insightful investment team,the flexible mandate both in terms of riskconstraints and derivative and shortingability, and strong performance sinceinception.

However, weaknesses are the poorlystructured performance fee, the flexiblemandate can be a double-edged sword,and variable market and currency expo-sure can make it hard to deploy in a port-folio context.

Zenith Investment PartnersRatingRecommended. This rating indicatesZenith’s view that a fund is a strong invest-ment within its respective asset class, typi-cally rating first quartile on most criteria.

RationaleThe ownership structure of the business (75per cent ownership by staff, 25 per cent byChallenger) provides a greater incentivestructure for the investment team while alsohaving the backing of a larger, stable finan-cial house.

The investment team is of high qualitywith a good depth and blend of experience(five seniors and four more junior members),led by an experienced and highly regardedlead portfolio manager, Chris Selth. Zenithalso regards the BT pedigree of four of thefive senior members as a positive, recognis-ing that the training provided by the organ-isation appears to have instilled a solid basefor investing globally.

The research produced by the team isamong the highest quality Zenith has seenin terms of clarity, depth and breadth.

Another key positive is the manager’sapproach of investing from the standpointof an Australian investor, recognising thatmovements in the Australian dollar canmaterially affect returns to Australianinvestors (a point ignored by many overseas-based managers).

A weakness is a comparatively smallteam for a global equities manager. Also,the business has broadened its mandateofferings in recent years (to include130/30, China Fund, Asia Fund), whichmay leave the investment team stretchedin coverage and focus. Finally, the rela-tive level of funds under management(approximately $250 million at the timeof Zenith’s review in June 2010, althoughthis has increased since) results in thestaff equity having low current value,possibly not acting as a strong retentionmechanism.

In association with


ResearchReview

Lonsec • Hedged global equities have providedconsistently stronger returns thanunhedged over the past decade, accordingto Lonsec’s recent review of the effect ofcurrency on portfolios. This was driven inlarge part by the depreciation of the USdollar versus the Australian dollar, althoughthat relationship did not hold in the previ-ous decade – in fact, it reversed. Given thatAustralian equities generally constitute amaterial component of a client’s equitiesportfolio, some unhedged global equityexposure makes sense from a diversifica-tion perspective.

• Fundamental global equity fundmanagers have beaten their quantitativemanager peers in terms of outperformanceconsistency in recent times. Lonsec’s newoutperformance study found that forperiods to January 2011 which include datafor 2007 and 2008, the average quantitativemanager outperformed its benchmark inless than 50 per cent of months, while formore recent periods, outperformance hasbeen greater than 50 per cent. By contrast,the average fundamental manager (thosewhich rely on traditional investment analystgenerated stock research) outperformed thebenchmark in over 50 per cent of months,save for the most recent one-year period.

• Nicholas Yaxley has joined Lonsec’sequities research team to focus onresearching listing fixed interest and hybridsecurities. Yaxley was previously an analystat Black Swan Capital Partners and a creditanalyst with JP Morgan Asset Management.

Morningstar• A report by Morningstar on the perform-ance fees charged by large-cap Australianequity funds has revealed a lack of consis-tency in performance fee structures and acorresponding lack of “any clear regulatoryguidelines as to how the complex compo-nents of the performance fee structureshould be displayed”. Morningstar brokedown a typical performance fee into itsessential components and calculated theimpact of different fee structures oninvestors’ funds over a decade. One of thehighest impacts is the benchmark used bythe manager. For example, with a 20 per centperformance fee on $100,000 over a decade,the difference between an absolute andindex-linked performance benchmark couldbe up to $46,000. “Ensure that the fundmanager has to beat a reasonable hurdlebefore starting to accumulate performancefees,” Morninstar’s Best Practice in ManagedFund Performance Fees report concluded.

Standard & Poor’s • Active international equity managers aretrending toward mandates that are less

sensitive to a benchmark, taking on moreactive risk, with an increased level ofinvestment in non-index companies,according to S&P’s review of the sector.Overall, international equity fundmanagers are broadening their investmentmandates to allow more flexibility inconstructing portfolios. “Increasingly, fundmanagers are adopting a fundamentalassessment of risk, in the belief it givesgreater insight into the future success orfailure of a company instead of a measureof risk based on a fund’s position relativeto the benchmark,” according to S&P.

Van Eyk • All three Australian equities fundsmanagement styles – growth, value andneutral – underperformed their bench-marks in 2010, according to van Eyk. Style-neutral managers outperformed growthand value styles, earning seven out of 12 ‘A’ratings handed out in the review of 42strategies. “Style-neutral managersshowed a greater propensity to queryindependent data points and researchsources in their analysis, giving them acompetitive advantage in stock selection,”van Eyk said. “Given market volatility anduncertainty regarding trend, managerscapable of capitalising on a range ofmarket conditions will be most competi-tive going forward. This favours style-neutral managers as they can invest ineither value or growth opportunities.”

• Only a minority of Australian equitiesconcentrated fund managers achievedtheir alpha objectives in 2010, van Eyknoted in its review of the sector. However,the average concentrated manager

performed better than the average coremanager. The average concentratedmanager displayed much stronger up-market consistency than down in 2010,outperforming more than 60 per cent ofthe time in months when the market returnwas positive, but underperforming moreoften than not in months when marketreturns were negative. “Most of the concen-trated managers are also overweight theconsumer discretionary sector, health careand industrials,” van Eyk said.

• Lyndall James has joined van Eyk asnational business development managerfor the van Eyk Blueprint Series. James is apast NSW Money Management BDM of the

Year, and has previously worked as a BDMfor OnePath and National/MLC.

Zenith Investment Partners• Zenith has upgraded its online toolset,adding a new Fund Surveys tool thatallows subscribers to create and save theirown list of funds to compare risk andperformance.

• Zenith has appointed ChristopherHuang as a data analyst. He previouslyworked as a research analyst at AustralianStock Report conducting fundamental andtechnical analysis on financial securities,and giving general advice to retail clients.He is a Level 1 CFA candidate.

Research round-upPortfolioConstruction Forum asks the majorresearch houses about their most recentprojects and appointments.

“ Overall, internationalequity fund managers arebroadening their investmentmandates to allow moreflexibility in constructingportfolios. ”

Reports released in April• Lonsec – Month in review, quarterlyoutlook • Lonsec – Model portfolios mid-cyclereview• Lonsec – Global equity sector review• Lonsec – Small-cap Australian equitiessector review • Morningstar – Monthly economic update• Morningstar – ETF Monthly • Morningstar – Global listed infrastruc-ture sector review• Morningstar – Large-cap Australian equi-ties sector review • S&P – Monthly economic and market report• S&P – International equities large/smallcap sector review• S&P – Alternative strategies multi-assetsector review • S&P – Mortgages sector review • Van Eyk – Investment outlook report• Van Eyk – Australian equities sector review

• Van Eyk – Australian equities concentrat-ed sector review• Van Eyk – Global macro sector review• Zenith – CTA/Macro sector review• Zenith – Quarterly asset class forecast report

Upcoming in May• Lonsec – Australian property securitiessector review• Lonsec – Preset model portfolios• Morningstar – Global listed propertysector review• Morningstar – AREIT sector review• Morningstar – Investment conference • S&P – Australian fixed interest sectorreview• Van Eyk – ETF sector review• Zenith – Property securities sector review• Zenith – Australian equities long/shortsector review

In association with

Appointments


Please send your appointments to: [email protected]

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

BUSINESS DEVELOPMENT EXECUTIVELocation: MelbourneCompany: Kaizen RecruitmentDescription: Our client has created a newrole for a business development executive.

In a varied and multi-functional rolefocused on maintaining business growth, youwill be working closely with the managingdirector in a role designed for success.

Working across multiple financial productsyou will be working with equities, derivativesas well as FX and alternative investmentproducts.

You will work with an advisor group toimplement initiatives, engage in the longerterm and you will build a businessdevelopment team to facilitate this function.

The right person for this job will have astrong understanding and experience workingin financial markets, ideally in a sales orbusiness development role. Additionally youmust possess excellent communication skills,business acumen and a passion for building along and successful career in private wealth.

For more details and to apply, [email protected] or visitwww.moneymanagement.com.au/jobs

FINANCIAL PLANNINGLocation: MelbourneCompany: AMP

Description: Financial planners have anopportunity to join AMP’s fully serviced andcustomer oriented centre with on-sitemarketing, administrative and technologicalsupport. This ensures that financialplanners have more time to focus onadvising their clients and growing theirbusiness.

To be considered for this opportunity, youneed to have a Diploma of FinancialServices (Financial Planning) or theequivalent RG146 compliance. You will alsohave a minimum of two years of client-facing, financial planning experience.

Desire to run your own business isessential.

AMP will be holding an informationevening on Tuesday 24 May, 2011.

For more information, [email protected] or visitwww.moneymanagement.com/jobs

FINANCIAL PLANNERLocation: Sunshine Coast, QLDCompany: East Coast Human ResourceGroupDescription: Located on the Sunshine Coast,this firm offers a unique and excitingchallenge for suitable professionals to workwithin a dedicated team.

As the financial planner, you will be

responsible for providing a comprehensiverange of options for your clients, using yourextensive and proven experience in financialand strategic planning.

Essential position requirements:Our client offers the opportunity for you to

work with a dedicated team of professionals,and offers a supportive work environment,progressive opportunities and performancerecognition.

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

PARAPLANNERSLocation: Canberra, ACTCompany: Hays RecruitmentDescription: This Canberra firm provideswealth management solutions across severalAustralian locations. Their business model isbuilt on a referral base and a commitmentto providing expert advice. To build on theirsuccess, they are looking for an expertparaplanner to join their team ofprofessionals. A strong background withinfinancial services is a must – together withdemonstrated leadership skills and anenergetic and client-focused attitude withthe proven ability to work effectively in ateam environment. In return, thisorganisation can offer you significant

business opportunities, transparent careerprogression and support with escalatingcompliance demands.

For more details and to apply, visitww.moneymanagement.com.au/jobs

COMPLIANCE TEAM LEADER – LIFEINSURANCELocation: MelbourneCompany: Bluefin ResourcesDescription: Our client, a leading insurancecompany, is offering an opportunity for asenior compliance officer, who will beprovided with on-the-job training.

You will be leading a small team that isresponsible for ensuring the authorisedrepresentative teams have a clearunderstanding of what process andbehaviours are required from a complianceperspective, and reducing risk. You will alsobe involved in stakeholder management andwill be a key liaison point for complianceissues for sales teams.

Suitable applicants will have experiencein compliance/quality assurance/callmonitoring environments, ideally from thelife insurance industry, though banking orfinancial services backgrounds will beconsidered.

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

JONATHAN Armitage has joinedMLC Investment Management asportfolio manager, moving fromSchroders’ global equities divisionin London.

He had worked as global equi-ties expert for Schroders, gaining18 years experience in equitiesacross several internationalmarkets including New York.

Most recently he was head of USequities and a global portfoliomanager as part of a team manag-ing US$12 billion in assets.

Armitage will start on 1 Augustand report to MLC chief invest-ment officer Nicky Richards, whojoined MLC in January from Fideli-ty in London.

According to Richards, theappointment of Armitagecompletes a wave of enhance-ments to MLC’s portfolio manage-ment team across the major assetclasses.

Richards also foreshadowedenhancements to MLC’s range ofinvestment products.

FORMER Perpetual executive,Michael Miller has moved toSuncorp, where he has taken upthe role of chief financial officer(CFO) of its commercial insurancedivision.

Miller had spent nine years atPerpetual filling various groupexecutive, CFO and strategy roles.

Prior to his most recent role atPerpetual, he was the deputyCFO group finance and had alsospent time working with Deloittein Brisbane, London and Sydney.

Suncorp commercial insur-ance chief executive officerAnthony Day said Miller had“extensive leadership experienceand a broad financial servicesbackground”.

Miller took over from MattPearson, who now heads up thecommercial claims division.

AXA has announced the appoint-ment of two business develop-ment consultants, Clint Thomas-son and Peter Vlachos.

They will aim to extend thereach of the AXA distribution teamand assist in driving sales acrossall product lines to the AXA/AMPnetwork, as well as to independ-ent financial advisers.

A further focus for this role isbuilding on existing relationshipsand uncovering new opportunities.

AXA stated Thomasson broughtvaluable financial planning expe-rience to the team, having beenwith both ANZ and AMP – earningthe AMP new planner of the yearaward in 2009.

Vlachos joined the team fromiSelect where he was a risk insur-ance adviser. His background alsoincludes financial planning, para-

planning and business develop-ment roles.

WEALTH management softwaresupplier, Bravura Solutions, hasappointed its chief financial officer,Rebecca Norton, to the board ofdirectors.

Chairman and interim chiefexecutive officer, Brian Mitchell,said Norton, who will be an exec-utive director, had been instru-mental in creating financial stabil-ity within the company since shejoined in 2009.

Prior to Bravura, Norton had adual role of chief financial officerand chief operations officer in the

Asia Pacific division of SAP.She had also worked at Oracle

Corporation in Europe and Asia,as well as other organisations,garnering over 18 years experiencein the information technologyindustry.

THE Australian and New ZealandInstitute of Insurance and Finance(ANZIIF) has announced theappointment of Christopher Trott as its general manager ofinformation technology and e-business, to assist the Institute inimplementing its online strategy.

This newly created positionwould help drive ANZIIF’s online

membership services and educa-tion delivery plans over thecoming year.

The institute said Trott had expe-rience in strategic analysis, informa-tion structure and function design,risk and security audit and analysis,usability and e-learning.

He had previously worked forNational Australia Bank as thedelivery manager for personalbanking channels, and ANZPrivate Bank as the manager ofbusiness systems.

ANZIIF chief executive officer,Joan Fitzpatrick said Trott wouldbe instrumental in assisting theinstitute with developing newservices.

Move of the weekRUSSELL has announced the appointment of John Nolanas practice development manager, intermediaries. Nolan willbe responsible for rolling out the new service in the localmarket. He has 18 years of financial services experience,including head of advice capability at ipac securities andsenior positions with AMP Financial Planning and AsgardWealth Solutions. His focus at Russell will be on developing,delivering and implementing effective practice managementsolutions to advisers, licensees and key clients.

Russell’s managing director for retail investment services,Patricia Curtin, said the changing regulatory landscape madethe introduction of the service all the more relevant.

“We are committed to supporting advisers in this processand are confident John has the experience necessary toprovide them with the right tools for success,” Curtin said.

John Nolan

““OUTSIDERhas always wonderedwhy financial advisers feel like it’sso hard to break out of the nega-tive stereotype that has themlumped in with used car sales-men as shonks who can’t betrusted – but a recent report on apopular nightly current affairsprogram may have helped toshed some light.

Being something of an elitistwhen it comes to journalism,Outsider obviously gets most ofhis news from Australia’s lastgreat bastion of quality inde-pendent reporting – TodayTonight. He was particularlyenthralled by a recent storyabout a financially challengedcouple who struck it rich with a

$3.6 million Keno win.Outsider really felt for the

couple, who, according to thereporter were feeling “pressuresfrom financial advisers, realestate agents and, indeed, a tugof war with family” who werewondering “when am I going toget my share?”

It really got Outsider thinking:

those darned advisers, alwaysafter their cut. Seriously, if acouple of people in a financial-ly precarious position strike itbig, and decide they want tospend their windfall on luxuryapartments, sports cars andholidays, that’s their business.

Surely they don’t need anadviser sticking his or her nosein? Doubtless they’ll be able tolook after their family, ensurethemselves financial security anda comfortable retirement andachieve all of their lifelong goalsnow with no outside assistance.

Particularly with the helpfuladvice of the Today Tonightreporter, who suggested theycould “spend $2 million on anapartment [by the beach] andhave $1.6 million left over”,before adding that “now all theyneed to do is spend, for the restof their lives”.

With advice like that, whoneeds to pay for an adviser?

Outsider


“I call it the US credit crisis –

not the global financial crisis –

because it was the US’s fault.”

Equity Trustees head of funds

management Harvey Kalman assigns

blame for the GFC at the Deloitte

funds management breakfast.

“As a property portfolio

manager, excitement is not

generally encouraged.”

Legg Mason’s head of property

securities Ashton Reid prefaces his

excitement about their product with a

warning.

“And you’re looking for

investment opportunities

because...?”

Platypus chief investment officer Don

Williams tries to understand the logic

for investing in Japan.

Out ofcontext

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Have you been playing

just one of our strings?

Unmasking atthe Masquerade

Tabloid advice

OUTSIDER does enjoy a bit of glitz andglamour and so, it seems, does MoneyManagement’s managing editor, MikeTaylor, who was seen rubbing shoulderswith some of the industry luminaries whoattended the eMerge Foundation’s Mas-querade Ball at Sydney’s Sofitel Wentworthearlier this month.

As Outsider discovered, the eMergeFoundation has garnered the support ofsome serious financial services identities,including Stephen van Eyk, Ian MacRitchiefrom IMR Financial Advisors, Lonsec’sSteve Newnham, Tyndall’s Garth Hobartand a plethora of other funds manage-ment and advisory identities.

Outsider noted that while MacRitchiespent the early part of the eveningbehind an ornate mask, Taylor and vanEyk eschewed such devices and decided

to go au naturel.The night proved to be a major success

with the 420 guests raising $102,000 tosponsor teaching scholarships in East Timorbut what Outsider found very impressivewas the number of financial services typeswho found themselves being increasingly

unmasked as the night progressed.He was particularly impressed by the

manner in which no one immediatelyrecognised brillient’s Graham Rich – some-one who Outsider reckons should be aboutas easy to disguise as a dreadnought in ayacht marina.

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

The usual suspects: Stephen van Eyk, Mike Taylor, Ian MacRitchie and Steve Newnham.

Money Management (19 May, 2011)

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Transcript of Money Management (19 May, 2011)