Money Management (May 12, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

MORE than 90 per cent of financial plan-ners responding to a Money Managementsurvey believe that the Government’scurrent Future of Financial Advice (FOFA)changes will have a negative impact ontheir businesses.

The survey, conducted over two dayslast week, revealed overwhelming oppo-sition to the key elements of the FOFAchanges – with particular emphasis onthe imposition of two-year opt-inarrangements and a total ban oncommissions on the sale or life risk prod-ucts within superannuation.

Nearly 80 per cent of respondents tothe survey described themselves as beingindependent financial advisers.

What little support existed for theFOFA changes was strongest amongthose respondents describing themselvesas being bank-aligned or connected toan industry superannuation fund.

The only element of the FOFAproposals to extract an element ofsupport from planners was the intro-duction of a ‘best interest’ requirement,with 42 per cent of respondents nomi-nating it as capable of having a benefi-cial effect on their businesses.

Asked which of the FOFA proposalswould have the most negative impact ontheir businesses, 58 per cent of respon-dents nominated the two-year opt-inarrangements, while 31 per cent nominat-ed the ban on commissions on life riskproducts sold within superannuation.

Despite 42 per cent of the respondents

suggesting that the ‘best interest’ require-ment would have a beneficial impact ontheir businesses, 92 per cent said they didnot believe the financial planning indus-try would be improved by the introduc-tion of the FOFA changes.

What became clear from the surveywas that a significant number of respon-dents did not believe the organisationsrepresenting the industry had done agood job in dealing with the FederalGovernment and appropriately influenc-ing its approach to FOFA.

When asked which organisations hadbest represented their interests with respectto FOFA, just over 50 per cent nominatedthe Association of Financial Advisers (AFA),while around 30 per cent nominated the

Financial Planning Association.There was no support among respon-

dents for the efforts of the FinancialServices Council.

A common theme in the commentsattaching to some survey responses wasthat the FOFA changes were largelyinspired by the industry superannuationfunds and that, ultimately, the changeswould not achieve the outcomes beingpursued by the Government.

A small number of respondents arguedthat the changes would create a divide inthe industry with financial advisersproviding comprehensive advice whilethe banks, major institutions and indus-try funds would provide single-issueadvice.

By Ashleigh McIntyre

A LEADING financial planning spokespersonhas said that the Future of Financial Advice(FOFA) reforms will push wealth manage-ment groups into the old ‘one-stop-shop’business models of the 1990s.

Fiducian managing director Indy Singh hassaid that the ‘al l - in -one’ model beingadopted by several groups is nothing new,but is simply history repeating itself, withFOFA creating new opportunities to consoli-date.

One such group is Yellow Brick Road(YBR), the new wealth management ventureby Mark Bouris.

By offering mortgage broking, financialplanning, accounting and insurance brokingall under one roof, Bouris says his licenseescan increase their revenue streams whiledoing business more efficiently.

Licensees do not need to know how todo all of those things in order to open abranch. Rather, all of the accounting andfinancial planning is done from head office,while the licensee gets payment for origi-nating the client.

According to Bouris, YBR takes the non-revenue earning hours away from licenseesand does the work out of head office.

“We’ve basically deconstructed how finan-cial planning is normally done and we’vebuilt economies at a head office level to

Planners reject FOFA One-stop-shopmodel returns

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Vol.25 No.17 | May 12, 2011 | $6.95 INC GST

By Milana Pokrajac

THE structure of agribusiness managedinvestment schemes (MIS) would need tochange radically before they become attrac-tive again to financial advisers, according toProfessional Investment Services (PIS)managing director Graeme Evans.

Furthermore, agribusinesses would haveto be “well diversified” with “substantialfunds under management” and institution-al ownership to complement retail investors,he said.

PIS had taken off all agribusiness MISsfrom their Approved Product List (APL) inMarch last year following the collapse ofTimbercorp and Great Southern, announcingthey would review the position in 12 months.

However, those products have not yetearned their spot on the dealer group’s APL,with Evans saying he did not want investment

schemes to rely on next year’s investments to“pay the bills for this year”.

“I think it is unfortunate that there are acouple of reasonable players like Macquar-ie and TFS who are collateral damage inrespect to the industry, but I think the risks

are far too great to put our toes back in thewater,” Evans said.

Managing director of researcher AdviserEdge, Shane Kelly, agreed the marketrequired the next generation of MISs in termsof the structures and protections that are putin place.

“Until the market settles down and thefailed projects are either restructured orpurchased by other investment houses, thefocus won’t come on to MISs,” Kelly said.

The researcher expected the agribusinessMIS inflows to be around $80 million thisyear, whereas that figure three to four yearsago was over $1 billion.

However, Adviser Edge is seeing theremaining players in the market increasing-ly focus on investor protection and “puttingin place structures that are more likely toallow the projects to actually reach theirconclusions.”

Nevertheless, neither Kelly nor Lonsec’shead of agribusiness research Jim Blackburnanticipated that the agribusiness MIS sectorwould bounce back to its pre-global financialcrisis position any time soon.

Lonsec is not covering the agribusinessMIS this year, due to “structural and corpo-rate issues” within the sector yet to beresolved, according to Blackburn.

However, he said the model was still sustain-able, as long as it was used only as part of thefunding, instead of being the only or the domi-nant form of agricultural asset and operationsfunding – supporting Evans’ claim.

“Over time, we expect things like [direct]land ownership and other structures becomemore evident,” Blackburn said.

Analysts also agreed that greater invest-ment in the sector would not occur until theaftermath of the failed schemes hadcompletely played itself out.

Agri-MIS still too risky for advisers

Shane Kelly

Continued on page 3

The two-year opt-in

The banning of all

commissions within

superannuation

The banning of

volume-related

bonuses

Other

3%8%

31%58%

Graph Which proposed FOFA change will have most negative impacton your business?

Source: Money Management

Watch the watcherI

f the Australian Securities and Invest-ments Commission (ASIC) did notreceive more funding from lastTuesday’s Budget, then it can expect

to do so in subsequent years as it takes onmore responsibility for delivering andoverseeing the implementation of theGovernment’s Future of Financial Advice(FOFA) changes.

It is axiomatic of Government policychanges that there are always winners andlosers, and ASIC can be counted a winnerbecause of the centrality of its role – some-thing which will create the need for morespecialist staff and therefore a larger shareof the public purse.

Viewed objectively, ASIC has beentreated highly fortuitously in the FOFAprocesses. Where many Governmentdepartments and agencies are treated assimple delivery conduits with respect topolicy, ASIC has enjoyed a seat at the tableas not only a regulatory delivery conduitbut also a ‘stakeholder’.

The net result has been to significantlyamplify the regulator’s voice. ASIC has notonly been able to have a voice in the policydevelopment which will ultimately betranslated into legislation, it will also havea voice in translating that legislation into

the regulations it will police.There will be those who argue that there

is no great harm in a Government regula-tory agency providing its input and expert-ise, but this overlooks the reality that suchagencies are just as capable of pursuingself-interested agendas as any of the majorindustry groups.

In circumstances where ASIC’s agendahas, over the years, been very much a reflec-tion of those leading the organisation,financial planners would do well to reflecton the background of the man announced

by the Government last week to succeedTony D’Aloisio as chairman – GregMedcraft.

Planners would instantly recogniseMedcraft as the ASIC Commissioner direct-ing the latest shadow shopping exercisewithin the financial planning industry butthey should also know that he has a strongbackground in securitisation and struc-tured investments.

Medcraft’s background suggests thatwhile he may have a good understanding ofsome of the more complex products in themarket, he will not necessarily have a goodfeel for the environment in which inde-pendent financial advisers are required towork.

As well, in circumstances where shadowshopping appeared not to be a priorityduring D’Aloisio’s period as chairman, theindustry needs to determine whetherMedcraft has any personal ownership ofthe current shadow shopping exercise.

Where the Government’s approach toFOFA has given ASIC a high level of influ-ence, the views and cultural approach ofthe man leading the organisation will bevital.

– Mike TaylorAverage Net DistributionPeriod ending Sept '1010,183 ABN 80 132 719 861 ACN 000 146 921

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“ Planners would instantlyrecognise Medcraft as theASIC Commissionerdirecting the latest shadowshopping exercise. ”

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By Caroline Munro

FINANCIAL advisers may see the advan-tages of advising on exchange-traded funds(ETFs), but the increasing popularity of ETFsis being driven by self-directed investors,according to Investment Trends research.

Investment Trends’ 2010 AlternativeInvestments Report revealed that 70 per centof ETF investors were self-directed and notinfluenced by an adviser.

The research was conducted in Novem-ber and December 2010, and surveyed 7,811respondents investing in alternative invest-ments. Investment Trends analyst RecepPeker said Australian investors were increas-ingly embracing alternative investments asthe number of investments grew 14 per centto 330,000 in the 12 months to December2010, and the current allocation to alterna-tive investments within their investment

portfolios had increased from 16 per centthe previous year to 18 per cent.

The most popular alternative investmentswere listed investment companies (LICs),followed by ETFs, and commodities andresource funds, Peker said. While thenumber of investments for ETFs and LICswere similar, the number of investors usingETFs and LICs grew by 39 per cent and 26per cent, respectively.

Peker said in 2008 financial planner inter-est in ETFs was increasingly due to diversi-fication (30 per cent) and low cost (31 percent).

“But that really shifted significantly in2010, when 14 per cent stated that the mainbenefit of ETFs was diversification and 44per cent were saying that the main benefit ofETFs was low cost,” he said.

“Greater pressure has come on fees fromclients, but also as advisers move to a fee-

for-service model it’s harder to justify higherfees. It’s more a cost awareness thing.”

From an investor perspective, diversifi-cation was considered to be the main benefitof ETFs, said Peker. Two-thirds of investorssurveyed felt that diversification was themain reason for investing in ETFs, while halfsaid the reason was low cost.

Advisers have not played a role in theincreasing interest in ETFs from investors,even though they themselves are increas-ingly seeing the low cost and diversificationbenefits, said Peker. Only 10 per cent ofrespondents investing in ETFs stated thatthey were being advised by a financialplanner and a further 10 per cent by stockbrokers. Some 37 per cent stated that noadviser played a part in their decision toinvest in ETFs, while an additional 33 percent stated that they did not use financialplanners.

www.moneymanagement.com.au May 12, 2011 Money Management — 3

News

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Advice plays small role in ETF popularity

increase ef f ic iency,”Bouris said.

To Bouris, a branchmanagers’ value comesin “gaining clients, man-aging clients, having arelationship with clientsand fact finds”.

“Most of them candeal with mor tgages,some can do life insur-ance, while the rest wedo at head office,” headded.

Since its inception in2007, YBR hasattracted 61 licenseesand has set a target ofsigning an average ofone branch per weekover the next 12months.

Another group that islooking to dabble infinancial planning is themor tgage aggregator,Vow Financial.

Vow Wealth waslaunched to enable Vowbrokers to diversify theirrange of ser v ices tocl ients, develop newincome streams andhelp “quarantine” theirclients from financialplanners who have been“encroaching on theirterritory”, according toVow chief executive offi-cer Tim Brown.

It said that while 70per cent of its brokerswould never be plannersand would simply act asreferrals, 20 per cent

wished to offer limitedadvice, whi le theremaining 10 per centwanted to become qual-ified financial planners.

Singh said that whilethese businesses wouldbe in direct competitionwith financial planningbusinesses l ike hisown, he encouraged themove so long as thosegiving advice were qual-i f ied and proper lytrained.

“It’s good that theycan offer an extendedser vice. It’s good forthem and it’s good forthe industry, I say.”

“What’s wrong withhaving a few more play-ers in the game? Morepeople get advice andas long as it’s properlydone and it’s good qual-ity why is that wrong?Bring it on,” Singh said.

Continued from page 1

Recep Peker

Tim Brown

One-stop-shopmodel returns


News

Australian equities managers fall shortONLY 28 per cent of the Australian equityfund managers reviewed by van Eyk havereceived a recommended rating, theresearcher stated. None of the 65 managersreviewed received van Eyk’s ‘AA’ rating in itsAustralian equities core and concentratedreviews, while 12 core strategies and sixconcentrated strategies received an ‘A’ rating.

“We are firmly of the view that Australianequities managers need to more activelyengage or hire independent industry experts

in order to increase the accuracy of theirinvestment predictions across varioussectors,” said van Eyk senior investmentanalyst, Matthew Olsen.

“Disappointingly, few Australian equitiesmanagers currently do this, even thoughmost can certainly afford to given the size oftheir annual fee intake.”

He added that van Eyk would prefer to seemanager fees more actively reinvested intoactivities that enhanced returns for the

underlying investor. “We see broker research as providing a

valuable service to the Australian market, butfund managers need to go well beyond merereliance on broker research in order to differ-entiate from their peers. Some managersdemonstrated these insights and were ratedfavourably in the review process.”

Olsen said managers were assessed holis-tically. Only 28 per cent received an ‘A’ ratingbecause most managers fell short in certain

areas. He said on average ‘style neutral’managers showed a greater propensity toconduct deeper research. He added that whilemanagers had a diverse range of views on themarket, there were some sectors where thesimilarity of viewpoints was striking.

“The most common positions as at thereview date were that managers were over-weight the consumer discretionary sectorand underweight both the property andconsumer staples sectors,” he said.

By Caroline Munro

AMP Horizons Financial Planning Academy hasevolved to become a national centre responsiblefor not only recruitment and training of new can-didates, but also the ongoing education anddevelopment of its entire financial planner base,according to Horizons director Tim Steele.

Steele said a strategic review of AMP’s financialplanning advice and services business last yearincluded all of its licensees and support areas,andresulted in the broadening of Horizons’ scope.Horizons is now responsible for the delivery oftraining and education of all AMP planners.

Steele said the change had enabled AMP andHorizons to leverage best practices and havereal synergies across the group.

“We’ve got a much better structure and theopportunity to do something really special inthat particular space,” he said.

A single education and development strategydoes not currently include AXA financial plan-ners, although Steele said this was somethingthe group was currently considering.

“We haven’t made any decisions with respect tohow Horizons may support any AXA licensees,” hesaid. “There’s a lot of work being done by ourintegration team to identify what areas we wouldlook to leverage. We would like to think that ourtrack record is such that Horizons will be one ofthose areas that would be of benefit morebroadly.”

The Horizons Academy attracts candidatesfrom all over the country and 327 graduates

and 53 new AMP practices have come out of itso far. Steele said there was still a long way togo and that the academy would continue toevolve. For example, although higher than theindustry average, only 27 per cent of femaleswere coming through the Horizons program,Steele said. Horizons was currently researchingwhat could be done to build awareness aroundfinancial planning and make it more attractiveas a career for successful professional women,he added.

Steele said women particularly tended tomake excellent financial planners as they weregenerally more empathic and better listeners.These attributes were important considering that50 per cent of the Horizons training programrevolved around soft skills, he said.

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News

By Mike Taylor

NATIONAL Australia Bank(NAB) hasturned in a strong half-year perform-ance, announcing to the AustralianSecurities Exchange (ASX) lastweek a 15.9 per cent increase innet profit of $2.428 billion.

The company’s cash earningswere up 21.7 per cent to $2.7 bil-lion, which it attributed to market

share gains and disciplined margingains and cost management.

Like all the other major banks,NAB announced a substantialreduction in provisioning for badand doubtful debts but referencedthe impact of recent natural disas-ters in both Australia and NewZealand.

Looking at its wealth manage-ment interests, the NAB announce-

ment said that MLC and NABWealth had grown its financialadviser numbers by 241 and hadprogressed the integration of Aviva.

It said it now had a portfolio ofinterests in 10 boutique investmentmanagement firms through nabIn-vest.

Drilling down on the perform-ance of MLC and Nab Wealth, thecompany said cash earnings being

interest earnings on shareholders’retained profits increased by 2.3per cent to $270 million, with themain contributions being net inter-est income, investment perform-ance and growth in average in-forcepremiums.

It said funds under managementas at 31 March had increased by6.8 per cent to $121.9 billion,reflecting improved equity markets.

NAB half year report sees profit up 15.9 per cent

ING Investment Management Limited ABN 23 003 731 959 AFSL 233793 (INGIM) is the responsible entity of the ING Wholesale Global Property Securities Fund (Fund) ARSN 115 202 358. This document has been prepared without taking into account any person’s objectives, financial situation or needs. Investors should refer to the latest offer document for the Fund before making any investment decision. Standard & Poor’s Rating: Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au. Lonsec Rating: The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned November 2010) for the ING Wholesale Global Property Securities Fund) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial products. They are not a recommendation to purchase, sell or hold the relevant products, and you should seek independent financial advice before investing in these products. The ratings are subject to change without notice and Lonsec assumes no obligation to update these documents following publication. Lonsec receives a fee from the fund manager for rating the products using comprehensive and objective criteria. Zenith Rating: The Zenith Investment Partners (“Zenith”) ABN 60 322 047 314 rating (Recommended February 2010) for the ING Wholesale Global Property Securities Fund referred to in this document is limited to “General Advice” (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of these financial products on this basis. It is not a specific recommendation to purchase, sell or hold the relevant products, and Zenith advises that individual investors should seek their own independent financial advice before investing in these products. The rating is subject to change without notice and Zenith has no obligation to update these documents following publication. Zenith usually receives a fee for rating the fund manager and products against accepted criteria considered comprehensive and objective.

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Cameron Clyne

Good quarterfor hedge fundsBy Chris Kennedy

HEDGE funds performedstrongly across the board inthe March 2011 quarter, withstrong inflows and positivereturns across most of thesector.

Hedge funds overall wereup 2.2 per cent for thequarter, according to theDow Jones Credit SuisseHedge Fund Index quarterlyreview, with eight out of 10sector strategies finishing inthe black.

The industry recorded netinflows of $10.1 billion,although funds with lessthan $500 million in assets,actually experienced netoutflows as larger fundsgathered $12 billion duringthe quarter.

The best performing strat-egy was convertible arbi-trage, which gained 4.5 percent over the quarter asmanagers benefited fromlarge institutional investorsseeking to increase theirexposure in the space.

Equity market neutralgained 3.5 per cent, and eventdriven gained 3 per cent.

Between inflows andperformance gains, totalindustry assets rose to around$1.8 trillion by the end of thequarter, up from $1.7 trillionat 31 December, 2010.

The favouritism shown tolarger funds by investors was“perhaps the most tellingindication of currentinvestor sentiment”, accord-ing to the report.

Large funds saw netinflows in each month of thequarter, while mid-tier funds(those with between $150million and $500 million)and smaller funds each sawnet outflows in each monthof the quarter. This is a clearindication of the increasingpreference for larger scalemanagers that have theestablished infrastructureand resources sought byinvestors, the report stated.

News

By Mike Taylor

WESTPAC has joined the line-upof major Australian banks report-ing solid earnings and profitsacross the first half of the currentfinancial year, recording a 38 percent increase in statutory net profitto $3,961 million on the back ofsolid cash earnings and signifi-cantly lower impairment charges.

Westpac chief executive, Gail

Kelly described the result as“healthy” and a reflection of thebuilding of momentum across thebusiness.

“All divisions delivered improvedfinancial results over the secondhalf of 2010 – something we havenot seen since before the globalfinancial crisis,” she said.

“The performance of WestpacRetail and Business Banking wasparticularly strong, with the bene-

fits of our Westpac Local invest-ment clearly emerging. BT Finan-cial Group also performed well,with good flows into our invest-ment platforms lifting wealthincome, which more than offsetthe cost of higher insurance claimsrelating to natural disasters,” Kellysaid.

Drilling down on the company’sdirection through the six-monthperiod, the Westpac results

announcement made clear thatwealth management had been apart of its so-called ‘multi-brand’strategy and made specific refer-ence to “further extending distri-bution of wealth and insuranceproducts into St George Bank andindependent financial plannernetworks”.

It said wealth management andinsurance income had increasedby $44 million, or 6 per cent.

Further CGTrollover reliefnecessaryBy Ashleigh McIntyre

THE Government hasannounced a three-monthextension of the capitalgains tax (CGT) rolloverrelief for merging super-annuation funds, but atthe same time ruled outthe possibility of perma-nent relief.

The new deadline willbe 30 September, 2011,which is intended to givethose funds currently inthe process of mergingtime to complete mergersand still qualify for thetemporary loss relief.

While the decision hasbeen welcomed by indus-try associations, manyare warning that it doesnot go far enough, and itwill be members who endup footing the bill.

The Australian Instituteof Superannuation Trusteeschief executive FionaReynolds said that threemonths did not give merg-ing superannuation fundsenough time to properlyplan and complete mergers– especially when they wereawaiting details of thecoming Stronger Superreforms.

Reynolds said shewould be recommendingto the government amore appropriate date of1 July, 2013, the date atwhich the default MySu-per funds can be offeredfor the first time.

The Association ofSuperannuation Funds ofAustralia chief executivePauline Vamos said thatwhile she was pleasedthe government chose tolisten to the industry, shebelieved a permanentCGT rollover relief wouldbe of greater benefit tomembers.

Westpac registers healthy six-month performance

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News

Australians better served bylift in compulsory SG: ASFA

By Mike Taylor

THE Association of Superannuation Fundsof Australia (ASFA) appears to have aban-doned the notion of ‘soft compulsion’,arguing that voluntary savings beyond thesuperannuation guarantee (SG) will notsucceed in delivering Australians a comfort-able retirement.

In a report issued this week, ASFAconcludes that compulsorily lifting the SGto 12 per cent is necessary because “the avail-able evidence suggests” voluntary contribu-tions will not achieve the desired outcomes.

ASFA policy had previously argued for“soft compulsion” as a means of dealing withAustralia’s retirement incomes shortfall.

“Despite significant tax incentives formarking voluntary superannuation contri-butions, only around 20 per cent of employ-ees do this,” the report said. “As well, the inci-dence of making salary sacrificecontributions only really begins to pick up

after age 45.“Compulsory superannuation contribu-

tions are both needed and wanted. Leavingdecisions about the level and timing ofcontributions to individuals would mean thegreat bulk of Australians would not makeadditional contributions,” it said.

The ASFA report suggested that for theminority of Australians that did make addi-tional contributions, these would generallybe made later in life when the impact on finalretirement savings would be less.

In pointing to the report findings, ASFAchief executive, Pauline Vamos said itconfirmed that Australians would be betterserved by a lift in the compulsory SG thanunder the recommendations of the HenryTax Review.

Indeed, the ASFA report analysis of theHenry Review pointed out that its recom-mendations were based on interactions witha proposed personal income tax system thatwas substantially different to the current oneand which the Government had ruled outadopting.

As well, it said the Henry recommenda-tions with respect to superannuation wouldresult in substantial ongoing costs to taxrevenue, individuals having to pay tax out ofwhat was previously take-home pay, andadministration complexity.

PaulineVamos


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New manager Avoca launched By Caroline Munro

FORMER UBS small capspecialists John Campbelland Jeremy Bendeich have launched AvocaInvestment Managementin partnership withBennelong Funds Manage-ment.

Avoca is majority-ownedby Campbell and Bendeich,and Campbell will serve as

managing director andportfolio manager, whileBendeich has taken on theroles of chief investmentofficer and portfoliomanager.

Michael Vidler, anotherformer UBS portfoliomanager, has joined Avocaas senior investmentanalyst.

Campbell stated that thepartnership with Benne-

long would enable the smallcap manager to be nimbleand proactive, whilesupported by the strengthand backing of the Benne-long team.

Bennelong FundsManagement chief execu-tive officer, Jarrod Brown,said Bennelong had beenlooking to expand into thesmall caps sector for sometime.

TOWER Australia Limited has announcedthe name change that follows its acquisi-tion by big Japanese insurer, Dai-Ichi: TALLimited.

Tower, which originated out of a NewZealand Government department sellinglife insurance policies in 1869, wasrequired to cease using the Tower name inNovember this year as part of an agree-ment entered into with the now-separateNew Zealand company five years ago.

Commenting on the name change,Tower chief executive Jim Minto said hebelieved the new name was sharp and

strong and resonated positively with manystakeholders.

TAL is the code used to define the com-pany on the Australian SecuritiesExchange (ASX).

“TAL has a close positive associationwith our company’s strong reputation andperformance in the Australian market,”he said.

Minto said the new name would be pro-gressively incorporated into the opera-tions of the business up until November,when the current licence to use the Towername will expire.

Tower becomes TAL Ltd


News

Vow promises assistance to brokersBy Caroline Munro

MORTGAGE aggregator VowFinancial has entered the finan-cial services sector to help brokers“quarantine” their clients againstfinancial planners, according tochief executive Tim Brown.

Vow Financial has entered intoa joint venture with a financialplanning firm to form Vow WealthManagement, providing brokerswith another opportunity to diver-sify their range of services anddevelop new income streams,Brown stated.

“There’s also been a sentimentamong brokers that financial plan-ners have been encroaching ontheir territory, and as such webelieve this strategy will helpbrokers quarantine their clients,”he added.

Brown said the joint ventureachieved the broker’s long-termgoal to enter the financial plan-ning space, especially regardingproperty.

“It will enable our brokers, ifthey choose to do so, to fill in allthose voids involving propertytransactions, such as risk insur-

ance, investment advice andsuperannuation,” he said.

Brown stated that the jointventure would mean that themajority of brokers would contin-ue to focus on home mortgages,offering referral services to itsaligned financial planners, whileabout 20 per cent would providelimited advice and 10 per cent ofbrokers would receive assistancefrom Vow Wealth to qualify asfinancial advisers.

Vow Wealth will be led by newlyappointed national sales managerJustin Dale.

Wealth management growth set to improveBy Mike Taylor

THE ANZ Banking Group has specifi-cally earmarked Australian wealthmanagement as a growth proposition,after reporting a solid first half statu-tory profit of $2.7 billion.

However, the big banking groupacknowledged that its bottom line hadbeen crimped by the natural disas-ters that had occurred in both Aus-tralia and New Zealand.

ANZ chief executive, Mike Smith,said the result was in line with thecompany’s first quarter trading updateand demonstrated good underlyingmomentum in its core businessesand continued progress with respectto its strategic goals.

Looking at the company’s Australianoperations, he said that profit beforeprovisions had increased by 4 percent but added that the net profit hadbeen impacted by a 69 per cent

increase in the provision charge,largely due to the impacts fromsevere weather events.

Referring directly to the wealth busi-ness, Smith said it was making goodprogress with respect to the OnePathintegration program and that the cost

to income ratio had improved by 60basis points with management havingbeen strengthened with new appoint-ments to leadership roles.

Those appointments included therecruitment of former Colonial FirstState general manager of advice, PaulBarrett.

He said wealth management growthrates were expected to improve as theintegration process (with ING) took hold.

“The focus is on distribution efficiencyand developing products which moreeasily integrated into the bank channeland work well in a simpler superannua-tion environment,” he said.

While being upbeat about the out-look for ANZ, Smith said the operatingenvironment continued to presentchallenges, with parts of the Aus-tralian economy having hit a flat spotwith consumers and businessesbecoming more conservative after thefinancial crisis.

Time is rightfor unlistedinfrastructure

By Chris Kennedy

CURRENT market volatility and the threatof inflation combined with increasingdemand for private sector involvement ininfrastructure development mean now isa good time to invest in unlisted infrastruc-ture, according to Mercer.

Private infrastructure offers protectionfrom volatility due to its decreased corre-lation with equity markets, and its infla-tion-linked returns also protect from thethreat of inflation, both of which areappealing in the current global marketconditions, according to Mercer’s chiefinvestment officer and leader of its portfo-lio construction team in Asia Pacific, RussellClarke.

Although Australia is an exception, thegovernments of many developed marketsare highly indebted and will increasinglybe looking to the private sector to becomemore involved in the provision of publicinfrastructure, Clarke said.

In the coming years, Australians will getaccess to a variety of interesting assets thatthey may not have got exposure to histor-ically, allowing investors to step up in bridg-ing the capital shortage, he said.

And although the Federal Governmentis in a good position, many state govern-ments may be making more infrastructureassets available as they are keen to maintaintheir credit ratings, he said.

Mercer has significantly boosted itsexposure to infrastructure assets over thepast six months, acquiring stakes inGerman gas transmission utility Thyssen-gas and Czech transmission towers busi-ness Ceske Radiokomunikace throughunderlying manager Macquarie SpecialisedAsset Management.

Mercer also seeded Westbourne Capitalin December to provide exposure to a rangeof investments, such as the port assets ofthe Newcastle Coal Infrastructure Group,Mercer stated.

“The winners in today’s infrastructuremarket will be investors who pay sensibleprices based on realistic assumptions forfuture growth and inflation, at appropriatediscount rates,” Clarke said.

“Those who can strike the optimalcapital structure for an asset and have asuperior ability to manage it effectivelyonce acquired will be successful investors.”

Emerging markets fundaddition to Realindex COLONIAL First State subsidiaryRealindex Investments has addedan emerging markets fund to itssuite of fundamental indexingproducts, which re-weight stockswithin a portfolio based on funda-mental measures of a company’ssize.

These factors are derived fromthe past five years of accountingdata from a global database ofcompanies, with companies thenweighted according to dollar sales,dollar cash f low and dollaramount of dividends, as well asthe company’s actual book value,according to Realindex chief exec-utive Andrew Francis. The portfo-lio is then rebalanced quarterly,he said.

Traditional indexing is inefficientin that it results in a portfolio beingoverweight to overvalued compa-nies and underweight to underval-

ued companies, causing returndrag when prices revert, Francissaid.

The Realindex emerging marketsfund holds around 400 stocksacross 21 countries, holding onlystocks in markets that are definedas ‘emerging’ according to theMSCI Index, although Francispointed out that the individualstocks do not mirror those in theMSCI Index.

He cautioned that this approachcan and will underperform a capweighted index in a growth orient-ed bubble-type market but addedthat in a lower return environmentsuch as the one we are currentlylooking at, removing that returndrag can have significant long termreturn benefits.

The fund is aimed at advisersand end retail clients, as well asinstitutional investors.

Fiduciary duty notthe best approachBy Milana Pokrajac

NEWLY appointed head of the UK equivalent of theAustralian Securities and Investments Commission,Martin Wheatley, has hinted that fiduciary duty might notbe the optimal approach to investor protection in theupcoming reforms.

Speaking at the Australian Centre for Financial Stud-ies lecture, Wheatley said enhancing investor protectionwas pivotal to the reform process, but that a betterapproach was needed since ethical behaviour couldnot be legislated.

“[Rebuilding] investor confidence … will require greateruse of judgement and a forward- looking perspective,and pre-emptive actions to stem any potential build-up ofrisk before significant damage is done,” he said.

“Financial markets are about managing and pricingrisk, not eliminating it,” Wheatley added.

Wheatley, who will soon become the head of the UKFinancial Conduct Authority, had come out in support ofgreater regulatory intervention in retail and wholesalefinancial products, noting regulators and governments arenow taking a more ‘considered’ approach to reforms.

Tim Brown

Russell Clarke

Mike Smith

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News

By Mike Taylor

THE life industry should lookto develop a sustainablecommission model capable ofresolving the Government’sconcerns about conflict ofinterest, according to the chiefexecutive of TAL ( previouslyTower Australia Limited), JimMinto.

Commenting on the

Government’s release of theFuture of Financial Advicereforms, Minto said the liferisk industry could contin-ue to push back or it coulddevelop changes “that makethe model viable for thelonger term and attempt towin Government confidencein these”.

However, Minto said thatany rules developed by the

industry should be appliedboth inside and outside ofsuperannuation – somethingthat would remove concernabout unequal treatment andhelp ensure that underinsur-ance is not exacerbated.

Despite his calls for aproactive industry approach,Minto pointed to independ-ent research that had shownthat policy lapse rate had

been rising both inside andoutside of superannuation.

“An independent reportshows profi t reductionsacross the industry of $100mil l ion a year,” he said.“ This has created somesustainabi l i ty concer nsaround this model for theindustr y and, in t ime,potential cost increase forconsumers.”

IOOF acquiresPatron stakeBy Chris Kennedy

IOOF Holdings has acquired aminority stake in boutiquefinancial advice firm PatronFinancial Advice for an undis-closed sum, with the transac-tion to be completed in earlyMay.

Patron was established in2007, is based in New SouthWales and currently hasaround 50 advisers, accord-ing to IOOF.

Patron, which is currentlynon-institutionally owned, willretain its operational inde-pendence and existing man-agement team and board ofdirectors, IOOF stated.

IOOF’s general manager ofdistribution Renato Mota saidthat par t of IOOF’s growthstrategy involved aligning todealer or planning groups thatare also experiencing stronggrowth, and Patron fits the bill.

Patron had fairly aggressivegrowth targets over the nextthree years in terms ofadviser numbers and prof-itability, somewhere in theorder of 50 per cent, Motasaid.

IOOF had also supportedPatron since the group’sinception in 2007, he added.

The most important thing isthat IOOF had already devel-oped a relationship withPatron’s key management,Mota said.

“That is the cornerstone;we’ve got a high degree ofcomfort and confidence in themanagement and believe wecan work with them quiteclosely. It’s important to havethat respect,” he said.

“IOOF sees this as a win-win scenario for both parties.”

Patron’s Rob McCann saidthat Patron had grown stronglysince inception.

“The IOOF partnership willenable us to accelerate ourgrowth while offering our clientsthe best possible quality serv-ice, investment and life prod-ucts and research,” he said.

Model needed to reduce extent of underinsurance


Jim Minto


News

By Mike Taylor

AMP Limited has released its firstquarter cashflows report inclusiveof those for the now-merged AXAAsia Pacific Holdings (AXA APH)business and the data haspainted a very mixed picture.

The company announced tothe Australian SecuritiesExchange (ASX) last week thatAMP Financial Services net cash

flows for the first quarter hadbeen just $42 million, comparedto $236 million in the first quar-ter of last year “as higher cashinflows were offset by highercash outflows”.

The company said net cash-flows for AMP’s retail superan-nuation and pension businesswere up $23 million on thesame period last year, with cashinflows 30 per cent higher as a

result of higher rollovers intoAMP Flexible Super from newcustomers.

It said corporate superannua-tion net cashflows were $122 mil-lion, down $68 million on the firstquarter last year.

Looking at AXA APH, the AMPannouncement said AXA Aus-tralian wealth management hadexperienced a net outflow of$634 million.

It said platform net cashflowswere down $8 million on thesame period last year to $84 mil-lion, while cash inflows were up 9 per cent as a result of highersales in the Multiport self-man-aged superannuation offering.

However cash outflowsincreased 13 per cent due tohigher outflows from the Summitand North platforms.

It said advice net cash out-

flows were $184 million, downfrom a net cash inflow of $35million in the first quarter of2010.

The analysis said cash inflowsdecreased by 12 per cent andwere impacted by continued lowinvestor sentiment and a reduc-tion in Genesys adviser numbersresulting in lower inflows to thebadged wrap platform used byGenesys advisers, Solar.

BT Investment Management(BTIM) has recorded a stronghalf, reporting a 10 per centincrease in net profit after tax of$15.6 million.

BTIM chief executive EmilioGonzalez attributed the result toa higher market and continuedpositive institutional flows intothe BT core business.

The result saw the directorsdeclare an interim fully frankeddividend of 6 cents per share.

Announcing the result to theASX, the company said closingfunds under management as at31 March stood at $36.1 billion,compared to $36.3 billion at thesame date last year and $35.4billion at 30 September, 2010.

It said BTIM had recorded netoutflows of $0.8 billion in the sixmonths, primarily from twolower margin sources – theWestpac retail ‘legacy’ book andinstitutional cash.

Discussing the company’soutlook, the company said thewholesale market remained asector for the wealth manage-ment industry and affordedBTIM “substantial opportunitiesto grow revenue and margins”.

Gonzalez said the domesticeconomy was continuing toperform well with increasinginvestment in the resources sectorcontinuing to underpin growth.

“The structural fundamentalsof the fund management indus-try overall remain positivedespite the current trend forinvestors to favour defensiveassets, a trend which I believewill shift once better returns arerecorded in the riskier assetclasses,” he said.

Variable cashflow story for AMP and AXA Asia Pacific

Emilio Gonzalez

Solid half-year for BT

News

By Milana Pokrajac

THE financial planningindustry loses almost asmany advisers as it gainseach year, which explainsthe slow growth in advisernumbers over the pastdecade, according to recruit-ment specialist eJobs.

According to eJobs figures,

there were around 1,000financial planning rolesadvertised each month forthe past 12 months, while thefigures prior to the globalfinancial crisis were signifi-cantly higher. Job numbershave also risen 18 per centover the last quarter.

But eJobs managing direc-tor and financial planning

recruitment manager TrevorPunnett noted that while onewould suspect the financialplanning industry had grownmassively over the past tenyears, “the total number ofadvisers has only increased aflat 2 per cent a year”.

eJobs analysed publisheddata from Money Manage-ment and other trade publi-

cations and found thenumber of advisers in the top100 dealer groups has risenfrom around 13,000 in 2001to about 16,000 last year.

“We’re not far off losing thesame number of advisersthrough retirement or leavingthe industry than we are inwelcoming newcomers,”Punnett said.

He also referred to theshallow talent pool, as theproposed Future of FinancialAdvice reforms would forcepractices to recruit more staffjust to assist with additionaladministration work.

“We see a continuation ofsimilar employment levelsand increasing supply chal-lenges,” Punnett added.

Hedging reliefmitigates shortselling risksBy Ashleigh McIntyre

THE Australian Securi-ties and InvestmentsCommission (ASIC) hasgranted extended relieffor market makers wish-ing to hedge r isk byshort selling securities.

Naked short sellingwill now be allowed onsecur i t ies in theS&P/ASX300 index,where it was previouslyrestricted to those thatappeared in theS&P/ASX200 index.

ASIC stated thatwhile naked short sell-ing is prohibited in theCorporations Act,licensed market makershave been affordedrelief in order to allowthem to mitigate therisks involved in theiractivities.

A condition of the reliefis that market makersmust have reasonablegrounds to believe securi-ties lending arrange-ments can be put inplace to allow deliveryand market makersacquire or borrow suffi-cient products by the endof the day to ensure theycan deliver all productssold at the time deliveryis due.

For the addit ional100 stocks in theS&P/ASX300, ASICstated that it believesthe liquidity ease withwhich the marketmakers can cover shortpositions are broadly inl ine with the S&P/ASX200 index.

Hence, it anticipatesthis change in rules willhave little impact, withsufficient investor andmarket protections inplace.

Financial planning job growth stagnant, says eJobs


Trevor Punnett

Like most other financial advisers, Ihave been living in a state ofsuspended animation, awaiting theexact nature of the FOFA reforms.

Expecting the worst whilst hoping for thebest. Now that the reforms have beenannounced, it seems that some criticalmessages have simply not got through tothe people that matter.

The relentless campaign by the industrysuper funds has convinced the governmentthat if they ban commissions and rebatesand do everything they can to prevent advis-ers getting paid via deductions from aclient’s investments, everyone will livehappily ever after. In my opinion, thesemeasures are based more on politicalagendas than on the major underlyingissues. Furthermore, there is a series of‘inconvenient truths’ that are blatantlyobvious to financial advisers but have beeneither papered over or totally ignored.

Inconvenient truth number oneThe people most in need of financial adviceare working families with a mortgage to pay,kids to educate, elderly parents to look after,student children living at home. Thesepeople invariably have a cash flow problemalready. Given a choice between paying aninvoice and having the money deductedfrom their super account, does anyone reallythink that they would prefer to pay a bill?

Inconvenient truth number twoContrary to the industry funds and mediaravings, asset-based fees are not ‘commis-sion by another name’. Commissions arehidden payments to licensees by fundmanagers/platforms which the clientcannot access, even if they sack the adviser.Asset-based fees are mutually agreed, trans-parent fees paid from the client’s accountbalance which the client can turn off at anytime. The ‘opt in’ provisions are an unneces-sary, onerous and expensive impost which

will force many independent financial plan-ners out of business.

Inconvenient truth number threeSituations where Australian investors havelost lots of money have been caused bycriminal or fraudulent activity by licensees,or bad product design by manufacturers.None of the forthcoming legislationaddresses these. Commissions were often asymptom but not the underlying cause.

Inconvenient truth number fourLicensees are responsible for the trainingof their employees/representatives andhave absolute responsibility for theiractions and advice. In turn, these organisa-tions are regulated by ASIC which issupposed to make sure the licensees areoperating properly and identify any misde-meanours. If this system is not working, itwill not be fixed by banning commissionsand rebates.

Inconvenient truth number fiveRebates are paid by platforms to licensees,not financial advisers. In most cases finan-cial planners have no knowledge of exactlywhat is paid to their licensee. So how canthey possibly affect the advice? And thereare usually hundreds of products fromdozens of different fund managers listed onthe platform menu. A platform is not aproduct, it’s a supermarket.

Inconvenient truth number sixInsurance commission in super is usually arelatively small amount of money deduct-ed on an annual basis from a client’saccount. Insurance outside super is usuallya relatively large upfront commissionpayment with a relatively small amount paidannually. The former will be banned, thelatter will not. Ask yourself whether thismeasure ‘will see Australians receive advicethat is in their best interests’.

Inconvenient truth number sevenThe Industry Super Funds campaign hasdamaged the reputation of financial advisersto such an extent that many Australians havedecided to set up their own self-managedsuper funds. Most of these people do not havethe time or the expertise to run their ownfunds, are doing it ‘on the cheap’ and a size-able proportion are non-compliant. Why arethese funds not regulated properly?

Inconvenient truth number eightThe average financial adviser does not makemuch money. Do Bill Shorten and hiscohorts know that the cost of running apractice is rarely less than $250,000? Officerental, support staff, professional indemni-ty insurance, compliance costs, research,licensee fees, IT, accounting, auditing, etc,etc. The majority of these costs have to bepaid monthly. The Industry Funds campaigngives people the impression that financialadvisers are making millions by cheatinginnocent people. The average superannua-tion balance is barely $20,000 and thecommission is at best 0.6 per cent perannum. This adds up to the princely sum of$120 a year. Given that the average retire-ment age is 57, has anyone actually both-ered to look at how realistic the ‘comparethe pair’ statistics are?

I accept that commissions are bad andshould be banned. I accept that many financialplanners focus exclusively on selling product,and this is also bad. However, our professionhas the potential to do an enormous amountof good. To help people with their cash flow,debts, investments, super, insurance, estateplanning and tax. Yet this potential is beingdestroyed by people and organisations withulterior motives, aided and abetted by govern-ment officials who seem disinclined to ask theright people the right questions.

Rick Cosier is a practising financial adviserwith his own AFSL.


Reality check

PointofView

With the Government having released its FOFAproposals, Rick Cosier writes that financial plannershave fallen victim to a range of blatant misconceptionsthat need to be recognised and addressed.

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ESG

CONCERNS remain about thebenefits of an environmental,

social and governance (ESG)approach to investment, partly due tothe increased investment cost and alsothe potential to shift the risk profile of aportfolio.

In a recent analysis of AMP CapitalInvestors’ sustainable funds strategy,Morningstar senior research analystJulian Robertson said that the focus onESG could push out many larger capand more defensive stocks, increasingthe risk profile.

This is partly because it can be harderto analyse the governance of largerconglomerates, because when you tryand apply the ESG approach to individ-ual companies it results in many ofthose larger stocks falling out of theportfolio. The universe then gravitatestowards the smaller end and mid capstocks, he said.

An ESG fi lter also removes many

companies with exposure to uranium(and other mining), gambling, alcohol,tobacco and armaments – and these canoften be larger cap and defensive stocks,Robertson said.

The resulting portfolio is cleaner interms of being able to analyse the ESGpractices of companies, he said.

AMP Capital’s new head of sustain-able share funds, Dr Ian Woods, hasbeen involved with the strategy for the10 years since its inception. He said thatwhile the ESG focus had contributed tothe fund’s underperformance over thepast 12 months, over three to four yearsit had boosted returns.

“It’s not whether it’s a smaller pool ofcompanies to invest in, but do you havea better pool of companies to invest in?Over three to four years that pool ofcompanies has performed better thanASX,” he said.

Companies that do better on ESG factorstend to perform better overall, he added.

AMP Capital’s sustainable funds takea slightly different approach to ESGfiltering. Rather than striking off stocksor sectors with suspect ESG criteria, thestrategy applies higher governancehurdles to companies that operatewithin sectors that tend to be red-flagged in terms of governance, such asmining.

For example, a mining companywould have to satisfy more stringentESG criteria, and would be expected todo more to manage their environmen-tal risk compared to a telecommunica-tions company, Woods said.

“ There is no disputingthat adding a layer of ESGresearch adds to theoverall investment cost. ”

Environmental, social and governance (ESG) issues are increasinglyguiding portfolio construction. However, taking an ESG approach canintroduce new risks. Chris Kennedy reports.

• An environment, social and governance(ESG) approach to investing is becomingmore popular among investors.

• However, there are concerns about theincreased cost of ESG and the potential toshift a portfolio’s risk profile.

• It is possible to maintain exposure to aparticular sector by switching to adifferent company.

• Portfolios that are concerned with climatechange tend to focus on smaller capcompanies.

Key points

Proceedingwith caution


ESG

Making adjustmentsIn terms of managing the risk profile,Woods said there were few companieson the ASX200 that were completelyexcluded, but often it was also possibleto maintain exposure to a particularsector by invest ing in a di f ferentcompany.

So if the team decided that Wool-worths did not pass ESG hurdles, thefund could maintain exposure to theretail sector through another companysuch as Wesfarmers or Metcash, he said.

Bill Hartnett is the sustainabilitymanager at Local Government Super,one of the most proactive super fundsin the country when it comes to respon-sible investment.

Hartnett does not feel that the poten-tial for an ESG screen to shift the riskprofile of a fund needs to be a factor,because there are enough options inter ms of companies to r un a fundwithout ending up underweight todefensive stocks or a particular sector.

There is no disputing that adding alayer of ESG research adds to the overallinvestment cost, whether that is doneinternally or through purchasing exter-nal research from a provider such asRegnan that LSG subscribes to.

But Hartnett believes the benefits toa portfolio outweigh the extra costs.

“[ESG research] has been a perform-ance enhancement for us and the addi-tional costs are made up for in a holis-tic evaluation of stocks,” he said.

Helga Birgden, Mercer’s head of respon-sible investment for Asia Pacific, said thatclients see ESG as an area of both risk andopportunity, adding that it is important tointegrate risk management mechanismswhen building a portfolio.

ESG is not necessarily a penalty, andthe investments should stack up on atraditional risk return basis, she said. Itis difficult to generalise and say that anESG approach will necessarily reducereturns, she added.

An ESG approach can also help iden-tify other drivers of risk; for example,companies that are exposed to climatechange risk, she said.

Climate changeThe major theme of climate change isan area that requires good governance.It is important not to look at it narrow-ly in terms of whether or not you areinvesting in green real estate. Rather,you should ask if the portfolio as awhole is managing risk with regards tothe new issues that climate change ispresenting to investors all over theworld, Birgden said.

Managers need to understand theimpact on their portfolio if they have ahigh exposure to infrastructure such asports, airports and roads, and if thereare ways to make those investmentsmore resilient to climate change risk,and also consider major thematicstresses on economic activity in portfo-lios, she said.

Depending on the type of portfolio aninvestor is looking for, smaller capstocks tend to predominate, and clientslooking for sustainably themed invest-ments would find more on the unlistedside, which could also contribute to asmaller cap weighting, she said.

However, if a manager was integrat-ing ESG into a fundamental bottom-upanalysis that would be less likely to bethe case, she said.

When looking at ESG investments itis important to choose a manager thathas superior ideas and can implementthem r ight through the por tfol ioconstruction and management processin the ESG area, Birgden said.

You need to be confident they areconstructing the portfolio in a way that’strue to these ideas, as well as managingthe risk well, she added.

A 2009 Mercer review of academicstudies found that 10 of 16 studies iden-tified a positive relationship betweenESG factors and a company’s financialperformance, while two of those studiesfound a negative relationship.

Of four studies looking at the effectsof environmental factors, one found apositive relationship between environ-mental factors and company value,while overall, Mercer noted the finan-cial community assigned more value toenvironmental factors within high envi-ronmental risk industries.

Four studies investigating the effectsof social factors on financial perform-ance found overall that improved social

performance of companies within aninvestment por tfol io can lead toimproved financial returns.

Four studies examining the effects ofgovernance factors also found thatstrong and actively promoted corporategovernance had a positive impact onfirm and portfolio performance.

Further studies examining the impactof screening out ‘sin’ stocks such astobacco and arms also found mostlyneutral or positive effects, according toMercer.

“The results are leaning in favour of

the value-added proposition of ESGintegration,” Mercer concluded.

Aside from the potential return bene-fits, Birgden said there is increasinglyan overall trend towards ESG integra-tion due to client demand, becauseclients want to know how mainstreamportfolios are managing ESG risk.

Investors see ESG as an area of port-folio resilience in terms of long-termrisk versus reward, she said.

“ESG is very much part of world welive in and the way companies operate,”she said. MM

Helga Birgden


ESG

AS a countr y that does notexperience the obvious effectsof c l imate change, i t often

becomes difficult for Australians tocare about investing responsibly.

But a recent study by Deutsche Bankfound that throughout Europe, thecountries that are closer to the NorthPole have greater levels of investmentin funds with an environmental, socialand governance (ESG) approach.

Stephen O’Brien, chief executive ofDeutsche Asset Management (DAM) inAustralia and New Zealand, jokes thatwitnessing the real effects of pollutionand climate change – like acid rain andmelting ice caps – makes responsibleinvesting hard to ignore.

“The Nordics are doing more and theSpanish are doing less. If that doesn’tsay something, I don’t know what does,”he says.

While the science of climate change isnot questioned in Europe, he saysAustralia’s debate has become extreme-ly politicised, which has not helpedinvestor sentiment towards ESGapproaches.

But O’Brien sees this as a temporaryphase, and in the meantime DAM hascommitted to investing in ESG funds forinvestors to turn to regardless of howthe debate pans out.

“We expect that there will hopefullybe investors out there who do want toemploy capital in a way that is consis-tent with their value framework and sowe think it is only logical to providesolutions in that space,” O’Brien says.

DAM is considering setting up anAustralian bond fund with an ESG focus,which it is talking about getting seededfrom its parent company DeutscheBank.

While ESG strategies have traditional-ly been thought of as venture capital forinvestments in c lean technologycompanies, O’Brien says it does nothave to be a ‘boom or bust’ approach.

“That’s the way people have thought

about approaching it. Either you are init in a big and potentially risky way, oryou are not, and I think that’s wheresome people have become stuck doingnothing,” he says.

Getting startedThere is building pressure on both insti-tutional and retail investors to investethical ly, but there is a lso a lot ofcaution surrounding the risks involved,O’Brien says.

“This is a potential way of puttingyour toe in the water, getting someexposure, but it’s not like either it all

goes brilliantly or terribly – it’s justslowly working into the real economythrough fixed income as a defensivecomponent of the portfolio,” he says.

DAM has had an ESG approach forthe fixed income asset class for morethan two years.

The process starts with 700 investmentgrade issues worldwide, as provided byESG research company Sustainalytics,which is then distilled down to between70 and 100 names with both strong ESGratings and investment ideas.

If DAM’s Australian bond fund wereto go ahead, it would be run by AndrewCanobi, f ixed income por tfol iomanager.

Canobi says the defensive nature offixed income goes hand-in-hand withan ESG approach, as it comes down toissues of trust.

“Fundamentally, what we do is lendmoney to corporations. We have seenmany high profile examples over the last10 to 20 years of companies that run onpoor ethical principles and with poorgovernance structures. These tend to bethe ones that you just don’t want to havein a portfolio,” Canobi says.

Companies that run on sound gover-nance principles, have strong manage-ment frameworks and are cognisant oftheir impact on the society around themtend to produce good investmentoutcomes over the medium-to-longterm, he says.

As for the environmental aspect of ESG,Canobi says companies that are position-ing themselves now for future changes togovernment carbon pricing policies willbe the beneficiaries when and if thesepolicies are revealed over time.

Companies that are actively dealingwith climate change now, in a real way,will be better positioned in the comingyears and will experience a lower costof capital and less abrupt change whenpolicies are introduced, he says.

While this approach sounds appeal-ing, O’Br ien concedes there are anumber of retail managers who have

had products available in the market fora long time that have not attracted largeamounts of money.

Championing ESGBut with the backing of the global headof asset management, Kevin Parker –whose ‘hobby horse’ is ESG – and muchdebate surrounding the issues of acarbon tax and climate change, O’Brienbelieves there wil l eventually be atipping point in public opinion.

“What we are seeing is a lot more ofthe general population interested insomething being done,” he says.

“It’s proven and tested with big port-folios that we have in Europe that havebeen going for more than two years.

“I don’t think it is something that isgoing to get 20 per cent of portfolioshere next week, but over time, I thinkpeople will get fed up with what ishappening on a policy level and willwant to make decisions on their own,”he says.

“We’ll be there and ready when theydo decide to come aboard.”

One of the biggest struggles ESGapproaches face is giving investors acompelling reason to change theirinvestment strategy, which ofteninvolves proving investors will notforego returns for the sake of being ethi-cally responsible.

Canobi says this is an area he strug-gles with, as it is difficult to prove in afixed income environment.

But being well-resourced makes it

Warming to ESGWith climate change at the forefront of manyinvestors’ minds, now may be the time to getstarted with an environmental, social andgovernance approach to investing. AshleighMcIntyre reports.

Andrew Canobi


possible to generate strong portfoliosthat have a good chance of excess returnperformance versus the benchmark, hesays.

“Because our investment universe isso large, even when we invest along ESGprinciples, I don’t believe we necessar-ily give up or sacrifice a lot of excessreturns just because we are investing in

that framework.” Despite this, Canobi says i t wi l l

always be difficult for fixed incomeapproaches, ESG or not, to compete inthe retail market if they are judgedsolely on performance.

“I feel very strongly, as does DeutscheAsset Management, that within the fixedincome component of a retail investors’

portfolio, what is paramount are thosedefensive characteristics – those offset-ting, uncorrelated characteristics,” he says.

“Clearly throughout the crisis we sawa number of high-achieving f ixedincome solutions that suffered horren-dous returns because it came to passthat the risks embedded in those port-folios were quite high.”

Canobi says that he feels very strong-ly that what is del ivered to retai linvestors needs to be robust from a riskperspective.

“I doubt we’ll ever compete withhigh-yield more risky style solutionspurely head to head in the retail space.

“The way we differentiate ourselvesis we are in the business of buildingsolutions that stand up in volati leconditions – and frankly that’s when youneed your fixed income portfolio tostand up,” he says.

Another question Canobi says hehears a lot is: ‘What difference will itreally make on a global scale if little oldAustralia adopts a framework to miti-gate carbon emissions?’

“I think the obvious answer is thatsomeone has to begin somewhere intaking responsibility for these sorts ofissues and that is also true at the invest-ment level,” he says.

“It m a y n o t c h a n g e t h e w o r l dovernight, but the point is: let’s begin.Let’s begin to actually apply what aregood principles to our investmentportfolios.” MM

ESG

“ Because our investmentuniverse is so large, evenwhen we invest along ESGprinciples, I don’t believewe necessarily give up orsacrifice a lot of excessreturns just because weare investing in thatframework. ”- Andrew Canobi

Last month I wrote about howwell inflation-linked bonds(ILBs) have performed againstequities over the last 20 years.

This month I’m continuing with thesubject of ILBs showing some workingexamples of how the consumer priceindex (CPI) uplift works in a capitalindexed bond (CIB) and what a real yieldmeans for the holder.

The basicsDiscussions with financial advisers oftenbring up the following questions:

• How does the CPI uplift work?; and• What does the real yield on a corpo-

rate ILB mean?

CPI upliftThe Australian Office of FinancialManagement defines the way the upliftof most CIBs works, as shown in formula1. In this formula,

• CPI t is the CPI for the second quarterof the relevant two-quarter period; and

• CPI t-2 is the CPI for the quarterimmediately prior to the relevant two-quarter period.

An example would be the CBA 2020,uplifts, which can be worked out asfollows.

First, one needs to define the relevantCPI dates and values. These dates andvalues are available from many places,such as the Reserve Bank of Australiawebsite, as shown in the first column offigure 1. In this case:

• CPI t is December 2010, which corre-sponds to the CPI index value of 174; and

• CPI t-2 is June 2010, which corre-sponds to the CPI index value of 172.1.

One then needs to insert these valuesinto the formula (see formula 2).

P is then used to increase, or ‘uplift’the capital price of the bond to the newadjusted capital price, as shown in figure1. Using formula 2, you can then deter-mine a series of capital uplifts, as shownin formula 2.

In the case of this ILB, this outcomemeans that the adjusted capital price ofthe bond goes up by 0.55 per cent, asshown in the third column of figure 1.Hence the old adjusted capital price ismultiplied by 1.0055 (rounded to 4 deci-mals) from 112.87 to 113.49, as shownin the fourth column of figure 1. Thismeans that the ILB issuer now has an


OpinionILBs

Inflation-linked bonds:the mechanics

Stephen Hart gives aworking example ofinflation-linked bonds.

Formula 1

p = [ - 1]100

2

CPI tCPI t - 2

Formula 2

p = [ - 1]100

2

CPI tCPI t - 2

p = [ - 1] = 0.55100

2

174

172.1

Source: FIIG Securities Ltd, Reserve Bank of Australia

CPI Release Date CPI index Capital uplift Current index factor

September 2009 168.6

December 2009 169.5 110.48

March 2010 171.0 0.71 111.26

June 2010 172.1 0.77 112.12

September 2010 173.3 0.67 112.87

December 2010 174.0 0.55 113.49

Figure 1: Capital uplifts

Source: FIIG Securities Ltd

Yield Purchase price Effective yield

5% 100 5.00%

75 6.67%

50 10.00%

25 20.00%

Figure 2: Effective yields

Purchase price Yield to maturity Purchase price Yield to maturity

135.7256 1.2% 153.3290 1.12%

100.0000 3.12% 153.3290 1.12%

75.1582 5.12% 85.5500 5.12%

71.3573 5.50% 81.2600 5.50%

Note: Adjusted capital value is reflected in the higher ILB price when compared to the normal bond

Source: FIIG Securities Ltd

Nominal bond Inflation-linked bond

Settlement date 28 March 2011 28 March 2011

Maturity date 23 March 2031 23 March 2031

Coupon 3.12% 3.12%

Current adjusted capital value 113.49

Figure 3: Pricing comparison of a nominal bond and a theoretical ILB


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obligation to pay 113.49,not 100, or the prior112.87, to the investor,upon the maturity of thebond.

Understanding how theCPI feeds into the adjust-ed capital price is impor-tant if you are looking forvalue among ILB issues.

Effective yieldsIf an investor canpurchase an interestbearing security, notnecessarily an ILB, with ayield of 5 per cent, at aprice of 100, then the yieldon that security is 5 percent. However, i f aninvestor purchases thatsame security at a price of50, or 50 per cent of theoriginal issue price, thenthe yield on the security is10 per cent, as indicatedin figure 2 – along withother possible purchaseprices. In other words, ifan investor pays half thepurchase price for a secu-rity that returned 5 percent at a price of 100, thenthat security effectivelyyields 10 per cent.

Buying an ILB at adiscount is just an exten-sion of this idea. Here,buying the ILB at adiscount is similar tobuying a nominal (fixedrate) bond at a discount,except for the adjustedcapital price has changedas shown above. If thecoupon on the ILB is fixedat 3.12 per cent, and aseller needs to sell thebond at a yield higher than3.12 per cent, then the 3.12per cent is effectivelyapplied to a value smallerthan the adjusted capitalprice, as shown in figure 3.

All that means is thatthis settlement amount isthe value that solves thediscounting of thecoupon of 3.12 per cent ata much higher rate of 5.50per cent over a longperiod. Figure 3 showsdifferent yield levels fordifferent bond settlementprices, for both a nominal(fixed rate) bond, and forthe theoretical ILB.Discounted bonds (thosetrading at less than $100)pay higher yields to matu-rity, whereas bondstrading at a premium(above $100) will havelower yields to maturity.

Purchase at par, at 3.12per centWhen investors purchase a

nominal (fixed rate) bond at par orat a yield that equates to thecoupon, then the settlement priceof the bond approaches 100, asnoted above. Yet, in the case of theILB, the settlement value approach-es the adjusted capital price, of say,113.49, as shown in figure 1.

Purchase at 2 per cent below thecoupon level, or at 1.12 per centWhen investors purchase a

nominal (fixed rate) bond at ayield lower than the couponlevel, then the price will be above100, in the case of the nominal(fixed rate) bond, and above theadjusted capital price of 113.49at say, 153.3290, as shown infigure 3.

Purchase at 2 per cent above thecoupon level, or at 5.12 per centW h e n i n v e s t o r s p u rc h a s e a

nominal (fixed rate) bond at ayield higher than the couponlevel , then the pr ice wi l l bebelow 100, in the case of thenominal (fixed rate) bond, andb e l ow t h e a d j u s t e d c a p i t a lprice of 113.49, in the case ofthe ILB, at 85.5500, as shown infigure 3.

Purchase at 5 per cent realHere, as with the above example,

when investors purchase anominal (fixed rate) bond at ayield higher than the couponlevel, then the price will be below100, and below the adjustedcapital price of 113.49, in the caseof the ILB, at say 81.2600, shownin figure 3.

Stephen Hart is the head ofplanner services at FIIGSecurities.

Until recently, the defining themeof European economic mone-tary union since its introduc-tion in 1999 was the conver-

gence of the peripheral economies(ex-Soviet bloc and outlying countries) andcore Europe (France, Germany, the UK andso on). The move to a single currencyprovided the impetus for fiscally weaker,less-competitive peripheral economies tocatch up to the stronger, more-competitivecore.

Short-term interest rates converged oncethe European Central Bank (ECB) began toset monetary policy for the entire eurozone.Over time, inflation declined in the periph-ery, which brought down long-term bondyields and reduced the risk premium forperipheral markets. Further economicbenefits followed as the ‘one-size-fits-all’eurozone policy benefited the peripherymore than the core. Interest and exchangerates were invariably too high for Germany,for instance, which meant that its exportsector struggled.

The eurozone debt crisis of 2010 hasupended this situation. Faced with steepunemployment, broken banking sectorsand indebtedness, economies in theperipheral south and west, such as Greece,Ireland and Spain are enduring the deepestrecessions of the financial crises.

At the same time, economies in thecentre, such as Germany, France, theNetherlands and Belgium are enjoyingstronger growth. Germany is the standout;buoyant activity there is, in fact, maskingweaker performances at the periphery inoverall measures of eurozone activity.

German exports are more competitivebecause, after the asymmetric impact ofthe financial and sovereign debt crises of2010, eurozone interest rates have beenkept low to support struggling peripheralmember states and the euro fell. This is,however, just one aspect of the reversal ofcore-periphery fortunes. As table 1 shows,a range of political and economic factorsare combining to reinforce the continuedoutperformance of core Europe.

Still partly the preserve of nationalgovernments, fiscal policy has become theweak point of the eurozone experiment. Atthe periphery, large public deficits exacer-bated by banking sector bailouts have ledto unavoidable and painful austerity meas-ures, which have caused sovereign spreadsto rise precipitously for Greece, Ireland andPortugal.

When the euro was introduced on 1 January, 1999, sovereign bond spreads inthe periphery converged to record lows.From 2001, the average spread overGerman government bonds stayed withina 10 basis point range until 2007 (based onan unweighted average of bonds fromPortugal, Italy, Ireland, Greece and Spain).It was at this point the prevailing forces thathad favoured all countries in the eurozonefirst showed signs of abating. As we nowknow, the credit crunch caused a seriousde-convergence in sovereign spreads thatcontinues to remain with us.

There has been a positive correlationbetween higher peripheral sovereignspreads and funding costs in the aftermathof the credit crisis, suggesting that there isa meaningful spill-over effect from the


OpinionEuropeBehind the maskStrong economicgrowth in core Europeis masking the weakerperformances of theperipheral economies,writes AlexanderScurlock.


public to the private sector.That increased cost ofcorporate funding is asignificant headwind forcompanies in the peripherythat reinforces my view thatdivergence will remain adefining theme in the euro-zone for much longer thaninvestors expect.

Divergent labour trendsalso seem here to stay.Peripheral countries facesignificant unemployment.Spain must deal with nearly20 per cent of its workforcebeing out of work. Irelandand Greece also havedouble-digit unemploy-ment, which, in the case ofIreland, has encouraged anupturn in emigration. Partof the explanation is the factthat labour costs surged inperipheral countries duringthe good times (by morethan 30 per cent in Irelandand Spain from 2000 to2008), when wage indexa-tion agreements were oftena feature.

Germany’s unemploy-ment rate (at about 7.5 percent) is less than the Euro-pean average. Once ‘the sickman of Europe’, a perceivedlack of competitivenessseveral years ago encour-aged deep labour marketreforms and collectivelybargained minimum wageswere effectively abolished.As a result, Germanycontrolled unit labour costs,meaning the economybecame more competitiverelative to its peripheralpeers.

With strong demand forits high-quality capitalgoods as well as forpremium auto brands likeBMW, the Germaneconomy can be expectedto benefit from furthergrowth in emerging-marketconsumption for years tocome. And the good feelingis not confined to the exportsector; the domesticeconomy is also humming.The German consumer, sooften a laggard historically,appears to be enjoying awelcome revival of confi-dence. If the Bundesbankerswere still in charge ofnational monetary policy,they would be applying thebrakes.

Peripheral eurozonecountries, meanwhile, mustovercome major hurdles tobe competitive again. Thiswill become more apparentas competition from emerg-ing economies intensifies.Without the safety valve of

a floating exchange rate, theireconomies face ‘internal devalua-tions’ (deflation) that could havepainful social costs.

In terms of European Union (EU)governance, the outlook is similar-ly polarised. The EU and Interna-tional Monetary Fund have alreadyannounced a €750 billion (A$985billion) package to cover severalyears of deficit financing.

However, European leaders have

been keen to respond to the accu-sation of ‘incremental reactive poli-cymaking’ in response to the sover-eign crisis. As a result, the EUsummit in March was expected tosee policymakers deliver a ‘compet-itiveness pact’, designed to draw acredible line under the debt crisis.

Significantly, however, now thatthe negotiating power of peripheralstates has been weakened, the archi-tecture of the pact has been domi-

nated by a vociferous Germany andFrance.

Beyond the expected expansionof the European Financial StabilityFacility lending capacity to €440billion, the focus of change is awayfrom austerity and more structural-debt brakes, an end to automaticwage indexation, increases to retire-ment ages and corporate taxharmonisation.

All of this points to further pain

for peripheral Europe. While theremay be investment opportunitiesfor the agile, from an asset-alloca-tion perspective I believe thatinvestors in Europe can profit fromconcentrating the focus of theirportfolios on the core eurozoneeconomies that are benefiting frompowerful and self-reinforcing trends.

Alexander Scurlock is portfoliomanager,European equities,at Fidelity.

Full lifestyles and packed workinghabits have combined to maketime a valuable commodity todayand while many people are

happy to travel to an adviser’s office forfinancial planning advice, it may be diffi-cult for others. Time-poor clients andthose with limited mobility are less likelyto wish to, or be able to visit an adviser’spremises.

Two obvious niche markets for mobilefinancial planning businesses are theelderly and the disabled.

Many advisers overlook these nichesin the belief that the FUA (Funds UnderAdvice) will be small and the adviceCentrelink-related. We need to moveaway from this thinking if we are tobecome widely regarded as genuineprofessionals operating via a fee-for-service model.

FOFA provides the perfect opportunityfor us to demonstrate to the public thatwe can service client requirements in agenuine and professional manner and stilloperate a viable business servicing alllevels of need.

At the opposite end of the spectrumrests another niche market: extremelytime-poor, high-level executives who arereluctant to leave their offices, except togo home.

Client meeting venuesConvenient alternative venues for mobilefinancial advisers to meet clients outsideof regulation business hours include:

• The client’s home;• The client’s workplace;• The office of one of the client’s other

professional advisers; and• Meeting rooms.

The client’s homeSeeing clients in their own home canpresent benefits not available at otherlocations. An astute adviser can takeadvantage of a more relaxed environmentfor the client. Another benefit is that anyrelevant records or information is likelyto be on hand and can be immediatelysighted by the adviser.

However, an adviser needs to beprepared for distractions which canprolong a home meeting. Here are a fewtips to overcome these potential prob-lems:

• Provide a pre-visit guide for clientsand highlight the necessity to keep themeeting on track

• Suggest a quiet corner of the home forthe meeting

• Allow time for clients to introducetheir family and, perhaps, show off someof their possessions.

The client’s workplaceAsk the client to arrange to meet in anarea of their workplace – ideally a board-room or private office – where they willnot be interrupted by the phone or workcolleagues.

Offices of other professionalsIt is fair to say that some clients prefercontact with their adviser in a formaloffice situation, as they feel their person-al life should remain private. This is not aproblem for the many financial planningbusinesses which maintain an office frontas well as a mobile service.

Where a financial planning business iscompletely mobile, joint client meetingswith the client’s accountant or solicitormake good sense. A joint meeting alsooffers you the potential to build a referralrelationship with the client’s other profes-sional advisers.

Meeting roomsLocal libraries, community centres andhotels usually have meeting roomswhich you can hire for an hour or twoat a nominal rate. Check with localcouncils regarding their provision of thisfacility and choose a meeting roomwhich is in a convenient location foryour client.

Establishing a mobile serviceProfessionalismProfessionalism results from the actionsand presentation of the adviser and is notconstrained by the workplace environ-ment. There should be no reasons why anadviser operating a mobile service doesnot have consistent branding and beregarded by potential clients as a trueprofessional. This means:

• Personal presentation – look the part;• Material – have professionally

produced, consistent presentation mate-rial; and

• Advertising – have attractive, profes-sionally produced advertising material,which may include your businessname/logo on your vehicle, briefcase andgive-aways.

Travel timesTo make best use of your travel time:

• Research the directions together withthe estimated time needed to get to anappointment venue – be aware of peaktraffic times;

• Buy a good quality GPS for your caror smart phone (most smart phones haveGPS, which is great when using publictransport);

• Save phone calls (where possible) andmake them during travel time (observing


OpinionAdvice

Access all areasWith remote access and flexibleworking hours becoming par for thecourse, Bruce Gingell considers theviability of the mobile financialplanning business model.


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driving regulations, ofcourse); and

• Try to make multipleappointments in the samearea, or on the way/returntrip.

Revenue model Assuming that an adviserwishes to operate a strictlymobile business theirrevenue should be similarto that earned by an adviserwho works in a full-timeoffice. Business overheads,however, can vary dramat-ically as many mobileadvisers can work out of avirtual office, or theirhome, substantially reduc-ing overheads. On the otherhand, operating costs suchas fuel and fares and/orleasing and servicing vehi-cles will prove a greaterexpense to the business.

Mobile businesses whichalso have an office and/orsupport staff will obviouslyhave greater overheadsthan those that do not.

Operating toolsVehicles used in mobilebusinesses need to becomfortable, reliable andsuitable to the task, and itis essential that they areequipped with Bluetoothand GPS. Fuel consump-tion is also a majorexpense, making diesel orLPG-powered vehicles wellworth consideration ascost-effective alternativesto the traditional petrolmodel.

Mobile phones, smartphones, laptops and tabletsare also essential tools. Inmy opinion, smart phonesare the most convenientand flexible although theyhave their limitations,especially for wordprocessing applications.Tablets such as the iPadprovide the best overallcompromise and will prob-ably be the preferredcommunication tool in thefuture. Before selecting amobile phone carrier, besure to do the backgroundresearch to assist you indeciding which provideroffers the best coverage inyour area.

Robust and user-friend-ly software is a key tool forall financial planning busi-nesses and is no less so fora mobile practice. My pref-erence is for an Internet-based service rather thanone which sits on my ownequipment. This means Ican access at various loca-

tions and also eliminates the worryabout backup procedures for clientdata. Since Internet-based servicecomes with IT support, it remainsone less thing I have to worryabout if server problems dodevelop. Also the compliance guyscan look at things without mebeing there.

Pros and consBenefits include the ability to

understand better a client’s situa-tion, the opportunity to nichemarket to elderly/disabled clientsand time-poor executives, and theflexibility to work outside both aformal office environment andtraditional business hours. Bettercommunication with other profes-sionals is also a built-in benefit ofthe mobile business.

Drawbacks include travel timesand the need to strike a balance

between time spent doing admin-istrative tasks and time spent atclient meetings. Having adequatesupport via technology, systemsand back-office staff will helpstreamline the day-to-day success-ful running of a mobile consultan-cy. Being required to attend clientmeetings outside normal businesshours can intrude on your person-al time.

It is likely that financial planning

business structures will evolve tomeet future expectations, bothfrom a legislative and clientperspective. Since the primary aimof financial planners is to establisha worthwhile, convenient and flex-ible range of service options, amobile service can become aviable alternative.

Bruce Gingell is a financial adviserat Fiducian Financial Services.

Atransition-to-retirement (TTR)strategy will be more benefi-cial to some client situationsthan others. It is still important,

however, to investigate this strategy forclients outside the typical TTR ‘targetmarket’, because many of these clients willstill benefit from its implementation. Thisarticle highlights the value that can beadded for these clients by implementingthis strategy.

BackgroundSince their introduction in 2005, TTRincome streams have become a centralfeature in the retirement strategies ofmany clients. Primarily introduced toallow for a reduction in working hoursprior to full retirement, in practice theyare now frequently used as part of astrategy that involves continued full-time work and increased super contri-butions – the ‘transition to retirement,or TTR, strategy’.

Historically, many advisers haverecommended a transition to retire-ment strategy to clients aged 55 andover, who:

• Have a relatively large existing superbalance;

• Are subject to a marginal tax rate(MTR) of at least 30 per cent; and

• Have not used up their concession-al contributions cap (concessional cap).

This target market is in the best posi-tion to benefit from both the tax-freepension-phase earnings and upfronttax benefit of concessional contribu-tions. These two tax savings combineto make the transition to retirementstrategy one of the most effective avail-able for pre-retirement clients.

TTR strategies recommendationshave been less common for a numberof other client types, particularly those:

• Unable to make further conces-sional contributions without breach-ing their concessional cap;

• Subject to a MTR of only 15 percent; or

• With low super balances.However, the following examples

suggest that TTR strategies are stillvaluable to many clients in these situ-ations.

Concessional cap already used upCatherine (age 60 with a MTR of 37 percent) is already making concessionalcontributions up to her concessionalcap. She has $500,000 in super andwants to retire at age 65. Will she benefitby implementing a transition to retire-ment strategy in the lead-up to herretirement? You should:

• Use $500,000 to commence a TTRaccount-based pension;

• Elect to receive a minimumpayment of 4 per cent; and

• Re-contribute the minimumpayment to super as after-tax contri-butions (to maintain existing netincome).

Analysis oneCatherine will have $34,469 moresuperannuation available by imple-menting a TTR strategy that involvesafter-tax contributions. While she doesnot receive any additional up-frontincome tax concessions (as would bethe case if she could make furtherconcessional contributions), she stillreceives substantial tax savings bymoving her super balance intopension phase (where earnings aretax-free).

As Catherine has reached age 60, anypension payments are also receivedtax-free, ensuring that her income taxbill will not increase by implementingthis strategy.

A client aged under 60 and in asimilar situation to Catherine may stillbenefit from implementing a TTR strat-egy. However, the actual outcome willdepend on each client’s circumstances,including marginal tax rate and taxcomponents within superannuation.

Low marginal tax rateDonald (age 60 and working part-timewith assessable income of $25,000) has$300,000 in super and wants to retire atage 65. Will he benefit by implement-ing a TTR strategy in the lead-up to hisretirement? You should:


• Elect to receive a minimumpayment of 4 per cent;

• Re-contribute the minimumpayment to super as after-tax contri-butions (to maintain existing netincome); and

• Government to make $1,000 co-contribution per year.

Analysis twoDonald will have $26,567 more byimplementing a TTR strategy. Hereceives no upfront income tax conces-sions, but does benefit by moving hissuper balance into pension phase(where earnings are tax-free) andreceiving a full Government co-contri-bution each year.

Low super balanceJudy (age 55 with a MTR of 30 per cent)has $70,000 in super (50 per centtaxable component) and wants to retireat age 60. Will she benefit by imple-menting a TTR strategy in the lead-upto retirement? You should:


• Elect to receive a maximumpayment of 10 per cent; and

• Salary sacrifice to super to elimi-nate income surplus generated bypension payments.

Analysis threeJudy will have $9,838 more superan-nuation available by implementing aTTR strategy. When compared with aclient who has a much larger existingsuper balance, clearly Judy cannotreceive the same level of benefit. Thisis because of a lower level of earningswithin super being moved intopension phase, and also because therelatively low pension paymentreduces the size of concessionalcontributions that can be made whilestill maintaining her existing level ofnet income.

However, Judy can still receive aclear benefit by implementing thisstrategy, with the only additional costbeing incurred by minor administra-tion fees.

Tim Sanderson is senior technicalmanager at Colonial First State.


TTR: Pros and cons

Toolbox

Tim Sanderson considers the benefits of implementing atransition-to-retirement strategy for clients.

BriefsBOUTIQUE investment manager Mason Stevens hasannounced the launch of what the company believesis the first global stock portfolio structured as a man-aged account.

Mason Stevens Global Concentrated Portfolio willbe managed by Caledonia (Private) Investments,according to the managing director Thomas Bignill.

Mason Stevens will hold and administer the individ-ual stocks via its managed account service, givinginvestors direct international equities ownership.

Bignill said the launch of global equity managedaccounts was previously thought to be impossible,and admitted the company was forced to overcomenumerous challenges.

“One of the biggest challenges is execution – youare breaking it up, down to the individual parcels forindividual clients,” Bignill said.

“The second challenge is currency – you’re doingan enormous amount of foreign exchange in betweendifferent currencies,” he added.

IRESS has released a new client engagement toollinked to advice platform Xplan, which it says willallow intra-fund and full-service advisers to leverageoff each other’s work.

Engage is a web-based application that providesboth superannuation funds and financial adviserswith access to limited scope statements of advice onall types of devices.

It operates in three modes: a client mode to allowindividual clients to self-assess their needs, anadviser engagement mode to facilitate the adviceprocess for both full service or intra-fund advice, andan integration layer for websites to allow advisers orsuper funds to see the data input from clients.

Iress managing director Andrew Walsh said Engagewould be useful for all advisers across the industry, asit helps individuals self-assess their needs, it aids callcentre advisers in the delivery of intra-fund advice, andthe data can then be used by full service advisers.

COLONIAL First State subsidiary Realindex Invest-ments has added an emerging markets fund to itssuite of fundamental indexing products, which re-weight stocks within a portfolio based on fundamen-tal measures of a company’s size.

These factors are derived from the past five yearsof accounting data from a global database of compa-nies, with companies then weighted according todollar sales, dollar cash flow and dollar amount of div-idends, as well as the company’s actual book value,according to Realindex chief executive Andrew Francis.The portfolio is then rebalanced quarterly, he said.

The Realindex emerging markets fund holdsaround 400 stocks across 21 countries, holding onlystocks in markets that are defined as ‘emerging’according to the MSCI Index, although Francis pointedout that the individual stocks do not mirror those inthe MSCI Index.

Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of interests in FirstChoice Wholesale Personal Super offered through the Colonial First StateFirstChoice Superannuation Trust ABN 26 458 298 557. Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (Avanteos) is the issuer of interests in FirstWrap Plus and FirstWrap offered through the Avanteos Superannuation Trust ABN 38 876 896 681. This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider thePDS available from Colonial First State before making an investment decision. Colonial First State and Avanteos are owned ultimately by Commonwealth Bank of Australia ABN 48 123 123 124 through theColonial First State group of companies. Commonwealth Bank of Australia and its subsidiaries do not guarantee performance or the repayment of capital of Colonial First State or Avanteos. CFS2001/STRIP

We’ve lowered the minimum investments for FirstChoice Wholesale Personal Super and FirstWrap, giving more of your clients the ability to benefit from lower fees and great features which may have previously been out of reach. Contact your Business Development Manager, call 13 18 36 or visit colonialfirststate.com.au/lowerfees

Great value for More of your clients.

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 EXECUTIVE Location: MelbourneCompany: Kaizen RecruitmentDescription: Our client has created a new rolefor a business development executive.

A varied and multi-functional role focusedon maintaining business growth, you will beworking closely with the managing director ina role designed for success.

Working across multiple financial products youwill be working with equities, derivatives as wellas FX and alternative investment products.

You will work with an adviser group toimplement initiatives (based on clientfeedback), engage in the longer term and youwill build a business development team tofacilitate this function.

The right person for this job will have a strongunderstanding and experience working infinancial markets, ideally in a sales or businessdevelopment role. Additionally you mustpossess 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: AMPDescription: Financial planners have an

opportunity to join AMP’s fully serviced andcustomer-oriented centre with on-sitemarketing, administrative and technologicalsupport. This ensures that financial plannershave more time to focus on advising theirclients and growing their business.

To be considered for this fantasticopportunity, you need to have a Diploma ofFinancial Services (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 is essential.AMP will be holding an information

evening on 24 May, 2011. For more information, [email protected] or visitwww.moneymanagement.com/jobs

ASSOCIATE ADVISER Location: MelbourneCompany: WHKDescription: An opportunity has arisen for anassociate adviser to join the wealthmanagement team on a full-time permanentbasis. The successful candidate will besupporting two dynamic advisers.

In this role you will be responsible forproject managing the client review process onbehalf of the advisers, including preparingagendas, portfolio updates and performancereports using COIN software. You will also

prepare advice documents on behalf ofadvisers, including delegating the preparationof advice to a centralised advice team.

A tertiary qualification is preferable, but notessential. Successful candidates will beworking towards or will have completed afinancial planner qualification. You will alsohave worked in a financial planningenvironment, with experience in client service,administration and basic advice preparation.

For further information or a confidentialdiscussion please contact Graeme Quinlan orJosh Pennell or visitwww.moneymanagement.com.au/jobs

PARAPLANNERLocation: MelbourneCompany: WHKDescription: As a paraplanner you will join ouradvice team, playing a key role in providingtechnical support to principals and adviserswithin our wealth management division.Specifically, you will be responsible forconstructing complex advice documents andassisting with professional and operationalsupport through research and modelling tosupport the provision of advice to clients.

You will have at least two years experiencewith high net worth clients across a broadspectrum of advice, including SMSFs, wealthaccumulation, retirement planning and estateplanning. Successful candidates will possess

RG146 qualifications and ideally will be ontheir way to completing a Certificate ofFinancial Planning (CFP).

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

CLIENT REPORTING – ASSET MANAGEMENTLocation: MelbourneCompany: Kaizen RecruitmentDescription: Our client is a leading assetmanagement firm that currently has anexciting opportunity in its middle office team.

The successful candidate will beresponsible for the oversight of daily, monthlyand quarterly client performance, attributionand investment reports in a timely andaccurate manner. It is essential that youpossesSs exceptional organisationalmanagement skills to manage reportingdeadlines for multiple clients. The idealcandidate will have over five years fundsmanagement experience, ideally from a clientreporting background, and will be comfortableengaging with front office portfolio managers.The additional focus of the team is expandingacross the APAC region, which will lead tolong-term career development opportunities.

If you are interested in learning more aboutthis position please contact Matt McGilton atKaizen Recruitment on 03 9095 7157 or visitwww.moneymanagement.com.au/jobs

AQR Australia has appointedformer van Eyk head of distri-bution, Michael Angwin, to therole of national distributionmanager.

Angwin will be based inSydney and his appointmentrepresented an important mile-stone in AQR’s strategy to intro-duce institutional-grade alterna-tive strategies directly toAustralian financial advisers andtheir clients, AQR CapitalManagement stated.

AQR Australia head of whole-sale Simon Wills said Angwinwould lead in AQR’s effort todevelop strong relationshipswith a select number of finan-cial advisory groups, initiallyutilising the AQR WholesaleDELTA Fund as its f lagshipoffering with the intention ofgradually introducing otheralternative strategies, such asthe AQR Wholesale ManagedFutures Fund.

MORTGAGE aggregator VowFinancial has announced that ithas made two key appointmentsas part of its growth strategy.

Justin Dale will head Vow’snew financial planning divi-s ion, Vow Wealth Manage-ment, while Leighton Kinghas been appointed as business

development manager.Dale has previously worked

for Macquarie Bank, Citibankand Westpac and stated that helooked forward to working withVow brokers as they expandedtheir offerings into financialplanning.

King previously held roles atAussie, South Western Finan-cial Services, GE Finance andWestpac.

IOOF Holdings (IOOF) hasfound a replacement for itsnational head of sales, follow-ing the resignation of Alexan-dra Tullio in February.

IOOF has appointed formerMacquarie Specialist Invest-ments head of sa les G e o f fKellett, who will be responsi-ble for developing and execut-ing the sales strategy of IOOF’sadministration and invest-ment offerings through theindependent financial advisermarket , the group stated.IOOF general manager, distri-bution, Renato Mota addedthat Kellett would also helpdrive IOOF’s organic growth strategy.

FORMER Morningstar researcherZac Wallis has joined the Zurich

key accounts team as a researchrelationship manager.

Wallis specialised in globalequities and exchange-tradedfunds research at Morningstar.

The appointment meansZurich’s key account team isnow fully resourced, accordingto Zurich Investments execu-tive general manager MatthewDrennan.

“Zac is a wonderful additionto Zurich Investments’ team,

balancing out our knowledgebase and skill sets to ensure wecontinue to successful lydistribute and communicateour best of breed products tothe marketplace,” he said.

ANZ Wealth managing direc-tor John Van Der Wielen hasjoined the Financial ServicesCo u n c i l ( F S C ) b o a rd a s adirector.

FSC chairman Peter Mahersaid Van Der Wielen’s appoint-ment would be a valuablecontribution to the board.

Van Der Wielen has over 25years experience in financialservices including senior posi-tions in wealth management,insurance and banking in bothAustralia and Europe.

He is also a member of theA N Z Au s t r a l i a leadershipteam.

Move of the weekTHE Federal Government has recommendedGreg Medcraft be appointed the new chair-man of the Australian Securities and Invest-ments Commission (ASIC).

Medcraft joined ASIC as a commissioner inFebruary 2009, with responsibility for invest-ment banking, investment managers, superfunds and financial advisers.

Treasurer Wayne Swan said Medcraft waswidely respected among financial markets,regulators and governments around the worldafter almost 30 years experience at globalinvestment bank Société Genéralé.

If approved by the Governor-General,Medcraft will be appointed for a term of fiveyears.

He will take over the position from theincumbent Tony D’Aloisio, who was appoint-ed ASIC chairman for a four-year term in 2007.

Medcraft said in his new role, he would be

concentrating on disclosure to consumers, creat-ing an efficient and fair marketplace, and ensur-ing an efficient and cost-effective licensingsystem.

Greg Medcraft

““OUTSIDER doesn’t particular-ly mind the winter season.True, clothing garments arechunkier and the windappears to chafe one’s lipsinstead of lifting skirts aroundthe city, but Outsider iscontent as long as there is norain to ruin his weekends onthe golf course.

However, yours truly madean interesting discovery theother day, when he found outwhy three of Perpetual’s seniormanagers despise the coldseason and wish for the sun tohang about just a little bitlonger.

While he was wined anddined by the Perpetual execson the twelfth floor of their

Angel Place premises, Outsiderrealised that those fellows hada pretty good view from upthere.

The view was fantastic, notbecause one can see all thehigh-rises at once, but becausetheir meeting room windowlooks down on the outdoorpool of Sydney’s prestigious Ivynight club.

Needless to say, the club’sfrequent daytime pool partiesare attended by women whoOutsider is reliably informedare rather easy on the eye. Infact, it may just be hearsay butit was suggested to Outsiderthat the club hires some of itsstaff for the sole purpose ofimproving the aesthetics of

this pool area.Regardless, Outsider would

not blame the gents fromPerpetual if they felt a suddenurge to conduct an emergencymeeting on level 12 on a sunnyafternoon.

However, he would suggestthe lads resist the urge to getan up-close look at the nativefauna – he’s not sure the Ivy isready for a troop of fundmanagers in their budgiesmugglers.

Outsider


“My previous boss said to me

‘Harvey, someone just called in

and said you should be fired,

so you’ve done very well’.”

Equity Trustees head of funds

management Harvey Kalman gives

tips on how to ingratiate yourself with

your boss at a Deloitte funds

management breakfast in Melbourne.

“I have a problem with my

humour – I try to explain it

beforehand.”

Kalman again, trying to explain

why his punch-lines don’t always

work.

“My fixed income jokes never

yield many laughs.”

After his joke about fixed income

failed at a Perpetual lunch, portfolio

manager Michael Blayney

responded with this sentence, which

was a joke in itself; except that

journalists, understandably, took

two minutes to start laughing.

Out ofcontext

The measure of a man

i-what?

Ivy league

OUTSIDER likes to believe that ifhe is not a man’s man, then he iscertainly a chap’s chap. Mrs Oinforms him that he is certainlynot a ‘lady’s man’.

Be that as it may, Outsider wantsto confess that he is a follower of the‘lipstick index’.

What is the lipstick index, youask? Well according to IBISWorld, itis a measure of the confidence ofconsumers such as Mrs O: a guideto “consumers’ substitution of bigticket items – such as designerclothing, in the face of tougheconomic times, for more afford-able luxuries – such as lipstick”.

According to IBISWorld, thelipstick index had real meaningthrough the global financial crisisand, apparently, the latestAustralian Bureau of Statistics retailsales data suggests that it might yetneed to be reinstituted.

Of course, working as a journalistcovering the financial servicesindustry, Outsider believes that(with the exception of a few peoplehe knows at Westpac and ColonialFirst State) the lipstick index mightnot be appropriate.

Thus, Outsider has come up withthe Toorak/Audi Index – a measureof those financial services types

exiting properties and motor vehicleleases in Melbourne’s posh suburbsbecause their annual bonus won’tcover the cost of their interest-onlymortgages – not to mention theprivate school fees.

If, or when, the financial servicesindustry experiences the long-feared ‘double dip’, Outsider will becruising the streets of Toorak count-ing real estate ‘for sale’ signs whiledriving the hardly-used Audi A4 hepicked up at the automotive dispos-al auctions.

No need to panic just yet, though– when Outsider last checked theindex, it was still in healthy territory.

FINANCIAL planners are unlikely to pickup on technological advancements asquickly as some other industries. After all,there remains a shortage of um, shall we sayyounger types with more hair on top and lesssprouting obscurely from various orifices. However,Rice Warner Actuaries client feedback has revealedthat some financial planners are actually quite with it,and it’s the regional planners no less!

Rice Warner aren’t just actuaries and researchers –they do some interesting stuff too, and Outsider has it ongood authority that they have even developed an app thatwill enable financial planners and wealth managementsales people to travel into the lost realms of space andtime.

Rice Warner recently launched a suite of superannuationapps and claims there has been an increase in queriesfrom financial planning and wealth management groupsregarding branded apps for their advisers to use on iPads

when consultingwith their clients, or

even for their salesstaff working in remote

locations “where internetaccess cannot be guaran-

teed”. So, not only is the finan-cial planning industry coming out of

the dark ages, but Rice Warner is evenhelping them reach back in time where

the Internet does not exist, where peopleactually speak to one another in person and where wealthis still cash.

Maybe they can also develop an app that providesaccess to the future, where hopefully the Internet nolonger exists, where people have finally put away their i-Whatsits and talk to one another in person, and wherewealth is measured by a fine single malt Scotch and a softplace to sit at the end of the working day.

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

Money Management (May 12, 2011)

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