Money Management (November 10, 2011)

www.moneymanagement.com.au

The publication for the personal investment professional

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By Mike Taylor

THE Federal Government has injectedenough complexity and uncertaintyinto its Future of Financial Advice legis-lation that it may not be possible forthe industry to implement it by 1 Julynext year.

That is the bottom line assessmento f k e y p a r t i c i p a n t s i n a Mo n e yManagement roundtable in the imme-diate aftermath of the Assistant Trea-s u re r a n d Mi n i s t e r f o r Fi n a n c i a lServices, Bill Shorten, introducing thefirst tranche of the legislation to theHouse of Representatives.

Matrix Planning Solutions manag-ing director Rick Di Cristoforo madeclear during the roundtable that hebelieved the Government had createdconfusion and complexity by movingaway from the original exposure draftof the legislation.

“By not listening to the industry...

they’ve put in a piece of legislation thatis actually not possible to be imple-mented by 1 July 2012,” he said.

“I know we’ve all got questions aboutwhen this thing gets implemented, buteven with it in its pre-exposure draftform, we had questions about theimplementation,” Di Cristoforo said.“I’ve now got questions about howevery single company in this industryactually coordinates together a piece ofdata on a piece of paper for a newclient, when all the pieces of data arein disparate places.

“They simply can’t be put together –what we’re seeing in the industry rightnow – and I know that’s not a view ofjust Matrix, that’s a view of every singleperson I’ve spoken to,” he said.

Colonial First State’s Nicolette Rubin-sztein said she believed the FinanceIndustr y Council of Austral ia hadwritten to the Government questioningthe Government’s legislative timetable

and seeking more transition time.Premium Wealth Management

general manager Paul Harding-Davissuggested the t imeframes beingimposed by the Government were alsolikely to be causing consternation

amongst some of the industry super-annuation funds seen as the Govern-ment’s own constituency.

“Given how long it’s going to take forfinal details, for final passage – how fewmonths are left for the industry towrestle with this – it’s kind of alarming,particularly when you think about thesorts of changes you’re asking platformproviders and super fund administra-tors to make,” he said.

“I find myself a little intrigued, too,about the implications of that – acrosssome of what the Government mightargue are their own constituencies –in terms of the effort they would haveto go to, to produce this informationand to put in place those processes inthat same space of time,” HardingDavis said.

“I would have thought that some ofthem would be alarmed by what they’rebeing asked to accomplish,” he said.

Roundtable transcript begins page 12.

THE Federal Opposition is main-taining pressure on Australia’stwo financial services regula-tors, the Australian Securitiesand Investments Commission(ASIC) and the Australian Pru-dential Regulation Authority(APRA) to reveal how they arehandling the activities of indus-try superannuation funds.

In what Money Managementunderstands to be a reflectionof the concern held by key Coali-tion parliamentarians about theamount of inf luence beingwielded by some senior LaborParty/union officials, the regula-tors have been asked a seriesof questions on notice going tothe heart of how they handleindustry funds.

Much of the activity directedtowards the regulators has beengenerated by Tasmanian LiberalSenator David Bushby, but theShadow Assistant Treasurer,Senator Mathias Cormann, hasalso raised the issues duringSenate Estimates.

In a series of questions onnotice directed to APRA, Bushbyhas asked how many enforce-ment actions the regulator has

undertaken in the last threeyears “in relation to flawed unitpricing and asset valuation prac-tices in superannuation funds”.

“And without naming the enti-ties concerned, what were theoutcomes for each (fines, courtaction, disqualifications, assetfreeze, enforcement undertak-ings etc)?”, Bushby said.

Bushby has also asked howmany formal and informalactions APRA has taken in rela-tion to unresolved conflict of

Devil in the detail of FOFA legislation

Continued on page 3

Opposition puts heat onindustry fund watchdogs

SG INCREASE FLAWED BY TAX LINK: Page 4 | ROUNDTABLE – FOFA UNFOLDS: 2

Vol.25 No.43 | November 10, 2011 | $6.95 INC GST

By Chris Kennedy

THE overlap between mortgage broking firmsand other segments has raced ahead in 2011 ascompanies search for diversified revenue streamsin a gloomy financial environment, and morediversification is on the way.

The opportunity to retain clients rather thanrisk losing them under another referral arrange-ment if they go elsewhere for other services is alsoa factor, according The Selector Group directorBrett Abikhair.

“It’s about protection – it might have been drivenby protecting your client base, but it’s all abouthelping that one person with as many things asyou possibly can,” he said.

Two weeks ago one-stop-shop Yellow Brick RoadHoldings (YBR) announced it would be venturinginto funds management, teaming up with CoolabahCapital to create a vertically integrated joint venturecalled YBR Funds Management.

YBR said the move was aimed at helping it diver-sify its cash flows and moving up the product valuechain by offering a range of low-risk, high-return,high-liquidity cash and fixed income products.YBR itself is only four years old, but has branchedfrom mortgage offerings into services includingfinancial planning, accounting and insurance.

Mortgage aggregator Vow Financial launchedfinancial planning division Vow Wealth Manage-ment – a joint venture with The Selector Group’sfinancial planning arm Wealth Selector – in Maythis year.

The service is promoted to Vow’s broking clientsvia a referral arrangement, and Vow chief executiveTim Brown said the group is trying to capture asmany opportunities as it can at that point of themortgage transaction.

Vow currently has two joint ventures in place,and plans to launch two more between now andJanuary, expanding further to a total of six jointventures in 2012, Brown said. The group also plansto launch Vow Legal in 2012, and eventually otherservices including accounting, Brown said.

Abikhair said mortgage commissions were cutby 35 to 40 per cent during the global financialcrisis, but the work involved in getting a loanprocessed doubled as banks passed that work backon to the brokers – making broking a far less prof-itable business.

The Selector Group – which is currently madeup of mortgage, financial planning, real estate, andleasing services – eventually rolled into financialplanning practices to leverage off its broking rela-tionships, and that’s how the business has grown,he said.

“I think the industry is headed down this [diver-sification] path because at the end of the day ifyou’ve got a relationship with a client, that’s whatit’s all about. If you’ve got a relationship, why can’tyou do 10 things for them? Most clients will tellyou that’s what they want,” he said.

“I think that’s the natural progression of theindustry – it’s a matter of when. When is the Yellow

Brokers expandingfinancial services presence

Rick Di Cristoforo

David Bushby

Continued on page 3

FOFA stampede could turn uglier

The financial planning industryhas been undertaking someintense lobbying in recentweeks in the hope of extracting

some key amendments to the Govern-ment’s Future of Financial Advice(FOFA) legislation – but one of its keyobjectives must be to achieve a longertimetable for implementation.

As the roundtable published in thisweek’s edition of Money Managementmakes clear, the complexity of thechanges being pursued by the Govern-ment are such that few companiesoperating in the financial planningindustry are likely to be able to meet a1 July, 2012 deadline.

What is more, the Gover nmentcannot suggest that the industry’sinability to meet the deadline is a resultof tardiness. Rather, it is the product ofthe Government’s own approach toFOFA and the manner in which it hasprolonged the exercise and createdlayers of uncertainty.

The very fact that the legislation isbeing introduced to the Parliament in aseries of tranches is evidence of thedegree to which companies are beingasked to accommodate importantlegislative change without the benefit of

being able to see a final picture.If the Assistant Treasurer and Minis-

ter for Financial Services, Bill Shorten,cannot demonstrate to the key stake-holders the final shape of his legislation,then he cannot expect to impose onthem the cost and energy of meeting anunrealistic timetable.

There is some evidence to suggest thatthe Government’s timetable is driven in

part by its belief that it is confronting anarrow window of opportunity to intro-duce the FOFA legislation. With the pollsconsistently indicating a change ofGovernment at the next federal election,a number of key figures within theindustry superannuation funds havealso indicated they are conscious ofgetting the FOFA changes in place in thebelief that the Coalition would be reluc-tant to alter everything.

This was also something clearlyevident in the attitudes of the round-table participants, a number of whomindicated that i f the Gil lard LaborGovernment did not run its full term,contingency arrangements would needto be put in place.

With the number of Parliamentarysitting days for 2011 already runningshort and with the FOFA legislationhaving been directed to a Joint Parlia-mentary Committee, the minister hasplenty of reasons to accommodate theconcerns of the industry by extendingthe timetable for its introduction.

Sensibly, the industry should not beexpected to commit to anything withoutbeing aware of the entire picture.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

S&P

2011 AUSTRALIA

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“If the Assistant Treasurerand Minister for FinancialServices, Bill Shorten,cannot demonstrate to thekey stakeholders the finalshape of his legislation,then he cannot expect toimpose on them the costand energy of meeting anunrealistic timetable. ”

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Average Net DistributionPeriod ending March ‘1110,207

By Chris Kennedy

SHADOW Assistant TreasurerMathias Cormann has questionedwhy Assistant Treasurer BillShorten said he was abolishing theage limit for superannuation guar-antee (SG) contributions when thenew superannuation amendmentbill itself states the limit will onlybe raised by five years.

“Is Bill Shorten dishonest orjust incompetent?” Cormannasked in a statement.

“The legislation he intro-duced into the Parliament isclear. It is not removing the agelimit at all. Instead Bill Shorten’slegislation only increases thesuperannuation guarantee agelimit from 70 to 75.”

Cormann said this was in line

with Labor’s policy at the lastelection, but has now been tiedto “the deeply flawed, unfairand ill-conceived mining tax,”which was never a part ofLabor’s SG age limit policy priorto the election.

In the relevant section of theSuperannuation Guarantee(Administration) AmendmentBill 2011 posted on the Treasurywebsite, the bill proposes to:“Omit ‘70’, substitute ‘75’” fromthe passage relating to the agelimit for SG contributions.

The bill also states that theamendments apply to superan-nuation guarantee: ‘for quartersstarting on and after 1 July 2013’.

But in his speech to parlia-ment, now posted on the Trea-sury website, Shorten stated,

“…this bill abolishes the super-annuation guarantee age limit.”

Cormann said Shorten’sspeech misled Parliament, andcreated the impression he wasacting to implement Coalitionpolicy to abolish the age limitwhich the Coalition took to thelast election.

In an explanation to Parlia-ment, Shorten said, “My secondreading speech for the Superan-nuation Guarantee (Administra-tion) Amendment Bill yesterdaystates that the Bill will lift the SGlimit to 75. It also states that afterstrong representations from theLabor backbench and the cross-bench – the member for Lyneand the member for NewEngland – the Government hasdecided to remove the age limit

for superannuation contribu-tions altogether,” he said.

“The Government will intro-duce our own amendments tothe Bill to achieve this in asustainable and prudent way

that provides sufficient lead timefor employers and olderAustralians to adjust,” he said.

A representative fromShorten’s office told MoneyManagement the reference tothe age limit being abolished inthe Bill was an error in thespeech writing process that wasclarified in Shorten’s secondreading of the speech, whichstated: “However, as a result ofstrong representations frommembers of the Labor caucusand cross-bench – including theMember for Petrie, the Memberfor Blair, the Member for Lyneand the Member for NewEngland – I have decided toremove the age limit for super-annuation guarantee contribu-tions altogether”.

www.moneymanagement.com.au November 10, 2011 Money Management — 3

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Inconsistencies in Shorten’s SG age limit message

Brokers expanding financialservices presence

Brick Road [model] goingto become the norm? It’snot an ‘if ’. You’ll findconsolidation in the mort-gage broking industry –there’s a lot of one-manbands – they’ll movetowards bigger groups asthe planning industry has,”he said.

Mortgage and FinanceAssociation of Australiachief executive Phil Naylorsaid the different licensingarrangements and regula-tory environments wouldpresent an issue for firmslooking at diversifying,which meant it would likelyonly occur in larger andbetter resourced groups.

Diversification within

the broking industry hasbeen a trend for a whilenow and there is clearly asearch for alternativestreams of revenue, as wellas a tendency for brokingand planning to movecloser together, he said.

interest issues in relation to super fund gover-nance during the past three years, and what werethe results of taking such action.

The Tasmanian has also asked APRA about itspolicy on super fund directors who hold multipledirectorships in the super fund sector, and inquiredabout how many occasions on which the regulatorhas raised the issue with a fund which had a directorin such a position, and with what results.

With ASIC already having been placed on noticeto explain whether the recent rash of industrysuperannuation fund television advertisementsare compliant, Money Management understandsits approach to the advertising campaign will besubject to further questioning and scrutiny in Par-liamentary committees.

– Mike Taylor

Opposition puts heat onindustry fund watchdogsContinued from page 1

Continued from page 1

Mathias Cormann

Tim Brown


News

SG increase flawed by tax linkBy Mike Taylor

THE Federal Government should nothave linked increasing the superannua-tion guarantee to 12 per cent to theimposition of the Mineral ResourcesRent Tax.

That is the bottom line of a round-table held last week by Money Manage-ment’s sister publication Super Review,with key participants saying that “super-annuation should be treated as super-annuation and nothing else”.

NGS Super trustee John Quessy saidthat linking the superannuation guar-antee increase to a tax carried with it therisk that another Government wouldremove that tax and therefore theincrease to the SG.

“To make retirement savings depend-ent on some tax that is popular with theGovernment at the moment but mightnot be popular with some other Govern-ment in the future means it could sub-sequently be reversed,” he said.

“That could kill the tax and thereforethe superannuation,” Quessy said. “Andif you’re serious about superannuation,you treat it as superannuation.”

Pillar Administration chief execu-tive Peter Beck said he agreed withQuessy’s assessment, but said healso understood the Government’sneed to find a way of funding therise in the superannuation.

“The Government’s problem hasbeen finding ways of funding this, but asan industry we should not express anopinion on where they get the fundingfrom. We should push very hard for theSG contribution being increased and

they should find the funding,” he said.Association of Superannuation

Funds of Australia general manager ofpolicy David Graus said his organisa-tion agreed there should be no linkbetween a tax and the superannua-tion guarantee.

“We totally agree it shouldn’t belinked, there is enough justification (toincrease the SG) on its own,” he said.

“ASFA’s research shows that itshould go ahead on a standalonebasis,” Graus said.

Deloitte partner Russell Mason saidthe industry needed to be mindful that12 per cent would not be enough tofund retirement and relieve pressure onthe superannuation guarantee, and thatfurther increases would be required inthe future.

Planning industrywelcomes SG raiseBy Chris Kennedy

THE financial planning industry has welcomedthe Government’s proposal to raise the super-annuation guarantee from 9 per cent to 12 percent.

Assistant Treasurer and Minister for FinancialServices and Superannuation Bill Shorten lastweek introduced to parliament the Superannu-ation Guarantee (Administration) AmendmentBill 2011, which proposes to use income fromthe mineral resources rent tax to fund theincreased SG and increase the age limit for SGcontributions.

Both Financial Planning Association (FPA)chief executive Mark Rantall and Association ofFinancial Advisers (AFA) chief executive RichardKlipin pointed to the country’s ageing populationas a key reason why an increase in the SG wasnecessary.

“Without an increase in the superannuationguarantee, Australians will need to extend theirworking life to be able to retire on an adequateincome, or will have to rely on the age pension,”Rantall said.

“By 2047, 10 years after maturation of thesuperannuation guarantee system, 75 per centof the population will still be on some form ofthe age pension. It is critical that this nationalissue is addressed now.”

He said the FPA also supported removing theage limit for SG contributions, and the Govern-ment should encourage all Australians to acceptresponsibility to save for retirement.

Klipin congratulated Shorten on what hedescribed as “an important step forward” and

relieving what could potentially become a crip-pling tax burden in the future. Financial advisersare well positioned to help people deal withlarger superannuation balances and work withthem to meet their retirement goals, he added.

The amendment bill was also widelywelcomed by the superannuation sector, includ-ing Association of Superannuation Funds ofAustralia chief executive Pauline Vamos;Australian Institute of Superannuation Trusteeschief executive Fiona Reynolds; Self ManagedSuper Fund Professionals’ Association ofAustralia chief executive Andrea Slattery; chiefexecutive of $42 billion industry fund Australian-Super Ian Silk; REST Industry Super chief exec-utive Damian Hill; and Challenger’s chairmanof retirement income and former Super SystemReview chair Jeremy Cooper.

ANZ posts strong profit, but Wealth strugglesBy Milana Pokrajac

DESPITE posting a solid profit of $5.36billion, ANZ Banking Group’s wealthmanagement division struggled over thepast year, according to its full year resultsposted on the Australian SecuritiesExchange.

ANZ Wealth’s net profit after tax was 16 per cent lower year on year, sliding down

from $412 million in September 2010 to$345 million in September 2011.

The group had largely attributed thisdecline to volatile market conditions, nega-tive investor sentiment and increased insur-ance costs caused by catastrophic weatherevents.

Strong new business growth was appar-ently offset by adverse general insuranceclaims around the Queensland floods,

Hurricane Yasi and New Zealand earth-quakes.

Recent reports have shown that three outof the big four banks have had their wealthmanagement divisions struggle over thepast year, with BT Financial Group beingthe only one to have performed well.

Despite the profit decline, ANZ hasannounced plans for expanding the ANZWealth division in Australia.

“We are improving our Wealth proposi-tion and enabling greater presence for thewealth management and insurance offer-ings within bank branches and online (eg,EasyProtect, 50+ Life),” the banking groupstated.

ANZ’s proposed final dividend of 76 centsper share fully franked brings the total divi-dend for the year to $1.40 per share, 11 percent higher than for 2010.

Industry funds struggling to retain high-balance members

Peter Beck

By Tim Stewart

THE vast majority of industry fundmembers who receive externalfinancial advice move their moneyinto a retail fund or a self-managedsuperannuation fund (SMSF),according to Deloitte partner RussellMason.

In his discussions with an indus-try fund chief executive, Masonlearned that 95 per cent of memberswho get external financial advice endup leaving the fund on retirement.

Industry fund members who seekexternal advice tend to be those withhigher account balances who are

nearing retirement, Mason said. However, people rarely have all of

the facts about their industry fundat their fingertips when they chooseto move, he added.

“I’ve seen people move out offunds because they thought theycouldn’t have an account-basedpension,” he said.

Deloitte research into the shapeof the superannuation sector overthe next 20 years, co-authored byMason, has found that SMSFs are setto far outstrip other superannuationsectors by 2030.

To prevent the leakage to SMSFsand the retail sector, Mason said it

was up to industry funds to educatetheir members about the featuresthey could offer.

“Many industry funds are startingto look at offering things that mimicSMSFs. A couple of the big fundshave ASX200 options where you canpick the stocks you want to be in,”he said.

But industry funds can’t afford totake the high moral ground when itcomes to advice, he warned.

“They need to be able to answerquestions such as ‘Am I in the rightfund?’, ‘What’s the best option forme?’, and ‘Am I contributingenough?’,” Mason said.

More complex issues wouldrequire the services of a licensedfinancial planner, but the basic ques-tions should be answered by super-annuation funds, he said.

He added that advisers needed todo more research into the servicesoffered by industry funds – particu-larly as the financial planning indus-try moved to fee-for-service.However, he stopped short of callingfor industry funds to appear onApproved Product Lists (APLs).

“If they’re not on recommendedlists, they should at least beresearched and given the opportu-nity to appear on APLs,” Mason said.Russell Mason

Richard Klipin


News

AMID efforts to extract amend-ments to the first tranche of theGovernment’s Future of Finan-cial Advice (FOFA) legislation,the Financial Planning Associa-tion (FPA) has relaunched thedo-it-yourself package designedto help members lobby parlia-mentarians.

The focus of the lobbying con-tinues to be on key independ-ents including Andrew Wilkieand Rob Oakeshott, as well asmembers of the ParliamentaryJoint Committee to which theGovernment’s legislation hasbeen referred.

However, Money Manage-ment understands that whileOakeshott earlier this year sig-nalled his concern about theimplications and costs associ-ated with the two-year ‘opt-in’,he has proved harder to pindown on the issue in recentmeetings with planners.

“He is willing to talk andlisten, but he is playing his cardspretty close to his chest,” onesource said.

The chairman of the PJC, Laborbackbencher Bernie Ripoll, lastmonth told the Association ofFinancial Advisers’ national con-ference on the Gold Coast thatwhile the FOFA legislation hadmoved beyond the original bipar-tisan recommendations of hiscommittee, he was comfortablewith the outcome.

By comparison, Oppositionspokesman on financial serv-ices Senator Mathias Cormannhas signalled Coalition mem-bers of the committee will bearguing for specific changes tolegislation.

Both FPA chief executive MarkRantall and the chief executiveof the Association of FinancialAdvisers Richard Klipin have saidthe FOFA legislation currentlybefore the Parliament is unac-ceptable in its present form.

Rantall said today that thePJC had afforded planners anopportunity to restate theirconcerns.

Australian investment managers outperformBy Mike Taylor

GOOD performances and the strength of theAustralian dollar have helped advance theglobal rankings of Australian investment man-agers, according to new research releasedby Towers Watson.

Indicating Australia’s position relative toother major economies, the research foundthat assets managed by Australia’s largestinvestment managers increased significantlyrelative to their global peers last year.

It found that in Australia growth over the

year had mostly been driven by market andorganic growth. Similar to the global trendamong investment mangers, growth had alsobeen boosted by merger and acquisitionactivity, but also by the Australian dollar whichhad appreciated by 14 per cent relative tothe US dollar.

Commenting on the research, TowersWatson head of research in Australia HughDougherty said the strong performance byAustralian fund managers and the strengthof the Australian dollar had meant that allmanagers who were on last year’s list had

moved up the rankings.He noted that in US dollar terms, total

assets of the Australian top 500 managersgrew by 49 per cent from US$568 billion toUS$847 billion. For the first time since theglobal financial crisis, total assets of Aus-tralian managers in the top 500 list sur-passed pre-GFC levels of US$691 billion setin 2007.

Dougherty said there were now 18 Aus-tralian managers in the research, more thanany time previously and around 50 per centhigher than in 2009.

He said the largest Australian managerwas Macquarie which ranked 69 overall, upfrom 116 in 2008 – something that waspartly due to its acquisition of US managerDelaware.

The other Australian managers on the listare Commonwealth Bank, AMP, NAB, QIC,Westpac, Industry Funds Management, Chal-lenger, Perennial, Platinum, Maple-BrownAbbott, IAG, Charter Hall Group, BalancedEquity Management, Lend Lease, NorthcapeCapital, JCP Investment Partners andParadice Investments.

Independentsoffer less certainty on FOFA


News

BT drives strong Westpac resultBy Mike Taylor

A STRONG performance by BT Finan-cial Group helped drive Westpac to astrong full-year finish.

The big banking group announcedto the Australian Securities Exchange(ASX) that it had reported a 10 per centincrease in statutory net profit to$6,991 million, on the back of a 7 percent increase in cash earnings of$6,301 million, rewarding investorswith a final fully franked dividend of 80cents per share.

The degree to which BT’s perform-ance has driven the Westpac resultwas highlighted by chief executive GailKelly, who referenced it as a “highlight”,saying there had been a strong “upliftin the cross-sell of wealth and insur-ance products which contributed to a 9 per cent increase in cash earnings for

BT Financial Group”.“The division welcomed over 70,000

new customers onto the BT Super forLife platform over the year, and ourinsurance cross-sell has continued toincrease from already high levels,”Kelly’s announcement said.

The ASX announcement also notedthat the St George Banking Group hadimproved momentum through the year,lifting cash earnings by 12 per cent.

It said growth had been achievedthrough depth of customer relation-ships, which was reflected in a strongcross-sell, particularly in insurance andsuperannuation.

The Westpac chief executive saidthe global operating environment wasclearly evidencing weakness with sover-eign debt issues across the Eurozoneand weak growth in the US.

“International events have weighedheavily on consumer and business con-fidence in Australia and are contribut-ing to a softer outlook,” Kelly said. “Nev-ertheless, Australia remains well placedto continue to grow, and has the policyflexibility to respond to global condi-tions as required.”

By Chris Kennedy

FINANCIAL planning group OmniWealth is addingaccounting and legal services, hoping to attract moreplanners to the firm.

OmniWealth managing director Matthew Kiddpointed to the current round of proposed legislativechanges as a factor in the decision. He said thecompany goal was to provide clients with a single

optimum solution and to support its advisers.The arrangement would enable the group to provide

clients with consolidated accounting services, as well asa spectrum of financial advice concerning mortgage,property investment and legal solutions, the group stated.

OmniWealth said the overall operation will nowencompass dealer services, financial planning, mort-gage and finance, accounting and audit, legal and prop-erty investment.

MF Global placedinto administrationBy Andrew Tsanadis

THE Australian Securities and Investments Commission(ASIC) has announced that MF Global Group has beenplaced into administration, affecting a number of compa-nies in Australia.

The companies affected by the announcement are MFGlobal Australia Limited, MF Global Securities AustraliaLimited, and Brokerone Pty Limited.

Deloitte Corporate Reorganisation Group PartnersChris Campbell, David Lombe and Vaughan Strawbridgewere yesterday appointed voluntary administrators ofthe three companies.

According to ASIC the activities affected by theannouncement are equities, futures trading, futures clear-ing, and contracts for difference (CFDs). The regulatorybody was also advised by ASX 24 that grain futures andwool futures would not open and all trading on MF Globalfutures and equities has been halted.

“As voluntary administrators, we have taken control ofthe assets of the three companies and begun the task ofassessing the positions of each, including their over-the-counter derivative positions such as CFDs,” said Campbell.

“We are commencing a process to reconcile all clientpositions as at the date of appointment to determinemonies owed to each client.”

“The total process will take some time, but we willadvise customers of their position as soon as possible,”he said.

ASIC’s release follows the announcement made by MFGlobal Holdings Limited and its finance subsidiary, MFFinance USA Incorporated that it would be filing for aChapter 11 Bankruptcy Petition in the United StatesBankruptcy Code.

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Planners need to review their business structure - JohnstoneSEQUENTIAL Project Services hasannounced that its new targeted reviewproduct is now being used by AMP Finan-cial Planners Association (AFPA), HillrossAdvisers Association (HAA) and GeneralInsurance Advisers Association (GIAA) tohelp their members adapt to the currentfinancial industry environment.

According to Sequential, the BusinessInsights program is helping licensees plug the

holes in their businesses which have been leftby market changes and regulatory reform.

Sequential managing director Adrian John-stone said planners are often committed firstto servicing their clients before consideringthe effect that market changes and regulato-ry reform will have on their business.

“Their businesses are leaky boats becausethey’re spending such large amounts of timeworrying about compliance and they’re not

getting the time they need to worry abouttheir businesses and servicing their clients,”Johnstone said.

As part of the independent review under-taken by Sequential, Johnstone said he oftensees a lot of the operational processes beingdouble-handled, such as clerical duties thatan administrator could undertake.

Johnstone said as a result of marketchanges, business owners are now – for the

first time in most cases – starting to asksome serious questions about running acompliant business. Owners are typicallynot well equipped to review their practicethemselves because they are too emotion-ally connected, he said.

“They (practice owners) feel their busi-ness needs help but they can’t see where.Businesses are not structured against thenew world,” he said.

Gail Kelly


News

Govt targets multinational tax rulesBy Tim Stewart

THE proposed changes to transferpricing rules will ensure multinationalcorporations operating in Australiapay the correct amount of tax ontheir income, according to AssistantTreasurer Bill Shorten.

‘Transfer pricing’ refers to the prac-tice by multinational corporations ofbuying or selling products and serv-

ices from one part of the firm in a dif-ferent country. These transactionsaffect the profit firms make in eachcountry, and consequently the amountof tax they are required to pay.

The changes to Australia’s taxa-tion laws will bring Australia into linewith international best practice whenit comes to transfer pricing, Shortensaid.

“International thinking on transfer

pricing has moved on since the cur-rent transfer pricing rules wereinserted in the income tax law,”Shorten said.

He added that recent court caseshad suggested Australia’s laws were“out of kilter” with international norms.

“While there is a strong argu-ment that tax treaty rules alreadyoperate independently of thedomestic rules, the Government

has decided to put this beyonddoubt to promote consistencybetween Australia’s rules and theinternational approach,” he added.

A consultation paper on the pro-posed changes to the Income TaxAssessment Act 1936 is available onthe Treasury website. Submissions areopen until 30 November 2011, butfurther comments will be soughtduring the legislative drafting process.

By Milana Pokrajac

PLATFORM provider OneVueis looking for an institu-tional investor to acquire aminority stake in the com-pany, which it says wouldbenefit OneVue’s distribu-tion expansion plans.

OneVue chief executiveofficer Connie McKeagesaid the decision was notfinancial, but one whichwould raise OneVue’sbrand awareness in Asia.

“We plan on deliveringproducts in Asia and weneed a global company asa backer, so potentialclients will know who weare,” McKeage said.

“No matter how manywell known Australian insti-tutions are backing you, itmeans little to Asianinvestors,” she added.

OneVue has appointedPricewaterhouseCoopersSecurities to help the plat-form provider select aminority shareholder byFebruary 2012.

The prospective share-holder would acquire 10-15 per cent of OneVue’sstake and would ideallyhave a large presence inAsia.

Meanwhile, Australianinstitutions such as Aus-tralian Unity Investmentsand Aviva Investmentscontinue to be key unitregistry par tners ofOneVue, McKeage said.

“The larger the organi-sation, the greater it wasperceived that having aninstitutional brand on theregister would benefitOneVue’s distributionexpansion plans, hencethe decision by the boardto proceed in acquiring aminority shareholder,” sheadded.

OneVue seeksinstitutionalinvestor

Bill Shorten


News

ASFA backs laws targetingphoenix company directorsBy Tim Stewart

THE Association of Superannu-ation Funds of Australia (ASFA)has backed moves by the Gov-ernment to make directors of‘phoenix’ companies personallyliable for any unpaid superan-nuation contributions.

A phoenix company is a firmthat closes down with anumber of unpaid debts, onlyto reopen with a new nameand the same directors.

Under the new laws, the Aus-tralian Taxation Office (ATO) willbe able to pursue a directorwhose company is threemonths behind in its Pay AsYou Go withholding or its super-annuation guarantee contribu-tions without issuing a directorpenalty notice.

ASFA chief executive PaulineVamos said it was important toquickly close off any loopholesin the system to safeguard theintegrity of superannuation.

“It is vitally important that allAustralians receive the super-annuation contributions theyare entitled to,” Vamos said.

“The average person is noton a high wage and for most,the only way they can achievedignity in retirement is by put-ting a small amount away overthe long-term and benefitingfrom compound interest,” sheadded.

Superannuation balancesare affected any time there is abreak in contributions, Vamossaid.

“We support any move toclose down activity undertakento avoid paying Australians theirentitlements,” she added.

According to the ATO, thereare about 6,000 phoenix com-panies in Australia.

Jail for property promoterA QUEENSLAND property investmentscheme promoter was last weeksentenced to jail in the Victorian CountyCourt on charges preferred by theAustralian Securities and InvestmentsCommission (ASIC).

The man, Gabrial Neil Pennicott, whowas a former director of Sunset CapitalPty Ltd, was described as a propertyinvestment scheme promoter.

He was sentenced to more than fouryears jail on six charges of dishonestlyusing his position as a director or officerof various companies contrary to section184(2)(a) of the Corporations Act, fourcharges of dishonestly obtaining prop-erty by deception contrary to section 81of the Victorian Crimes Act, six chargesof dishonestly obtaining a financialadvantage by deception and sevencharges of attempting to obtain a finan-cial advantage by deception.

According to ASIC, the transactionsrelated to transferring shares betweencompanies he controlled at artificiallyinflated prices so as to change the

balances of inter-company loan accountsbetween the companies. It said the bookvalue of these transactions was$2,465,000.

ASIC said Pennicott had also beencharged with transferring and attemptingto transfer shares at artificially inflatedprices to repay and attempt to repayamounts owed to lenders to a companyhe controlled in lieu of repaying themonies owed and transferring shares atartificially inflated prices to himself andanother person in lieu of being repaidamounts owed to them and then trans-ferring the same shares to anothercompany controlled by him.

Catastrophe bonds providediversification for portfoliosCATASTROPHE bonds help companies to reducethe risk of loss from extreme events and are auseful source of diversification for investors,according to van Eyk Research.

van Eyk said catastrophe bonds are designedto spread or reduce the risk of loss related to poten-tial catastrophes and, in return for offsetting thisrisk, investors are offered a very attractive yield.

According to van Eyk, if the catastrophe doesoccur on a grand scale, investors risk losing asubstantial amount of the principal placed on thebond. The research house believes investors areoverpaid for taking on this risk.

van Eyk refers to the Swiss Re Global Cat BondTotal Return Index as an example of the benefitsof catastrophe bonds. Swiss Re research revealedthat the index has declined just 0.46 per cent inthe first half of 2011, and has generated steady

returns from January 2002 to March 2011,despite periods of significant natural disastersworldwide.

An Aon Benfield Securities report showed 45 per cent of catastrophe bonds on issue areexposed to hurricanes in the United States. vanEyk has warned investors against concentratingtheir portfolio exposure to these geographicalevents because they risk experiencing significantdrawdown if a major natural disaster like a hurri-cane makes landfall.

van Eyk stated that the catastrophe bondmarket is approximately US$25 billion, and theresearch house expects it to grow over the nextdecade, driven by increased population density,building cost inflation and concentration risk, andthe growing popularity of such bonds withinvestors.

ASIC accepts EU from Sydney auditorBy Andrew Tsanadis

THE Australian Securities and Investments Commission (ASIC) has acceptedan enforceable undertaking (EU) from Trood Pratt & Co auditor Peter Lockyer.

The EU follows an investigation by the regulatory body concerning Lockyer’saudit of the financial reports of Elderslie Finance Corporation Limited for the finan-cial years ended 30 June 2006 and 2007 and that of Grenfell Securities Limitedfor the financial year ended 30 June 2008, ASIC stated.

The regulatory body stated that it was particularly concerned with Lockyer’s fail-ure to ensure that a qualified audit report was issued, after the respective finan-cial reports for both companies failed to comply with various accounting stan-dards. ASIC was also concerned that the audit report itself may not have beenconducted in accordance with various auditing standards.

Under the EU, Lockyer has undertaken to request that the regulator cancel hisregistration as an auditor within seven days of ASIC’s acceptance of the EUand to never re-apply as an auditor. He must also provide a copy of the EU toanyone who engages him to perform any audit work outside of what only a regis-tered company auditor can perform.

ASIC clarifies insurancephone sales requirementsBy Milana Pokrajac

GENERAL insurance providers will now be able to send their prod-uct disclosure statements (PDSs) to retail clients after the quote isgiven, following the class order relief introduced by the AustralianSecurities and Investments Commission.

These product providers were previously required to give a PDSto a client at or before the time the quote is provided, due to the facta quote may constitute “offer to issue”.

However, the regulator was concerned about the inability ofproduct providers to supply quotes during telephone calls solicitedby clients.

Under the relief, the client can choose to receive the PDS, and ifthey do, the general insurer or intermediary must give a PDS assoon as practicable after the quote is given.

“This means that the PDS can be given after the telephonecall,” the regulator stated in its announcement.

The relief, however, does not apply to telephone calls not facili-tated by the client.

By Mike Taylor

BT INVESTMENT Management(BTIM) appears to be weatheringrecent market volatility and cautiousinvestor sentiment in good shape,reporting just a one per cent declinein net profit after tax of $30.5 millionfor the year ended 30 September.

It said the result excluded the one-off transaction expense associated withthe acquisition of J O Hambro CapitalManagement, which would have seenstatutory net profit after tax decliningby 23 per cent to $16.9 million.

Commenting on the result, BTIMchief executive Emilio Gonzalez said itwas sound against the backdrop of

volatile markets driven by concernsover European sovereign debt and adeteriorating global macro-economicenvironment.

“In a difficult environment, BTIM hasmaintained its underlying profitabilitywith a continued focus on costs whilstcontinuing to invest for growth,” he said.

Gonzalez said the company hadmade significant progress on a numberof strategic initiatives, in particular therecent JOHCM acquisition which hadnot resulted in any mandate losses or inany funds being placed on hold.

The BTIM Board declared a final fullyfranked dividend of 10 cents per share,taking total dividends for the year to 16 cents per share.

BTIM’s solid profit

Emilio Gonzalez

Pauline Vamos


SMSF WeeklyAuditor requirementschallenge regional AustraliaBy Mike Taylor

NEW auditor registration arrangements areproving a real challenge for accounting practicesin regional areas, according to Institute of Char-tered Accountants self-managed superannuationfund (SMSF) specialist Liz Westover.

Westover said a recent tour of NSW regionalareas had revealed that many auditors were olderpartners in regional accounting firms who werethen faced with difficulties in adequately imple-menting succession planning.

"Not only can it be difficult to find audit staff,but it is becoming almost impossible for region-al practitioners to satisfy the requirements tobecome Registered Company Auditors," she said."Unfortunately, they will rarely be able to gain therequired experience in large listed audits unless

they have worked in larger, often city-basedfirms."

Westover said she was concerned that as therequirements for the registration of SMSF auditorswere being finalised, a similar problem could betriggered.

"SMSFs continue to grow in number and theyall require an annual audit," she said. "We needto be careful that the new provisions don't makeit so prohibitive to become a registered SMSFauditor that it then becomes difficult for SMSFtrustees to find a suitable auditor, particularly inregional areas."

Westover said the objective of SMSF auditorregistration was to ensure competent auditorscarried out quality audits, but there was a needto be careful not to over-regulate to the point ofstifling the industry.

ATO ruling triggerssuccession issuesBy Damon Taylor

WHILE the Australian TaxationOffice’s (ATO’s) recent draftruling regarding auto-reversion-ary pensions has already high-lighted the importance of effec-tive succession planning withinself-managed super funds(SMSFs), it is also an opportu-nity for advisers to take stock oftheir current succession plan-ning practices, according to DBALawyers director Daniel Butler.

“Advisers are frequently askedto assist with SMSF successionplanning assignments for theirclients,” he said. “And more oftenthan not, they will be approachedby advisers with the query ‘I’d liketo update Mr X’s pensions tomake them reversionary’, or ‘MrsY needs a BDBN (Binding DeathBenefits Nomination) drafted’.

“However, in order to appropri-ately plan for Mr X and Mrs Y’sSMSF succession upon theirdeath or loss of capacity, thereare a number of things that mustbe considered.”

Butler said that as a first port ofcall, the SMSF’s deed needed toallow for other supporting docu-mentation to be put into place.

“The SMSF members shouldthen consider having a sole-pur-pose corporate trustee appointed,with mechanisms in the companyconstitution that allow for thesmooth succession of directors,”added Butler. “Thereafter, thingssuch as wills, enduring powers ofattorney, pension documentationand BDBNs should all bereviewed and considered.

“They need to be checked toensure that they are consistentwith one another and are in accor-dance with their clients’ goals,”he continued. “For example, a

BDBN may state that a member’ssuperannuation benefits are tobe paid to their legal personal rep-resentative. However, thatmember’s will may not take theirsuperannuation benefits intoaccount.”

According to Butler, when anadviser’s client asks them to starta pension or BDBN, the advisershould be thinking about a rangeof other aspects.

“The reversionary nominationis now an important decision andhas an impact on clients’ estateplanning,” he said. “Advisers suchas accountants, financial plannersand lawyers should hopefully beable to formulate strategies thatcan be applied across all of theirclients.

“Such a strategy should notnecessarily restrict clients’ suc-cession planning choices, butrather ensure that the adviser isdemonstrating that they have theclient’s best interests at heart bythinking outside the square - andthat the client will have a rock-solid SMSF succession planningposition at the completion of theengagement.”

Trustee caution urged on charitable donationsSPECIALIST sel f-managedsuperannuation fund companyCavendish Superannuation haswarned trustees to take carewith respect to char i tabledonations.

Cavendish Superannuationhead of education David Busolisaid care was needed in circum-stances where some trustees

had received communicationsfrom organisations which facil-itate the transfer of smallparcels or shares, or dividendsto nominated charities.

“As individuals, they can dow h a t t h e y w i s h w i t h t h e i rp e r s o n a l a s s e t s , b u t a strustees, they are not able tod o n a t e s u p e ra n n u a t i o n

assets,” Busoli said.“If a trustee member wishes

to donate some shares or allo-cate dividends to a charity, theassets or monies must first bepaid out to the member as afund benefit subject to preser-vation rules. The individualmember may then make thedonation personally.”

Daniel Butler

BGL adds actuarial provider to SMSF softwareBy Chris Kennedy

SELF-MANAGED super fund (SMSF) softwaref ir m BGL Corporate Solutions has addedBendzulla Actuarial to its actuarial certificateproviders.

In May this year, BGL upgraded its service toallow integration of an actuarial certificate intoan administrator’s SMSF software.

The firm’s Simple Fund software automatical-ly provides the data and supporting documentsto Bendzulla Actuarial, which then provides the

certificate to the client, BGL stated.Actuarial certificates provide administrators with

the percentage of income that is exempt from fundincome tax for members receiving a pension, andthis percentage is saved in the appropriate placein the software, according to BGL.

BGL managing director Ron Lesh said the firmwould add further actuaries to the certificateprocess in the coming months.

Since incorporating the actuarial service, morethan 1,800 certificates have been obtainedthrough this process, according to BGL.

Financial planners should not becometoo optimistic about the capacity forthe Parliamentary Joint Committee(PJC) on financial services delivering

any outcomes capable of altering the shape ofthe Government’s Future of Financial Advice(FOFA) legislation.

While it is true that the PJC chaired by Laborbackbencher Bernie Ripoll managed nearly twoyears ago to deliver the original bipartisanreport that gave rise to the Government's FOFAagenda, the likelihood of bipartisanship or anymeaningful change to the first tranche of theFOFA is remote.

The Government and particularly the Assis-tant Treasurer and Minister for FinancialServices, Bill Shorten, have too much at staketo allow Labor members of the PJC to supportany of the changes which might be pursued bymembers of the Coalition for and on behalf ofthe financial planning industry.

Indeed, the most likely outcome from thePJC will be two reports – one generated byGovernment members and likely supported bythe Greens and another, dissenting analysis,generated by members of the Coalition Liberaland National parties.

The benefit that will flow to the FinancialPlanning Association (FPA) and the Associa-tion of Financial Advisers (AFA) is that refer-ence of the FOFA legislation to the PJC givesthem an opportunity to restate their concernsabout issues such as the two-year ‘opt-in’ andthe almost retrospective imposition of compre-hensive product disclosure requirements.

The two organisations have also lost no timein ramping up the lobbying campaign theybegan earlier in the year aimed at convincing

parliamentarians in all states – but particular-ly the independents – of the flaws in theGovernment's approach.

As was the case earlier in the year, the most-visited independent has proved to be PortMacquarie-based parliamentarian RobOakeshott, largely based on the belief that heearlier this year signaled he held some reser-vations about the benefits of opt-in.

Similarly, a good deal of lobbying has beendirected towards Tasmanian independentAndrew Wilkie.

However it is axiomatic of the delicatebalance in the House of Representatives andthe relationship which exists between the keyindependents and the Government thatOakeshott’s attitude towards ‘opt-in’ and otherelements of the FOFA legislation in November,2011 is somewhat changed from that whichprevailed in June.

While no one is suggesting that financialplanners should not continue lobbyingOakeshott, Wilkie and other key parliamentar-ians, the industry's cynics suggest that the inde-pendents may yet seek to use their support oropposition to FOFA as a bargaining chip fortheir own agendas. Wilkie in particular is seenas a single-issue politician.

However the degree to which the lobbyingefforts of the financial planning industry havemade their mark was indicated by Bernie Ripollwhen he addressed the Association of FinancialAdvisers’ annual conference on the Gold Coastlast month.

Ripoll remarked about the manner inwhich his Parliamentary colleagues hadcomplained about the number of visitsthey had received from financial planners

and the issues which had been raised.While the PJC chairman indicated that he

was entirely supportive of the Government'sFOFA approach, he acknowledged that the levelof lobbying undertaken by financial plannerson the issue had made some of his colleaguesuncomfortable.

Notwithstanding the likelihood that the PJCwill fall well short of adopting a bipartisan posi-tion on the FOFA bill, the FPA last weekrelaunched the do-it-yourself lobbying kit withwhich it armed members earlier this year.

FPA chief executive Mark Rantall said thatwhatever the outcome, he believed the refer-ence of the FOFA bill to the PJC represented animportant opportunity for the industry torestate its points.

This was a view echoed by AFA chief RichardKlipin, who said his organisation and itsmembers had never ceased making represen-tations with respect to its concerns about theFOFA legislation.

While the PJC appears unlikely to adopt abipartisan position with respect to the FOFAlegislation, it will give financial planners a clearsignal as to how the bill is likely to be treatedin the House of Representatives.

If the only members of the PJC recommend-ing amendments to the legislation are sitting onthe Opposition benches, then the Governmentwill know that its bill is likely to be passed intact.

If, however, a majority of members on thePJC support the position adopted by the Coali-tion, amendments become a certainty.

What must be remembered, however, is thatthe legislation to be considered by the PJC isonly the first tranche, with at least two furtherpackages expected in coming months.

InFocus


Much attention has been directed towards the manner in which aParliamentary Joint Committee will handle the Government’s Future ofFinancial Advice legislation but, as Mike Taylor reports, the likelihood of abipartisan approach is very remote.

Meeting of FOFA minds unlikely in Canberra

ASFA National Conference &Super Expo 20119-11 November 2011Brisbane Convention &Exhibition Centrewww.superannuation.asn.au/asfa2011-conference

SMSF’s – Stronger SuperReforms (Breakfast)10 November 2011Amora Riverwalk Hotel,Richmond, Victoriawww.spaa.asn.au/events.aspx

Procure to Pay 201115-17 November 2011The Sebel, Sydneywww.procure-to-pay.com.au

FPA 2011 NationalConference17-18 November 2011Brisbane Convention &Exhibition Centrewww.fpaconference.com.au

Insto FX Congress30 November 2011Sheraton on the Park, Sydneywww.intrepidminds.com.au

What’s on

BANKREPUTATIONSNAPSHOT

6%Westpac

Best reputation withinstitutional customers

15%CBA

Best reputation with retailbanking customers

8%NAB

Best reputation withcorporate clients

Source: The Bank Reputation Index – DaymarkPublic Relations and East & Partners


Roundtable

FOFA: living life by ava-tranche

M T T h e l e g i s l a t i o n , t h e b i l l , w a sb r o u g h t d ow n l a s t we e k a n d i tc o n t a i n e d a c o u p l e o f s u r p r i s i n gthings. I think one of the foremostamongst these, from talking to peoplelike Mark and others who watch thisvery closely, was the fee disclosurerequirements which, when you readthem, seem very, very onerous and veryt i m e - c o n s u m i n g – a n d t h e re’s a nelement of retrospectivity about them.

So, I guess kicking off with that, I’dlike to ask the panel how they feel theindustry will deal with something likethat in the event that the legislationgoes through unamended.

I’ll kick off with you Mark, because Iknow that you’ve been at the coalfaceon this one?

MR That particular piece of legisla-tion was in terms of expanding feedisclosure to be retrospective, withexisting clients to be captured ratherthan new clients, as opt-in is proposedto capture. It certainly was a surprise tothe whole industry. It seemed to be alast-minute inclusion.

We’re not quite sure why i t wasincluded at the last minute, but we’llwork through the details of that throughconsultation.

What it does mean, however, is thatnow that it’s embedded in the draftlegislation and that legislation will bedebated, it can only be removed by thegovernment through ongoing consulta-tion at the political level.

In terms of the effect that it will haveon financial planners, the form of thefee disclosure is quite onerous and ithas a number of different components.The first component is to let clientsknow what fees have been charged in

the past (the previous 12 months), whatservices were on offer during the previ-ous 12 months, and what services theclient availed themselves of during theprevious 12 months.

In addition to that, the fee proposedfor the next 12 months has to beoutlined in dollar terms. The servicesthat are provided for that fee have to beoutlined as an estimation by the finan-cial planner, the services that will betaken up by the cl ient have to beoutlined.

So this is not a small piece of workthat’s being required of the financialplanners when that has been allocatedback to their existing client base. This

fee disclosure could run to a number ofpages, and whilst the proposal as itstood was to be implemented for newclients, financial planners might havehad half a chance to progressivelyimplement this piece of legislation inunison with opt-in – even though wedon’t support opt in as a legislativerequirement.

But now, effective from the 1 July ifthis legislation is passed, the entireclient base of a financial planner willhave to be sent this notice – and wethink that’s excessive. The reason wethink it’s excessive is that we supportfull disclosure to clients of fees andcharges. Full disclosure of fees and

charges are made in a statement ofadvice and full disclosure of fees are alsomade at the product level, whether it befrom a platform or from an individualproduct. And if an adviser is being paidvia a cash management account, wellclearly there’s full disclosure there onannual statements. So we just think thisis additional red tape, additional workfor no consumer benefit, and this willexplode the cost of opt-in legislation.

So we’re quite concerned about it andwe’ve taken a strong stance against it.

NR Well what’s frustrating is that theyhaven’t taken on board any of the indus-try’s feedback about how impractical

Mike Taylor, Money ManagementMark Rantall, FPARichard Klipin, AFANicolette Rubinsztein, Colonial First StateGerard Doherty, FidelityRick Di Cristoforo, MatrixPaul Harding-Davis, Premium Wealth

Management

Present

Rick Di Cristoforo and Paul Harding-Davis

With both tranches of the Future of Financial Advice draft legislation now released, participants ina Money Management roundtable discuss the good, the bad and the ugly coming out of theGovernment’s proposed package.


Roundtable

that actual notice is. It’s one thinghaving an option of having the clientsign a piece of paper; it’s another thingproducing a piece of paper that has theprior year’s fees, the future fees, all ofthe services – and you think about howyou actually do that.

You’re going to have to get the infor-mation off the platform, possibly offmultiple platforms if your client is onmultiple products. And then you’regoing to have to – the deliverer is goingto have to – put the services on.

I think it’s going to be very costly forthe industry to build that in with previ-ous clients. At least with future clientsyou could have actually managed theirarrangements in such a way that youknew you were going to be able to getmore of that information together, butwhen it’s for existing clients that’sgoing to be very, very difficult.

RD There’s a couple of points this

raises as far as overall implications areconcerned. One of them, at the highestlevel, is that effectively a clause was movedfrom what was 962 Division A down to 962Division C, effectively removing the grand-fathering.

The presumption was always that theindustry would work on a forward basiswith future clients on a new process.That’s the first thing. The next implica-tion is by removing the grandfatheringyou’re effectively applying this to whatwe classify as C and D clients across theindustry.

How the thought process around a feedisclosure is consistent with access toadvice is beyond me. There is no compat-ibility between the overall aim of accessto advice.

And the third thing – and this is notfrom a Matrix perspective but fromconsultation with a number of players inour industry including consultants whoare supposed to be helping the overall

industry do its job – is they’ve said in nouncertain terms the data doesn’t exist.

So by not listening to the industry, asNicolette has rightly said, they’ve put ina piece of legislation that is actually notpossible to be implemented by the 1July 2012. I know we’ve all got questionsabout when this thing gets implement-ed, but even with it in its pre-exposuredraft form we had questions about theimplementation.

I’ve now got questions about how everysingle company in this industry actuallycoordinates together a piece of data on apiece of paper for a new client, when allthe pieces of data are in disparate places.

They simply can’t be put together withwhat we’re seeing in the industry rightnow, and I know that’s not a view of justMatrix, that’s a view of every single personI’ve spoken to.

NR And the Finance Industry Councilof Australia have now written a letter to

Government questioning the timing,asking for more transition time.

PH Given how long it’s going to takefor final details, for final passage, howfew months are left for the industry towrestle with this? It’s kind of alarming,particularly when you think about thesorts of changes you’re asking platformproviders and super fund administra-tors to make.

I find myself a little intrigued, too,about the implications of that acrosssome of what the government mightargue are their own constituencies – interms of the effort they would have togo to to produce this information, and

to put in place those processes in thatsame space of t ime. I would havethought that some of them would bealarmed by what they’re being asked toaccomplish.

MT Richard, the question really islooking at the bill, which has now beenintroduced, had to say particularlyabout fee disclosure – and the impactthat has on planners and the costimposition, I guess, on planners. I’mjust wondering, as you’ve just reallyentered the room, I just wonder whatyour take on it is from the AFA’s pointof view?

RK Oh look…great concern, greatconcern that it’s been, if you like, tossedin at the last moment; great concernabout what it’s going to mean, as peoplearound the table have said, in terms ofjust practice activity. It adds another layerof uncertainty, this is almost like the joker

in the pack that’s tossed in at the lastmoment. Is it a negotiating point? Is it nownew policy? Is it now new policy on therun? Where’s the evidence for it? It kind ofbrings into question what the whole thrustis here, because the playing field keeps onshifting.

Big businesses and small are makingbig decisions about getting ready,because the 1 July, 2012 deadline reallyhasn’t changed – and it’s entirely unrea-sonable for the landscape to shift thatdramatically in the space of weeks. I’mnot sure whether it’s been tabled, but it’sour understanding that the legislation is

Continued on page 14

“By not listening to the industry they’ve put in a piece oflegislation that is actually not possible to be implementedby the 1 July 2012.” – Rick Di Cristoforo

Nicolette Rubinsztein, Gerard Doherty and Mark Rantall


going to be referred to the Parliamen-tary Joint Committee [PJC]. I’m not sureif you guys have spoken about that.

There’s therefore a process that’sgoing to now happen within the PJC.That’s no doubt going to take sometime. And it almost feels as though we’reback to the start of 2009. If we’re goingback to the PJC (which is where westarted), it feels like: what’s the last threeyears of really hard labour, hard yards,dramatic landscape change, what’s it allbeen for, if you like? So yeah, as anopening set of comments, that’s whereI sit.

MT Gerard, you’re coming at it froma slightly different perspective?

GD Yeah, well look, as an industryparticipant I agree with Richard. There’sbeen, I think, a long arduous processthat we’ve gone through, and this stingin the tail at the last minute is very frus-trating and very concerning.

We’ve heard consistently that thedialogue from the government is, ‘Wewant to give more Australians access toadvice’, (but we keep putting up morebarriers for people who want to be inthat business by introducing thiscontinual complexity).

So for all industry participants it’s nota good thing and I don’t think it’s ulti-mately a good thing for investors. I thinkit will produce another set of paperworkthat people won’t understand, that’s thesad thing. I don’t think it will achieve –well, I don’t know what the desired

outcome is – but it won’t achieve whatthe normal person would think it wouldachieve, which is to make an investorbetter informed. I just don’t think it will.

MR Well I’m glad you’ve raised that,because given that both the ISN andChoice have come out with such strongsupport for this particular retrospectiveinitiative around disclosure documents,you know, they’ve lobbied hard to havethis addition at the last minute to thelegislation that’s been tabled – giventhis, I just question why they wouldwant to do this when we fully supportdisclosure in all its forms, when thatdisclosure is already there on people’sannual statements in terms of fees andcharges.

When we’ve gone through, as every-body says, an arduous consultationprocess over many years and manymonths, then to have this sort of thrownin at the last minute – you know, youcan only draw the conclusion that theISN is trying to put in place a more diffi-cult operating environment for advis-ers to suit their own ends.

Where the ISN is a wealth managementconglomerate consisting of part of a groupcalled Industry Super Holdings which hasa bank – ME Bank – it has a wealthmanagement company with $39 billionunder management and a financial plan-ning company turning over $265 million ayear, you know, I think the question needsto be asked: what are the motives ofsupporting such an initiative when thevast majority of the industry had alreadylined up behind a position only to have itoverturned at the last minute?

PH Before I have to head off, I thinkit’s really important when we discussthis and we use the term ‘retrospectivedisclosure’ to constantly reinforce thefact that there has been extensive feeand cost disclosure in place andprescribed fee and cost disclosure foryears.

The reality is the level of informationthat is required to be given to aninvestor or a customer of a financialplanner is already highly prescribed andvery comprehensive. So I worry [that]we sound like we’re objecting to feedisclosure on a retrospective basis; it’squite the contrary, what we’re objectingto is a radical change in the form of thatdisclosure at the last minute.

The fact is there has been compre-hensive and rigorous fee disclosure, infact arguably some of it’s almost hardfor the consumer to understand

because there’s so much of it prescribedin a Product Disclosure Statement. Theaverage PDS must cover three or fourpages on fee disclosure, and I questionmost ordinary individuals’ interest levelin wading through three or four pagesin amidst 40 or 50 or 60 others, but thereality is the disclosure has been exten-sive and it’s been consistent and it’sbeen prescribed by all of those partiesfor some time – and willingly adheredto by everybody I know in the sector.

MT Well let me throw probably alittle bit of a controversial question atyou on this and I’ll understand whys o m e p e o p l e m a y w i s h n o t t o b e

involved in answering this question,but in all the circumstances do youb e l i e ve t h e g ove r n m e n t h a s b e e nhonourable in the manner in which it’sgone about this legislation in terms ofwhere it started with Ripoll and howit’s got to where it is today which is thebill that was introduced to the Houselast week? Were they honourable, werethey transparent in how they got towhere they’re going? It’s a very noisysilence.

MR Well I’ll lead off, I don’t think thisis a matter of being honourable or not,I don’t think it’s a matter of behaviour. Ithink there was a robust process thathas taken a long period of time, which isappropriate for the extent of changesthat are being made. I mean FOFA is notjust about opt-in, there are other rami-fications of FOFA.

There are lots of other parts of legis-lation and tranches to come throughthat we haven’t seen yet, and from theFinancial Planning Association’s pointof view we broadly support the thrustof the FOFA reforms. We have had forsome time in our code of professionalpractice a best interest duty. We had forsome time the removal of commissions,and we’ve had for some time the avoid-ance of conflicted remuneration. Andwe’ve had for some time the avoidanceof any soft dollar opponents.

We support higher standards and wesupport higher education. We don’tthink RG146 is an appropriate level ofeducation for financial advice.


Nicolette Rubinsztein

Mike Taylor

“I worry [that] we sound like we’re objecting to feedisclosure on a retrospective basis; it’s quite the contrary,what we’re objecting to is a radical change in the form ofthat disclosure at the last minute.” – Paul Harding-Davis

Roundtable


So, you know, the disappointmentwith this is: after two years of consulta-tion where our association broadlysupports the majority of the FOFAreforms and the new direction that we’retaking for the benefit of consumers, tohave a piece of legislation which incor-porates two pieces of policy – one ofthem a bi-annual renewal statement,and the other a retrospective disclosurestatement which is excessive.

It is disappointing to see that thebroader industry has not been listenedto on this subject and that legislation isstill being tried to be pushed through,because I think without it there’d begeneral industry support and profes-sional support to make sure that weimprove standards for the benefit ofconsumers.

That’s the disappointing aspect, andI can understand that due process hasbeen undertaken. It’s the result of thatdue process in relation to specific partsof this legislation that has now beentabled that is a disappointing result.

NR Staying off the honourable, nothonourable: I think there’s been a sort ofdecline in trust, and now just if we lookat the way that we’re going to build opt-in from a platform point of view we willprobably do the IT build in two sepa-rate sections, almost on the expectationthat the Labour Government will not beelected next time around.

So we will build the ability to capturethe client information and the fee infor-mation in the first instance. Then thenext build, which only needs to happenin two years time, will provide the abilityto produce the statements. But I thinkthat’s indicative of people’s view of thegovernment.

MT It’s a pity he’s had to leave us, butPaul Harding-Davis I think last weekwas suggesting, as have others, that insome ways the net outcome of FOFA isa bit of a back-to-the-future where thebanks and the major institutions aregoing to be dominant in the advicespace.

I guess we can see Count Financial,you know, get the offer from the ComBank, and understandably given all thethings there’s a move there that willprobably get signed off. Rick is hereand he announced yesterday that infact Matrix is looking for investment.

So I just wonder whether really whatPaul had to say last week, about theway in which vertical integration iskind of where it’s all being pushed, iswhat’s really happening – and ulti-mately is it a good thing, is it a badthing? Rick I’m going to ask you firstbecause…

RD Of course, why not? I think we’vegot to be very careful to separate thedecision that an individual companymakes around its own strategy versuswhat goes on in the macro environ-ment. I can only speak for Matrix thatwe would make decisions based onwhat our own internal capabilities andour own internal views are about whatthe future looks like.

So I can honestly say FOFA had noimpact on the announcement. However

I think that what you see when you seeFOFA, in terms of the overall industryconsolidation, is the beginning of a verylarge, unintended consequence.

Now whether or not you think thatvertical integration, industry consoli-dation, companies like Matrix – forwhatever reason making the decisionsthat we’ve made – is a good or bad idea,we will end up with an industry thatlooks different. We would arguably, asI’ve always argued, end up with anindustry that has less dynamic compet-itive pressure.

By definition that seems to not beconsistent with the best interests of thecommunity and clients overall. So forthe purposes of FOFA and its impact onthe industry at large, rather than specif-ically related to Matrix, you know I’vesaid publicly it is a real shame becauseit’s creating changes in the industry forcertain players that would not other-wise make decisions.

And Nicolette, that is exactly the sortof conversation I’ve been having withother people over the past few weeks.You’re in a large organisation, peopleoften talk about independent-owned

licensees – and I’m not going to go intoany of that – but the reality is if you’re ina very large institution with a very largeplatform that you’ve spent X amount ofmillions of dollars developing, and youare seriously considering building twodifferent systems effectively to deal withthe ‘what-if-they’re-in, what-if they’re-out’ scenario.

If that isn’t a waste of money I don’tknow what is – but you’ve got no choice,and that to me is another unintendedconsequence. I don’t think we really thinkthe Treasury ever thought, ‘let’s just makeColonial First State and ANZ and all theseother companies build dual systems fordisclosure and fees’. It’s ridiculous. So Ithink what we’ve seen is just the begin-ning of one of the many of what could bevery large unintended consequences.

NR Sorry, just to clarify, we’re notbuilding two systems, we’re actually justsplitting the build.

RD But let’s put it this way, that has acost to it.

NR It’s easier to do it all in one go.

RD Exactly, so at the end of the day, ifwe’re talking about something that’smost efficient, you would not be doingit a particular way, and I don’t knowanybody in our industr y that canhonestly say that they’re looking at thefuture and going, “I’ve absolutely beenable to choose the optimum path”, ifthey are they’re lying, to be perfectlyhonest. How can they possibly be tellingthe truth, because you’re having to dothings that have been manufactured bya piece of law.

NR I think FOFA does favour verticalintegration obviously, but I think theiPhone market will be alive and well. Idon’t think anybody would predict thecomplete decline of the IFA market, andyeah, you know we were looking atCount, we’ve looked at them for yearsso we would have done i t with orwithout FOFA. We’re still very interested.

We get 50 per cent of our inflows fromthe IFA market, so we’re very focused onmaking sure it continues to thrive. Ithink without doubt you can cross-subsidise within vertical integratedbusinesses.

GD I think there’s no doubt that verti-cally integrated players will dominateover the next few years and I think thereare three influences.

One is the global financial crisis,which has seen incredible consolida-tion of banks and insurance companiesand it’s also driven consolidation inlarge industry funds that are gettinglarger. The consolidation in the industryfunds I think is something we should bevery mindful of. It’s happening at a hell

Continued on page 16

Richard Klipin and Rick Di Cristoforno

“There’s two sorts of people you meet in financial plannerland: there’s the older guys who are feeling really frustratedwith the ways the rules are changing, and the other guyswho are saying ‘bring it on’.” – Rick Di Cristoforo

Roundtable


Roundtable

of a pace. So that’s partly driven by theglobal financial crisis.

I think the Cooper Review and theadvent of MySuper is another reason todrive consolidation – so difficult finan-cial times, Cooper Review and nowFOFA is the third thing that makes forconsolidation. So we’ve gone from the80/20 rule almost to the 90/10 rule, asmall number of very large players whoare integrated and who will be able todominate, because they have the scaleto be able to deal with these things.

It’s also happening during a difficultperiod for investors where sentiment isdown and flows of the managed invest-ments are down. But I agree, I think inthe future there will be a new IFA world.I think it will be a different bunch ofguys. It won’t be the entrepreneurs whogrew up through the 1980s, like theMatrix guys who did a wonderful jobbuilding businesses on the rules thatwere there at that time.

But there’ll be a new bunch of guysand I meet those guys. There’s two sortsof people you meet in financial plannerland: there’s the older guys who arefeeling really frustrated with the waysthe rules are changing, and the otherguys who are saying “bring it on”.

I can see great opportunity and Ithink as confidence re-emerges ininvestors and markets become morebullish, then those entrepreneurs willbe able to build businesses in the newgame. So you’ll get this small numberof large players – and then a number ofsmall players breaking out again. In 10years time I think you’ll probably havea more robust IFA market than today,

quite significantly, building new busi-ness models.

RD If you’re running a business at themoment and you’re that sort of originalentrepreneur, if you haven’t alreadyaddressed the idea around successionyou’re probably f ive years too lateanyway. So I suppose the argument isFOFA obviously focuses the mind, butrealistically in organisations again likeMatrix you have to make it a part of yourjob to ensure that people have genera-tional shift , for example we’ve gotsecond and third generation in now.

So you’re moving to do that andthere’s an element of people who obvi-ously have frustration, who say, youknow, “this is a pain” as rules change. Ithink we’ve al l got those [people]regardless of how much time we’ve got.

At the same time we’ve got somepeople who are saying, “this is justanother way of doing business”. In factthere are people within businesses

where one par t of the business ispredominantly – let’s call it commis-sion-based – and the other part of thesame business is utterly fee-for-service,and that happens within even the small-est of businesses now. So there’s oppor-tunities attached to it, but you knowobviously what we’re here to talk aboutis an impost that’s put upon the indus-try for no apparent benefit and not inalignment with the stated goals of whatthe Government was saying.

RK There’s also an emerging issue, notin the advice world I think but in thefund insurance world. Advice is now thecommodity – that is, advice is not aboutthe product side, and there’s now count-less examples where the role of adviseris not to end up being a product desti-nation but to manage cash flow, get thestrategy right and so on.

So I think the chal lenge for theproduct providers is that the currentindustr y business model rel ies on

quality advice leading to some kind ofproduct outcome. Well if you break thatnexus, which is clearly where FOFA isheading, how do you end up with flows,how do you maintain that relationshipwhich I think spins out the whole adviceoffer?

Which is why the scaled advice, intra-fund advice piece opens up the oppor-tunity, as do the incubators of direct-to-market gain and so. That opens upthe area of channel conflict or potentialchannel conflict, but also opens up theissue of what is advice.

Because, advice to date [may havebeen], you know, quality advice, end-up-in-a-product proposition and away yougo, but there are other things that arecalled advice, or ‘advice lite’ or scaledadvice that ends up in a product propo-sition, so then we end up in this blurryland again of does advice equal sales oradvice equals advice?

The question if you’re running a fundsinsurance super business is how do youmake sure that you continue to do – so ifyou l ike feed the beast or feed thefactory and keep it humming when yourdistribution channels have a change offocus into providing advice irrespectiveof whether there’s a product sale madeor not.

I know product providers are absolute-ly addressing those issues, but I think itdoes change the landscape and in someways, in the same way the economics ofthe advice models are in change, so theeconomics of the product provider modelalso have to be in change. So it’s kind ofinteresting up-line impacts. Ripoll andFOFA was never about that stuff, it wasalways about giving good advice so thestorm doesn’t happen again. MM

“I think the challenge for the product providers is that thecurrent industry business model relies on quality adviceleading to some kind of product outcome. Well if you breakthat nexus, how do you end up with flows, how do youmaintain that relationship which I think spins out thewhole advice offer?” – Richard Klipin

Paul Harding-Davis and Mark Rantall


The prospect of a sovereigndefault in Europe evokes memo-ries of 2008 and the collapse ofLehman Brothers. For me, a

better parallel is 10 years earlier. Today’sdrama has all the hallmarks of a classicLatin American crisis, only this time theLatins are in southern Europe.

The Russian default of 1998, itself anecho of the previous year’s Asian Tigercrisis, sent Latin America into a tailspinthat took five years to stabilise. Countriesmany thousands of miles from Moscow,and with few trade links, were caught upin the crisis, their leaders, such as Argenti-na’s then president Carlos Menem, at firsteither unwilling or unable to comprehendthe impact a Russian default might haveon their own creditworthiness. The crisisroamed from one country to the next,causing havoc in financial markets andled to a range of support measures fromthe International Monetary Fund (IMF).

For Russia read Lehman Brothers. ForArgentina, read Greece. For Menem, readPapandreou. For Brazil, read Italy. For IMF,read IMF. There are differences, but thecombination of surging sovereign yields,frail banks, ever-larger IMF-backed stabil-isation plans, austerity, no growth, fallingequities, volatility and bewilderment arecommon to both episodes. The lesson ofthe 1990s’ crisis is to prepare for the worstbecause it will happen. Countries that did,such as Brazil, recovered; those that didn’t,such as Argentina, still struggle.

The role of the private sector was key tothe recovery in those Latin economies.Latin American governments, led byBrazil, adopted a range of financial andeconomic policies that sought topromote private sector involvement ineconomic recovery. Asset sales, priceliberalisation and fiscal consolidationfocused on expanding the private ratherthan the public sector. I do not recall theBrazilian central bank ever buyinggovernment bonds.

In southern Europe today, it is not clearwhat role the private sector is expectedto play in economic recovery. The Euro-pean Central Bank’s (ECB’s) policy ofpurchasing sovereign debt is stabilisingsovereign yields but it has an unintend-ed consequence, encouraging thebanking system to offload its bond port-folios and abandon southern Europe,with dire consequences for economicgrowth. In the next few months, theextent of the recession in continentalEurope will become clear and debtdynamics will further deteriorate. This isnot what policymakers are assuming. Butwhat else should we expect? We shouldpursue policies that seek to encourageprivate sector finance in southern Europerather than offer it a means of escape.

The lessonsBefore southern Europe can return togrowth we need private sector involve-ment and finance. The experience of theLatin American crises can guide us inEurope today.

First, governments in southern Europeneed to commit to primary surpluses(budget surpluses before interestpayments) and halt the drain on privatesector resources. Fifteen years ago, devel-oped countries (and the IMF) demandedthat emerging countries such as Brazil runlarge primary surpluses to stabilise theirdebts. It is hardly surprising that similarcalls are heard from emerging economiesnow that roles are reversed.

Second, the ECB should stop buyingsovereign bonds. The purchases shouldbe replaced with a Brady-style plan that‘incentivises’ the banking sector to renewits lines of credit to southern Europe, whilesimultaneously lowering the overall debt

burden. (The Brady plan was a US-spon-sored strategy that emphasised debtforgiveness.) The creation of a 30-yearzero-coupon ‘Trichet bond’ would collat-eralise the principle of new Greek sover-eign securities, which would be the centre-piece of a debt-swap plan. The swap – oldGreek securities for new – would simulta-neously reduce the overall quantity ofGreek sovereign debt and extend its dura-tion. Banks would enter the swap volun-tarily as the discount to the old bondswould be more favourable than currentprices and the new securities would bebacked by the Trichet bonds. The Greekgovernment would be responsible for allcoupon payments, maintaining fiscaldiscipline.

Third, banks will require more capitalto absorb the financial impact of thedebt swap. Accounting standards couldbe relaxed temporarily to facilitate this,but there will be calls for fresh capital.

Equity markets may not be prepared toprovide this capital at current shareprices, but European banks can sell theirnon-European subsidiaries to localcompetitors. They can sell off non-banking businesses. Some troubledbanks can be sold to foreign banks intheir entirety. US and European banksscooped up much of Latin America’sbanking system 15 years ago.

It is difficult to see an end to this crisisin southern Europe, but it can be solvedif policies are crafted to encourage privatesector involvement. At the moment, theprivate sector is disengaging from south-ern Europe and the ECB’s purchasing ofsovereign bonds is accelerating theprocess. This can only mean that econom-ic growth will continue to disappoint.

Dominic Rossi is global chief investmentofficer, equities at Fidelity WorldwideInvestment.

Euro debt dance just an old Argie tango

OpinionEuroDebt


There is a striking similarity between what debt-ridden European countries are going throughnow and what some Latin American countries were going through more than a decade ago. AsDominic Rossi writes, past events point to a bleak economic future.

In April 2007, after the ReserveBank of Australia (RBA) had liftedrates, the Sydney Daily Telegraphdisplayed a large photograph of

the face of RBA Governor Glenn Stevenson its front page, with the caption “Isthis the most useless man in Australia?”.

We need not give much credence tothe implied view that interest ratesshould never go up. However, I wish togo further, and offer high praise toGovernor Stevens. What has he done todeserve such praise? Not much – andthat is the point. This is an article infavour of a healthy passivity by centralbanks.

The head of RBA does not appear tosuffer delusions of grandeur; he doesnot seem to believe he is a supermancalled on to save the world or evencapable of such a task; he does notsuffer manic depression when it comesto interest rate settings. All in all, heseems a man of the past, when centralbankers were prudent and considered,and limited themselves to worryingabout the stabil i ty of the bankingsystem and trying to contain inflationwithin reasonable limits and not toomuch else. In other words, GovernorStevens appears to have not lost hismind.

This stands in clear contrast to thebehaviour of Federal Reserve (Fed)Chairmen Alan Greenspan and Ben S.Bernanke. What the inflation marketsshould be most worried about is infla-tion of the egos of American centralbankers.

The god of marketsThis began during the period called the‘Great Moderation’, though it shouldhave been called the ‘temporary bubbleof the late 1990s’. For a period, WallStreet applied the nickname “God” toFed chairman Alan Greenspan. Therationale for this idiotic sycophantismwas that many market participantsbelieved that the then prevailing bullmarket was caused by the Fed’s inter-est rate settings. And it was expected

that, at the first hint of a downturn inequity markets, Greenspan would slashrates to send markets back to theirupward trend – the “Greenspan put”.

History has shown this expectationto be drivel. It was just another versionof “this time it's different.” Subsequent-ly, as markets fell, rates were cut all theway to vir tual ly zero – yet equitymarkets have remained weak. Nonethe-less, during the boom, central bankersbegan to be seen as all powerful inmanaging the economy. Then, BenBernanke assumed the ‘all powerful’seat of Fed chairman.

Bernanke clearly believes the Fedshould take a leading role in managingthe economic cr isis, and that i t isequipped to do so. Thus, we have seenrates reduced to near zero, Quantita-tive Easing (QE) 1 and 2, OperationTwist, etc. Further, Bernanke tells usthat the Fed has many other arrows inits quiver.

It is all vanity; all froth and no beer;all pain with no gain.

Rational expectations“Rational expectat ions are wherepeople in the economy and investorsactually think a little bit, and cannotsimply be repeatedly fooled, misled,and hoodwinked by policymakers andcentral bankers to believe things thatconstantly contradict the evidence, thereality, history, and rational thought.”

These words are from Erik Metanom-ski, chairman of Lanyon Asset Manage-ment. From the beginning of the globalcrisis, Metanomski foresaw that thepanic of authorities would lead themto take extreme actions, which wouldultimately prove counterproductive. Hehas been warning of this – whenever hecould get a podium – since 2007. Unfor-tunately, he is being proved correct.

As Metanomski points out, most of the‘rescues measures’ implemented by theFed were implemented without anyhistorical evidence of their effectiveness.To the contrary, in many cases historysuggested they would be ineffective.

Consider the example of zero quanti-tative easing. Japan engaged in quantita-tive easing on a grand scale for a halfdecade from March 2001. It has been anabject failure.

Seemingly, the Fed philosophy is “Itdidn’t work in Japan so it must work here.”

QE failed in Japan and America for thesame reason. The economy wasconstrained by lack of consumer demand.Consequently, businesses and consumerswere not borrowing. QE made significant-ly greater funds available for borrowing.This proved pointless in the face of lackof demand for loans.

Richard W. Fischer, president and chiefexecutive officer of the Federal ReserveBank of Dallas, has dissented from theview of the majority of his colleagues onthe Fed. In a speech on 17 August 2011called Connecting The Dots, he argues:

“I have posited both within theFederal Open Market Committee andpublicly for some time that there isabundant liquidity available to financeeconomic expansion and job creationin America.

The banking system is awash withliquidity. It is a rare day when thediscount windows – the lending facil-ities of the 12 Federal Reserve banks –experience significant activity. Domes-tic banks are flush; they have on depositat the 12 Federal Reserve banks some$1.6 trillion in excess reserves, earninga mere 25 basis points – a quarter of 1 per cent per annum – rather thanearning significantly higher interestrates from making loans to operatingbusinesses. These excess bank reservesare waiting on the sidelines to be lent tobusinesses.

Non-depository financial firms –private equity funds and the like – havesubstantial amounts of investable cashat their disposal. US corporations aresitting on an abundance of cash – someestimate excess working capital onpublicly traded corporations’ booksexceeds $1 trillion – well above theirworking capital needs. Non-publicly

held businesses that are creditworthyhave increasing access to bank creditat historically low nominal rates.”

The point being made by Fisher is thatthere is no shortage of funds availablefor borrowing, so how can it make anydifference to make more funds avail-able? The problem is over-indebtednessand consequent lack of demand. TheFed, like the Bank of Japan, tried toaddress this by facilitating more borrow-ing. It is like using fire hoses to assist inan area suffering floods.

The Fed has greatly weakened itsbalance sheet for no enduring benefitto the economy. The money base hasbeen greatly expanded, for no purpose.

If Bernanke had a realistic assess-ment of his and the Fed’s capacity, hewould go to Congress and the Presi-dent and admit that there is nothingthe Fed can do. Unfortunately, Amer-i c a n c e n t ra l b a n k e r s a re n o t s omodest, or realistic, about what is intheir powers.


The Messenger

In praise ofuselessness

One of the great risks to the world’s economy is theirresponsible actions of central bankers, according to Robert Keavney. He argues they will give pain, but no gain.

You expect politicians to make deci-sions which make them look good inthe short-term without considerationof the long-term consequences, but youdon't expect it of central bankers.However, this is happening in America.

They should take lessons from GlennStevens. Restraint is a laudable attrib-ute for central bankers.

(It should be noted that the Australianeconomy has not been put under stresslike the US. If that should occur, it is to behoped that the RBA does not becomeinfected with the American disease.)

Before leaving this subject we can notethe wild swings in US interest rate settingsover the past decade. Fed rates have fluc-tuated over a 6.2 per cent range over thepast decade. This is about 2 per cent morethan the range in Australia. The Fed hasbeen manic depressive in its interest ratemanagement.

Somehow the Fed managed to set ratesat their cyclical peaks as America headedtowards recessions in 2000 and 2007. Thiswas entirely counterproductive.

Meanwhile, in Europe…Julia Gillard has called for the Europeansto get their act together and fix the situa-tion. Angela Merkel must be trembling.

Everyone, it seems, is calling on theEuropeans to fix their situation – as if itcould be fixed by a political decision.

A significant number of Europeannations have debts which seem beyondtheir capacity to repay. Many Europeanbanks are significantly exposed to thosenations’ bonds and their banks. This putsthe European banking system at risk. Eurocountries are prevented from using toolssuch as allowing the currency to depreci-ate or printing money. How can this be‘fixed’ by politicians?

Only after we give up the illusion that

there is a good fairy who can wave a magicwand and make everything better will theworld be ready to accept the necessity ofgoing through substantial pain and suffer-ing before a new normalcy emerges.

History repeatingOliver Marc Hartwick, research fellow atthe Centre for Independent Studies, wrotean interesting article in the Third LinkNewsletter (October 2011) on the Historyof European monetary union. The Eurois not the first time European countrieshave adopted a common currency.

In the Nineteenth Century, Belgium,Switzerland, Italy, Greece, Bulgaria, Spainand Serbia either adopted the Frenchfranc or linked their currencies to it. This

became known as the Latin MonetaryUnion (LMU). In that era of gold backedcurrencies, the LMU was based on havingidentical amounts of gold and silver intheir coins.

You won’t be surprised to learn that thecurrency union failed and was disband-ed in 1927.

In 1908, one country was expelled forcheating with the gold content of its coins.One guess as to who it was? Greece!

History repeating – lessons not learnt.Hartwick reports new evidence which

suggests that France insisted on the adop-tion of the euro as a condition for itssupport for the unification of East andWest Germany.

This, it was hoped, would preventGermany from becoming the dominantnation in Europe. This hope has beendisappointed. As have all the hopes forthe Euro. If the Euro survives, Germanywill be calling the shots.

Robert Keavney is an industrycommentator.


“Everyone, it seems, is calling on the Europeans to fix theirsituation – as if it could be fixed by a political decision.”

Exchange Traded Funds andmanaged funds are ver ysimilar. In fact, “ETFs are listedmanaged funds” according to

the Australian Securities Exchange(ASX) ETF Fact Sheet. They are bothopen-ended funds which co-mingleassets and try to achieve a stated invest-ment outcome.

Both investment options can be clas-sified into two broad categories: indexfunds and actively managed funds. Theformer tracks the performance of anunderlying index, while the latter aimsto outperform a stated index throughactive management. Although active-ly-managed ETFs are common over-seas, they are not yet listed in Australia.

W h e n c o m p a r i n g E T F s w i t hm a n a g e d f u n d s, m a n y f i n a n c i a lcommentators compare index ETFs to

act ive managed funds, and c la imsignificant cost savings for ETFs. Thisis a misleading comparison, sincemost of the cost difference comes fromactive versus index management, notmanaged funds versus ETFs. There isa legitimate debate worth having onthe merits of passive versus activeinvesting, but that is a separate discus-s i o n . Fo r a n i n v e s t o r t o m a k e a ninformed decision, the comparisonneeds to be like for like – index ETFsversus index managed funds. So howdo (index) ETFs and managed fundsreally compare?

The primary difference between theinvestments is the access mechanism.ETFs are by definition exchange-traded,which in Australia means they aretraded on the ASX, whereas managedfunds are usually accessed through a

platform provider who offers indexfunds in i ts range of investmentoptions. An ETF’s price is confirmed atthe point of execution on the ASX, whilefor an index managed fund, the cost isdetermined based on the Net AssetValue (NAV) price at the close of busi-ness on the day the investment is made.

ETF providers appoint marketmakers who endeavour to keep thebid/offer prices close to the NAV.

They do this by arbitraging (that is,making a profit on) any price discrep-ancy between the listed price and theNAV. If an investor buys an ETF at apremium to its NAV, the investor facesan additional cost of investing in theETF. Likewise, if an investor sells an ETFat a discount to its NAV, they also facean additional cost. At the point ofpurchase, the investor does not know

the NAV of the ETF, and their only guideis the movement of the correspondingindex. For a managed fund, while intra-day pricing is not offered, the investorcan be sure the investment or redemp-tion will be processed at the NAV lessthe spread (see Table 1).

Other key differences between indexETFs and managed funds are the costof access, the ongoing managementcost, and the services each productprovides to clients. On the cost issue,an index ETF tends to be marginally(around 0.12 per cent per annum)cheaper than an equivalent indexmanaged fund. This difference is apayment for the additional servicesoffered by managed fund providers,including consolidated investment andtax reporting, portfolio managementtools such as auto-rebalancing and


Managed Funds vs ETFs

Old school or good old?Managed funds are supposedly a non-transparent and expensive way of investing,while ETFs are increasingly touted as low cost investment saviours. Graham Handoutlines how similar the two investment products are when compared on a like-for-like basis and highlights the features that can set a managed fund apart.

regular investment plans, access to aclient services centre, and marketnewsletters.

In addition, the potential benefitgained by an ETF investor from thelower ongoing management fee can beoutweighed by the brokerage costs paidto purchase and sell an ETF. Brokersgenerally charge a minimum fixeddollar brokerage rate on trades of lessthan $10,000 – a f igure which mayrepresent a high proportion of theinvested amount, particularly for thosewho make regular contributions. Forexample, a brokerage charge of $29.95on a $1,000 investment representsaround a 3 per cent transaction cost,and although the brokerage rate fallsfor larger investments, a typical rate ofat least 0.3 per cent applies for tradesover $10,000. To transact on an indexmanaged fund, an investor will pay aspread of approximately 0.15 per cent.

Tax treatment can also differ. All ofthe ETFs l isted on the ASX whichprovide exposure to non-Australianequities markets are US-domiciled.Consequently, investors in these vehi-cles are subject to 30 per cent US with-holding tax on their distributions. This

figure can be halved to 15 per cent if aninvestor completes and lodges a W8-BEN form with the US Internal RevenueService and ensures this form is peri-odically updated to maintain the appli-cation of the lower tax rate. While anequivalent managed fund is subject tothe same requirement, the paperwork ishandled by the fund, thus alleviatingthe investor of the administrativeburden.

Other possible tax related burdensthat can affect investors in US-domi-ciled ETFs include US estate tax, which

comes into effect upon the death of theinvestor, and US generation-skippingtransfer tax, which may come into playif the investment is transferred to agrandchild at death. These do not applyto index managed funds.

It is also important to note that if asuperannuation investor wishes to investin an ETF, it’s a requirement that super-annuation is held in a trust structurewhich is compliant with the Superannu-ation Industry (Supervision) Act. Theonly way an investor can do this withoutusing a platform is by establishing a self-

managed super fund (SMSF) or a smallAPRA fund. There are a wide range ofissues that must be addressed in deter-mining whether an SMSF is appropriatefor a particular investor. These issuesinclude administration requirementsneeded to maintain accounting and taxrecords, which increase the complexityand cost for the client, as well as a widerange of trustee responsibilities, whichsome investors may not be wellequipped to handle.

Comparing index ETFs and indexmanaged funds reveals a number ofsimilarities, yet there are also somenotable differences that need to becarefully considered prior to making aninvestment decision. The investor andadviser should determine if they valuethe additional services offered by themanaged fund provider and whetherthose services justify the minor differ-ence in ongoing management costs.They should also ensure they factor inthe upfront brokerage costs – especial-ly if they are dealing in small parcels.

Graham Hand is Colonial First State’sgeneral manager of funding andalliances.


“Comparing index EFTs and index managed funds revealsa number of similarities, yet there are some notabledifferences that need to be carefully considered prior to themaking of an investment decision.”

i This fund has been selected as it represents approximately 40% of the ETF market in Australia. The Vanguard Australian Shares Index ETF has an ongoing management cost of 0.15% and is the least expensive Australian shares index ETF on the market.ii This fund has been selected as it is the only ETF which has an investment universe which covers all developed markets. There are less expensive ETFs which invest only in the US market which has little investor interest in Australia.iii Source: ASX Exchange Traded Funds Product List – August 2011.iv Cost of product on the Colonial First State FirstChoice Wholesale platform. Includes platform cost.v Source: ASX Exchange Traded Funds Product List – August 2011.vi Cost of product on the Colonial First State FirstChoice Wholesale platform. Includes platform cost.vii CommSec internet brokerage. If certain conditions are met, brokerage can be $19.95 up to $10,000, $29.95 up to $25,000 and 0.12% above $25,000.viii CommSec internet brokerage. If certain conditions are met, brokerage can be $19.95 up to $10,000, $29.95 up to $25,000 and 0.12% above $25,000.

Australian shares International shares

ETF Index managed fund ETF Index managed fund

Name SPDR S&P/ASX 200i Colonial First State iShares S&P Global 100ii Colonial First State

Wholesale Index Wholesale Index Global

Australian Share Share

Paperwork If an account with a broker exists no If an account with the fund manager exists If an account with a broker exists If an account with the fund manager exists

(initial investment) paperwork is required. Otherwise, standard no paperwork is required. Otherwise an no paperwork is required. However, a no paperwork is required. Otherwise an

paperwork must be complete to open a application form must be completed W8-BEN form should be completed application form must be completed

brokerage account post trade

Paperwork No paperwork required No paperwork required W8-BEN form must be updated regularly No paperwork required

(ongoing investment)

Minimum investment Minimum size as set by a broker or the ASX $5,000 or $1,000 with a regular investment Minimum size as set by a broker or the ASX $5,000 or $1,000 with a regular investment plan.

plan. $500 for subsequent investments $500 for subsequent investments

Ongoing management 0.286% paiii 0.41% paiv 0.400% pav 0.52% pa (hedged version also available for the

cost same cost)vi

Transaction costs The greater of $29.95 or 0.30% brokeragevii 0.15% The greater of $29.95 or 0.30% brokerageviii 0.15%

Investment price Bid/offer at point of trade – market makers NAV price as at close of business on day of Bid/offer at point of trade – market makers NAV price as at close of business on day of

aim to keep the bid/offer close to the NAV investment aim to keep the bid/offer close to the NAV investment

Liquidity Proceeds of sale are received on T+3 in line Proceeds deposited to the account of investor Proceeds of sale are received on T+3 in line Proceeds deposited to the account of investor on

with exchange settlement process on the evening of T+1 with exchange settlement process the evening of T+1

Tax reporting Investor must keep record of purchases Tax reporting provided by managed fund Investor must keep record of purchases Tax reporting provided by managed fund provider

and sales and calculate tax parcels provider and sales and calculate tax parcels

Additional services Consolidated reporting, portfolio management Consolidated reporting, portfolio management

provided to the investor tools such as autorebalancing and regular tools such as autorebalancing and regular

investment plans, and access to a client investment plans, and access to a client services

services centre centre

Table 1 A comparison of index ETFs and index managed funds

LONSECLonsec believes that on a strategic basis,an unhedged exposure to global equitiesis appropriate over the long term (ie 10years or more) because:

1. Over the long term, the risk and returncharacteristics of hedged and unhedgedglobal equities are broadly similar;

2. Unhedged global equities are lesscorrelated to Australian equities thanhedged global equities, therefore offeringsuperior diversification characteristics to aportfolio; and

3. Most investors will have some expo-sure to hedged assets within their portfo-lio, including global fixed interest, globalproperty securities and global listed infra-structure.

Risk and return While hedged global equities maybenefit from a yield pick-up due to inter-est rate differentials between theAustralian dollar and the underlyingcurrency exposure of the portfolio, thisis expected to be largely offset by the

cost of hedging. As Figure 1 highligts, thelong-term average return and volatilityfor hedged and unhedged global equi-ties have been similar. Of course, overshorter periods, there will be materialdeviations between the two.

DiversificationFigure 2 shows the 10-year correlationsof unhedged and hedged global equitiesrelative to other asset classes. Unhedgedcorrelations are lower in all cases exceptrelative to Australian fixed interest andcash. Specifically, unhedged global equi-ties are less correlated with Australianequities, which is important given

Australian equities are a dominant allo-cation within most growth-orientedportfolios.

However, in the short term, currenciesmay be volatile and it may be appropri-ate to complement a long-term strategicallocation to unhedged global equitieswith global equities products that have

an active currency overlay. There are alarge number of unhedged global equi-ties funds with active currency hedgingstrategies which aim to reduce theimpact of currency volatility on invest-ment returns. This is an effective way tointroduce further diversification to a portfolio.


ResearchReview

Research Review is compiled by PortfolioConstruction Forum in association with MoneyManagement, to help practitioners assess the robustness and disclosure of each fund researchhouse compared with one another, given the transparency they expect of those they rate. This month, PortfolioConstruction Forum asked the research houses: In the short term, we oftensee dramatic differences in the performance of hedged vs unhedged international equitiesportfolios. How much (if any) of an international equities allocation should be hedged, assuminga 10-year investment timeframe?

Figure 1 Global equities – 20-yearrolling annual return andvolatilityMSCI World Index MSCI World Index

Unhedged A$ Hedged A$

Return (%pa) 7.3 7.3

Volatility (%pa) 17.5 17.9

Source: Bloomberg, MSCI; June 2011

Figure 2 Global equities – 10-year correlations

MSCI World Index MSCI World IndexUnhedged $A Hedged A$

Australian Equities 0.58 0.86

Emerging Markets 0.69 0.77

Australian Listed Property 0.46 0.56

Global Listed Property 0.47 0.74

Direct Property 0.09 0.02

Global Listed Infrastructure 0.55 0.80

Australian Fixed Interest -0.18 -0.44

Global Fixed Interest -0.32 -0.15

Diversified Income 0.34 0.74

Cash -0.02 -0.28Source: Bloomberg, MSCI; June 2011

MERCERMercer believes retail investors shouldconsider currency over both the long andmedium term. (In addition, active curren-cy managers may be appointed to imple-ment tactical or short-term currencymanagement. These managers fall withinthe alternatives absolute return grouping.)

For Australian investors deciding thestrategic or long-term level of hedging,there are essentially two competingconsiderations:

1. Fully hedged positions have outper-formed unhedged positions historically.

2. Currency exposure provides diversi-fication benefits for risky assets.

The strategic currency position needs tobe assessed at the total portfolio level bybalancing these competing considerations.In general, a higher currency exposure willbenefit higher growth portfolios by reduc-ing the volatility of a portfolio’s total returns– ie the diversification benefits of currencyincrease with the holding of risky assets.

However, there are practical consid-erations at the asset class level. Mercerrecommends fully hedging the curren-cy exposure of high-income, lower-volatility assets, such as global fixedinterest. Unlisted, illiquid assets arebetter left unhedged at the managerlevel because hedging can result in

short-term liquidity issues. To implement the desired level of

currency exposure for the portfolio,larger institutional clients can use aspecialist foreign currency overlaymanager. For retail cl ients, thehedged/unhedged mix for global equi-ties may be used as a balancing item toachieve the desirable level of exposurefor the overall portfolio, after taking intoaccount foreign exchange exposure fromany unhedged global assets.

Mercer has assessed different riskprofiles to determine the level of currencyexposure that minimised the variance of aportfolio’s historical returns. As expected,the results depend on the profile’sgrowth/defensive splits. As a general rule,we recommend a strategic currency expo-sure for the portfolio equal to about 30 percent of listed equities (Australian equities,global equities, AREITs, GREITs, listedinfrastructure). Refer to Figure 3.

Like all investment decisions, thecurrency hedging decision should not be aset-and-forget position. As seen in recentyears, the Australian dollar can movewithin a wide range and can deviate signif-icantly from estimates of its long-term fairvalue. This presents investors withmedium-term risks and opportunities.Consequently, Mercer believes that the

appropriate level of currency hedgingneeds to be dynamic.

MORNINGSTARThe past 10 years are often referred to asa ‘lost decade’ for Australian investors inunhedged global equities. The spectacu-lar rise of the Australian dollar, whichmore than doubled in value over theperiod, significantly eroded returns forunhedged investors. Past performanceregularly dominates portfolio construc-tion decisions, but it’s critical to also thinkbeyond performance.

Rewind 10 years and many fundmanagers provided global equity fundswith tactical currency funds or a set 50:50hedged/unhedged currency strategy. Thecurrency allocation within global equitieswas decided by the fund managers. Thishas now changed, and in a big way. Thevast majority of global equity fundsoffered now come in fully hedged orunhedged versions and the active deci-sion has transferred from the fundmanager to the investor. Why? Forecastingcurrencies is a notoriously difficult exer-cise to get right consistently.

The Australian dollar can have a largebearing on short-term returns, soAustralian investors can’t just ignore thecurrency implications when investingoverseas. However, it may come as asurprise that the returns from hedgedglobal share funds over the 10 years to 30June, 2011 were much more volatile thanthose from unhedged global equities.Currency hedging may have protected thequantum of returns, but the ride was amore volatile one, especially duringperiods of distress such as 2008.

Attempting to ‘time’ specific currencyinflection points is a pointless exercise,though timing can’t be ignored entirely.Given the A$/US$ cross-rate in 2011 wastrading in a band between US$0.95 andUS$1.09 – a large range, but less than in2008 when it fell to US$0.61 – these largedifferences can impact investors’ objec-tives. Australia’s role as a proxy for globalgrowth has been underpinned by ourdependence on exports to burgeoningemerging nations such as China. Hence,because the Australian dollar is widely-touted as a commodity currency, whenglobal growth expectations decline theAustralian dollar typically suffers sharp falls.

Morningstar believes risk is toofrequently overlooked when making thehedging decision. The risk side of theinvestment equation is an element whichinvestors and fund managers alikefrequently neglect in favour of focusing onreturns. Over the long haul, we believeforeign exchange movements should washout of the returns from offshore invest-ments, and that’s before considering thecostly exercise of adjusting hedging expo-sure. But, as discussed above, the pro-cycli-cal nature of the Australian dollar makes

it susceptible to sharp sell-offs. Currencyvaluations at the investor’s point of entryalso matter.

As a result, Morningstar’s strategic assetallocation has adopted an unhedged globalequities position. However, our modelportfolios do have a tactical currencyhedging element through the managerselection framework. A number of fundshave been chosen for their ability to tacti-cally allocate to currencies whether in analpha-seeking process or from a riskcontrol perspective. Morningstar believesthis is an effective way for advisers to effi-ciently manage the currency exposure inglobal equities.

STANDARD & POOR’SThe high volatility of the Australian dollarin recent years has resulted in currencygains and losses impacting on investmentportfolio returns. As a result, many nowquestion how to manage global equities’currency exposure and whether to employa fully hedged, partially hedged orunhedged position in portfolios.

Pending a client’s risk and return objec-tives, S&P typically suggests a currencyunhedged global equities position for accu-mulators’ portfolios and a combination ofhedged, unhedged and actively managedexposure for income stream recipients.

For accumulators making regular contri-butions, the impact of the volatileAustralian dollar on investor returns isnegligible over the long run. It also has ahigh correlation to global growth andhence when growth declines (as in recentmonths), equities and the Australian dollartypically fall in value, but an unhedgedposition provides a buffer due to gainsfrom the Australian dollar depreciation. Inaddition, the earnings of Australiancompanies are impacted significantly bythe value of the Australian dollar, anddiversification benefits are typicallyachieved by diversifying a portfolio’s expo-sure to any one currency. Hence for thelong-term accumulator portfolio, S&P typi-cally suggests a currency unhedged globalequities exposure.

However, the risks change for portfo-lios where contributions are no longerbeing made. Income stream recipients,for example, are in the phase of theirlives where they are employing thereverse of dollar cost averaging (sellingunits regularly for income payments)and can be significantly impacted by thevolatile Australian dollar. During the2000s, investors faced low returns fromglobal equities which were compound-ed for unhedged portfolios due to thelong-term upward trend in theAustralian dollar, with the end result thatunhedged portfolios not only enduredpoor returns from underlying assets, butalso experienced losses from unhedgedAustralian dollar exposures as theAustralian dollar rose, benefiting fromthe huge growth in demand forresources from 2003 onwards. Hence, forinvestors no longer contributing to port-folios, we suggest considering 50 percent unhedged, 25 per cent hedged and25 per cent actively managed.


Figure 3 Currency hedging guidelines Conservative Mod Conservative Balanced Growth High Growth

Allocation to listed equities* 21.5% 37.5% 54% 73% 85%

Portfolio target currency exposure 6% 11% 16% 22% 26%

% of global equities unhedged (approx) 85% 75% 70% 70% 70%Source: Mercer Continued on page 24

Back testing analysis shows the optimalcurrency hedging position over the last 20years would have been 40 per cent hedgedand 60 per cent unhedged – and hence, itmakes sense to have a combination ofhedged and unhedged global equities expo-sure in a portfolio.

Also, not only have hedging strategiesprotected investors when the Australiandollar is on a long-term upward trend, buthave also aided returns in recent years dueto Australian investors being paid to hedgeportfolios (ie the carry trade).

Using active currency management ina portfolio can significantly reduce theimpact of Australian dollar volatility onportfolio returns by balancing the expo-sure to hedged and unhedged global equi-ties, pending the Australian dollar valua-tion. However, in practice, this approachis extremely difficult to manage and isusually outsourced to a fund with separatecurrency management expertise.

Ultimately, there is no optimalhedging strategy for all investors as riskand return objectives plus stage-of-lifewill impact on which strategy is mostappropriate to employ.

VAN EYKIt is fairly widely accepted that predictingcurrency moves is difficult if not impossible(although currency managers may disputethis). There is also an increasing recognitionof the benefits of long-term, valuation-based

investing, which again relegates currency tothe too-hard basket, as value can be difficultto define for currencies given they have noyield. The closest thing to a long-term valu-ation metric is purchasing power parity(PPP), which suggests Australian investorsshould have more exposure to other curren-cies as the Australian dollar looks overval-ued (Figure 4). This suggests a fullyunhedged position is better as risks are nowbiased towards Australian dollar weakness.

On the other hand, those with a 10-yearinvestment time-horizon with a sole focuson returns and a strong belief in the contin-ued rise of Asia would believe in a stronger-for-longer Australian dollar and the bene-fits of a hedged position.

In fact, Figure 5 suggests the long-termhistory of the Australian dollar could justifya range-bound, bullish or bearish trend,depending on the time-horizon chosen .

Paradoxically, the short-term justificationfor holding overseas currency exposure iseasier to analyse as there is a relative degreeof certainty about its correlation with otherassets. The Australian economy and sharemarket are leveraged to Asian economicgrowth and, by extension, global economicgrowth and share market performance. Thisis a fundamental reason why the Australiandollar has become a lightning rod for therisk-on/risk-off trade that has dominatedmarkets (see Figure 6).

Given this relationship, the timing ofpotential downside risk is also veryimportant. The benefits of overseascurrency exposure are likely to accrue

exactly when needed most – becauseAustralian dollar weakness is very likelyto coincide with highly negative returnsfrom the rest of portfolios.

In summary, if an investor has a veryhigh degree of conviction about the posi-tive outlook for Asia over the next 10 yearsand is unconcerned about volatility, a fullyhedged global equities position willmaximise an investment strategy predi-cated on those beliefs. If not, it may payto retain some insurance in the form ofoffshore currency exposure, primarily theUS dollar, which remains the world reservecurrency and liquid haven in times ofstress. Those without a definitive view mayopt for an arbitrary 50 per cent hedge –but perhaps the question should bewhether to look for more currency diver-sification elsewhere in the portfolio?

ZENITH INVESTMENT PARTNERSCampbell, Serfaty-de Medeiros and Viciera(2009) investigated the correlations offoreign exchange rates with stock returnsover 1975 to 2005. Their research supportsthe view that the Australian dollar is posi-tively correlated with local currency returnson global equity markets. This positivecorrelation is consistent with fundamentaldrivers: global economic growth drivesequity and commodity prices in the samedirection. The Australian dollar typicallyfalls when global equity markets fall, cush-ioning poor performance. The opposite isalso true – the Australian dollar typicallyrises when equity markets rise. The endresult is a smoother return pattern forunhedged investors relative to hedgedinvestors.

Zenith believes these findings should beconsidered when constructing internation-al shares portfolios, as they imply thatAustralian-based investors will be able toreduce risk by not being fully hedged to theAustralian dollar.

While from a risk minimisationperspective being unhedged is theoptimal outcome, total return expecta-

tions for Australians investing in interna-tional shares should not be the same forhedged and unhedged positions. That is,investors generally have to choosebetween less risk and lower returns fromunhedged investing, versus higher returnsand higher risk of hedged investing. Ahigher return expectation for hedgedexposures is backed by theory, as theassumed return from hedging is thedifference between long-term interestrates (driven by longer-term growth rates)and therefore if domestic interest rates(and growth expectations) are higher thanrest of world, this should provide positivereturns from hedging. Based on thisanalysis, we currently have slightly higherexpectations for hedged exposure to inter-national shares based on the positiveinterest rate differential between Australiaand other developed countries.

Furthermore, this analysis also impliesthat the optimal level of hedging requiredshould be linked to the risk profile of theinvestor. Based on forward-looking riskand return expectations for hedged andunhedged international shares,combined with analysis of correlationswith other sectors, Zenith believes growthprofile investors (70 per cent growthassets) will benefit from adopting a 50-50 approach when hedging the foreigncurrency exposure of their internationalshares exposures. While on face value thismay appear a simplistic approach,growth profile investors would havemaximised Sharpe Ratios with a 50/50exposure over the 20 years to 2010. A50/50 approach also provides someinsurance from an event risk perspective,which may lead to a large appreciationor depreciation of the Australian dollar.For those in lower risk profiles, a lowerthan 50 per cent hedged exposure makessense based on their lower risk/returnexpectations (and vice versa).


ResearchReviewContinued from page 23

Source: RBA, van Eyk

Figure 5 Australian dollar trade weighted index

0

10

30

50

70

90

110

130

May 1970

May 1980

May 1990

May 2000

May 2010

50 year cycle

5 - 10 year cycle

Secular decline

Source: MSCI

Figure 6 Hedged vs. unhedged global equities

50

70

90

110

130

150

170

Feb

2005

Jun

2005

Oct

200

5

Feb

2006

Jun

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6

Feb

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200

7

Feb

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8

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9

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201

0

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MSCI World Hdg AUD MSCI World NR AUD

In association with

Source: RBA, van Eyk

Figure 4 Australian dollar outlook

0

0.2

0.4

0.6

0.8

1

1.2

1.4

19801985

19901995

20002005

20102015

Actual AUD:USD Exchange rateImplied PPP Conversion Rate (OECD)Implied PPP Conversion Rate (IMF Forecast)

Globalisation delivered enor-mous productivity benefits overthe past decade, as the world’slabour-intensive productive

capacity shifted to lower cost developingnations. These productivity gains havebeen a major contributor to moderateinflation outcomes in developed nationsin recent times. From December 1999 toMarch 2011, nominal gross domesticproduct in the US, UK, and Australia grewat 4.1 per cent, 4.2 per cent and 6.9 percent per annum respectively, while CPIgrew at just 2.3 per cent, 2.1 per cent, and3.2 per cent per annum, respectively.

With global inflation highly likely toincrease due to rising food prices, risingenergy prices, and increasing costs of trad-able goods, it is unlikely globalisation willcontinue to deliver global productivitygains over the next 10 to 15 years.

Drivers of global inflationRising food pricesRising food prices are one of the mostpotent sources of current and prospec-tive inflation. As people move up thewealth curve, calorie and protein intakerises from subsistence levels, and realfood prices increase, unless there is anincrease in the quantity of land undercultivation and/or an increase in agricul-tural productivity.

The shrinking availability of arable landas the world urbanises suggests thatincreasing land under cultivation will beextremely difficult. Further, agriculturalproductivity gains have slowed from closeto 3.5 per cent per year in the early 1970sto below 1.5 per cent in 2011, despitefertiliser use more than doubling. Foodprices have already risen significantly.After a flat period in the 1990s, food pricesrose at 9.7 per cent per year in nominalreturns and 7.7 per cent in real terms overthe past decade.

Between 2005 and 2007, the worldconsumed 6.5 trillion calories per year andthis is forecast to increase to 8.7 trillion calo-ries per year by 2030, and 10.2 trillion calo-ries per annum by 2050. Much of thisincrease emanates from Brazil, Russia,India, and China (BRIC), which are fore-cast to increase annual calorie intake byclose to 1 trillion calories per annum over

the next 20 years. The world’s alreadystretched agricultural capacity will be chal-lenged to cope with a 35 per cent increasein demand for food over the next 20 years,let alone a 57 per cent increase in demandover the next 40 years.

The impact of higher food prices onwages in developing countries – and thusinflation on rich world imports – isdramatic, as food occupies such a highproportion of household consumptionexpenditure. Consumers in the BRICnations allocate 25 per cent, 28 per cent,33 per cent and 35 per cent respectively oftheir household budget to food,compared to 7 per cent in the US, and 11per cent in Australia. Food price increas-es will result in wage stress in the develop-ing world, and advanced economiesshould expect much higher inflation inimport prices over coming years.

Rising energy costsA 2010 study by ExxonMobile forecastsannual energy demand amongst non-OECD nations to grow by 46 per cent by2020 and a further 17 per cent between2020 and 2030, increasing annual globalenergy demand by 23 per cent and 11 percent respectively, despite improvedenergy efficiency and government policyinitiatives moderating future demand inthe OECD countries. The same studynoted that these increased energy

demands will grow annual oil and coaldemand by close to 20 per cent and gasby over 60 per cent over the next 20 years.

Oil, coal and gas are finite resources.While alternative options are providingsources for meeting the world’s energyneeds, these are less efficient with highercosts of production that must eventuallybe passed on to consumers. And despiteproduction expanding through alternativesources, oil and gas production is still wellbelow 1970s production peaks. With thesesupply restraints, energy prices are highlylikely to increase.

Increasing costs of tradable goodsAccording to an April 2011 IMF workingpaper, for every 1 per cent shock to foodprices, there has been a 0.15 per centincrease in non-food prices in rich worldareas, and a 0.30 per cent increase in non-food prices in poor countries.

The impact of inflation on portfoliosOne of the major challenges is managingthe impact of significant global infla-tionary pressures on portfolios. Inflationeats it way into real returns, as shown inFigure 1.

Investors must seek assets that willprotect them from inflation. While it is clearthat the returns of long-dated bonds witha fixed coupon will suffer when inflationincreases, the impact on stock returns has

been debated widely. One theory that has received attention is

the Fed model. It asserts that, in the longrun, the forward earnings yield of a stockmarket should equal the yield on long-termgovernment bonds. The logic is simple –with stocks and bonds competing for aplace in portfolios, any relative mispricingwill be arbitraged away and thus, in thelong-term, yields on stocks and bondsshould be equal. A more practical approachis to add a risk premium to the bond yieldto arrive at an equilibrium stock marketyield. With inflation expectations theprimary driver of long-term governmentbond yields (assuming the issuer carrieszero default risk), an increase in inflationaryexpectations will cause the required earn-ings yield on the stock market to increase –or, for the inverse of the earnings yield,Price-Earnings ratio, to fall.

Empirically, there is strong support forthe Fed model. Asness (2002) showed asignificant negative relationship betweeninflation and PE ratios. Over the 1965 to2001 period studied, E/P (the inverse of P/E)had a correlation with inflation of 0.81.

But there is one major flaw with the Fedmodel. Stocks are at least partially realassets, as their cashflows and dividendshave the ability to grow with inflation. It isthe ability of companies to increase cash-flows that govern their performance ininflationary times. Investors should seek toinvest into companies that have pricingpower that allows them to at least main-tain prices in real terms (even in inflation-ary environments), an ability to at leastmaintain volumes, and low capital intensi-ty, thus reducing the impact of inflation oncapital expenditures and working capital.Such companies are extremely rare, as capi-talism tends to compete away these desir-able advantages. Hence, a passive indexapproach to equities is fraught with dangerduring inflationary times.

Yet a portfolio focusing on companiesthat exhibit these characteristics is one ofthe few ways an equity investor can berelatively confident that their investmentswill provide adequate defence in infla-tionary times.

This is an abridged extract from a paperpresented at the 2011 PortfolioConstructionForum Conference.The full paper is availableat www.PortfolioConstruction.com.au.

Matthew Webb is an investment specialist atMagellan Asset Management.


As emerging markets wages increase significantly, the core CPI of many developed worldeconomies will rise, and potentially force some central banks to revisit interest rate settings.Positioning portfolios for the prospect of rising inflation is therefore critical.

Rising inflation will impact portfolios– what are you doing about it?

In association with

Figure 1 Effect of inflation on returns

Source: Magellan Asset Management. Note, assumes a 30% tax rate on return.

Inflation (%) Annual nominal return (%) 10-year NOMINAL return after tax (%pa) 10-year REAL return after tax (%pa)

2 8 5.6 4.18

4 8 5.6 2.21

6 8 5.6 -0.69

In times of volatile markets, extracaution needs to be taken whenrolling money from one superannu-ation fund to another – specifically

in relation to the impact that action mayhave on the tax-free component amountand the non-preserved benefit amount.

Not considering how these amounts areimpacted by volatile markets could perma-nently affect the amount of those compo-nents, which could impact the amount thatcan be withdrawn or the amount of taxpayable on future withdrawals.

Tax components within superannuationFrom 1 July 2007 superannuation bene-fits are made up of tax-free and taxablecomponents.

The tax-free component is the sum ofthe:

• Contributions segment – this consistsof all non-concessional contributions madeafter 1 July 2007, and

• Crystallised segment – this is a fixeddollar amount calculated on 30 June 2007consisting of the concessional component,post-June 1994 invalidity component,undeducted contributions, capital gainstax exempt component and pre-July 1983component.

The taxable component is the value ofsuperannuation interest less the tax-freecomponent.

From 1 July 2007 the proportioning ruleis used to calculate the tax-free and taxablecomponents of a superannuation benefitthat is paid as a lump sum, which will beused to commence a superannuationincome stream or rolled over to anothersuperannuation fund.

Proportioning ruleA superannuation benefit in an accumu-lation phase is valued just before thebenefit payment is made to obtain theproportions of the lump sum or rollover.This percentage of tax-free and taxablecomponents is then applied to the super-annuation benefit being paid or rolledover to another fund.

For example, if the balance of member’ssuperannuation interest was $100,000($40,000 tax-free and $60,000 taxable) andthe amount was to be rolled over to anotherfund, the proportioning rule would apply.Therefore 40 per cent of the rollover benefitwould be tax-free and 60 per cent wouldbe taxable.

The effect of volatility on super taxcomponentsThe effect of volatile and falling marketson superannuation tax componentsdepends on whether the fund is in accu-mulation phase or pension phase.

In pension phase, the components arecalculated at the commencement of thepension, therefore the percentage of the

tax-free and taxable components in thepension phase will not be affected by nega-tive markets.

However, as explained above, in theaccumulation phase the components arenot based on a fixed percentage, but rathercalculated using the proportioning rule.Therefore if the value of an accumulationaccount falls so that its value is less thanthe tax-free amount of the contributionssegment, the tax-free component may bepermanently reduced once the proportion-ing rule is triggered and the money is rolledto a new superannuation fund.

It is important to note that this reduc-tion would not be permanent if the propor-tioning rule is not triggered.

There are a number of strategies toconsider when the dollar amount of thetax-free component is temporarily reduced.These include:

• Waiting until the fund’s balance recov-ers before the money is rolled over toanother superannuation fund

• Making an additional concessionalcontribution before the money is rolledover

• Rollover other superannuation bene-fits to the fund.

Let’s have a closer look at these scenar-ios based on the case study below.

Case studyJohn makes an initial non-concessionalcontribution of $150,000 to a new super-annuation fund on July 1, 2011. Since thatdate the fund has had negative earningsof $30,000 and no other contributions.

If John rolls over his entire benefit of$120,000 into another superannuationfund, by applying the proportioning rulethe tax-free component of the new fundwould be $120,000. As such, if the newfund’s balance subsequently grows to$150,000, the tax components would be$120,000 tax-free and $30,000 taxable.

Strategy consideration 1 – retain thebenefit until the balance recoversIf John retains his benefit in the currentsuperannuation fund, the contributionssegment of the tax-free component willremain at $150,000, although the accountbalance would only be $120,000. If thebalance of John’s fund grows to $150,000,the entire benefit of $150,000 would betax-free, as any investment earnings willform part of the tax-free component untilthe account balance recovers to $150,000.

As such, by retaining the benefit in hiscurrent superannuation fund John is ableto recover the tax-free amount of his super-annuation interest.

Strategy consideration 2 - make a conces-sional contributionIf John makes an additional concession-al contribution of $30,000 to superannu-

ation, after deducting contributions taxof $4,500, the net amount added to hissuperannuation account would be$25,500. The new balance in his superan-nuation fund would be $145,500($120,000 + $25,500), which is less thanthe amount of the tax-free contributionssegment of $150,000. Therefore, the newbalance of $145,500 would be tax-free.

In effect, John’s concessional contribu-tion has been reclassified from beingtaxable to tax-free. If the money was thenrolled over to another superannuationfund, the amount of the tax-free compo-nent in the new fund would be $145,500.

Strategy consideration 3 – rollover anotherfund into the current fundIf John rolls over $100,000 of taxable bene-fits from another superannuation fund tohis current fund, this would make thebalance of John’s fund $220,000 ($120,000+ $100,000) and consist of $150,000 of tax-free and $70,000 of taxable components.

In effect, $30,000 of the taxable compo-nent has been converted into a tax-freecomponent.

The effect of negative markets on non-preserved amount withinsuperannuationIf the superannuation fund has negativeearnings in a certain period, superannu-ation rules require that these losses arefirst offset against preserved benefits. Ifthe negative earnings exceed themember’s preserved benefits, the excessis then offset against restricted non-preserved benefits, then against unre-stricted non-preserved benefits. Wherethis happens, the reduction is permanent.

The time at which the reduction is madewill depend on the fund’s trust deed orwhen transactions occur.

For example, John’s superannuationbenefit of $100,000 consists of an unrestrict-ed non-preserved amount. Due to a fall inmarkets the benefit has fallen to $80,000 atthe date the fund’s earnings are credited tohis account. This means that John’s unre-stricted non-preserved benefit has beenpermanently reduced from $100,000 to$80,000.

SummaryIn times of volatile markets, extra cautionneeds to be taken when providing strate-gy advice to clients regarding their super-annuation funds. Importantly, where theimpact on the tax-free and non-preservedcomponents is not considered, this mayaffect the amount of tax that may bepayable and the amount that could beaccessed – and unfortunately be a lostplanning opportunity.

Anna Mirzoyan is the technical servicesconsultant at Fiducian Portfolio Services.


Super, volatility and rollovers

Toolbox

Anna Mirzoyan takes a look at the ways in which market volatility mayaffect superannuation rollovers.

BriefsBOUTIQUE absolute return invest-ment manager Kardinia Capital isof fering a long/shor t Australianequities capability to institutionalinvestors.

The Bennelong Kardinia AbsoluteReturn Fund was established inAugust 2011 and is managed byportfolio managers Mark Burgessand Kristiaan Rehder, in partner-ship with Bennelong Funds Man-agement.

Kardinia said that the fund haslong/short objectives of achievingdouble-digit annual rates of return,without compromising on capitalprotection.

“Core to the strategy is long-termfundamental stock select ion tocreate a high-conviction portfolio ofbetween 20-50 stocks,” Kardiniastated.

CMC Markets has upgraded its CMCplatform for contracts for dif fer-ence.

The CMC Tracker was launchedin Austra l ia in September, andaccording to CMC represents a leapforward in traders’ capacity to cus-tomise charts.

The charting software enablesusers to highlight specific situationsor combinations that are relevantto their individual trading strategy.The platform then saves these cus-tomised chart settings, increasingef ficiency and providing traderswith quick access to past analysisin fas t -mov ing markets , CMCstated.

“Time is at a premium for everytrader, and the more features aplatform provides, the more timetraders have to focus on managingtheir trades,” CMC chief marketstrategist Michael McCarthy said.

EATON Vance Management (EVM)has launched an investment fundfor institutional investors.

The Eaton Vance International(Australia) Senior Loan Fund will bemarketed in Australia as a whole-sale investment vehicle, EVM said.

EVM In ternat iona l manag ingdirector Niall M. Quinn said thecompany had identified Australia asan oppor tun i t y to p romote i tsinvestment exper t i se in f i xed -income, floating-rate and equityasset classes.

Accord ing to EVM di rector ofbank loans Scott Page, Australia’scompulsory superannuation guar-antee had accumulated a nationalsavings pool of approximately $1.4trillion.

“We have developed the fundspec i f i ca l l y fo r the Aust ra l ianmarket to provide Australian institu-tional investors access to a broadspectrum of floating-rate invest-ment,” Page said.

Appointments


Please send your appointments to: [email protected]

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

FINANCIAL PLANNERLocation: Far North Coast, NSWCompany: Terrington ConsultingDescription: A financial services firm isseeking an experienced and establishedfinancial planner.

The firm has excellent brand and marketreputation and you will be rewarded with ahighly competitive salary package andincentives. You will also have access toresearch, professional facilities,established systems and an opportunity togrow your portfolio.

In this role you will be engaged in arange of financial services offerings,including stockbroking, strategic planning,superannuation, SMSF, insurance, portfoliomanagement and fixed interest.

You will have several years experiencedelivering to a diverse range of clientele.You will also have proven sales skills andnetworking capabilities.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466,[email protected].

CLIENT SERVICES MANAGERLocation: AdelaideCompany: Terrington ConsultingDescription: An Adelaide-based financial

services firm is looking for a relationship-focused and highly professional clientservices manager.

In this role you will be assisting theplanner to maintain and build clientrelationships; become the key contact forclients; provide administrative support asneeded; prepare financial planningdocumentation and client reviews; andmanage compliance procedures.

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

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466,[email protected].

BUSINESS DEVELOPMENT OFFICER– AGRICULTURAL FOCUSLocation: Wagga Wagga and Riverina, NSWCompany: Terrington ConsultingDescription: An established Australianbank is seeking a business developmentmanager as part of a significant expansionacross key locations.

You will be capable of driving growth,building brand equity and providing holisticand tailored solutions.

You will have a solid understanding ofcredit risk and the ability to manage long-term relationships.

Commercial lender or BDMs withinaligned industries are encouraged to apply.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Emily at Terrington Consulting – 0422 918 177 / (08) 8423 4466,[email protected].

BUSINESS SERVICES ASSISTANT MANAGERLocation: AdelaideCompany: Terrington ConsultingDescription: A second-tier fringeaccounting firm is seeking a businessservices assistant manager.

In this role you will lead a team andtrain and mentor junior staff members. Youwill also be involved in budgeting andperformance analysis, client relationshipmanagement and growth.

The successful candidate will be at theassistant manager level in businessservices accounting and have experiencewith SMEs.

Preferably you will be CPA or CA-qualified or near completion.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Jack at Terrington Consulting

– 0422 918 177 / (08) 8423 4466,[email protected].

MANAGER BUSINESS SERVICESLocation: AdelaideCompany: Terrington ConsultingDescription: A financial planning firmspecialising in tax planning and riskmanagement is seeking two experiencedprofessionals to join the management team oftheir middle market business services division.

The two positions available are titledmanager and assistant manager, and yourresponsibilities will involve managing a teamwith the provision of taxation services includingcompliance and advisory.

In both roles you will be servicing a range ofclients from various industries and structures,including family businesses and small privatecompanies.

You will be offered extra employee benefits,pathways for professional development andgenerous remuneration packages.

Successful candidates will be CA or CPA-qualified and have several years experience in abusiness services or professional accountingcapacity.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Jack at Terrington Consulting – 0422 918 177 / (08) 8423 4466,[email protected].

ABERDEEN Asset Managementhas appointed John Manningas investment manager andsenior credit analyst, and DavidChoi as assistant investmentmanager.

Choi previously worked forNSW Treasury Corporationwhere he had portfolio dealingand management responsibilities.

Manning was most recentlyRoy a l Ba n k o f S c o t l a n d’sdirector of credit strategy forAustralia and New Zealand andhas more than 22 years indus-try experience.

Commenting on theappointments, Aberdeen headof Austral ia Fixed IncomeV ictor Rodriguez said thatManning’s credit analysis skillswere highly respected in theAustralian market, while Choi’sexperience was well suited toAberdeen’s rates strategy team.

KENYON Partners has appoint-ed Paul Tynan as associatedirector.

Commenting on Tynan’sappointment, Kenyon manag-ing director Alan Kenyon saidTynan had almost 30 yearsexperience and a well-roundedknowledge of the financialservices industry.

He was most recently chief

executive officer of boutiquefinancial planning businessRetire Care Personal WealthManagement, where he willremain a chair man of theboard.

Before that, Tynan was southregional manager for AMPAdviser Services, responsible fordistribution in Perth, SouthAustralia, Victoria and Tasmania.

Between early 2001 and2003, he spent time in the UKas AMP’s platfor m salesmanager.

B R AV U R A S o l u t i o n s hasappointed Ro l a n d Sl e e asmanaging director for AsiaPacific.

Reporting to Bravura’s chiefexecutive officer Tony Klim,Slee will be responsible foraccelerating growth, develop-ing new l ines of business,implementing major changeprograms and leading mergerand acquisition activity in theregion.

Commenting on the appoint-ment, Klim said Slee is highlyregarded as a leader, thinker andcommunicator within the infor-mation technology industry.

Prior to his new role, Slee wasOracle Corporation vice pres-ident, representing Oracle’s

software development organi-sation in Asia Pacific and Japan.He also led the company’sbanking industry solutionsteam for Asia Pacific andmiddleware business.

F U T U R E Pl u s Fi n a n c i a lServices has announced theappointment of Elvio Bechel-li as chief financial officer.

The former St George BankCFO will be a member of FuturePlus’ executive managementteam and commenced his dutieson 7 November.

Future Plus managing direc-tor Madeline Dermatossiansaid Bechelli would be respon-

sible for growth strategy forthe company as it repositionsitself as a third-party admin-istrator for superannuationfunds.

Bechelli has over 20 yearsexperience in financial servic-es, with most of that t imespent with retai l domesticbanks. His other experienceincludes income tax compli-ance, APRA reporting, statuto-r y reporting, property andprocurement.

TYNDALL Asset Managementhas announced the appoint-ment of Matt Russell as headof institutional business.

Russell joined Tyndall afterthe funds manager becamepart of Nikko Asset Manage-ment as an independent fundmanager. He was previouslyColonial First State GlobalAsset Management’s head ofinstitutional business develop-ment and consultant relation-ships and held senior positionsat Pe r p e t u a l L i m i t e d andIntech.

Tyndall said Russell has exten-sive business developmentexperience in both institutionaland corporate superannuationareas, with knowledge of assetclasses ranging across fixedincome, credit and Australianequities.

Move of the weekBANK of Melbourne Private has announced theappointment of Jonathan Ayres as its first head.

Commenting on the appointment, BT FinancialGroup general manager of private wealth Jane Wattssaid that Ayres has a proven track record in wealthmanagement, particularly in private banking, strate-gic financial advice and servicing high net worthclients.

Ayres spent more than 10 years in senior roles atNational Australia Bank (NAB), including time ashead of financial planning for NAB Private and as aregional executive. He was most recently a seniorinvestment specialist with NAB Invest. Jonathan Ayres

““OUTSIDER is star ting towonder what it is about thepolicy gig over at the Asso-ciation of SuperannuationFunds of Australia (ASFA).

Outsider hears thatASFA's current policy chief,David Graus, is about tohead off for a year of R&Rin South America learningSpanish, and no doubtdoing other interestingthings.

And, if Outsider’s ageingmemory serves him cor-rectly, that means ASFA willhave had at least threepolicy chiefs since incum-bent chief executive,

Pauline Vamos took thehelm.

Of course, these are test-ing times for those workingin the superannuation indus-try and Outsider has somesympathy for anyone whohas had to deal with issuesranging from SuperStreamto auto-consolidation.

If appearances and atti-tude are any indicator, Out-sider believes Graus willenjoy some time in SouthAmerica. No one would everdescribe the ASFA policychief as a cowboy, butthere is a lot of the gauchoabout him.

Outsider


“You are the game foot-

soldiers of a war on chaos

that each year and each

decade is fought anew …

I don’t want to overpraise

you, but good on you.”

Minister of Financial Services

and Superannuation Bill Shorten

has a soft spot for the Taxman.

“… Between one day and

three months …”

Soros Fund Management chair-

man George Soros gets specific on

the shelf life of the Eurozone’s new

debt deal.

“Prince Charles is going to

have to exercise his hand.”

Deloitte's Wayne Walker on what

an ageing Australian population

means for the next monarch.

Out ofcontext

Don’t feed the investment managers

Over 50s golf club swingers

OUTSIDER was given a tour of TyndallAsset Management’s new digs in Sydneylast week, and he was sui tablyimpressed.

The rows of traders staring at flashingscreens lined up with his expectations,and the boardroom contained the high-est ceiling this side of the Sistine Chapel.

That said, he must confess to a degreeof scepticism about his host’s claimsthat the view of George Street from theboardroom was akin to downtown NewYork. As it happens, Outsider will be visit-ing the east coast of the US of A nextweek, so he will reserve judgement.

But what really captured Outsider’seye was the narrow ‘observation’ room

that separates the boardroom from theconference room. Tyndall has created aspace for clients to observe fund man-agers and strategists engaging in livelydebate – behind the safety of two inchesof glass, of course.

Outsider has always wondered howinvestment managers behave in theirnatural habitat. It must be at least asentertaining as a trip to the zoo, hereckons.

Upon first entering the observationroom, Outsider asked his host if theglass walls were in fact one-way mirrors,lest eye contact was made with one ofthe species investus managerus. Hishost was not amused.

OUTSIDER tips his hat to Fiducian managing director,Indy Singh, for his strong support of the annual Fidu-cian Legends golf tournament.

Singh, an ardent golfer not scared to take a lesson,threw his support behind the Legends a couple of yearsago with the tournament being held at his home club,Killara.

While there are some who might question what valuea multi-faceted financial services house such as Fidu-cian gets out of sponsoring a seniors golf tournament,Outsider can vouch that it attracts just the sort of clien-tele a financial planner would be pleased to meet.

Apart from a bunch of professional golfers aged over50, the Legends attracts well-heeled golf fans also agedover 50. Indeed, a close examination of age/wealthdemography told Outsider Singh may have identified afinancial planning client sweet spot.

Outsider must confess to having participated as anamateur in the Legends tournament and found himselfplaying alongside the brother of Morningstar chief,Anthony Serhan – one George Serhan.

For what it’s worth, Outsider will stick to committingacts of journalism – because he sure won't earn a livingas a golfer.

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

Spanish fly

Money Management (November 10, 2011)

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Transcript of Money Management (November 10, 2011)