Money Management (April 12, 2012)

www.moneymanagement.com.au

The publication for the personal investment professional

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ETFs

The perfect stormTHE performance of many asset classesremains uninspiring at best and disappointingat worst. Investors are increasingly expressingpreference for low-cost vehicles – as well astransparency in both product and pricing –creating a breeding ground for exchangetraded funds (ETFs).

Despite coming from a low base, the growthrate of the Australian ETF sector in recentyears was enormous, with up to three quar-ters of funds coming from retail investors.

In Australia the first fixed income ETF waslaunched at the end of March 2012, enablinginvestors to properly diversify their portfoliosolely using ETFs. But the industry has warnedsome “back to basics’ education is required

for both clients and financial advisers on theasset class, due to challenges in gainingmeaningful direct exposure to fixed income.

Industry experts believe it is the implemen-tation that is the greatest departure from whatadvisers might be accustomed to with man-aged funds.

The Australian ETF market might notremain at its current level of simplicity, asthere may be a place for synthetic ETFs wherethe underlying exposure cannot be deliveredin any other way.

However, the success of this product mightnot come easily, as negative press resulted ina bad year for the sector globally.

For more on ETFs, turn to page 14.

By Tim Stewart and Andrew Tsanadis

UNALIGNED dealer groups cannot estab-lish in-house funds management busi-nesses and hope to maintain their inde-pendence, according to Tupicoffs partnerNeil Kendall.

“There’s no way you can claim to beindependent and run a product providerat the same time,” said Kendall.

“If you’re running an advice businessand someone comes and sits in front ofyou and you know you lose money unlessyou sell them in-house products, you can’texpect client-focused outcomes,” he said.

The comments come after Mercer headof wealth management Brian Longsuggested that larger independent dealergroups could retain their mass affluentclients by running their own multi-manager funds.

“There’s an opportunity to build, ownor operate your own suit of products,” saidLong.

He added that the multi-manager funds

would be catered to the client base of thedealer group, thereby satisfying the ‘bestinterests’ test.

“As a dealer group you can still chasedown high-net-worth clients, but sudden-ly you’ve got a solution for mass affluentclients that is scalable, meets the ‘bestinterests’ duty, and also creates a revenuestream for the dealer group,” he said.

Boutique Financial Planning Principals’Group president Claude Santucci said themodel could well be viable, but he wasdoubtful the dealer group could continueto claim it offered independent financialadvice.

“I can’t see how you could be called afinancial planner if you’re just a productdistributor,” he said.

“Independence is very important.We’ve taken a good step towards that [withFOFA]. If you take Mercer’s advice you’reprobably taking a step backwards again,”he said.

Shadforth Financial Group (SFG) headNick Bedding said his group would be open

to running its own funds managementbusiness “if we felt we could do it betterthan the people we’re outsourcing to”.

“If you’re capable of doing that in-house, then that shouldn’t compromise

[the ‘best interests’ duty] or your inde-pendence,” he said.

One of the few unaligned dealer groupsto actually operate the model advocated byLong is Professional Investment Services(PIS), whose parent company CentrepointAlliance also owns a funds managementarm (comprising of All Star Funds andVentura Investment Management).

All Star managing director Kate Mulligansaid the advisers at PIS can maintain theirindependence because the funds manage-ment and the financial planning arms ofthe business are completely separate.

“We have to convince the PIS advisers thatour products are suitable for their clients –just like any other product. All Star andVentura have separate compliance systemsand different people,” Mulligan said.

In addition, new All Star funds don’tautomatically go onto PIS approvedproduct lists, she added.

“My products are subject to the require-ments of any other fund manager – I haveto earn a spot,” Mulligan said.

By Mike Taylor

THE financial services industry may beobliged to dig deeper to fund the implemen-tation of the Government's Future of Finan-cial Advice (FOFA) changes as well as itsStronger Super reform agenda.

With the Government currently entering thefinal stages of formulating the May Budget,senior executives within both the AustralianSecurities and Investments Commission(ASIC) and the Australian Prudential Regula-tion Authority (APRA) have acknowledged theregulators will have to manage a heavierworkload over the next 18 months.

Separation of product from advice vital

Continued on page 3

Carrying thecost of FOFA

SMSF AUDITOR REGISTRATION: Page 12 | EUROPEAN AUSTERITY: Page 20

Vol.26 No.13 | April 12, 2012 | $6.95 INC GST

Neil Kendall

ISN ads reflect good advice O

ne or two advertisements do notrepresent the true indicator of along-term campaign, but finan-cial planners should take heart

that the Industry Super Network (ISN)appears to have changed the “messaging”contained in its television advertising.

Either by coincidence or design, theadvertising appearing under the logo of theISN through the opening months of 2012lauds the value of superannuation withoutat the same time diminishing the value ofadvice or referencing the payment ofcommissions to financial planners.

Of course, given the manner in whichthe Government developed its Future ofFinancial Advice (FOFA) bills and the roleplayed by the ISN, it would have been odd,indeed, if the industry funds had opted tomaintain their confrontational approach.

Financial planners should be grateful forthe ISN’s apparent change in tacticsbecause it will allow them to focus on oneof their most critical tasks in the immediatepost-FOFA environment – reinforcing thevalue of good financial advice.

Despite all the talk about the manner inwhich the FOFA changes will serve topromote vertical integration and reinforcethe dominance of the major banks and

institutions in the delivery of financialadvice, this does not need to be the case.

Looked at objectively, the post-FOFAenvironment should prove highly benefi-cial for financial advisers offering quality,“full-touch”, holistic advice.

Something which became clear at theroundtable conducted by Money Manage-ment in the week immediately followingthe passage of the FOFA bills was thatneither intra-fund advice nor scaled advicerepresent particular problems for well-established “full-touch” advisory firms.

Premium Wealth’s Paul Harding-Davis

made the point very clearly when heacknowledged that his dealer group prob-ably did not have either the scale or thetypes of clients which would warrantpursuit of a scaled advice solution.

By contrast, Mercer’s Jo-Anne Blochmade clear that scaled advice delivery wasa core strategy for her organisation andsomething which it would be stronglypursuing in the months ahead.

In other words, it is not the advent ofscaled advice which will change the under-lying texture of the financial planningindustry; it will more likely be the mannerin which the FOFA legislation impactsdealer group commercial models.

Then, too, those financial planners whohave become too reliant on trails and whocontinue to carry too many ‘C’ and ‘D’ clientson their books will need to consider whetherthey can survive in a post-FOFA world.

Reality dictates that planners must makethe best of the environment in which theynow find themselves. With the industryfunds having wound back their anti-planner messages, the way is clear to moreforcefully sell the value of good advice – andit is a message worth selling.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

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“Those financial plannerswho have become tooreliant on trails and whocontinue to carry too many‘C’’ and ‘D’ clients on theirbooks will need to considerwhether they can survive ina post-FOFA world.”

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Average Net DistributionPeriod ending March ‘1110,207

By Chris Kennedy

RECENT Australian Taxation Office( ATO ) f i g u re s re v e a l i n g a n o t h e rincrease in excess contributions tax(ECT) breaches foreshadow a potentialperfect storm when the concessionalcontribution cap for those aged 50 andover, with a superannuation balanceover $500,000, is halved again from 1July this year.

The warning, from the Self-ManagedSuper Fund Professionals’ Association ofAustralia (SPAA), follows the ATO’s ECTStatistical Report showing that ECTbreaches had tripled in one year, with45,330 excess concessional contributionsassessments issued during the 2010financial year, up from 15,315 recordedin 2008/09 and 18,068 in 2007/08.

The jump in breaches coincided with

the halving of the contribution caps on1 July 2009, SPAA stated.

“Our concern now is there is a veryreal possibility of another spike in thenumber of members exceeding theircap when the concessional contributioncap for people aged 50 and over, withmore than $500,000 in their account, ishalved again from 1 July 2012,” saidSPAA chief executive Andrea Slattery.

SPAA is advocating for the restoration

of the caps to pre-2009 levels. It alsowants the Government to revisit thedecision to freeze indexation of theconcessional contribution cap and toadopt a workable solution for those whounintentionally breach superannuationcaps and incur ECT penalties.

SPAA said it was encouraged that theATO used discretion in 24 per cent ofcases where there was a discretionrequest.

www.moneymanagement.com.au April 12, 2012 Money Management — 3

News

SPAA warns of “perfect storm” of contributions cap breaches

“Our concern now is there is a very real possibility ofanother spike in the number of members exceedingtheir cap.” – Andrea Slattery

While the Governmentis expected to direct atleast some more fund-ing towards both ASICand APRA with in i tsBudget outlays, it is alsoexpected to prevail onthe industry to carry apart of the burden viahigher financial serviceslevies.

The higher workloadresulting from FOFA isalready impacting ASICbecause, although theFOFA bi l ls are yet topass the Senate, it isalready in discussionswith the various finan-cial planning industrystakeholders on ques-t ions around theexpected new regulatoryenvironment.

Among the new tasksneeding to be handledby ASIC will be the reg-u la to r y f rameworkaround the best inter-es t tes ts , and theapproval of codes ofconduct suf f ic ient toenable the granting ofc lass o rder re l i e f tofinancial planners.

In recent speeches toindustry events, bothASIC chairman GregMedcraf t and APRAdeputy chairman RossJones have made clearthe higher workloadsbeing carried by theirorganisations.

As well, Jones madereference to the Finan-cial Institutions Supervi-sor y Levies and themanner in which theywere often referred to

as APRA levies.An examination of the

levies regime for 2011-12 revealed relativelymodest levy increaseson the basis of startingwork with respect to theGovernment's StrongerSuper agenda, while thecomponent cover ingASIC 's act iv i t ies wasalso relatively modest,reflecting the state ofp lay wi th respect toFOFA and the CooperReview.

However, the demandsbeing placed on the tworegulators in the comingfinancial year are muchgreater, and are expectedto result in a commen-surate recommendedincrease in the supervi-sory levies.

When the Governmentlast moved to l i f t thelevies, APRA issued adiscussion paper in May2011 – and i t isexpected to act similarlythis year.

Carrying the cost of FOFAContinued from page 1

Andrea Slattery

Ross Jones

News

By Chris Kennedy

ANOTHER Commonwealth Financial Plan-ning Limited (CFPL) adviser has beenbanned by the Australian Securities andInvestments Commission (ASIC) for failing tomeet his obligations as a financial adviser,making it three former CFPL advisers bannedin just over a year.

Under the terms of an enforceable under-taking (EU), Christopher Baker of Croydon inNSW will not provide financial services inany capacity for a minimum of five years.

The EU follows an investigation into theadvice provided by several CFPL advisers,ASIC stated.

ASIC found that between 1 March 2005and 27 February 2009, Baker failed to prop-erly complete a number of CFPL’s financialneeds analysis documents, failed to deter-mine the relevant personal circumstances,and failed to make reasonable inquiries inrelation to the personal circumstances ofclients before implementing advice, and hada large proportion of clients that were profiledwith “aggressive” risk profiles.

He also provided property asset alloca-tions to clients far above the recommendedasset allocation for their risk profile, failed toprovide a statement of advice to clients whenrequired, and failed to include a replace-ment product advice record in a statement ofadvice, according to ASIC.

Baker has also undertaken to completeappropriate professional education require-ments and must adhere to supervisionrequirements for six months should hedecide to re-enter the financial servicesindustry, ASIC stated.

The latest EU follows the two-year banning offormer CFPL financial adviser Simon Langtonearlier this year and the seven-year ban handeddown to Don Nguyen in March 2011.

CFPL last year entered into an EU with ASICunder which it agreed to conduct a comprehen-sive review of its risk management frameworkand develop a plan to address any deficienciesin that framework. Any clients adverselyaffected would be compensated.

ASIC said its investigation into the con-duct of several other former CFPL advisers iscontinuing.

Hillrosspractice joinsParagem

By Mike Taylor

VICTORIAN-based finan-cial planning practiceFuture First has movedfrom under the Hillrossumbrella to participateunder the ParagemAustralian FinancialServices Licence (AFSL),with Paragem managingdirector Ian Knox sayingit is the fifth Hillross prac-tice to do so in the past 18months.

Knox said the movemeant Paragem now had 13practices working under itsAFSL looking after morethan $1.3 billion, making itone of the most rapidly-growing independentlyowned and managedlicensees in the country.

Knox said he believedParagem was now of suffi-cient size to generate scaleand some attention in themarket.

He said the AFSL wascontinuing to work withproduct manufacturers toreduce costs, and claimedit was one of the fewlicensees in the country toconsistently rebate 100 percent volume payments andto have no soft dollar deals.

Commenting on themove, Future First princi-pal Luke Provis said thepractice believed it hadoutgrown the verticallyintegrated model.

Crackdown on Commonwealth Financial Planning advisers continues

Issued by Aberdeen Asset Management Ltd ABN 59 002 123 364 AFSL 240263. You should carefully consider the relevant Product Disclosure Statement and seek advice which takes into account your own circumstances, objectives and financial situation in deciding to invest, or continue to hold an investment. 3CAB1MM_2

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Some see investmentas an abstract game of numbers.


Ian Knox


News

By Milana Pokrajac

THE Financial Planning Standards Board(FPSB) has praised its member organisa-tion, the Financial Planning Association(FPA), for its efforts in negotiating some ofthe key legislative outcomes for Australianplanners.

FPSB – which is based in the UnitedStates and owns the Certified FinancialPlanner logo marks outside the US – also

praised the Australian Government andregulators in “recognising the key role offinancial planning professional bodies inthe oversight of financial planners”.

“The FPA … negotiated with theAustralian Government to encouragefuture regulation of financial planning tobe informed – and potentially moderat-ed – by the professional standards devel-oped by the FPSB and localised by the FPAfor the Australian marketplace,” the FPSB

wrote in a statement.These comments follow the perceived

last-minute deal between the FPA andthe Industry Super Network on some ofthe key proposals from the Future ofFinancial Advice reforms package –including opt-in, best interests andenshrining of the term ‘financial planner’– which recently passed through theHouse of Representatives.

FPSB chief executive officer Noel Maye

congratulated the Australian Governmentand the FPA “for taking the initiative toprotect consumers seeking the services offinancial planners.”

“If approved, these reforms and the part-nerships between government and profes-sional financial planning bodies theyencourage could provide a model for otherjurisdictions seeking to establish andoversee the profession of financial plan-ning,” Maye said.

Aus Unity takesstake in advisorypractice

By Chris Kennedy

AUSTRALIAN Unity PersonalFinancial Services has part-nered with corporate finan-cial advisory firm CertaintyFinancial, establishing a jointventure and taking a majorityinterest in the practice.

Certainty has 22 staff inMelbourne and four inSydney, including directors,and $500 million in fundsunder advice.

It has a “quality corporateclient base”, according to Aus-tralian Unity Personal Finan-cial Services general man-ager Steve Davis, who saidthere would now be opportu-nities to provide those clientswith access to a broaderrange of services includingAustralian Unity’s corporatehealth insurance programs.

“Certainty Financial is ahighly successful businessthat has substantial revenue,funds under advice andclients. Certainty Financial willbe a significant contributor toincreasing the scale andstrength of Australian UnityPersonal Financial Services,”Davis said.

Australian Unity describedCertainty as a high growthcorporate advisory firmspecialising in superannua-tion and group insurancesolutions

“The addition of CertaintyFinancial will better positionAustralian Unity PersonalFinancial Services to takeadvantage of opportunitiesarising from the significantregulatory and environmen-tal changes impacting finan-cial services such as theFuture of Financial Advicereforms,” Davis said.

Certainty Financial will con-tinue to operate as a stand-alone business with its exist-ing management team andstaff, according to AustralianUnity.

FPSB praises FPA on FOFA efforts

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News

Practices worth 2-3 times recurring revenue: surveyBy Chris Kennedy

MOST planners believe the averagefinancial planning practice is worthbetween two and three times recur-ring revenue (RR), according to asurvey of planners conducted byRadar Results.

Asked what a practice is worth, justover one third of respondents select-ed 2 to 2.5 times RR, and a similarnumber opted for 2.5 to 3 times RR.From a pool of around 2,400 plan-ners, the survey received around 800responses – around three quarters ofwhich came from the eastern states.

There was still some optimismamong planners, with 15 per centindicating a practice was worth 3-3.5

times RR and 4 per cent selecting 3.5-4 times. Just 7 per cent indicated theythought the average practice wasworth less than 2 times RR.

Western Australian plannerswere more bullish than theireastern neighbours, with onethird of WA respondents preparedto pay between 3 and 3.5 timesrecurring revenue.

Radar results principal John Birtsaid there had been a dramaticincrease in the number of plannerslooking to sell their practices in thefirst three months of 2012, with thefirm’s merger and acquisitions divi-sion receiving almost 30 requestsfrom planners wanting to sell theirpractice. “That’s an unusually high

level of enquiries,” he said.In terms of payment method,

almost a third of respondents wouldprefer to pay half upfront, with thebalance paid over two years. Onequarter opted for an 80/20 paymentover one year and one in fivepreferred a 60/40 payment over oneyear. Just 7 per cent would pay thewhole value upfront.

Birt said it was surprising in thecurrent environment that a 50 percent upfront payment was themost popular, given planners overthe past five years or so had tendedto opt for upwards of 70 per centas an upfront payment.

When acquiring a practice orclient register, the most popular

size of recurring revenue wasbetween $100,000 and $250,000 (39per cent of respondents) followedby $250,000 to $500,000 (31 percent) and under $100,000 (16 percent). Practices worth between$500,000 and $1 million, and over$1 million each polled 7 per cent.

Almost half of purchasers wouldprefer a seller to remain in the busi-ness for one year after purchase; 11per cent said two years, and 6 percent said three years. However, 28 percent would not want the seller toremain in the business at all.

Eighty-two per cent of respon-dents also said that a clawbackclause in a contract of sale isessential.

AFA and FSC link onFOFA forumJUST weeks after thepassage of the Future ofFinancial Advice (FOFA)bills through the FederalParliament, the Associa-tion of Financial Advisers(AFA) and the FinancialServices Council (FSC)have joined forces todeliver a forum on theimplications of thechanges for licensees andplanners.

The forum, to be heldon 1 May, will be addressedby Australian Securitiesand Investments Commis-sion (ASIC) commissionerPeter Kell. It is intended tospell out the operatingenvironment likely to be

encountered by the plan-ning industry once thelegislation and consequentregulations are in place.

Commenting on theforum, AFA chief executiveRichard Klipin said itmade sense for the FSCand the AFA to join togeth-er to talk to licensees in thecontext of the evolvingregulatory environment.

“Obviously, a lot ofthings occurred lastmonth as the FOFA billswent through the Parlia-ment, and the FSC andAFA believe it is impor-tant that we deliver thistype of forum for thebenefit of those most

affected,” he said.Among the speakers at

the forum will be Klipin,FSC chief executive JohnBrogden, FSC seniorpolicy manager CeciliaStorniolo and AFA chiefoperating officer PhilAnderson.

ClearView moves in IFA marketBy Andrew Tsanadis

CLEARVIEW Wealth (ClearView) has expanded inthe independent financial adviser (IFA) market withthe acquisition of three IFA practices.

The acquisition of TSG Financial Solutions (TSG),East Coast Consultants and Knightcorp takes thenumber of ClearView financial advisers from 57 (asat 31 December 2011) to 66.

ClearView stated that the acquisitions broadenits distribution footprint across Australia, with TSGbased in Queensland, New South Wales-based EastCoast Consultants, and Knightcorp based inWestern Australia.

ClearView has also announced that its life adviceproduct suite LifeSolutions has been added to sevenmore dealer group-approved product lists – takingthe total to 13.

A key part of the company’s distribution strategyhas been based on ClearView advisers and IFAs.ClearView managing director Simon Swansea said thebusiness “is pleased with the progress year-to-date”.

John Birt

Richard Klipin

ASIC accepts permanent undertakingfrom Adelaide financial adviserTHE Australian Securitiesand Investments Commis-sion (ASIC) has accepted apermanent undertaking froman Adelaide-based financialadviser to permanentlyrefrain from providing finan-cial services.

The regulator accepted theenforceable undertaking (EU)from Barry David Hassell aspart of a broader investigationthat it is currently undertakingin relation to Hassell’s conductas a financial services repre-sentative.

In offering the EU, Hassallacknowledged that he:

• provided advice in circum-stances where the advice wasnot appropriate to the client;

• did not provide clients

with statements of advice(SOAs) and did not retain SOAsor records of advice;

• did not give clients infor-mation about his remunera-tion (including commission)or other benefits, interests,associations or relationshipsthat might reasonably beexpected to have been capa-ble of influencing him in pro-viding advice; and

• at times, fabricated SOAsand other documents relatingto the financial services heprovided to clients.

The regulatory body statedthat Hassell undertook tonotify current clients that hecould no longer provide finan-cial services and that theyshould refer any queries

about the services providedto his former Australian finan-cial services licensee, 101Wealth Solutions Pty Ltd.

According to ASIC, Hassallhas carried on the businessof Hassall-Free InsuranceServices since 31 August1988 – either in his owncapacity or as a director ofBD & WJ Hassall Pty Ltd.

Since 2004, Hassell hasbeen an authorised represen-tative at different times forPivotal Financial Advisers Ltd,Guardian Financial PlanningLtd, AAA Shares Pty Ltd, AAAFinancial Intelligence Ltd, andmost recently, 101 WealthSolutions, which revoked hisauthorisation on 28 March2012, ASIC stated.

Small cap peer group highly competitive: S&PBy Bela Moore

STANDARD & Poor’s (S&P) 2011-2012Sector Report for Australian Equity SmallCap Funds has found the group remainshighly competitive, with the average man-ager surpassing market performancebenchmarks in recent years.

The review rated 44 headline fundsand 96 product offerings. It outlines keyfindings, themes and rating distributionof funds within the Australian equities -small cap peer group. Seven funds wereupgraded while two were downgraded.At the time of S&P’s review the ratedpeer group held an average of 32 percent in non-index exposure.

The median manager returned closeto 4.1 per cent per year net of fees abovethe Small Ordinaries benchmark, accord-ing to S&P reports. The report notes thatthe smaller capitalised end of the marketis dominated by active bottom-up man-agers employing less benchmark-aware

strategies compared to large-cap strate-gies.

Key person risk remains an issue, withsenior portfolio manager pairings thebasis for many small cap offerings.

“It is therefore important that seniormembers display a healthy working rela-tionship and encourage strong teamdynamics,” said John Huynh, analyst atS&P Fund Services. “During 2011notable departures were seen in the UBSand Macquarie teams, but there was sta-bility across the remaining peer groupwhich was underpinned by effective lock-in structures.”

Three- and -four star rating categoriesdominate ratings distribution and sup-port S&P’s view that the majority of fundsin the peer group can deliver risk-adjusted returns in line with their invest-ment objectives.

Only one fund – Aviva Investors Profes-sional Small Companies – was awardeda five-star rating. The report notes that anumber of top-tier capabilities, includingthose managed by BT and Eley Griffiths,were constrained primarily due to con-cerns about capacity.

Research houses face challengesbrought about by the small cap group’scapacity issue, as high-rated offeringsattract a greater share of investor flows,according to S&P.

“Highly rated offerings can quicklybecome hindered by strong growth inFUM, therefore we are naturally sensi-tive to awarding our highest rating toofferings which are at risk of being toolarge,” said Huynh.

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IT’S A NEW WORLD.

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News

By Andrew Tsanadis

VAN Eyk has awarded the Fidelity AustralianEquities Fund and the Goldman Sachs Aus-tralian Equities Wholesale Fund an AA ratingin Australian equities – the first AA ratingsince 2009.

In its ‘Australian Equities Review 2012’,van Eyk considered the approach of 46strategies, awarding 14 A ratings, 15 BBratings and 10 B ratings. Along with two AAratings, five strategies were either screened

or refused review, van Eyk stated.van Eyk head of ratings Matthew Olsen

said that both the Fidelity and GoldmanSachs funds were superior to the otherstrategies under review due to the skill ofthe investment teams and the researchresources available to them.

According to the review, the AA ratingmeant van Eyk had “high confidence” themanagers would outperform the bench-mark over a three–year period.

“We believe that managers who are willing

to go that extra mile will have the edge ontheir competitors,” Olsen said.

The better rated managers had the willand ability to look for unique insights intostocks and industries by regularly visitingcompanies, customers and suppliers inperson. Managers who had the ability tochoose superior companies within sectorswere also at an advantage, the reportstated.

Macroeconomic conditions will be par-ticularly important to the performance of

Australian equity strategies in the next twoto three years, according to van Eyk.

In relation to the sector results, Olsensaid the better managers could back uptheir assumptions on underlying forecastsand valuations with detailed and propri-etary fundamental research at both thestock and industry level.

The report also stated that van Eyk’slong-term strategic recommendation is for abalanced fund to have a 28 per centweighting to Australian equities.

FPA liftssocial mediaengagement

By Mike Taylor

THE Financial PlanningAssociation (FPA) haslooked to step up itsmember engagement byutilising social media.

The FPA announced lastweek it had reached a mile-stone, exceeding 1,000members who had joinedthe LinkedIn MembersForum which was launchedin November last year.

According to the FPA, onaverage, 40 FPA membersjoin the forum each week.It said around 10 newdiscussions and over 30comments are posted eachweek.

The organisation alsopointed to its Twitterfollowing having dramati-cally increased from astanding start in just oversix weeks.

Commenting on thedevelopments, FPA chiefexecutive Mark Rantall saidthe organisation believedleveraging social media wasanother way the profes-sional body “goes the extramile for its members”.

“Communicating withour members is especiallycrucial in the currentclimate, with so muchindustry reform and busi-ness change taking place,”he said.

van Eyk hands down AA rating to two Australian equities funds

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News

WealthSure signs upto OneVue platformBy Andrew Tsanadis

INDEPENDENT dealer groupWealthSure has signed up toO n e Vu e’s u n i f i e d m a n a g e daccount (UMA) platform amidplans to broaden its productrange.

WealthSure group chief exec-utive Darren Pawski said thathaving the UMA platform avail-able to its members was partic-ularly important as the dealerplanned to introduce MillimanProtected Portfolios and MercerModel Portfolios to its offering.

He said it was important forits financial advisers to havethe ability to differentiate theirservices and provide clientswith a complete view of theirtotal wealth position via oneplatform.

WealthSure advisers wouldalso benef i t f rom OneVue’sweb-based financial planningtool WealthVue which wouldhelp give clients full visibilityof their f inancial s ituation,Pawski added.

OneVue head of sales StephenKarrasch said WealthSure was asignificant new client for theOneVue business.

Currently WealthSure hasapproximately 420 adviserslocated in Western Australia,New South Wales, Queensland,Victoria, the Australian CapitalTerritory, and South Australiaand Tasmania, OneVue stated.

Property for income: AustralianUnity InvestmentsBy Bela Moore

FINANCIAL planners need tore-envision property invest-ment as a three to five yearstrategy that can provideconsistent income streams forretirees, according to MarkPratt, Australian Unity Invest-ments general manager, prop-erty, mortgages and capitalmarkets, and generalmanager, property, CameronDickman.

Dickman said that while theindustr y was seeing anincrease in “the high networth self-managed superfund space” on the back ofplatform investments, “mumand dad investors” were yet tojoin the fray and needededucation about the incomestream well managed proper-ty investments could provide.

“We’ve got a demographicmovement under way andthey are income dependentand the biggest issue they’refacing is the liability gap that

they’ve got about their ownincome retirement needs,” hesaid.

Dickman said manyinvestors were burned duringthe global f inancial cr isis(GFC), but planners and retailinvestors who had plotted theliability issue of future incomerather than target “one singlehot f lavour of the monthincome source” had been ableto weather the GFC.

Pratt said “the institutionalmarket has invested anabsolute truckload of cash inthe last 18 months in whole-sale” but planners and retailinvestors needed to be re-educated about what to lookfor in commercial propertyand encouraged to considerthe asset class “noting thatsome investors have had anegative experience”.

He said investors hadalways looked to propertyinvestments for yield, but thepast four years had proven thereward/risk equation with any

investment. Pratt said whileliquidity was the risk associ-ated with property, consistentreturns of 7 to 8 per cent fitwith changing demographics.

“Most people in pensionphase don’t need their capitaltoday, they need income tolive off,” Dickman added.

He said property invest-ment tackled the inflationissue of cash investments,which is where many retailinvestors moved their fundsafter the GFC. Dickman saidgood financial planners couldassess investors fundingrequirements; the other pillarof property investments.

“This is one of the mostobvious places for incomestreams to be generated so thenatural fit is that there is asequential movement back toproperty…Property plays thatperfect spot in between whereyou’re talking about goodstable capital movements…with a strong income stream,”he said.


Darren Pawski

News

By Tim Stewart

INDEPENDENT dealer groups wonderinghow they will service mass affluent clientsunder the Future of Financial Advice(FOFA) changes should consider startingup their own funds management busi-ness, says Mercer head of wealth man-agement Brian Long.

The business model would be under-pinned with “a series of multi-managerunderlying building blocks at the sector

and sub-sector level”, said Long. Thosebuilding blocks could then be combinedto produce some diversified funds, headded.

The construction of the in-house fundsmust take into account the “precise needs,preferences and culture of the dealer groupand its client base”, said Long.

“The problem with most multi-managerfunds is that they’re very peer-aware andgeneric. So they don’t really meet the bestinterests test,” he said.

However, by catering the funds to theclient base, “you come up with a series offunds that actually reflect the needs of theunderlying investors”, Long said.

“As a dealer group you can still chasedown high-net-worth clients, but suddenlyyou’ve got a solution for mass affluentclients that is scalable, meets the bestinterests duty, and also creates a revenuestream for the dealer group,” Long said.

The funds management model wouldonly work for larger independent dealer

groups, as they would need sufficient scaleto access institutional pricing for the multi-manager funds, Long added.

“One of the things that’s elegant aboutthis is that it basically meets the objec-tives of FOFA by making advice available tothe public that want advice,” Long said.

“This sort of product will allow inde-pendent dealer groups to service massaffluent clients, whereas at the momentthey’re all talking about getting rid ofthem,” he added.

BT almosthalf of wrapmarketBy Milana Pokrajac

BT FINANCIAL Group(BT ) now accounts foralmost half of the totalwrap market, resulting ineven more concentrationin this space, according toa latest report released byPlan for Life.

Last year has seen a fallof $16.5 billion in fundsunder management (FUM)in the overall masterfundmarket, which encompass-es wraps, platforms andmaster trusts.

Both wrap and platformFUM fell by more than 5per cent each, with disap-pointing net flows for allmajor players.

However, the market isdominated by a handful ofinstitutions which accountfor close to two-thirds of theoverall total: BT, NationalAustralia Bank/MLC,Macquarie and AMP.

“From an administratorperspective the wrapmarket is even moreconcentrated, with BT($68.1 billion) alone beingresponsible for almost half,or 48 per cent of the total,”the report said.

While most leadingcompanies recordeddecreases in FUM, BT andColonial fared best byreporting relatively littlechange in the overall levelof their masterfund busi-ness in 2011.

Perpetual, however, hada particularly tough yearlosing 14 per cent in FUMover the year to December2011, followed by Macquar-ie, IOOF and OnePath.

“Uncertain, volatile andmore often than not nega-tive underlying investmentmarkets were responsiblefor this overall poorperformance for 2011,”Plan for Life stated.

In-house funds could solve FOFA concerns: Long


News

Insurers key in auto-consolidationBy Mike Taylor

THE insurance industry will need to workwith the Government to develop a frame-work to handle auto-consolidation ofsuperannuation accounts under theStronger Super initiatives currently beforethe Parliament.

That is the bottom line of a roundtableconduced by Money Management’s sisterpublication, Super Review – an exercisewhich also pointed to the fact that theAustralian Institute of SuperannuationTrustees (AIST) believes the Governmentmay ultimately move to allow the auto-consolidation of accounts containing morethan $10,000.

Reacting to concerns from some insur-ers about how the auto-consolidationprocess would work, AIST specialistconsultant David Haynes told the round-table he did not think it was too late forthe necessary discussions with theGovernment to take place.

He said insurers had not been significant-ly represented in the Stronger Superworking group, and this was something theGovernment needed to address.

“Insurers weren’t represented significant-ly on that group, and I think there is a press-ing need for the government to get togeth-er with the insurers to actually work outwhat the most appropriate way of consoli-

dating larger accounts is in a way thatdoesn’t lead to distortion or misuse,” he said.

Haynes had also suggested that the$10,000 limit that had been discussed withrespect to auto-consolidation was notnecessarily a fixed amount.

“The $10,000 limit that people are talkingabout, that too is not a fixed amount,” hesaid. “The position of AIST in fact is that thefinal position with auto-consolidation ofthose accounts should be uncapped,because the aim of this exercise should beactually to facilitate the consolidation of allaccounts, not just the minority of smalleraccounts.

“That is also consistent with the Govern-ment position, which says that subsequentexercise will be the auto-consolidation ofaccounts with balances of at least $10,000,”he said.

Comminsure’s Frank Crapis had earlier

expressed concern about the manner inwhich auto-consolidation would work andimpact insurance once it moved beyondaccounts containing $1,000.

“There isn’t anything in the legislationthat’s going to outline exactly how the auto-consolidation will occur from the insurancepoint of view,” he said. “The two or threekey risks in there are, once it moves to $1,000it’s generally fine, because I think that withthe auto-consolidation of accounts less than$1,000 there won’t be too many accountsthere anecdotally which will have the insur-ance impacts.

“It’s once it moves to $10,000 that I can seethat it will have a major impact on thoseaccounts where members have multipleaccounts,” Crapis said. “The question really isaround, so what will be the process? Whatwill be the process that will be followed whenthose auto-consolidations of those accountsoccur from an insurance point of view?

“If you look at the process today, you’ve goteight or nine insurers out there and they alloffer this choice of where members canconsolidate their insurance balances, but ifyou look at all the process it’s eight differentprocesses and there’s no one uniform way ofactually consolidating insurances today.Behind those eight insurers there are about sixor seven different reinsurers who have differ-ent practices again, and will influence theway auto-consolidation occurs today.”

FPA’s code earnstax accreditationBy Chris Kennedy

THE Financial Planning Association’s (FPA’s)code of professional practice has earned it thestatus of recognised tax agent association bythe Tax Practitioners Board (TPB).

The accreditation shows the TPB hasrecognised that the FPA has rules in its codeand requisite disciplinary procedures andprocesses that meet the TPB’s requirementsfor recognition as an association. The TPBalso recognises that the FPA has appropriateprofessional and ethical standards for itsmembers, the FPA stated.

The accreditation means the only addi-tional requirements FPA members will nowneed to fulfil to become recognised taxagents are the relevant fit and proper persontest and experience requirements, accordingto the FPA.

The formal recognition came into place on 21March. FPA members who are already regis-tered tax agents or registered BAS agents will beable to retain this status as members of theFPA, the association stated.

FPA chief executive Mark Rantall said hebelieved the FPA had a world-class code whichwas already used by the Financial OmbudsmanService in its determinations. He said theapproval of the code by the TPB was furtherrecognition of this.


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Michael D’Ascenzo, Commission-er of Taxation, has describedself-managed super fund(SMSF) auditors as the eyes and

ears of the Australian Tax Office (ATO). Audi-tors play an important role in the integrity ofthe SMSF industry and are relied upon heavilyby the ATO to ensure trustee compliance.

In his review, Jeremy Cooper also felt thatSMSF auditors play a significant role in thesuperannuation industry, describing them asthe cornerstone of the existing regulatoryframework. Unsurprisingly therefore, theCooper review panel gave some attention toSMSF auditors as part of the Super SystemReview.

Cooper’s final report, handed to the FederalGovernment in 2010, made a number ofrecommendations with respect to SMSF audi-tors, including the introduction of a newregistration process as well as changes topromote auditor independence.

SMSF Auditor RegistrationAn announcement is still pending from theMinister for Financial Services and Superan-nuation, Bill Shorten, on various aspects of anew SMSF auditor registration process.However, it has been confirmed that a regis-tration process will be introduced and bemanaged by the Australian Securities andInvestments Commission (ASIC). ASIC hasbeen tasked with developing the registrationprocess, including registration requirements,in consultation with industry representatives.

The introduction of a registration processis a real opportunity to take stock of the SMSFaudit industry and develop systems andprocesses that will produce positiveoutcomes, beyond creating a list of SMSFauditors, or regulation for regulation’s sake.The new system can and should support theoverall policy objective of the changes toensure we have competent auditors carryingout quality audits. The challenge in this will beensuring that regulation or criteria for regis-tration do not become too onerous, and thatthey do not impose too significant a barrier toentry that would ultimately place a strangle-hold on the industry. We need to make surewe have enough auditors to audit a growingnumber of SMSFs.

The new registration process, developedusing a collaborative approach between rele-vant parties, will be the best approach toensuring a workable and useful process thatwill meet good policy objectives. Important-ly, the new process should ensure that theprofessional bodies are supplied with theappropriate information to undertake direct-ed activities to their members. It is thesedirected activities that will truly enhanceaudit quality. It has been an anomaly in theSMSF audit industry that the ATO, as regula-tors of the SMSF industry, has never been ableto provide the professional accounting bodies(or other relevant associations) with thenames of their respective members who were

reported to them as conducting audits. Thiscreated a scenario in which the ability to targetthose auditors with respect to education,communication and compliance was limited.The new registration regime, appropriatelydesigned, can take away this limitation.

The Government has also confirmed that acompetency exam will be introduced forSMSF auditors as part of the registrationprocess. Details of exactly who will need tosit this exam are still to be released, althoughit is likely that new auditors will be requiredto sit a test, as will some existing auditors whohave only previously audited a low numberof SMSFs. Experienced SMSF auditors whohave been conducting large numbers ofaudits are not likely to be required to sit anexam prior to registration.

It is questionable as to whether a compe-tency exam will achieve any of the desiredpolicy outcomes. Treasury’s strategic review ofaudit quality in Australia does not identifycompetency tests as a driver of audit quality.Rather, the drivers identified in the reportinclude targeted communication and educa-tion, mentoring, on-the-job training, profes-sional scepticism, technical training andsupervision. The final design of the registra-tion process will need to support and facilitatethese drivers as being part of the new SMSFaudit landscape.

IndependenceThe independence of an auditor is a crucialaspect of audit activity. In his review, JeremyCooper believed “independence of auditors iscrucial for the efficient and effective opera-tion of the SMSF sector”.

His final report recommended mandatoryoutsourcing of SMSF audit activity. That is, ifa firm was offering any other services to anSMSF or its trustees, the firm would berequired to decline the audit engagement andoutsource to a third party in what Cooperdescribed as “true independence”. Unfortu-nately, such arrangements do not ensureindependence. An auditor would still berequired to take a principles-based approach

to determine their independence. Imaginean arrangement between two firms whoseprincipals happened to be best friends orwhere a significant portion of an auditor’swork came from one source. They may well beable to ‘tick the box’ under Cooper’s suggest-ed arrangement, but their independencewould still be questionable. In fact, under thecurrent Code of Ethics that applies to profes-sional accountants, it is highly likely theywould be required to decline the auditengagement.

The Government, in its Stronger Superreforms, rejected Cooper’s recommendationfor mandatory outsourcing and insteadadopted APES 110, the Code of Ethics forprofessional accountants as determined bythe Accounting Professional and Ethical Stan-dards Board (APESB). Independence is asubjective issue to be determined by anauditor in relation to each and every auditengagement they undertake. It cannot bedetermined without considering the individ-ual facts of each case. This is why a prescrip-tive approach to independence would neverwork, and why the Government was right toback the principles-based approach as set outin APES 110.

All SMSF auditors will now be required toadhere to APES 110, regardless of theirmembership of a professional accountingbody. It is anticipated that adherence will begiven legislative backing and SMSF auditorswill be required to sign off on their adherenceas part of their initial and ongoing registra-tion with ASIC.

As the number of SMSFs in Australia increas-es, it is important to ensure that SMSF audi-tors are providing a high-quality service thatcan be relied on by trustees, Government andregulators. We need to make sure the upcom-ing changes to the industry meet the goals ofcompetent auditors and quality audits. Over-regulation, without considering the implica-tions, will only serve to stifle the industry.

Liz Westover is head of superannuation at theInstitute of Chartered Accountants.

InFocus

If auditors are, indeed, the eyes and ears of the regulators in the SMSFsector, Liz Westover writes that the new auditor registration regime willprove to be crucial as the industry evolves over the next few years.

The eyes and ears of an industry

ACFS Funds Management:Fees and Performance Panel13 AprilRACV Club, Melbournewww.australiancentre.com.au

AFA/FSC The Future of Advice Post FOFA1 MayFSC King Room, Sydney

2012 Money ManagementFund Manager of the YearAwards10 MayFour Seasons Hotel, Sydneywww.moneymanagement.com.au/events

SMSF, ETFs and DirectInvesting15 MayCockle Bay Wharf, Sydneywww.moneymanagement.com.au/events

2012 Annual StockbrokersConference31 May Crown Promenade, Melbournewww.moneymanagement.com.au/events

$73.4bnNational Australia

Bank/MLC

WHAT’S ON

MASTERFUNDMARKETSNAPSHOT


Funds undermanagement atDecember 2011

$85.2bnBT Financial

$68.7bnAMP Group

$57.8bnCommonwealth/Colonial

$33.2bnOnePath Australia

Source: Plan For Life


SMSF WeeklyIs Govt using ECT breaches to close deficit gap?By Mike Taylor

INSTITUTE of Chartered Accountantssuperannuation specialist Liz Westoverhas pointed to the latest AustralianTaxation Office statistics on excesscontr ibutions tax (ECT ) as havingconfirmed just how problematic theregime remains.

In analysis published last week, West-

over suggested the Government and theregulators had got it wrong in believingthat ECT contributions would declineas people become more aware of theconsequences.

“When concessional contributionswere introduced and ECT assessmentsstarted being issued, the government andregulators believed that the number ofassessments would fall as people became

aware of the new rules,” she said.“The latest figures indicate that this

is clearly not the case,” Westover said.“ECT was originally introduced simply

as a deterrent to people breaching supercontribution caps, not a revenue raiser.With the complexity surrounding thecaps and the rules around super, it isclear that people are still getting it wrong,and the number of inadvertent errors

continues to rise,” she said.Westover said $132.5 million had

been raised in 2009-10 financial yearfrom ECT assessments and she wasconcerned that the 2010-11 figureswould be even higher.

“ The gover nment has stated i tscommitment to a budget surplus. Is itsreluctance to change the ECT linked tothe revenue it is collecting?” she asked.

Cap breacheson the riseCONCESSIONAL contr ibut ion capbreaches have increased around three-fold in the past three years, accordingto specialist self-managed superannu-at ion fund (SMSF) company Can-vendish Superannuation.

Cavendish head of education, DavidBusoli this week pointed to the latestAustralian Taxation Office (ATO) dataon the excess contributions tax and thestrong trends which had emerged.

He said the number of concessionalcap breaches had increased three-foldfrom 15,315 in 2008/09 to 45,330in 2009/10.

“This is not surprising consideringthat concessional contribution capswere halved in that year and there isan inevitable period of adjustment,” hesaid.

Busoli said the result had seen anincrease in the value of assessments,up from $58.4 million in $2008/09 to$130.9 million in 2009/10.

He pointed out that the number ofexcess non-concessional contribu-tions had fallen dramatically from1,550 over the same period to just six.

Advice key tocomfortable retirementONLY two-thirds of Australianpre-retirees are on track tomeet their retirement goals,according to the latest datareleased by InvestmentTrends.

The report revealed plannersstill have a long way to go in get-ting their pre-retiree clients inposition to meet their objectivesfor a comfortable retirement.

Commenting on the find-ings, Investment Trendssenior analyst Recep Pekersaid the findings were consis-tent wi th the company’sinvestor research.

Twenty-eight per cent of Aus-tralians who use a planner feelthat they are not on track toachieving their retirementgoals,” he said.

“However, Australians whouse a planner are more likelyto feel on track to achievingtheir goals.”

He said the proportion whodon’t feel on t rack was

higher, at 42 per cent, amongthose who don’t use a plan-ner.

The Investment Trendsresearch found that plannersanticipated that 33 per centof their clients aged under 75would be dependent on theage pension for more thanhalf of their income whenthey retire, growing to 54 percent by the t ime they areaged between 84-95.

Australian optimismplumbs new depthAUSTRALIANS are feelingdecidedly less optimisticabout the immediateoutlook for the economy,according to the latestresearch released by AllianzAustralia.

The research, containedin the company’s optimismindex, revealed optimismhad reached a particularlow in Queensland justahead of the recent StateElection.

It said that while WesternAustralians remained moreoptimistic than otherAustralians, their level of opti-mism had nearly halved sinceJanuary.

The data pointed to thedrop being dr iven bymiddle-aged men (35 to 64)whose optimism scoreswere at record lows.

Commenting on theresults, Allianz Australiamanaging director Terry

Towell said that overall ,Austral ians’ sentimentabout the future of theeconomy had hit a lowpoint in March with anOptimism Score of only 5,down from the level of 8recorded in January.

“This is less than half thedouble-digit scoresachieved throughout mostof 2011 and well down onthe score of 20 in November2010,” he said.

“Looking at the results inmore detail reveals that theoverall national fall in opti-mism is being driven by a lessoptimistic outlook amongmen, those living in Queens-land and Western Australiaand those aged between 35and 64,” Towell said.

He said that in all cases,optimism about the futureof the economy had hit thelowest levels recorded in thelast 18 months.

Recep Peker


ETFs

THE secret to the success ofexchange-traded funds (ETFs) is

a ‘perfect storm’ of post-GFCinvestment themes – investors seekinglow-cost vehicles, transparency in bothproduct and pricing, and a preference forlisted investments.

Over the last five years, as traditionalmanaged funds have floundered, ETFs haveposted a compound annual growth rate of33 per cent per annum, according to figuresreleased by the Australian SecuritiesExchange (ASX). ASX-listed ETFs attractedover $500 million in net inflows during 2011,to reach an overall market cap of $4.3 billion(as at February 2012).

While it’s still early days in the Australianmarket, the number of ETFs on offer hasincreased significantly – from 45 to 61 during2011, and to 68 by the end of March – and

with new ASX regulations opening the doorto fixed income ETFs for the first time thisyear, you have a recipe for rapid growth.

Build it and they will come?According to the Australian Securities andInvestments Commission (ASIC), there iscurrently a high level of retail investmentin the sector – between 50 and 75 per centacross most products, with self-managedsuperannuation funds (SMSFs) account-ing for up to 30-40 per cent of the memberregister of Australian ETFs. By contrast,overseas, institutional investors are muchstronger in this space, holding approxi-mately 80 per cent of ETF assets in Europeand around 50 per cent of ETF assets inthe US.

The June 2011 BetaShares/InvestmentTrends ETF report also found that while

early adopters of ETFs were primarily self-directed, 30 per cent of investors werediscussing ETFs with their adviser. Around27 per cent of planners surveyed werealready using ETFs, with a further 27 percent planning to implement them in future.

So what is driving interest in these vehicles?According to iShares director Tom

Keenan, there are both top-down andbottom-up factors at play. As the perform-ance of many asset classes remains lacklus-tre, investors have increasingly expressed apreference for passive, low-cost investmentvehicles, and ETFs offer managementexpense ratios of half or even a third of thosecharged by actively managed funds.

Drew Corbett, BetaShares’ head ofproduct strategy, says its own research indi-cates that investors are increasingly focusedon fees.

“Investment expectations have beendiminished a little by the volatility in themarkets over the last 18 months. People seethat the number one thing you can do toimprove your returns in an investment port-folio is to lower your costs,” Corbett says.The GFC also made investors focus moreon the value for fees, and why they werepaying higher fees for proposed outperfor-mance that was not being delivered.”

While high net worth investors arefavouring direct securities and off-platform

Fee and portfolio transparency remainthe most attractive features of ETFs.Adding fixed income to the menuenables investors to properly diversifysolely using ETFs.Financial advice is crucial especiallyfor investors who are looking to enterthe fixed income space.The negative press surroundingsynthetic ETFs resulted in a tough yearfor the sector globally.

Key points

Theperfect

storm

Despite its relatively small size, solid growth in recent years has made theexchange-traded fund (ETF) space the envy of managed funds and someof the other sectors. Freya Purnell explores the reasons why a ‘perfectstorm’ might be brewing for the growth of ETFs.


ETFs

products, Tria Investment Partners seniorconsultant Oliver Hesketh and director ofRussell Investments’ Australian ETF busi-ness Amanda Skelly see this trend particu-larly among self-managed super fund(SMSF) trustees.

“About 40 per cent of our investors areactually running their own SMSFs, and fromour research it was quite clear that they havea preference for control and transparency,which trading on the share marketprovides,” Skelly said.

In fact, liquidity and transparency are keyconcerns across the board for retailinvestors.

“Since the GFC, investors have becomefar more worried about the liquidity of theinvestments they are using and far moreconcerned about understanding thoseproducts,” Keenan says.

ETF Consulting director Tim Bradburyalso says the appeal of the transparency ofETFs extends beyond just what is in theinvestment portfolio, to “who is getting paidto do what”.

Another aspect of the appeal of ETFs –which may be going under the radar at themoment – is their tax-efficiency, according

to Morningstar co-head of fund researchTim Murphy.

“The ETF structure is much more tax-efficient for the investor than a managedfund or unit trust structure,” Murphy says.

In addition to these strong consumerdrivers, on the other side of the coin,impetus is coming from the structuralchange afoot in the intermediary market.The move towards fee-for-service is accel-erating the process of adoption of ETFs, asadvisers look to demonstrate value forclients, and the commission-free structureof ETFs fits well within this new proposi-tion. Keenan says this transition was alsocritical to the growth of ETFs in the US.

With these drivers at play, the managedfund sector could be forgiven for feeling alittle threatened by the new kid on the block– and perhaps with good reason, if the over-seas experience is anything to go by.

“Looking at the US, mutual funds havebeen in net outflow or small inflows for somebond funds. ETFs have continued to gain ashare of wallet among investors during thattime. In 2008, there were huge outflows acrossthe board in all asset classes, includingmanaged funds, but ETFs saw net inflows of

around $200 billion,” Murphy says.Despite this rosy view, there are some

barriers to the growth of the sector. Distri-bution is a “critical hurdle” for all ETFissuers, according to Bradbury.

While the 2011 Investment Trends ETFsurvey said that 63 per cent of planners

reported that they would use Australianequities index ETFs over the next 12months, with proposed adoption numbersalso high for international equities, fixedinterest and commodities ETFs, there wasa big ‘if’ attached – that is, if these productswere available on their approved productlist (APL).

Bradbury also draws the distinctionbetween the general level of awareness ofETFs, currently high, and real ETF knowledge,which is low, and points to the need forimproved education across the industry.

And if the nerves and jitters continue toaffect investors in 2012, they may also avoidany perceived “riskier” path, preferring tostay invested in cash and “safe haven”options, Bradbury says. This would hinderthe local ETF market from reaching itsmedium-term targets – though he admitsthis is less likely as cash rates decrease.

Opening the floodgates on fixed income From a regulatory perspective, 2012 hasalready brought the Australian ETF marketa major win. The long-awaited changes by

Continued on page 16

Tom Keenan


ETFs

the ASX to the AQUA rules which clearedthe way for fixed income ETFs to be listedcame into effect on 9 January 2012. Bythe end of March, seven new cash andfixed income ETFs had already beenlaunched, by Russell Investments, iSharesand BetaShares, with more in the pipelinefrom issuers such as State Street GlobalAdvisers.

This move is important not just becauseit creates the opportunity to launch newproducts to the market, but because addingfixed income rounds out the major assetclasses offered through ETFs.

“It now enables investors to build prop-erly diversified multi-asset portfolios acrossthe full risk spectrum solely using ETFs. Upuntil now you’ve only had the risky assetclasses like equities, commodities, andproperty,” Murphy says.

This could be particularly attractive forthose investors who only want to deal withASX-listed securities.

“Historically that meant using directequities and hybrid securities, which are farfrom the defensive investments that peoplemight think they are. Fixed income adds aproper defensive asset class to theirinvestable universe,” he adds.

Importantly, it makes high credit qualityAustralian fixed income much more acces-sible, enabling investors to buy bonds in thesame way they buy a stock, and transpar-ent, with pricing to be published daily.

“This is a tremendous change fromwhat we have known previously, which isa market difficult for investors to accessdirectly due to high minimums and acumbersome process. This really doeschange the game, and I think that the easeof use will mean that self-managed superfund trustees and financial advisers willrethink their allocation to fixed incomeand its role in a portfolio,” Keenan says.

Bradbury believes fixed income ETFs aregoing to be of greater interest to advisersand institutions, who are skilled in portfo-lio construction and asset allocation, thanthey will be to self-directed investors.

“That’s mainly because self-directedinvestors tend to be of an equity mindset. It’sprobably a better result for them to thinkabout buying term deposits for the timebeing, rather than a government bond indexor high-yield ETF,” Bradbury says.

Russell undertook research into howfixed income ETFs might be used in aportfolio before launching its bond ETFs,and this clearly indicated that advisers,brokers and SMSF trustees were lookingfor an investment solution that could betailored and was – surprise, surprise – low-cost. For investors who don’t want asmuch control, Russell also created a modelportfolio to provide guidance on howadvisers should allocate to bond ETFs.

And it’s here that the industry sounds awarning. Because in the past, it has beenso challenging to gain a meaningful directexposure to fixed income, some ‘back tobasics’ education is required on the assetclass, as well as the nuances of accessingit through the various ETFs.

“The introduction of another asset classis exciting and it helps all of us in themarket to continue to build on the story,”says Guy Maguire, head, Standard & Poor’s(S&P) Indices Australia. “What is still chal-lenging is how we position these, and how

we support the adviser so they can feelcomfortable and understand how thesedifferent ETFs will work.”

The timing may also be right for fixedincome ETFs. There has been a rally ingovernment bonds of late, rendering themless attractive right now, but term deposits,which could be seen as the major competi-tor for these defensive dollars, are seeingdeclining yields.

“As people start to reassess their termdeposit holdings, corporate bond ETFs area nice complement to provide liquidity andthe comparable yield without equity marketvolatility,” Skelly says.

There are, however, some pitfalls withfixed income ETFs that investors need tobe aware of – for example, spreads poten-tially blowing out. To avoid this, Skellysuggests advisers and investors look care-fully at the underlying securities held by theETF and how liquid they are.

The trouble with syntheticsDespite the good news locally, the last yearhas actually been a tough one for thesector globally.

The negative press started last April inthe US, when the Financial Stability Boardsounded a warning about systemic risksrelating to ETFs; fears that were compound-ed when a UBS junior trader generated a$2.3 billion loss through unauthorisedtrading through ETFs.

International regulators such as the Inter-national Monetary Fund, the UK FinancialService Authority and the Bank for Interna-tional Settlements added to the chorusconcerns that investors might not be awareof the risks around ETFs.

These concerns relate specifically tosynthetic ETFs, and particularly the coun-terparty and systemic risks they carry, linkedto the use of derivatives and leverage in theirstructure.

Though synthetic ETFs have beenextremely popular in Europe, where theymake up almost 45 per cent of the ETFmarket, new regulation could see thissection of the market stopped in its tracks.The European Securities Market Authorityhas drawn up new guidelines to improvetransparency in the market, consultingpublicly on whether ETFs should be dividedinto complex and non-complex products,and whether the sale of derivative-basedsynthetic ETFs to retail investors should berestricted.

In Europe, the worries have seen anexodus of investors from synthetic ETFs infavour of those that are physically backed.European synthetic products had outflowsof US$7.3 billion in the three months toOctober 2011, according to BlackRock’s ETFLandscape Summary Report, with US$6.0billion flowing back into physically backedproducts during the same period.

Although caution also infected theAustralian market, it was unwarranted – inmost cases, these issues haven’t evenapplied to products distributed locally,which are primarily physically backed byassets or cash on deposit. (Two exceptionswere the BetaShares Financial andResources Sector ETFs, up until October2011, when the company announced itwould move the funds to a physicallybacked structure and limit their use of deriv-atives “to an immaterial level”.)

“I think now, more than a year ago, youcan look at the whole ETF segment and saythe risks are still fairly low,” Hesketh says.

“ASIC has worked closely with ETFproviders to ensure that the products hereare next generation ETFs as opposed tothose products overseas that did causesome of the concerns,” Corbett says.

This close attention to getting the rightrules in place was also the reason it took so

long for fixed income ETFs to come to market.“That has been due to the regulator

wanting to ensure that the fixed incomeETFs that are brought to market are the rightsolutions, so not a high reliance on deriva-tives, not a lot of leverage. They have beenquite thoughtful in the rules,” Skelly says.

Many other industry players are support-ive of the careful approach ASIC has takento regulating this emerging market, andparticularly in applying the lessons learnedfrom overseas.

“Certainly I think ASIC has done a verygood job of spelling out the risks to investorsand educating the market, as have the ETFproviders in the Australian marketplace,”Keenan says.

But this is not to say the Australian ETFmarket will remain at its current level ofsimplicity.

“Potentially there is a place for syntheticETFs where the underlying exposure can’tbe delivered in any other way. A greatexample of that is a commodity ETF – obvi-ously you need derivatives or futures todeliver that, because you can’t warehousethe underlying commodity,” Keenan says.

Bradbury agrees that greater complexityis coming – partly because issuers arelooking to implement new investmentideas, and partly because some exposurescan only be delivered synthetically.

In the commodities area, BetaShareslaunched a raft of cash-backed productstowards the end of last year, including oiland agriculture ETFs, as well as a broad

Continued from page 15

“Potentially there is a place for synthetic ETFs where theunderlying exposure can’t be delivered in aany other way.”– Tom Keenan


ETFs

commodities basket ETF, aimed at provid-ing access to agriculture, livestock, oil andnatural gas.

They’re not for everyone – Murphy, forone, warns advisers against usingcommodities exposures in portfoliosthrough ETFs or other vehicles.

“Particularly where you have index-basedcommodity exposure, like ETFs are, wherethey are based on futures curves rather thanphysical assets, the performance can varyquite a lot from the movement of spotprices. There is a whole range of differentissues when you are investing in commodi-ties, which is a big leap ahead in educationand understanding,” Murphy says.

ASIC’s current view of the regulation ofETFs is comprehensively outlined in itsReport 282 Regulation of Exchange TradedFunds, which was released in late March.The review was undertaken as a result ofthe International Organisation of SecuritiesCommissions (IOSCO) issuing proposedregulatory principles relating to ETFs forconsultation.

Among the principles proposed byIOCSO are a number of disclosure require-ments relating to how an ETF tracks anindex or basket of securities, portfolio hold-ings, fees and expenses, and lending andborrowing of securities, how ETFs are soldby intermediaries, management of conflictsof interest, and requirements for regulatorsto address risks raised by counterpartyexposure, collateral management, andliquidity shocks.

Releasing the report, ASIC chairman GregMedcraft said that the regulation of ETFs inAustralia is in line with these proposedinternational standards, and reiteratedASIC’s commitment to market surveillanceand investor education in the ETF sector.

The report outlined ASIC’s view thatproducts using ‘funded swaps’ had beenidentified as the most risky types of ETFs interms of counterparty risk, and that whileno Australian ETF to date has used this typeof mechanism, it “would consider careful-ly the appropriateness of any proposedproduct using a funded swap”. It also notedthat there are currently no inverse or lever-aged ETFs in the Australian market.

But Bradbury believes this may change. “As ASIC and ASX become more comfort-

able with synthetic exposures [and ways arefound to provide retail investor educationand protection], we might see inverse fundsacross broad equity indices this year,” hewrote in the ETF Consulting Australian ETFOutlook report. “This seems a logical andsensible progression, given the lack of anactive market for borrowing ETFs inAustralia and the need to provide investorswith superior ways to manage down-sideequity risk.”

The role of the adviser Many would argue that with a new invest-ment vehicle, there is no such thing as toomuch education – both for advisers andbrokers and their clients – and the entryof fixed income ETFs is in fact promptingadditional efforts in this area.

“That alone I think is really important,because there is still a lot of uncertainty andconfusion around what ETFs actually are,”Skelly says.

Advice is also critical for those looking todip a toe in the water in the fixed incomespace.

“Our research in the SMSF sector showedthat the number one reason SMSFs seekfinancial advice is to get advice on bonds,”Skelly says.

When it comes to including ETFs in theirproduct toolkit, boutique advice practiceshave tended to be among the earlyadopters, but this may change in the future,particularly with ETF coverage now extend-ing across the major asset classes, a widerrange of options, and products being fullyresearched and added to APLs.

“I think many more advisers are consid-ering how ETFs might play a part in theirbusiness. It’s not compromising the valuethat the adviser provides, it’s simply usingadditional tools to build better or more cost-effective or more diversified portfolios fortheir clients,” Bradbury says.

Hesketh believes there may also be growthin ETFs driven by the broker market switch-ing from transaction trading to more portfo-lio management, while Corbett says anincreased knowledge of ETFs among adviserscould see them used in more sophisticatedstrategies such as portfolio tilting andconstructing core-satellite portfolios.

“As ETFs become a full suite of productsand as issuers increase the offer to the fullrange of asset allocation tools through ETFs,advisers will recognise that there is a rolefor ETFs in portfolios and in helpinginvestors to achieve their investment objec-tives,” says Lochiel Crafter, Asia Pacific headof investments, State Street Global Advis-ers. “The value of ETFs is if you have aparticular view on a particular period, you

can get price certainty in executing on thatview at the time you want to do it, so it doesincrease that degree of flexibility.”

Importantly, it is the implementation thatis the greatest departure from what advisersmight be accustomed to with managedfunds.

“The underlying investments are oftenlargely the same, sometimes exactly thesame as the investment exposure you aregetting in a managed fund,” Murphy says.“But the implementation is quite different– and over time, as advisers get more confi-dent and more understanding of that, thenyou would expect to see the use of ETFsamong advisers growing.”

What’s next for ETFsIf ETFs over broad-based indices are atthe vanilla end of the spectrum andsynthetic and actively managed ETFs areat the highly structured end, then fixedinterest ETFs, commodities ETFs andETFs over tailored indices are some-where in the middle ground – and it isthese type of funds which will flood theAustralian market over the coming year,as well as possibly some active ETFs bythe second half of the year, according toBradbury.

“That’s a natural progression, because asthe market starts to grow, and regulatorsbecome more comfortable that retailinvestors are adequately protected andinformed, you are going to see variations ofETFs that aren’t simply the standard assetclasses we have seen up until now,” Brad-bury says.

And if managed funds are starting to feelthe squeeze from ETFs, there’s anotheroption – they could take their funds ontothe ASX.

“If you look at the trends out of the US,some of the biggest managers there aremoving their product on exchange,” Brad-bury says. “The recent ASX listing of theDIGGA Mining Fund demonstrates hownew specialist entities could emerge andtake market share in funds management,with the help of AQUA listing rules and rela-tively low barriers to entry.”

As the saying goes – if you can’t beatthem, join them. MM

Tim Murphy

The defensive portion of aninvestor’s portfolio shouldgeneral ly provide regularincome, liquidity and capital

protection. It should also have a lowcorrelation to growth assets. Assetclasses such as term deposits, short-dated government bonds and cash arewell-known defensive style assetswhich have traditionally been used tomake up the defensive component ofan investor’s portfolio.

Government bonds, for example – atleast when issued from well-ratedcountries – meet many of the afore-mentioned key characteristics of adefensive asset c lass. In di f f iculteconomic climates, when central banksreduce interest rates further thanexpected as a means of stimulatingdemand, bonds will generally performwell. They provide income and liquid-ity, and they protect capital in this typeof environment, whereas growth assetsgenerally perform poorly.

However, bonds tend to underper-form in the opposite market environ-ment. That is, when central banks needto stem growth and raise interest ratesabove expectations to control inflation,bond investments may underperform.If the interest rate hikes are of a signif-icant magnitude, the bond investmentmay produce a negative return, andconsequently, fail to provide capitalprotection.

Term deposits also protect capitaland have a low correlation to growthassets. However, they may compromiseliquidity because investors cannot exitwithout forfeiting return. In future,under its proposed implementation ofthe Basel III liquidity requirements, theAustral ian Pr udential Regulat ionAuthority will require Australian banksto be far more strict before allowingearly withdrawal of term deposits. Thatsaid, the liquidity issue can generallybe managed by diversifying acrossdefensive portfolio options or stagger-ing maturity dates.

If these safe asset classes tradition-ally dominated defensive portfolios,why did so many defensive portfoliosunderperform or produce negativereturns through the global financialcrisis (GFC)? The answer is that the pre-GFC environment lulled investors intoa false security and they shied awayfrom these traditional vehicles. Instead,they shifted their attention to generat-ing higher returns from their defensiveportfolios rather than seeking income,liquidity and capital protection.

Between 2003 and 2007, volatility wasat abnormally low levels. Taking risk

was generally rewarded over boththe short and long-term. Duringthis period, many “diversifiedincome funds” came to promi-nence. These funds are multi-asset class funds that investin a range of securit ies.They were (and often stillare) positioned as defen-sive, and became apopular alternative tobonds and cash. Manyof these funds aimed toachieve higher returnsby taking on addi-t ional r isk, whichcame in the form ofexposure to growthassets such as equities,credit (which is posit ivelycorrelated to equities), propertyand options. The pre-GFC economicenvironment was extremely benign,and as such, the extra risk taken bythese funds was handsomely rewarded,and for a time, many of these fundssignificantly outperformed.

However, dur ing the GFC, theperformance of some of these strate-gies plummeted, revealing that somediversified income funds had taken ontoo much risk to be considered trulydefensive. Investors were surprised bythe high correlation between somediversified income funds and globalequity markets. In addition, large nega-tive returns from some diversifiedincome funds occurred at the timewhen global equity markets sufferedtheir worst returns.

While some diversified income fundsrecovered over the next one to two years,it was an important reminder that shouldbe adhered to regardless of the econom-ic climate: defensive investing should be

assessed over a relatively short timehorizon – generally up to three years.Although these funds may have a rightfulplace in an investor’s portfolio, they maynot be suitable for a purely defensivestrategy, particularly if capital preserva-tion is a key objective.

For investors seeking a true defen-sive style fund, it’s important to under-stand the range of options available.

Current economic and market condi-tions have brought defensive invest-ment options back into the spotlight.

Investors should maintain an alloca-tion to traditional defensive assets suchas cash and fixed interest, regardless ofthe environment. Where other defen-sive options are considered, theyshould be risk focussed rather thanreturn chasing – this approach will helpthe defensive portion of the portfolioto work throughout the economic cycle.

Andrew Hair is vice president, client andconsultant relationships, Acadian AssetManagement.


OpinionAsset allocationBringing the defensive backThe global financial crisis and heightened volatility have brought defensive funds back into thespotlight. Andrew Hair discusses the characteristics of true defensive assets and examines whysome so-named funds suffered during the crisis.

“Investors shouldmaintain an allocation totraditional defensive assetssuch as cash and fixedinterest, regardless of theenvironment. ”

It seems to me that we’re all over theFuture of Financial Advice (FOFA)reforms before they have evenstarted. As I talk with advisers they

consistently say they’ve had enough andreally just want to get on with it. That is,they want to get on with giving advice.

A lot of the problem, of course, is thatthe starting line and the finishing line keepchanging. The latest news that implemen-tation will initially only be on a voluntarybasis just blurs things a little more again –even though it will be welcomed by many.Is that date of July 2013 really going to bethe mandatory start date? It’s a little bit likesuperannuation legislation isn’t it? A bit oftinkering here, some grandfathering there,and a bit of political spin put on top forgood measure. Various parties are hope-fully satisfied, but mostly clients willcontinue to be confused. Hopefully thisconfusion doesn’t apply to advisers, butclearly, regular changes in any area do leadto a certain level of apprehension for allconcerned.

So, I say let’s say goodbye to FOFA. Let’stake hold of FOFA and claim it for ourselves.Let’s make it stand for something mean-ingful to all advisers in the trenches bybreathing new life into it. How about Focuson Financial Advice?

Instead of talking about the future ofour profession, let’s focus on what it’s allabout. Last time I checked, it was aboutgiving our clients carefully consideredadvice. It’s not really that complicated isit? Our advice may be either simple ormore complicated, but the advice itself is

always based on the single premise thatour role as advisers is to get our clientsfrom where they are now to where theywant to go. As I heard recently, it’s really assimple as getting our clients’ financialhouses in order and rearranging theirrooms from time-to-time as they progressthrough their various life stages.

What about the Financials of FutureAdvice? Does it really matter how our clientchooses to pay us for the advice given?Many would argue that it doesn’t, butperception does matter to some extent. Itmay be that the client accepts and evenappreciates having a number of paymentoptions, but it’s unlikely that the media andother professionals will accept any methodof payment other than fee-for-service.

Is this really a problem? I don’t think so,and most of the advisers I talk to don’t seeit as a problem either – largely as they’vealready taken the voluntary step of prepar-ing and implementing fee-for-servicemodels. Better still, maybe we should bereferring to service for a fee? In line with afocus on financial advice, maybe the finan-cials of future advice would be decidedlybetter if we focused on ‘service for a fee’rather than ‘fee for the service’. It’s aboutnot putting the cart before the horse. Afterall, a hallmark of any successful businessis tailoring it to meet clients’ needs.

They don’t want a fee – they want aservice, and for that service they’reprepared to pay a fee. The better theservice and service offering in general, thehigher the fee they’re willing to pay. Itmight seem like a small point, but really,

clients will see value in advisers if we firstvalue them. They’ll recognise that we’reacting in their best interests, as a matterof principle rather than some legislatedrequirement, and they’ll usually bewilling, and ideally, keen to refer us totheir family, friends and colleagues.

In fact, it’s a goal and reality for manyadvisers already. Rather than needing toask for a referral, the service and adviceoffered is such that clients ask their adviserto help others in much the same way thatthey’ve been helped. At that point, we canbe confident that the service and advicegiven really is worthy of a fee.

What about Friends of Financial Advis-ers? For too long it seems, advisers havebeen the ones seeking to build relation-ships with other professionals, with thethought being that those in other profes-

sions are doing us a favour by referring theirclients. Building relationships with otherprofessionals obviously makes a lot ofsense, but wouldn’t it be great if our servic-es and business models were so closelyaligned to the needs of our clients that theirmost trusted professional relationship waswith us? For some this is already the case,but in other cases a worthy goal is for otherprofessionals to have good reason to makefriends with us and thus gain our referrals.

Many advisers have already taken stepsto prepare for this new focus on financialadvice for the simple reason that it makesgood business sense. They’ve sought toadapt their businesses in the context ofthe wider fee-for-service debate, butmore importantly, for the purpose ofbetter serving their clients. For theseadvisers it really has been an evolutionrather than a revolution.

Yet for the vast majority of advisers, andregardless of the economic environmentand at times relentlessly negative press,there is no reason at all to be defensiveabout what we do, and for that matter, howwe get paid. We can all be proud of the rolewe play and we can all unite as a body ofadvisers to voice our vision. Our role –maybe even our calling – is to focus ongiving advice to our clients today andtomorrow, and hopefully for the childrenof our clients as well. It really is a Focus onFuture Advice.

Stephen Bartholomew is practicedevelopment manager of FiducianFinancial Services.

OpinionFOFA


“For the vast majority ofadvisers, and regardless ofthe economic environmentand at times relentlesslynegative press, there is noreason at all to be defensiveabout what we do. ”

FOFAreborn

Stephen Bartholomew proposes financial advisers take theFuture of Financial Advice reforms into their own hands.

“PAIN. But no gain” was how The Inde-pendent newspaper of the UK summedup the grim news on the country’seconomy one day late last year. Unem-ployment had jumped, the Bank ofEngland had slashed growth forecasts,and the UK Treasury had forecast that thesluggish economy and rising joblessnesswould boost government debt beyondpreviously projected levels.

“Pain. But going backwards” wouldhave been a more accurate (though lesslyrical) assessment of the austeritysqueeze of David Cameron’s government.The coalition slashed spending and raisedtaxes to tackle a budget deficit that stoodat 8.5 per cent of the gross domesticproduct (GDP) in 2011 and to lowergovernment debt from 73 per cent of GDP– even though the country was under nopressure from bond investors to do so.“Those who argue that dealing with ourdeficit and promoting growth aresomehow alternatives are wrong,”Cameron said in Davos in 2011.

The economic news out last Novembershowed otherwise – as has data since. Thejobless rate surged to a 15-year high of 8.3

per cent in the third quarter (2.6 millionout of work). The Bank of England cut thegrowth forecast to just 0.9 per cent for theyear to June 2012. The Office of BudgetResponsibility revealed that net publicborrowing targets had, in effect, beenblown three years off course and pastLabour’s 2010 predicted peak. Austerity ishardly a political-winning strategy becauseit prompted two million public servants tostrike on 30 November 2011 – the UK’sbiggest industrial action for at least 30 years.

The UK’s experience is another testa-ment to how austerity plans all over theworld are worsening government financeswhile inflicting misery; the fiscal compact25 European countries signed up to on30 January 2012 will legally hinder themfrom using fiscal stimulus to spur theireconomies. They prove that Keynesianshave a better recipe for repairing govern-ment finances over the medium term. Thebig flaw of Keynesian economics in prac-tice is more subtle though.

Reality versus ideologyThe Keynesian medicine for tough times isthe counterintuitive solution of boosting

government spending because econom-ic growth and some inflation are the bestways to prune public deficits and debt.More people in jobs means higher taxrevenue and lower spending on socialsecurity – the opposite of what austeritydoes. Austerity is even more pointless if acountry’s trading partners are inflictingthe same pain, or monetary policy canprovide no help for an economy in theform of reduced interest rates or a lowerexchange rate.

Europe, from Portugal to Ireland andLatvia to Greece, provides endlessevidence against austerity, especially theEurozone countries. The terms imposedon Greece as part of its rescue packagesincluded such fierce spending cuts andtax increases that they have made thecountry almost ungovernable whileruining its economy – Greece’s GDP shriv-elled 5.2 per cent in the year to September2011, manufacturing slumped 15.5 percent in December from a year earlier, andunemployment is already 20.9 per cent.At the same time, these austerity policieshave destroyed government finances.Greece’s ratio of government debt to GDP

has soared from 110 per cent in 2010 toabout 160 per cent.

Once this ratio reaches 100 per cent, it’sdifficult for it to decline unless a country’seconomy is growing at a faster pace thanthe average interest rate on governmentdebt. Since austerity crushes growth, itsadherents appear ideological as theystress how cutting government spendingwill give business the confidence to invest.Nobelprize winning economist PaulKrugman dismisses proponents of auster-ity for believing in the “confidence fairy”.

Bond investors and rating agenciestook little time to work out that austeritydamages economies and worsens govern-ment debt positions.

This is why we are witnessing thevicious cycle of rising bond yields damag-ing government finances leading to higheryields, which prompts a rating down-grade, leading to higher yields and so on.

So austerity can lay claim to bringingon the Eurozone debt crisis. A colum-nist in The Telegraph of the UK haslabelled Germany’s Finance MinisterWolfgang Schauble as the “most danger-ous man in the world” for his push to


OpinionEurozone

Busy goingbackwards

Austerity plans all over the world – and especially in Europe – are worsening government financeswhile inflicting misery, writes Michael Collins.

enforce “a reactionary synchronisedtightening” on Europe’s sick economies.

Flawed comebacksCritics of Keynesian solutions cite exam-ples of when economies grew throughausterity packages. But usually thecircumstances differ from today’s (andsome even question the stats that proveeconomies grew under austerity).

Economists at the International Mone-tary Fund recently studied 173 episodesover the past 30 years when 17 advancedeconomies took steps to fix governmentfinances. While the study’s conclusion wasthat austerity boosted unemployment(and hence failed to mend publicfinances), Ireland in 1987 and Finland andItaly in 1992 coped under austerity. Thiswas because large currency depreciationsboosted net exports, or lower interestrates supported consumption and invest-ment. “Unfortunately, these pain reliev-ers are not easy to come by in today’s envi-ronment,” the authors said.

The critics of fiscal stimulus say the USgovernment’s US$780 billion packagefailed to reignite the US economy, even ifit helped avoid a depression. It’s true theUS economy has only wobbled alongsince the stimulus was approved in 2009.The problem was, though, that thepackage was never big enough and waspoorly designed. It was about half the size

needed and contained incremental taxcuts and only glacial increases in publicworks. Any good it did was offset byreduced spending by state governments.

The Australian Government’s responseto the global financial crisis in late 2008and 2009 is an example of a well-constructed stimulus package. The “gohard, go early, go household” cash andbuilding stimulus propped up theeconomy and meant the Governmentundershot its own debt forecasts. TheFederal Government’s debt to GDP wasonly 7.7 per cent in 2011. (To those whothink China saved Australia, authoritiesin Beijing kept China going with a stimu-

lus package worth 16 per cent of GDP.)One worry now for the Australian

economy is that the Government iswedded to having a surplus in 2012-13.This will mean sizeable cuts to govern-ment spending, estimated at $11.5 billionover four years.

At least, the Reserve Bank of Australiahas scope to cut interest rates to keep theeconomy going.

Big spendersAdvocates of Keynesian economics prob-ably feel vindicated by what’s happened inrecent years. But there is one flaw to howKeynesian economics is practised.

The flipside to Keynesian economics isthat during good times governmentsshould run surpluses and reduce debt tocurb inflationary pressures. If they do this,they save their firepower for tough times.The problem is this tends not to happen.

The US, UK, France, Italy and Greeceare guilty of running structural deficitsduring the good times leading up to 2008(though Ireland and Spain ran budgetsurpluses before 2008 and had reducedgovernment debt to between 30 per centand 40 per cent of GDP – the real causeof the Eurozone debt crisis is the currentaccount imbalances of countries on afixed-currency regime).

France – with its generous social secu-rity – last posted a budget surplus in 1973.

That’s not usual for Europe. In aggregate,the countries in the Eurozone have beenin deficit for the past 40 years. The USgovernment under President George Bushthought it could wage trillion-dollar warswhile reducing tax rates for the wealthy.

These governments are in trouble nowbecause they had to bail out banks andother industries and boost social securi-ty after Lehman Brothers collapsed in2008. The US Federal Government’s deficitin 2011 was about 9.6 per cent of GDP – itsratio of government debt to GDP at 73 percent. France’s Government’s shortfall wasabout 5.9 per cent of GDP in 2011, whileits ratio of government debt to GDP was81 per cent.

Australia could afford stimulus in 2008and 2009 because government debt waslow – thanks in no small way to the previ-ous government’s asset sales (rather thanto any impressive spending discipline).

When the good times return, that’swhen it’s time to demand prudence fromgovernments. Not now. Even Cameron’sgovernment is realising, sort of, thatausterity is a self-fulfilling prophecy. Bythe end of November 2011, it was talkingof a plan to invest in infrastructure toavoid a recession, but further squeezingthe public sector and the poor to do so.

Michael Collins is the investmentcommentator at Fidelity.


“When the good timesreturn, that’s when it’s timeto demand prudence fromgovernments. Not now. ”

THIS EVENT SOLD OUT IN SYDNEY, SO

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LONSECGold has long been considered a safehaven in difficult and uncertain times.It is generally viewed as a store ofwealth when political and economicuncertainty leads investors to loseconfidence in the value of paper assetssuch as currency, bonds and equities.

Gold is an alternative asset class thathas a number of unique characteristics:

• It has a low or negative correlationwith major asset classes;

• It pays no income;• It has experienced a low rate of

return, yet has a higher volatility thaneither cash or fixed interest; and

• It is subject to different forces ofsupply and demand from those whichaffect other asset classes.

These characteristics also make it anadditional source of diversificationwithin an investment portfolio.

There are a number of ways forinvestors to gain exposure to gold,including via gold bullion, gold futures,shares in goldmines, exchange-tradedfunds (ETFs), and managed funds.These strategies are all very different inthe ways they invest or gain exposureto gold, and as a result, have very differ-ent risk/return attributes, liquidityprofi les and costs. Therefore, i t isabsolutely critical that any investorcompletely understands why they wantexposure to gold, what they arepurchasing, and how it potentiallyimpacts on their portfolio.

While gold has had a stellar period oflate in terms of performance, it can alsohave sustained periods of negativeperformance – typically during solideconomic times when investors arewilling to pay for risk. The 1990s are a

good example. Gold hit a high of $416per ounce in February 1996, and it wasDecember 2003 before it reached thatlevel again. Not only did it take eightyears to reach a new peak, but therewere 36 consecutive months of nega-t ive annual rol l ing retur ns. Mostinvestors would have given up on theirgold holdings, unable to tolerate such asustained period of poor performance– both on an absolute and relative basis.

Therefore, for most investors, Lonsecwould not recommend a stand-aloneinvestment in gold. Typical ly, webelieve it is best to take a more diver-sified approach – by which, we meanhaving active fund managers that willmake the call as to when they believe itis most appropriate to be in gold –whether via a commodity fund, a hedgefund or an equit ies strategy. Forexample, the Zurich Global ThematicEquity Fund invests in gold as a themeat various points during the economiccycle. Currently, the fund has an 8.5 percent holding in gold and preciousmetals. Investors can also look to alter-

native funds such as the CoralsCommodit ies Fund, a diversi f iedcommodities fund able to take bothlong and short positions on gold –dependant on the manager’s view ofboth the global economic environmentand gold relative to other commodities.The more diversified approach offersmore attractive risk/return outcomesfor most investors.

MERCERThe breaking of the gold standard at thestart of the 1970s clearly changed notonly the way gold was valued, butarguably, also how it should be viewedas an investment. Although its directuse as a monetary asset ended, is thathow it should still be viewed? Or shouldit be viewed as a commodity? Twoschools of thought exist , broadlysummarised as follows:

• Gold continues to have importanceas a monetary, and therefore, financialasset. This theory contends that goldmerits a place in an investment portfo-lio because it will broadly retain its

value in real terms, while also providingprotection against the fear of a collapseto the current fiat-based currencysystem.

• Gold should be seen as a commod-ity, with no yield or income stream. Assuch, pr ices should be set by thebalance between the available supplyand demand from industr y andjewellery (its major physical uses).

In practice, Mercer believes that bothviews have had merits through time. Inperiods of low systemic risk, the price ofgold will be underpinned by commod-ity fundamentals. However, wheresystemic concerns are prevalent, themarket is likely to see gold as a safehaven investment – that is, it may beviewed by some investors as a form ofmonetary insurance.

The downside to investing in gold isthat it does not always perform well whenequity markets decline significantly.Indeed, the performance of gold indifferent market environments can be


Analysingthe raters

Research Review is compiled by PortfolioConstruction Forum inassociation with Money Management to help practitioners assess therobustness and disclosure of each fund research house compared withone another, and given the transparency they expect of those they rate.This month, PortfolioConstruction Forum asked the research houses:should gold be a part of most investors’ portfolios?

“Gold does not generate an income so it is verydifficult to construct a long-term view on its value. ”

ResearchReview

very difficult to predict. Other problemsassociated with gold investing are thedifficulty of assessing fair value (atsome point, price must matter, but atwhat point?) and the practicalities ofaccess and the expense of storage.

Mercer does not recommend a strate-gic allocation of gold to an investor’sportfolios. However, we do believe atarget allocation to a broad group ofcommodities (including gold) makessense over the long-term. Commoditieshave historically demonstrated someunique properties that may make thembeneficial as a diversifier in an invest-ment portfolio. Indirect ownership ofcommodities includes ownership ofstocks, bonds and other investments ofcompanies that are impacted bychanges in commodity prices. Directinvestment in commodities could be inthe form of ownership of the commodi-ties themselves, or through commodi-ties futures. Due to the costs and otherimpractical i t ies associated with

storage, investors typically do notinvest directly in physical commodities.Mercer prefers investors gain access tocommodities through commodityfutures.

MORNINGSTARMorningstar is neither a gold bull norbear, and there is no allotment to goldin our asset allocation policy. Rather,our preference is to delegate this deci-sion to the underlying fund managerswe recommend. A number of the fundmanagers we rate highly do invest intogold mining companies or hold goldbullion in the physical form – based ontheir outlook and the underlying funda-mentals.

Fear and uncertainty have prompt-ed a consistent interest in gold, fuellingthe metal’s decade-long upwardperformance. Investors flock to goldduring periods of increased risk aver-sion, when there's deteriorating faithin currencies, and to protect against the

risk of inflation. A key reason for gold’sperformance is that the supply of thisprecious metal is limited.

Gold does not generate an income soit is very difficult to construct a long-term view on its value. It is an invest-ment that relies on the expectation thatthere will always be a buyer enticed byan ever increasing price. Like all thingsthough, there will come a time whenthere are fewer buyers than sellers.Successfully timing a short-run goldinvestment is not an easy task. Whenbullion prices are soaring, it’s all tooeasy to jump on the gilded bandwag-on. Gold prices soared in the early1980s, and many speculative investorspoured into the market – only to losetheir shirts after the price of goldcollapsed. There will come a time whenthis happens again.

There has been a huge rush for goldin recent years, and as a result ,investors have more options to investin it than ever before. One of the most

famous is the US-domiciled SPDR GoldShares ETF originally listed on the NewYork Stock Exchange in November 2004.SPDR Gold Shares is the largest andmost liquid physically-backed goldoffering on the market.

Investing into physical gold bullionis the cleanest way to access theprecious metal. Gold mining compa-nies bring with them other factors fora fund manager to analyse, such asmine life, management quality, debtlevels, and cashflow, to name just a few.There is a lot more room to go wronghere, as we have seen from theper for mance of many l isted goldcompanies – which often deviate farfrom the market pr ice for gold.However, many fund managers are notable to invest into physical gold bullion,so the only way they can gain goldexposure is through listed companies.


Continued on page 24


ResearchReviewSTANDARD & POOR’S The debate as to whether gold shouldbe included in portfolios has raged foryears and no doubt will continue. Weacknowledge there is merit on bothsides. However, Standard & Poor’s doesnot advocate a dedicated strategic allo-cation to gold (bullion or equivalent)in investor portfolios.

Our reasoning begins with the ques-tion – what is gold? It is a metal withcharacteristics of scarcity, durabilityand malleability, and these make itideal for minting currency – as has beenthe case through history. Apart fromthis function and its value as an adorn-ment, the other direct industrial appli-cations for gold are insignificant.

Gold’s key source of value derivesfrom its role as currency and as anaccepted store of value (bullion), to theextent that countries have historicallybased their currency’s value on theamount of gold held in nationalreserves (the gold standard). In recentdecades, many countries have movedto Fiat currencies – that is, currenciesbacked by faith in the strength of thenational economy and its tax payinghuman capital rather than its store ofgold. The need for countries using theFiat system to retain gold reserves toback their currencies has substantiallydiminished.

As an asset, gold does not of itselfgenerate earnings. Further, holding itincurs costs such as storage, transac-tion costs, etc. Gold as a commodityhas l i t t le intr insic value given i tscurrent lack of industrial use. In thiscontext, gold is worth what somebodyis prepared to pay for it, notwithstand-ing that at times, the motivationaldrivers (like fear, greed or risk hedging)can see the price of gold vary signifi-cantly from the marginal cost of itsliberation from the earth.

From an investor's perspective, if itis believed that the Australian mone-tary system is at risk of significantdebasement due to economic events ormismanagement (as has occurred inZimbabwe, Russia, and Argentina sincethe 1980s) then an allocation to gold asa hedge is prudent. However, we don’tbelieve the Australian economy orcurrency is at risk of such an event, andhence, the need to use gold specifical-ly as a hedge against these events is notrequired currently.

From a philosophical perspective, S&Pbelieves that capital is best deployed inthe support of economic endeavourthrough equity and debt allocations toproductive enterprise. Naturally, there willbe times of price volatility as a result ofeconomic, political and market events,and at these times, gold may provide aneffective hedge. However, over the longerterm, prudent allocations of capital toenterprise and debt have generallyproduced a superior outcome whencompared to gold.

S&P Fund Services has advised thattheir business activity will cease as at 1October 2012, but meanwhile, it is ‘busi-

ness as usual’ and PortfolioConstruc-tion Forum is satisfied with the integri-ty of the analyst opinion provided.

VAN EYKVan Eyk believes gold should be a partof most investors’ portfolios. Goldprovides somewhat of a safe haven, attimes. It provides investors with diver-sification benefits, in that its value isnot dependent on the values of stocks,bonds or other investments such asproperty. In times of market turmoil,when equity markets fall, the value ofgold may r ise. I f used as par t of abalanced portfolio, this can lower thevolat i l i ty of retur ns, which couldincrease the compound return of aportfolio over the long-term.

There are various ways investors can

access exposure to the gold price. Thiscan be done with a physical holding ofgold bars or coins, by going long goldfutures or contracts for difference, bybuying a gold ETF, or by buying sharesin a gold mining company.

A key consideration is the currencyrisk inherent of any investment, givengold is priced in US dollars, so thereturns of any Australian investor whobuys gold wil l a lso be af fected bycurrency fluctuation. One way to over-come this is by shorting the US dollarrelative to the Australian dollar for theamount of gold purchased. If the USdollar were to fall, the investor wouldmake money on this currency hedgeand receive the underlying perform-ance of the gold price.

Buying stocks in a gold producer is agood way to benefit from a rising goldpr ice. I f the company’s ear ningsincrease when gold increases in price,the degree of upside will be determinedby that company’s operating leverage.Share prices in gold producers withhigh fixed cost bases will benefit morein a rising gold price environment thanthose with a low level of fixed costs. Thereverse will occur when the gold pricefalls, all other things being equal. Whenbuying gold company shares, investorswill also be exposed to the level ofproduction that the company gener-ates. Hence, this type of investment isnot a pure play on the gold price. Thecompany’s operating costs, cash burnand exploration costs will also influ-

ence the rate of return.One other point to consider is that

gold does not always increase in valuein times of weak economic perform-ance. If deflation takes hold, gold mayin fact fall at the same time as equitymarkets. Hence, gold is not a panaceato portfolio underperformance, and theinflation/deflation environment mustalways be taken into considerationwhen deciding how much of a portfoliois allocated to gold.

ZENITH INVESTMENT PARTNERSFrom a diversification angle, physicalgold in Australian dollars has a nega-tive correlation to most traditionalassets can significantly reduce overallportfolio risk and provide inflationprotection to a portfolio.

While not to diminish these charac-teristics, Zenith tends to allocate mean-ingful exposures to the CTA and GlobalMacro alternative sectors in the ZenithModel Portfolios. Like gold, thesesectors provide strong diversificationand low correlation to traditional assets,but also provide the scope of significantupside in returns versus cash. Gold onthe other hand, is viewed as a store ofvalue, and in inflation-adjusted terms,our long-term expected return of theasset is close to zero. Therefore, atpresent, Zenith has no exposure to goldrelated investments.

“Gold is priced in USdollars, so the returns ofany Australian investor whobuys gold will also beaffected by currencyfluctuation. ”

Continued from page 23

In association with

Gold bugs promote gold as aninvestor’s dream. Think of thecase they put in terms of whatgold offers – it’s a permanent

store of value, it’s an alternative (if not theonly) currency, it’s a hedge against infla-tion, it’s a diversifier, it’s a hedge againstchaos at the end of the world, it’s a symbolof power and status – and for now at least,the price is appreciating.

But does it deliver on those promises?

DiversificationIn my research on the case for holding goldin portfolios, I could find very little discus-sion on its diversification benefits thatwasn’t written by gold managers or spon-sored by the Gold Council. The little I didfind gave some credence to the diversifica-tion benefits of gold – although the corre-lations shown (just one measure of diver-sification) were not particularly low.

As a practical example, I examined theAgAu Global Producer Fund. Its perform-ance since 2004 certainly looks greatcompared to the MSCI. However, 2008 wasa disaster – the fund was down 22 per cent.Naively, I would have expected that itwould have been a great year for goldbecause there should have been a flight toit. So that raises a question mark aroundthe value of gold as a diversifier. Perhapseven gold goes to hell in a hand basketwhen there’s a crisis.

A safe havenAs a safe haven, gold has broadly deliveredacross millennia, across differing econom-ic systems, even across communism, andacross different civilizations and cultures.It’s remarkable that gold has been held asa safe haven for four or five thousand years.It is not the only underlying source of valuein currency. Salt has been used at varioustimes, not to mention silver, and there havebeen Fiat currencies that were not denom-inated in gold going back as far as the 9thcentury in China. The fact that gold is inde-pendent of time, space, economics andculture does reassure me that it will prob-ably remain as a store of value.

An inflation hedgeThe data I was able to find did support thecase for gold as a reasonable inflationhedge over the long-term. However, thereare dramatic spikes in gold, most of whichtend to be followed by equally massivecollapses. For example, in 1968 in the US,gold was trading at US$35 an ounce. By1980, it was up to US$850 an ounce (in realterms, it has not yet reached that levelagain). Over the twelve years, that’s a30 per cent per annum return, with somevolatility. However, by 1980, there wasmore invested in gold than there was inthe entire productive capacity of the US

economy. If that’s not a sign of some-thing that is totally unsustainable, I don’tknow what is. Sure enough, it was unsus-tainable. Gold drifted along from 1980to 1989 and then fell 60 per cent throughto 1997 – a return of -11 per cent perannum for eight years.

Martin Feldstein from the NationalBureau of Economic Research atHarvard showed that from 1980 throughto before the GFC gold was a poor hedgeagainst inflation and currency fluctua-tions in the US.

As mentioned, in real terms gold is notyet at US$850 today. Some gold bugs claimit will get to US$10,000. I was working inAmerica when similar people said the Dow

would get to 100,000. Being below ahistoric high is not an argument in supportof gold.

But there is a stronger argument thatgold is not in a bubble – not because ofprice. Since 1980, the US money base hasincreased eightfold, while its debts haveincreased about eightfold too – whereasthe price of gold has increased only fourand a half times. So if you accept that goldis an alternative currency, and you’re meas-uring one relative to the other, that’s somecomfort. What that also hints at is a way ofvaluing gold which is sorely needed, givengold doesn’t have a yield or earnings.

Perhaps the credit-induced crisis we’reliving through would not have happened

under a gold standard. But the gold stan-dard also caused crises. For example,when there is a massive exploration ofgold – like in the 17th century in SouthAmerica and Central America – gold ismassively inflationary.

Moreover, in normal times, gold is defla-tionary for the simple reason that the rateof gold production at times falls behindthe production rate of the rest of theeconomy. Typically, this leads to a defla-tionary depression.

Valuation Valuation is made more difficult by the useof gold as a form of currency stored invaults – which makes the free market’s roleas a price discoverer difficult.

In a normal free market, rising priceslead to rising supply and falling demand,and hence falling prices, which is a self-correcting mechanism. With gold, that canbe a bit different. For instance, the non-monetary demand for gold is typicallycomprised about 70 per cent jewellery, 20per cent investment, and 10 per centindustry. Assume there’s a shock that raisesthe non-monetary demand for gold. Asmaller amount will then be available formonetary uses, leading to a credit squeezeand a consequent decline in aggregatecommodity prices. That, in turn, inducesa greater demand for gold as a commodi-ty. So the fact that gold has got two verydifferent sources of demand can lead to adamaging and destabilising positive valu-ation feedback mechanism.

Dr Jack Gray is adjunct professor ofEconomics at the Centre for CapitalMarket Dysfunctionality at UTS. Thisis an edited transcript of his address tothe PortfolioConstruction ForumMarkets Summit in February 2012.www.PortfolioConstruction.com.au


Gold: a knight in shining armourIs gold a good means of portfolio diversification? Is it a hedge against inflation and currencydepreciation? Or is it that the past decade is an anomaly for gold and it has no place in portfolios?Dr Jack Gray explains.

In association with

“The fact that gold has gottwo very different sources ofdemand can lead to adamaging and destabilisingpositive valuation feedbackmechanism. ”

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

PLANNER'S ASSOCIATE-ESTATE PLANNINGLocation: PerthCompany: Met RecruitmentDescription: A boutique financial services firmspecialising in risk insurance, estate planningand business succession is seeking a planningassociate to join its Subiaco office. The companytakes a collaborative approach to resolving clientneeds and outsources all non-core services toexperienced financial planners and accountants.

In this role, you will be required to participatein client meetings with the principal planner andprepare advice.

To be considered, the candidate will havecompleted their ADFP and have at least 3 years’experience in a related role within the financialplanning industry.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Mike at Met Recruitment - 0422 922467, [email protected]

SENIOR AUDITOR - ASSURANCELocation: AdelaideCompany: Terrington ConsultingDescription: A second tier accounting firm iscurrently looking for a senior assuranceaccountant.

Your duties will include developing auditplanning strategies, conducting interim andyear-end visits, facilitating the training and

development of staff, and prepare and conductassurance of general and special purposefinancial reports.

To be successful, you will need over 3 years’experience in accounting – preferably inAustralia – and will need to have previously helda position in a professional services accountingfirm.

Working directly with the firm's partner, youwill take ownership for your work and clients.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Jack at Terrington Consulting – 0412690 268, [email protected]

TAX CONSULTING MANAGER/ASSIS-TANT MANAGERLocation: AdelaideCompany: Terrington ConsultingDescription: A mid-tier firm is seeking a taxconsulting manager or assistant manager toprovide tax advice and consulting services to adiverse client base.

Along with identifying opportunities toimprove tax-related client strategies, this is agreat opportunity to act as a client consultantand as a resource to a senior managementteam.

In this role you will deal with high level andcomplex taxation issues, provide technical taxplanning advice and act as a resource to firmemployees and partners.

To be considered for the position, you will beeither CA or CPA qualified, have a firmunderstanding of Australian taxation legislationand have a proven experience working within abusiness services environment.

You will be suitably equipped to performtaxation and advisory services at a high level.

Although the role is a full-time position, thefirm will consider candidates who are seekingpart-time employment.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Jack at Terrington Consulting - 0412690 268, [email protected]

FINANCIAL ACCOUNTANTLocation: AdelaideCompany: Terrington ConsultingDescription: A wholesale trader is currentlyseeking an accountant with a professionalservices background.

The role offers progression in the short tomid-term to group accountant level, as well asongoing professional development.

Your responsibilities will include financialrecording and reporting, financial analysis,providing advice to internal stakeholders, taxadvice and document preparation, and assistingwith audit duties.

The ideal candidate will have 2-5 years'experience within a business services, audit orother professional services account field.

You will also need to have either completedor be in the process of completing a CA or CPA.

This opportunity is ideal for any professionallooking to transition into a commercial setting.

To find out more and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Victor at Terrington Consulting –[email protected].

MANAGEMENT ACCOUNTANTLocation: MelbourneCompany: Lloyd Morgan AustraliaDescription: A large services firm is seeking amanagement accountant for an 8-monthcontract.

As a key member within the commercialteam, you will liaise with both finance andoperations.

Your key responsibilities will includemonthly/quarterly management reporting,budgeting and forecasting, financial analysisand analysis on operational performance andsystems administration.

To be successful, you will have provenexperience as a management accountant andexcellent skills in reporting and analysis.

For more information and to apply, visitwww.moneymanagement.com.au/jobs, orcontact Stewart at Lloyd Morgan Consulting -(03) 9683 5200,[email protected]

GENWORTH Australia hasmade a number of additions toits Australian board as itprepares for its minority initialpublic offering.

The company hasannounced the appointment ofIan MacDonald as a non-exec-utive director and remunera-tion committee chairman.

MacDonald spent 34 years atNational Australia Bank in anumber of senior roles, includ-ing group chief informationofficer. He currently sits on theboards of Araba BankAustralia , Elders Limited ,Rural Bank and TasmanianPublic Finance Corporation.

Genworth has alsoannounced that Gayle Tollifsonhas stepped down from her roleas Genworth chair and hasbeen appointed the audit andrisk committee chair.

She has over 30 years’ experi-ence in the global finance andinsurance markets and current-ly sits on the boards of MunichReinsurance Australasia, RACInsurance and Campus LivingFunds Management, Genworthstated.

In addition, currentGenworth non-executive TonyGill has been appointed chair-man of Genworth's capital and

investment committee. Thebanking and securitisationprofessional currently holdsboard positions at First Amer-ican Title Insurance ofAustralia, Australian FinanceGroup and V irgin MoneyAustralia.

TOWERS Watson has appoint-ed former Deloitte Australiapartner Jonathan Finlay tohead up the newly-establishedexecutive compensation busi-ness in Australia.

Finlay will lead a team of

seven consultants includingStephen Burke, who (alongwith Finlay) recently retiredfrom Deloitte Australia as apartner.

Finlay has over 30 years ofmanagement and humanresources consulting experi-ence, and supports the boardsof ASX 200 companies andmultinational firms in theirstewardship role.

Burke has more than 16years’ experience in interna-tional executive remunerationconsulting experience.

The team will offer servicesthat include advice in the areas

of board and executive pay andgovernance, regulatory compli-ance, Australian and globalshare plans, annual pay reviewsand market benchmarking, thecompany stated.

FUNDS manager BennelongGroup has appointed MichaelPratt as a non-executive direc-tor and a director on the boardof the Bennelong Foundation.

Pratt has significant invest-ment management andbanking experience through-out Australia and Asia, havingworked for Standard Charted

Ba n k as regional head ofconsumer and SME banking,north east Asia.

He has also held senior exec-utive roles with We s t p a c ,National Australia Bank andBank of New Zealand, anddirectorships with MasterCardand BT Financial Group.

Bennelong Group chiefexecutive Chris Cunninghamsaid Pratt's addition to bothboards complements the exist-ing director l ine-up, andprovides an excellent culturalf i t with the company'scommercial and philanthropicgoals.

Move of the weekFIRSTFOLIO has appointed Eric Dodd as a non-executivedirector and chairman of the board.

Dodd replaces Anthony Wales in the role of FirstFoliochairman. Wales will remain a non-executive director of thecompany.

With more than 30 years' experience in the insurance andfinancial services industry, Dodd was previously managingdirector and chief executive of MBF Australia. Followingits merger with BUPA Australia in 2008, Dodd served asmanaging director of the merged entity.

He has also served as NRMA Insurance managing direc-tor and chief executive of NRMA Limited.

Dodd currently holds the position of SFG Australia chair-man and is a non-executive director of Credit Corp Group.

Eric Dodd

Jonathan Finlay

““

OUTSIDER has precious littletime for anyone under 50 atthe best of times, but heis willing to make anexception for 10-year-old aspiring econo-mist Jurre Hermans.

Jurre, who hailsfrom the Nether-lands, has beenawarded 100 eurosfor his entry to the Wolf-son Economics Prize,which “challenges theworld’s brightest economists toprepare a contingency plan for a break-upof the Eurozone”.

The one-page plan (complete with illus-tration) plays out as follows:

“All Greek people should bring theirEuro to the bank. They put it in anexchange machine (see left on my pic-ture). You see, the Greek guy does notlook happy!! The Greek man gets backGreek Drachme [sic] from the bank, theirold currency.

“The Bank gives all these euro’s to theGreek Government (see topleft on my pic-ture). All these euros together form a pan-

cake or a pizza (see on topin the picture). Now the

Greek governmentcan start to pay

back all theirdebts, everyonewho has a debtgets a slice ofthe pizza.”

Jurre evenaddresses the

possibility of a cur-rency flight as

Greece transitions backto the drachma.

“If a Greek man tries to keep hisEuros(or bring his euros to a bank in another country like Holland or Germany)and it is discovered, he gets a penalty justas high or double as the whole amount ineuros he tried to hide!!!”

While Jurre’s ‘pancake/pizza plan’didn’t make the shortlist for the £250,000prize, it has generated plenty of mediaattention – although the 10-year-old isstarting to grow weary of all the interviews.

“I’d rather be playing in the sun,” headmits.

Wouldn’t we all, mate!

Outsider


“The American people havefigured out somebody is going tohave to make some serioussuggestions, and they’re probablynot going to be all sunshine andcotton candy."

US congressman Tom Cole onunsavoury tax reform for the struggling

US economy.

"…He was extremely uncertainas to what is actually going onwithin the Communist Party atthe moment, let alone theeconomy!"

AXA Framlington fund managerMark Tinker concurs with the confusionof a local market strategist in relation to

the Chinese economy.

“I try to imagine, ‘How is thisgoing to sound in a hearing?’"

BDL Compliance Consulting chief

executive Brian Lenart questions the

ease with which customers could invest

in a complex exchange-traded note

without contractual permission.

Out ofcontext

Pollies hook into ECT therapy

Just what thedoctor ordered

When Greeks go Dutch

OUTSIDER is not exactly an avid punter, but hedoesn't mind a wager or two when he thinks he'sonto a sure thing.

On that basis, Outsider is putting money onthe Federal Government doing very little aboutthe excess contributions tax (ECT) regime in theMay Federal Budget, notwithstanding the factthat the existing arrangements seem to havemore flaws than a Health Services Union creditcard reconciliation form.

Outsider notes the warnings from SMSFProfessionals’ Association of Australia chief,Andrea Slattery, that the upcoming changes to

concessional contribution caps for those agedover 50 will create a "perfect ECT storm", butsuggests that the Treasurer, Wayne Swan, is fartoo focused on delivering a surplus to worryabout such things.

Outsider recalls there was much speculationsurrounding the likelihood of the Governmentfixing the ECT problems ahead of its 2011 Budget,but ref lects that the changes ult imatelyannounced seemed only to fiddle at the edges.

Perhaps, then, Institute of Chartered Accoun-tants super specialist Liz Westover is right whenshe points to the $131.5 million raised in ECT

penalties in 2009-10, and the likelyhigher amount to be shown in theBudget receipts to bepublished in May.

Westover wonderswhether the Government'sreluctance to change theECT is related to the revenueit generates.

Outsider reckons she's right.Even incompetent farmers knowbetter than to slaughter a veryhealthy cash cow.

EVERY time Outsider leaves his officeand goes out to lunch with one of hiscontacts in the financial services indus-try, he comes back a little bloated andvery tipsy.

It is no secret that financial serviceschaps like a bit of a smoke and a drink,which almost certainly explainsOutsider’s strong friendships with thesame lot.

But this is also why he was notsurprised when he heard that a Work-Safe Victoria analysis found that workersin the financial services sector are anunhealthy bunch.

According to the study, bankers, insur-ers and brokers regularly shun exerciseand the five serves of greens one ought tohave daily. Not to mention incurring thethrough-the-roof risk of diabetes relatedto the consumption of junk food.

Ladies in the industry, however, didyours truly proud – again – with the studyrevealing they smoked more then men.

WorkSave Victoria attributed the poorstate of workers in the financial servicessector to long hours behind their desks,which limits the access to healthy food.

In his younger years, Outsider was aliberal drinker, smoked more than a packa day, and ate the most expensive itemsfrom the vending machine.

Luckily for him, Mrs. O has introduceda new regime. As for the exercise…well,he only gets it if he begs hard enough.

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

Documents

Money Management (April 12, 2012)