However, the opposition will neither support nor oppose the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, despite describing the changes as “rushed,” and “ad hoc”.

“The Coalition remains sceptical about this proposal though we will not oppose passage of the legislation,” states an amendment to the PJC report.

Central to opposition concerns is that the terms ‘financial planner’ and ‘financial adviser’ can legitimately be used to describe business activities quite different to those envisaged by the legislation. It also makes the point that accountants are highly respected professionals without having the term ‘accountant’ enshrined in legislation.

“While the provisions are drafted on the assumption that these terms are only used in association with personal financial advice, they can equally be used in association with wholesale or corporate financial advice,” it notes.

“For example, an investment bank providing advice to the board and management of a corporate may reasonably describe itself as that corporate’s ‘financial adviser’.”

Time is against us

The other factor now is time, with several sources indicating to Professional Planner that there may not be a long enough period for government to consider the PJC recommendations and proceed with the passage of the bill, unchanged or with amendments, before the last sitting week of parliament in late June.

For the moment, the committee recommends that the Australian Securities and Investments Commission consult with key stakeholders in the financial advice sector to implement a grace period to ensure that in the short-term, passive breaches of the new provisions will not be prosecuted.

“ASIC should engage with the financial advice sector to discuss the time that practitioners will need to ensure that signage is changed,” concluded the PJC report.

The committee also recommends that the regulator clearly sets out on its MoneySmart website the changes that the bill makes to inform consumers about what they can expect when they receive a service from a “financial planner” or a “financial adviser”.

The Financial Planning Association (FPA) cautiously welcomed the report but stressed there is a long way to go before enshrinement of the terms under law.

Dante De Gori (right), FPA general manager of policy and conduct, told Professional Planner that the recommendation was “a green light to proceed but we can’t get too carried away” and that “time is against us” when it comes to getting the legislation passed before June 27.

Welcome to enshrinement

In April 2011, the FPA called on the government to restrict the term “financial planner” under law for the protection of consumers. Minister Bill Shorten released legislation for enshrinement in November 2012 and in March this year, government introduced legislation for “financial planner/adviser”.

Under the Corporations Act 2001, there is presently no constraint on individuals calling themselves “financial planners” irrespective of their training, competence and even licensing.

“The FPA welcomes specific recommendations made by the report to ASIC pertaining to enshrinement of ‘financial planner/adviser’,” said FPA chief executive Mark Rantall in a statement.

“In order for any piece of legislation to be implemented, an entire profession and industry needs to be behind it. The FPA welcomes the recommendation by the report to have ASIC, through MoneySmart, promote and communicate to consumers the benefits of enshrining the terms financial planner and financial adviser.

“We also support the recommendation to require ASIC to consult with industry about how to deal with short-term breaches and determine what time is needed to allow inappropriate usage of the term financial planner and adviser to be removed from all marketing material.”

Installed in the role after an AMP management shake-up across its advice business late last year and officially taking the reins in mid-February, Steele has faced the twin challenges of complying with the Future of Financial Advice (FoFA) reforms and the integration of the Tynan MacKenzie boutique into ipac.

The latter decision was made as part of an ongoing review following AMP’s acquisition of AXA, which owned both ipac and Tynan MacKenzie, in 2011.

“It’s been a very interesting three months as we bring together ipac and Tynan MacKenzie and at the same time set the business up to comply with the new world under FoFA,” Steele told Professional Planner.

“Behaviourally, ipac and Tynan MacKenzie are very aligned to running a fee-for-service-type model but there are changes to our model that we need to consider.”

Specifically, ipac has sought to broaden its approved product lists (APLs) to ensure it meets the best-interests duty under the FoFA reforms.

Ensuring a consistent client value proposition across the business has occupied much of Steele’s time and he sees this as a key differentiator post-July 1.

“Given that ipac is business-to-consumer and not business-to-business, our constant focus is on what we need to deliver to clients to meet their objectives,” he said.

“Both ipac and Tynan MacKenzie have not exclusively but predominantly been working in the pre-retirement and at-retirement market… but we have a desire to expand the segments that we support.”

Steele says the merger is not yet complete but the Australian Financial Services licences and advice policies of ipac and Tynan MacKenzie will have been harmonised by June 30. The brands will co-exist until March 31, 2014, at which point the Tynan MacKenzie logo will disappear.

Ipac currently has 225 advisers including 113 employed advisers with the remainder part of the group’s equity partner model.

In the past 12 months the practice management agenda for most industry stakeholders has been dominated by getting compliant with the new Future of Financial Advice (FoFA) regulations and, in particular, the requirements for delivering fee disclosure statements.

However, as the practicalities and mechanics start to really seep in with the July-1 countdown rapidly approaching, the focus for many advisory practices is quickly turning to how to shape their business models in order to continue to grow and prosper in a post-FoFA environment.

Sharpening focus

While it is generally accepted that the latent demand for quality financial advice and the looming baby boomer retirement bubble provides immense opportunities for advice firms, there are still many growth challenges for practices. As we travel around the country helping them prepare for the future in our consulting work, these challenges are coming into significantly sharper focus. Some of the main ones are:

•        What is the revenue impact on my firm and future asset value of the business if clients don’t actually want an ongoing relationship with it and instead want a pay-as-you-go, transaction-based advice offering?

•        How can I free up my staff’s time so they can actually deliver proactive client services and do so consistently – do we need to start outsourcing some of our back-office administration work?

•        If client engagement and communication is so important, how can I provide my advice offering to clients in the way they want while doing so within the business rules and technology framework of the licensee?

•        Is the future value of my practice going to be based on clients with the most funds under management paying the highest fees or do we need to seek to diversify revenue streams?

 What’s new?

Much of the practice management theory behind these questions is not new. It has been part of the conversation we have been having with firms over the last 10 years. The difference now is that practices can no longer afford to pay lip service to the theory. They will have to actually implement it in order to get a ticket to the game in a post-FoFA world, and how well they do this will increasingly distinguish the quality and value of firms.

We believe it is going to be a matter of getting back to some basics for most firms: redefining business plans, more sophisticated marketing execution, refining and implementing their value propositions, reviewing client segmentation models, sharpening the scope and pricing of advice and ongoing service offers, embedding back-office work flows and processes, and making sure the right people are in the right roles – all of which will need a much stronger focus on implementation of good practice management principles rather than just the theory.

Matthew Fogarty is national practice development manager at The Encore Group

Watchdog cracks down on SMSF property spruikers

ASIC has cancelled the credit licence of Money Choice Pty Ltd and banned its director, Matthew George, after an investigation found failures to comply with credit laws, responsible lending shortfalls and instances of unlicensed self-managed superannuation fund (SMSF) advice. George, who is the sole director of the Melbourne-based property investment and finance business, has been banned from engaging in credit activities for eight years and from providing financial services for three years.

“Mr George demonstrated through his conduct that he is not a fit and proper person to engage in credit activities,” said ASIC deputy chairman Peter Kell. “This included some instances where Mr George preferred his own interests to those of Money Choice’s clients.”

The regulator also found that George had advised some clients to set up SMSFs for the purpose of purchasing property when he was not licensed to provide such advice.

“We do not want to see SMSFs become the vehicle of choice for property spruikers and the action we’ve taken against Mr George should serve as a timely warning of ASIC’s intention to ensure compliance with the law,” said Kell. “ASIC is committed to improving the standards of advice given to investors regarding the establishment of SMSFs and the investments within the SMSF, including investment properties.”

Money Choice and George have the right to lodge an application for review of ASIC’s decision with the Administrative Appeals Tribunal.

AFA launches Inspire experience

The Association of Financial Advisers (AFA) is hosting three events in June to formally launch its Inspire initiative to help and encourage women be proactive in seeking support within the financial services industry. AFA Inspire chair, Deborah Kent, said the response has proved that women in the industry are actively seeking support networks outside the workplace. “In the first two weeks, the AFA Inspire LinkedIn group had over 200 members – so it’s clear the initiative is resonating within our industry,” she said.

Kent said the challenges women face in the industry extend beyond the workplace and the AFA Inspire program will help them network with other women, even clients, who may be facing the same obstacles.

“Women have different needs to men,” she said. “Creating a community where the needs of women are met is most important and the AFA has done this through the creation of the AFA Inspire initiative.”

The AFA Inspire launch will be held in Brisbane, Melbourne and Sydney from 17–19 June.

Property trumps shares for cautious investors

Colonial First State Global Asset Management (CFSGAM) says investors were cautiously optimistic about shares during the March 2013 quarter, but are braver when it comes to investing in the property market. These are the latest findings from the CFSGAM-UWA Business School Equity Preference Index (EPI), which measures investor sentiment of non-advised investors, tracking overall moves in and out of equity-based managed funds and switches between asset classes.

Senior analyst at CFSGAM, Belinda Allen, said the latest analysis revealed investor activity closely mirrored the flow of information about the market, suggesting sentiment toward equities is still very fragile.

“What really stood out in the March quarter was the increased appetite for shares,” she said. “Additional money was allocated into the asset class, which was largely driven by Australian male investors. Continued positive returns from the share market and lower interest rates prompted investors to increase their preference toward shares in January and February.”

When it comes to the residential property market, Australian investors appear far more confident in the same economic environment with both property prices and auction clearance rates accelerating in the March quarter.

“While investors are heavily reliant on a positive equity market outlook to increase their preference to shares, it seems that they are comfortable investing in residential property in the same economic conditions,” said Allen. “This is possibly due to a higher level of confidence in the property outlook or they are attracted to the tangible nature of property.”

While some in the industry had predicted changes that would reduce incentives and benefits, Treasurer Wayne Swan resisted the urge to further tinker with the superannuation system.

The Financial Planning Association (FPA) said there were plenty of positives, particularly in respect to the raising of superannuation caps. The cap on concessional limits to superannuation will be raised to $35,000 for 60 year olds from July 1, 2013 and will be again raised to $35,000 for 50-year olds in July 2014.

“The FPA strongly urged government to avoid tinkering with superannuation and we are happy to see Treasurer Swan has avoided changes that would reduce incentives and benefits of the superannuation system,” said Dante De Gori, general manager policy and standards at the FPA.

Off the table

After much speculation following the prime minister’s recent statement that “everything was back on the table”, others in the sector welcomed the budget and expressed relief that superannuation was not raided to fix budgetary problems.

“The budget essentially reiterated the superannuation announcements already made on April 5, 2013,” said John Randall, superannuation tax partner at Deloitte.

“Individuals and the superannuation industry should now be able to carry on with some sense of certainty and stability at least until the November mid-year economic forecast outlook.”

The Association of Superannuation Funds of Australia (ASFA) agreed with chief executive Pauline Vamos, stating that this will allow people to plan for their retirement with some confidence.

“Over the past few months we have expressed concern regarding the impact on community confidence in superannuation as a result of the ongoing speculation. These concerns appear to have been addressed,” she said.

“We note that some measures have been slightly adjusted as a result of the response to the April announcements, however there is still further work to be done to address any potential issues which may arise on implementation.”

Cost, complexity cools confidence

While most of the announcements in the budget were not new, with most having been released over the last few months, one surprise was the future ability for retirees to downsize their home and invest up to $200,000 of the surplus sale proceeds without impacting their pension means testing.

The SMSF Professionals’ Association of Australia (SPAA) head of technical and professional standards, Graeme Colley, said the association was pleased that, aside from a few minor technical amendments, the government had stuck to its word.

“SMSF trustees should now feel more confident that the superannuation system is off the government’s radar and remains Australia’s primary retirement savings vehicle,” he said.

However, Colley cautioned that the government’s move to apply tax to earnings above $100,000 on assets supporting income streams could introduce substantial complexities and costs to the super system.

The Institute of Public Accountants (IPA) also had a mixed reaction to the news.

“The federal government has provided a ‘mish mash’ of reforms in place of a long term policy platform. This will impact on future retirement expectations of thousands of Australians,” said IPA chief executive officer, Andrew Conway.

“While the budget made some good announcements for the superannuation sector these have been tempered by other negative announcements.

“We welcome the government’s commitment to finally reform the Excess Contribution Tax by taxing people at their marginal tax rate plus an interest charge, rather than at the highest marginal tax rate.”

FoFA frustration

The FPA also flagged its concerns with government’s lack of support for small business, especially those facing significant reform.

“We are disappointed to see no announcement in support of small business across Australia. The financial planning profession has been and will continue to be under significant strain as a raft of new regulation come into effect in 2013,” said Dante De Gori.

“These small financial planning businesses will receive no support from government with the implementation of Future of Financial Advice laws on July 1. This is unfortunate however we encourage all financial planners to use all the tools and support being provided to you through your professional association.”

Life insurer TAL launched Affinia late last year but the doors only officially opened on February 14. Including TAL’s previous AFSL and the licensee totals about 70 authorised representatives.

Craig Parker, head of Affinia, said his dealings with risk specialists have convinced him the group is embarking on the right strategy.

“Affinia’s strategy is very clear in reference to being a risk-specialist licensee,” said Parker. “We want to be seen as the choice for risk professionals who want to take their business to the next level.

“We have recruited and are in the process of on-boarding 30 advisers and we are in the process of talking to several more groups.

“All of them are risk professionals with established businesses and all of them are looking for greater involvement from their licensee.”

Parker believes licensees are unable to be “all things” to all practices in much the same way as advisers are struggling to provide a full suite of services to clients.

However, interest in Affinia’s business model appears to have come from both large and small players.

“We have definitely had a lot of interest from the large institutions,” he said. “The education that is supplied to them is an issue. If I’m a risk specialist I don’t need to know what’s happening on the investment front. We have had some interest from the boutiques as well.”

An open APL also suggests a certain flexibility, which risk-specialists might need as both legislation and increased self-regulation take effect this year.

“FoFA is still important for risk advisers,” said Parker. “You still get interesting conversations with risk specialists who don’t believe FoFA is anything to do with them. But the clock is ticking and of course it does have a lot to do with them.”

Economic growth in 2014 is forecast
 at 6 per cent year-on-year for some countries, and this is underpinning a strong property development pipeline. Property development companies looking to 
offload some of their holdings, or to free up capital to fund further developments, are driving the development of the real estate investment trust (REIT) sector.

Louis Christopher, founder and research director of SQM Research, says the Asian REIT sector has bright growth prospects.

“Where the Asian REIT sector is right now, it’s still in its infancy in terms of the number of managers offering product, as well as the number of REITs that are available,” Christopher says.

“Mind you, it has exploded in terms of the number of REITs, but I think it’s going to get a lot bigger than it is now through more and more Asian economies developing a REIT sector.”

Stephen Finch, chief executive of APN Property Group’s Asian operations, says there are opportunities for Australian investors to diversify their property holdings, and “Asia definitely gives some opportunity for diversification”.

Finch (right) says historical correlations between Asian property markets and the Australian property markets are “not that high – in fact, in one or two cases they’re approaching zero to negative”.

“It’s also about tapping into a very interesting growth story,” Finch says.

“Australia is quite a mature market for real estate, while Asia is a market that is growing very rapidly, both in terms of the underlying economies, and the growth in the rental streams that are supported by that economic growth, but also in the context that REITs in Asia are still a relatively small part of the investable commercial real estate space.”

Zenith Investment Partners analyst Jonathan Baird says Asian REITS were not immune from the same issues that hit the sector globally prior to the global financial crisis.

He says REIT managers deviated
from their core business of being “rent collectors” into activities like property development and funds management, and also, in many cases, became highly leveraged in an attempt to bolster returns.

“There has been a painful period of reconstruction since then,” he says.

The full version of this article was originally published in the May 2013 edition of Professional Planner.

Dividend income is another significant source of return for share owners and its value is often underestimated. In fact, if share prices don’t change much, dividend income often accounts for a large part of a share investor’s return. These also tend to follow a more predictable pattern than their company’s share price.

Dividends can provide a steady flow of income for an investor to reinvest and grow their wealth or use to fund their lifestyle. For retirees and others reliant on returns from their investments, they may be a valuable source of income.

All of this makes investing in shares for their income potential an important alternative to simply considering whether their share price will go up or down.

How important are dividends to total returns?

In the last six decades, dividends have been a significant component of investors’ returns from Australian shares. On average, dividends have contributed 50 per cent to total returns over that time.

Dividends can also be more predictable than share prices. Because dividends are paid from profits, and the decision on whether and how much to pay is made by the board, there’s never a guarantee that a company will pay a dividend.

However, there are good reasons for a board to maintain or increase regular dividend payouts: it helps the company stand out from others, particularly for income-minded investors, and signals the company’s financial strength. As a result, a company’s dividends tend to follow a more predictable upward pattern than its share price.

So investing in shares for their dividend potential can deliver a fairly steady stream of income. In an environment where investors remain edgy and share markets potentially volatile, focusing on dividends may be a more reliable strategy than relying on capital growth.

The Woolies example

Woolworths Limited’s recent dividend history shows how resilient dividends can be through changing market conditions. In calendar year 2008, which covered the worst of the global financial crisis, Woolworths’ share price fell by 21.5 per cent. However, Woolworths paid its shareholders a dividend of 92 cents per share that year, 24 per cent higher than in the previous year.

So for Woolworths’ shareholders, 2008 was a great year from an income growth perspective. And the falling share price presented a good opportunity to buy more shares. Those who did have enjoyed dividends that have continued to rise steadily, while the share price has moved up and down.

The chart shows the increase in capital value of $10,000 invested in Woolworths shares since the company was listed in 1993 and the annual income (mostly dividends) on that investment.

Capital growth and income from $10,000 invested in Woolworths Limited shares

Source: MLC Investment Management, Woolworths Limited. Notes: Original investment made on 31/12/93. Assumes no change in shareholding and dividends are not reinvested. Excludes buybacks.

Tax advantages of dividend investing

For investors in Australian shares, dividend investing can also be tax-effective.

Unlike international shares, Australian shares are often partly or fully franked, which means the company has already paid tax on some or all of the dividend at the company rate of 30 per cent.

This reduces the investor’s liability for tax on the dividends.

John Owen is a portfolio specialist at MLC Investment Management

Speaking on Friday at the Australian Council of Trade Unions (ACTU) Investment Forum in Melbourne, Shorten used the opportunity to again sell the benefits of the council of superannuation custodians operating within a charter of superannuation adequacy and sustainability.

However, the minister for financial services and superannuation began his address with a homage to the national savings system.

“Ladies and gentlemen, I stand before you today a confessed superannuation nerd,” he said. “I am utterly excited by superannuation. In my quieter moments, I often stop and think about the sheer size of our system.

“It has occurred to me, if we amassed the entirety of Australia’s $1.5-trillion superannuation saving, you could build 12 stacks of $1 coins all the way to the moon and those stacks would weigh the same as 135 of the US navy’s largest aircraft carriers.”

An even more remarkable system

Shorten promised that the superannuation system will become “more remarkable” in the future.

“Yesterday I released a discussion paper seeking views from industry and the community more broadly about the eventual establishment of a council of superannuation custodians, whose task will be to advise on whether any proposed changes to Australia’s superannuation system are consistent with an agreed charter of superannuation adequacy and sustainability,” he said.

“The council itself would be an impartial, expert and apolitical body that is able to act as the stewards of the superannuation system, reporting to Parliament on its sustainability and its prospects for attaining the vision the nation has for it.

“The proposal does not take decisions about superannuation from the parliament in the way the Reserve Bank now does over interest rates.

“But the broad principle of protecting the collective wealth of the Australian people from short-term political considerations, by putting it under the stewardship of a neutral council that people can trust, is similar.

“That’s why I think of the council and its charter broadly as a ‘reserve bank for super’ – helping the parliament make decisions about super calmly and apolitically in the way that the Reserve Bank makes decisions about interest rates calmly and apolitically.”

Beyond the news cycle

Shorten added that thinking around superannuation need to look beyond the next budget, the 24-hour news cycle, next week’s news poll or the September election.

“I’m thinking about the fact that in 25 years Australia’s superannuation pool will grow to $6 trillion, which will be almost twice the size of our GDP,” he said.

“That’s why the charter and the custodians are important – because they require all future governments, Labor or Liberal, to implement superannuation policies which are in the long-term national interest.”

Speaking at the Australian Shareholders’ Association (ASA) Conference, ASIC chairman Greg Medcraft committed the watchdog to addressing emerging risks to ensure confident and informed investors, and fair, efficient markets.

Globally, new rules to strengthen the banking system are imposing higher capital and liquidity requirements.

“The net effect of this is often a decreased access to debt capital and an increased cost to business. As a result, many businesses are turning to market-based financing to source their capital,” said Medcraft.

“The second driver of market-based financing is the continuing global growth of the pension and superannuation sectors – much of which is invested in debt and equity capital markets.

“The growing importance of market-based financing presents a challenge for market regulators to ensure we have the right tools and resources in place, so that debt and equity capital markets can perform their critical role in funding economic growth.

“This increase in activity in our capital markets will have a flow-on effect on financial service providers such as financial advisers, investment managers, custodians, research houses, credit rating agencies, and auditors and accountants.”

Keeping up with complexity

Medcraft added that the regulator was keeping pace with innovation-driven complexity in products, markets and technology.

“It’s a constant struggle to monitor new developments and respond in a way that doesn’t unduly restrict the benefits of innovation. However, we also need to be mindful that innovation can add complexity and risk,” he said.

The problem of complex products being mis-sold is particularly concerning to ASIC.

“It is important that investors take responsibility for their decisions. They should understand the risk–reward pay off and the concept of diversification. In this regard, investor education remains key,” warned Medcraft.

“In fact, I like to say if you don’t understand it, you shouldn’t buy it – even if your financial adviser recommends it.”

Despite the “perennial challenge” of mis-selling, Medcraft also put product providers on notice and hinted at further regulation.

“Product manufacturers and product issuers have a role to play. It’s not a sustainable business model if the customers are losing money. They need to ensure the products are appropriate for the customer and aren’t mis-sold,” he said.

“My position on this is clear: those selling complex products to unsuspecting investors need to wise up and do the right thing. They might get away with it for a while, but as we saw with the crisis, governments and courts inevitably rule in favour of investors that have been mis-sold these complex products.

“ASIC has a working group on complex products, which is currently exploring the best ways to regulate these products. This includes considering the whole of the product life cycle, not just distribution and disclosure.”

Online research conducted by Galaxy Research for the TAL Group found misconceptions such as “health insurance provides the same sort of cover as life insurance”, “the government will look after my family if I die” and “life insurance isn’t necessary for those without family” are still widely prevalent.

In the poll of more than 1200 people, 47 per cent living in households where the main breadwinner doesn’t hold life insurance claimed they could not afford to take out some form of personal cover.

TAL Group chief executive, Jim Minto, said the results are a major cause for concern as life insurance is not only affordable but provides vital support for a person’s main asset: their ability to earn an income.

“We know from our polling that some people will not let their insurance drop for their car or even their phone, but when people are not having life insurance due to home budget pressure or because of a lack of understanding, then we know the life industry has a responsibility to help educate people on the risks they face and benefits of life protection,” he said.

“The great irony is that times of reduced confidence in job and financial security are the times when people need life insurance protection the most. Life insurance is essential, not a luxury that people should let go of easily. Being unable to earn an income can have life-long and devastating consequences for Australians, their dependents and families.”

Single and health insured

One in five of those surveyed (18 per cent) claim they didn’t need life insurance because they have no immediate family to protect and 17 per cent of people felt that they could get the same level of cover from their private health insurance policy.

Rounding out the top five reasons why the main income earner doesn’t have life insurance was the belief that life insurance was redundant if a person had other assets that can be drawn on in the event of death (16 per cent), and that life insurance was simply unimportant (13 per cent).

Geography and gender differences were particularly pronounced in some of the reasons respondents gave for not holding insurance, with men more likely to think they are immune to health risks.

Men were also more likely than women to think that their health insurance would give them the same benefits as a life policy (19 per cent versus 14 per cent).

It’ll never happen

Minto concluded that the results reveal just how much more the industry needs to do to educate people on the benefits of life insurance and how it differs from other forms of insurance and social supports.

“The vast majority of Australians benefit from holding life insurance,” he said. “It isn’t just for people with dependents or those who think that, because they have assets such as a home, that their family will not need financial assistance should they be no longer able to work through illness or death.

“Men also need to think more about the financial risks to their families and dependents from them being unwell. It is not enough just to think it will never happen.”

The quarterly survey covers around 1950 funds, a sample of the SMSFs Multiport administers, and the investments held at March 31, 2013. The assets of the funds surveyed represent approximately $1.8 billion.

AMP SMSF administration head of technical services, Philip LaGreca, said the overall allocation to cash fell 1 per cent during the March quarter to 23.4 per cent, its lowest point since the same quarter last year when cash holdings were at 22.9 per cent.

“Lower interest rates during the quarter and the possibility of further cuts have meant cash has become a less attractive investment, so trustees are ‘cashing out’ of cash and looking for other homes for their money,” he said.

Managed funds find favour

The total fixed interest asset allocation remained unchanged at 6.6 per cent compared to the December quarter. However, there was a reduction in exposure to longer term deposits – dropping 0.6 per cent to 1.4 per cent in the March quarter.

“The fall in longer term deposits is most likely the result of unattractive interest rates for new longer term deposits,” LaGreca said.

Meanwhile, exposure to managed funds increased for the first time in two years, rising from 15.8 per cent in the December quarter to 17.4 per cent in the March quarter.

“The lift in the use of managed funds has occurred in the fixed interest and Australian equities sectors, possibly related to the search for an alternative to cash and term deposits, combined with a little more optimism in equity markets,” LaGreca continued.

“Managed funds seem to be the preferred method of investing in overseas markets but there was also an increase in Australian equities, possibly due to softening in the mining sector leaving investors unsure of which stock to invest in.”

Filling the void

AMP also released its first quarter cash flows and assets under management last week, including a strong performance by its retail business.

AMP Financial Planning managing director, Michael Guggenheimer (right), told Professional Planner the integration of the North wrap platform was complete and that this had “filled a void” for AMP planners.

According to AMP figures for the first quarter of 2013, the North wrap platform continued its strong growth, tripling net cash flows to $779 million, compared to $228 million in the same quarter last year.

The company put the gains down to recent platform enhancements and a strong take-up across AMP’s aligned planner network. Assets under management increased by $1 billion to $5.7 billion, up from $4.7 billion in the fourth quarter of 2012.

Speaking at the Queensland Media Club on Thursday, Shorten announced plans to progress a charter of superannuation adequacy and sustainability by establishing a charter group that will conduct consultations.

“The purpose of the charter is to enshrine the core objectives, values and principles of our superannuation system for the long term,” Shorten said.

The charter group will also seek input on the establishment of a council of superannuation custodians.

The council has been mooted as an impartial, expert superannuation body tasked with protecting the integrity of the scheme and ensuring the policy settings are consistent with the core objects, values and principles.

“As with the Reserve Bank on monetary policy, the council will be required to consider the interests of all Australians when reviewing superannuation policy,” Shorten said.

“The charter and council will ensure that Australia’s superannuation system is protected and enhanced for future generations.”

The council will report annually on the adequacy, performance and sustainability of superannuation, as well as make recommendations to parliament for improvements.

Cormann: not more committees

However, the opposition believes the creation of another committee will not change the recent past.

“Despite promising no change to superannuation in 2007, Labor over the past five years has increased taxes on people’s retirement savings 10 times already, increasing taxes on super by more than $8 billion in the process,” said Senator Mathias Cormann.

“They have cut concessional contribution caps from $50,000 and $100,000 under the last Coalition government, depending on age, down to $25,000 across the board. This means people who want to save more than $25,000 towards their retirement through superannuation in one year have to pay 46.5 per cent tax on those contributions.

“Having cut the super co-contribution benefit for low income earners from $1500 a year to $1000 a year already, Bill Shorten is about to try and push legislation through the parliament over the next five weeks to cut that benefit down again – this time in half, down to just $500 a year.”

Cormann believes voters will be their own “council of custodians” when they pass judgment at the next election.

“To protect people’s superannuation savings, we don’t need more bureaucracy, we need a change of government,” he said.

The SMSF sector is bubbling along nicely, or so the figures would suggest. The number of funds is poised to exceed half a million, the number of trustees is approaching 1 million and assets under management total about $474 billion – about one third of the total superannuation pool of savings.

On this evidence it seems many people want to manage their superannuation and for one overriding reason – they want to be actively involved in overseeing their retirement savings, both pre- and post-retirement. And this is exactly what SMSFs allow them to do: they give them the vehicle to control their fund investments by having direct access to the market, as well as having direct responsibility for its administration.

But to hear our critics, many SMSF trustees aren’t to be entrusted with this responsibility. They are seen as lacking the necessary investment skills and having little understanding of compliance or costs, ignoring the fact SMSF trustees have access to skilled professional advice and that the long-term performance of SMSFs is superior to other funds.

Critical response

Certainly, SPAA begs to differ with the critics. And if they did their homework, they would remember that the Cooper Review in its final 2010 report did so too. For those with short memories, here’s what the report stated:

The vast majority of submissions supported the view that the SMSF sector, with a few exceptions, generally works well. This view is shared by the panel. The review process has generally confirmed that the SMSF sector is largely a successful and well functioning part of (the) superannuation system.

The Panel suspects that the most significant aspect of its work in the SMSF sector is that it has not (my emphasis) recommended wide‑ranging changes — a minimum SMSF asset size or specific trustee educational requirements, being two examples. The panel’s SMSF recommendations are not dramatic and largely relate to compliance, audit, and advisor competency and like measures. These changes are aimed at ensuring that this growing sector can continue to prosper in an enhanced environment.

Put simply, what Cooper recognised was that SMSFs are well managed.

Since then there has been little evidence that the SMSF sector has dropped its guard; indeed, the evidence is to the contrary, as legislative and regulatory reform is demanding even higher standards of the sector.

Even the ASIC research undertaken recently was based only on 100 pieces of advice to low-balance SMSFs, as well as those advisers that are prolific spruikers of property and borrowing (something SPAA has explicitly warned about) or those that have had consumer complaints made against them. This was a very small subset of SMSF advice, only addressing the really risky end of advice to the SMSF industry.

It was certainly not typical of the industry, although SPAA welcomed the report as being a useful tool in determining what the regulator saw as risks to watch out for, and provide SMSF advisers with an example of what ASIC expected of them.

On any objective assessment of SMSFs, there is a dearth of evidence that SMSFs are being operated by people who don’t understand superannuation. [Colley was asked by Professional Planner whether the SMSF trend could be curtailed by Super Funds offering product look-alikes].This is clearly false as it is promoted by those who are often conflicted and see SMSFs as a threat to their survival without understanding and acting on the dynamic changes taking place in the superannuation industry.

SPAA has always acknowledged that SMSFs are not for everyone. But just like other types of superannuation funds they are a necessary part of the retirement savings cycle for many people. Just read Cooper.

Graeme Colley is technical director of the SMSF Professionals’ Association of Australia (SPAA)

Morcos, 33, is a principal of Wealth Journey, an independent financial planning practice accredited by SPAA as self-managed super fund specialist advisers.

“Believe it or not, I started as young as 16 when I attended a career day at school. I’ve always seen the logic in saving and investing, and so financial planning was the natural fit,” he told Professional Planner.

“After school I went on to university to complete an undergraduate degree in applied finance and that was my pathway into financial planning. I started my career at the age of 21 and back then I was considered the youngest financial planner NAB had.”

After completing his degree, Morcos went on to complete a diploma in financial planning and has since completed the SPAA SMSF Specialist Adviser qualifications.

“SMSFs have always been of interest to me because I was frustrated with the limitations of corporate and publicly offered superannuation plans,” explains Morcos.

“SMSFs allow me as a financial planner to really add value in my advice and can be a valuable tool for the self-employed or for families that have more than one income.”

No two clients are the same

His clients are predominantly wealth accumulators who range from high net-worth individuals to middle income families and the self-employed.

“I love the diversity of my client base as it really supports the notion that no two clients are the same, which is what keeps my job exciting,” he said.

Morcos attended the recent SPAA Conference in Melbourne, which he feels are a great way to meet other like-minded professionals and to keep on top of industry developments.

“The highlight for me at the recent SPAA conference was the gala dinner, which was a chance to meet everyone on a social level. Also, the fact that Bill Shorten didn’t show up for his presentation was great,” he said.

The Future of Financial Advice (FoFA) reforms hold few fears for Morcos.

“Wealth Journey has always been an independent fee-for-service financial planning organisation, and as such I feel my business has been well positioned to keep on top of all the changes in regulations,” he said.

“Furthermore, my flexible approach to financial planning has meant that I can react to change with ease and with very minimal impact to my clients and business. To be honest I fully support the regulations as it ensures we keep the best in the industry as they are the ones fit to keep up with changes.”

“It may be that buying the 10-year US bond at 4.5 per cent right now turns out to be one of the best trades for years to come.” A great quote from Rory “Rate Cut” Robertson at Macquarie Group’s internal debt markets’ morning meeting in mid-2007.

How far we have come since 2007. The US 10-year bond has been bid up so much that its yield reduced to 1.76 per cent at the end of 2012. Investors who went against the grain in early 2007 and took some money from strongly performing equity markets and shifted to more defensive bonds would have done well.

Early this year we have seen “rotation thinking” come back into play, with investors rightly questioning their portfolio allocations and many commentators asking whether a rotation from defensive asset classes back to equities was looming. According to Bloomberg, even some central banks, concerned with extreme valuations for traditional reserve assets, are now considering adding a sleeve of equities to official reserve investments.

Rotation thinking

Here is a simplified version. Unprecedented monetary stimulus from the world’s most powerful central banks has significantly benefited fixed interest investors and prices have increased to the point that bond yields have fallen to generational lows. Would the removal of that stimulus see the high price of bonds fall? If so, in order to capture and lock in the gains to their bonds, investors would be incentivised to sell bond investments and shift the funds into other investments.

Those who have worked with brokers know that pitching transactions to a client that already believes they need to do something is often successful. This is because it’s at market extremes that behavioural finance comes into its own. We are human and our capital markets are products of our fears and greed.

Of course it’s very hard to do better than a herd when you’re part of that herd. Taking capital away from glamour sectors, especially when they have done well, and investing where capital is scarce (when those sectors have been sold off) is emotionally hard because it usually either feels like you are leaving gains on the table or catching a falling knife.

Opportunity in Australian small companies

One sector that has been out of favour with investors recently is small companies. Looking at the chart below, it’s immediately apparent that the lag in 12-month performance of small companies versus the ASX 200 is historically as extreme as it gets. Diving deeper into the data reveals even more information, such as the market’s broad disregard for small resources, even the best placed ones.

Source: Bloomberg

This history is telling. Not only have small caps “caught up” their relative performance deficit to large caps, they usually then go on to outperform in a relative sense. Further, the sector seems to do this with a surprising degree of regularity. If you were a technical trader looking at this graph, you would be smiling.

For advisers, the twin challenges of articulating investment opportunities while managing client fears and greed have always come with complexity.

Tactically, the market has largely ignored smaller companies while pushing some of our large caps to all-time highs. Yet history makes it hard to have a view that divergence of performance will be maintained.

For forward-looking investors the message is clear. While going against the grain might feel difficult, for investors with a reasonable time horizon, history tells us there is an opportunity here.

When small companies do start to close their performance deficit, whatever the catalyst for that change in sentiment is, having exposure via a quality manager has the potential to contribute significantly to the portfolio achieving the client’s investment objectives.

Angus Crennan is an investment specialist at Zurich Investments

It believes the changes will encourage Australians to contribute more to their superannuation later in life while allowing investors to withdraw or retain excess concessional contributions without penalty.

“The government believes that it is important to allow people who have not had the benefit of the Superannuation Guarantee for their entire working lives to have the ability to contribute more to their super as their retirement age approaches,” said Shorten.

The proposed legislation will bring forward the start date for the new higher concessional contributions cap to July 1, 2013 for people aged 60 and over. Individuals aged 50 and over will be able to access the higher cap from July 1, 2014.

“This means Australians reaching retirement age during the next financial year can contribute up to $10,000 more to their super at the concessional tax rate,” Shorten said.

An exposure draft of the legislation to bring forward the start date of the new concessional contributions cap has been released today for consultation is available here.

Separately, the government will seek to introduce legislation that allows individuals to withdraw any excess concessional contributions made from July 1, 2013 from their superannuation fund without penalty.

Under the proposal, government will tax excess concessional contributions at the individual’s marginal tax rate plus an interest charge, rather than the top marginal tax rate.

“This reform will ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution,” said Shorten.

At the moment, concessional contributions that are in excess of the annual cap generally are effectively taxed at the top marginal tax rate (46.5 per cent). This is a severe penalty for individuals with income below the top marginal tax rate.

features

08 - focus on FoFA
Beware the cookie (cutter) monster

10 - forum
A question of style in Australian equities

14 – cover story
How a national university curriculum for financial planning
will produce a stream of “entry-level” professionals
The full Professional Planner 2013 University course guide.

22 - best practice
Who is the discovery meeting really for?
Martin Mulcare

26 - technical
Future challenges for aged care
Louise Biti

29 - in focus
On the REIT track in Asia

35 - self-managed super
Once is never enough for a trust deed
Tony Negline

36 - self-managed super
Tenants in common versus joint tenants
Bryce Figot

38 - sharemarket
A fresh look at broker forecasts
Ron Bewley

40 - risk
How to future proof life insurance arrangements
Richard Weatherhead

42 - professionalism
Who are we really protecting?
Robert MC Brown AM

regulars

04 - from the editor
A glimpse of a professional future
Simon Hoyle

06 - wrap
A round-up of the month that was
Andrew Starke

by association
34 Graeme Colley
44 Mark Rantall
45 Deborah Kent

46 - Final Word
Black Caviar causes a nagging suspicion
Dixon Bainbridge

“There is still a bit more information to come particularly around final clarity on conflicted remuneration, implications of grandfathering and details on annual fee disclosure statements,” he said.

“We’ve got a lot of information, we understand where things are, we’ve been communicating all the way through and now, at the beginning of this year, we’ve swung into training and development with our advisers.”

Humphrey says specific state-based FoFA courses are assessing Hillross advisers, determining any holes in their knowledge and delivering training to close these gaps.

“Clearly FoFA is a big deal with a lot of moving parts to it but we’ve put a whole lot of resources against it and some big budgets to make sure that it’s all happening and trucking along in line with our expectations,” he said.

“Our objective is that everything will be 100 per cent by July 1.”

Hillross shifted its branding strategy in the latter half of 2012 with the “What’s your idea of financial freedom?” tagline now prominent in the group’s marketing as a response to the view that a lot of financial planning is driven by compliance concerns, rather than by a focus on client goals and objectives.

“We’ve rebuilt our brand and business around this and, as a consequence, any recruitment that we do is all about how we grow the number of Australians we are helping achieve their idea of financial freedom,” he said.

“And we are finding like-minded practices that are equally passionate about the customer.”

Humphrey says Hillross added 90 new advisers in 2011 and 70 in 2012 with growth continuing this year.

“Like-minded advisers often means these are self-licensed businesses… who have maybe been running their own license and looking for a business partner,” he said.

“We’re also finding that Horizons is a fantastic resource and another source of our growth.”

It’s no secret that SMSFs are top of mind for all superannuation funds, big or small, retail and not-for-profit. Offering direct investment options (DIOs), including term deposits, equities and exchange-traded funds has been the weapon of choice (and will continue to be) used by a number of funds in the hope that these are the solution to stopping the leakage of members to SMSFs.

It seems only logical to conclude that if the main reason people leave their super fund to set up an SMSF is because they want to have greater control of their investments and financial future, then such options will give members the tools to do so and therefore be the most effective way to retain them.

If such strategies were to be successful in their aim, then the SMSF sector, which is expected to continue to grow for some time, certainly would have a fight on its hands.

Factors in conjunction

It is too early to tell, of course, but DIOs and other SMSF-lite solutions are unlikely to be the panacea that some funds hope they are. Though they will be effective in retaining some members, the fact is that the greater proportion of those migrating to SMSFs are likely to leave despite the availability of these options.

As CoreData’s 2013 Post-retirement Report findings highlighted, while members do want greater investment choice and the flexibility and control of DIOs, these are not in themselves the key factor in retaining their business and are, in fact, low on the priority list.

What is more likely to be effective in conjunction with DIOs and SMSF-lite solutions is funds’ greater focus on member engagement. This means conducting segmentation research, identifying triggers and those members most at risk of leaving (and reason for wanting to leave), and targeting members with appropriate communications and messaging.

However, few funds are actually doing this. Despite the misconception that SMSF trustees want to do and control everything themselves, the reality is that about half of SMSF trustees are what CoreData classifies as coach-seekers, that is, they would rather do things themselves and want to retain a sense of control but are looking for help. Coach-seekers actually look for guidance and a trusted person to have that conversation with. Super funds aren’t doing that and don’t seem to know when to have such conversations.

Communication skills?

In fact, there seems to be little idea or agreement on when members should be contacted with regards to financial advice and retirement, with many funds of the view that somewhere in a member’s 50s is appropriate. Given our most recent SMSF research reveals the largest level of growth in SMSF demand cited by advisers is from the 41 to 50 year old cohort, it is no wonder that SMSF advisers are poaching members before the funds themselves have even begun to think about having a conversation around financial advice.

And it’s not just this cohort that funds need to engage with regards to advice, with a majority of advisers noting substantial growth in demand for SMSFs from the 31 to 40 segment.

Of course, in many cases members simply aren’t aware of their funds’ financial planning services (or the costs) or the different types of advice available through their funds, whether comprehensive or scaled advice. So it’s no surprise to see that only 10 per cent of 45-plus year-old members have used their main funds’ financial planning services, yet close to half would strongly consider doing so.

This therefore represents a great opportunity for super funds as they battle with accountants and financial planners looking to poach their members towards SMSFs, with 45 per cent of 45-plus year-old members having an SMSF.

With such low usage of advice through super funds at present, the threat to advisers generally will become only too real as funds realise the power of advice as an engagement and retention tool and increasingly dedicate greater resources to this area in their fight to keep members. Watch this space.

Salvador Saiz is head of advice, wealth and super at Core Data Consulting

This is the view of investment management group Select Asset Management, with chief executive Brendan Foley noting increased demand for simple, conflict-free portfolio construction services.

While financial planning licensees have had months to consider their business propositions under the new regulatory regime, guidance on the finer points of best interest and conflicted remuneration have been recent additions.

Foley added that institutionally unaligned groups are also seeking greater business certainty built on non-conflicted remuneration structures and a systematic approach to enhancing the full value proposition of unfettered financial advice.

“Demand has increased as we approach the July-1 start date for FoFA reforms, with many quality dealer groups seeking innovative ways not only to remove or minimise their compliance risk, but to properly unshackle their advice from the constraints of inherent conflict,” he said.

Foley also warned that licensees have had too few choices as they seek a non-conflicted approach, which means avoiding the pitfalls of institutional dealer group models where research, investment and platforms can be tilted towards inhouse-investment products.

“Standard model portfolios and recycling approved-product lists no longer make the grade,” he said.

Product news

Select has secured partnership agreements with several financial advisory firms and expects many more institutionally unaligned licensees to be interested in its Customised Portfolio Solutions (CPS).

Victoria-based DMG Financial Planning, which operates under its own license, is the most recent firm to sign on for Select’s CPS.

DMG director and financial planner Gary Lucas said the practice had conducted its own research in-house for many years but, post GFC, had decided it needed a higher level of expertise.

In related news, the payment of conflicted remuneration has been removed from the FirstChoice Retail platform, which means new clients are eligible for an automatic fee rebate from June 11. The fee rebate is equivalent to the amount of commission that was previously payable.

FirstWrap plans to launch a new online dashboard offering greater visibility of client accounts and enhanced administration support.

“We continue to innovate to enhance our existing model portfolio functionality on FirstChoice. We are now the first platform to combine a new record-of-advice (RoA) tool with model portfolio implementation, so in one click an integrated process for portfolio change and advice-documentation compliance across all clients, saving advisers an enormous amount of time,” said Colonial First State’s general manager product and investments, Peter Chun.

Particularly, the Australian Securities and Investments Commission (ASIC) wants licensees to be on their guard when employing advisers who have worked for a business ASIC has previously taken action against.

The warning follows recent ASIC action against licensees, including financial advisers and securities dealers, with ASIC becoming aware many of their representatives have moved to new licensees.

“More broadly, we are seeing significant industry restructuring at present and it is vital that recruitment standards are high in such an environment,” said ASIC commissioner and deputy chairman Peter Kell.

“Generally, licensees have good compliance and governance standards and ensure representatives go through rigorous checking before taking them on. However, we want to make sure that all licensees are fully aware of the need to do this. The reputation of a firm can painstakingly be built over a number of years but seriously damaged overnight through poor representatives.

“In many cases, representatives of licensees against which ASIC has taken action will be adequately trained and competent, and comply with the financial services law. However, where representatives have come from an environment in which there was a culture of poor compliance or poor quality advice, appointing licensees need to take extra care to satisfy themselves that representatives are properly trained and monitored to address early any issues that might arise.”

The regulator’s warning also highlights a broader industry issue around recruitment risk.

Communication key

Fiona Navarro, general manager of dealer group Apogee Financial Planning, believes it is a conversation that is long overdue.

“I don’t think that licensees communicate enough to each other around these sorts of experiences,” she said. “Obviously there are privacy issues but we still have advisers who go from one licensee to another and who might replicate bad behavior. It would good to talk about it as an industry.”

It is a point picked up by Kell.

“Monitoring and supervision are much more than audits and compliance checks. They are about proactively ensuring that advice is appropriate and clients are treated fairly,” he said.

“ASIC is continuing to closely scrutinise licensees’ obligations to demonstrate adequate monitoring and supervision and will not hesitate to take action where we find those practices deficient.”

Kell also reminded licensees of ASIC’s new powers under FoFA.

‘The powers allow us to restrict or remove from the industry firms and individuals who might cause or contribute to investor losses,” he said.

The Roy Morgan Image of Professions Survey 2013 again found that nurses are most highly regarded, closely followed by doctors and pharmacists, with planners languishing in mid-table.

Ironically, or perhaps as a result of, the oft-cited estimate that only one in five Australians are currently receiving financial advice, just 25 per cent of those polled rated planners very high or high for ethics and honesty.

Of all 30 professions surveyed in 2013, 21 saw their image enhanced but financial planning wasn’t one of these dropping from 26 to 25 per cent, the same figure as when first included on the list in 2009.

This put financial planning in eighteenth position, the same territory as directors of public companies, business executives and newspaper journalists, but significantly behind a top six made up of nurses, doctors, pharmacists, engineers, school teachers and dentists.

Insurance brokers were highly rated by just 13 per cent, but this at least represented some progress from 10 per cent in 2012.

This puts them in the same category as politicians with federal members of parliament (14 per cent, up 4 per cent) and state members of parliament (13 per cent, up 3 per cent), both making similar gains after last year recording their lowest ratings for ethics and honesty since 1998.

The lowest ranked profession is once again car salesmen, a position they have held for over 30 years. Just 4 per cent of those surveyed rated this much-maligned industry very high or high for ethics and honesty.

The next lowest were advertising people with 9 per cent and real estate agents with 12 per cent, which sounds terrible but is in fact the professions highest rating since it was first ranked by the survey in 1983.

The Roy Morgan telephone survey was conducted on the nights of April 16 to 18 with 645 Australian men and women aged 14 and over.

Respondents were asked to give a rating that best described how they would rate or score people in various occupations for honesty and ethical standards.

Sadly, but perhaps typically, countries have not responded well to the debt crisis; the politics of populism has proved too attractive. Neither have the central banks. To a greater or lesser degree, they have bowed to political pressure to address unemployment and lacklustre economic performances.

What does this mean for investors in debt markets? In a nutshell, there is no simple answer. But we do expect the impact of ongoing global policy experimentation on real economic growth and financial markets will likely vary substantially from country to country.

Alpha variety

It is this variance that creates investor opportunity. But it requires an active approach to bond investment; passively floating through this investment environment is a risk too far.

Take sovereign bond exposure. If investors rely on market capitalisation-weighted indexes, the result could be holding more debt from countries that are less creditworthy or countries in which inflation risk is rising. Overexposure to peripheral Europe has been and may continue to be a significant investment risk. Who knows when the next Cyprus-style banking crisis will erupt?

So, although our expectations of total returns have been wound back because the lower yielding environment, there are more opportunities for potential alpha than could be expected in a “normal” investment environment.

Policy response

As countries choose different paths to address issues with debt, growth and inflation, so too will they provide alpha opportunities as the market reacts differently to economic events and the policy responses they evoke from governments and central banks.

In the developed world, many central banks are keeping policy rates at zero. Such policies have contributed to a significant slope in the yield curve, and that creates opportunities for investors focused on risk-adjusted returns.

Additionally, some central banks (including Australia’s) will likely deploy additional monetary stimulus through rate cuts and/or balance-sheet expansion in the year ahead, providing opportunities for active positioning.

Site specific

Country differentiation is critical when investing in global regions. Greater variation between countries is likely as the limits of debt sustainability and monetary and fiscal policies are tested to varying degrees. Ultimately, this may lead to more bond market volatility and changing correlations across the globe.

For example, the spread between Spanish and German yields at the end of 2012 was only 50 basis points higher than at the start of the year. Any appearance of calm, however, would be deceptive given that spreads oscillated substantially by up to 300 basis points throughout the year.

Expect volatility, and the potential for alpha, to remain the norm in a low-beta environment.

Peter Dorrian is head of global wealth management at PIMCO Australia