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No.1

By Tim Stewart

DESPITE moves in the industry to removeperceived conflicts of interest, questions stillremain about ‘buyer of last resort’ (BOLR)contracts between dealer groups and theiraligned planning practices.

The buy-back provision was created toprovide retirement security to planners, withthe first BOLR contracts offered in the late80s, according to Paragem managing directorIan Knox. Since then, dealer groups havemoved to alter their BOLR contracts tocombat the perception that they offer morethan the market rate to practices that favourtheir products.

“It’s been accepted by the [Financial Plan-ning Association] and other entities thatBOLR should be stopped,” Knox said. “Howdo you look after your clients’ best interestswithout acknowledging that you’re going toget more at retirement than would becommercially available in the market?”

For his part, FPA chief executive MarkRantall played down the suggestion thatBOLR agreements were causing planners tobehave unethically.

“I don’t think BOLR in itself is necessarilya conflict provided it is well disclosed toclients … What is important is the individualfinancial planner is a member of a profes-sional association and adheres to its code,”Rantall said.

Knox said his biggest disappointment wasthe leaders of the industry were undermining

the industry’s push towards professionalismby offering practices BOLRs above the marketrate.

“Anyone who is going out and payingadvisers hundreds of millions of dollars abovecommercial values is undermining the adviceprofession,” Knox said.

The BOLRs offered by different dealergroups vary from two times recurringrevenue to a maximum of four times at AMPFinancial Planning (AMPFP) for experiencedplanners, according to Forte Asset Solutionsdirector Stephen Prendeville.

“AMPFP is self-perpetuating. It’s a self-contained business unit, and there’s thisexpectation that everyone who’s been therefor 20 years will sell at four times,” Prendev-ille said.

“People join with the knowledge of a BOLR,so if AMPFP were to shift that, it would posea real business risk,” he added.

Kenyon Partners principal Alan Kenyonsaid AMPFP could afford to pay above themarket value for the practices of experiencedadvisers because it had a stable of younger

By Mike Taylor

THE financial planning industry mayhave to wait longer than expected tosee the entire legislative packageflowing from the Government’s Futureof Financial Advice (FOFA) changes,with the Assistant Treasurer, BillShorten, now expected to deliver thedraft bill in two tranches.

Shorten told last month’s Finan-cial Services Council (FSC) annualconference on the Gold Coast thatthe draft bill would be made public inearly September, but industry sourceshave told Money Management thetwo-tranche approach will see key ele-ments delivered at a later date.

Money Management has alsobeen told that in 11th hour negotia-tions with key stakeholders,Shorten has sought to use a partialremoval of the ban on risk commis-sions inside superannuation as abargaining chip to extract commit-ments from financial planninggroup negotiators.

Shorten told the FSC conferencethat the Government – having lis-tened to the Financial Planning Asso-ciation and the FSC – was preparedto revisit the proposed total ban onrisk commissions inside superannua-tion and perhaps allow commissionsto be applied with respect to individu-ally advised risk products.

However, in negotiations whichhave followed his statement to theFSC conference, the minister isunderstood to have indicated theGovernment will only deliver on theconcession if the planning groups fallinto line.

Shorten’s attitude and the realitythat a ban on risk commissionsinside superannuation would serveto exacerbate Australia’s longstanding

Buy-back contracts under scrutiny A bill intwo parts

IOOF SIGNALS GROWTH: Page 4 | REVERSE MORTGAGES: 6

Continued on page 3

Vol.25 No.33 | September 1, 2011 | $6.95 INC GST

By Chris Kennedy

THE single most important factorto consider for financial planningpractices looking at merging withor acquiring another business isdemonstrating reliable futurecashflow of the combined busi-ness, as lenders place greateremphasis on what are the risksassociated with an acquisition.

Kenyon Partners managingdirector Alan Kenyon said this isa factor that it is not readily under-stood throughout the industry.

Lenders are most interested inwhat the business will look likeonce the new practice has beenincorporated, as well as how theacquisition will be funded, what

the purchaser’s liability is, andmost importantly, what the freecashflow will be after financingcosts, he said.

Lenders would previously be

happy to look at the annual figuresof the businesses involved and besatisfied that everything was ok,and while the criteria for lendingto practices may not havechanged, lenders’ ability to get amore frequent handle on how abusiness is tracking has changed,he said.

But the principal of Hunt’sGroup consultancy Anthony Huntbelieved there would be anincreasing trend for lenders tofocus on the EBIT [earnings beforeinterest and tax] of the businessto be acquired.

“It’s taken years to get specialistteams in banks to understand theprinciple of revenue multiple, butthey understand earnings and areprepared to lend on an earnings

basis,” he said.NAB’s national manager of

financial planner banking ShaneKirsch said NAB assesses thestrength of the cashflow and theability of the combined businessto repay debt.

“It’s what can be produced,what the banks would belooking to partner with – that’swhat the assessment has to befocused on,” he said.

“You could have a businesstoday that might be operatingsuccessfully, then acquiresanother one – it’s got to prove itcan manage a larger business,”he said.

“We also look at the cultural fit

Continued on page 3

Post-merger cashflow most important for merging practices

Alan Kenyon

Ian Knox

Continued on page 3

Bluffing with a weak hand

If everything goes to the plan broadlyindicated by the Assistant Treasurer, BillShorten, Australian financial plannersought to be able to see the first draft of

the Future of Financial Advice legislationwithin the next few weeks.

Given that to meet that deadline theGovernment’s legislative draftsmen willhave begun working on the bills someweeks ago, planners should not expect thedocument will contain any radical conces-sions or changes. Rather, what they willsee is a direct expression of governmentpolicy as conveyed by the Department of Treasury.

Draft legislation gives legal form togovernment policy and is usually subjectto a period of consultation before it is ulti-mately introduced to the Parliament. Assuch, the financial planning industry andother key stakeholders will have the opportunity to make further commentsand representations.

However if, as expected, Shorten opts totake the legislation into the Parliament in twotranches, then the industry will have to decidewhat it is prepared to accept in the first trancheknowing that it will need to leave room tocontinue haggling with the Government overthe contents of the second tranche.

It is now apparent that the only conces-sion on offer from Shorten is a change tothe Government’s approach to the banningof all commissions on risk products withinsuperannuation, as indicated at the Finan-cial Services Council (FSC) conferenceearlier this month.

Shorten indicated to the FSC that theGovernment would be prepared to revisit therisk commission issue and to consider allow-ing the maintenance of commission-basedremuneration with respect to individuallyadvised risk products. However, it is under-stood that his delivery of that undertaking willbe subject to the planning industry ceding at

least some ground on other issues.The minister is playing a dangerous

game because the move for a blanket banon risk commissions inside super alwaysrepresented dubious policy, carrying withit a myriad of unintended consequences –many of which, were last week laid bare bymodelling undertaken by specialist riskresearch house DEXX&R.

That modelling not only confirmed theexpected significant diminution in incomefor those advising on risk products, it alsopointed to a significant magnification ofAustralia’s already significant under-insur-ance problem.

In other words, by trying to pursue theelimination of commissions as argued byindustry superannuation fund lobbyists,the Government risks exposing itself to aset of potentially politically embarrassing,unintended consequences.

Ambitious politicians looking to amass arecord of viable legislative reform can ill-affordto have embarrassing unintended conse-quences tarnish their legacy. Reversing theGovernment’s approach on risk commissionsin super is therefore not so much a bargainingchip as a political necessity.

– Mike TaylorABN 80 132 719 861 ACN 000 146 921

2 — Money Management September 1, 2011 www.moneymanagement.com.au

[email protected]

“The minister is playing adangerous game becausethe move for a blanket banon risk commissions insidesuper always representeddubious policy... ”

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Average Net DistributionPeriod ending March '1110,207

Mike Taylor

IN circumstances where there will beno commissions attaching to MySuperand default superannuation products,industry superannuation funds shouldalso ensure such funds are quarantinedfrom unnecessary expenditures suchas television advertising.

That is the assessment of FinancialPlanning Association chief executiveMark Rantall, who said the financialplanning industry had addressed thequestion of commissions some timeago, and it was time for other sectionsof the financial services industry to gettheir own houses in order.

“Our industry addressed the ques-tion of trailing commissions and theearning of passive income some timeago as we progressively moved to a feefor service regime, but there is certainly

scope for other sections of the finan-cial services industry to be equally fas-tidious,” he said.

Rantall said in circumstances whereit had been clearly stated that commis-sions should not apply with respect toMySuper and default superannuationfunds, there should be equally strongrules utilised to quarantine memberbalances from unnecessary expendi-tures.

He said in circumstances where con-troversy had surrounded the amountof money expended by industry super-annuation funds on television advertis-ing, it followed that funds should berequired to specifically quarantineMySuper and default fund balancesfrom use for such purposes.

Rantall said with the objective ofMySuper being to protect members’interests via a low-cost default option,

such protection needed to be extendedbeyond commissions and applied tothe other activities which served toerode member balances.

www.moneymanagement.com.au September 1, 2011 Money Management — 3

News

no.8

Australia • Asia • Europe • Middle East • The Americas

Issued by T. Rowe Price International Ltd (TRPIL), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney,NSW 2000, Australia, as investment manager. TRPIL is exempt from the requirement to hold an Australian Financial Services Licence (AFSL) in respect of the financial services it provides in Australia. TRPIL is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defi ned by the UK FSA, or as defined in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confi dence, and the bighorn sheep logo are registered trademarks of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.

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Quarantine default funds from TV campaigns – FPA

Post-merger cashflow mostimportant for merging practices

– does the management have the capability to manage alarger business is a critical part, what capital is beingcontributed to the acquisition, and what security is beingoffered up as collateral,” he said.

By the same token, a business could qualify for a loan tobuy a struggling practice if the bank was confident that itcould successfully incorporate that business and make itprofitable, he said.

ANZ general manager advice and distribution PaulBarrett said any lending for a book buy or business is subjectto typical commercial lending terms and conditions, butultimately it was the cashflow of the business to supportthe loan repayments.

Other factors included the requirement to meet the finan-cial benchmarks such as loan and interest cover ratios, loanto value ratios, profitability, and synergy gains, he said.

under-insurance problemhas given rise to concernsthat the minister hassought to use the issue asa bargaining chip toachieve grudging planningindustry acceptance of atwo-year opt-in.

Specialist risk researchhouse DEXX&R last weekproduced modelling whichshowed that the impositionof a total ban on risk com-missions inside superannu-ation would not onlyseverely impact adviserremuneration, it would alsosignificantly underminelevels of insurance coverwith respect to life and totaland permanent disable-ment.

It is expected that thefirst draft of the FOFA leg-islation will be a directreflection of the Govern-ment’s position as out-

lined by Shorten earlierthis year, including thetwo-year opt-in and theban on risk commissions.

Industry sources saida key to judging the Gov-ernment’s ultimateapproach would be thetenor of Shorten’sannouncement attachingto the release of the draftlegislation.

A bill in two partsContinued from page 1

Continued from page 1

Mark Rantall

advisers ready to take over the reins.AXA Financial Planning’s BOLR is the most proactive on

the market, according to Kenyon.“It’s structured that it’s there in the event of death and

disablement – it’s a proper [BOLR],” he said.A spokesperson for AMPFP said his company’s BOLR was

generally below the market rate and did not contain a biastowards products.

“We have changed our BOLR recently due to the merger ofAMP and AXA. The methodology is still based on revenue, butit’s part of a negotiation so it can vary,” the spokesperson said.

MLC changed its BOLR contracts in 2006, valuing practicesat the current market rate rather than through a set formulafavouring in-house products – although the existingcontracts were grandfathered.

Buy-back contractsunder scrutinyContinued from page 1

Bill Shorten

By Mike Taylor

IOOF has declared it is poisedfor future growth after reportinga 29 per cent increase in netprofit after tax of $99.5 millionand delivering shareholders a22 cents per share dividend,fully franked.

IOOF managing directorChris Kelaher described theresult as solid in challengingconditions, and claimed thebenefits of pursuing simplifica-tion in challenging times meantthe company was streamlinedand “ready for new opportuni-ties” and “poised for futuregrowth”.

Referring to the company’sacquisition of dealer group DKN,the company’s announcementto the Australian SecuritiesExchange (ASX) said it was inline with IOOF’s “adviser drivengrowth strategy”.

“The acquisition addsstrength and depth to IOOF’sexisting distribution network,” itsaid.

Looking at the company’splatforms, the ASX announce-ment said that net inflows toIOOF’s flagship platforms were$650 million, which representedannualised growth of 6 per cent ahead of the industryaverage of 2 per cent.

Kelaher said volatile condi-tions in global markets hadmade it difficult to provide afinancial forecast for the com-pany, but he believed IOOF waswell positioned to navigate itsway through challenging times.

“Off the back of this strongresult, and courtesy of itsstrong balance sheet and sim-plified operating model, IOOFis ready for further newgrowth,” he said.

IOOF signals moregrowth ahead

News

By Chris Kennedy

TREASURY Group has announced anincrease in funds under management(FUM) but a decrease in net profit after tax(NPAT) in what it describes as a “difficultyear” for funds management.

While FUM increased almost 14 per centto $16.7 billion, normalised NPAT was $9.72million, a decrease of 4.5% over the year,the group announced in its full year finan-cial results.

The group will pay a fully franked finaldividend of 20 cents per share, bringing thetotal dividend to 34 cents, up almost a thirdon the previous year.

“The past 12 months have been a diffi-cult year in funds management,” said TRGchairman Mike Fitzpatrick.

“The heightened level of caution amonginvestors, particularly retail investors,reflects the recent volatility of global equi-ties markets,” he said.

TRG chief executive Andrew McGill said

although the consolidated profit was down,growth in FUM and underlying aggregateearnings at group boutiques were impres-sive in the context of volatile financialmarket conditions.

“TRG’s normalised net profit after tax wasmarginally down – this was largely due tocontinuing investor caution impacting anumber of managers,” he said.

“Our multi-boutique strategy will remainat the core of Treasury Group’s business,however, a strong balance sheet and the

growth of existing boutiques provide finan-cial capacity to consider a broad range ofopportunities in future,” he said.

Investment performance during year wasgenerally strong, relative to benchmarks,and there were strong net fund flows, withinstitutional flows increasing, particularlyat RARE Infrastructure, the group stated.

But retail investor confidence remainsweak and (Investors Mutual experiencednet outflows ) despite excellent perform-ance and ratings upgrades, TRG stated.

Steady results for Treasury Group in difficult year


Chris Kelaher


News

WHK’s “solid”performance amidmixed results

ACCOUNTING business WHKhas delivered a “solid” fiscalperformance for 2011 despitereporting a decline on anumber of fronts, includingrevenue and cash earningsper share, according to fullyear results released to theAustralian SecuritiesExchange.

The WHK Fiscal 2011 FullYear Results recorded rev-enue of $406.1 million –down from $413 million in theprevious financial year, repre-senting a 2 per cent decline.

The recorded revenue rep-resents both WHK’s Australianand New Zealand ventures,which were either flat or downby 11 per cent, respectively.

Also in decline, cash earn-ings per share went from 9.8cents in 2010 to 92 cents inthe year ending June 2011(down 9 per cent), while oper-ating cash flow was down 26per cent to 35.6 million – asharp drop from $47.8 millionin the 2010 fiscal year.

WHK pointed to the natu-ral disasters that impactedNew Zealand as a factor inthe challenging business con-ditions faced by the company.

WHK Managing DirectorJohn Lombard said whilestrong cash flow and cost con-trol point to solid manage-ment, the focus is on organicrevenue growth.

“We have a strong founda-tion to drive the next phase oforganic growth by leveragingour scale and enhancingvalue to our clients,” Lombardsaid.

“We are seeking to estab-lish a business that will sup-port medium term double-digitrevenue growth.”

While the business is struc-turing to reward performancein alignment with organic rev-enue growth, a new sharedservices model for supportfunctions will be introducedthis year to boost efficiencyand cut costs, WHK said.

*The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned February 2011) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria.

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You see smaller companiesWe see hidden gems

Australian Unity achieves $1 billion in FUABy Andrew Tsanadis

AUSTRALIAN Unity Personal FinancialServices has reached $1 billion in fundsunder advice (FUA) – a two-fold increaseover the past year.

Australian Unity general manager ofpersonal financial services Steve Davis saidthe business is also seeing very stronggrowth in other areas.

“Our mortgage broking loan book hasmore than doubled over the past 12 months,

and our revenue from risk insuranceincreased by 27 per cent over the sameperiod,” Davis said.

“We now have a very strong business,especially when you consider that it was justa few years ago that we restructured andmoved from a retail, sales driven, shopfrontapproach to a modern advice driven finan-cial services business.”

The restructure allowed Australian Unityto modernise the dealership so that it is nowlargely prepared for the proposed Future of

Financial Advice legislation. It also allowedthem to develop a more sustainable busi-ness strategy, which included the develop-ment of an accountants’ alliance business,said Davis.

“We currently have relationships witharound 160 accounting firms – most ofwhom refer their clients to our financialadvisers and mortgage brokers for special-ist financial advice – and we intend tocontinue to grow that,” he said.

“As a result, we are still on the lookout for

good quality advisers who want to buildtheir practices by partnering with account-ants.”

Davis said accountants are turning toAustralian Unity because the dealershipallows accountants to provide financial serv-ices in-house or through a referral to aspecialist from Australian Unity.

“It’s a flexible, full-service model that isattractive to accountants because it makesit easy for the accountant to retain their inde-pendence and identity,” said Davis.


News

Natural disasters hit Suncorp resultBy Mike Taylor

NATURAL disasters and other factors have servedto significantly undercut Suncorp’s annual result,with the company reporting an almost 36 per centslump in net profit after tax of $453 million.

In an announcement released to the AustralianSecurities Exchange, the company said the resultreflected the worst period of natural disasters in theregion’s history.

At the same time, Suncorp announced it hadmoved chief executive Patrick Snowball from a fixedterm contract to a rolling contract, on the basis ofhis remaining with the company until at least 2015.

Under the terms of the contract change, Snow-ball’s fixed remuneration will be $2.55 million a year.

Despite the profit slump, the company main-tained its dividend at 35 cents per share fully franked.

The result announcement revealed the companyhad dealt with more than 100,000 natural hazardclaims worth an estimated gross cost of $4 billionbeing managed across Australia and New Zealand.

It said the company’s general insurance after taxprofit was $392 million, down from $557 million lastyear, while the core bank after tax profit was $259

million, down from $268 million last year.Suncorp Life recorded an after tax profit of $149

million, down from $222 million last year.Commenting on the result, Suncorp chief execu-

tive Patrick Snowball said they had confirmed thesubstantial improvement in the underlying strengthand performance of Suncorp businesses.

He said the group’s balance sheet and capital posi-tion had strengthened considerably over the finan-cial year due to the implementation of the non-oper-ating holding company structure and the continuedrun-off of the non-core bank portfolio.

By Andrew Tsanadis

INVESTORS are taking upmore separately managedaccounts (SMAs) and thenumber of fund managers isgrowing to meet demand,according to Standard &Poor’s (S&P) latest SMAModel Portfolio Ratings.

As part of its review, S&Pupgraded the Dalton NicolReid Australian Equities HighConviction Portfolio to fourstars, while the MCPM CoreAustralian Equity SMA wasdowngraded to three stars.

Ten of the SMAs, includingGoldman Sachs JBWere CoreAustralian Equities and Hype-rion Australian GrowthCompanies SMA, retainedtheir rating.

Meanwhile, the AvivaInvestors Blue Chip Top 20 andAusbil Australian Concentrat-ed Equity were withdrawnfrom S&P’s ratings report.

As the SMA sector contin-ued to grow, specifically whenit came to funds inflow, S&P’sfund services analyst RodneyLay pointed to the variety ofinvestment strategies andplatform availability as amajor factor in growth.

“The sector continues to becharacterised by concentrat-ed, low portfolio turnoverportfolios with predominant-ly large to mid-market capi-talisation stocks,” Lay said.

“This is partly a reflectionof investor preference, whichin turn partly stems from thevisibility of the constituentstocks of an SMA portfolio,”he said.

Lay said larger market capi-talisation stocks are looked onfavourably by investorsbecause they provide anelevated piece of mind.

“Investors have a preferencefor stocks they know andunderstand, and low turnover,

as it conveys the perception tomany investors that the invest-ment manager has a greaterdegree of conviction in theirstock picks,” said Lay.

S&P believes that, overall,the management of modelportfolios has improved –particularly when it comes tomanagers who may havepreviously been criticised bythe ratings house.

The rate at which invest-

ment decisions were provid-ed to SMA platforms has alsoimproved, while the reconcil-iation between the perform-ance of funds managers andthe actual performance oftheir model portfolios oneach platform has helped topaint a clearer picture forboth ongoing and potentialinvestors.

“As a consequence of theseimprovements, what we referto as SMA-specific risks,tracking error and relativeperformance risk betweenthe SMA product on the plat-forms and the managers’internal/unit trust equivalenthas declined,” said Lay.

S&P Fund Services believesSMAs are an efficient accessmechanism to managers’investment strategies, provid-ing stock, taxation, and cashflow visibility, as well as amore efficient taxation struc-ture for investors.

More global managers eye emerging marketsBy Chris Kennedy

THEREhas been a growing trend for globalequities large cap managers to increase theirexposure to developing economies, butspecialist emerging market managers arestill likely to deliver better results in thatsector, according to Lonsec’s Global Emerg-ing Markets sector review.

Global managers are looking to gainexposure to growing companies in marketswith forward momentum, but specialistmanagers with dedicated resources andtailored investment approaches may stilldeliver superior outcomes in emergingmarkets, Lonsec stated.

Lonsec’s highest rated managers in thissector tend to be singularly focused on theasset class rather than investing as a bolt onapproach to another strategy, said Lonsecsenior investment analyst Steve Sweeney.

The only two funds to receive the highlyrecommended rating were the AberdeenEmerging Opportunities Fund and the T Rowe Price Asia Ex-Japan Equity Fund.

There has also been an increase in thenumber of funds using the MSCI AllCountry World Index over the MSCI WorldIndex as the fund’s benchmark, accord-ing to the review.

“Despite the growing global awarenessof emerging markets as a source of poten-

tial return, this sector remains a more inef-ficient research pool than developedmarkets, particularly for those managerscomfortable investing in the less heavilyresearched mid cap stocks,” Lonsec stated.

“This gives fundamental, activemanagers with well formulated invest-ment research processes a greater oppor-tunity to exploit insights gained fromdirect company contact and the researcheffort in general,” Sweeney said.

“Emerging market investors payingactive fees should be more willing to affordactive managers greater freedom in port-folio construction to add insight and ulti-mately, alpha,” he said.

Yields eclipsing term deposit ratesBy Tim Stewart

WITH yields on equitiesrivalling bank termdeposit rates, the Aus-tralian share market islooking attractive as along-term investment.

“The Australian marketas a whole provides a sig-nificant dividend invest-ment play – a dividendyield of about 5 per cent,”said Fidelity head of Aus-tralian Equities, Paul Taylor. “Some individual stocksobviously offer even more.”

The ASX200 Accumulation Index dividend yield of 5 per cent was edging closer to the average term depositrate for two years of 5.7 per cent, Taylor said.

He added that due do recent volatility, the Aus-tralian market was sitting at about 10 times earn-ings.

“Traditionally, the Australian market trades at closerto 14-15 [times earnings]. While I don’t think the Aus-tralian market is going to go from 10 back up to 14-15anytime soon, I think maybe we stay at that 10-11 andreturns come from the dividends that get paid, aswell as the earnings growth in the market,” Taylorsaid.

BNY Mellon Asset Management Australia managingdirector Bruce Murphy agreed that the banks in particu-lar looked like a good buy, since their stocks were offeringhigher yields than the banks themselves were offeringtheir customers in term deposits.

“You can buy banks at a 10 per cent yield at themoment, and that seems like a great deal. It’s a volatilemarket, but it’s a stock picker’s market [since] marketsare probably going to go sideways for a while.”

It isn’t only Australia that is looking like a good long-term investment, according to BNY Mellon Asset Man-agement Asia Pacific chief executive Alan Harden.

“The markets present pretty good value. In mostplaces now – certainly in the US and here – you’re get-ting a better yield on equities than you are on 10-year bonds,” he said.

Patrick Snowball

S&P says SMAs have improved

Commsec dominates online tradingVOLATILE markets do not appearto have significantly impacted thenumber of people trading sharesonline, according to new datareleased by research house,Investment Trends.

The data revealed that whilethe number of online sharetraders had fallen late last year,it had stabilised through the firstfive months of 2011.

Commsec continues to dominatethe online trading environment,accounting for half of active trades(up from 48 per cent in December),while E*Trade was in second place,accounting for 18 per cent of pri-mary broking relationships, withWestpac Online Investmentaccounting for 8 per cent, followedby NAB OnLine Trading (6 per cent)and Bell Direct (5 per cent).

As well, the research pointed toan increasing number of traders

using smart phones to conducttheir trades.

The survey found that whileCommsec might dominate themarket, ‘deep discount’ providersBell Direct and CMC Markets ledin terms of customer satisfaction.

Investment Trends senior ana-lyst Pawel Rokicki said onlinetraders were very much aware ofmarket events in May, and whiletwo-thirds saw Australia as ahealthy economy, the majoritywere worried the European debtcrisis might spell a second waveof the global financial crisis.

“Against this backdrop, theunderlying number of tradersheld up well, although until therecent extreme volatility, tradingvolumes have been weak,” hesaid.

Rodney Lay

Paul Taylor

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News

By Angela Welsh

NATIONAL Australia Bank’s(NAB’s) direct assetmanagement business,nabInvest, has taken a non-controlling interest in Peri-diem Global Investors LLC(Peridiem), a Los Angeles-based investment manage-ment firm specialising inglobal fixed income.

Peridiem’s chief executiveAndrew Stenwall has morethan 20 years experience inportfolio management,nabInvest said in a state-ment. Stenwall has previ-ously been responsible formanaging over $170 billionin global fixed interest.

The Peridiem businesscomprises 15 senior invest-ment professionals who

have worked together overthe past 10 years – mostrecently, at Nuveen AssetManagement.

nabInvest chief executiveGarry Mulcahy said nabIn-vest remained focused onpartnering with investmentmanagement f irms thathave capabilities across arange of asset classes.

“Peridiem provides broad

global fixed income skillscovering over 30 countriesand currency markets,which complements nabIn-vest’s strategy to build asustainable and diversifiedasset management busi-ness,” Mulcahy said.

Stenwall said he lookedforward to offering incomeoriented strategies toAustralian investors.

Banksforecast lowercash rateBy Tim Stewart

FIXED interest rates aresitting significantly belowvariable rates as lendersprepare for a cut in theofficial cash rate amidcontinuing global eco-nomic uncertainty.

Some lenders are offer-ing fixed interest rates thatare as much as 1.5 per centbelow the bank’s standardvariable rate on the market,according to Loan Marketchief operating officer DeanRushton.

“We haven’t seen a gaplike this between fixed vari-able rates in some time,”Rushton said.

He said the spreadbetween fixed and variablerates had remained consis-tent since the ReserveBank of Australia (RBA) lastmoved on interest rates byraising them from 4.5 percent to 4.75 per cent inOctober 2010. However, headded that the spread hadwidened in the last 12weeks with the three-yearfixed rates falling signifi-cantly below variable rates.

“During the initial monthsof the global financial crisis,medium term (three to fiveyear) fixed rates stoodalmost 2 per cent abovevariable rates, which high-lights the extraordinary posi-tion the market is in rightnow.”

Lenders have been fore-casting the RBA will lowerthe official cash rate due tothe volatile global economyand declining domestic con-sumer confidence, Rushtonsaid.

He added that LoanMarket had received a 15per cent increase inenquiries from customersabout fixed rate products inthe last three months.

nabInvest takes non-controlling interest in Peridiem

FinancialPlanner of the

Year 2011


News


The Lonsec Limited (‘Lonsec’) ABN 56 061 751 102 rating (assigned May 2011) presented in this document is limited to ‘General Advice’ and based solely on consideration of the investment merits ofthe financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The ratingis subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the Fund Manager for rating the product(s) using comprehensive and objective criteria.Challenger Managed Investments Limited ABN 94 002 835 592, AFSL 234 668 (CMIL) is the responsible entity and issuer of interests in the Five Oceans World Fund ARSN 117 060 769 (Fund). Thisadvertisement is not intended to be financial product advice and does not take into account any person’s investment objectives, financial situation or needs. Accordingly, investors should considerthese matters, the Fund’s product disclosure statement (PDS) and its appropriateness to them before making an investment decision. The PDS is available from www.challenger.com.au and should beconsidered prior to making an investment decision. Five Oceans Asset Management Pty Limited ABN 90 113 453 160 , AFSL 290 540 is the Fund’s appointed investment manager.12

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1. Aims to deliver strong, consistent performance.2. Benchmark unaware investment approach.3. Reduced volatility via hedging.4. Active currency management.5. Diverse investment ideas.

Five clear reasons to investinternationally with Five Oceans

By Mike Taylor

A GOVERNMENT decision to ban risk com-missions inside super would have a devastat-ing impact on not only planner remunerationbut levels of coverage, according to a newanalysis published by specialist risk researchcompany, DEXX&R.

The analysis, published last week, doesnot take account of the announcement bythe Assistant Treasurer and Minister forFinancial Services, Bill Shorten, that theGovernment is prepared to cede groundwith respect to commissions on individuallyadvised risk products, and paints a grimpicture of the industry in the event of atotal ban.

Shorten announced earlier this monththat the Government might be prepared torevisit the question of a ban on individu-ally advised risk commissions, but has yetto formally declare a precise approach.

The DEXX&R modelling imposes anumber of assumptions around the impact ofa zero commission being payable on superan-

nuation business, including a 30 per cent reduction in superannuation pre-mium rates, a 50 per cent decline in advisersuper new business from 2013, and a com-pensating increase in adviser ordinary newbusiness as advisers recommend risk bene-fits be held as ordinary rather than superan-nuation business.

The modelling also assumes a compen-sating increase in adviser ordinary newbusiness, replacing new business thatwould otherwise have been written undergroup super policies included in masterfunds and wrap accounts.

Utilising these assumptions, the DEXX&Rresearch claims the projected outcome onindividual lump sum business would be adecrease in each year from 2013, with thedecrease in new premium in 2013 being$31 million growing each year to a $183 million decrease in new premium inthe 12 months ending 2020.

It then foreshadows a total decrease innew lump sum business between 2013and 2020 to be $742 million, with new

business commissions projected to be$294 million lower by 2020.

The DEXX&R modelling forecasts a pro-portionately similar picture with respect toIndividual Disability Income business.

Grim modelling on risk commission ban

By Angela Welsh

THE corporate regulator has finalised proceedings in the SupremeCourt of New South Wales against property development companyGreat Northern Developments Pty Ltd (Great Northern).

Based in Richmond, New South Wales, Great Northern raisedfunds from investors through loan arrangements and promissorynotes to finance its building projects in Queensland.

As at 30 June 2008, Great Northern owed in excess of $24 million toinvestors.

The Australian Securities and Investments Commission (ASIC)commenced proceedings against Great Northern in September 2009,alleging that Great Northern had offered the loans and promissorynotes in breach of the Corporations Act 2001 (the Act), and that it is justand equitable that Great Northern be wound up by the Court.

In September, the Court confirmed that Great Northern hadcontravened 283AA of the Act by failing to enter into a trust deed andby failing to appoint a trustee that complies with 283AC beforemaking offers of debentures that require disclosure.

The Court accepted an undertaking from Great Northern that itwould enter into a trust deed and appoint a trustee in compliancewith the Act.

Great Northern was unable to secure a trustee. However, ASICassisted the company to achieve regulatory compliance – by ensur-ing that those investors who elected to continue with their invest-ment were transferred to the La Trobe Australian Mortgage Fund –a registered managed investment scheme operated by La TrobeCapital and Mortgage Corporation Limited; making sure the contin-uing investors obtained a mortgage over Great Northern’s proper-ties; and ensuring those investors who did not wish to join thescheme were fully repaid their original investment and interest.

ASIC Commissioner, Dr Peter Boxall AO, said the regulator’s actionwas consistent with ASIC’s objective of achieving compliance as afirst step to safeguard investor funds.

“Where appropriate, and in the best interest of investors, ASIC willtake steps to ensure that fundraising schemes which might be oper-ating outside the requirements of the law are made compliant so thatinvestors are afforded the relevant legal protections,” Dr Boxall said.

Property developer court case finalised

Clients OKabout opt-inFINANCIAL planners might not like theproposed two-year ‘opt-in’ rule or so-called ‘dollar fee’ invoicing, but that is whatmost clients really want, according to astudy conducted by MSI Global Alliance.

The MSI Global Alliance – whichmarkets itself as one of the world’s leadinginternational alliances of independentlegal and accounting firms – has publishedthe findings of a survey of 570 businessowners which it says confirms pressurefrom clients for financial planners to moveto charging time-based fees.

And while the survey outcome clearlycontains some negative results, it alsonoted that planners were “the mosttrusted source of retirement planningadvice”.

On the fee for service question, thesurvey found that 68 per cent of partici-pants want financial planners to charge a‘dollar fee’ via a tax invoice for the numberof hours work on their investment, with22 per cent happy to be charged a percent-age of funds under management.

Dealing with the two-year opt-in, thesurvey found that 66 per cent of respon-dents regarded it as a positive move,with just 14 per cent saying it was abackward step.

It suggested that while respondentsagreed opt-in would impose higher costson planners, nearly half believed the costswould not be significant.

Commenting on the survey results, MSIGlobal Alliance spokesman, CharlesHornor, said it had confirmed two things– that financial planners were the mosttrusted source of investment advice andthat there was concern over what fee forservice should really mean in practice.

“Clients are looking for value for moneymore than ever before, and they are sayingthat a dollar fee based on the time actu-ally spent on their financial affairs ispreferable to being charged a percentageof funds under management,” he said.

Bill Shorten

MLC announcesinsuranceupgradesBy Chris Kennedy

MLC is aiming to reduceinsurance turnaroundtimes by up to 70 per centthrough a new offer withupgraded service, productand technology benefits.

The improvements arebased on adviser feed-back and aim to give themmore time to focus ontheir clients, said MLCexecutive general managerof insurance, DuncanWest.

Advisers have beenasking for an upgradedproduct that is morecompetitive in the mar-ketplace, as well as aservice and technologyof fering that makes iteasier for them to dobusiness, West said.

Launching from 17 October, MLC will pres-ent improvements to itsonline application engine,Riskfirst, and a new desk-top based quotation toolcalled Illustrator, Westsaid.

“From launch day weexpect at least 20 per centof applications completedonline will be approvedimmediately,” he said. Cur-rently applications have tobe signed off manually anddepending on the rate atwhich the technology istaken up we could seehigher rates of onlineapprovals, he said.

The new offer will bringtogether the best ele-ments of Protectionfirstand MLC’s Personal Pro-tection Portfolio, Westsaid.

“We’re excited aboutthese developments andwill work closely with advis-ers to support their busi-nesses through implemen-tation,” he said.

News


Super returns start 2011/12 in the redBy Mike Taylor

AUSTRALIAN superannuationfund returns have started thenew financial year in the red.

That is the bottom line of thelatest data from Chant West,which has reported that returnsfor the median growth superan-nuation fund fell 1.5 per cent inJuly on the back of weak share

markets, with the Australianmarket down 3.8 per cent for themonth and with internationalequities falling 2.6 per cent inhedged terms.

Chant West principal WarrenChant said share markets hadbeen the main drivers for growthfund performance, and reactedsharply to news whether it wasgood or bad.

“In the early weeks of the newfinancial year we’ve seen sharemarkets take a beating, bringingback grim memories of the globalfinancial crisis,” he said.

Chant said for the financialyear to 19 August, Australian andinternational shares were downabout 10.5 per cent and 15.5 percent respectively, on the back ofconcerns about the debt crisis in

Europe and the US.“We estimate that the median

growth fund is down about 5.5 forthis period,” he said.

Chant said industry funds,with their lower weighting tolisted markets, returned minus1.5 per cent and therefore outper-formed master trusts which, onaverage, returned minus 1.9 percent in July.


News

Mortgage Choicereports a 7.4%profit boost

By Milana Pokrajac

MORTGAGE Choice hasrecorded a $15.9 millionnet profit after tax, anincrease of 7.4 per cent onthe previous correspon-ding period.

The mortgage brokerhas deemed this result ahealthy financial perform-ance, with the group’sloan book also rising 6 percent to $42.4 billion.

Chief executive officerMichael Russell said thepast financial year wasone of the most demand-ing for the company’sbrokers and staff in its 19 years of operation.

“First homebuyers’home loan appetiteshowed the largest fallbecause many wereencouraged into the 2009and 2010 marketplace bythe First Home OwnerGrant (FHOG) boost.”

The number ofdwellings financed forfirst home buyers in the2011 financial year wasdown 35 per cent on thelast corresponding period.

“Financial year 2011was especially challengingfor mortgage brokers dueto the prior financial year’sFHOG boost bringingmany purchases forwardand the drop inAustralians’ financialconfidence,” Russell said.

“This damage wascaused by a range of livingcost hikes, November’s outof cycle interest rate rises,and speculation aboutfurther rises and a so-called housing bubble,” headded.

Mortgage Choicereceived total commissionrevenue on a cash basis of$132.9 million, down 1.6per cent.

Annuities drive strong Challenger resultBy Mike Taylor

CHALLENGER Limited ended thefinancial year in good shape, post-ing a 7 per cent increase in nor-malised net profit after tax of$248 million on the back ofstrong product sales and cashearnings.

The company said increasedadvertising, marketing and distri-bution activity, and an outlook for

ongoing equity market volatilityhad helped drive organic retailsales of annuity products up by56 per cent to $1.46 billion.

As well, Challenger chief execu-tive Dominic Stevens said in thecompany’s announcement to theAustralian Securities Exchange hebelieved there was considerablescope for further growth in annuitysales.

“While Challenger’s annuity

sales have already grown by anannual compound rate of 33 per cent since 2006, webelieve we’re still in the earlystages of a fundamental changein the Australian retirement sav-ings market,” he said.

Stevens said to match expecteddemand the company had grownits distribution team, targeting 25per cent retail annuity growth, 10per cent retail book growth and a

record $430 million in cash earn-ings for the life company.

“In the medium term, webelieve this growth rate is sustain-able because baby boomers con-trolling 60 per cent of the assetsin our trillion dollar super systemare beginning to retire,” he said.

Challenger rewarded investorswith a final dividend of 9.5 cents,with the full-year dividend up 14per cent to 16.5 cents. Dominic Stevens


News

IOOF to retain DKN staff and execsBy Chris Kennedy

IOOF will aim to retain the majority of existingDKN employees and offer retainers to seniorexecutives if a proposed takeover of the groupgoes ahead – although certain positions maybecome redundant, according to a proposedscheme of arrangement released to theAustralian Securities Exchange.

Subject to a review of the DKN business,IOOF said it intends to retain the majority ofexisting employees that support the Lons-dale dealer group and DKN wealth manage-ment practice joint ventures, and where rele-vant, relocate those employees to IOOF’shead office.

However, IOOF also said it expected somecorporate, managerial and operational dupli-cation between the businesses, and as such,

certain positions may become redundant –although the extent of this would not beknown until after a review was completed.

IOOF also said it has agreed to make aretention payment of $180,000 and issue100,000 IOOF employee options to DKNdirector and chief executive Phil Butterworth.IOOF would also make retention paymentsand issue IOOF employee options with anexercise price of $7.50 to DKN senior execu-tives Andrew Rutter, Mario Modica and KenCostas, if the scheme becomes effective.

The total of all such executive retentionpayments is approximately $335,000 in cashwith 200,000 IOOF employee options, withthose payments aimed to ensure continuityof service for up to two years following thescheme implementation date, IOOF stated.

IOOF stated the DKN business wil l

continue in substantially the same manner asit is presently, with no other redeploymentof the fixed assets of DKN.

The proposed merger comes as part of astated intention by IOOF to grow throughvertical integration, and the opportunity tocross-sell products to an enlarged distribu-tion network.

The proposed acquisition should addstrength and depth to IOOF’s distributionnetwork, broaden DKN’s product offeringand accelerate the growth of DKN’s busi-ness under IOOF’s larger vertically integrat-ed wealth management model; and createmore efficient operations by leveragingIOOF’s capital and scale to implementchange, IOOF stated.

Shareholders are to vote on the schemeproposal on 27 September, 2011.

By Tim Stewart

CONCERNS about global econom-ic growth have led to outflows from19 of the 25 major equity, bond andsector fund groups monitored byfunds data tracker EPFR Globalover the last few weeks.

Investors redeemed $2 billionfrom high-yield bond andcommodities sector funds, andcontinued reducing their exposureto Asian exporters.

But one theme that was stand-ing out among the outflows was anincreased appetite for dividend-paying equities, according to EPFRGlobal director of researchCameron Brandt.

“Recently the flows have beenmore along sector than countrylines, but so far this year equityfunds with a dividend focus havepulled in nearly $13 billion, versuscollective outflows for all the equityfunds we track of over $45 billion,”Brandt said.

Amid sovereign debt worries inthe Eurozone, investors haveturned to the ‘safer’ sovereigns, withGerman, Canadian and Swissequity funds recording recordinflows for the week ending 17 August, according to EPFRGlobal managing director BradDurham.

“At least in the developedmarkets space, investors areheeding the old dictum that intough times you invest in the cred-itor, not the debtor,” Durham said.

US equity funds recordedmoderate outflows, as redemptionsfrom US exchange-traded fundsbalanced out inflows into actively

managed funds – although theEPFR data didn’t take into accountthe recent poor employment andindustrial production data,Durham added.

Emerging markets equityfunds came in at $2.77 billion,with Asia ex-Japan equity fundsaccounting for over half of thatamount, as investors becameless bullish about exporters inthe region.

Middle Eastern and Africanequity funds extended their runof outflows to 15 weeks, as civilunrest, weaker oil prices and asoftening outlook for commodi-ties took their toll.

LMI fact sheet will provide greater education for borrowers: GenworthBy Andrew Tsanadis

MORTGAGE insurer Genworth Financial has sup-ported a government move to introduce a factsheet to educate homebuyers on home loanswith lenders mortgage insurance (LMI).

The announcement comes on the back ofthe Government’s bank competition reformpackage, and will provide greater transparencyand education for borrowers, said Genworth.

Genworth said the mandatory fact sheetcould be similar to the Government’s key factsheet for home loans, and could be handed outto lenders just prior to borrowers signing theirhome loan contract.

“Genworth believes it is important that home-buyers know how LMI works and the benefits itoffers, plus their potential rights in relation toexisting refund schedules if they switch homeloans,” Genworth CEO and President, Ellie Com-erford said.

“We also support Treasury’s findings and theGovernment’s decision to rule out the introduc-tion of a scheme to allow the transfer of LMIbetween lenders,” she said.

As part of the fact sheet, Genworth said bor-rowers should be made aware of the reason

that LMI is required by a lender, and the cost ofinsurance – which is most often spread overthe entire term of the loan.

Genworth said home buyers should also bemade aware that discounted mortgage insur-ance at the outset of the loan may be providedinstead of a refund.

In a consumer survey conducted in June, Gen-worth found more than two-thirds of Australianborrowers agree that LMI is a helpful product forfirst home buyers.

“At a time when the dream of owning a prop-erty looks increasingly unattainable, risk prod-ucts such as LMI insurance are helping aspiringhomebuyers buy a home sooner,” Comerfordsaid.

“Consumers value that LMI is a communitypriced product, meaning that borrowers whotake out loans pay the same amount whetherthey live in, for example, Western Sydney, Bris-bane or regional Australia.”

Higher SG moreimportant thancarbon taxBy Mike Taylor

AUSTRALIA’S world-class retirementsavings system is in danger of failingunless the Government moves morepromptly to lift the superannuationguarantee to 12 per cent, accordingto leading retirement income spe-cialist, Mercer senior partner, DavidKnox.

Knox claimed the 12 per centsuperannuation guarantee (SG) riseproposal had been sidelined by thefocus on the carbon tax, which over-looked the reality that superannua-tion would have a much biggerimpact on personal living standardsthan either a carbon tax or an emis-sions trading scheme.

He said opponents to the increasein the superannuation guaranteefrom 9 to 12 per cent claimed taking3 per cent from wages would lead toa drop in living standards, but Mercerdid not believe this would be thecase.

“The real decline in living stan-dards will come much later as ourincomes drop when we hit retire-ment, unless we raise the superan-nuation guarantee now,” Knox said.

He pointed to recent Organisa-tion for Economic Cooperationand Development research whichshowed under the current 9 percent SG regime retirees couldlook forward to a net income,after allowing for tax and the agepension, that was little more thanhalf their net income before theyretired.

“This is not good enough for aretirement savings system that con-tinues to be held up as one of thebest in the world,” Knox said.

“Increasing the level of Australia’scompulsory superannuation will notonly improve the living standards offuture Australian retirees, it will boostthe long-term sustainability of theeconomy,” he said. “More money insuper means there are more fundsavailable for a range of investmentswithin Australia, as well as providingthe economy with greater protectionfrom external shocks.”

Global uncertainty drives fund outflows

David Knox

By Ellie Comerford

Zenith securesnew mandatesRATINGS house Zenith Invest-ment Partners has beenadded to the research panelof Melbourne-based financialadvisory group, RetireCarePersonal Wealth Manage-ment.

Zenith announced themandate last week, alongwith the fact it had beenappointed by Adelaide-basedPeople’s Choice Credit Unionas a primary researchprovider.

Commenting on theappointments, Zenithnational sales managerJohn Nicoll said manydealer groups werereassessing their servicerelationships.

“The value of good port-folio construction is particu-larly important duringvolatile equity markets,” hesaid.


SMSF WeeklyAustralians stop spending to save for retirementBy Mike Taylor

AUSTRALIANS are spending less andsaving more, not only because theybecame worried by the impact of theglobal financial crisis (GFC), but alsobecause many baby boomers now realisethey will not have enough to fund theirown retirement.

That is one of the f indings of aresearch paper released by AMP CapitalInvestors, in which its head of macromarkets Simon Warner joined with port-

folio manager Andrew Scott to investi-gate the phenomenon of the Australian“conservative consumer”.

Their research paper – AustralianRetirement Funding and the SavingsRatio – pointed to the level of unease andchanged behaviour in the householdsector that has occurred within what isdescribed as “a generally positive macro-economic backdrop”.

Warner and Scott point to suggestionsthat Australian consumers will become lesscautious as the economy improves, but

warn that this might not ultimately be thecase in circumstances where those agedover 50 have experienced almost theperfect storm with respect to the impact ofthe GFC on their retirement goals.

“When the household sector does lookforward, the scale of underfunding forretirement goals under a variety of real-istic scenarios has the potential to gener-ate continuous upward pressure on thesavings rate in Australia,” they said.

“It seems possible that the standardnorms of what constitutes ‘adequate’

savings – such as historical levels ofsavings rates, debt to income, or debt toassets – are on their own insufficientmetrics to utilise in understanding thecurrent savings rate dynamic,” theresearch paper said.

“The increase in the savings rate hasbeen meaningful, and our analysis suggeststhat the current savings rate may havereached long run equilibrium levels,” itsaid. “However, investors should be awarethat in our judgement the risks around thesavings rate remain to the upside.”

Govt warned to stop super tinkeringTHE Federal Government needs to ensure morestability around the legislation and regulationssurrounding superannuation if it wants commu-nity support for lifting the superannuation guar-antee (SG) to 12 per cent, according to Institute ofChartered Accountants in Australia specialist, LizWestover.

Discussing the proposed rise in the SG on theICAA web site, Westover said if more hard-earnedcash was going to be directed to superannuation

funds, the rules needed to stop changing “so we canbe sure it will still be there when we retire”.

“We need to know that what we warn is headinginto an efficient system which is managed withoutconflicts, with reasonable costs, and without overlycomplex rules that are easily breached,” she said.

Westover said the Cooper Review and other initia-tives had provided the opportunity to get thingsright, but once that had occurred, it was imperativethat the tinkering stopped.

SMSF options inpension phaseBy Damon Taylor

SELF-MANAGED superannuation fund trustees are just aswell placed in the pension phase as those in conventionalfunds, and may even enjoy greater flexibility during periods ofmarket volatility, according to Peter Crump, SuperannuationStrategist for ipac South Australia.

“They're probably even more flexible in pension phase,” hesaid. “In the first instance, you move from a tax conces-sional environment to an even better tax environment, whichis either more tax-free in terms of exempt investment incomeor fully tax-free.”

Next in the list, according to Crump, is the ability to resetsome of the tax components from an estate planning per-spective by drawing money out.

“And if you're either below 65 or still working, you can putmoney back in and recirculate money under the withdrawalre-contribution process,” he added. “Thirdly, you have theflexibility where you can actually start to contemplate thedirection of your eventual benefit payments or pension pay-ments for estate planning purposes.”

For Crump, the perception of agility during pension phasecan be a significant drawcard, and is probably a large part ofthe reason behind SMSF start-ups occurring in the yearsleading up to retirement.

“People want to be more agile, and that agility is hard toachieve at a fund where you're not the trustee,” he said.“For example, stopping and resetting pensions involves aseries of paperwork in a public offer fund, but it involvessimple paperwork in a self-managed fund.

“In many cases, it’s a perception rather than reality, butpeople believe that they have greater agility and conven-ience,” Crump said.

Equities exposures hurt amid volatilitySELF-MANAGED superannua-tion fund (SMSF) investors withhigher than average exposure toequities will have started thenew financial year in negativeterritory.

That is the bottom line of datareleased by two specialist super-annuation fund research andratings houses – Chant West andSuperRatings.

According to Chant Westprincipal Warren Chant, themedian growth superannuationreturned minus 1.5 per cent inJuly on the back of the declin-ing value of both domestic andinternational equities – bring-ing back memories of the globalfinancial crisis.

At the same time, SuperRatings managing director Jeff

Bresnahan said the medianbalanced fund had fallen by 1.4per cent for the month, andpointed out that this hadoccurred before the sharp equitymarket sell-off began in August.

Further, Bresnahan said theextreme bout of market volatil-ity was not expected to go awayany time soon.

Like Chant, Bresnahan saidthe greatest pain had been feltby those funds with greatestexposure to equities.

The confirmation of thedecline of superannuation fundreturns into the red during Julyhas come amid other datasuggesting many investors havesought to gain greater exposureto cash products, including termdeposits. Warren Chant

At the close of the 2010/11 financialyear, many Australian superannu-ation fund members could look attheir account statements and, if

they knew how, make the assessment thatwhile they had enjoyed close to 18 monthsof positive returns, they still had some wayto go to make up losses incurred during theglobal financial crisis (GFC).

The market volatility which has markedthe closing weeks of July, and most ofAugust, suggests it may be as much asanother 18 months before members ofAustralian superannuation funds can claimto have regained their GFC losses.

Data released last week by specialistresearch houses Chant West and SuperRat-ings confirmed that Australian superannu-ation funds had started the new financialyear in red figures, with the median growthfund declining 1.5 per cent in July (ChantWest) while the median balanced funddeclined by 1.38 per cent (SuperRatings).

Importantly, neither Chant West princi-pal, Warren Chant, nor SuperRatingsmanaging director, Jeff Bresnahan werepredicting the market volatility which hadundermined returns was likely to end anytime soon.

According to Bresnahan, the currentextreme bout of market volatility is notexpected to go away quickly.

“It has been with us since the GFC andwill remain with us,” he said.

While superannuation fund returnsthrough July and August were reminiscent ofthe GFC, so too was the relative perform-ance of industry funds and retail mastertrusts. Just as had been the case in 2008/09,

retail master trust returns proved to beharder hit than those of industry superan-nuation funds due to the former’s higherexposure to equities.

Therefore, on the back of their higherexposure to unlisted and less frequentlyvalued assets, the industry superannuationfunds will emerge from the opening monthsof the new financial year in better shapethan their retail master trust competitors.

According to Chant West principal,Warren Chant, industry funds with theirlower weighting to listed markets returnedminus 1.5 per cent during July compared tominus 1.9 per cent for industry funds.

What both Chant and Bresnahan mighthave noted, however, is that retail master trustreturns outstripped those of the industryfunds through much of 2010 because thesame exposure to equities which saw returnsdiminished also sufficed to see them recoverat the same pace as the equity markets.

At the same time, the returns of manyindustry funds languished amid some slowadverse revaluations of their unlisted assetholdings.

The good news for financial planners andtheir clients is that having experienced theadversity of the global financial crisis, theyare well aware of the scenarios that are likelyto evolve and the reality that switchingfunds in a crisis most often results in thecrystallisation of losses.

Hardly surprising in the face of twoconsecutive months of negative returns,Chant and Bresnahan were last week choos-ing to point to the fact that superannuationis supposed to be a long-term investmentand that, taken over the long haul, has

tended to outperform expectations.Chant points out that both growth and

conservative superannuation strategies basedon CPI plus 3.5 per cent and CPI plus 2 percent respectively have performed aboveexpectations about 60 per cent of the time.

Bresnahan argues that market downturnsare going to occur about once every fiveyears, and that a panicked switch to cash isnot the way to go.

“Short-term, knee-jerk reactions are nevera good idea, and even less so when theyinvolve retirement savings and lead to thecrystallisation of losses,” he said.

“The fact is that over the longer term,balanced funds and even fixed interestfunds, outperform cash.”

“Members certainly shouldn’t panic,having been through the worst of the GFCand then seeing their balances recover,”Bresnahan said.

While at the height of the GFC, a numberof superannuation funds undertook adver-tising campaigns which appeared aimed atencouraging disenchanted members toswitch funds, the latest Roy MorganResearch suggests that switching is not highon most members’ agendas.

Switching is still most likely to occur whenpeople change jobs but the Roy Morganresearch confirms that the most importantelement for members remains the level oftheir returns.

When superannuation returns are innegative territor y across the board,Australians appear to have learned enoughto stay put – knowing that industry fundsreturns may be slower to decline, but veryoften they are even slower to recover.

InFocus

While all about you lose their heads

70%

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WHAT’S ON

PERFORMANCESNAPSHOT


Australian superannuation fund returns have started the 2011/12 financial yearin negative territory but, as Mike Taylor reports, most members have learnedenough from the GFC not to crystallise their losses.

Indices Versus ActiveFundsPerformance over a five

Winners:

of Australian equity small-capfunds outperformed the

S&P/ASX Small OrdinariesIndex

Losers:

70%of Australian equity generalfunds were beaten by theS&P/ASX 200 AccumulationIndex

60%of all active funds

underperformed, relative totheir benchmark

60%of active Australian A-REITfunds also failed to beat the

70%of active Australian bond

funds fell short of thebenchmark

Source: Standard & Poor’s Indices Versus

Active Funds Scorecard (SPIVA Australia)

Taking superannuation early isgenerally par for the course forsomeone who is terminally ill.However, it may be worthwhile

stopping and thinking of better optionsfrom a financial planning perspective foryour client if they are in this unfortunateand all too common predicament.

Specifically, there are some key issues toconsider:

• Access;• Taxation;• Estate planning; and• Insurance proceeds.

AccessThere are potentially two conditions ofrelease available to a terminally ill client:permanent incapacity and terminalmedical condition. There are some impor-tant distinctions between the two.

The terminal medical condition ofrelease requires certification from tworegistered medical practitioners (includ-ing one practitioner who is a specialist onthe particular injury or illness) that theperson suffers from an illness or hasincurred an injury that is likely to resultin their death within a (certification)period that ends no more than 12 monthsafter the date of the certification. To satisfythe terminal medical condition require-ments, the client must have a lifeexpectancy of less than 12 months.

In contrast, a trustee of a super fundmay release super benefits under thepermanent incapacity condition ofrelease if the trustee is reasonably satis-fied that the individual is unlikely toengage in gainful employment for whichthe person is qualified.

Medical certification is not a require-ment under permanent incapacity, rather,it is up to the trustee as to the standard ofproof they require to enable them to bereasonably satisfied that the definitionhas been met.

A client who is permanently incapaci-tated must be unlikely to be able to work,whereas a terminally ill client canconceivably continue working (subject tocapacity).

Terminal medical condition benefitscannot be rolled over within the super-annuation system, although a terminalmedical condition and permanent inca-pacity benefits may be retained in thesuper fund indefinitely.

Both a terminal medical condition andpermanent incapacity benefit can be paidin the form of a lump sum or an incomestream.

TaxationTerminal medical condition benefits

A terminal illness lump sum benefit ispaid tax-free, regardless of the recipient’s

age and the underlying tax components.In addition, it is not assessable income,and it is not exempt income.

Concessional tax treatment does notapply to a terminal medical conditionincome stream; any taxable component istaxed at marginal tax rates, similar to adisability income stream. However, the 15per cent tax offset only applies betweenpreservation age and age 60 or if the disabil-ity super benefit definition has been met. Aterminal medical condition income streamcan only be commenced from the client’sexisting fund (ie, the benefit cannot berolled over to another fund). However, aclient can roll their benefit to another fund(that pays an income stream) before declar-ing terminal illness. Alternatively, the clientcan withdraw their benefit and re-contribute it to another fund (if eligible).

Permanent incapacity benefitsA lump sum disability benefit is taxed asa normal super lump sum (ie, it is paidtax-free from age 60 but may be taxableunder the age of 60). However, an addi-tional tax-free amount may apply to lumpsum benefits paid under age 60 to reflectthe future period the individual wouldhave been expected to work. Since theformula relates to days to retirement(generally age 65), the younger the indi-vidual, the more tax-free component.Importantly, insurance proceeds areincluded in the lump sum benefit towhich the formula is applied.

For the additional tax-free amount tobe calculated, a crystallising event musttake place – ie, a super lump sum mustbe paid, or alternatively, the benefit can berolled over. In addition, two legally qual-ified medical practitioners must certifythat because of the person’s illness or

injury, it is unlikely he or she will ever begainfully employed in a capacity for whichhe or she is reasonably qualified because ofeducation, experience or training. The addi-tional tax-free amount does not apply to adisability income stream. For someone whois under 60, the taxable component of theincome stream payments is taxed at theirmarginal tax rate. However, the taxableportion will be entitled to a 15 per cent taxoffset, regardless of the recipient’s age.Income payments to an individual aged 60or over are tax-free.

Estate planningIf an individual who is terminally ill orpermanently disabled withdraws theirbenefit from super, they may distributesome money to children and grandchil-dren at that point. However, it may bemore tax-effective to retain some or allthe money in super and have it distrib-uted as a death benefit.

If the terminally ill individual does notrequire the money and has tax depend-ent beneficiaries (eg, spouse or childunder 18), it may be worth consideringleaving the money in accumulation so thebeneficiary can take advantage of theanti-detriment provisions, and potential-ly receive a larger death benefit. The anti-detriment is essentially a refund of the 15per cent contributions tax paid. As not allsuper funds pay an anti-detrimentbenefit, the client could roll their benefitto another fund (that pays an anti-detri-ment amount); this must be done beforedeclaring terminal illness.

If benefits will be paid to a tax depen-dant (particularly if there are minor chil-dren) consideration could be given toretaining the benefit in super so they canhave the option of taking an income

stream for ongoing tax benefits. Alterna-tively, the client could commence anincome stream while alive, with a rever-sionary nomination to the survivingspouse.

Where a terminally ill individual hasnon-tax dependent beneficiaries, it maybe preferable to take a tax-free lumpsum benefit and distribute the moneyimmediately.

Insurance proceedsIf a client receives insurance proceeds(either total and permanent disability orterminal illness), these will be added tothe taxable component of their superan-nuation balance. This will have implica-tions if benefits are retained in super oran income stream is commenced.

It is likely that an untaxed amount willarise upon payment of a death benefit tonon-tax dependants (ie, tax of up to 31.5per cent will apply to a portion of thedeath benefit).

Where an income stream iscommenced, the tax components will beproportioned between taxable and tax-free components. The insurance proceedswill create a larger taxable component.This will mean more tax on a terminalmedical condition or permanent incapac-ity income stream before age 60.

An anti-detriment amount is calculat-ed on a lump sum death benefit to aspouse or child (of any age); however, thecalculation excludes the insuranceproceeds. An untaxed amount (if any) iscalculated on the entire death benefit (ie,the death benefit increased to include theanti-detriment amount).

Care needs to be taken if rolling toanother fund before declaring terminalillness (to take advantage of the anti-detri-ment) to ensure this doesn’t terminate oradversely affect the client’s insurancearrangements.

ConclusionIn the instance where a client is able tosatisfy both the permanent incapacity andterminal medical condition of release, theterminal medical condition of release willprovide a better tax outcome for mostclients under age 60 who take a lump sum.However, if an income stream iscommenced, individuals will only qualifyfor the 15 per cent pension offset if they areage 55 to 59 or satisfy the disability superbenefit (more likely if they pursue thepermanent incapacity condition of release).

Where a client wishes to provide fordependants, retaining some or all of thebenefits in super may give beneficiariesa potentially larger death benefit (wherean anti-detriment is paid) or the optionof taking an income stream.

If a speedy payment is required, termi-nal illness is generally paid more quicklythan permanent incapacity due tosimpler administrative processes.

Sarina Raffo is a technical servicesconsultant at Suncorp Life.

Superannuation and the terminally ill

OpinionHealth


While a reflex action to terminal illness might be to claimsuper immediately, Sarina Raffo examines a better strategy fordealing with a worst-case scenario.

“REVERSE mortgages are differ-ent from other credit products,

and it is important the law takesinto account their unique characteristics.”Those were the words of the AssistantTreasurer and Financial Services MinisterBill Shorten, who had recently announcedwhat he said would be positive changesfor both the consumers and the equityrelease sector.

As reverse mortgages have long beenperceived as dangerous by both consumersand financial planners, the rise in popular-ity of this product might not come easy.

The lack of interest in reverse mortgagestriggered a chain reaction and the sectorhad shrunk to less than a handful of activeproviders in 2011. However, experts believethe needs of the ageing population coupledwith government endorsement could bringreverse mortgages back to life.

PerceptionReverse mortgages are not only complex, butalso deal with a very sensitive issue for manyseniors – letting go of the equity in homesmost have worked their whole lives to pay off.

Depriving family members of all or partof their inheritance does not help the popu-larity of reverse mortgages which also wasfurther dented by negative media coverageless than a decade ago.

A careful decision making process isrequired before a client is recommended torelease equity in their home.

However, some industry commentatorsclaim reverse mortgages have been largelymisunderstood. National InformationCentre for Retirement Investment (NICRI)chief executive, Wendy Schilg said productproviders were not giving enough informa-tion about these products to borrowers andmany have been burnt.

“I think that’s where they got their badname – people go into a reverse mortgageand five years down the track find out thatit’s really eating into the equity in their homeand they suddenly realise that the house isnot theirs anymore,” Schilg said.

NICRI has unsuccessfully sought fundingfrom the Government to set up an equityrelease information centre.

Targeted consumers still believe reversemortgages are associated with the loss ofhome, according to managing director of areverse mortgage brokerage firm Seniors

First, Darren Moffatt.“That’s not right, and when I tell people

that they establish the loan amount theywant and that they don’t get charged inter-est on money they do not use – they realisethere is a very acceptable level of risk asso-ciated with reverse mortgages,” he said.

In fact, research conducted by Deloitte(see Figure 1) found that the average loansize as at December 2010 was $72,474,mostly used for regular income, homeimprovement or debt repayment.

Shrinking spaceAlthough the reverse mortgage market hasbeen growing slowly but steadily since2005, the number of providers has dramat-ically shrunk.

The number of Seniors Equity ReleaseLenders Association of Australia (SEQUAL)members peaked in the 2007-08 financialyear, with 15 financial institutions having areverse mortgage offering. Those includedBankWest, Commonwealth Bank (CBA),Macquarie Bank, St. George, ANZ, Suncorp,Over Fifty Group, Australian SeniorsFinance (AFS), and other smaller providers.

Of major institutions, Suncorp and ANZleft the sector within a year of joining, whileMacquarie left within two years of tappinginto the reverse mortgage space.

By 2011 SEQUAL membership wasreduced to eight members, with only four –BankWest, CBA, St. George, and AFS – stillactively lending.

According to Moffatt, lack of supply inthe market presents one of the major chal-lenges for the reverse mortgage industry.

He further points to the “very basic andstale” product ranges currently available onthe market.

“Banks will have to wake up to the factthat the days of previous credit growth rates

are gone, and if they are going to have anyhope at all matching that, they’re going tohave to innovate,” Moffatt said.

“Eventually, they’ll turn their gaze to thebaby boomer market – that’s where thenumbers are, that’s where the product needis, and that’s where the property equityresides,” he added.

Lack of planner interest The reverse mortgage sector has grown from$900 million in December 2005 to $3 billionin December 2010, according to Deloittefigures.

Borrowers are usually assessed based ontheir age and the value of their home; theage requirement used to be 65, but someproviders are now offering reverse mort-gages to those aged 60 years. There weremore than 5,000 new borrowers last year,which – although appearing miniscule whencompared to other sectors within the finan-cial services industry – represents growth.

However, financial advisers need to stepup to the realisation that Australia is on thecusp of change as to how the family homewill be viewed in the future, according toSEQUAL chief, Kevin Conlon.


Reverse Mortgages

Light at the endof the tunnel Reverse mortgages have largely been ignored byfinancial planners and mortgage brokers, withthe product supply rapidly shrinking over theyears. Milana Pokrajac finds the needs of theageing population coupled with governmentendorsement might bring reverse mortgagesback to life.

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Outstanding market size $0.9 billion $1.5 billion $2 billion $2.5 billion $2.7 billion $3 billion

Number of loans 16,584 27,898 33,741 37,530 38,788 41,600

Average loan size $51,148 $54,223 $60,000 $66,150 $69,896 $72,474

Settlements $315 million $520 million $466 million $321 million $264 million $322 million

Facility (settlements) $519 million $714 million $627 million $426 million $367 million $449 million

Additional drawdowns n/a n/a $125 million $116 million $126 million $131 million

Discharges n/a n/a $203 million $253 million $309 million $354 million

Figure 1: Reverse mortgage sector figures

Source: Deloitte Australia

“I’ve been challenging the advice indus-try to do a better job of providing affordableand accessible advice and to shift attitudesfrom adviser preferences to client prefer-ences,” Conlon said.

“Equity release is not the only answer, butcertainly the family home is going to besignificant in whatever strategy they use,”he added.

Being a baby boomer herself, Schilgagreed that the current generation of peopleheading into retirement would be muchmore willing to let go of the equity in theirhome.

“Our children have been on a superan-nuation guarantee since they started work,so they don’t need that inheritance and theexpectation is not there,” she added.

Chief executive officer of the FinancialPlanning Association, Mark Rantall,commented that financial planners havebeen making a wide loop around equityrelease products because of their unpre-dictability.

However, with the right protection mech-anisms in place and proper governmentregulation, Rantall said these products havea good chance of attracting adviser interest.

Government regulation andendorsement The better Australians are able to fundtheir own retirement the less reliant theyare on the Government, which presents ahuge factor considering that babyboomers will massively pullout from theworkforce over the next two decades.Although reverse mortgage providers werealready subject to many government-proposed changes as part of beingmembers of SEQUAL, the Governmentappears to be determined in increasingclient confidence in reverse mortgages byembedding these requirements into law.

The Government released its draftamendments to the National ConsumerCredit Protection Act 2009 last month,which would see the introduction of a statu-tory no negative equity guarantee forclients, allowing them to draw down on theequity in their home without having torepay more than their home is worth. Otherchanges include better disclosure of finan-cial consequences of entering into a reversemortgage, as well as the introduction ofcertain ethical requirements on lenders. TheGovernment was, however, encouraged toendorse reverse mortgages during theconsultation process, when the Productiv-ity Commission released its inquiry reportrecommending the Government establishan Australian Aged Care Home CreditScheme “to assist older Australians to makea co-contribution to the costs of their agedcare and support”.

While acknowledging the complexity ofequity release products and the consumernervousness around them, the Commis-sion’s report stated “a public scheme couldplay an important role in inspiring confi-dence in equity release products and stim-ulating market development, although itcould also crowd out the further develop-ment of private schemes”.

Ageing population to boost the sector“It is very important to note that the first ofthe baby boomers have moved into retire-ment at age 65 this year,” Conlon said.


Reverse Mortgages

Continued on page 18

Benefits ofreversemortgages

Associated risks

Obstacles totake up

Figure 2: Consumers

• Ability to release equity while remaining in the family home.• Top up to current income stream to enable reasonable standard of living.• Access to funds for basic home maintenance and/or to adapt home to meet needs of ageing in the

home.• Flexibility in use of funds for one-off needs such as holidays and large items (eg, white goods and

vehicles).• Enables gifting to children in the present rather than on inheritance.• non-negative equity guarantee.

• Compounded long term interest.• Interest rates above market levels.• Unplanned longevity.• Lack of expertise of many legal and financial service providers.• Break fees for premature finalisation.• Falling housing prices.• Any negative future tax rulings regarding means testing for the aged pension and for home care assessment.

• Lack of expertise and understanding of many legal and financial service providers.• Lack of access by certain sub populations (exclusion clauses).• Inability to borrow against retirement village units.• The requirement of ongoing regular fees in addition to compound interest in a number of products

available in the market.• Lack of usage of reverse mortgage calculators by many brokers or lenders.• Lack of information regarding the range of products available.• Minimum age applied to youngest borrower for access to reverse mortgages.

Providers• Fills a gap in the market.• Increasing the range of products

available to clients.• The market’s growth potential as the

population ages.

• Falling valuations resulting inreaching negative equity levelsearlier than anticipated.

• Any negative future tax rulingsregarding means testing for theaged pension and for home careassessment.

• Complexity of product andconsequent requirement and costsof high levels of documentationrequired.

• Current commission levels.• Exclusion clauses.• Low community awareness of

product.

Source: Australian Housing and Urban Research Institute


According to a research reportconducted by the AustralianHousing and Urban ResearchInstitute (AHURI), 81.2 per centof people over 60 were homeowners in 2006. AHURI’s report“Reverse Mortgages and olderpeople: growth factors and impli-cations for retirement decisions”noted the market for reversemortgage borrowers is the popu-lation of home owners aged 60years and over, who tend to be

“well informed and proactive inmanaging their own affairs”.

For those who had alreadytaken out a reverse mortgage, thedecision was made based on theability to manage cash flow, theflexibility on uses for the fundsand the ‘no negative equity’ guar-antee, which will soon become astatutory requirement.

More importantly, the factorthat most influenced their deci-sion was helpfulness of the brokeror lender, according to the report,which is where Conlon believes

financial planners could find theirvalue proposition.

“The big story is not only thedemographic shift, but the shiftin attitude as to how the familyhome will be viewed: as storageof wealth rather than with thesentimentality that has alwaysbeen attached to it,” Conlon said.

Numerous research papershave shown that the majority ofAustralian retirees will not have adequate superannuationbalances to fund their retirement.Unless they took a proactive

approach to boost theirsavings, most would bedependant on the Govern-ment’s age pension withinyears. Rantall believes thedemands of the ageingpopulation would helpboost the take-up ofreverse mortgages, giventhe right consumerprotections were in place.

“With the ageing popu-lation, with propertyprices where they are, andwhere you’ve got retireeswanting to stay in theirhome rather than move toa smaller dwelling, reversemortgages could well bean appropriate source oflifestyle funding – with theright protection mecha-nisms in place,” he said.

From a financialplanner point of view,Rantall said consumerprotection is the mainconsideration.

OutlookAlthough there are very fewpredictions that reversemortgages will take off inthe short term, industrycommentators claim thedemands of baby boomerswith insufficient superan-nuation balances willprovide the necessary boostover the next two decades.

The AHURI reportconcluded that the demandfor reverse mortgage prod-ucts is expected to risesignificantly over the next25 years.

“As people are livinglonger, home owners maybe willing to trade offhousing equity for a level offinancial security in retire-ment,” the report said.

However, Schilg said it isimportant to consider theeconomic outlook, too.

“With the economy theway it is at the moment, it istoo difficult to guess; but 12months ago we were sayingthat the boost might bewithin the next five years –this might be accurate, butit could also take longer,”Schilg added.

Moffatt from Seniors Firstblamed the stagnantmarket on provider lethargy.

“It is interesting thatSEQUAL’s numbers on thetransactional volume havegone back to the same levelof the previous peak, yetthere is no marketing oradvertising,” he said.

“The natural demand iscoming through, and theGovernment is sending amessage that this is some-thing you should endorse,but if banks were advertising– it would explode.” MM

Reverse Mortgages

Continued from page 17

Mark Rantall


Home equity release products(the most popular of which isthe reverse mortgage) havebeen around for many years,

going back at least to the days of theAdvance Building Society. However, it isonly in the last six or seven years thatsenior Australians have embraced them.

Family home becomes an assetThis change has seen seniors – with thegeneral support of their families – recog-nise the home as an asset which they havethe right to access for their needs in senioryears. It saw them overcome the long heldAustralian philosophy that the familyhome should be bequeathed to the family,regardless of the size of the dwelling. Withthe support of the family, home equityrelease is now recognised as an entitle-ment and certainly should not be seen asa failure to provide.

As a result of this thinking there are nowjust over 41,000 reverse mortgages operat-ing in Australia (there are other homeequity release products such as sharedequity in addition to these) representing aloan book of $3 billion with an averageloan of $72,500.

This book of business has been gener-ated almost exclusively through the directsales channels of product providers (55per cent) and intermediaries (45 per cent).The intermediary channel is almost exclu-sively represented by mortgage brokerswith almost none coming from the finan-cial planning industry.

Some sources suggest that financialplanners are not interested in this productbecause of the low commission rewards,especially where in most cases there is notrail commission. Intensive labour is alsorequired to complete a sale - most mort-gages are processed within three or fourdiscussions with the borrowers and some-times their families.

It is distressing that planners have notbeen more active in this area of retirementplanning and to some degree ignore thesocial responsibility that exists to theseniors of our society. It is somewhatunderstandable that there hasn’t been anygreat engagement with the existing reversemortgage borrowers given that the averageage of current borrowers is 74 years, mostof whom haven’t had any exposure to aplanner.

Shift in demographicsThis situation will change as the incom-ing seniors will be mostly the babyboomers, who almost certainly will haveengaged with a planner during theirworking life and will see the home from adifferent perspective to their parents. Theywill see it as an asset to maintain theirlifestyle desires and requirements. There-fore, home equity release could wellbecome the fourth pillar of retirement and

financial planning. This will surely causeplanners to engage with their clients todetermine when to use the equity in theirhomes as part of their financial plan. Insome cases it can be desirable to accessequity in the home before accessingsuperannuation or other investments. Thisis where planners can add value by provid-ing the correct strategy, including provid-ing affordable financial advice, to achievethe best result for consumers and protectentitlements to appropriate governmentbenefits. This often involves engagementwith families, so it provides opportunitiesnot only to continue to serve existingclients, but possibly develop practicesthrough engagement with familymembers.

Things to considerReverse mortgages (as well as all homeequity release products) have been usedfor a wide range of purposes and whilst

the use of the money is the exclusive rightof the borrowers, we have found thatalmost all borrowers take just the amountthey need and the three top uses are for:

• Regular income to supplement exist-ing income

• Home improvement in order to allowaccess to government home care services,allowing them to stay in their home, and

• Repayment of debt, mostly credit carddebt.

Reverse Mortgages provide a numberof benefits and protections for customers:

1. There is no need for regular repay-ments of principal or interest.

2. Guarantee to live in the home for aslong as the borrowers wish.

3. A no negative equity guarantee whichensures that borrowers, or their estate, arenever required to repay more than the netsale proceeds of the security when it is sold.

Similarly there are protective require-ments to be observed prior to the

completion of the mortgage:• Mandatory independent legal advice

on the mortgage contract• Strong recommendation to engage

with the family• Check Centrelink requirementsIt is here that financial planners can

play an important role by making finan-cial advice more accessible and affordable.Presently, the cost of financial advice canbe prohibitive, especially for those whoare taking a reverse mortgage to delivertheir life’s needs.

So while the planning industry has notbeen to the forefront in using home equityrelease as a retirement and financial plan-ning tool, there is a growing need. Theopportunity exists for financial plannersto engage in the sector now to the benefitof both consumer and adviser.

John Thomas is the chairman of the SeniorAustralians Equity Release Association.

Home is where the equity isLack of planner interest in reverse mortgages presents one of the major challenges for theequity release sector. John Thomas lists some of the things to consider when recommendinga reverse mortgage to a client.

Reverse Mortgages

Are you one of the many finan-cial planners whose clientsare seeking safer asset classesto protect their wealth? Are

you unsure of the options? Bonds couldprovide the solution. They are a saferasset class than shares as the invest-ments sit higher in a corporate or bankcapital structure (see Figure 1 below),they pay a known return, and in mostcases capital is repaid at maturity.

Figure 2 shows the performance ofCommonwealth Bank secur it iesthroughout the global financial crisis.Equities or shares were clearly the mostvolatile, hybrids a little less so, andbonds (in this case subordinated debt)

sitting higher in the capital structureperformed most consistently, protect-ing investors’ hard-earned capital.

Global volatility is set to continue. Inparticular, US debt, possible (in myopinion, probable) debt default by EUcountries, economies recovering orexperiencing natural disasters ( Japan,New Zealand, Australia, Somalia), andan Australian carbon tax all make for aperiod – perhaps extending to years –of share market volatility. What assetsdo your clients hold that will protecttheir wealth? Does their asset alloca-tion match their age profile?

Older clients – especially those nolonger earning an income – have little

or no capacity to recover lost capital.To ensure they have enough capital tolive well for the remainder of their years(with some left over to provide aninheritance) you’ll need to allocate thefunds to relatively safe asset classes.One rule of thumb we use is that themaximum equity holding an investorshould have is 100 minus their age. Soa 70 year old investor would have amaximum allocation to equities of 30per cent.

Many Australians are great fans ofshares, and with good reason. Resourcestocks have performed well, but consid-er what percentage they make up inyour clients’ share portfolios and total

portfolios. BHP Billiton – the largestcompany on the Austral ian StockExchange, worth approximately $238billion – is rated by Standard and Poor’s(or equivalent) as ‘A+’; four notcheslower than the highest ‘AAA’ rating (onlyattr ibuted to the CommonwealthGovernment in Australia). That meansits debt is considered to have a lowprobability of default. BHP’s shares –which are lower in the company’scapital structure – are higher risk. Part ofthe reason BHP’s debt is only rated ‘A+’is that the company largely trades incommodities. Commodities are cycli-cal, so we know that their prices will goup and down, and will impact earnings.


OpinionBonds

Bondhavens

Many clients are currently seeking safer asset classes to protect their wealth from further marketdownturns. Tamara Radice examines ways in which bond portfolios can deliver high returns.

Capital Structure – Corporate

Senior Secured Debtlowest risk

highest risk

Prio

rity

of p

aym

ent i

n liq

uida

tion

Ap

plic

atio

n of

loss

esSenior Debt

Subordinated Debt

Hybrids

Equity

Source: FIIG Securities

Figure 1: Capital Structure – Corporate

$140

$120

$100

$80

$60

$40

$20

$0

CBA Sub debt FRN 28/9/16 CBA Perls III CBA Equity

31-Dec-0

7

31-Mar-0

8

30-Jun-0

8

30-Sep-0

8

31-Dec-0

8

31-Mar-0

9

30-Jun-0

9

30-Sep-0

9

31-Dec-0

9

31-Mar-1

0

30-Jun-1

0

30-Sep-1

0

31-Dec-1

0

31-Mar-1

1

30-Jun-1

1


Figure 2: CBA share price 31 December 2007 to 30 June 2011

Consider if your clients hold a largeproportion of their wealth in a resourcecompany that only produces one commod-ity – it is going to be considered very highrisk. Is the asset still appropriate?

So how do you diversify and protectyour clients’ wealth?

Bonds – and if your clients already holdsome, maybe more bonds. Global uncer-tainty will still impact debt markets, but toa lesser extent. In the majority of cases,investors know they will receive theircapital back on a known date. To demon-strate current opportunities, we have puttogether a portfolio including householdnames such as National Australia Bankand AXA that can achieve a 10 per centreturn while providing a weighted averagerating of ‘A+’ (the same risk attributed toBHP Billiton debt). In rating agency terms,that represents just a 0.61 per cent chanceof default over a five year time horizon.

However, before we move on, it is

important to point out the shortcomings:1. This portfolio is only available to

sophisticated investors, as a number ofthe bonds can only be sold in minimumface value parcels of $500,000. In fact, thetotal funds needed to replicate the port-folio are $1.75 million – not exactly smallchange. However, a similar portfoliobased on an investment of $350,000(available to all investors) still returns over8.6 per cent, and could be structured bysubstituting a few names – albeit, with aslightly lower weighted average rating of‘A’ (see below).

2. Diversity is only moderate, havingjust four bonds – two of which are insur-ers – plus a small allocation to a Rabobank‘At Call’ account. Also, three of the fourbonds are Tier 1 hybrid securities. Typi-cally, we would recommend a more diver-sified portfolio with at least five bondsfrom a mix of industries.

3. The portfolio is better suited to hold

to maturity investors as Tier 1 securitiescould see some liquidity issues if themarket is stressed at a time when thesesecurities need to be sold quickly.

Finally, it is important to point out thatthree of the securities are Tier 1 callablesecurities, and the expected yield isbased on the assumption all are calledat first opportunity (which we do expectto occur). If not called, these securitiesare technically perpetual. The currentmarket yield/swap curve and inflationexpectations are also used to estimatethe yield to (expected) maturity for thefloating rate and inflation linked bondsin the portfolio.

Despite the abovementioned short-comings, the ability to achieve close to a10 per cent expected return from a highquality portfolio is worthy of assessment.

The National Capital Instruments is onlyavailable in minimum parcels of $500,000face value. However, by replacing it with

National Wealth subordinated debt (awholly owned subsidiary of NAB), a similarportfolio with a return of 8.69 per cent anda weighted average rating of ‘A’ can beachieved (‘A’ represents a 0.64 per centprobability of default over five years). Totaloutlay for this portfolio is $350,000.

In conclusion, it’s worth taking the timeto assess the risks within your clients’portfolios. Is their asset allocation diver-sified enough to withstand an extendedperiod of share market volatility? Does itsuit their age profile and capital preser-vation goals? (Particularly relevant forthose in retirement and pay-down phase.)Bond portfolios can offer high, knownreturns that are close to equity returns,yet are significantly lower risk and gener-ally less volatile in uncertain markets.

Tamara Radice is the director forinstitutional investment and plannerservices at FIIG.


Issuer Maturity/ Issue Trading Coupon % EXP Capital YTM Running Capital Face Capital Accrued TotalCall Date Margin Margin Type Structure Yield Price Value Value Interest Value

National Capital Instruments 30/09/2016 0.95% 3.63% Floating 25.59% T1 Capital 8.89% 6.72% 89.00 $500,000 $445,000 $2,785 $447,785

Elm Bv (Swiss Re) 25/05/2017 1.17% 6.54% Floating 22.63% T1 Capital 12.10% 8.14% 78.00 $500,000 $390,000 $6,090 $396,090

AXA SA 26/10/2016 1.40% 6.14% Floating 23.33% T1 Capital 11.43% 7.84% 81.50 $500,000 $407,500 $700 $408,200

Envestra Ltd 20/08/2025 3.04% 0.08% ILB 25.06% Senior Debt 8.73% 4.10% 87.08 $587,400 $435,400 $3,100 $438,500

RaboDirect At-Call Account 30/07/2011 6.50% 1.75% Fixed 3.40% Cash 6.50% 6.50% 100.00 $59,425 $59,425 $59,425

$2,146,825 $1,737,325 $12,675 $1,750,000

Figure 3: Bond Portfolio Friday, 29 July 2011

Portfolio Exposure StatisticsWeighted Average Yield to Maturity 10.09%Weighted Average Running Yield 6.64%Weighted Average Term to Maturity 7.39%Weighted Average Trading Margin 3.92%Weighted Average Rating A+

Capital Structure ExposureCash/TD 3.40%Senior Debt 25.06%LT2 Sub Debt 0.00%T1 Capital 71.55%

Issuer Maturity/ Issue Trading Coupon % EXP Capital YTM Running Capital Face Capital Accrued TotalCall Date Margin Margin Type Structure Yield Price Value Value Interest Value

AXA SA 26/10/2016 1.40% 5.71% Floating 23.75% T1 Capital 11.00% 7.70% 83.00 $100,000 $83,000 $140 $83,140

National Wealth 16/06/2016 0.63% 2.10% Floating 20.30% LT2 Sub Debt 7.28% 5.96% 94.00 $75,000 $70,500 $553 $71,053Management Holdings Ltd

Southern Cross Airports 20/11/2020 3.76% -0.08% ILB 22.99% Senior Debt 8.40% 4.27% 106.50 $90,735 $79,875 $575 $80,450Corporation Pty Ltd

Envestra Ltd 20/08/2025 3.04% -0.12% ILB 25.61% Senior Debt 8.53% 4.01% 89.00 $117,480 $89,000 $620 $89,620

RaboDirect At-Call Account 30/07/2011 6.50% 1.75% Fixed 7.35% Cash 6.50% 6.50% 100.00 $25,738 $25,738 $25,738

$408,953 $348,113 $1,887 $350,000

Figure 4: Bond Portfolio Friday, 29 July 2011

Portfolio Exposure Statistics

Weighted Average Yield to Maturity 8.69%

Weighted Average Running Yield 5.53%

Weighted Average Term to Maturity 7.98%

Weighted Average Trading Margin 1.86%

Weighted Average Rating A

Capital Structure Exposure

Cash/TD 7.35%

Senior Debt 48.59%

LT2 Sub Debt 20.30%

T1 Capital 23.75%



The financial headlines haverecently been dominated byshare market volatility and theimpact this has had on invest-

ment portfolios. However, when talkingto clients about how they may respond tomarket downturns, it is also important toconsider the technical issues and howthey interact with the asset allocation andinvestment selection decisions. Volatiletimes can create some strategic traps andopportunities, especially for retirees andsuper fund members.

Strategies for pension investorsPension investors are usually the hardesthit by market downturns. It is thereforeessential to assess whether their portfoliosare well positioned to meet their incomeand other liquidity needs while minimis-ing (where possible) the need to redeemgrowth assets at lower prices.

The amount and frequency of incomepayments drawn by account basedpensioners should also be revisited. Forexample, they may want to reduce theirincome payments if they are currentlydrawing more than the minimum. Alter-natively, if they are already receiving theminimum, they could:

• Spend less than this and ‘save’ the rest(in a managed fund, for example); and/or

• Change the payment frequency from,for example, monthly to annually at the endof the financial year.

Those who have other money to meettheir income needs could even switch offthe income payments completely bycommuting and rolling the money back intothe accumulation phase of super.

Each of these strategies could ensure moreof their money is invested in the market sothey can benefit from any future upside.

There are some implications to commut-ing a pension.

Before clients commute a pension,there are a range of factors that need tobe considered.

For example, where a pension is

commuted back to the accumulationphase:

• Investment earnings will be taxed at upto 15 per cent, not tax-free;

• The commutation will trigger a calcu-lation of the tax-free amount under thecurrent rules for account based pension-ers under the age of 60 who commencedtheir pension prior to 1 July 2007;

• If the pension was commenced orcontinued due to death, it will lose its deathbenefit status upon commutation and therecipient will no longer be eligible for a 15per cent tax offset if they use the money torecommence a pension under age 55;

• Superannuation pensions are general-ly treated more favourably under theincome test when compared to the deemingrates that would apply when money is heldin the accumulation phase of super; and

• A lower social security deductionamount could arise if and when a pensionis recommenced, but this will depend onwhether the account balance goes up ordown, and the amount of time that elapses.

Furthermore, where a pension is fullycommuted to cash:

• A recent draft Australian Taxation Officeruling has indicated there may be capitalgains tax (CGT) implications;

• Investment earnings will be taxable atmarginal rates, not tax-free; and

• It may not be possible to get all themoney back into the concessionally taxedsuper system due to the contribution capsand possibly the work test (when over theage of 65).

Other social security implicationsAnother issue to consider is, while Centre-link will usually review age pensioners’investments twice a year, they can approachCentrelink at any time and request areassessment based on their latest invest-ment values. By doing this, some agepensioners may find they are now eligiblefor higher payments due to their reducedaccount balance. Retirees who previouslywere not eligible may now qualify for a part

pension due to the reduction in the valueof their assets and income.

SMSFs and investment strategychangesIf self-managed super fund (SMSF)trustees want to change the investmentsin the fund, they will need to:

• Ensure the changes are consistent withthe investment strategy;

• Update the investment strategy, ifrequired; and

• Ensure complete records are retained tocorrectly calculate any capital gains or losses.

Implications of rolling over superIf super fund members are thinking aboutrolling over their benefit to another fund,the tax-free and taxable components willbe recalculated at that time. This couldbe undesirable if the tax-free componentdeclines and:

• The member intends to start a pensioninvestment before the age of 60; and/or

• The benefit is passed to financially

independent adult children in the event ofthe member’s death.

Other issues to consider are:• The CGT implications when invest-

ments are sold prior to transferring the benefit;

• Whether any insurance cover will begiven up;

• If any exit fees are payable;• If binding death benefit nominations

are offered by the new fund; and• The administrative procedures and

potential time lags that could apply whilethe transaction is being processed.

Implications when cashing out superThere is the risk that super fund memberswith unrestricted non-preserved benefitsin the accumulation phase could decideto pull their money out of the supersystem if not sufficiently informed of thepotentially adverse tax and social securi-ty consequences.

For example, if super money is redeemedand invested outside super:

• CGT will potentially be payable in thefund after the disposal of assets;

• Investment earnings will be taxable atmarginal rates, not a maximum rate of 15per cent;

• The money will be assessed under thesocial security income and assets test(whereas it is exempt if held in the accu-mulation phase of super and the person isunder the age of age pension); and

• As discussed in the pensions section,it may not be possible to get all the moneyback into the concessionally taxed super system.

The bottom lineWhen markets take a dive and investorsreassess what they are doing with theirmoney, it is important to consider boththe technical and investment implica-tions, and how they interact.

Richard Edwards is technical writer atMLC Technical Services.


OpinionMarkets

Richard Edwards outlinessome of the technical issuesfinancial advisers need toconsider when talking to theirclients about possibleresponses to market declines.

“... super fund memberswith unrestricted non-preserved benefits in theaccumulation phase coulddecide to pull their moneyout of the super system ifnot sufficiently informed ofthe potentially adverse taxand social securityimplications.”- Richard Edwards

In February this year the Governmentreleased a consultation paper in rela-tion to the proposal to retain the$50,000 concessional contributions

cap for people aged 50 or over with superbalances under $500,000. While the deci-sion to retain the higher cap to allowpeople to make catch-up contributionscloser to retirement should be supported,the idea of imposing eligibility criteria todetermine who will qualify for the highercap needs further consideration as it willincrease super fund costs and increase thecomplexity of the super system formembers.

Outline of the proposalsThe consultation paper outlines the keyelements of the proposal, which aresummarised as follows:

• From 1 July 2012 a higher cap of$25,000 over and above the current conces-sional cap of $25,000 will apply for peopleover the age of 50 with a total super balanceof under $500,000.

• The $500,000 threshold will not beindexed.

• All of a member’s superannuation enti-tlements (which will presumably includepension interests) will count towards the$500,000 threshold, including superannu-ation interests held in accumulation funds,defined benefit funds and untaxed andconstitutionally protected funds andschemes.

• The calculation of a member’s accountbalance will be based on their withdrawalbenefit or on the method used to deter-mine the value of their super interestsunder the family law regulations.

• The value of a member’s superannua-tion interest will be measured at one of thefollowing dates:

– 30 June in the financial yearpreceding the year in which contributionsare to be made, or

– 30 June two years prior to the endof the financial year in which the contri-butions are to be made.

• The process for assessing eligibility willbe based on either a self-assessment modelor the Australian Taxation Office (ATO) willbe required to provide a super accountbalance reporting facility which memberscould rely on to determine their eligibilityto the higher cap.

One of the major concerns around theseproposals is that by introducing a $500,000threshold, the proposal will result inincreased complexity and cost for superfunds due to the increased reportingrequirements involved. It is incongruousfor this proposal to be announced so soonafter the release of the final report of theCooper review, which sought to reduce thecomplexity and cost of the superannua-tion system.

The proposal not to index the $500,000threshold will also make the higher capharder to qualify for over time in real terms.As a result, this could lead to an increase inthe number of people exceeding theirconcessional cap and having to pay excesscontributions tax in the future. The propos-al to assess the member’s entire superan-nuation entitlements, including amountsderived from non-concessional contribu-tions, also discriminates against thosemembers who have made personal contri-butions from after tax dollars.

The introduction of a $500,000 thresholdmay also lead people to assume that$500,000 is an adequate retirementbalance for their individual situation. Itcould also lead to people not making addi-tional non-concessional contributions inthe lead up to retirement due to fears theymay impact their ability to access thehigher concessional cap.

Eligibility criteria for people who havealready started drawing downThe consultation paper outlines threedifferent options for how the rules wouldpotentially apply where a person hasalready commenced drawing down theirsuper. These options are summarised asfollows:

Option oneThis option involves adding the indexedvalue of any benefits previously withdrawnfrom a fund (excluding rollovers andamounts withdrawn on hardship grounds)back in to the member’s account balancewhen assessing their balance against the$500,000 threshold.

While the intent of this measure is toensure the $500,000 is not circumvent-ed by people withdrawing benefitswhere possible, it involves the re-intro-duction of a quasi-reasonable benefitlimit system as it would require funds toreport al l withdrawals, includingpension payments, and for the ATO tomaintain records for each member forlife. This option would impose addition-al costs on funds and would increase thecost of financial advice as adviserswould potentially need to do addition-al work to identify and verify all with-drawals and to calculate the member’snotional account balance to determinetheir eligibility to the higher cap.

In addition, it could also underminelegitimate strategies, such as a re-contri-bution strategy to maximise a client’s tax-free component for estate planningpurposes, as it would result in the doublecounting of amounts withdrawn and thenre-contributed back into the fund.

For example, if a 60-year-old memberwith $350,000 in super withdrew the wholeamount and re-contributed it as a non-concessional contribution, their accountbalance for the purposes of assessing eligi-bility to the higher cap would be calculat-ed as $700,000 – being their actual accountbalance of $350,000 plus their withdrawalof $350,000.

Option twoThis option involves ignoring any previ-ous withdrawals when calculating themember’s account balance to determinetheir eligibility to the higher cap.

While this option lacks the cost andcomplexity of option one, it would allow

people who had unrestricted non-preserved benefits to withdraw thoseamounts in order to qualify for the highercap each year. This would obviously under-mine the integrity of the higher cap as wellas the super system in general.

Option threeThis option simply involves excludingthose people who have already starteddrawing down their super from being eligi-ble to the higher cap. For example,someone who had commenced drawing atransition to retirement pension at age 55would be ineligible to qualify for the highercap, regardless of the fact that their superaccount balance did not exceed $500,000.

This option could significantly disad-vantage those members who had previ-ously withdrawn any benefits from superand impact their ability to fund anadequate retirement.

Potential alternativesIn June the Financial Services Council, theSelf Managed Superannuation FundProfessionals Association and the Associ-ation of Superannuation Funds of Australiacalled for the higher concessional contri-butions cap to be set at $35,000 instead of$50,000, but to remove the $500,000threshold and make it a universal cap foreveryone over age 50.

While this measure would reduce theamount of concessional contributions amember could make after age 50, it wouldavoid all of the additional cost andcomplexities associated with the $500,000threshold, and would remove an addition-al layer of uncertainty for members whoare just seeking to save enough for theirretirement.

Alternatively, if the $500,000 thresholdmust remain it should be indexed andnon-concessional contributions should beexcluded from the calculation.

Craig Day is the senior manager technicalservices at Colonial First State.

OpinionSuperannuation


Which cap fits best?The Government has proposed retaining higher concessional contributions caps forthose aged 50 or over, however Craig Day argues imposing eligibility criteria needsfurther consideration.


Portfolio ConstructionConference attendees enjoy successful dayMoney Management caught up withPortfolio Construction Forum Conferenceattendees as they relaxed at the end of a daythat featured presentations on global macroeconomic risks and opportunities.

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John Nicoll from Zenith Investment Partners, Charles Levinge from Franklin Templeton, and David Wrigth Zenith Investment Partners.

Garry Kinnaird from Advice First, Krystyna Weston from PortfolioConstruction, andDennis Perry from Advice First.

Fil Andronaco from van Eyk Research, and Jack Kewalram from T. Rowe PriceMark Oliver, John Jardin, Tom Keenan, and Delbert Stafford from iShares.Money Management’s Rating House of the Year: Lonsec represented by John

Ryan, Eleanor Menniti, Jeremy Pree, and Amanda Gillespie.Winners of the BlackRock / PortfolioConstruction Forum CIMA Scholarships: Jeff

Poe from AMP Financial Planning (Research), Ben Williams from BlackRock, TheoHatsis from Colonial First State Advice, and Zaffar Subedar from BlackRock.

Graham Rich from brillient! and Michael Kitces from Pinnacle Advisory Group.Michael Winchester, Stephen Barbarich, and Dominic McCormick from Select

Asset ManagementCraig Muchamore from Wealth Logic, and Scott Bennett from Russell Investments.

Steve Melling from Paul Melling & Associates, Andrew Seddon from Colonial FirstState, Corin Jacka from Financial Foundations, Tyrone Cockle from Financial Foundations, and Patrick Malcolm from Gillham Financial Management.

Bronny Speed from AdviceIQ Partners and Mike Taylor from


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Forum Conference

Recent rule changesThe laws applying to limited recourseborrowing arrangements were altered, witheffect from 7 July 2010. Specifically, sections67A and 67B of the Superannuation Indus-try Supervision Act 1993 tightened therequirements for arrangements existingsince 24 September 2007. Notably, theborrowed monies:

• Must be used to acquire a single asset,or a collection of identical assets that havethe same market value (that are togethertreated as a single asset);

• May be applied to expenses incurredin connection with the borrowing oracquisition (such as loan establishmentcosts or stamp duty), or expenses incurredin maintaining or repairing the acquirableasset; and

• Must not be applied to improving anacquirable asset.

The acquirable asset can be replaced byanother acquirable asset in very limitedcircumstances. The Explanatory Memoran-dum for the amended rules gave anexample of circumstances not permitting areplacement asset, which included areplacement by way of improvement to realproperty.

Implication of improvementsWhen a property is acquired using alimited recourse borrowing arrangement,it is possible that repairs and mainte-nance could be considered an improve-ment to the asset. This is a very impor-tant distinction as improvements canchange the state or nature of the asset tosuch an extent that it may be considereda different asset to the single acquirableasset, subject to the borrowing arrange-ment. Because the rights of the lender arelimited to the rights relating to the singleacquirable asset (or a replacement inlimited instances) no money can be usedto improve the asset if it results in a differ-ent one.

Key terminologyThe only guidance we have to help usdefine what is a repair and an improvementis Tax Ruling TR 97/23. However, this rulingwas written to explain the circumstancesin which expenditure incurred for repairs isan allowable deduction and doesn’t consid-er the implications for limited recourseborrowing arrangements.

TR 97/23 provides that expenditure forrepairs to property is of a capital naturewhere:

• The extent of the work carried outrepresents a renewal or reconstruction ofthe entirety, or

• The works result in a greater efficien-cy of function in the property, thereforerepresenting an ‘improvement’ ratherthan a ‘repair’.

RepairsThe word ‘repair’ ordinarily means theremedying or making good of defects,damage or deterioration of property. Itcontemplates the continued existence ofthe property and, for the most part, is occa-sional and partial. If a repair occurs toprevent or anticipate further defects,damage or deterioration, it is only a repairif it is done in conjunction with remedyingor making good the defects, damage ordeterioration. A repair merely replaces apart of something or corrects somethingthat is already there and has become wornout or dilapidated. It involves restorationof the efficiency of function without chang-ing the property’s character, and mayinclude restoration to its former appear-ance, form, state or condition.

Works can fairly be described as repairsif they are done to make good damage ordeterioration that has occurred by ordinarywear and tear, accidental or deliberatedamage, or the operation of natural causesduring the passage of time. A repair some-times improves, to some extent, the condi-tion the property was in immediatelybefore the repair. However, a minor andincidental degree of improvement, addi-tion, or alteration may be done to a prop-erty and still be considered a repair.

MaintenanceWork done partly to remedy or make gooddefects, damage or deterioration, does notcease to be a repair if it is also done partly(even largely) to prevent or anticipate themin their very early stages. Repairs are notconfined to situations where the defect,damage or deterioration has alreadybecome serious.

Some kinds of maintenance work areconsidered repairs, such as painting a plantor business premises to rectify existingdeterioration and prevent further deterio-ration. However, other kinds of mainte-nance work, such as oiling, brushing orcleaning something that is otherwise ingood working condition and only requiresattention to prevent the possibility of itgoing wrong in the future aren’t considered‘repairs’.

ImprovementsWhile a repair restores the efficiency offunction of the property without chang-ing its character, an ‘improvement’provides a greater efficiency of functionin the property – usually in some exist-ing function. To distinguish between arepair and improvement to property,you therefore need to consider the effectthe work has on its efficiency of func-tion. This is the determinative test.

An improvement involves bringing athing or structure into a more valuableor desirable form, state or conditionthan a mere repair would do. Somefactors that point to an improvementinclude whether the work will extend theproperty’s income producing ability,significantly enhance its saleability ormarket value, or extend the property’sexpected life. Use of different materialsis not a determinative test, but replace-ment or substantial reconstruction ofthe entirety — as distinct from thesubsidiary parts of the whole — is animprovement.

Using other SMSF fundsJust as a SMSF trustee cannot put an exist-ing fund asset into a limited recourseborrowing arrangement, they cannot useother SMSF funds to pay for improvements.Regardless of the source of money, anycapital improvements would breach thereplacement asset rules in section 67B.However, funds in a cash account that arenot part of the acquirable asset can be heldby the trustee of the holding trust to payexpenses such as repairs.

The law clearly states you cannot useborrowed monies to make improvementsto a property, but you can use borrowedmonies to maintain or repair the asset tomaintain its functional value. Consequent-ly, if a prospective property requires reno-vations or improvements, considerationshould be given to negotiating with theseller to do this prior to entering the limitedrecourse borrowing arrangement.

Martin Breckon is a senior technicalconsultant at MLC Technical Services.


Repaired or improved?

Toolbox

Martin Breckon explains when repairs to property acquired in aSMSF using a limited recourse borrowing arrangement could beconsidered improvements, and the implications this could have.

BriefsMPG Funds Management Limited (MPG)has launched its $5.5 million HardwareTrust, offering investors the opportunity toacquire an interest in a soon to be com-pleted hardware warehouse develop-ment.

The 1709 square metre propertylocated in Wonthaggi, Victoria, is currentlyunder construction and due for comple-tion in 2012. It has a nine year agree-ment to lease with Australian homeimprovement retailer Bunnings GroupLimited, a subsidiary of Wesfarmers Ltd.

MPG is seeking to raise a minimum of$2.43 million from investors, with the prop-erty valued at $5.4 million upon comple-tion. The single asset Trust will be close-ended, with an anticipated term of sevenyears. The Trust has an initial forecast cashyield of 7.5 per cent per annum, which willbe approximately 79 per cent tax deferredincome. Distributions will be paid quar-terly.

GLOBAL hedge fund investment firmFinancial Risk Management (FRM) hasintroduced weekly liquidity for its FRMSigma Fund. The Fund provides exposureto commodity trading advisers, trading alonger term systematic strategy in man-aged futures.

Richard Keary, FRM Australia Manag-ing Director, said the enhanced liquidity ofFRM Sigma reinforced its suitability forAustralian investors seeking the diversifi-cation benefits of alternative assets with-out compromising on liquidity, simplicitytransparency, and value for money.

ADVANCE Asset Management haslaunched three new sector multi-blendfunds – the Advance Alternative Strate-gies Multi-Blend Fund, Advance AsianShares Multi-Blend Fund, and AdvanceCash Multi-Blend Fund.

Head of Advance investment solutions,Patrick Farrell, said the new funds reflectthe firm’s multi-manager focus.

To gain additional knowledge in thegrowth alternative strategies sector,Advance has partnered with RamiusAlternative Solutions LLC to co-managethe Alternative Strategies Multi-BlendFund.

The firm’s existing Advance AsianEquity Fund will become the AdvanceAsian Shares Multi-Blend Fund to takeadvantage of the firm’s multi-blend fundinvestment process. All existing investorsin the Advance Asian Equity Fund willautomatically be invested into the newstructure. The fund will use two Asian-based investment managers – TT Inter-national and Wellington.

Advance is also changing the struc-ture of the Advance Cash ManagementFund, which will become the AdvanceCash Multi-Blend Fund. Two cashinvestment managers – BT InvestmentManagement Limited and IMS FundsManagement Limited – will managethe fund.

Appointments


Please send your appointments to: [email protected]

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

FINANCIAL PLANNERSLocation: PerthCompany: ANZDescription: ANZ Financial Planning isseeking planners to fill a number ofpositions in Perth. Reporting to a practicemanager, you will be responsible for theprovision of comprehensive financialplanning services and advice.

Specifically, you will assist clients toplan for their financial goals by providingstrategies, access to a diversified productrange and ongoing services. You will alsoidentify and analyse businessopportunities, network and build internaland external relationships to promoteservices. In return, ANZ offers managementsupport, an enviable brand andoutstanding financial rewards.

You must have an extensive knowledgeof the financial planning industry and beprogressing towards your CFP qualification.

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

ASSOCIATE ADVISER/SENIOR PARAPLANNERLocation: MelbourneCompany: FS Recruitment SolutionsDescription: This high net worth financial

planning business is now seeking anexperienced senior paraplanner. Anincrease in business activity will see youhelping the business owner in managinghis client base.

You will be responsible for theconstruction of comprehensive statementsof advice, ranging from wealthaccumulation strategies to self-managedsuperannuation funds, direct equities andmanaged funds. As the technical expert,you will assist in the creation of newtemplates and the management of anytemplate changes due to new legislation.

To find out more and to apply, please visitwww.moneymanagement.com.au/jobs, or contactKiera Brown at FS Recruitment Solutions –[email protected],0409 598 111.

FINANCIAL PLANNING OPPORTUNITIESLocation: various statesCompany: Terrington ConsultingDescription: Terrington Consulting isinterested in receiving applications fromqualified financial planners who are readyto make their next move.

Current positions include:paraplanner/review planner, Adelaide;

financial planner, large charteredaccountancy firm, Adelaide; financialplanner, Darwin; senior financial planner(business start-up); senior financialplanner (equity option), Adelaide; as wellfinancial planners in Iron Triangle, MtGambier, Clare Valley, Alice Springs andMetropolitian Perth.

For more information and to apply, visitwww.moneymanagement.com.au/jobs orcontact Emily – 0422 918 [email protected].

PARAPLANNER – BIG FOUR BANKLocation: Melbourne Company: FS RecruitmentDescription: One of the big four banks islooking for a paraplanner to join itsprofessional and supportive team,reporting to the team leader and unitmanager. The position involves working ona wide range of financial plans, includingstrategies involving Centrelink, allocatedpensions, wealth accumulation andgearing, self-managed superannuationfunds, direct equities and managed funds.The bank will provide structured trainingand support to its entire financial planningstaff and is renowned for its track record inpromoting internal staff members.

You will have a minimum of DFP 1-4 andover 12 months paraplanning experience.

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

RELATIONSHIP MANAGER – HNWFOCUSLocation: PerthCompany: Terrington ConsultingDescription: Due to continued growth, aleading bank is now seeking arelationship manager to build the highnet worth client segment within a keystrategic location.

The role will require effective portfoliomanagement to ensure continueddevelopment and growth of a diverserange of personal account relationships.This is an opportunity to work for adynamic lender offering an extensiverange of financial services includingpersonal and commercial finance, privatebanking, financial planning, tradefinance, treasury and financial markets,cash management and global banking.

The successful applicant must have astrong background in lending as well asproven sales and service results.

To find out more about this opportunity, pleasevisit www.moneymanagement.com.au/jobs.

THE Association of FinancialAdvisers (AFA) has appointedPhil Anderson to the role ofchief operating officer (COO).

Anderson’s 16 year career infinancial services has so farincluded positions with MLCand AMP, as well as ColonialFirst State’s advice businesswhere he was most recently thehead of risk management andcompliance.

Anderson said he has watchedthe AFA grow over the years, andwas impressed by the associa-tion’s progress.

According to AFA chief exec-utive officer Richard Klipin, theassociation has increased itsmembership significantly overthe past five years, at a rate of 24per cent per year.

“We recognised that in orderto drive this growth and build

our value proposition we neededto appoint a COO who has thesame energy and commitmentto the industry as our members,”said Klipin.

PROFESSIONAL InvestmentHoldings has announced theappointment of Peter Walther aschief executive of its financialadvice business, ProfessionalInvestment Services, commenc-ing 22 August.

Walther was most recentlymanaging director, Asia Pacific,private equity and M&A serviceswas for global insurer and riskadviser Marsh.

He has worked in financialservices for 22 years, and previ-ously worked as a commerciallender specialising in high lever-aged transactions, including theroles of Vice President, Lever-aged Finance Group withNatWest USA and Fleet Bank,respectively.

“Peter came to our attentionbecause of his strong executionskills, his proven ability to lead topperforming teams and his trackrecord in driving shareholdervalue,” said PIH Group managingdirector Grahame Evans.

“He is a persuasive leaderwith impressive financialmanagement skills who willmotivate staff and networkrepresentatives to continually

test themselves in an everchanging market,” Evans said.

BNP Paribas Securities Serviceshas appointed Barry Dench asthe new head of its New Zealandbusiness, based in Wellington.Dench would report to themanaging director of BNPParibas Securities Services inAustralia and New Zealand,Pierre Jond.

Dench was previously head ofWestpac’s custody business,where he has been responsiblefor client service and relation-ship management for assetmanagers in Australia and NewZealand.

FIIG Secur ities (FIIG) hasappointed a new chief operat-ing officer (COO) for its Bris-bane office.

Michael Massingham willjoin FIIG as a member of thecompany’s executive commit-tee and report to managingdirector Jim Stening on mattersconcerning custodian servicesand administrative supportfunctions.

Massingham is a CPA withover 20 years experience infinancial services, specialisingin the management of busi-ness operations at a number ofcompanies including ANZ ,

Fi r s t m a c , and C i t i g r o u pAustralia and New Zealand.

The appointment of Mass-ingham as COO reflects FIIG’saim to expand i ts team toservice more investors who areseeking access to secureinvestments.

AU S T R A L I A N S U PE R hasappointed Innes McKeandfrom UK manager Aegon AssetMa n a g e m e n t to the newlycreated role of head of equi-ties, working across both localand international equities aswell as developed and emerg-ing markets.

AustralianSuper said McKeand

will be responsible for the devel-opment and implementation ofa comprehensive strategy for theconstruction and managementof AustralianSuper’s equitiesportfolio, and will commence therole on 12 September, reportingto the fund’s chief investmentofficer Mark Delaney.

Prior to his role as head ofequities at Aegon, McKeandwas chief investment officer atAIB Investment Managers ,and before that was head ofinvestment at the Nestlé UKPension trust, and also spent14 years with Scott ishLifeAssurance Company as chiefinvestment officer, Australian-Super stated.

Move of the weekBANK veteran Stuart Grimshaw will join Bank of Queensland(BOQ) as its new managing director and chief executive officer,following the recent resignation of David Liddy.

Grimshaw, who will start his new role at BOQ on 1 November, hasalso resigned from the board of Suncorp Group, where he served asa non-executive director.

During his 30 years in the financial services industry, Grimshawperformed executive roles at Commonwealth Bank of Australiaand led what was later renamed the wealth management divisionof Colonial First State.

He was chief executive of National Australia Bank in the UK, andmost recently, chief executive officer of Caledonia Investments.

Grimshaw will receive an annual remuneration of $1.25 millionat BOQ, as well as short-term and long-term bonus incentivesranging up to 160 per cent of his salary.

Phil Anderson

“OUTSIDER admits it – he is a babyboomer and, as such, guilty of a myriadof sins against younger generations.

Of course Outsider could not helpbeing born in the same year Godzillapremiered or Playboy was published(he rather enjoys the perverse symme-try), but he does take exception to theperpetual claims that he and his selfishbaby boomer brethren are responsiblefor many of the world’s ills.

Thus, he utterly rejects the latestsuggestion that baby boomers are nowresponsible for the length of time it willtake for the US to properly emergefrom the depths of the global financialcrisis.

This latest heinous claim has comefrom the Federal Reserve Bank of SanFrancisco where researchers havesuggested aging baby boomers may

hold down US stock values for the nexttwo decades as they sell their invest-ments to finance retirement.

It seems these geniuses haveconcluded that baby boomers arebeginning to retire at the same timeas the US stock market struggles torecover, and that the t iming is“disconcerting”.

The reason these researchers findthis disconcerting is that it was thebaby boomers who drove stock pricesup, and their retirement and withdraw-al of assets will mean those stock priceswill now take longer to recover.

Outsider therefore has a message forother generations, and particularlyGen X and Gen Y – stop whining andpull your bloody weight. After all,someone has to pay Outsider’s pensionwhen his money runs out.

Outsider


“You can formally sponsor the

ride by buying my butt.”

Future2 trustee Peter Bobbin will do

anything for a buck, including

selling off sponsorship rights of his

derriere for the Future2 Wheel

Classic.

“I think we should give $50 a

head to keep Bobbin’s clothes

on. Future2 would make a

fortune.”

Clearview’s Chris Blaxland-Walker

summed up the thoughts of many at

a recent industry lunch, as Peter

Bobbin’s exhibitionist side came to

the fore when he stripped off his

business attire to reveal his cycling

lycra underneath.

“The bad news is this is my

best Aussie accent. The good

news is I’ll be finished

speaking in two minutes.”

There was no hiding Orbis head of

retail, Johan de Lange’s South

African heritage at an FPA Sydney

Chapter lunch.

Out ofcontext

Fertile ground for money tree

Baby Boomers not guilty

HAVE you ever been sittingoutside on your back deck witha cold drink, enjoying a nicesummer breeze, as one of thosehelpful fellas from Jim’s Mowingdoes the rounds of your back-yard, and thought to yourself“my life would be a lot simplerif I could get this fellow to helpme organise my personal loanneeds, instead of having to waitin line at the bank”?

Strictly speaking, Outsiderhimself hasn’t been in quite thatexact circumstance, but heponders whether it would be alogical progression for any

person with personal financeneeds, who also employs theservices of a trusty lawn caretechnician.

It certainly seemed a logicalenough progression to thehelpful chaps from Jim’s Mowing,who Outsider has just recentlylearned have expanded into anynumber of franchises over theyears – now including ‘Jim’sFinance’.

Jim’s actually has roughly 30different franchise businessesthese days, including fencing,roofing, trees, plumbing andpainting, but Jim’s Finance and

Jim’s Bookkeeping appear to bethe only ones that wouldn’treadily fit under the broaderumbrella of ‘home maintenance’.

To be fair, Jim’s these days issomething of a multi-nationalconglomerate, and one of thebiggest franchisers in the world,and they’re not actually provid-ing the finance – just helpingcustomers navigate through theprocess and select a product – sono doubt they have the resourcesto provide a useful service.

But given their logo is still thesame old image of a grinning,bearded handyman wearing a

terry-towelling hat, Outsiderquestions how many peoplewould make the mental leap toasking that same chap to helpthem out with a loan.

Still, no doubt they’re far moretrustworthy than one of thosedastardly ‘financial advisers’ thatDavid Whiteley keeps warning usabout…

OUTSIDER is old enough to have worked in an era whenashtrays, cigarette butts and bottles of scotch in the bottomdrawer weren’t frowned upon. However, that time has longpast, and Outsider has not only quit his two-pack-a-day habit,but reserved the consumption of alcoholic beverages forafter work hours – as corporate ethics dictate.

However, Outsider was very surprised when he foundthe same couldn’t be said about Zenith’s chief executiveofficer, David Wright. Although Wright is somewhatyounger than yours truly, Outsider is always pleasantlysurprised when a young-un adopts old-school habits.

Wright may not have been technically working whenhe participated in last week’s PortfolioConstruction Confer-ence as a member of a discussion panel, but Outsiderwould argue it at least was in that grey area that falls

between work and beer o’clock.Following a technical presentation by a conference

guest, Wright stepped onto the stage and sat on a fancyhigh chair, waiting for a panel discussion to begin. Makinghimself comfortable, the research house executiveremarked: “I’m not so sure about this bar stool without abar and a beer!”

The auditorium burst into laughter, innocently assuminghe was joking. However, a couple of moments later acaterer walked in with a beer for each panel member.

Although he enjoyed seeing the grin on Wright’s face,Outsider must say he is disappointed the beers were notdistributed to the wider audience. After all, journos doneed to find a way to make industry conferences seementertaining.

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

Where the beer doesn’t flow

money management (september 1, 2011)

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