For Investors seeking the most tax effective investment vehicles there are a number of choices. For many, superannuation may work very well, for some high net wealth investors, they may seek greater diversification and flexibility and often look to other structures to build wealth.

Many turn to company structures, setting up private companies to hold investments. Earnings on the funds held within such a private company are taxed at the company’s rate of 30%.

Ultimately investing in a company structure may only be a tax deferral mechanism. Eventually funds paid out of the company will be taxed at the investor’s marginal rate at the pay-out date. In the case of high net worth investors, it’s probable that the marginal rate at payout date will often be higher than the company tax rate.

So while a company structure may offer increased flexibility, it is not without its limitations. Aside from the tax payable, there may be other requirements that that need to be considered.

• Capital gains tax reporting or compliance is required.
• The company structure offers little protection from creditors following a bankruptcy event.
• Estate duties may be payable if the investor dies, at a loss to the surviving beneficiaries.

What if there was another alternative investment vehicle with less of these limitations? What if that investment structure provided the additional investment flexibility to effectively compliment a superannuation fund but did so with greater simplicity, and also potentially reducing the tax liability of the investor over the long-term (10 years or more)?

Introducing Investment Bonds.

For high-income earners, investment bonds are a tax effective alternative investment vehicle. If funds can remain invested for at least 10 years, then personal tax obligations are permanently removed after year 10. Bonds can thus provide a significant tax saving, especially if the investor is paying tax at the highest marginal rate.

How are investment bonds taxed?

The taxation of an investment bond falls under company tax rules. Tax on earnings is payable at the company tax rate, currently 30%. In contrast, the top marginal rate on personal taxes, inclusive of the Temporary Budget Repair Levy and Medicare Levy, is 49%. If an investment bond is held for at least 10 years, then earnings do not need to be included in the investor’s tax return. This means tax within the bond is capped at the company tax rate of 30%. While this may be one of the advantages of investing in a Bond, compared to a company structure, there are other tax advantages worth considering.

• If a withdrawal is made within the first 10 years, the earnings are included in the investor’s personal tax return (only a portion is included in the ninth and tenth year) and a 30% tax credit applies. However, unlike a company where the grossed-up dividends are included as taxable income, only the net after-tax income received from an investment bond is taxable.

• If the Bond proceeds are withdrawn due to the death of the life insured, neither the beneficiary nor the estate needs to pay any further tax.

The differences between these two investment structures are outlined in the example below. Consider the following:

Features of investing in an investment bond structure

While the investment bond offers a tax advantage alternative to the company structure, it also offers many more key benefits that make it a viable complement to an investor’s portfolio. Here are our top 7.

Flexible investment options

Investment bonds allow clients to access many asset classes and provide a market-linked investment vehicle to help meet investment goals.

No limit on the investment amount

There is no limit on the amount that can be invested to establish an investment bond. Investors can also make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the 10-year period. Investors can choose to start new investment bonds if higher amounts are to be invested.

No excess contributions tax

Investment bonds can provide a tax effective means of investing and avoid excess contributions tax that may otherwise apply in superannuation.

Flexibility

Investment bonds give investors the flexibility to access funds at any time, which can act as a hedge against the restricted access for superannuation.

Capital gains tax simplicity

Investment bonds provide simplicity as earnings are automatically reinvested in the bond. This means reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.

Transfer of ownership

The ownership of the investment bond can be easily assigned or transferred at any time. The original start date is retained for tax purposes. This may not be achieved within a company structure without creating tax liabilities.

Bankruptcy protection

Investment bonds may offer protection from creditors in the case of bankruptcy (subject to certain rules), which may not be provided through a company structure.

Conclusion

If your clients are looking for alternatives to invest in a tax effective manner, then investment bonds provide a range of advantages to investors seeking more flexibility and diversification to complement their superannuation.

When compared to company structures, investment bonds can provide significant advantages, especially if funds are invested longer than 10 years. The table which below gives a good side-by-side comparison.

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This paper contains general information and is intended as an informational guide for financial advisers. In preparing this paper, no individual circumstances have been taken into consideration and therefore may not be applicable to an adviser or their client’s particular circumstances. Before making any investment decision, you and your clients should obtain and read a copy of the PDS of any financial product before making a decision to invest.  Centuria Life Ltd (ABN 79 087 649 054 / AFS Licence 230867) (“Centuria”) is the issuer of this paper and the Centuria TaxAstute series.

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Equity investors face a constant dilemma: how can I achieve the long term returns that equities can provide, without the capital loss that accompanies market downturns? This question has become particularly pertinent following the GFC and its dramatic impact on share markets. The Australian equity market lost 50% of its value between the peak in November 2007 and March 2009 when the market bottomed.

While most investors appreciate the impact of the loss of capital, they tend to overlook the secondary impact; they now earn future returns on a reduced amount of capital. Over time this can have a significant impact on investment outcomes.

Risk management in client investment portfolios has traditionally been an asset allocation decision. Indeed, for an overall “balanced” portfolio asset allocation may work to an extent, cushioning portfolio volatility through diversification. But why wouldn’t you seek to manage volatility within an equity portfolio?

Most long only managers are employed to generate ‘alpha’ above an equities benchmark. ‘Beta’, the risk arising from exposure to general market movements, is someone else’s concern (typically the asset allocator putting together the investor’s portfolio). Why then was the average investor unhappy when their equity fund halved in value in 2008? After all, their manager had a mandate to be at least 90% invested in equities, regardless of how bearish they may have been. The simple answer is that conventional equity products do not meet all investors’ expectations during such difficult times.

Numerous studies have shown that the pain of losing money is greater than the joy of making it. But emotions aside, the loss of capital is a serious matter. In our view ‘risk’ is the probability of losing money, not just volatility. It took almost six years for the market to return to its November 2007 high on an accumulation basis. If you had invested at the pre-crisis peak, this equates to a 100% return – a return that only gets you back to where you started.

This dilemma is most important for those investors approaching retirement. For these investors the possibility of loss can pose a more significant problem. The issues arise where the pattern of equity market returns is such that large negative returns occur early in the drawdown phase causing investors to eat into their capital such that they do not get the full benefit when markets inevitably rebound. This is known as ‘sequencing risk’. Given that we are in retirement for longer, we need to make sure that when we do retire our asset base is as healthy as it can possibly be.  What that means is that as we approach retirement age we need to be even more mindful of losing capital. Hence, while risk management is always important, it is even more important in the pre-retirement phase and in the early years of retirement.

One common solution proposed to reduce the impact of negative market movements in the retirement phase is to adjust the asset allocation mix by decreasing the allocation to growth assets and increasing the allocation to defensive assets. But will a portfolio skewed towards fixed interest assets be able to deliver the growth required to sustain a long and comfortable retirement? Does trying to solve the issue of sequencing risk in this manner just open up a new risk – longevity risk? That is, the risk that you will outlive your nest egg. With life expectancies growing and the cost of living rising, more than ever our retirement nest egg needs to be maximised, both at the start of retirement and throughout the drawdown phase. Therefore reducing exposure to growth assets may not be the solution.

Alternatively, some investors believe that timing is the solution to protecting their capital in market downturns. “I will just pull my money out of shares and put it into cash, then put it back into shares when the market turns”, right? Wrong. Perfect timing is impossible to achieve without the benefit of hindsight.

The chart below shows the impact that timing can have on returns. Consider $1,000 invested in the Australian share market over 30 years (left hand bar). By staying invested over the whole 30 years the investment would have grown to be worth almost $23,000 (after tax at the highest marginal rate) or an 11.0% p.a. return. At the other extreme (right hand bar), consider a situation where with perfect hindsight, moving in and out of the market at exactly the right time (which of course is all but impossible to do) would have produced more than $260,000 (equivalent to a 20.4% p.a. return); over 10 times the dollar amount achieved by just staying invested in the market over the 30 years. While perfect timing is unrealistic, it does illustrate that there is a significant opportunity to improve our long term returns if we as investors can better manage the risk of losing capital during periods of significant market downturn. The key is to try and stay invested, but find alternative ways to reduce your effective exposure when needed in a market downturn.

In the example below, the opportunity set that arises by better managing the capital risk of your portfolio lies between $23,000 and $262,000. It is within this opportunity set that we believe dynamic protection can help enhance returns.

An important point here is that timing affects your market participation, and you need to maintain good market participation in order to maximise future returns. But attempting to time the market is very challenging. It is neither a rational or likely achievable strategy. Risk management can produce a better and smoother outcome for investors, in our view.

Managing the downside in equity portfolios can be the difference between staying in front, and falling behind, perhaps forever. We believe the best of both worlds is to have a risk management strategy that allows investors to benefit from the superior long term return of shares, while having a dynamic protection strategy in place to help reduce the impact of market drawdowns.

At Perennial Value, we believe risk should be managed both within equity funds as well as via asset allocation changes. In some cases, particularly for retirees, it makes sense to embed risk management in the form of simple insurance style instruments into the equity portfolio itself. The aim is to manage the risk of equity market downturns automatically, without the investor having to make a conscious decision to change asset allocations.

In part two of this article we will discuss the strategies utilised that make it possible to embed risk management within an equity portfolio and how this can provide investors with a degree of confidence to remain invested in equities, regardless of market volatility or their proximity to retirement.

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Disclaimer: Issued by the Investment Manager, Perennial Value Management Limited, ABN 22 090 879 904, AFSL: 247293. Responsible Entity: IOOF Investment Management Limited ABN 53 006 695 021, AFSL: 230524. This promotional statement is provided for information purposes only. Accordingly, reliance should not be placed on this promotional statement as the basis for making an investment, financial or other decision. This promotional statement does not take into account your investment objectives, particular needs or financial situation. While every effort has been made to ensure the information in this promotional statement is accurate; its accuracy, reliability or completeness is not guaranteed. Past performance is not a reliable indicator of future performance.

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Andrea Slattery

The SMSF Professionals’ Association of Australia (SPAA) has told a parliamentary inquiry that the education and training requirements for the financial advisory industry need to be radically overhauled.

In 21-page written submission to the Parliamentary Joint Committee on Corporations and Financial Services, SPAA argues that the current system of a minimum standard of education and competencies for financial advisors via ASIC’s Regulatory Guide 146 (RG 146) has failed the industry.

“We believe this (approach) has not succeeded in ensuring that advisors have the competencies required to provide high-quality advice to consumers,” SPAA’s submission says.

“RG 146 is not a flawed concept by itself as it simply outlines the minimum requirements expected by ASIC as a guide to advisors, licensees and education providers. However, too often the industry (licensees and educators) have interpreted the minimum requirements to be all that is required to be competent.

“This compliance-based approach leads to financial advisors being pushed towards a minimum level in a race to the lowest acceptable level rather than increased and improved skills that is the underlying aim of a professional level.”

SPAA CEO/Managing Director Andrea Slattery says the organisation outlined to the parliamentary committee five key steps to establish a profession for financial advice. They are:

• Adequate and appropriate education and experience requirements;
• A co-regulatory approach to regulating financial advice;
• Requiring professional association membership for market participants;
• Maintaining high ethical and professional conduct standards in the financial advice profession that each individual must be personally accountable for;
• Establishing professional remuneration models.

Slattery says by adopting this approach the industry would be embracing a “cultural shift” that embraces professionalism to encourage higher competencies rather than the current compliance driven approach.

“To achieve this outcome what is required is a co-regulatory approach that is more appropriate to lift standards of financial advice through education and training.

“It would allow professional associations to drive professionalism by setting their members higher levels and stringent competency and training requirements.

“ASIC would approve professional associations that can regulate advisors under this framework, replacing the regulator’s need to dictate and be responsible for minimum education standards.”

She says continuing professional development (CPD), as required under RG 146, is a prime example of why SPAA thinks the current system requires radical change.

“The need to undertake CPD is currently driven by a compliance-based approach where advisors are required to undertake a certain amount of CPD over a set period.

“This results in advisors often undertaking training that maintains their current knowledge to just meet the absolute minimum rather than being extended and challenged through new learning and improved knowledge.”

SPAA believes that professional associations should be given the task of setting the CPD requirements for their members.  This would ensure CPD would become more orientated to improving and challenging advisors’ skills rather than being viewed as a mere compliance requirement.”

SPAA’s submission stresses the importance of improving professional, ethical and educational standards in the financial services industry.

Slattery says: “SPAA is adamant that the professionalism within the financial services industry, especially in financial advice, needs to be lifted in order to create a robust industry that can consumers can trust and engage with confidence.

“This is particularly important as Australia shifts to an older demographic where financial advice will be crucial to ensure Australians can retire with dignity and increased self-sufficiency.”

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Around 85% of all advisers are associated with product manufacturers and it probably wouldn’t take a forensic examination of the numbers to conclude that the majority of Enforceable Undertakings from ASIC and disciplinary actions from professional associations in recent years have been handed out to the very large licensees and/or their representatives.

While it has been thirty years in the making, in many respects it has been a frenetic rush by the large licensees to accumulate massive amounts of funds under management. In the case of bank owned licensees, the rush was predicated on the deregulation of banking in 1980s; simply put with increased competition in home lending and related margin compression, banks had to find other arenas to generate profit and while the chase for funds under management was but one alternate source for them, it nevertheless has been integral in maintaining and then increasing their profits over time.

In the aftermath of the recent Senate Inquiry into the Commonwealth Bank’s scandalous management of both their planners and the related complaints, many planners might well be feeling they are being ‘tarred with the same brush’.  The news media will only ever tell their consumers bad news and with CBA et al, there has been plenty of it. It is wasted effort to think that at some stage the media will report the good that truly professional financial planners bring to the lives of their clients and their families. It’s never going to happen.

While the very large licensees feature prominently in the public relations damage caused to financial planners generally in Australia, it doesn’t take bad media to create dissatisfaction with the services provided to representatives by a largish licensee.  Advisers who have been in their role for several years might well question the value proposition of representing a licensee which they do not own and over which they have minimal, if any, say.  Areas such as levels of fee sharing and Approved Product Lists are two areas where concerns can arise.  And then there is the declining certainty of Buyer of Last Resort (BOLR) provisions.

So if you are serious about providing genuine professional advice and are tired of having a ‘guilt by association’ air about the business you represent or you are questioning the value for money you are receiving from your licensee, then you have a choice of two options. The status quo is of course the path of least resistance and for many, this is all they will ever want in their career. People who are happy to practice under someone else’s licence and who are happy to not take the burden of liability in the first instance. Note that failure to comply with a licensee’s legal obligations can still see representatives targeted for litigation – by the licensee.  For those who reject the status quo and who are really serious about building a professional services business, there is the option of applying for their own AFSL.

Gaining control of your business destiny

In 1995 at the annual FPA Convention, I presented a paper titled: “Gaining control of your business destiny – becoming a licensed dealer”. Back before the Financial Services Reform Act 2001 (FSRA), licensees held either a ‘Securities Dealer’ or an ‘Investment Adviser’ licence.  As the name suggests, dealers were licensed to ‘deal’ in securities; to arrange the purchase and sale of securities and they outnumbered Investment Advisers who could advise but not ‘deal’ in securities. Dealers could have either a ‘restricted’ licence or an unrestricted licence which generally meant the latter could deal in any form of securities. By contrast, generally speaking, restricted licensees were not able to deal in listed securities. As a side note, you will still often hear AFSL holders referred to as ‘Dealers’.

The 1995 paper was warmly received and criticised in seemingly equal proportions. Some existing licensees spoke against it during question time due to the simple (yet unspoken) fear of seeing their advisers leave and set up their own license. The supporters were advisers who had the reached the point in their career of questioning the status quo of working under another party’s licence.

Ten years later, in 2005, an adviser approached me at the FPA convention and said words to the affect that he wanted to thank me for that 1995 paper because it had prompted him to establish his own licence. At the time of the 2005 convention, he was in a ‘work-out’ period having recently sold his business for a very handsome amount of money. He said that getting his own licence was pivotal to being able to build his business under independent ownership and better prepare if for an eventual sale.

Changing licence eligibility

It’s now twenty years since I first obtained an AFSL (An Unrestricted Securities Dealer Licence in 1994) and the intervening period has seen a significant lift in the eligibility criteria. With the various iterations of the Corporate Law Economic Reform Program (CLERP) and the onset of the FSRA, it has become a more rigorous vetting process by the regulator.

However, it might come as surprise to some that it is far from difficult provided you study the requirements in detail and assess if you and your business can comply.

But first – what does your representative’s contract say?

Many advisers will have restraint of trade clauses in their contracts with their licensees which might have a serious impact on their cash flow once they leave and begin business under their own licence. The first point to make here is to be sure to have your lawyer review the contract so that you can make an informed decision about your situation if you obtain your own AFSL.

Your current contract might have a serious impact of the commercial viability of going out on your own. That said, it might just mean you need to plan how you will survive while you serve out the restraint period. One prominent adviser had a two year restraint of trade clause which he duly planned for in leaving his then licensee in 1997. The very day after his restraint period expired he commenced, with military like precision, a series of advertised seminars in towns and suburbs across the state he had former clients in and, he would proudly tell you, he eventually regained more than 90% of his previous clientele.

The easy part

The easiest part of applying for an AFSL is the application itself. The online form can be progressively saved on the ASIC site allowing you to continue completing the form at any time at your leisure. The key here is to know exactly what type of licence you are applying for. Some issues to consider:

• Will you want to be able to advise on listed securities?
• Will you want to advise on superannuation products?
• Will you want to hold a life broking licence?
• Will you want to advise on bonds and deposit type accounts?

The more difficult part

The more arduous part of the application process is the so-called ‘proofing documents’. These are the documents which you prepare to prove or validate the information you have given on the application form. This is where the largest time component is spent in applying for an AFSL and this is where you need to have a thorough understanding of the relevant legislation in order that you can demonstrate your capabilities and that of your organisation. It is possible for ‘sole operators’ to make application for an AFSL however the ASIC license assessors will be looking at the person’s resource capabilities to meet his/her obligations under the FSRA.

Regulatory Guidelines

In applying for an AFSL you will be referred to various Regulatory Guidelines (RG) and these are essential reading in the process of ensuring you will be able to comply with the requirements of the Acts.

In addition to the three parts of the AFS Licensing Kit, RG 104 Licensing: Meeting the general obligations is an excellent first source of information in assessing whether or not you will be able to meet the requirements of holding an AFSL. In this document you will find information on:

• Key compliance concepts
• Your broad compliance obligations
• Your risk management systems
• Your people
• Your resources

For example, RG 104.21 details how your obligations will be dependent on the nature, scale and complexity of the type of licensee business you wish to operate.

In regard to risk management, RG 104.62 states:

RG 104.62 We expect your risk management systems will:

(a) be based on a structured and systematic process that takes into account your obligations under the Corporations Act;

(b) identify and evaluate risks faced by your business, focusing on risks that adversely affect consumers or market integrity (this includes risks of non-compliance with the financial services laws); 

(c) establish and maintain controls designed to manage or mitigate those risks; and

(d) fully implement and monitor those controls to ensure they are effective.

With reference to the above comments on ‘proof documents’, your proof document in regard to Risk Management would need to clearly illustrate how your AFSL business will comply with ASIC’s expectations. This is where the real workload lies in the overall application process.  In effect, the AFSL application itself will be a dozen or so pages in length whereas the proof documents – in total – will be many times that quantity.

Planning

There are several components to planning to obtain an AFSL and they are essentially split into pre and post licence issuance segments.

The application process will absorb quite some time however with a concentrated focus and disciplined attention to preparing your proofing documentation, it is possible to successfully navigate to a licence being granted within ten to twelve weeks depending on individual circumstances, assuming you have successfully proved your eligibility.

The immediate period after you commence operations under your own licence is crucial. You need to know how your cash flow will be impacted by the change and, in your application, you will need to evidence to ASIC how you will manage your cash flow, both initially and in an ongoing basis. Some of the issues to address include:

• Capital expenditure in the establishment phase?
• If clients are transferring with you to your new AFSL, how soon after commencement will your fees be received and what will the business’ cash flow position be?

Equally important is the need to communicate your change to clients.  Again, to restate, you need to be sure that you are meeting any contractual obligations under your existing representative agreement before communicating with clients.

You will need to have Professional Indemnity insurance cover in place to a level which complies with ASIC’s requirements. If ASIC is going to approve your application, you will be asked to provide evidence that the required level of PI cover is in place.

Licensing Kit

ASIC provides applicants with very detailed information on how to apply for an AFSL in its three part Licensing Kit.  The kit is three downloadable documents which step through the process of making the actual application itself and the preparation of the proofing documentation. It should be the first reference people interested in obtaining their own licence.

Not for everyone

It must be stated: obtaining an AFSL is not for every financial adviser. There are many for whom it is entirely unsuitable. If you are in the business of simply selling investment products then an AFSL is most likely not for you. However, if you are serious about building a business which is owned in every respect by you/your business partners then it might be right for you. If you are serious about compliance and prepared to take on the responsibility for advice and portfolio management for clients, then it could be for you.

For and against

There are arguments for and against on both sides of this discussion. If you are considering your own AFSL as an option for your career, then you need to research the readily available information from ASIC and assess your capacity to obtain and retain a licence. If you proceed to apply, then allow plenty of time to prepare the application and proofs and carefully plan the transition for your business.

While it is easy to stand out from the crowd with your own AFSL you need to be sure to consider your clients in the whole process – after all they need to be the end beneficiaries of any decision to establish your own AFSL or remain as a representative of another party’s licence.

They should come first in all of your deliberations.

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For many advisers, the term ‘estate planning‘ conjures up thoughts of complex, highly technical advice solutions such as wills and testamentary trusts. Whilst some aspects of a comprehensive estate planning process can indeed be complicated, advisers are ideally placed to act as a ‘facilitator’ of such a process, bringing in highly qualified specialists as required.

Background

With more than 45% of Australians not having a valid will, an ageing population and the amount of household wealth available for transfer by bequest in 2030 is set to surpass $70billion, there is a clear and significant disconnect between the need for estate planning solutions and the current usage of those solutions.

The 2006-07 Family Characteristics and Transitions Survey (FCTS) highlighted the stark realties facing families in modern Australia with a specific focus on the impact of divorce:

Of the 4.8 million children aged 0 to 17 years in 2006- 07, just over 1 million (22%) had a natural parent living elsewhere.

Indeed, considering that around one third of all marriages end in divorce, and half of all divorces involved children under the age of 18, the increasing prevalence of ‘blended families’ and the resultant complications in estate plans reinforce the need for an advice solution that is accessible.

Add to this the life risks that insurers like Zurich know all too well:

• Over 60,000 Australians will have a stroke this year (that’s one every 10 minutes)
• 684,000 Australians are estimated to have chronic heart disease.
• 1 in 2 men and 1 in 3 women will be diagnosed with cancer before they turn age 85
• More than 110 Australians will die of cancer every day
• There are estimated to be over 800,000 diabetics in Australia. Diabetics are 5 times more likely to have a stroke and 10 times more likely to have a heart attack.

And there are – indeed overwhelming – cultural, social and economic factors driving an increased need for estate planning advice, representing a fantastic opportunity for financial advisers to provide meaningful assistance to their clients and the community at large.

Aside from the significant demographic trends which are driving growth in demand for estate planning solutions, there are 4 major benefits of applying an estate planning methodology across your business (rather than thinking of it as a service relevant only to your older clients):

• It can uncover new opportunities for advice with your active clients
• Insurance
• Business succession
• SMSF advice
• Intergenerational advice
• It can be a cost effective way of re-engaging with inactive clients
• It can be an easy to articulate, high value-add proposition to take to your referral partners
• It can add significant flesh to your proposition and can be reflected in your Fee Disclosure Statement

Why build capabilities around estate planning advice

To succeed in reatining and capturing assets during the coming intergenerational wealth transfer, advisers should develop end-to-end strategies rather than disconnected solutions, focusing on the following key areas:

Estate Planning

Family estate planning is critical during the wealth transfer period and will be an effective tool in attracting and retaining clients. The more an adviser knows about the Boomers’ and their heirs’ plans, the more they can do to proactively retain their assets. Advisers have been investing in advancing their wealth planning tools and customer relationship management (CRM) systems. While the primary focus of these systems is to support the proposal process and improve the depth of current relationships, some of the same information can be leveraged to increase client engagement on topics related to estate planning.

Make deliberate plans to help clients navigate their inheritances

A Canadian study[1] shows 39 percent of Canadians whose parents have a will have not explicitly reviewed it with their parents, and 61 percent who have deceased parents stated they never discussed it with their parents before they passed away.

By supporting the heirs during the difficult experience of a death in the family and making the process less stressful, advisers can solidify existing relationships or establish new ones with the heirs.

Advisers may consider establishing client-facing operational groups that specialize in the transfer process and support their clients in navigating this unfamiliar and unpleasant exercise.

The richness of the client interactions can be improved by investing in capabilities that increase the convenience to the client.

Whether it is led by an adviser or a specialized service, the experience should be a high-touch, branded, and personalized service that wows the clients, generates trust and makes them want to continue a relationship with the firm – regardless of the value proposition they prefer.

Establish go-to-market strategies to “catch” heirs now

Matching the heirs with their offerings of choice and “wowing” them is an important step towards retaining assets transferred across generations. According to research[2] done by Phoenix Marketing International and Cerulli Associates, dissatisfaction with current and previous provider relationships is the main reason investors left their providers, and only one out of every two wealth management clients in the 30-49 age group, which stands to inherit from the Boomers, is satisfied with their primary wealth provider. This suggests many advisers are at risk of losing these clients right at the point where their value is about to increase significantly.

To strengthen the relationships with the heirs, advisers can consider multiple approaches in tailoring their offerings including creating collective allocation models that enable managing self-directed assets alongside managed assets, bundling products around life stages, and expanding the product set to include cash management, debt management, and insurance.

Typical estate planning instruments

• Wills
• Advanced Care Directives (sometimes called ‘living wills’)
• Testamentary trusts
• Business Succession Plans
• Insurance solutions
• Power of Attorney
• Superannuation beneficiary nominations

Be prepared to ask the difficult questions

As with most aspects of the advice process, doing the job properly often involves questions which can be uncomfortable for the adviser and confronting for the client:

• What is the state of your marriage?
• Do you have any other descendants?
• Do you have any health issues?
• Who will bring up your children if you and your partner died
• Are your adult children in stable relationships?
• Do you have any children with financial, health or legal issues?

Increasingly advisers are able to access a variety of online tools that can make the discovery process more comfortable for both parties, thus encouraging more honest and comprehensive answers. These tools range from simple online self assessments to comprehensive report producing tools.

Be the facilitator, rather than the subject matter expert

The most successful advisers recognise their strengths, and which services are more suitable for outsourcing. Just like a surgeon needing a specialist anaesthetist, outsourcing a service does not have to mean ceding control or oversight of that process, and estate planning solutions are a perfect example of how a financial adviser can still facilitate the components of the process and co-ordinate them into a cohesive all-encompassing solution.

Being seen as an expert willing to bring in external specialists can also strengthen your own brand and elevate your standing as a professional.

Every adviser should aim to have a network of lawyers and accountants they work with, not just as referral sources but as true members of a virtual team, all focussed on same end goal for your clients.

When seeking a partner – for example a lawyer – to work in a field such as estate planning, remember that just like surgeons, they too tend to specialise, so make sure you find one who is genuinely experience in testamentary trusts, or wills, or buy sell agreements.

Resources to get you started

The following process is a good starting point, and involves working with Centres of Influence to identify clients who may benefit from estate planning advice and solutions.

One of the key tools in this process is a self assessment questionnaire. It’s’ designed to get someone thinking about issues they may have overlooked in terms of estate planning and their personal, financial and business situation. It allows them to consider sensitive questions in their own environment. We have attached a sample for your reference. You can use this as is, or tailor to your needs or that of the client. It’s initially intended as a thought provoker which makes them more receptive to your call when you follow it up (because they will have already self identified areas where they have no plans). This means it doesn’t matter if they send it back to you. (Once you get to the stage of an appointment you will go though a comprehensive fact find anyway.)

Notes

1. Investors Group Survey Feb 2012 ‘Trillion Dollar Wealth Transfer – Myth or reality?’
2. Cerulli Associates: Cerulli Quantitative Update-Retail Investor Provider Relationships 2011 (based on data from Phoenix Marketing International, Cerulli Associates)

Other sources

a. Australian Bureau of Statistics, 2004, ‘Household and Family Projections, 2001 to 2026’.
b. Australian Bureau of Statistics, 2008, ‘Family Characteristics and Transitions’.
c. Accenture, 2012, ‘The Greater Wealth Transfer: Capitalising on the Intergenerational Shift in Wealth’.
d. AMP.NATSEM, 2003, ‘Income and Wealth Report’, Issue 5.
e. National Seniors Australia, Productive Ageing Centre, 2012, ‘It’s not just about the money : intergenerational transfers of time and money to and from mature Australians’.

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From the introduction of retail unit trusts in the 1980s and the subsequent emergence of master trusts and access to wholesale unit trusts in the 1990s, the underlying theme of this evolution has been one of efficiencies underpinned by cost savings for both product manufacturers and investors. By the early 2000s unlisted index funds, both retail and wholesale, started to garner more presence in advisers’ portfolio recommendations. Roll forward to the second decade of this century and Exchange Traded Funds (ETFs) are now taking an increasing share of the capital deployment route for investors.

So what is it about ETFs which sees them receive a seemingly ever increasing flow of adviser recommendations for clients? AdviserVoice’s Ray Griffin spoke with John Hewison CFP of Hewison Private Wealth (Melbourne), Paul Dunn of Meridian Wealth Management (Melbourne), Tim Mackay CFP of Quantum Financial (Sydney) and Adrian Zoppa CFP of Hood Sweeney (Adelaide) in an effort to identify how advisers are using – or not using – ETFs in their advice to clients. He also then takes a close look at Exchange Traded Australian Government Bonds and how they provide access to government bonds in the retail market.

As the name suggests, ETFs are investments which can be bought and sold on an investment exchange and which can have a variety of underlying asset exposures. Shares both domestic and international, fixed interest (bonds), listed property, currencies and commodities exposure can all be accessed through ETFs. While the first ETF launched in 1989 in the United States was a passive share market passive index exposure, there is an emerging trend for ETF providers to market active funds.

In terms of equity ETFs, perhaps their closest relative is Listed Investment Companies (LICs) in that they are both bought and sold on, in the case of Australia, the Australian Securities Exchange (ASX). However, at that point they traditionally diverged with ETFs typically having been passive index exposure whereas LICs are investing in companies based on research and analysis which complies with the LIC’s investment strategy. Like LICs, ETFs provide low cost access to markets with Management Expense Ratios (MERs) as low as 0.05% p.a.

By early 2014, with the total number of ETFs being traded in Australia approaching one hundred, funds under management had reached circa $10 billion. According to a 2013 survey by BetaShares and Investment Trends, approximately half of the 102,000 ETF investors in Australia were SMSFs.  Globally, ETFs account for around US$2.4 trillion with more than 5,000 funds listed on 59 exchanges. With such numbers, ETFs are anything but the latest ‘fashion of the month’ investment.

ETFs more generally, tick both the efficiency and cost reduction boxes and are increasingly finding favour with both advisers and investors alike.  However one of their drawbacks, some advisers might argue, is that they can deliver exposure to assets which, given a choice, an adviser might not wish to recommend to clients.  In the case of index exposures, it could be argued that an ETF is a quasi-recommendation for all the assets which comprise the index; it’s a case of taking the good with the bad, as the adage goes. For actively managed ETFs it can still be the case that an investor is buying assets which they might otherwise prefer not to be exposed to. It has to be said however that this aspect applies equally to all managed investment products; at any one time a fund of any ilk might hold assets which if addressed in isolation might not carry a ‘Buy’ recommendation from an adviser.

Structure

The emergence of ETFs in the US in the late 1980s saw investment managers transfer components of/their entire share portfolios, heavily weighted to the S & P 500 Index, to fund managers who contracted to track and administer the performance of the holdings over time. The fund manager issued units and there was a relationship between the unit price and the value of the underlying shares.

In effect, rather than administering large numbers of share certificates, which in the US could mean hundreds of share certificates, institutional investors could hold a single asset which was units in a fund. The economics of this delivered lower administrative fees for investment managers.

Source:

http://www.ifa.com/images/articles/etf_concern_diagram2.jpg via http://www.betasharesblog.com.au/etf_creation/

The units are only available to wholesale investment managers; the Authorised Participants. The delineation sees institutions dealing in the wholesale, primary, market and individual retail investors participating in the secondary market.

 ETFs in Australian portfolios

While financial advisers have been using ETFs in Australia for many years, the strategic application in portfolios varies quite markedly.

Melbourne based Hewison Private Wealth specialises in managing and administering portfolios of direct investments.  Founder and Managing Director, John Hewison says his firm has been including ETFs in portfolio recommendations for around eight years. “We have used them for both index exposure to a sector such as REITs for example and for sector exposure such as International Emerging Markets or International Global Top 100 companies. We typically use ETFs in specialist areas where we would find it difficult to get direct access or prefer to utilise an index approach.” He said. “However, our typical allocation is small at around 10% of a portfolio.”

While Hewison Private Wealth will use LICs over ETFs for some sector exposures, Quantum Financial’s Tim Mackay cites the greater propensity for LICs to trade either side of Net Asset Value (NAV) as a reason to rank ETFs ahead of LICs. “We prefer them over LICs as they don’t face the same problem that LICS do of trading at a discount or, less frequently, trading at a premium to NAV.” he pointed out. Quantum Financial utilises ETFs to deploy a so-called thematic investment strategy on a client by client basis with no specific level of portfolio allocation. “We think that ETFs provide the ideal tools to easily and precisely construct portfolios based on asset allocation, enabling us to create efficient portfolios in a modular way as easily as snapping Lego pieces together. And they increasingly cover most asset classes and are cheap, liquid and reliable.”

Meridian Wealth Management’s Paul Dunn however notes that just like LICs there can be occasions when ETFs don’t trade at NAV. “They don’t always trade at NAV like an unlisted fund. Premium and discount factors always need to be considered.” Meridian Wealth’s portfolios can hold up to 20% exposure to ETFs subject to any active tilts in place. “We use them to provide specific exposure towards any strategic theme that we want included within a portfolio like, for example, CTN for microcaps or IOO for large global market caps and the like.” Dunn added. “We like the liquidity and broad based exposure and the biggest advantage is being able to buy and sell directly on the overseas exchanges where a lot more options are available.”

In contrast to the higher and more active use of ETFs at Quantum Financial and Meridian Wealth Management, John Hewison points out that ETFs do not fit Hewison Private Wealth’s investment philosophy. “We generally like to use direct investments so ETFs don’t really fit our broad philosophy of going direct to markets where we can. That said we typically use ETFs in specialist areas where we would find it difficult to get direct access or prefer to utilise an index approach.” He said.

Hood Sweeney’s portfolio allocations are based on a direct approach to assets along with strategic inclusion of managed funds with the usage of both asset types being centred on a value bias. “We’re active portfolio managers but we’re very focused on the long term and fundamental business valuations and we’re keen to understand the likelihood of continuing dividends.” Notes Hood Sweeney’s Adrian Zoppa CFP.  “While we’re yet to make substantial use of ETFs in portfolios, we believe that for some investors there is an argument for low cost, well diversified, equity ETFs that are consistent with the client’s investment strategy.” He added. “The return investors should demand from such ETFs should be at a high risk premium over the risk-free rate and the objective with the equity ETFs in the portfolios is that a 5-10 year time frame is adopted.”

While not all advisory firms are recommending ETFs in portfolios, in 2014 there is no shortage of choice in fund styles. While the original ETF raison d’être had been market cap funds with index or market segment exposures, increasingly so-called smart beta funds are being launched which are structuring funds based on non-market cap factors such as dividend yield and valuations. Put simply, the new breed of ETFs are far less sedentary than traditional market cap funds. 

“We’re closely watching the way this sector is developing and we’re quite interested in the more sector specific ETFs which are coming onto the market.” John Hewison said.

Tim Mackay’s Quantum Financial builds portfolios with as few as eight investments, all of them ETFs. “You can put together a wonderfully simple, diversified, cheap and coherent portfolio based on investment themes such as blue chip shares, broad index shares, high dividend/imputation shares, small cap shares, resources and so on.”

Tactically, Quantum Financial leans toward so-called ‘core and satellite’ construction techniques with cores comprised of diversified low cost ETFs and satellite investments based on high conviction positions in direct shares or funds they see as outperforming. “We see this as the best of both worlds.” Mackay said. “Clients save in fees in the core or passive components and this is complimented with the active satellite positions.”

According to Paul Dunn, Meridian Wealth uses ETFs to complement the firm’s active portfolio management style.  “They provide us with broad based exposure for portfolios as well as themed exposure to complement our active style. They provide very good liquidity especially when gaining exposure to market sectors that are often very thin or limited in size.”

In focus – Exchange Traded Australian Government Bonds (ET AGBs)

One of the more interesting recent developments in the ETF market in Australia was the launch of a facility on the ASX for trade in Australian Government Bonds (AGBs). Up until the mid-1980s, Australians were able to invest in AGBs in amounts as low as $20 via their local bank branch in over the counter transactions (OTC). In some respect, this was a carry-over from the issue of war bonds during the Second World War when citizens lent money to the government to fund the war effort. Some readers might recall the somewhat patriotic, flag waving, television advertisements of the late 70s and early 80s for ‘Aussie Bonds’. For several decades following World War 2, small OTC AGB investments were still possible in bank branches all over the nation.

However, by the 1980s the high cost of administering many tens of thousands of individual investments and the cumbersome, unreliable, nature of raising capital via that method, saw Treasury withdraw back to dealing only with large, authorised, institutions to fund the government’s Bond (medium to long term) and Treasury Note (short term) requirements.  As a consequence, direct access to investing (lending money to the government) in AGBs for the vast majority of investors disappeared. While most Australians had indirect access to AGBs via superannuation funds, life insurance policy statutory funds (i.e. so-called Capital Guaranteed funds) and managed (unit trust) bond funds, the primary market participants were only the very large authorised institutions.

Retail trade in bonds

In late 2012, as a first step in developing a broad and liquid corporate bond market under the Competitive and Sustainable Banking System (2010) policy, legislation was passed to facilitate retail trade in Federal Government Securities. The rationale for the change was to reduce the government’s reliance on foreign funding and a goal of reducing the prominence of equity and property allocations in superannuation funds which can be vulnerable to sharp market value declines with a corresponding sudden lapse of confidence in that form of savings retirement vehicle.

While the ‘paper’ or physical bonds are not traded on the ASX, the rights to the physical bonds are traded electronically as with any other security on that exchange. Austraclear is a subsidiary of the ASX and is the wholesale securities depositary which holds legal title to the AGBs. The holder of an Exchange Traded AGB holds the right to receive all interest (coupons) and principal payments applicable to the underlying bond; the beneficial ownership. This ownership takes the form of a CHESS Depositary Interest (CDI) and it is the CDIs which in effect link the wholesale bond market (institutions) with the retail market.

Types of Exchange Traded AGBs

The two types of ET AGBs are Treasury Bonds (eTBs) and Treasury Indexed Bonds (eTIBs) with each having a minimum one unit which is equivalent to $100 Face Value of the bond over which they are issued.

As with any interest bearing security being traded on an open market, the market price of Exchange Traded Australian Government Bonds (ET AGBs) is driven by its yield to maturity and it is also impacted by the prevailing inflation and interest rate expectations. The market price of the securities move above/below face value in accordance with such expectations.

Making a market

The Commonwealth Bank of Australia, JP Morgan and UBS are the three market makers appointed by the ASX to access liquidity in the wholesale bond market. These participants are also required to provide continuous Bid and Offer prices on all ET AGBs. The market makers must quote a minimum volume of ET AGBs and quote a maximum spread between the bid and offer price which is concomitant with the spread in the wholesale market. At present their obligations include quoting a minimum 50,000 Treasury Bonds and Treasury Indexed Bonds which equates to around $5 million (50,000 x $100) on the bid and offer.

Risk and reward?

The price for the perceived greater security of investing in a government borrowing with a high credit rating comes, in part, in the form of a yield which is low relative to some other types of securities. Governments with high international credit ratings can borrow at lower rates than those with lower ratings. For investors in AGBs this means that while the yield is low the risk of capital loss is low and it is these characteristics which see roles in portfolios for clients with lower tolerance for portfolio volatility.

The above comments about risk notwithstanding, it’s instructive to note that the GFC put an end to the view that government debt is risk free debt.

An ET AGB versus an Index Bond ETF?

As mentioned earlier, the purchase of any fund of investments bring with the possibility that some of the fund assets are, at a point in time, sub-optimal. In the case of an Index Bond ETF, understanding the average terms to maturity and yields are essential to gaining insight into how the market price might perform over time under various scenarios. In the case of an ET AGB, an investor is buying rights to a single bond not multiples of them. There is a single yield to maturity and but one term to maturity. The risk, it could be argued, is easier to identify when compared to a fund which has a bundle of bonds at various coupon rates and maturity dates. Bond fund managers would rightly point to the spreading of risk which a fund with a range of maturities and yields can provide.

In the case of a Global Index Bond Fund there is of course the issue of currency risks – a buoyant AUD and an unhedged fund does not bode well for capital stability.  In addition a global bond fund will, notwithstanding the principles of diversification and risk management, potentially hold government bonds in economies with less than stellar credit ratings.

These are some of the risk-reward trade-offs to consider when evaluating the two forms of exchange traded investments.

Exchange Traded Investments – Summary

For the time being at least, with a tailwind of relatively robust economic data from around the world, exchange traded investments of various types are gaining increased prominence in Australia investment portfolios. Their role in portfolios varies from passive index exposures for minor portfolio proportions to much larger and more active allocations which advisers will look trade as their outlook for a sector or commodity changes.  ET investments deliver reduced costs and under normal market conditions they provide liquidity.

While not strictly a ‘fund’ as advisers know them to be, Exchange Traded Australian Government Bonds provide retail access to investors for amounts as low as $100 per unit.   ET AGB investors do not have legal title to the underlying bond however they do hold the rights to all coupon and principal payments related to the bond.

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Background

Many empirical studies have shown that a value style approach to share investing has consistently outperformed growth investing – and with less risk. Other studies have shown that lower volatility portfolios, particularly lower beta portfolios, outperform higher beta portfolios.  Concentrated equity portfolios have also proven to outperform their more diversified counterparts.

If value, lower beta and concentrated portfolios have consistently outperformed in the past, then isn’t it only a matter of time before investors arbitrage this away? If this was true, then these ‘anomalies’ should have disappeared a very long time ago as they have been documented for many years. In fact, these so called ‘anomalies’ are a permanent feature of share markets.

The first article looked at the value investing anomaly. This article focuses on lower beta portfolios.

Lower beta portfolios outperform higher beta portfolios

There have been numerous empirical studies showing that lower volatility portfolios, and in particular, lower beta portfolios, outperform higher beta portfolios.  This phenomenon is widespread and applies to most equity markets, including the US and Australia.

Clearly, this is contrary to the Efficient Market Hypothesis and the well-known investment axiom of “the higher the risk, the higher the return”.

Certainly, as shown above, as value portfolios tend to have a lower beta and have outperformed in the long run, value is one potential subset of lower beta portfolios.

A quote from Eugene F. Fama and Kenneth R. French (American economist and Nobel laureate in Economics, and Professor of Finance respectively, known for their work on portfolio theory and asset pricing, both theoretical and empirical) from one of their papers in the Journal of Economic Perspectives which was published in August 2004 provides a succinct summary of our view.

“…funds that concentrate on low beta stocks, small stocks, or value stocks will tend to produce positive abnormal returns… even when the fund managers have no special talent for picking winners.”[1]

MSCI produces minimum volatility returns based on the MSCI index constituents, which is a proxy for low beta portfolios.  It is constructed using the Barra risk model and is subject to holding constraints by stock and sector.

As table 1 shows, the MSCI Minimum Volatility Index has outperformed the MSCI broader market index by 0.38% pa – despite targeting lower beta (or lower risk) portfolios by construction.

For completeness, comparable numbers were produced for global equities using the MSCI World Index.  As can be seen in table 2, the numbers show an even more compelling story than Australia, with the MSCI Minimum Volatility Index outperforming the MSCI by 1.52% pa.

The reason why the numbers are more pronounced for the global market may be explained by the greater number of stocks to choose from while still constructing the portfolio within the portfolio constraints.

To test how meaningful these results are, t-statistics have also been calculated in table 3. The t-statistics are not as convincing as they were for value, but they are still on the right side of the ledger.  What they do imply is that a longer time frame is required for the outperformance to come through than the time frame required for value.

Why does low beta investing work?

There are various theories as to why lower beta (or lower risk) stocks tend to outperform higher beta stocks.  The theory that makes the most sense to us is the ‘lottery effect’ of high beta stocks.  This is where investors focus only on the upside or ‘blue sky’ scenarios and bid up the price of a stock on the hope that it could be a ‘ten bagger’ (ie worth 10 times its original amount) without fully incorporating the impact of the potential downside.  This also leads to some investors disregarding the steady, boring stocks as they chase the ‘sexy’ stocks that could make them rich – but in most cases never do… just like the lottery.  We have seen this occur many times in the past.

Another theory is that the lower beta stocks are on average inherently boring and conservative and have good stable cash flows.  As such, they tend to be higher dividend-paying stocks. These dividends are actually cash returns that help to underpin portfolio returns.

Table 4 provides a list of the top 10 lowest beta stocks and top 10 highest beta stocks in the ASX 50 Index as at January 2014.  The names in each list should not be a surprise – reflecting largely the nature of the industries the stocks are in.

One more theory that has emerged recently as to why low beta stocks outperform is the impact of ‘index aware’ investing, and portfolio manager bonuses rewarding more ‘risky’ behaviour in their stock selection – as they don’t get negative bonuses.  It is by virtue of managing portfolios against an index weight, portfolio managers may be compelled to hold higher beta stocks whether they like it or not, and as such, leads to inefficient pricing.  In conjunction with this, the ‘lottery effect’ discussed above comes into play, as some portfolio managers look to achieve big short-term outperformance by taking active positions in higher beta stocks, so as to receive big bonuses.

Chart 1, sourced from Nardin L Baker and Robert A Haugen (in their paper Low Risk Stocks Outperform within All Observable Markets of the World, 2012), depicts this notion graphically, albeit utilising volatility as the risk measure. The ideas are comparable. Given equity markets are considered to rise over time, a manager paid a bonus for outperformance may skew the portfolio to those stocks expected to rise more than the market – ie higher beta stocks.

Other potential explanations outlined by Baker and Haugen in their paper include lower volatility stocks are harder sell to a portfolio manager or investment committee. This is a function of the tendency for low beta and low volatility stocks to have a boring narrative relative to higher beta/higher volatility names and is suggested to have an impact on institution stock selection.

Baker and Haugen conducted research on the largest 1,000 stocks in the US between 2000 and 2009. They categorised these into ten deciles by market capitalisation, from the smallest (on the left in chart 2) to the largest (on the far right). The blue bar shows the stocks that institutions own more of, and the red bar shows the stocks that institutions own less of, within each capitalisation decile. Their research showed that institutions tended to own more of the higher volatility stocks – regardless of market capitalisation. The very smallest stocks were the only exception, where it was lineball.

The more volatile stocks also tend to have greater intensity of broking analyst coverage and greater news coverage.

However, while low beta investing does work in the long run, there are times when it can be in the wilderness for some time, as noted by the lower t-statistics.  These are typically when the market is in the latter stages of a massive bull run or when the market is driven by speculative fads which typically mean the boring, but reliable, low beta stocks can be overlooked by investors for some time.

Intuitively, why will value and low beta continue to outperform?

If value as well as lower beta has consistently outperformed in the past and has done so for less risk, then isn’t it only a matter of time before investors arbitrage this away?  If this was true, then these ‘anomalies’ should have disappeared a very long time ago, as they have been well known and documented for many years.  In fact, these so-called anomalies are really a permanent feature of the share markets.

The real answer for why value investing and lower beta investing has outperformed and why it should continue to do so, may be answered by delving into behavioural finance ie the psychological decision making of investors.

Time and time again, history has repeated itself with the various booms and busts of share markets, and speculative bubbles within the share market itself as investors chase the latest fads and ‘fashionable’ stocks.  In each case, the markets have corrected themselves.  There are numerous examples of varying degrees that have occurred in individual stocks, individual sectors, in whole countries and regions.  They have occurred in so called ‘growth’ stocks which become ‘high beta’ stocks as they rise quickly relative to the market in a short period of time.

We can even go back to the 18^th Century for such examples as the ‘South Sea Company bubble’ in London.  It would seem that investors never learn from history.

In the United States, in the early 1970s there were the ‘Nifty Fifty’ stocks that were the favoured large stocks that raced up to excessive prices, while many of the other stocks were at bargain prices.  In Australia, there was the Poseidon boom in 1970, the speculative bubble in casino stocks in 1996, and short periods of heightened speculation in certain types of low- quality commodity-related stocks since 2003 and up to late 2010.

We only need to recall the Telecommunications/Media/Technology (TMT) boom of 2000 and its subsequent bust for a very dramatic example of when so-called growth and/or high beta stocks moved to stratospheric price levels, while solid companies with real cash flows were sold down heavily as investors chased the latest hot stock.

In each and every case, a great opportunity was created for those investors who stayed with value and did not get caught up in the hype. These opportunities will present themselves again well into the future due to the psychology of investors as inevitably, history will repeat itself again and again.

The next and final instalment from this three-part series will explore the anomaly of the outperformance of concentrated portfolios over their more diversified counterparts.

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[1] Source: Journal of Economic Perspectives – Volume 18, Number 3 – Summer 2004

Disclaimer: This document was prepared and issued by Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No: 237563 (TIML). The information contained in this document is of a general nature only and does not constitute personal advice. It is for the use of researchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation or needs of any individual. The Tyndall Australian Share Concentrated Fund (TASCF) ARSN 143 598 556 is issued by Tyndall Asset Management Limited ABN 34 002 542 038 AFSL No: 229664 (TAML). Investors should consult a financial adviser and the information contained in the current Product Disclosure Statement available at www.tyndall.com.au before deciding to invest. Reference to individual stocks in this material neither promise that the stocks will be incorporated into TASCF nor constitute a recommendation to buy or sell. TIML and TAML are part of the Nikko AM Group.

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Jeremy Bendeich, Chief Investment Officer and Portfolio Manager of Avoca Investment Management, discusses the fundamentals of intrinsic investing.

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PortfolioConstruction to create CPD for AFA members.

The Association of Financial Advisers (AFA) has once again demonstrated its ongoing commitment to enhancing the AFA’s continuing professional development (CPD) program with the appointment of PortfolioConstruction Forum to create and deliver a far-reaching investment and portfolio construction curriculum (the curriculum).

AFA CEO Brad Fox said, “The AFA’s new relationship with PortfolioConstruction Forum reaffirms the AFA’s commitment to delivering a balanced professional development program for our members and a consistent and cohesive investment narrative across all our programs.”

Graham Rich, Publisher of PortfolioConstruction Forum, presented the vision for the curriculum at the AFA’s National Roadshow this month. The Roadshow was a sell-out across five capital cities around Australia.

“The AFA and PortfolioConstruction Forum share the belief that the higher purpose of financial advice is to ensure that the wealth of every Australian is not only protected but, as a result of quality investment advice, maximized so that they can live the life they want to live in retirement,” Mr Fox said.

Deepening the AFA’s education curriculum in investment and portfolio construction will also help further build consumer trust in the financial advice profession, Mr Fox said.

“The AFA is committed to providing members with access to the continuing professional development they need to build, manage and protect the wealth of every day Australians,” he said. “We are delighted that a provider of the caliber of PortfolioConstruction Forum is joining us on this journey and look forward to them moderating the investment content at the AFA National Conference in October and beyond.”

PortfolioConstruction Forum is recognised as Australia’s leading investment and portfolio construction continuing professional development provider for financial advisers/planners in Australia.

The AFA has long had a reputation for working co-operatively and collaboratively with industry experts to deliver best practice solutions for its members.

Click here to o find out more about PortfolioConstruction Forum.

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This mini-series is centred on 5 key components to establishing, building and retaining client relationships. In part 1 we examine how you can make the process of establishing client relationships more consistent while also backtracking to the point of making sure a client’s first impression of you is likely to build good rapport.

(Click here to read the second instalment in this series and click here to read the third and final instalment.)

For decades now the financial services sector has been faced with constant change and advancement on several fronts. There has been a veritable barrage of change in areas like legislation, technology and service delivery.  Amid it all however, it would be very easy for advisers to lose sight of some of the fundamental aspects that create, build and retain professional relationships with clients.  To this end it’s instructive to recall an old French proverb: ‘The more things change – the more they stay the same’.

While technology to improve efficiency is now in abundance it is important to remember what clients are really looking for in a professional relationship with an adviser. They want to have strong rapport with you and they want to receive tailored, unbiased, advice from you. Clients also want to know that you have genuinely understood them and that you sincerely care about them. These are needs that can be aided by technology however it is the ‘human’ components, that are interwoven with technology use, which fortify client engagement with their adviser. Building stronger, longer and closer professional relationships with your clients will see both you and clients profit and we have identified five key strategies which can help you.

1. Process

The very best professional adviser-client relationships do not happen by accident – they are most often the result of implementing a process, no matter how sophisticated or otherwise, it might be. If you do not already run an effective, process-driven, client acquisition and retention process in your business then there is a process for you to follow to get there.  And if you do already have established client management processes in place then what follows might still assist you in, for example, cross-referencing what you are already doing.

Firstly, you need to decide on the client experience you want to give to clients.

Consider what you would like your clients to experience from their first interaction with you and your business and then write it down. What experience do you want them to have from when they first meet you (or have first contact with your business such as via your website), through to hearing and reading your strategy recommendations, to signing documentation; right through to their ongoing relationship with you and your firm. Now think about how will you maintain that experience and your important role in your clients’ lives?

Successful processes can only be so if other people can replicate the tasks and actions within them with relative ease. In this regard if you have staff members who are great at their job get them to document how they carry out all of their tasks in your business.  For example, what they do when they book a client meeting; how they administer investment/insurance lodgements and so on.

The point here is that while many businesses have outstanding support employees, the business owners can be blind to the over-dependence on such employees. It’s a risk that too often is overlooked by business owners in all types of business. This over-dependence and the embedded risk are sometimes only identified when someone, who has been with the firm for many years, leaves and the business subsequently struggles. Service delivery and quality fall away simply because there was no written record of what that key person actually did in the business.

Take note however that in making a request to your employees to document what they do in carrying out their roles, you need to explain the reasons behind making the request. It’s not uncommon for staff to feel threatened or worried that they may be out of a job if they remove the ‘mystique’ of what they do.

Align then automate the on-boarding

Subsequent to a detailed written account of each employee’s role is the need to align the current processes with the type of client experience you want to deliver. By doing this with your administration support team, you will better understand where you have inefficiencies in your workflows.  And when you identify weaknesses or inefficiencies ask the people involved for help in solving the problems. They will see things you cannot see – the good and the bad – and the final outcome will very often be better for their input to devising a solution.

Once you have documented your processes it is important to automate them as much as possible either using ‘threads’ in software such as XPlan and the like or ‘workflows’ if you are using a CRM program.  Essentially this means the process is input to a series of the tasks that can be automatically delegated, diarised and flagged for completion.

For example in the case of the written ‘new client on-boarding process’, the staff member who receives the first enquiry has responsibility for activating the process.  After the first step is carried out by a staff member (e.g. received initial enquiry by phone), that person initiates the thread and the subsequent tasks are allocated.  Your support person might receive a task to send out a ‘Welcome Pack’ to the potential client and then another task on the day before the client meeting to contact the client and confirm the appointment. This person, for example, also might receive an automated task to prepare a new client file in readiness for your meeting with the potential new client the following day.

At first glance it might seem counterintuitive that in order to deliver a customised, very personal, service you need to automate and document processes into a standardised format.  However, automation serves to ensure the key tasks actually get done and done efficiently.

2. First impressions and beyond

The second stage of a plan to increase client engagement centres on your on-boarding process for new clients; the process you deploy from the moment of first contact with a potential new client.

Your capacity to successfully engage with potential clients in a very personal way will be greatly influenced by their very first introduction to you; this influence could even be at play before they meet you in person.  Getting the first impressions right can lay the foundations for a long and fruitful professional relationship with clients.

Take a moment to list all the ways a potential new client might become aware of you and your business. Start with the obvious, your website but then think beyond that to advertising, your business card handed to someone by another client, your brochures and so on. Try to be objective – what sort of impression do these items give?

Back to on-boarding and, ideally, you should be aiming to ensure that your on-boarding process is designed to remove, or at least reduce, fears that potential new clients will have.  This step should begin to place your clients on a footing of trust, right from the outset, regardless of whether they have been personally referred to you or found you from their own enquiries.  Be careful though – in the twenty teens – consumers are more and more ‘hard-wired’ to be suspicious of claims made by financial services people. Many will treat with, great suspicion, written or spoken claims of an adviser being ‘trustworthy’. It is the old saying of ‘actions speak louder than words’ situation.

Now think again about how your new clients currently find their way to you?  Do the current pathways for new clients begin to engender an atmosphere of trust? Your website? Your referral sources? Your other marketing? Note – this is not about even mentioning the word trust or its derivatives.  Rather, it’s about the overall impression generated by the sum of all that is presented – written and spoken and physical (your reception area, for example) – in representing you and your business.

For a potential new client, at every contact with you and your business in the early weeks and months, she is running the ‘trust radar’ to confirm that you really are trustworthy. After committing to, for example, engaging you to prepare a Statement of Advice, she is looking for that document – and the way you present it – to confirm her initial trust in you. The same can be said at the plan implementation stage and so on.  Trust is not a set and forget aspect of a professional relationship – it must be ever present in your every action for and on behalf of clients.

Your internet presence

What will a prospective client see if they search for you on the Internet?  If they view your website, your LinkedIn profile, or your business Facebook page, what will they learn about you?  How do all these sites ‘position’ you in the eyes of someone who hasn’t met you?  When you read the information about you on your website or LinkedIn profile, for example, how does it ‘sound’?  Try to explore your online presence as a client – with fresh eyes – and consider if these give potential clients a genuine sense of who you are, why you do what you do and your areas of advice expertise. If you don’t think you can ‘trust’ yourself to be objective, ask a friend or another professional person to give you a full and frank critique of what they see.

All of these things can be very powerful tools in enabling your potential clients and clients to get to know you.  Conversely, the reality is that if they do not position you well in the eyes of a potential client, you might never get to meet them – they might not even contact you.

In addition, when used with your existing clients they can be a great way to communicate ideas, inform them about financial concepts and keep them in touch with you and your business.  You can also utilise them to keep clients in touch with key issues and the economy and markets – even if that’s only to get comfort that you are keeping an eye on investment markets.

Be careful though.  This doesn’t mean you should publish an academic style thesis to show people how clever you are.  Rather, by simply sharing client stories, publishing comments on issues of interest and allowing people to get a sense that you are someone who can really help them, you will enhance the propensity for people to gain and retain trust in you.

In Part 2 of this series we will examine how to manage the interaction at the point of ‘First Contact’ and explore ways of creating the right first impression using the world’s second largest search engine.

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

The post 5 Ways to Create, Strengthen and Retain Client Relationships (Part 1) appeared first on AdviserVoice.