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Ontrack - What's new for February?

News in review
Recent economic data has painted a mixed picture for the Australian economy, with consumer sentiment easing and manufacturing activity expanding slightly. Internationally, Spain’s been forced to wield the axe on spending after discovering that its finances are worse than expected, while the German and US economies continue to show resilience. In other news, the Federal Government has imposed restrictions on intra-fund advice, while ASIC has put 30 licensees under the spotlight.

Using social media to drive business
Social media websites have grown dramatically in popularity in recent years. With a well-crafted strategy and appropriate risk protocols in place, social media platforms can add value for clients while lowering licensees’ and advisers’ business costs. However, experts warn that embracing the world of social media needs to be done carefully, as a poorly executed strategy could result in time wasting and in some cases, reputational damage. This article defines social media, identifies the primary channels appropriate for business purposes, explains how advisers should undertake developing a social media presence, discusses some of the potential applications for social media within an adviser’s business, and outline risks arising from the use of social media and the importance of implementing an appropriate policy governing its use.

Getting started in estate planning
Australia’s rapidly ageing population is making estate planning an increasingly significant facet of a comprehensive financial plan, and presents a lucrative business opportunity for financial advisers seeking to carve out a niche in this area. The adviser plays a key role for the client when it comes to modern estate planning. Including this advice component in a business model involves partnering and maintaining ongoing relationships with associated professionals, understanding the relevance of estate planning documents, and ensuring extensive knowledge is acquired on the more technical issues associated with estate planning.

SMSFs: transitioning from accumulation to pension
As Australia’s population ages, increasing numbers of individuals with a self managed fund (SMSF) will be seeking a pension from their fund. Transitioning an SMSF member’s super account from the accumulation phase and setting them up with a pension is not a simple task and raises unique and specific issues that trustees and advisers need to consider in order to manage the process effectively. This article identifies the key steps to transfer an SMSF account from accumulation to pension phase, outlines some of the principal issues and concerns that can arise during transition, explains the impact of death on a sole-member SMSF if the member is in receipt of a pension, and describes the key elements of common scenarios faced by SMSF trustees when members are in pension phase.

Compliance for small AFS licensees
All Australian financial services (AFS) licensees are expected to meet a broad range of compliance obligations, such as managing conflicts of interest and ensuring that their authorised representatives are adequately trained. However, for small AFS licensees, fulfilling these requirements can potentially be more challenging, given they tend to have fewer resources than large AFS licensees. This article summarises the key compliance obligations for smaller AFS licensees, discusses the benefits and costs of maintaining compliance for small licensees, outlines the issues/indicators most watched by ASIC for non-compliance and assesses the potential implications of breaches in compliance for smaller AFS licensees.

Stockbroker news update
Volatility was significantly higher in the second half of 2011 than the first half, and remains above long-term averages. Average daily trades for the year were 19% higher than 2010. The total value of cash market trades in calendar year 2011 dropped off 4% from the previous year. A total of $48.6 billion of capital was raised in 2011, down 14% on the $56.5 billion raised in calendar year 2010. The Australian Securities Exchange (ASX) is consulting with resources industry stakeholders about proposed changes to its disclosure rules for mining, and oil and gas companies, including the rules set out in the Joint Ore Reserves Committee Code. The Australian Securities and Investments Commission has proposed streamlining disclosure and liability requirements for corporate bond issues; intends to closely scrutinise asset valuations and going concern assessments; cautioned investors before investing in hybrid securities and unsecured notes; expressed concerns over the robustness of ASX’s IT systems; and advocated potential toughening of research providers, including stockbrokers and investment banks.

Measuring market volatility
A volatility index is a measure of expectations of future volatility in a particular market.
The Chicago Board Options Exchange Volatility Index (VIX) is the most widely used measure of US sharemarket volatility. This article outlines the history of the VIX, and explains in broad terms how it is calculated. The historical (negative) correlation of the VIX with the S&P 500 index is considered, including the behaviour of the VIX in recent times during the global financial crisis. The use of the VIX as a leading indicator is examined. Methods of directly trading volatility via futures and options listed over the VIX are also explained. The Australian equivalent of the VIX, the S&P/ASX 200 VIX, introduced in 2010, is discussed.

Fundamental indices
Fundamental indices are portfolios of shares where the weight of each share is determined by one or more fundamental measures of company size or economic performance, rather than the price or market capitalisation of the company’s shares. Because they are insensitive to a company’s share price, fundamental indices avoid some of the potential biases that can affect the performance and risk characteristics of market capitalisation indices. This article describes the main features of fundamental indices; explains how common fundamental indices are constructed; distinguishes between price weighted, market capitalisation weighted and fundamental indices; and identifies key advantages and potential risks of investing in fundamental indices.

Adviser responsibility regarding non-disclosure
Contracts of insurance are governed by the doctrine of uberrima fides or ‘utmost good faith’. Under this doctrine, the applicant is required to disclose material, (or relevant) information regarding the risk for which they are seeking cover. The nature of what the applicant is required to disclose is contained within the duty of disclosure as per the Insurance Contracts Act 1984. Unfortunately, not all applicants fulfil their obligations. This can place the adviser in a difficult position because of the fiduciary duty towards their clients. This article considers several scenarios and explores various actions that might be taken in order to protect not only the client’s position, but also that of the adviser and even the insurer. It also details appropriate actions to consider if non-disclosure is encountered.

Negotiation skills for financial advisers
People negotiate every day, often without realising. This article explains different negotiation styles and models, evaluates their application to a financial planning context, and uses different financial planning scenarios to illustrate the relevant processes. It identifies the key issues governing negotiation in a financial planning context and describes the steps in a typical negotiated agreement.

CSI Granny flats
This case study intensive (CSI) allows users to extend their knowledge of the issues surrounding granny flats and apply it to an adviser/client case study scenario. Its content focuses on the definition of granny flats, ways to create a granny flat interest, whether an arrangement will be considered a granny flat interest, treatment of granny flats for social security/Centrelink eligibility purposes, and taxation treatment of granny flat interests.

Dealing with unmanageable debt
For many reasons, people may get themselves into financial difficulty with unmanageable debt levels. This article explores methods of dealing with these situations, from informal means to more formal approaches under the bankruptcy provisions to enable financial rehabilitation of debtors. It identifies different approaches to dealing with debt levels; explains the concept of informal arrangements with creditors, and hardship provisions; describes the reasons for and against proceeding into bankruptcy, identifies some of the formal alternatives to bankruptcy; and summarises what needs to occur for a bankruptcy period to cease.

Negotiation skills for mortgage brokers
This article evaluates the major styles and processes of negotiation in a mortgage broking context. It uses a number of mortgage broking scenarios to illustrate the processes, explains different negotiation models, identifies the key issues governing negotiation in a mortgage broking environment, and describes the steps in a typical negotiated agreement. Overall, the negotiation process is examined as a number of distinct steps.