Jerry Parwada

Tomorrow will be a historic day in terms of financial advice, one that is likely to reinforce the perception of a crisis of trust and confidence in Australia’s financial planning industry.

It is when the government will implement the Future of Financial Advice (FOFA) regulations, which govern financial planners. These could force two rounds of changes, creating greater uncertainty in the market.

By rushing the FOFA changes, the government foregoes the potential benefits of having the current Financial System Inquiry take a holistic view to cleaning up the financial planning industry for the future benefit of all Australians.

Instead, the federal government should halt legislative changes impacting relations between financial planners and investors until the conclusion of the inquiry, scheduled for November 2014.

No less than 25 of the submissions to the inquiry are from associations, consumer groups and firms that have significant exposure to the financial planning business sector or its customers, the retail investors. This number does not include the many regulators, research centres, and policy think tanks that may well have expressed opinions on the financial planning industry.

Clearly, a significant component of submissions to the inquiry will cover FOFA-related issues. Expediting the government’s proposals means that any recommendations made by the inquiry that affect the financial planning industry will trigger another major change to the legislation and regulations governing the sector, creating greater uncertainty to a market that is particularly vulnerable to falling participation rates by the public.

Is it not better to take advantage of the timing of the inquiry to give the financial planning industry a thorough review? FOFA issues may appear politically isolated, but financial planners’ fiduciary duties to investors and the fairness of fee and commission arrangements in the industry are at the heart of the integrity and safety of the whole industry.

It’s really disappointing to see the government come out with a change to financial sector operations when they have said there would be a moratorium on that during the course of the Financial System Inquiry. It would have been good to see them defer this and put it into the mix.

Indeed, at this stage it would be a shame to reduce the impact of FOFA. For example, under the new moves, a large fund management group could refer people from personal to general advice within the same company. Second, the FOFA changes mean that complex products could have commissions on them; this could be seen as a step backwards, and is something the Financial System Inquiry has been looking at in depth.

In support of this move, Minister for Finance Mathias Cormann has said that incentive payments related to the provision of general advice are not conflicted remuneration – in other words, it is not expected to influence the choice of financial product.

However, the Financial System Inquiry is right now looking at ways in which the four main banks may be able to get around the banning of commissions by, for example, offering bonuses to bank tellers even if they don’t get a direct cut of the product they are effectively selling.

So, why not let the Financial System Inquiry conduct a thorough review of these issues, and actually come up with some moves that reduce red tape without impacting on the quality of advice to clients, and ensure they are better served?

All parties on either side of the FOFA debate would be hard pressed to refute the common perception that there is a crisis of trust and confidence in the Australian financial planning industry. Education and accreditation standards are being debated. Solutions to this crisis need better treatment than targeted interventions by the incumbent government.

Associate professor Jerry Parwada is head of the school of banking and finance at the Australian School of Business and an expert in funds management.

James Morley

What are the risks in the economic outlook for Australia?

Typically, prognosticators take a scenario-based (aka “story-telling”) approach to answering this sort of question. And usually these scenarios end up as a litany of woes about what the future holds (such as weak productivity growth, unfunded fiscal liabilities, and highly unfavourable demographic trends).

But for most economists, the more natural approach to answering this question is to consider formal econometric analysis of the macroeconomic data.

Without going into the gory details of how to do this, I want to provide a sense of what such analysis says about the short-run and long-run risks in the economic outlook for Australia.

I consider two key indicators of economic activity: output growth and inflation. The short-run risks are captured by statistical distributions for these indicators, while the long-run risks relate to possible changes in these distributions.

The graph below plots output growth for Australia and the US.

It’s clear from the graph that output growth for both countries has been much less volatile since the mid-1980s. Economists, who like to label everything as “Great” (e.g. the “Great Depression” and the “Great Recession”), refer to this stabilisation as the “Great Moderation”.

Even a casual glance at the graph makes it clear that the Great Moderation was not a myth, as has been asserted by some commentators, but is very real. Yes, the US economy had large negative growth rates in 2008. But since then, output growth has been stable, if lacklustre. Australian output growth also remained stable throughout this period.

The reasons behind the Great Moderation are highly contested. But at least a couple of leading explanations suggest it should persist in the future. The most compelling explanation is that the economy now faces “smaller shocks” due, in part, to a changing structure towards services and away from manufacturing (though the reduced volatility occurs within services and manufacturing, not just due to their shifting importance).

Also, monetary policy likely played some role by stabilising inflation, leading to fewer movements along the “Phillips curve” (the short-run link between inflation and output). Note, however, that US output growth remained stable after the global financial crisis, despite the US Federal Reserve facing a “zero lower bound” constraint on interest rates. So a paramount role for monetary policy in stabilising output growth is doubtful.

Consistent with the visual impression in the graph above, formal tests suggest the statistical distribution for Australian output growth has remained fixed since the mid-1980s. Based on this distribution, the short-run outlook has real GDP growing at a 3% annualised rate, with a standard deviation of 1.5 percentage points for year-on-year growth summarising the risk in this prediction. In words, output growth could well be 1.5% or 4.5%, but there is a low probability that it will be less than 0% or greater than 6%.

Notably, a major recession along the lines of what happened to the US in the global crisis is extremely unlikely based on this distribution, although other statistical modelling suggests the probability of some sort of recession for Australia is less remote, but still small, at close to 15% during the next two years.

The graph below plots inflation for Australia and the US.

This graph shows that Australian inflation has been lower and less volatile since the early 1990s, especially in comparison to the 1970s. This pattern of stabilisation roughly mirrors that of US inflation, also plotted in the graph, although the timing is a bit later in Australia.

The stabilisation of US inflation in the early 1980s coincides with major changes in the Federal Reserve’s monetary policy at the time, while a link to monetary policy for Australia is strongly supported by the anchoring of inflation expectations (such as the measure also reported in the inflation graph based on the difference between yields for 10-year nominal and real Australian government bonds) at the start of the inflation-targeting era in the early 1990s.

Consistent with the visual impression in the inflation graph and similar to output growth, formal tests suggest a fixed statistical distribution for Australian inflation in recent years, albeit since the early 1990s only when inflation targeting was put in place.

Based on this distribution, the short-run outlook has inflation at a 2.5% annualised rate (exactly the midpoint of the Reserve Bank of Australia’s target range), with a standard deviation of 1.3 percentage points for year-on-year inflation summarising the risk in this prediction. In words, the headline inflation rate could well be 1% or 4%, but it is unlikely that it will be much more extreme than that.

A major recession might push Australian interest rates to the zero lower bound, along the lines of what has happened in Japan, the US, and Europe. However, if the RBA were to follow similar unconventional policies to those conducted by the Federal Reserve in recent years, the US experience suggests that inflation volatility should remain contained.

The main long-run risks for the Australian economy are that the statistical distributions of output growth and inflation could change in some fundamental way, as they have in the past.

Given the reasons for the past changes discussed above, it seems unlikely that output growth and inflation will return to their pre-Great Moderation patterns. A downside of this is that long-run output growth now appears to be lower than it was in the 1960s and 1970s. Furthermore, there is always a risk that long-run output growth could fall further.

It is notable that the average growth rate for the Australian economy was as high as 5% in the 1960s when worldwide productivity growth was high, but has only been 2.8% over the last decade. At the same time, average growth has been reasonably steady since the mid-1980s. So an imminent end to economic growth, as might be suggested by the most dire scenario-based analysis, is quite unlikely.

The key point is that to really understand the risks in the economic outlook, it is important to step back from a story-telling approach, no matter how compelling, and take an  objective look at the data. Doing so provides some encouraging bounds on the likely risks for the Australian economy.

James Morley is a professor of economics and Associate Dean (Research) at the Australian School of Business. A version of this post appeared on The Conversation.

Julie Cogin

Smart phones are designed to make you feel indispensable. Forever on tap, on line, alert to the beep or vibration of an incoming message, you are chained to the workplace.

Imagine a CEO who is always available, a senior manager who can decide every major operational decision, whether in the office or on holiday.

What is this connectivity doing to workplace culture?

Managing talent and succession planning will fail if executives don’t delegate responsibility.

At an executive education session on talent management I presented recently, each of the 80 or so executives had their smartphone sitting in a prominent position on the desk in front of them.

The room was full of highly committed senior executives looking for the secret to attract, engage and retain the best talent in order to propel their businesses forward or outdo the competition. The behaviour of folks in the room was consistent with every other executive audience I have encountered in recent years. There was good exchange of views and listening to examples of workplace practices or troublesome issues.

Yet everyone leapt out of their chair for all breaks or group work activity to call the office or at the very least check their smartphone for email, text or incoming calls, certain something must have gone pear-shaped in their short absence. Every single person in that room had a smartphone accessible to enable regular (in some cases meant several times each minute) checks for action.

The irony of the situation was that this behavior is a major impediment to talent management – the very topic of the day. Let me outline three reasons why.

First, if you can always be contacted to deal with emergencies, urgent situations or the usual bushfires that come up you’re not encouraging others to make decisions in your absence or assume greater responsibility. By not providing employees with the autonomy to make decisions about how they can best deal with difficult situations you reduce their motivation and ability to take risks, try new things and be creative.

Remember the days when senior executives took leave and someone talented was coached and prepared to “act up” in that role? What a win-win situation for the person on leave who could really experience the benefits of a vacation or professional development opportunity – as well as the individual with the chance to develop new skills, be exposed to matters they may not be in their regular job and gain experience or recognition to prepare for their own advancement. It seems this approach is now lost.

Second, the addictive smartphone behavior I observed during this session (and on many other occasions) where executives immediately answer emails and phone calls any time of the day (and night), encourages that behavior in others. The cascading effects are likely to block the development opportunities of those below and impede succession planning right down the line. Also important is the signal sent across the organisation on managing work and non-work responsibilities, let alone the message this communicates on well-being.

Third, during the session those most addicted to their device argued that they wanted to be “available” to their teams (and boss) or it was an extremely busy time of year, while some confessed to a high sense of wanted to be needed or in high demand. And while I don’t believe anyone is indispensable to an organisation, creating a situation where you are in a high-demand position, invaluable or needed for all key decisions prevents your own progress to more interesting roles. 

A key component of any talent management program is the “make” versus “buy” decision. Irrespective of whether you “make” your talent internally by developing people for roles or “buy” your capabilities in from the labour market, both require a concentration on improving the return on investment efforts (from recruitment or development activities).

This means protecting that investment by creating a work environment where people can thrive and want to remain as well as generating sufficient internal opportunities to enhance skillsets. And there is no better way to improve a skillset than by temporarily promoting talent, where you can also test them by seeing how someone performs before giving them a ‘leg up’ the corporate ladder.

Also – from a purely accountant’s perspective – if you look at the costs of recruiting staff, and the risks inherent in taking on a virtual unknown, it is clear that internal promotion has obvious advantages: firms can save a lot of money by promoting those with obvious abilities, and the only way to do that is if the hierarchy permits a temporary promotion to see how they perform.

Having their boss switch off – both physically and mentally – for a couple of weeks is a great way to do this. The boss won’t be away long enough for any real damage to be done if those standing in prove mediocre, but it’s long enough to give a good test run, and see if promoting talent is a cheaper alternative than ‘buying’ someone new in.

I am a big supporter of smartphones, laptops and other mobile technologies as they can enhance productivity, provide greater freedom and flexibility, however they also may be your organisation’s major impediment to talent management.

However switching off that phone and having genuine time out of the office is the best way of securing talent for the next generation – and saving the company money.

James Morley

As a former North American, I decided I would pay a bit more attention to Prime Minister Tony Abbott’s trip to Canada and the United States than to some of his other adventures abroad. So how did his trip go?

The short answer, at least in terms of the economic agenda, is not all that well.

On the trip, Tony Abbott wanted to focus on the vague theme of “Australia is open for business” (it will have come as a great surprise to most North Americans that it had been previously closed).

But climate change and policy responses to it quickly became the focus of attention for the trip. On this, Tony Abbott has willingly set himself up to be a world-wide posterchild of climate-change denial, along with Stephen Harper, PM of Canada. 

To be fair, Tony Abbott emphasized that he thinks climate change is real and important (just not that important!). But the big policy differences from other leaders in wanting to avoid any demand-side price mechanism and coordination of policies made him look like “yesterday’s man” compared to Barack Obama (Californian Democrat Henry Waxman used the doubly-dismissive phrase “a behind-the-scenes lagger”).

The “Canadia” gaff was a small, if amusing highlight of the trip. But the initial snubbing of key economic leaders, such as Christine Lagarde from the IMF, was flat-footed and more serious. Clearly someone in the PM’s staff figured this out because he did meet socially with Ms. Lagarde in the end.

However, I was surprised that Tony Abbott was initially scheduled to meet Janet Yellen, the Chair of the US Federal Reserve, and not Christine Lagarde. It’s as if someone was confused about the difference between monetary and fiscal policy. It makes more sense to me for someone like Glenn Stevens, Governor of the RBA, to meet with Janet Yellen and for Tony Abbott to meet with Christine Lagarde and the US Treasury Secretary Jacob Lew. 

Of course, the fact that the IMF has in the recent past published statements implying that Australia has no impending budget crisis may have made a formal meeting with Christine Lagarde a little bit awkward. The IMF has also just released a report suggesting that the Australian housing market is one of the most overvalued in the world. Meanwhile, the recent budget cuts mean that the RBA has to hold off on raising rates (by contrast, the RBNZ has been able to raise rates) even though doing so risks inflating a housing bubble.

I doubt Tony Abbott’s lecture to the US on corporate tax manipulation will have much impact. Like addressing climate change, this is something that would require a lot of international coordination. But with the exception of the love-in with Stephen Harper in Canada, I don’t see Tony Abbott in much of an international-coalition-building mode right now. Whether he likes it or not, climate change will get more attention at the G20 meetings than Google’s small Australian tax bill.

A noteworthy economic story from the trip was the fact that US pension funds expressed interest in Australian infrastructure. Canadian pension funds have already invested. This all makes sense given diversification benefits and high returns in Australia right now compared to the US and Canada. But I’m not sure that any future increases in investment will have been because of Tony Abbott’s financial planning advice rather than just what the pension funds would have done in any event.

Indeed, some US fund managers explicitly stated that they would have been just as happy buying Australian government debt (or probably happier because government bonds are highly liquid assets). There just isn’t much Australian government debt to buy nowadays, so they have to directly buy Australian infrastructure instead. But new infrastructure could be financed using debt and this might actually be less costly given the preferences of US fund managers. Of course, borrowing to build infrastructure rather than selling it wouldn’t fit in with the PM’s apparent view that the government avoid owning public goods.

I had particularly hoped that Tony Abbott would get to meet members of the Tea Party as part of his trip. Alas, Eric Cantor, the House Majority Leader and renowned Tea partyer (partier?), cancelled his meeting with Prime Minister at the last minute after he was unceremoniously dumped by his own party. Of course, I doubt the Prime Minister would have enjoyed the meeting under the circumstances. Instead, he had more time to contemplate the loyalty of his own party before his long flight home.

James Morley was born in Canadia and is Associate Dean (Research) of the Australian School of Business.

Tim Harcourt

We are days away from the long awaited FIFA World Cup in Brazil – the most watched sporting event in the world. Like the Olympics it happens every four years since it began in 1930 and this time the event has been controversial because of protests against the hosting of the World Cup (and Rio Olympics in 2016) by local Brazilians and most recently by suggestions of corruption in FIFA’s decision to hand the 2022 World Cup to Qatar.

As usual, most economists are soccer fans (soccer is known as football in most countries but soccer in North America, Australia, New Zealand and South Africa) and have been analysing the economic impact of the Cup, especially as they have to justify watching the games on TV over the next four weeks or so at the same time as they are analysing shares and commodity prices. But they needn’t be too sheepish about it.

Sport is a big deal in economic terms and the business of the World Cup has become one of the most scrutinised set of international transactions you’ll ever see (or not see). 

Soccer, ‘the beautiful game’, transcends cultures and national borders, has been the subject of economic diplomacy and the odd dispute, and touches millions of people on this planet, for better or for worse.

But what exactly is its economic impact?

First, it is clearly a big deal for Brazil to host the World Cup again, for the first time since 1950, to much fanfare and riots, but is there a world cup effect? Is it good for the host country economy?

There’s no doubt that Brazil went for the hosting rights because of the prestige it would bring and would help their claim to be the world’s next economic superpower. After all they are the world’s 5th largest economy by population and the seventh (on a purchasing power parity basis) or sixth (on a US dollar basis) largest country in the world, accounting for between 3 and 3  ½  per cent of world output.  As a member of the BRICSA grouping (Brazil, Russia, India, China and South Africa), Brazil is playing an important role in international affairs as we have seen in the World Trade Organisation (WTO) and G20 multilateral fora. 

Brazil has undertaken a charm offensive in the developing world under the ‘South-South banner’. Under President Luiz Inacio ‘Lula’ da Silva, Brazil opened up 53 new embassies in Africa and has expanded its sphere of influence across the globe. 

According to Goldman Sachs, 250 million people play soccer football regularly in more than 200 countries and since the first FIFA World Cup was hosted in Uruguay in 1930, over 70 countries have participated in various qualifying rounds. But as the protestors point out, if resources are allocated away from health and education to build stadia, or if something went wrong, it could damage Brazil’s prestige just 2 years ahead of the Rio Olympics in 2016. 

Second, if there is an economic gain from hosting the world cup, how about winning it? Remember, in 1950, 200,000 people jam-packed the newly built Maracana stadium in Rio de Janeiro, and Brazil just needed to draw to win the Cup. But they lost, to their neighbour Uruguay on a day that shocked the nation, and ruined the life of the poor Brazilian goal keeper who happened to be custodian of the national team on that day.

According to Goldman Sachs, a World Cup win does give a country a boost on the stock market. All the winners since 1974, have outperformed in the post final month with the exception of Brazil in 2002, that had been going through a financial crisis as was near neighbour Argentina. The victor outperforms the global market by 3.5 per cent in the first month, then it tails off, and for the host nation outperformance is 2.7 per cent but it tails off too, and can even underperform in three months.

Apart from the stock market, the economic impacts can be positive if the host nation uses the major event to bring forward much needed infrastructure (as in the Sydney Olympics in 2000), provides a legacy to a local area (East London in 2012 via Westfield Stratford) or to showcase its global engagement to the world (Seoul as Olympic host in 1988 signalling its move to an advanced North East Asian global ‘hub’ of trade and commerce). In addition, there are networking effects of hosting the games or the Cup e.g. Austrade’s famous ‘Business Club Australia’ model at the Sydney Olympics that paved the way to Beijing business for the likes of architect John Bilman, of PTW architects who built the watercube at Beijing in 2008.

Third, what will the World Cup do for Brazilian-Australian relations?

Brazil has had better economic progress than the ‘lost decades’ of the 1970s and 1980s, and has plenty of economic suitors, so Australia will need to do more than just woo the Girl from Ipanema if it wants to succeed in Brazil. Areas of potential collaboration include resources and agriculture, transport, better cities (urban renewal), renewable energy, education, arts and popular culture and of course sport!

Will the World Cup help with many Australians going to Brazil for the first time to support the Socceroos? One interesting fact from  the Goldman Sachs report was that amongst foreign buyers of World Cup tickets, Australians bought 41,000 or 41k tickets making it  second only to the USA (154 k), and ahead of football mad England (38 k) and nearby Colombia (33 k). Whether it is the strength of the Aussie dollar, the enthusiasm of Brazilian-based Australians or the perfect reason for a once in a lifetime extended holiday to Brazil, is unclear.

Fourth, how with the World Cup impact on Australia’s trade and investment ties with the rest of Latin America? As I wrote in the recently released Latin lessons – Australia and Latin America face the Asia Pacific Century, the Andean countries of Chile, Peru and Colombia have been happy hunting grounds for Australian exporters and investors, particularly in resources, energy and education. The World Cup may draw in a bit of extra business, especially as Qantas flies to South America through Santiago, but I expect that business will go on whatever happens in Brazil this month.

And finally what will the World Cup mean for the business of sport in Australia? As I have been finding in researching my forthcoming book, Footynomics, on the battle of the football codes in Australia, there has been a time when the AFL, NRL and Australian Rugby Union officials were sort of hoping for the Socceroos not to qualify for the World Cup, because it would awaken ‘the sleeping giant’ and they’d lose their talent – on and off the field – to Australia’s fledgling soccer code. 

I think we would expect the rival football codes to want the Socceroos to do well at least out of national pride and professional respect. The big question is whether the latest scandal rocking FIFA in handing the 2022 World Cup to Qatar, with accusations of bribes and breaches of occupational health and safety and actual workplace deaths and might shake things up and bring Australia back into the picture as an alternative host. Then we would see a battle of the football codes but following a successful Australia 2022 not Brazil 2014.

Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business.

The two changes to superannuation announced in the Federal Budget, one of which is welcome news, were:

• the way excess non concessional contributions are dealt with, and
• the progressive increase of the Superannuation Guarantee will be delayed another year.

A third announcement, the 2% debt levy, is already encouraging the financial planning community to look at ways to avoid it (sigh).

In addition to these Budget changes, the Australian Taxation Office (ATO) recently put the market on notice that it will come down hard on taxpayers using leverage in a superannuation fund to circumvent the contribution limits.

Non-concessional contribution caps

The contributions caps in superannuation limit the amount of tax concessions anyone, no matter how wealthy, can receive from using a low-taxed superannuation fund. One of those limits applies to contributions which, in effect, have not been tax-deductible, and is considered a penalty. It has also been highly problematic for many.

When introduced in 2007, any contributions in excess of the limit were taxed to the member at 46.5%. While that extra tax on excess contributions was said to recapture any tax concessions that had been derived from having the excess in the fund, it was more in the nature of a penalty tax.

Indeed, through one of the other rules relating to this contributions limit, it was not unusual for people to make contributions, say, two years ago and without fully appreciating what they had done earlier, make a contribution now that resulted in an excess non-concessional contribution and a 46.5% tax bill on that excess. It is with some relief, and probably six years too late, that these rules are now changing for the better.

From 1 July 2014 it is proposed that a person who contributes non-concessional contributions in excess of the cap will be required to take it out of the fund. No more 46.5% taxes.

Super Guarantee increase delayed

The increase in the Super Guarantee payment from 9% to 12% will be delayed a year. The super guarantee will not reach 12% now until 2022. However, the increase from the current 9.25% to 9.5% in 2014/2015 will go ahead, and it will remain at this level for four years until the end of the 2017/2018 financial year.

Dealing with the 2% debt levy

I never cease to be amazed by the ingenuity of the financial planning profession (of which I am part, I feel obliged to add). Within a few days of the Government announcing taxpayers over $180,000 pa will be charged an additional 2% income tax as a levy to cover Australia’s debt position, plans surfaced on how to manage around it.

The 2% increase will mean that the highest marginal tax rate for those affected, excluding the Medicare levy, will now be 47%, rather than 45%. However, the FBT rate is staying at 45% until at least the 2014/2015 financial year. The proposed scheme to avoid the levy is to salary sacrifice into taxable fringe benefits, which will be taxed at 45% rather than 47% had it been paid in cash, until 31 March 2015 (the commencement of the new FBT year).

Leveraging around the contribution limits

There has been one other significant tax issue related to superannuation that does not come out of the budget. The ATO has put the market on notice that it is not happy with people using leverage in a superannuation fund to overcome the contribution limits.

In one extreme example, three wealthy brothers all over age 60 who each set up an SMSF then loaned $10 million to it interest-free. The three SMSFs would then co-invest in a $30 million commercial property.

There is no deeming of the interest free loan as being a contribution so there were no contribution limit problems and as each brother was over age 60, their SMSFs were in pension mode and no tax was being paid on any rent or gain on sale from the commercial property.

The only risk being run was if they died without a Death Benefit Dependent, when tax would be payable on any benefit payment.

In any case, the ATO is now signalling that this kind of structuring is problematic. Briefly, the ATO is suggesting that the rental income and indeed, any gain made by the SMSF on sale, will be taxed to the fund at 46.5%. Some tax professionals are not sure the ATOs technical analysis of these types of transactions is correct. However, they take the view that the more likely result would be the application of the general anti-avoidance rule, which would seem to directly catch this practice.

Importantly, the views expressed by the ATO are a message to the market that it does have serious concerns with using leverage to get around the contribution limits.

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of Business, UNSW. A version of this post originally appeared in Cuffelinks.com.au. This information is general in nature and readers should seek their own professional advice before making any financial decisions.