Top 5 ones to watch: 2010

While there has been some speculation that Perpetual would be the next logical takeover target in a rapidly consolidating Australian wealth management industry, few expected the offer would come from notorious private equity firm Kohlberg Kravis Roberts & Co.

1. Perpetual/KKR

There has been speculation in recent months that Perpetual would be the next logical takeover target in a rapidly consolidating Australian wealth management industry, but few expected the offer to come from notorious New York-based private equity firm Kohlberg Kravis Roberts & Co (KKR).

The surprise October bid, with a premium price tag of up to $40 per share, prompted an initial rejection from Perpetual’s board, but the Australian listed wealth management firm has left the door open for further discussions.

Some analysts have suggested a successful bid would see KKR offloading Perpetual’s Private Wealth and Corporate Trust businesses.

The offer may have somewhat stymied Perpetual’s search for a new chief executive, with incumbent David Deverall due to leave in March 2011 at the latest.

Those who have been contacted by head hunters must be wondering about the wisdom of accepting the appointment in these uncertain circumstances.

Whatever the outcome of the KKR bid or the search for a chief executive, it’s likely the Perpetual the industry sees today will look somewhat different this time next year.

2. Treasury workings

Will they or won’t they? Whether it’s banning platform rebates or insurance commissions, many in the industry are wondering what’s inside the heads of the Treasury officials currently drafting the legislation underpinning the incoming Future of Financial Advice (FOFA) reforms.

Treasury officials have consulted widely with the industry in recent months.

The detail regarding the opt in proposals for advice agreements, as well as the potential scope and application of intra-fund advice rules, remain two of the most contentious and influential issues for the financial advice industry.

A number of platform providers, meanwhile, have expressed confidence that rebates paid to licensees will not be ruled out in the legislation — the first draft of which is due early next year.

The red herring of the reform consultation has been the discussion around any potential ban of commissions on insurance products.

Initially raised by the Cooper Review and restricted to commissions with respect to insurance within superannuation, the concept raised widespread attention and was later adopted by Treasury as a topic for discussion.

Treasury has told the industry that no decision has yet been made, and that it will consult on the issue early next year.

It will then be up to the industry to persuade Treasury not to make any decisions that would further exacerbate Australia’s chronic state of underinsurance.

3. Definition of fiduciary duty

The other sleeper issue contained in the FOFA reforms is the definition of the ‘fiduciary duty’ to be imposed on financial planners, and how it will be applied under the law.

Of particular interest will be how the definition is applied to advisers working within institutional structures, where advice arms could be argued to be first and foremost distribution channels for banks and funds management companies.

Also of interest will be how the definition applies to financial advisers licensed by superannuation funds — particularly those who provide intra-fund advice.

There are some who believe the introduction of a statutory fiduciary duty for advisers could see the financial services industry return to the agent and broker models of its roots.

That could result in a polarisation of the financial planning landscape, with advisers residing inside institutionally owned licensees becoming agents acting on behalf of the licensee, with a relationship based on a limited product choice; and advisers outside those regimes becoming brokers who offer a full choice of products free from institutional influence.

4. SMSFs

The self-managed superannuation fund (SMSF) sector continues to be one of the fastest growing segments of the financial services industry, and within that sector one of the rapidly growing trends is gearing into both commercial and residential property

The new gearing rules for SMSFs came into play in late 2007 but there was little take-up before the beginning of this year.

The number of SMSF trustees borrowing to invest has more than doubled in the past two years, with property by far the most popular geared investment.

Two thirds of planners surveyed by Investment Trends intend to place at least one SMSF client into a loan product in the next 12 months.

With a number of advice firms actively promoting gearing into residential property, it is probably only a matter of time before the critics define the nexus between the investment performance of SMSFs and the always volatile nature of the Australian residential real estate market.

The Cooper Review, chaired by Jeremy Cooper — himself an SMSF trustee — saw no particular need to tighten the regulatory arrangements with respect to SMSFs.

“Given that SMSF members are entirely responsible for their own decisions, the panel sees the ability to be genuinely self-directed and self-sufficient as an important feature of SMSFs,” the panel said.

But, as the assets at stake continue to rise, only the naïve would believe that the Government will not at some point move to more closely monitor the sector.

5. Default superannuation wars

Much to the joy of the retail superannuation funds, the Senate last month asked the Productivity Commission to consider a new process for the selection and review of default superannuation funds under modern awards.

The Shadow Treasurer and Minister for Financial Services, Mathias Cormann, said the Senate’s action represented a win for the Coalition, with Labor voting against the motion.

Cormann, along with many in the retail super camp, see the current process — which only allows industry funds into default super arrangements — as anti-competitive.

Cormann lamented the two years of the existing “closed shop” arrangements, saying Australians would benefit from “robust competition between all superannuation funds”. He argued it was the interests of the union movement, rather than the public, being served by the current process.

The report from the Productivity Commission is due to be tabled in the Senate by the end of May next year.

In light of the changes being introduced as part of the FOFA reforms and the recommendations of the Cooper Review, retail funds may find themselves in a more competitive position for default arrangements in 2011.