Low interest and the "Cash" myth...

For those prepared to take on extra risk, exiting cash may make sense. But for the nearly or already retired, capital preservation is key. For many SMSF trustees, cash remains the preferred defensive asset. Rising competition among banks for consumer deposits means returns are still ahead of the most defensive asset – government bonds.

One of the more strange "finance profession" comments I have recently heard, is "Stay in Cash, you will slowly Fry. PMSL"1
- David Lunn, Director , LifeStyle Wealth Partners.

Fear uncertainty and doubt (FUD), combined with economic jargon slips many trustees into a comatose like state, and rightly so: finance professionals carve out a living making simple subjects seem complex. It’s the best way to convince you to part with your hard-earned money.  Throw away comments like the above, typically have a tendency to be very light on any facts, and often emotive, or personal in focus.

Inflation
So why do we care about inflation? Because it is meant to give us an indication of how the prices we pay for goods and services vary over time. Inflation is one measure of the cost of living. Hence, inflation suddenly becomes important to all savers. We need the savings we set aside for retirement to beat inflation. If we don’t, our nest egg will not keep pace with our lifestyle. And if we’re in retirement, we want our savings to generate returns that, as a minimum, meet or exceed inflation otherwise our purchasing power will shrink.

Since 1982, annual “core” or “underlying” inflation in Australia has averaged about 4 per cent. If we focus only on the period since 1993 when the Reserve Bank of Australia formally started targeting the inflation rate with its chief policy instrument, known as the “target cash rate”, inflation has averaged a touch under 3 per cent.

Hence an overall savings strategy should deliver returns greater than 3 per cent annually with the minimum possible risk.

A related issue is what sectors offer savers effective “inflation hedges”. In this context, there is a pervasive myth that fixed income is a bad inflation hedge. This is both right and wrong. Fixed-rate bonds that pay a set rate of income decline in value in periods when inflation is high and interest rates rise.
This is not hard to understand: if you buy a bond that returns 5 per cent annually for six years and interest rates on other bonds rise to 6 per cent, your bond’s price will fall until its yield makes investors indifferent between the two alternatives.

RBA cash rate and Inflation
This begs the question of whether the RBA’s target cash rate is a good inflation hedge?

The chart below shows the correlation between the RBA’s cash rate and core inflation since 1990. Given the RBA is officially mandated to manage inflation with its policy rate, one finds, the correlation between interest rates and inflation is a strong at around 73 per cent.

The Cash Myth?

Contrary to popular myth, cash is, therefore, an excellent inflation hedge.

But does it give you a “real” return above your cost of living?

If one received, say, 1 per cent annually above the RBA’s cash rate through smart investments in bank deposits, your “real” return after inflation would have averaged about 4 per cent over this period. 

An alternative Strategy

"If the objective is to produce a steady, tax-effective income stream, good quality shares with a long history of paying dividends are a real alternative to a term deposit.
Some current yields are very attractive and if you then add the franking credit, you are looking at a nice, tidy return,” he says.
He adds this strategy requires investors to be comfortable with short-term volatility as their capital will still vary. But by focusing on quality and targeting companies with high dividends, investors may also experience less volatility as typically many are defensive stocks".
- John Donald , Partner and Senior adviser , Ipac Western Australia

Peak Debt and the Effectiveness Monetary Policy

So why has monetary policy become ineffective?
The answer is deceptively simple.
Loose monetary policy is designed to encourage consumption and investment by making current period consumption and riskier assets more attractive, and has historically been an effective tool in this regard.
This is no longer the case because we have collectively reached ‘peak debt’ (at least in most western countries, including Australia).

Whether an individual, organisation or nation state, for any given level of income there is a maximum level of debt that can be accumulated without triggering a repricing of risk. Beyond ‘peak debt’ any further increase leads to a repricing of credit risk – the price that must be paid for that debt.

If you can’t increase income, you can’t increase the debt level. The monetary authorities are trying to send one signal about the pricing of credit, but at a national level the markets are sending exactly the opposite signal – the two just cancel each other out. (There is some increase in consumption because of the cash savings in interest cost, but at a national level this tends to be neutralised because one person’s interest expense is another person’s income).

This is the fundamental cause of Europe’s woes – countries like Greece, Spain and Portugal went past their ‘peak debt’ levels, and their creditors started to re-price their debt because doubts emerged about their credit-worthiness.

The RBA will continue to cut interest rates, but their efforts will be in vain, because many economists, suggest that we have already borrowed as much as we can for our current level of income, given the mining boom is over(and having spent much of the money on non-productive real estate assets, have little in the way of options for driving the improvements in productivity which are a fundamental pre-requisite for increasing the size of the Aussie pie).

Risk

The GFC is still fresh in many people’s minds of many and there are still concerns over the state of the European and US economies, so there is still a comfort factor in bank accounts and term deposits, even if returns may be lower, than some alternatives.

This article looks at cash with a view, that cash, correctly managed, can provide a reasonable return, plus an inflation hedge, with very low risk.

But as always, it is up to the individual SMSF trustee, to get the facts and make an informed decision.

“I can afford to be patient, but to make an acceptable return above inflation, I need to take some risk. Diversification is important because nobody can accurately forecast the future value of any investment.”
- David Murray, Senior Adviser, Credit Suisse

Notes

1. PMSL, is slang for Pissing MySelf Laughing..

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Your SMSF in the Cloud, the Opportunities...

State of Play
The SMSF Administration industry today is at best a "cottage" industry, characterised by:

1. High fees, or Lower quoted Base fees, with hidden charges (kick backs), or additional per transaction fees
2. Very Low levels of automation, when compared to Industry or Retail Superannuation Funds
3. High levels of individual fund compliance, Superannuation funds audit at the "system" level
4. No economies of scale, resulting in low levels of specialist SMSF skills, very little "real" understanding of the application of modern day system audits.
5. Auditability
   a) Could not find a single accounting or SMSF administration platform in use today audited against ISAE 3402.
   b) Most of the feeds, such as brokers, contract notes, registries ect are also not audited. We see recent announced solution which "scrap" data from pdf file raw data, these are not originals or audited, but are being presenting as "true and accurate" data to auditors.
   c) Due to the rise in the variety,and volume of traded instruments, markets and currencies, by SMSF's; auditors have a difficult time auditing the level of complexity and interactions, which in many cases is hidden from the auditor.
   The old "get your bank to send me your bank statement" approach simply does not work, with modern information systems..
   Note in many cases this is not an auditor issue, but is mainly caused by the lack of audited, or even audit-able data available to SMSF auditors.
6. Trustee access to SMSF information  to make informed decisions
   Very few systems offer a daily "reconciled" set of data to trustees, even less offer "reconciled" daily fund and member positions. This is due to the very low levels of automation in the current systems,and the lack of "audited" data to perform daily reconciliations. Most systems don't even tell you if the reports are "reconciled", you just get a bunch of reports.
7. Trustees want the advantages of an SMSF (control, direct ownership and flexibility), but typically don't want the day to day compliance issues. Trustees want to concentrate on their Investments for retirement, or during retirement. The majority of trustees really don't want to care about data feeds contract notes, or the myriad of  SISS and ATO accounting issues..
   It is delusional to suggest the typical SMSF Trustee can be an expert in these areas above.  

It is truly a sorry state of affairs..

Cloud Computing

Cloud computing has become an overloaded term, which is used to mean almost anything..

I will use the NIST definition:
"Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction"
Read "It is a collection of computing and enabling resources, to realise "stuff" like SMSF Admin services when combined with Application Software.. "

What does this mean to the SMSF industry?
We are one of "the" pioneers of "Cloud Computing", way back in 1999; in those days it was called "ASP Providers" (this is now one of the cloud computing "service models" within the above NIST definition).

What we were trying to do, was to overcome the limitation of the current "desktop" accounting packages in use, in those days the pioneers were groups like MYOB and even BGL
It is simply economics, if you want to put a database on a clients desktop computer, it cannot be a $50k enterprise SQL server, it needs to be a very low cost standalone system. Now these same economics applies to almost all elements of the system. To this add the cost of software updates, and the "time lag" of releases to distributed clients.

An important aspect of cloud computing is "Elastic or on-demand processing", this allows me to dynamically scale the processing resources required to meet a specific load, this may be growing the Numbers of funds, or simply doing 100,000 tax returns overnight..
I don't have a fixed capital cost, I simply pay for what is used, and if I am smart about it, I will match this cost to an income stream..

The last advantage is not cloud in itself, but rather that one now has an "enterprise" solution, rather than a set of dis-joint uncontrolled desktop solutions.. This is the ASP or SAAS service model within Cloud computing.

The SAAS model allows for the first time things like an ISAE 3402 audit report to be performed each year for SMSF administration systems. This brings them in line with normal "enterprise" solutions "Google" the systems in Australia with ISAE 3402 reports, they are not desktop solutions. Its is simple economics..

SMSF Automation

It is simply not possible to 100% automate, 100% of the existing SMSF administration tasks today..
It is possible to 100% automate 99.9% of the volume of SMSF administration transaction, with full ISAE 3402 audibility back to the original raw audited source data, i.e unbroken audit chain into the SMSF tax return.

On a typical active investment fund, of the 500->1500 transaction each year, about 10 to 15 transactions will need to be manually entered into the system.. This gets very close to Industry and Retail Superannuation systems.

In an non "cottage" market, this should be reflected in a yearly wholesale SMSF fee with audit, in the sub $300 area, yes lower cost with increased compliance and overall quality.
I call this the "jetstar"(1) SMSF service..

This scale of fees are more than competitive with any Industry and Retail Superannuation Fund ( the Cloud is providing the same economies of scale and enterprise solutions as a Superannuation Fund), and open up the opportunities to the under 30's SMSF market(2), who are currently locked out of the high "minimum balance" SMSF word today..

Our own Cloud  based SMSF administration service, called SMSF365 exists today, and can achieve these objectives.. the "Cottage" SMSF Industry has the choice to merge, as required these capabilities to realise the benefits.. Like all could services they are on-demand, consume as little or as much as required.

And just like the real Jetstar, this approach may not be "the" solution for 100% of the market, my proposition is that just like Jetstar it is an option, always let  the client decide..
The "Qantas" model is going in only one direction "broke", even Virgin has acquired  their own jetstar "tiger" airways.
Just like airline travelers, trustees, accountants can work out what is right for them, and their clients.

I predict that within 5 years, there will only be Cloud based SMSF administration based solutions in existence, and most accounting firms with less than 20 SMSF funds will outsource their back office to a specialist "jetstar" SMSF admin firm..

It is an exciting time for the SMSF Industry.
Enjoy...

Charles Moore
CEO VillageMall Pty Ltd

Ok.. so there must be some downside,what are the risks?

Not all Cloud Services are created equal, just as not all existing SMSF admin services are the same.
Key questions, I recommend you receive answers for::

1. Is my data being sent out side of Australian jurisdiction ?
   If your SMSF data is being worked on by anyone outside of Australia (Indian, or other located  back office outsourcing is very common, an in all of these cases your data is going outside of Australia, don't listen to the waffle we are accessing your system in Australia)..
2. If a third party is working on your data, ask if they are SAS70 audited, this is most common standard and is mandated by all the Big players in the USA.. If not I then suggest you ask why not?
3. Is your data protected in the case of a disaster, i.e geo location  replication.
4. Is your data "always" encrypted at "rest" and encrypted in "transit".
5. Can I get my data in a form suitable to store under my control, meet ATO and other regulatory data retention requirements? Ideally this should be in a  vendor neutral format, an IBM 80 EBCDIC char punch card is not much use today.. or even Word Perfect files. I still miss those ctl K->D sequences...
6. Bottom line you need the information above, you may still make a decision to use the service, even with the risks, but this is an informed decision, your basic right..
   
   The issue... Your informed consent is required, before your data is sent overseas, after all it is your data.

For the details, take a look at  my blog  Does Your Data Still Call Australia Home

--- notes

1. "Jetstar" is the trade mark of Jetstar Airlines, and  is not related to or in any way connected with this blog..
2. The “2013 Active Management Report” found 46 per cent of recent SMSF investors were under the age of 30, while 44 per cent of the next wave of intending investors were also under 30. -


Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Plutus- Managed Investments for Retail SMSF Trustees

Finally.. after many years of R&D, the ultimate SMSF solution..

For the first time, a true alternative
to Retail and Industry Superannuation funds..

Features:

• Trustee directed, just select from a range of global, professionally managed Mandates
•  - just like a traditional managed fund, but you directly "own and control" the securities within the mandate.
• - mandate can include almost any global market, instrument type and currently 16 different currencies.
• - get rid of your existing, old school, Managed Funds with the typical 2% plus fees; even when your balance is going south!
• - get rid of trailing adviser, or SMSF admin kick backs; there are no free lunches..
• Build your own mandate, via ETF's to get Index coverage of the market, or individual stocks, who does not want to directly own Apple, Google or Coco Cola?
• We do all the portfolio construction, and re-balancing, all in your name.
• Integrated on-line 24*7 Global Trader, for those add-hoc trades, on any global market, anywhere, any currency (well almost)
• All investments, directly owned, and controlled by your SMSF, no unitized, pooled, or embedded tax issues.
• A Fully Manged solution, no "accounting", data feeds, or traditional old world cottage industry SMSF issues to worry about, we look after them for you.
• Select your mandate.. and we do the rest.
• On-line access, with daily reconciled accounts, includes Australian compliance and tax reporting for global mandates, available 24*7*365.
• Service includes a Managed SMSF Deed service, SISS and ATO compliance, reporting, auditing, actuary if needed, and online tax return submitted to the ATO. All done with our fully integrated SMSF365 service, via one of the leading SMSF administration, and audit firms in Australia.  
• Plutus, lets you concentrate on building Wealth,  for your retirement, and just like any Industry or Retail Superannuation fund, we do the rest for you.
• Plutus is SMSF wealth management, made easy for Retail Australian Trustees.

Ask about our "one-click" Plutus solution to move your existing Industry or Retail Superannuation account across to the next generation SMSF solution.

Get all the benefits of an Enterprise Retail/Industry Superannuation solution, but with direct control and ownership, of global securities, with none of the old world SMSF complexities or hassles.

Gen X/Y, ask about the Plutus online solution to start your, no hassle, wealth accumulation.

Take control, with direct ownership of your retirement Wealth!

Start 2013 on the right footing, open a Plutus account today.

Enjoy..
Charles Moore

Accounting Practices, retain your clients, stay out of the "with advice AFSL world" , but back office all SMSF drudgery to us.

Dealer Groups/Advisers, retain your clients, concentrate on providing professional Investment Advice on a fee for service basis, outsource all the portfolio and and SMSF drudgery, and compliance to us.

Retail or Industry Superannuation Funds, retain your clients, by offering an Enterprise SMSF solution out of the box. We take away the SMSF specific compliance pain, while providing a standardized enterprise solution, via our private label service.


PS: If you hear about "next generation SMSF", this appears to be the season for these,  then see their lists of features if  a lot of technology, accounting, data feeds, or even contract notes, or registry data, your are looking at an old world solution..
Time to compare to the truly next generation Plutus Managed SMSF Service..


Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Does your data still call Australia home?

"I Still Call Australia Home" Peter Allen sings of an Australian expatriates' longing for being home; is this the growing situation for Australian Trustees' SMSF data.?

There has been a recent increase in off-shoring SMSF back office administration processes, to India[10] and  Malaysia service providers[11]; primarily to reduce the Australian labour arbitrage rates, in the face of poor fund returns. In the current market, cost is probably the only element that one can reliably control.

This debate has been quietly raging in Australia's boardrooms since the early days of off-shoring. Many of the government and large corporate organisations constantly ask what protections are in place for Australian data when it is stored in servers outside our jurisdiction. But is this the case for the "cottage" SMSF administrators, or accounting practices within Australia, who typically do not have the same corporate or data security policies in place.The question? are the Australian superannuation, accounting firms or SMSF administration service providers, who are using these off-shoring services, advising the Trustees and their Advisers of the change, and the affect it may have on their data security and personal privacy. In many cases, it appears that neither the Trustee or his Adviser is told or even consulted, regarding the change to off shoring processing. The changes are just happening in the "back office". As a result the Trustee and AFSL licensed  Adviser (if the adviser recommended  a specific SMSF administration service, the basis for such advice may have changed?) has no opportunity, to assess if they wish to be part of any offshore processing.

This article looks at some of the issues involved in outsourcing services to an off shore, data entry, accounting or Cloud service providers, which is located outside the Australian jurisdiction.


Is data sovereignty so important, that SMSF trustees need to ensure that only domestic providers are used?

A recent Microsoft Cloud Adoption Study among small to medium businesses found a strong desire for local services among clients in Australia. Eighty-two per cent of respondents said it was critical or important to source cloud services from a provider with a local presence. Others, however, have been happy to embrace offshore cloud services for some of their data – usually data that does not include customer, or privacy information.
A growing number of traditionally conservative bodies are addressing data off-shoring within broader guidelines for cloud adoption. The financial-services industry overseer, the Australian Prudential Regulatory Authority is authoring a data-management guide that urges the sector to implement strict data-management regimes that enable tight control over which data ends up in the cloud, wherever it sits.

The argument isn't entirely governance-related, however. Many CEO's of  SMSF administrators, sleep better knowing clients data is in the same city or country as they are.

Currently the Privacy Act 1988 (Cth) (‘the Act’) provides the core protections for private data transferred outside Australia through its extra-territorial application and National Privacy Principle number 9 (NPP 9). NPP 9, which was introduced in 2000 outlines the current requirements that must be satisfied before an organisation may transfer data to a ‘foreign country’. The aim is continued protection of data after it leaves Australian shores, and the principle was modelled on arts 25 and 26 of the European Union Data Protection Directive[7] (‘EU Directive’). Transfers to foreign countries must either occur with the consent of the individual whom the data concerns, be necessary for the fulfilment of a contract, occur for the benefit of an individual whose consent cannot be obtained or where the recipient of the information is ‘subject to a law, binding scheme or contract which effectively upholds principles for fair handling of the information that are substantially similar to the National Privacy Principles’.

"The Australian Government Information Management Office (AGIMO) therefore advises that ‘transitioning citizen (personal) information to the public cloud is not expected to be a viable option within the next several years’; and the data centre strategy envisages that Australian data centres will be utilised rather than overseas providers."

Similarly, the Australian Department of Defence issued the following guidance on cloud services in 2011:"DSD strongly encourages agencies to choose either a locally owned or foreign owned vendor that is located in Australia and stores, processes and manages sensitive data only within Australian border.  A risk assessment should consider whether the agency is willing to trust their reputation, business continuity, and data to a vendor that may transmit, store and process the agency’s data offshore in a foreign country"

The Australian Prudential Regulatory Authority (APRA) noted in a November 2010 guidance letter to trustees of APRA regulated super funds that, although uptake of cloud services is increasing in the financial services industry, ‘regulated institutions do not always recognise the significance of cloud computing initiatives and fail to acknowledge the outsourcing and/or off shoring elements in them. APRA therefore requires regulated funds to engage in a detailed risk assessment for ‘any off shoring agreement, either directly or via a service provider, involving a material business activity’. Typical considerations include the location of the services and the service agreements with the provider.The guidance is aimed at ensuring that trustees attain ‘a detailed understanding of the extent and nature of the business processes … the technology architecture and the sensitive information … impacted by the outsourcing arrangement’

Should SMSF trustees, have less concerns than an APRA regulated super fund?

In January of 2011 Macquarie Telecom commissioned a pair of white papers from law firm Freshfields Bruckhaus Deringer discussing the cloud and cross-border risks, using the examples of Singapore and the United States. The whitepapers note that cross-border data flows have the effect of ‘seriously reducing’ the ability of companies ‘to ensure continuing regulatory compliance with Australian law and to manage the associated non-compliance risks.’ They also note the growing government and industry concern over the privacy of data that is offshored. The essential conclusion of the papers is the need for caution when sending data overseas, recommending that particularly close attention be paid to regulatory and compliance perspective. The importance of this increases the more sensitive and/or business critical the data is.

SMSF data and documents often contain SMSF fund and member tax file numbers(TFNs), these need to be protected in a similar manner as credit card numbers, the question if industry PCI standards should apply to the protection of TFN's, is a separate discussion. It is quite common for offshore providers to request Trustees to "email" documents which may contain TFN's across the unprotected Internet, to an offshore email address.

"You tax file number can be the key to protecting your identity and therefore your personal finances against theft and fraudulent behaviour, so guard it with your life."
"Unlike PINs and bank account numbers, people usually have the same tax file number their entire lives"
"If your identity is stolen it can take years to put everything right," the ATO spokeswoman says."[7]

The Tax Practitioners Boards chairman, Dale Boucher, expanded on the Board's concerns in a speech on 3 March 2011."The practice of offshoring raises the potential of conflicts with the requirement in subsection 30-10(6) of the TASA [Tax Agent Services Act], in that, you must not disclose any information relating to your client's affairs to a third party without their permission or unless you have a legal duty to do so...
If any component of your client's tax work is completed overseas, the Board suggests that agents be very clear in explaining this to your client. In particular to avoid any likelihood of your practices being seen as misleading, we suggest that you must not imply or state that all your work is completed in Australia, if that is not the case."[9]

I suggest Trustees, ask their SMSF service provider, the following questions:

The first question: Always ask, your Accountant or SMSF administrator, if they offshore any activities relating to your SMSF.
If they do, seek details of the provider, at a minim they should be able to supply you, or certify that they hold, the last SAS 70[8] audit report for the off shore service provider. If your SMSF is handled via an Australian Accountant they will have already obtained a SAS70 report as part of their due diligence. Financial Advisers should also seek the availability of a SAS70 report as part of their due diligence on any SMSF service provider, recommended under their AFSL licence, if any off shore activities are provided as part of the SMSF administration service. 

The second question:  Is any of the SMSF data being accessed by any third party service provider outside of Australian jurisdiction.
Important: if an entity (i.e an employee of an offshore provider), views data stored within Australia, via any method, then technically the data has left the jurisdictional control of Australia. We have seen several instances where off-shoring providers are stating (incorrectly) that the data is stored on Australian servers and hence is not out side of Australian Jurisdictional control.  See AAP8 where the ordinary meaning of disclosure is to allow information to be "seen" rather than the implication of ‘transfer’ of a cross-border movement of information. This means that a disclosure will occur when an overseas recipient accesses information, whether or not the personal information that is accessed is stored in Australia or elsewhere.
The third question: Does the SMSF administrator provide a secure document upload service; the provider shall never request that you send documents, which may contain privacy and identity information, via standard unprotected email, especially to a email address, or server hosted outside of Australian jurisdiction.
The forth question: Does the SMSF service provider clearly state that all SMSF data within the service is owned, and controlled by the SMSF, and that all "trans-border" data flow issues are clearly identified within the service contract. This contract should also clearly identify the SMSF rights to transfer their SMSF data from the service and data retention for 5, 7 and 10 years after creation. A minimum requirement is to allow SMSF trustees to archive their data in the OECD defined SAF-T formats to meet these data retention and any future audit requirements.


As the pioneer of on-line, wholesale SMSF solutions, the above issues require careful service design, and extensive operational deployment experience before reaching the right combination of service features security mechanisms.

Today, VillageMall makes use of Cloud infrastructural, specifically data storage, for the purpose of providing  geographic disaster recovery functions (this is very low cost, effective and there are few alternatives within a single geographic location like Australia), we typically store documents which are required to be retained under the seven year data retention rules. But... we 100% encrypt all such data.

All SMSF personal, TFN's and transitional and reporting data is only stored within Australian located data centers, under Villagemalls' direct ownership and control. All access to data stored within VillageMalls' service is subject to access controls; access is audited, including the IP address point ( hence access country, and city location), which was used to access the data.

We believe the above solution, is a reasonable, commercial  approach, which safe guards trustee data, while exploiting the use of the low cost Cloud  infrastructure.

We see an increasing level of local support from global Cloud providers to address the Australian sovereignty, and performance issues, especially for the large corporate and government departments. Hence we predict a trend towards an increase in Australian located and controlled Cloud service providers, this will assist in meeting the requirements of  SMSF Trustees, their Advisers and Accountants, who do not wish to take on the risks associated with off shoring..

As an aside, we believe that advanced Australian developed technology, combined with high levels of automation, will produce a lower cost, higher integrity, secure solution, then just off shoring labor.

Considering all of the above, I believe there is a place for off shoring, and Cloud infrastructure services, but such usage must be transparent to the Trustees and their Accountant.

The issue: SMSF Trustees, and their Advisers, must be informed, when any off shore third party is used to provide services, and also if their data is being "disclosed" to entities outside of Australian jurisdiction, so they can make an informed decision, regarding the use of such service.

Update: Jan 2014.
On the 12 of  March 2014, new APP8 cross-border disclosure of personal information, comes into force, which effectively changed the "transfer" of information to the "disclosure" of information, and requires the data owner be a) informed of  overseas access and b) that they give concent to the overseas access. APP8 finally removes the ability of overseas BPO's to say they access data on Australian servers and hence the Privacy principles do not apply, Clause 8.2 b) prevents the current situation where organisations simply use overseas BPO's without getting informed consent from the data owner, something very common within the SMSF administration area.


Charles Moore
CEO VillageMall Pty Ltd

-- Some interesting opinions, sourced from the Internet..

From  www.smh.com.au, author tag PF
"No one has mentioned the big elephant in the room - the US Patriot Act, which Microsoft recently got pulled up on, admitting that as a US company, any data held on ANY of their or their subsidiaries' servers worldwide can be subject to seizure under the Patriot Act. More so - they would be obligated under US law to NOT inform the client that their data was compromised, even if that means breaching local privacy legislation.
Any scenario which involves corporate/sensitive data being stored in a jurisdiction which does not offer complimentary privacy/data rights is to be avoided."


“Many businesses have assumed that a local data centre, even if owned by an offshore provider, is enough to avoid data sovereignty issues,” said Peter James, Managing Director at Ninefold.“However, data stored in an Australian data centre owned by a provider headquartered in the US would face the same exposure to the US Patriot Act – and wider US law - as if it were stored in California.”

From http://www.customermanagementiq.com/people-management/articles/offshoring-to-india-no-longer-a-smart-strategy/
"Firms migrated operations to India to save money, focus on their core competencies, and move away from a fixed cost structure. Today, faith in offshoring must be tempered by reason. In the last few years, India’s significant advantages have yielded to some harsh economic realities. New cost dynamics and the reality of doing business halfway around the world with a very different culture have reduced the attraction of offshoring many operations, particularly those in knowledge intensive industries"

References
[1]Australian Law Reform Commission (‘ALRC’), For Your Information: Australian Privacy Law and Practice, Report No 108 (2008), 1064; see also D Giles and A Chotar, ‘Offshoring Personal Information – The Devil in the Detail’ (2006) 3(6&7) Privacy Law Bulletin 73, 73.

[2]Senate Finance and Public Administration Committees, Parliament of Australia, Senate, Exposure Drafts of Australian Privacy Amendment Legislation Report Part 1 – Australian Privacy Principles (2011).

[3]AGIMO, ‘Cloud Computing Strategic Direction Paper’, (Report, AGIMO, April 2011

[4]Letter from APRA to all trustees of APRA regulated super funds, 15 November 2010

[5]Connie Carnabuci and Heather Tropman, ‘The Cloud and US Cross-Border Risks’ (Whitepaper, Macquarie Telecom/Freshfields Bruckhaus Deringer)

[6]David Loukidelis, ‘Privacy and the USA Patriot Act’ (Report, Information & Privacy Commissioner for British Columbia, October 2004

[7]Beware of fraud by the numbers
http://www.news.com.au/money/money-matters/beware-of-fraud-by-the-numbers/story-e6frfmd9-1225958249884

[8] Statement on Auditing Standards (SAS) No. 70, SAS No. 70 with a purpose of reporting on service organization’s internal policies, processes, and controls when hosting or processing information belonging to customers in a uniform reporting format. Typically SAS 70 certification is a standard companies will look for when outsourcing.
 "The SAS 70 Type II audit serves as a testament to the high degree of rigor we place around our processes and management of client data. No matter if we are providing our clients services in the United States, India, or Europe, they can continue to rest assured that their financial information is handled according to internationally recognized standards of security and control."
http://sas70.com/sas70_overview.html

[9] Offshoring receiving attention,
https://www.charteredaccountants.com.au/secure/myCommunity/blogs/PaulM/professional-standards-blogs/133/offshoring-receiving-attention

[10]07 November 2012 A India-based BPO administration company, is forecasting growth to 20,000 SMSFs over the next four years.
http://www.thesauce.net.au

[11] Sarbanes-Oxley and the Outsourcing of Accounting: India, Outsourcing Theory, and Global
Accounting Standards.
http://next.eller.arizona.edu/courses/24hourKnowledgefactory/Spring2008/final_papers/PCervantes_PaulCervantes_ENTR489_FinalDraft.pdf

[12] Clayton Utz Insights, Privacy and the new APP 8: Cross-border data flows in a world without borders
http://www.oaic.gov.au/privacy/privacy-resources/privacy-fact-sheets/other/privacy-fact-sheet-17-australian-privacy-principles

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

The Goldsmith Who Became a Banker..

(An article of Louis Even, first published in the October, 1936 issue of “Cahiers du Crédit  Social.”)

If you have some imagination, go back a few centuries to a Europe already old, but not yet progressive. In those days, money was not used much in everyday business transactions. Most of those transactions were simple direct exchanges, barter. However, the kings, the lords, the wealthy, and the big merchants owned gold, and used it to finance their armies' expenses or to purchase foreign products.

But the wars between lords or nations, and armed robberies, were causing the gold and the diamonds of the wealthy to fall into the hands of pillagers. So the owners of gold, who had become very nervous, made it a habit to entrust their treasures for safekeeping with the goldsmiths who, because of the precious metal they worked with, had very well protected vaults. The goldsmith received the gold, gave a receipt to the depositor, and took care of the gold, charging a fee for this service. Of course, the owner claimed his gold, all or in part, whenever he felt like it.

The merchant leaving for Paris or Marseille, or travelling from Troyes, France, to Amsterdam, could provide himself with gold to make his purchases. But here again, there was danger of being attacked along the road; he then convinced his seller in Marseille or Amsterdam to accept, rather than metal, a signed receipt attesting his claim to part of the treasure on deposit at the goldsmith's in Paris or Troyes. The goldsmith's receipt bore witness to the reality of the funds.

It also happened that the supplier, in Amsterdam or elsewhere, managed to get his own goldsmith in London or Geneva to accept, in return for transportation services, the signed receipt that he had received from his French buyer. In short, little by little, the merchants began to exchange among themselves these receipts rather than the gold itself, so as not to move the gold unnecessarily and risk the attacks from robbers. In other words, a buyer, rather than getting a gold plate from the goldsmith to pay off his creditor, gave to the latter the goldsmith's receipt, giving him a claim to the gold kept in the vault.

Instead of the gold, it was the goldsmith's receipts which were changing hands. For as long as there were only a limited number of sellers and buyers, it was not a bad system. It was easy to follow the peregrinations of the receipts.

The gold lender

But the goldsmith soon made a discovery, which was to affect mankind much more than the memorable journey of Christopher Colombus himself. He learned, through experience, that nearly all of the gold that was left with him for safekeeping remained untouched in his vault. Hardly more than one-in-ten of the owners of this gold, using their receipts in their business transactions, ever came to withdraw any precious metal.

The thirst for gain, the longing to become rich more quickly than by handing jeweller’s tools, sharpened the mind of our man, and he made a daring gesture. “Why,” he said to himself, “would I not become a gold lender!” A lender, mind you, of gold which did not belong to him. And since he did not possess a righteous soul like that of Saint Eligius (or St. Eloi, the master of the mint of French kings Clotaire II and Dagobert I, in the seventh century), he hatched and nurtured the idea. He refined the idea even more: “To lend gold which does not belong to me, at interest, needless to say! Better still, my dear master (was he talking to Satan?), instead of the gold, I will lend a receipt, and demand payment of interest in gold; that gold will be mine, and my clients' gold will remain in my vaults to back up new loans.”

He kept the secret of his discovery to himself, not even talking about it to his wife, who wondered why he often rubbed his hands in pure joy. The opportunity to put his plans into motion did not take long in coming, even though he did not have “The Globe and Mail” or “The Toronto Star” in which to advertise.

One morning, a friend of the goldsmith actually came to see him and asked for a favour. This man was not without goods — a home, or a farm with arable land — but he needed gold to settle a transaction. If he could only borrow some, he would pay it back with an added surplus; if he did not, the goldsmith would seize his property, which far exceeded the value of the loan.

The goldsmith got him to fill out a form, and then explained to his friend, with a disinterested attitude, that it would be dangerous for him to leave with a lot of money in his pockets: “I will give you a receipt; it is just as if I were lending you the gold that I keep in reserve in my vault. You will then give this receipt to your creditor, and if he brings the receipt to me, I will in turn give him gold. You will owe me so much interest.”

The creditor generally never showed up. He rather exchanged the receipt with someone else for something that he required. In the meantime, the reputation of the gold lender began to spread. People came to him. Thanks to other similar loans by the goldsmith, soon there were many times more receipts in circulation than real gold in the vaults.

The goldsmith himself had really created a monetary circulation, at a great profit to himself. He quickly lost the original nervousness he had when he had worried about a simultaneous demand for gold from a great number of people holding receipts. He could, to a certain extent, continue with his game in all security. What a windfall; to lend what he did not have and get interest from it, thanks to the confidence that people had in him — a confidence that he took great care to cultivate! He risked nothing, as long as he had, to back up his loans, a reserve that his experience told him was enough. If, on the other hand, a borrower did not meet his obligations and did not pay back the loan when due, the goldsmith acquired the property given as collateral. His conscience quickly became dull, and his initial scruples no longer bothered him.

The creation of credit

Moreover, the goldsmith thought it wise to change the way his receipts were set out when he made loans; instead of writing, “Receipt of John Smith...” he wrote, “I promise to pay to the bearer...”. This promise circulated just like gold money. Unbelievable, you will say? Come on now, look at your dollar bills of today. Read what it written on them. Are they so different, and do they not circulate as money?

A fertile fig tree — the private banking system, the creator and master of money — had therefore grown out of the goldsmith's vaults. His loans, without moving gold, had become the banker's creations of credit. The form of the primitive receipts had changed, taking that of simple promises to pay on demand. The credits paid by the banker were called deposits, which caused the general public to believe that the banker loaned only the amounts coming from the depositors. These credits entered into circulation by means of cheques issued on these credits. They displaced, in volume and in importance, the legal money of the Government which only had a secondary role to play. The banker created ten times as much paper money as did the State.

The goldsmith who became a banker

The goldsmith, transformed into a banker, made another discovery: he realized that putting plenty of receipts (credits) into circulation would accelerate business, industry, construction; whereas restriction of credits, which he practised at first in circumstances in which he worried about a run on the bank for gold, paralyzed business development. There seemed to be, in the latter case, an overproduction, when privations were actually great; it is because the products were not selling, due to a lack of purchasing power. Prices went down, bankruptcies increased, the banker's debtors could not meet their obligations, and the lenders were seizing the properties given as collateral. The banker, very clear-sighted and very skillful when it came to gain, saw his chances, his marvellous chances. He could monetize the wealth of others for his own profit: by doing it liberally, causing a rise in prices, or parsimoniously, causing a decrease in prices. He could then manipulate the wealth of others as he wished, exploiting the buyer in times of inflation, and exploiting the seller in times of recession.

The banker, the universal master

The banker thus became the universal master, keeping the world at his mercy. Periods of prosperity and of depression followed one another. Humanity bowed down before what it thought were natural and inevitable cycles.

Meanwhile, the scholars and technicians tried desperately to triumph over the forces of nature, and to develop the means of production. The printing press was invented, education became widespread, cities and better housing developed. The sources of food, clothing, and comforts increased and were improved. Man overcame the forces of nature, and harnessed steam and electricity. Transformation and developments occurred everywhere — except in the monetary system.

And the banker surrounded himself with mystery, keeping alive the confidence that the captive world had in him, even being so audacious as to advertise in the media, of which he controlled the finances, that the bankers had taken the world out of barbarism, that they had opened and civilized the continents. The scholars and wage-earners were considered, but secondary in the march of progress.

For the masses, there was misery and contempt; for the exploiting financiers, wealth and honours! Like his worthy successor Herbert Holt (the chairman of a large Canadian bank in 1936), honoured, flattered, he demanded respect from the people that he bled: “If I am rich and powerful, while you are suffering the stranglehold of poverty and the humiliation of social assistance; if I was able, at the peak of the Depression, to make 150% profits each year, it is foolishness on your part, and as for me, it is the fruit of a wise administration.”

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Money, what's it worth..

The ongoing thoughts of an SMSF Trustee...

Money doesn't have any inherent value. It is simply pieces of paper or entries in a ledger. A car has value because it can help you get where you need to go. Water has a value because it has a use; if you don’t drink enough of it you will die.

In the past money was in the form of coins, generally composed of precious metals such as gold and silver. The value of the coins was roughly based on the value of the metals they contained, because you could always melt the coins down and use the metal for other purposes, in Australia we have examples where the value of the metal was worth more than the face value of the coins. Until a few decades ago paper money in different countries was based on the gold standard or silver standard or some combination of the two. This meant that you could take some paper money to the government, who would exchange it for some gold or some silver based on an exchange rate set by the government. The gold standard lasted until 1971 when President Nixon announced that the United States would no longer exchange dollars for gold.

Australian is on a system of fiat money (Fiat currency is money that is created by government and given a value by regulation or law), which is not tied to any other commodity. So these pieces of paper,  in your pocket or digits in your bank account are nothing but pieces of paper, or one's and zero's.

Goods and services are what ultimately matter in the economy, and money is a way that allows people to give up goods and services which are less desirable to them, and get ones that are more so. People sell their labor to acquire money now to purchase goods and services in the future. If I believe that money will have a value in the future, I will work towards acquiring some.

Our system of money operates on a mutual set of beliefs; so long as enough of us believe in the future value of money the system will work.

What if we believed our money wouldn’t be nearly as valuable in the future as it is today? This inflation of the currency causes people to want to get rid of their money as quickly as possible. People will not sign into profitable deals which involve future payments because they’ll be unsure what the value of money will be when they get paid. Business activity sharply declines because of this. Inflation causes all sorts of other inefficiencies, from the café changing its prices every few minutes, to people taking a wheelbarrow full of money to the bakery in order to buy a loaf of bread. The belief in money and the steady value of the currency are not innocuous things. If people lose faith in the money supply and believe that money will be worth less in the future economic activity can grind to a halt.

The key cause of inflation is increases in the supply of money. Money has value because people believe that they will be able to exchange their money for goods and services in the future. This belief will persist so long as people do not fear future inflation. To avoid inflation, the government must ensure that the money supply does not increase too quickly.

A bit link our Superannuation, if we don't believe it will be there and have value in the future, we will leave in droves..

Forces on the value of Money?

Increases in American bond prices will have an effect on the global exchange market. Rising American bond prices will cause investors to sell those bonds in exchange for other bonds, such as Australian ones. So an investor will sell his American bond, exchange his American dollars for Australian dollars, and buy a Australian  bond. This causes the supply of American dollars on foreign exchange markets to increase and the supply of Australian dollars on foreign exchange markets to decrease. This causes the U.S. Dollar to become less valuable relative to the Australian Dollar. The lower exchange rate makes American produced goods cheaper in Australian and Australian produced goods more expensive in America, hence American exports will increase and imports will decrease causing the balance of trade to increase.

When the Australian government raises interest rates, this increases the supply of bonds, this reduces the price for bonds. These bonds will be bought up by foreign investors, so the demand for domestic currency will rise and the demand for foreign currency will fall. Thus the domestic currency will appreciate in value relative to the foreign currency. The higher exchange rate makes domestically produced goods more expensive in foreign markets and foreign good cheaper in the domestic market. Since this causes more foreign goods to be sold domestically and less domestic goods sold abroad, the balance of trade decreases. As well, higher interest rates cause the cost of financing capital projects to be higher, so capital investment will be reduced.

Hence today, we have a historically high AUD, and high (compared to the USA and many others) interest rates, It is worth mentioning, that none of the above is caused by "our" activities such as increased productivity, world competitive goods and services.. the above is totally outside of the control of the average SMSF Investor.

Falling Interest rates?

The conventional economic theory is that all segments of the bond market will perform well when prevailing rates are falling, but that’s not necessarily true. Certain sectors tend to benefit more than others, and some may actually be hurt. Longer-term bonds tend to have the highest interest rate risk; i.e., they are more sensitive to rate movements than shorter-term issues. As a result, long-term bonds deliver the best performance when rates fall.The difference in the performance results of long- and short-term bonds can be dramatic.

For example, concerns about the slowing economic growth and the crisis in Europe caused Treasury yields to plunge,but the vast majority of the action was in longer-term issues. The iShares Trust Barclays 20+ Year Treasury Bond Fund (ticker:TLT), an exchange-traded fund that focuses on the longest-term bonds in the U.S. Treasury market, returned a gaudy 16.48% in this time. In contrast, the iShares Trust Barclays 1-3 Year Treasury Bond ETF (SHY) barely budged, gaining just 0.38% in the same period. It helps to think of the price action along the maturity spectrum as similar to the movement of a whip: the section closest to the handle (near-term bonds) moves the least, while the portion furthest away from the handle (longer-term bonds) moves the most.


The declining yields in government bonds are often the result of a “flight to quality” into the safest assets. During these times, investors tend to gravitate away from assets with higher credit risk.
Second, a decline in prevailing rates can be a sign of slowing economic growth. Since many corporate, high yield, and emerging market issuers tend to benefit when growth is robust (since it reduces their credit risk), an economic slowdown tends to have the opposite effect on them as it does government issues.
Third, lower-quality bonds have yields that are well above those on higher-quality issues, so a change in yield has less of an impact on their “yield spread.”

While risk and reward go hand-in-hand, in the bond market it’s the type of risk that counts the most. If you want to take advantage of falling rates, be sure that you’re investing in a security with higher interest-rate risk, not higher credit risk.

When we hear monetary policy news, it's usually of the form "today the RBA decided to raise/lower interest rates by X%." We currently live in a capitalistic enough society that interest rates are determined by the forces of supply and demand, so it's not like the RBA can just directly dictate what they are. Instead, the RBA has a number of indirect tools at its disposal. The most commonly used tool is open market operations, which is just a fancy term for "buying and selling government bonds." When the RBA buys bonds, it takes in a bond and puts money out into the system. When it sells bonds, it gives out a bond and takes money out of the system. Therefore, buying bonds increases the money supply and selling bonds reduces it.
As it turns out, an increase in the money supply lowers interest rates, and a reduction in the money supply raises them.

In the past, a form of social contract existed to tighten the link between the RBA and the interest rates changed by Tier one banks. As Australian banks become more dependent on the global bond markets, and less on Australian Government bond issues, the linkage between RBA rates and the bank interest rates will become less coupled. Additionally most Australian banks ( such as CBA Perls IV) and large corporates have been issuing their own long term financing instruments, that have rates well in excess of RBA rates.

SMSF trustees, need to consider how to maintain the current value, and future purchasing power of their assets.



Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Wealth, an illusion?

An SMSF trustee perspective...
Those providing the resources through paying taxes, earning profits and efficiently producing goods and services see their capital being squandered or devalued. After all, why work when someone else can do it for you. Why resort to free market competition when you can lobby for assistance?

Unfortunately, decades of slowly increasing government intervention and paternal policies, which allow government control of money and credit, will not be permitted to recede easily. One must therefore ponder the potential actions of policymakers and the response these actions are likely to elicit from those impacted, as it is certain they will dominate the landscape for years to come.

Industries such as steel and aluminium are suffering from Chinese policies, which encourage new capacity to be built until profits disappear totally. They are proving successful in this profit elimination. Banking thrives on volume growth dictated by the extent to which central banks make credit available. Airlines are subsidised and manipulated the world over in the name of tourism.

Regulators set prices for utilities and telecommunications companies while governments allow toll roads to shut and prevent alternate routes to allow high tolls and upfront payments to governments. Land prices are influenced by government regulation on land release and house prices are distorted by credit availability, first home owners grants and negative gearing policies.

Lately we have artificial carbon tax policies making us uncompetitive versus countries without them and handouts back to those impacted by them. The idea is no-one feels the pain, how could this possible work.

So how should one invest in an environment of such intervention? Probably the first step is to ascertain where intervention has caused prices to divorce most significantly from fundamentals. There is little doubt that bond markets should be the centre of attention in this regard.

Regulatory reforms are forcing banks and insurers to become buyers of sovereign bonds, central banks using their own balance sheets in an effort to manipulate prices and the europeans desperately trying to create artificial buyers of government bonds to salvage insolvent governments, this has caused fundamental buyers to disappear, crowding instead into the corporate bond market. There has been a steady additional supply in this area, as corporates seek to dis-intermediate banks and secure longer-term funding, this process has prevented prices from reaching the ridiculous levels seen in sovereign bond markets.

Investors, quite rationally, are responding to a consistently reinforced message that they will not be offered the same protection as bondholders. Consistent outflows are the order of the day, and when any pool of assets sees the pool of money seeking to buy them contract, they fall.

What about gold?
Valuing gold is almost impossible. It has value only in so far as others accept as it having value in exchange. In this function it is obviously similar to money, but the fundamental issue with gold, is that it does not "generate" wealth.

If investors lose faith in the ability for wealth to be sustained with available assets, they will seek refuge elsewhere. Gold is looking like one of these "elsewheres".  But many see the gold as being manipulated just like the bond market, to ensure it does not become a "currency" outside of sovereign control.

Another outcome of tougher economic times which is causing many investors consternation is the strategy and remuneration in the face of mediocre operating performance.

When businesses generate unacceptably low returns on capital for extended periods, management and employees must take steps to improve inadequate performance. Similarly, the concept of resetting remuneration hurdles for highly paid management personnel that have cost shareholders large amounts of money through ill-considered acquisitions. When shareholder losses are permanent, financial costs for those responsible should not be fleeting.

Australia, via its forced superannuation "tax" has accumulated significant wealth, the concern is that governments are seeing this wealth as a means to support government policy. The continual tinkering with superannuation is growing, to a point where one must wonder at the ability for any trustee to make any long term decisions.

"Suggestions that the Federal Government intends tapping the superannuation industry and, particularly self-managed superannuation funds (SMSFs), to bolster its promised Budget surplus, have raised the ire of the Self-Managed Super Fund Professionals' Association (SPAA)."

To date, investors have seen intervention in the form of monetary policy and stimulus as the panacea for improving market performance. As Mitt Romney noted in a CBS interview in relation to US stimulus, it "did not put Americans back to work, did not raise our home values, did not bring jobs back to this country or encourage small businesses to open their doors".

Within Australia, as individuals we have reduced debt, and moved our wealth to as low a rik as possible. See the effect of the Government bank guarantee, it decimated CMT's within Australia. During this time governments have accumulated significant debt for the next 20 years in our names.

The only tangable result of the Australian stimulas, almost every school has a new "shed", and most homes have a solar power station or pink bats. Would like to see the ROI for these investments.

So where do we go from here?



Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information, the persoanl views of the author, that may or may not relate to your specific requirements.