Socially responsible investment, or SRI, has grown into an increasingly popular investment choice over the last decade. So, is SRI a good investment choice, and is it something you should consider for your clients?

SRI has been available in Australia as an investment option for a number of years now. When it was first introduced, many investors steered clear of the investment option because it was unproven and the funds’ earlier incarnation, the ethical or green funds, had not performed well. Investors who wanted to feel warm inside knowing that they were doing something positive seemed to be the only investors to embrace the new socially responsible funds. Now however, their positive track record is making more traditional investors sit up and take notice.

Socially responsible investment funds are managed investment funds that invest in companies based not only on their financial viability but also on their environmental, social and human rights practices. Many of today’s managed investment funds and superannuation funds will include a socially responsible investment option.

Where do SRI funds invest?
While the different SRI fund managers will use different vetting criteria to determine the suitability of a company for inclusion in their SRI fund, they are all based on certain social and environmental factors. Most SRI funds will not invest in many industries including the tobacco, pornography, arms or nuclear industries. However, some funds may consider investments in companies that are involved in the mining or alcohol industries for example.

How does an SRI manager determine what companies to invest in?
SRI managers will have a range of social and environmental as well as financial criteria that must be satisfied before a company will be considered for inclusion in their SRI fund.

Environmental considerations for example may cause one fund to completely reject all mining companies while another SRI fund may include mining companies if they can demonstrate that their mining practices are minimising any harmful effects to the local environment. They may also look at investing in a mining company if they can show that they are beginning to implement strategies that will minimise environmental damage. Also, social considerations may allow a mining company to be included in a particular SRI fund if the manager sees that the miner is providing valuable services to indigenous or other local communities living in the vicinity of their mining operations.   

Socially responsible investment funds will also look at social considerations such as the company’s workplace practices, their human rights record and their business ethics. They may also look at how they contribute to the community through charitable donations and the sponsorship of community programs.

Of course, a company still has to demonstrate that they can be a viable financial concern and that investing in the company will provide a good return on the investment made.

How do SRI funds stack up?
When the first ethical funds were launched during the 1970s and 1980s they were predominately ‘green funds’ which invested in companies that were considered environmentally sound. Unfortunately for investors in these funds, there was little regard for the financial viability of the company. As a result of this lack of financial scrutiny, these funds often performed quite poorly. But with current SRI managers closely examining the balance sheets of any company being considered for investment, today’s SRI funds are far removed from their ethical and green predecessors. And they have the results to prove it.

In fact, socially responsible investment funds are now appearing among the top performing managed investment funds.

For financial planners, corporate super provides an excellent opportunity to expand your business in a cost-effective manner. Here we explain some of the benefits of getting involved in corporate superannuation.

Corporate super funds offer financial planners an excellent opportunity to expand their business as employers increasingly look to corporate super funds offering more than just a simple super fund in which to pay employees’ compulsory super contributions.

Corporate superannuation is fast becoming an important, and lucrative, market for superannuation providers with competition among the superannuation funds becoming increasingly fierce. As a result, large companies are being offered a wide range of other financial options for employees in order to win corporate business.

Where previously, many employers would look for a cheap, simple, no-thrills option in which to contribute to their employees’ retirement savings, today, they are being wooed with a whole plethora of financial options and insurance benefits. For example, instead of the one single capital guaranteed investment option for all employees, corporate super funds now offer members a whole range of investment options, from low risk capital guaranteed options through to higher risk Australian and international specialist funds. The range of insurance options has also dramatically improved with salary continuance, temporary disablement and trauma cover now available to many employees.

Financial education is also another added benefit that the super funds are providing to corporate super clients. And it’s this financial education that can provide financial planners involved with corporate super funds with a cost-effective way to increase business. The super funds now typically provide a members’ only website with information on many financial topics ranging from superannuation to buying a home and budgeting and saving. Seminars on a wide range of financial planning topics are now conducted for employees in the workplace. As a financial planner, these seminars provide you with a cost-effective way to attract new clients to your business as you can position yourself as a financial expert and develop a trusting relationship in an environment that the employee feels comfortable in, namely their workplace.

Your position as the financial planner for a corporate super fund will provide you with clients who are moving through the various life stages where financial planning advice is vital. You will have the opportunity to deal with employees who are getting married…or divorced. You will have access to employees who are buying their first property, or starting a family. You will have access to employees who are becoming empty nesters, or who have just received an inheritance. You will also have access to employees who are leading up to retirement or are now ready to retire.

All these life stages require professional financial planning advice and for many of these employees, you will be the only financial planner with whom they have had any contact.

How to get involved in corporate super
Some tips on how to get your foot in the door with a lucrative corporate super client:

• Position yourself as being able to provide a range of services including employee financial education through seminars, marketing material and a member’s only website.
• hop around different superannuation providers for the best deal for the client. Consider what added benefits the super fund is prepared to offer.

Australia’s superannuation industry is booming. But as the coffers of our retirement funds swell, the problem of lost super accounts continues to increase. Here we look at just how big a problem lost super has become, and how financial planners can benefit.

According to the Australian Taxation Office (ATO), the total amount of super sitting in lost member accounts has doubled from that of a decade ago. The total value of lost member accounts for the 2004-2005 financial year was $8.2 billion, sitting in a total of 5.4 million lost member accounts. To illustrate how fast the problem is growing, for the 2000-2001 financial year there was $5.5 billion sitting in 3.8 million lost member accounts.

For financial planners, these millions of lost member accounts represent a valuable opportunity to consolidate your clients’ superannuation funds into the one account. For your clients, super consolidation generally means lower fees and charges and less paperwork. And over the years, it provides better returns through the power of compounding returns.

How to find lost member accounts
If a client has lost track of some of their super, they should firstly seek the help of the ATO in finding their lost member accounts. The ATO keeps a Lost members register, which is a list of all members who have been reported by the super funds as having lost super.

Superannuation members will be reported to the Lost members register if:

• they could not contact the member because they have changed address
• the fund that the member’s contributions were paid into has not received any contributions or rollovers within the last two years, or
• the account was transferred to another fund or RSA as a lost member account.

The ATO has a SuperSeeker search that members can use online or by calling the ATO on 13 28 65. Alternatively, the member can contact their fund and ask them to conduct a search on their behalf through SuperMatch.

Many of the big super funds also offer a free search to members for lost super. Super funds are increasingly doing this because generally the fund that does the search will usually see the super money being rolled over into their fund.

As a financial planner, you should be encouraging your clients to search for their lost super so that they can benefit from the advantages of having their super in the one easy to manage fund.

The benefits of consolidating super

Consolidating super has many advantages. Firstly, it offers the opportunity for the client to reduce their fees and charges, because they’ll only be paying fees and charges on the one fund. Another benefit is that of compounding returns. Over time, one larger consolidated account will generally provide a higher return than several accounts with smaller account balances in them. And of course, with only one super account, there is less paperwork for the client to worry about. Before consolidating into one account however, the client should consider the implications including the loss of any insurance cover and any fees that may apply to withdrawing from the fund.

There has been a lot of negative publicity recently regarding mezzanine investing. This has largely been due to the collapse of a large mezzanine investment company resulting in many investors losing their entire investments. So what is mezzanine investing, and is it suitable for any of your clients?

Mezzanine investing refers to a specific type of investment where investors put their money into projects and ventures that are financed from outside the mainstream financial markets. This means that this type of investing is not regulated by the same financial services laws that protect investors who invest in shares, superannuation and managed investment funds. While mezzanine investing is outside the regulatory bounds of other types of investing, it is nevertheless legal.

Mezzanine investing works by seeking investors to invest in say a new property development where the banks will only lend a certain amount according to the level of risk for which they are prepared to accept. The mezzanine investors put up the next level of capital while the property developer will usually provide the remaining level of capital. This means that if the property development gets into trouble, the bank will be repaid firstly from any money raised from the liquidation of any assets. Only if there is any money left after the banks have recouped their investment will the mezzanine investors be paid. As mezzanine investing involves a higher level of risk, a higher return is expected by the investor.

Another feature of mezzanine investing is that it is a very illiquid investment. Property developments can take a long time from start to completion and also take time to sell. These investments are not as liquid as shares, listed property trusts or managed investment funds. However, having said that, experienced mezzanine investors can often make a lot of money through these schemes.

Who should invest in mezzanine investment schemes?
Mezzanine investments should only be used by experienced investors who have a good working knowledge of the property development marketplace. The more important question here to ask is perhaps who should not invest in mezzanine schemes?

• ‘Mum and dad’ or unsophisticated investors.
• Investors who have not got a diversified investment portfolio.
• Investors who need liquid assets, or who do not have a longer term investment horizon.

As the recent case of a mezzanine investment scheme collapse shows, it’s important for your financial planning clients to have a clear understanding of the investment that they are putting their hard earned money into. And they should never overexpose themselves to such investments, even if it does appear, on the surface at least, to be a relatively safe investment. Diversification should always be the key. There have been a lot of hard luck stories of people losing their life savings with the recent mezzanine investment scheme collapse, but if those advising them had been doing their jobs properly and had their clients’ best interests at heart, then there would not have been the heartache that the collapse of this scheme has caused.

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