John Aldersley, Executive Chairman Direct Portfolio Services Limited 22 November 2006

MANAGED ACCOUNTS: Latest fad or simply evolution?

Disclaimer This presentation has been prepared by Direct Portfolio Services Limited (DPSL), ABN , AFSL DPSL’s contact details can be found on Our address is Level 5, 2 Bulletin Place SYDNEY NSW DPSL believes the information contained in this document to be accurate at the date of the presentation. But to the extent permissible by law DPSL makes no express warranties and excludes all implied warranties in relation to the information contained in this document. This document does not purport to be comprehensive or to provide legal, financial or any other professional advice and should not be relied as such. To the extent permissible by law, DPSL excludes all liability for any loss or damage whether direct, indirect or consequential arising in any way out of the use of the information contained in this document or results obtained from the use of it.

Agenda The marketplace opportunity An evolutionary view of discretionary portfolios IMA, SMA & MDA – explained SMA Features

USA SMA growth projection Source: Money Management Institute, FRC, 2005

51% of Australians own shares 44% directly

Share Ownership rising in all age groups

Direct shares are 17% plus of assets ASX Australian Share Ownership Study

Direct equity investors not using planners

The Australian Marketplace 40% of these investors do not use a planner Conclusion – passive holdings on Wraps & equity unit trusts are not the solution 40% of share-owning investors are seeking

Differing risk perspectives? Adviser view of the world Inflation is not an issue Life expectancy for a 65 year old male is around 86 Current product range should achieve investment goals Client view of the world Inflation is an issue eg health care, fuel, etc Longevity is seen as a risk – (a 65 year old has >35% of becoming a 93 year old) Standard industry “unitised” products not trusted to deliver sufficient after tax growth Source: McKinsey Survey 2005 presented at Money Management Institute conference in USA 2006

Evolution of discretionary managed accounts For 200 years: Traditional private bank style discretionary equity portfolios available to very wealthy & institutional investors only – traditional IMA – 0.05% of population Team of adviser, fund manager, brokers, banker, accountant built & managed the investment portfolios Private banking arms of banks still operate this way

Unit Trusts took discretionary shares to the masses… Commenced pre-computerisation over 40 yrs ago Pooling of investments in unit trust allowed for investment & administrative efficiencies Allowed for low investment minimums Shift of power from life companies to funds management companies

Disadvantages of Unit Trusts Own units not the underlying shares Cannot transfer your existing shares in New investors inherit existing undistributed gains Deliberate realising of gains each year Income & realised gains paid six monthly Any realised losses are trapped in the trust

DIY issues to consider paperwork hassles too speculative at highs sporadic dividends hard to access growth return too cautious at lows

Ideal future Separately accounted personal portfolios within a managed fund structure Full time professional discretionary management Beneficial ownership & tax effective investment management Each client determines a monthly income amount in conjunction with a professional adviser Eliminate paperwork & CGT hassles

Everyone told me in 1992 it was impossible

The Lesson: Technology & human endeavour makes most things possible in time

The “impossible” retail SMA of 1994 Prospectus based “prescribed interest” retail offer Single pooled bank account “virtual” client accounts Single pooled “bare trust” Custodial holdings Separately accounted portfolios True investment system (cash and accrual accounting) Centrally implemented manager models Ability to transfer existing shares in specie – locked parcels Derivative overlays on existing shares Monthly Annuity-style income stream (EasyIncome) nominated by each client Regular saving & instalment gearing into direct shares

Beneficial ownership Scheme Model Portfolio Investor 1 Investor 2 Investor 3 Securities Cash Ownership Tracking to Individual Scheme Model Portfolio Model Manager Units Model Manager Investor 1 Investor 2Investor 3 Trust Unit Trust Structure Separately Managed Account Structure Trust structure is removed

FSR was a watershed FSR introduced: Single Responsible Entity (fiduciary) for financial products Distinction between financial products and financial services Management of conflicts of interest in discretionary accounts within a regulated compliance setting SMA formally recognised by ASIC Dec 2004 – ASIC Policy on Managed Discretionary Accounts (PS179 & CO 04/294) allows financial service version

What are Managed Accounts? Defining features of Managed Accounts Underlying investment assets are held personally by the investor Held either legally & beneficially (IMA) or just beneficially (single HIN SMA) Investments managed on a discretionary basis

Individually Managed Accounts (IMA) Customisation Tailored to individual wishes Administration Individual HINs Trades, corporate actions & income/distributions are processed at an individual level High administrative overhead hence high fees & minimum investments Difficult to scale due to individual nature of portfolio management Legalities (Retail Clients) Must be structured as either an Managed Discretionary Account (MDA) or SMA financial product

Separately Managed Accounts (SMA) Customisation Range of model portfolios, each with particular investment process & strategy Technology can allow for customisation Locked existing holdings, exclusion of stocks from a model, min trade sizes Administration Single HIN – all securities held by a custodian Trades, corporate actions & income/distributions by pooled electronic processes Highly efficient hence becoming cheaper than unit trusts Highly scaleable so expect further cost reductions Legalities (Retail Clients) For pooling benefits must be structured as a Managed Investment Scheme (MIS) – like a Unit Trust

SMA v MDA SMA = Financial Product Registered Managed Investment Scheme PDS disclosure No requirement for transaction reports No ASIC requirement for personal advice No requirement to provide Statement of Advice to RE No ASIC requirement for continuing personal advice Professional active management Suits retail and wholesale clients MDA = Financial Service Governed by PS 179 & CO 04/294 Individual contracts Transactions reports required Personal Advice required & linked to investment program Copy of SOA must go to MDA operator <13 months confirm advice & investment program remains in best interests of client Mostly broker run portfolios Mostly for wholesale clients

Why advisers will go SMA route SMAs are financial products – no change to current business model PS146 Managed Fund training (& product training) Separation of advice from product Suit retail as well as wholesale clients Great fit with Self-Managed Super Funds Good margins available (less competition in retail) Efficient scaleable way of providing direct equities for clients Will shortly be wholesale product on wraps/desktops Adviser can focus on advice & growing client numbers (or construct own models) Clients are demanding them

SMA Features Tax & investment efficiencies No inheritance of other investor’s capital gains In-specie transfers without CGT events enable customisation & flexibility “Tax aware” portfolio management & tax planning possible – eg 12 month discount rule on CGT; tax harvesting Realised losses available to investors Reduced transaction costs (SMAs) – netting of trades Enables accumulation & capital drawdown strategies in direct shares

SMA Features Investment options Portfolios predominantly built from ASX300 securities Some providers offer: Fixed interest & hybrids Derivative overlays Listed property trusts Margin lending Managed models of unit trusts Soon we will see direct International equity portfolios

SMA Features Model portfolios Range of investment strategies, managers Internal & external model managers As security weightings from model manager change, the SMA provider automatically rebalances each investors portfolio to reflect the changes

SMA Features Customisation tools Custody-only style service possible Filtering of stocks – exclude stocks/sectors from model portfolios “Locking” of particular tax parcels to avoid sales of “existing” shares Derivative overlays Individual tax parcel management – bed & breakfasting Minimum trade sizes IMA portfolios for ultra HNW

SMA Features More transparent than unit trusts Fees & charges are shown as individual transaction items Individual transaction history available Individual holdings within a portfolio are visible Web based daily valuation reporting the norm Allows the adviser/client to be fully informed

Fees & Charges Administration Fee Charged by the MA provider for operating the service Range from 0.385% to 1.5% pa. Usually scales down for size Amount depends on level of individualisation (increased overheads) Custodian & audit fees may also be charged Model Manager Fee (Investment Fee) Deducted and paid to the model manager Range between 0% - 0.6% pa depending on the type of model profile MER (pre adviser) Can range between 0.44% - 2.5% pa

SMAs are no fad Client driven demand DIY Clients believe SMAs are high touch sophisticated products – likely to meet their emotional & financial needs

Beliefs depend on perspective…

SMA Opportunities with SMSF Treated as a managed fund for compliance purposes: therefore summary audited data only required by administrator no need to verify holdings, transactions or corporate actions can be annual rather than 24/7 super administration Non-unitised structure appeals to their accountants Can establish dollar cost averaging strategies for small DIY funds via regular salary sacrifice Can organise regular monthly capital drawdown for pension mode members – can combine with specialist low volatility funds Can accept existing holdings in specie S.I.S. exemption for Risk Management Statement for Option overlays when through a collective financial product DIY Super Baby-boomers are fast approaching retirement – need strategic financial advice for the first time (in their view)

SMAs deliver practice efficiencies Current IDPS (Wrap) structures have efficiency limitations: Investor discretionary – so SOA based changes, lack of pooling Direct share solutions – mainly administration based - active management can be complex & expensive (corporate actions, contract notes, etc) Primitive investment systems – lack accrual/cash accounting Solution SMA menu of mandates on wrap Indirect investment in wholesale SMA via WRAP SMA migrate to Unified Managed Accounts (combine shares & unit trusts)