Storm Financial Group

[Junior]

Doobsy and/or Junior,

As Financial Planners, have you ever had a client approach you wanting to undertake a double gearing strategy in the manner that Storm promoted, or would you ever see a circumstance where this could be appropriate for anyone?

I posted a link a while back to an article by Paul Resnik which looked at margin lending on its own and also the double gearing strategy. It would appear from that, that if Storm has have taken even 5 minutes to stress test the entire strategy they would have seen just how ludicrous it was.

http://www.aph.gov.au/SENATE/committee/corporations_ctte/fps/submissions/sub293.pdf

Their research even suggests that a margin lending scenario without the double gearing doesn't bring much to the table either...

The majority of my experience to date is as a Paraplanner.

I write SOAs, work with advisers to put together strategies, do some modelling, insurance quotes etc.

I previously worked for FPs who recommended margin lending to some clients. My experience was, pre 2008, the sentiment in FP circles was effectively that the bull market would run for a long time, and there was rarely talk of it ending. 'Commodity Supercycle', 'we have a strong financial system', 'PEs indicate stocks are at fair value' etc.

A common myth being perpetuated was that blue chips stocks were unlikely to ever fall more than 20%, and by gearing to a 50% lending ratio, you are mitigating the risk of a margin call as your conservative blue chip portfolio (bhp, banks etc.) would need to fall more than 30% to trigger a call....unlikely to ever occur, and if it did, you can sell some stock or add funds to your account.

The other major basis used for recommending a ML was tax based. Interest is deductible, benefits of franking credits etc.

As far as clients requesting margin loans, it happened a lot. Because most clients are via referrals, they would hear from the friends, relatives etc. how great margin lending is, and how much money they were making, tax they were saving and so on.

Having experienced all of this, my opinion is that margin lending should rarely/never be recommended by FPs. The risks outweigh the potential benefits, and for a buy/hold strategy they only work in a bull market...one black swan event and the game is over!

 

[doobsy]

SJG

My experience is a little different. My ex boss was very anti gearing. Out of a book of 500+ clients we had maybe 10-15 margin loans and most of those would have been inherited clients from other advisers.

We used them to average clients into markets but always started with VERY low LVR's (20%) with a 50/50 monthly contribution. We never saw the tax advantages as significant enough and agree completely with the work done by the boys in your article. ( We used to use their risk tolerance questionairre)

At no stage would we ever double gear. We work in a town that was a major Storm hub so saw the plans all the time. There were a couple of other planners pushing slightly less aggressive strategies (no initial home equity or if equity then no margin loan). I did not see anyone else who double geared (or effectively triple geared+ on capital outside the home/farm)

We warned clients to reduce exposure to shares if borrowing or at least bring LVR's down because we were lucky to be early into sourcing quality information about the subprime problem. We have newspaper columns to back that up. To give that argument balance we also went too early and for more conservative clients (esp retirees) we reduced share exposure to 10% in late 2006. That made us miss 12 months of upside. We lost clients because of that. Those that left probably got back in at virutally the top unfortunately. Those who stuck it out experienced drops of 10-15% at the bottom (listed property did us no favours either).

Our thoughts have always been about capital preservation. It is SO much easier to make money if you still have most of it still around working for you after a downturn.

To make this point:

Investor 1 - 100% shares
Investor 2 - 30% shares, $70,000 defensive bringing in just 3% steadily

$100,000 invested

If unfortunate enough to time it and run into some bad years early:

Year 1 - 8% growth return
Year 2 - -14% return
Year 3 - -4% return
Year 4 - 2% return
Year 5 - 25% return.

Investor 1

Year 1 - $108,000
Year 2 - $92,880
Year 3 - $89,164.80
Year 4 - $90,948.10
Year 5 - $113,685.12

Investor 2

Year 1 - shares - $32,400 defensive - $72,100 total - $104,500
Year 2 - shares - $27,864 defensive - $74,263 total - $102,127
Year 3 - shares - $26,749.44 defensive - $76,490.89 total - $103,240.33
Year 4 - shares - $27,284.43 defensive - $78,785.62 total - $106,070.04
Year 5 - shares - $34,105.54 defensive - $81,149.19 total - $115,254.72

In a bull run that looks completely different obviously but is anyone backing in a bull run with no more volatility? I know which journey most of my retiree clients want to go on and it isn't the rollercoaster.

Oh and change the -14% and -4% to -20%+ and look at the effects, you need a long run of very good markets to come back. Of course other advisers will feed the usual line of time in the market but trust me timing is important especially when starting.

 

[SJG1974]

Thanks Doobsy and Junior for those comments....good to get some perspective from the darkside as it were!

 

[Julia]

In the interests of keeping things upbeat and interesting we seem to have established 2 clear sides. Looking forward to the comments from both to continue.

That's a clear summary.

When I came back 'online' a week or so back I only read a couple of posts, read Julias post on the r*** story, and fired back, as it certainly seemed out of character for her to say such a thing on a public forum, and the only reason I could see for such an admission, was to trivialise the trauma that stormies are feeling. Financial r*** is certainly real imo. Have just read Julias post #5833 and understand. My sincere apologies

Glad to have your explanation, HQ, thank you. Understood. I was at the time surprised at your post because you are clearly not a callous person and the vehemence of your remarks was out of character.

Rape is an horrific crime, and one I'm not qualified to comment on, unfortunately we need to accept that the r word is used poetically to describe 'the loss of something important'. I thought that Franks explanation in post #5784 when he says 'this is a hypothetical ...' explains this adequately.

Disagree entirely. Nothing adequate or appropriate from FA in response to my post.

Bunyip you say in post #5785 that 'you are not aware of all stormies were greedy', maybe you and others don't claim that ALL stormies were greedy, yet I find the word GREED used profusely in regard to stormies throughout this thread, including your post # 5789 "or perhaps it was just a case of being GREEDY or stupid" and SJG #5847 "Given your ....you were GREEDY'.

I haven't dissected who said exactly what but have had the impression that 'greed' was referred to only when applied to people who already had an asset base that would have supported a very comfortable retirement if invested very conservatively.

In that circumstances, it seems like a pretty reasonable descriptor to me.

Others have been described as "naive" for thinking double gearing is safe.
I, and others, have said this, and I stand by it.

One of the difficulties in a discussion like this is that we have people who are hurt and very personally involved, and then people who are interested onlookers.

When we're feeling hurt, a comment which is just an objective comment from someone with no emotional involvement often comes across as personal criticism.
e.g. the term "naive" above:
actual meaning "having lack of sophistication, understanding, experience".
It's simply a fact that this applied to many of the affected people. It is not a criticism.

As a stormie I feel that we are constantly accussed of being greedy, perhaps the small sample of posts that I've highlighted above will explain while I feel this way. Go back a way on this thread and there are loads more.

HQ, if there's one thing common throughout this thread, it's unfair and unreasonable accusations all over the place. The only examples I've seen where greed is the prime motivator is in the example offered above.

Thanks for the following information from your link SJG

Helping you create your good fortune
At Storm Financial, our core desire
is to support you in a genuine and lasting
way in your quest for a fulfilling life............

Etc Etc.
It makes pretty nauseating reading.
Such extravagant claims.
The sort of thing that would ring alarm bells for me in the first few paragraphs.

However, if you'd asked around and received enthusiastic referrals from friends, didn't happen to notice that we were in the throes of a roaring bull market, then I can see that it would just seem like a dream come true.

Side 3: Those who feel this "debate" is going nowhere as there appears to be no interest shown on either side of reaching a middle ground, or actually giving consideration to "the other side's" point of view. The section I've bolded above is, imo, often at the crux of it for the non-storm bunch - can't understand why somebody would get so hot under the collar by the thought of someone receiving "more than they deserve" otherwise?

OK, I'll have a go at this.
Consider as a rough analogy the current asylum seeker situation.
Most reasonable human beings want to extend assistance to people who are genuinely fleeing persecution.
The current impasse is allowing anyone who rocks up to Australia in a boat from anywhere, entirely without documentation, being admitted to our community, given accommodation and some income, health care etc.
These people have been able to afford to pay people smugglers.

Meantime, those without funds to pay people smugglers continue to wait patiently in squalid refugee camps in places like Malaysia where they are subjected to mistreatment, have no rights, no medical care, nothing. They have applied to come to Australia via the conventional means, i.e. via the UNHCR application process and have taken their turn to be vetted accordingly.

Australian bureaucracy and accommodation facilities are entirely consumed with coping with those who have paid the people smugglers, so for every one of those people, someone in Malaysia is being pushed further back.

The reason we do not like this is simply because most Australians believe in a fair go for everyone, that it's just wrong for some to receive special treatment.

Sorry for such a lengthy attempt at an analogy, but hope it helps to make the point.

Others have pointed to the considerable losses experienced by many investors during the GFC, losses which I'd say will be a long time being made good. Indeed, many of these investors have confirmed their losses, being so shocked and in fear of further falls, and sold out. No chance of making good the losses.

It would simply seem unfair and unreasonable that Storm investors should be compensated for the equivalent of that same market drop.

I sit at my screen and alternatively swear, laugh or simply shake my head in bewilderment at the lack of manners, courtesy, sensitivity or consideration shown on this thread.

True enough at times. I know I've reacted less than politely in the face of some of the gratuitous insults, and this is how this sort of unpleasantness escalates.

In the end it will come down to the court's decision based upon the law and nothing else - matters of "blame" and whether claimants "deserve" to be compensated or not are immaterial, and the endless exhortations to admit blame or otherwise are pointless imo.

Agree. But given you have some who find perhaps some emotional outlet in continuing to go over the same ground, this is unlikely to change any time soon.

, and I believe a ball or dinner may have been provided by either storm or Manny & Jules.

Nothing so unusual or suspect about this. Lots of firms do it for their clients.
I recall, with some cynical amusement, the brief period I used a full service broker: at the end of the year clients received a 'class' of invitation depending on the dollar value of their investment!
Those with minimal transactions of not high value just got to go to a drink and sandwich stand up affair at the local office with the local personnel.
Those with greater wealth were invited to a swanky dinner somewhere with the head office people.

 

[DocK]

OK, I'll have a go at this.
Consider as a rough analogy the current asylum seeker situation.
Most reasonable human beings want to extend assistance to people who are genuinely fleeing persecution.
The current impasse is allowing anyone who rocks up to Australia in a boat from anywhere, entirely without documentation, being admitted to our community, given accommodation and some income, health care etc.
These people have been able to afford to pay people smugglers.

Meantime, those without funds to pay people smugglers continue to wait patiently in squalid refugee camps in places like Malaysia where they are subjected to mistreatment, have no rights, no medical care, nothing. They have applied to come to Australia via the conventional means, i.e. via the UNHCR application process and have taken their turn to be vetted accordingly.

Australian bureaucracy and accommodation facilities are entirely consumed with coping with those who have paid the people smugglers, so for every one of those people, someone in Malaysia is being pushed further back.

The reason we do not like this is simply because most Australians believe in a fair go for everyone, that it's just wrong for some to receive special treatment.

Sorry for such a lengthy attempt at an analogy, but hope it helps to make the point.

Others have pointed to the considerable losses experienced by many investors during the GFC, losses which I'd say will be a long time being made good. Indeed, many of these investors have confirmed their losses, being so shocked and in fear of further falls, and sold out. No chance of making good the losses.

It would simply seem unfair and unreasonable that Storm investors should be compensated for the equivalent of that same market drop.

I can see where you're coming from, but to use your analogy I'd counter that in the case of the illegal asylum seekers, let's call them "boat people" , there is a detrimental effect for each one that arrives in that a refugee in the legitimate queue has to wait longer. So a positive for one equates to a negative for another, so to speak. I agree that most of society would say this is not fair, regardless of their opinion on whether we should process or deny access to the "boat people" themselves, but that's a whole other topic......

In the case of ex-stormers being compensated, there doesn't appear to be the same negative for a prospective positive. If the banks are found to have broken the law and ordered to pay full compensation from a certain date the only negative I can think of would be to the bank's bottom line, and potentially to shareholders in the form of a lower div. Doubt that even a full payout would put much of a dent in profits, certainly not enough to affect divs, so to my mind the massive positive for the ex-stormers in desperate straits (through partly their own fault or not ) equates to a much lesser negative for the banks, and none at all for society at large that I can see - apart from the "it's not fair" factor. I certainly understand that the vast majority of society would baulk very strongly if ex-storm clients were to be compensated in full, if only because, as you say, many have lost capital due to GFC and will find it hard or impossible to replace it. I can imagine the resulting media sh#tstorm and if only for that reason I can't imagine full compensation could become reality.

It has often been pointed out to me though, that life's not fair. Sometimes it just seems to me that if you're going to get done over or take a hit, better to do it with a large group. For every group of workers who lose their jobs and entitlements and are bailed out like the Ansett employees there are many unheard of men and women who are ripped off by unscrupulous or unlucky employers that receive nothing. For every group of flood or fire victims that receive a hand from a generous public, there are those who've lost everything in a flood or fire that received no media coverage and have to rely on friends and family, or a supportive community. I'm sure there are any number of people who've taken a hit and just had to wear it, but begrudging the "good fortune" of others (if being involved in a class action can be called good fortune) really won't help them in any way. I'm sure quite a few of the ex-stormers who might be compensated have probably taken a hit or two in other aspects of their lives also.

 

[Garpal Gumnut]

There is a very dangerous element of reason creeping in to this thread.

gg

 

[Julia]

Iform of a lower div. Doubt that even a full payout would put much of a dent in profits, certainly not enough to affect divs, so to my mind the massive positive for the ex-stormers in desperate straits (through partly their own fault or not ) equates to a much lesser negative for the banks, and none at all for society at large that I can see - apart from the "it's not fair" factor.

Agreed. However, I think perhaps you're under estimating the importance of the "it's not fair" factor.
I don't believe this factor stands alone. It is imo part of a broader concern regarding the growing sense of entitlement, accompanied by this government's promotion of the nanny state. I really worry that what I think is the essential characteristic of personally taking responsibility is being undermined by so many rules and restrictions, limiting this personal responsibility. If you remove the decision making capacity from people in such a fashion, they will gradually lose this, becoming instead dependent on the state.
This, imo, is exactly what some governments have in mind. A compliant, obedient electorate is easily managed.

Examples are the proposed pokies legislation and the cigarette plain packaging.
Both these suppose individuals are incapable of making their own choices and exhibiting wisdom. They reduce everyone down to the worst characteristics of the most incapable in our society.

Consider also the successful claims against tobacco companies from people who have smoked themselves silly over decades and pretty inevitably developed serious diseases as a result. They have claimed that they have no responsibility and it is all the fault of the big tobacco companies.
I hold no brief for manufacturers of tobacco products, but I'm damned if I can excuse anyone who has puffed poisonous substances into their bodies over many years from responsibility for the end result.
No doubt the compensation paid by big tobacco will not materially affect their bottom line, but it does offer the message that, once again, you can be irresponsible and still be compensated. I simply think this is wrong and not the way our society should be going. Just my opinion, as always.

Perhaps this all seems far removed from the Storm situation.
To me it's not.

The more we paint people as victims, the more they will assume that role.

It has often been pointed out to me though, that life's not fair. Sometimes it just seems to me that if you're going to get done over or take a hit, better to do it with a large group. For every group of workers who lose their jobs and entitlements and are bailed out like the Ansett employees there are many unheard of men and women who are ripped off by unscrupulous or unlucky employers that receive nothing. For every group of flood or fire victims that receive a hand from a generous public, there are those who've lost everything in a flood or fire that received no media coverage and have to rely on friends and family, or a supportive community. I'm sure there are any number of people who've taken a hit and just had to wear it,

A totally realistic and relevant point of view. I agree. There have been many people affected severely by floods in FNQ in past years who have never been compensated at all. But oh how different when Brisbane was devastated last summer!

You, perhaps inadvertently, raise another point. One Storm client with whom I earlier had some PM communication made the point that the experience with Storm was the more shocking because they'd previously sailed through life pretty much without any problems until now at almost retirement age. So, of course, the realisation that you've made a huge mistake/been taken for a ride by shysters, totally devastates your existing world view.

Others have seemed to be knocked around by life for most of their existence and as a result have accepted the "life is not fair" philosophy, have their battle scars hardened, and are therefore more able to move on.

 

[Solly]

"ASIC considers civil recovery remedy
Shorten questioned over regulator's actions

Assistant Treasurer Bill Shorten has been questioned over ASIC's actions following the collapse of Westpoint, Storm and Trio."

More by Kate Kachor @ www.investordaily.com

 

[DocK]

Agreed. However, I think perhaps you're under estimating the importance of the "it's not fair" factor.
I don't believe this factor stands alone. It is imo part of a broader concern regarding the growing sense of entitlement, accompanied by this government's promotion of the nanny state. I really worry that what I think is the essential characteristic of personally taking responsibility is being undermined by so many rules and restrictions, limiting this personal responsibility. If you remove the decision making capacity from people in such a fashion, they will gradually lose this, becoming instead dependent on the state.
This, imo, is exactly what some governments have in mind. A compliant, obedient electorate is easily managed.

Examples are the proposed pokies legislation and the cigarette plain packaging.
Both these suppose individuals are incapable of making their own choices and exhibiting wisdom. They reduce everyone down to the worst characteristics of the most incapable in our society.

Consider also the successful claims against tobacco companies from people who have smoked themselves silly over decades and pretty inevitably developed serious diseases as a result. They have claimed that they have no responsibility and it is all the fault of the big tobacco companies.
I hold no brief for manufacturers of tobacco products, but I'm damned if I can excuse anyone who has puffed poisonous substances into their bodies over many years from responsibility for the end result.
No doubt the compensation paid by big tobacco will not materially affect their bottom line, but it does offer the message that, once again, you can be irresponsible and still be compensated. I simply think this is wrong and not the way our society should be going. Just my opinion, as always.

Perhaps this all seems far removed from the Storm situation.
To me it's not.

The more we paint people as victims, the more they will assume that role.

The first thing that occurs to me in your examples above are that they relate to compensation or protection from irresponsible behaviour with legal products or services. Gambling, tobacco, poker machines etc are all legal. I see the potential compensation of ex-storm clients by the banks as being unrelated, as it will only take place if our legal system finds that something illegal has taken place. IMO a government setting out to "nanny" society's use of legal products is quite different to our legal system applying penalties and remedies where the law has been broken.

 

[Julia]

Good point, DocK. You are realistically focusing on the purely legal aspect.
I was looking more at the wider social implications.

 

[Harleyquin]

Thanks for the link to the info below Solly. So many of us would like to know exactly where ASIC were when, as the regulator, they should have had their finger well and truly on the pulse.

Attempts have been made to try and 'explain' why ASIC can't monitor every investment, however that's not the case, a decent auditor for example wouldn't need to monitor every investment. An audit is / or should be done every year on all businesses involved in the financial world, and this should have been more than enough to throw up any problems a long time before these collapses ever reached a critical stage.

What monitoring do ASIC have in place to ensure that these people are doing the right thing? In the twenty first century with the technology they have to monitor these things it should be easy. Or is this too simplistic / too much for the ordinary man in the Aussie street to expect.

I expect accountability from ASIC and to date I'm not impressed with their past performance. To date we're still waiting for a creditable explanation.

Either ASIC can do the job or they can't it's as simple as that.

If they can't then give us somebody who can.




ASIC considers civil recovery remedy
Shorten questioned over regulator's actions

By Kate Kachor
Tue 29 Nov 2011
Assistant Treasurer Bill Shorten has been questioned over ASIC's actions following the collapse of Westpoint, Storm and Trio.


ASIC intends to publish a document by the end of the year that sets out factors that may be relevant in choosing enforcement remedies to recover compensation on behalf of aggrieved investors, Assistant Treasuer Bill Shorten has said.

Shorten made the remarks late last week in response to questions in the House of Representatives regarding the actions of the corporate regulator in investigating the collapses of Westpoint, Storm Financial and Trio Capital.

In May, Shorten was called on to answer questions regarding ASIC's response to the collapses, including what total amount of investor money was lost in the collapses; what compensation actions did ASIC take against the parties; what criteria did ASIC use in choosing its actions; and what were the outcomes of the actions.

"One such remedy is to take action to recover damages or property on a person's behalf, including as part of other court actions we take," Shorten said.

"However, ASIC must form the view that it is in the public interest to commence such litigation."

He said ASIC would take a number of factors into consideration when deciding whether it was in the public interest to take civil recovery action on behalf of an investor.

Among the factors under consideration are whether such action is considered viable; whether there is enough evidence to prove the civil recovery; and the extent of the impact or amount lost arising from the misconduct.

Other factors for ASIC to consider are the costs of commencing the civil action; the prospects of the action being successfully litigated by ASIC; and the availability of alternative forms of dispute resolution.

In response to questions about the actions ASIC had taken with Trio Capital, Shorten said the corporate regulator had focused on the conduct of directors and officers of Trio, the investment managers of the Astarra Strategic Fund (ASF) and ARP Growth Fund (ARP), and a number of other stakeholders.

"ASIC is also looking at the conduct of a number of financial advisers who advised their clients to invest in ASF. These investigations are continuing," he said.

When Trio was placed into administration, the reported value of the AFS was around $125 million, he said.

"ASIC has not commenced any actions against any third parties for loss recovery purposes. As ASIC's former chairman indicated to the Joint Standing Committee for Corporations and Financial Services on 24 November 2010, ASIC is unlikely to commence such an action in relation to ARP," he said.

In regards to Storm, he said the corporate regulator's investigations were ongoing.

In terms of Westpoint, the failed company had total capital invested at the time of its collapse in 2006 of about $388 million.

As a result of ASIC's Westpoint actions, investors were expected to see a return of about $160 million to $170 million of the $388 million, Shorten said.

 

[doobsy]

HQ

I think you will find the problem lies in the following:

How do you prosecute someone who has got the client to sign every single page of the SOA, and the strategy is making them bucket loads of money.

In the good times, Storm were the top of the tables. Good returns, no complaints, clients loved them.

By the time it all hit the fan it was too late to say the strategy may not have been appropriate for all clients invested.

This is normally ASIC's dilemma - no one complains when it is all going well. And generally the riskiest strategies make the most money when times are good, right up to the point when it all goes bad. Mostly it goes bad so fast no one can pull it up from a compliance point of view.

From a FP point of view, they disclosed fees, they completed thorough fact finds, they did modelling, all the things any good planner does. The problem was the same advice for every client and the glossing over the risk. But if you are an auditor and you come in and look at say 10 files, and see the clients signed everything, full records of how you came up with the strategy, then you will probably be inclined to sign off. No talk of super, no talk of centrelink etc where it could be avoided so they never tripped up. Investments were index funds so no dramas having advisers pick the wrong funds that underperform.

Trust me, EC had it worked out in his head how to tick all the boxes. He just never backed in a 50%+ fall in markets.

 

[Garpal Gumnut]

HQ

I think you will find the problem lies in the following:

How do you prosecute someone who has got the client to sign every single page of the SOA, and the strategy is making them bucket loads of money.

In the good times, Storm were the top of the tables. Good returns, no complaints, clients loved them.

By the time it all hit the fan it was too late to say the strategy may not have been appropriate for all clients invested.

This is normally ASIC's dilemma - no one complains when it is all going well. And generally the riskiest strategies make the most money when times are good, right up to the point when it all goes bad. Mostly it goes bad so fast no one can pull it up from a compliance point of view.

From a FP point of view, they disclosed fees, they completed thorough fact finds, they did modelling, all the things any good planner does. The problem was the same advice for every client and the glossing over the risk. But if you are an auditor and you come in and look at say 10 files, and see the clients signed everything, full records of how you came up with the strategy, then you will probably be inclined to sign off. No talk of super, no talk of centrelink etc where it could be avoided so they never tripped up. Investments were index funds so no dramas having advisers pick the wrong funds that underperform.

Trust me, EC had it worked out in his head how to tick all the boxes. He just never backed in a 50%+ fall in markets.

Excellent post doobs.

A bit remiss of Manny though not looking at retracements. Then again he was an FP? Everyones stake goes up!

gg

 

[Harleyquin]

Thanks Doobsy and as gg has just said 'excellent post'

There's just a couple of questions come to mind

1. I'm under the impression that storm were reported to ASIC and ASIC investigated storm and allowed them to continue as before. I''m not sure what was reported or by whom but obviously there was a problem, why didn't ASIC find the problem back then, when there obviously was one imo

2. When personal profiles were all different, ie different age groups, risk levels etc and yet the advice all the same risk, shouldn't this have caused them to question further? Or don't they look at all the paperwork.

3. Why do some financial planners suggest a SOA first and yet others give it to you after the event. Do the FPA or whoever is in 'charge' of this have some sort of ruling on when a SOA should be given to the client. I think that a SOA should be given to the client before they make any decision and not afterwards.

4. Why is the SOA considered so important in the case of storm eg when they are all same? I'd like to see the planners give their clients a signed SOA that the planner has signed, he understands what he's proposing and he should have to sign to say that he guarantees the client that he's giving them the type of plan that the client is asking for. {obviously if the client understands it's different but how many understand?} Do all clients know they are supposed to get a SOA and when. }

 

[Solly]

"Storm Financial mansion sold

The Melton Terrace home, belonging to Storm Financial founders Julie and Emmanuel Cassimatis, sold for an undisclosed amount yesterday."

From abc.net.au

 

[Solly]

"FORMER Storm Financial customers are set to be updated on court actions against the Commonwealth Bank, Macquarie Bank and Bank of Queensland when Sydney lawyer Stewart Levitt addresses meetings in Townsville and Cairns this week.

According to the Storm Investors Consumer Action Group, actions being brought by the Australian Securities Investment Commission and Levitt Robinson have been set for trial in the Federal Court in Brisbane on September 10 next year."

From Tony Raggatt @ townsvillebulletin.com.au

 

[Junior]

Thanks Doobsy and as gg has just said 'excellent post'

There's just a couple of questions come to mind

1. I'm under the impression that storm were reported to ASIC and ASIC investigated storm and allowed them to continue as before. I''m not sure what was reported or by whom but obviously there was a problem, why didn't ASIC find the problem back then, when there obviously was one imo

2. When personal profiles were all different, ie different age groups, risk levels etc and yet the advice all the same risk, shouldn't this have caused them to question further? Or don't they look at all the paperwork.

3. Why do some financial planners suggest a SOA first and yet others give it to you after the event. Do the FPA or whoever is in 'charge' of this have some sort of ruling on when a SOA should be given to the client. I think that a SOA should be given to the client before they make any decision and not afterwards.

4. Why is the SOA considered so important in the case of storm eg when they are all same? I'd like to see the planners give their clients a signed SOA that the planner has signed, he understands what he's proposing and he should have to sign to say that he guarantees the client that he's giving them the type of plan that the client is asking for. {obviously if the client understands it's different but how many understand?} Do all clients know they are supposed to get a SOA and when. }

Doobsy would be better qualified to answer these queries. But here's my take:

1. Because they are under-resourced and don't possess the relevant knowledge and experience to recognise that a strategy such as Storms is inappropriate. As has been previously acknowledged, if the vast majority of clients are happy and making money, then ASIC would probably consider investigating a waste of time. Pre 2008 there were untold high risk strategies and products being spruiked everywhere....Storm probably didn't really stand out.

2. See 1.

3. SOA should be issued and signed by client and adviser before the advice is implemented. There is however, a 5 day rule which allows you to issue an SOA after implementation as long as it's within 5 business days.

4. That is what's supposed to happen...the reality is that some FPs use the SOA as a marketing tool and central to their business and others see it as a compliance burden.

Some FPs charge $1000s for the SOA and spend a lot of time on projections, modelling etc whereas others only include what is required by legislation and hope the client won't read it word for word.

 

[doobsy]

Thanks Doobsy and as gg has just said 'excellent post'

There's just a couple of questions come to mind

1. I'm under the impression that storm were reported to ASIC and ASIC investigated storm and allowed them to continue as before. I''m not sure what was reported or by whom but obviously there was a problem, why didn't ASIC find the problem back then, when there obviously was one imo

Other planners felt the advice was too aggressive and that they were not being "clear and concise" which is part of what any Fin Plan should be. ASIC (as with most govt depts) obviously felt since client were having each individual page discussed and signed off that clients were getting a full explanation.

2. When personal profiles were all different, ie different age groups, risk levels etc and yet the advice all the same risk, shouldn't this have caused them to question further? Or don't they look at all the paperwork.

The rules for giving advice are based around "knowing your client" which storm certainly did (they hounded people for information so that they could get the most out of them) and providing "appropriate" advice based on needs, objectives and risk tolerance.

Appropriate is a pretty broad brush but it is there to stop investors complaining if fund A outperforms fund B in a certain year. As long as the adviser can justify the reasoning then it is still appropriate. Where I felt they were in danger was more the recommendations to pull money from super for retirees over 60. Take money from a tax free environment and bring it back into a taxable environment then you need gearing for a deduction to offset the tax you have again.

Needs and Objectives - I think the "education process" clients undertook (I like to think of it as indoctrination) slowly wore clients down until they were nodding their head when advisers (salesman) were suggesting what the needs and objectives were. That mixed in with some generalisations - "You are looking for your asset base to work for you in the best way possible". BS.

Risk Tolerance - again a difficult one. I have seen that clients can change within a 6 month period. The cyclone 12 months ago triggered some to become more conservative, others more aggressive. Storm felt EVERYONE could handle the risk of shares as long as they had a better understanding. Again BS in my opinion. My little old lady posse have never stepped more than 25% into shares and can only sleep at night knowing the bulk of their monies are in defensive income producing assets. The 8 out of 10 that walked away from storm would have made up a high percentage of these sorts of clients. They weren't worth chasing and would have been too much work.

So Storm, through it's seminars, followups etc did a filter on clients before they even started down the proper FP process. By targeting only the clients who made the right noises, nodded their heads at the right time and ticked the right boxes on the feedback forms it made it easier to justify the fact that everyone got a small variation on the same advice.


3. Why do some financial planners suggest a SOA first and yet others give it to you after the event. Do the FPA or whoever is in 'charge' of this have some sort of ruling on when a SOA should be given to the client. I think that a SOA should be given to the client before they make any decision and not afterwards.

Rule is that SOA should come first unless there is a bloody good reason not to. AND THEN it must be given ASAP no more than a few days later. This allows us to get a phone call from a frantic client who has had a family issue, needs us to sell something immediately to get them cash quickly and not mess about getting an SOA ready, sending it to them, them sending back the authority to proceed and then getting things started. It should be the exception, not the norm.

4. Why is the SOA considered so important in the case of storm eg when they are all same? I'd like to see the planners give their clients a signed SOA that the planner has signed, he understands what he's proposing and he should have to sign to say that he guarantees the client that he's giving them the type of plan that the client is asking for. {obviously if the client understands it's different but how many understand?} Do all clients know they are supposed to get a SOA and when.

The SOA should be personalised advice. If it is all the same the argument can be made that Storm were not giving personalised advice, not following the "know your client" rule. Where this will struggle will be that some were still working, others retired, some had investment property as the source of the original income, others it was withdrawing super, others the family home. I think there are enough differences that they won't get caught on this point.

The appropriateness is another matter. As mentioned, pulling people out of super is fraught with danger in my eyes as it remains the most tax effective, centrelink effective place for retirement savings. For those who had monies outside, the argument is harder and comes down to needs, objectives and risk.

Planning is not all cut and dry, each planner will use strategies they like, feel comfortable with and have seen work. Because there is investment, tax, estate, centrelink implications with every change we make, more often than not 3 planners will come up with 3 different plans. That doesn't mean 2 are inappropriate. Hope that makes sense.

We have a range of products out there, cash, term deposits, shares, property, all of those in superannuation, should we move super to a transitional pension, a full pension, is there insurance linked, what about an annuity, a funeral plan, will centrelink be affected or lost, what about the tax, the estate, who is getting the money if something happens, is a SMSF appropriate, a family trust to minimise tax etc etc etc. So many variables means that each plan should have clear differentiations. Not sure storms did.

A plan should be a fluid thing as well. No client should get a plan that is set and forget.

Hope that didn't bore too many but I felt it was a good question that deserved a thorough answer from the darkside.

 

[Solly]

More Storm Financial probes ahead
A fuller exploration into the collapse of Storm Financial and the liability of Macquarie Bank and the Commonwealth Bank of Australia will now go forward.

"There could be negotiations on the way, there's copious discovery that has to occur," said Levitt, adding that his firm, Levitt Robinson Solicitors, had to install $300,000 worth of software in order to handle the discovery from ASIC and the banks."

From www.lawyersweekly.com.au

 

[Solly]

Curtain falls on Norris's reign at CBA

More @ abc.net.au