Storm Financial Group

[Frank Ainslie]

OK Frank

Understand you don't want to be repeating yourself but I was trying to get out into the forum more specific information around mostly the top two points on the Corps act breaches.

This along with the UMIS will be where Storm clients either have a big win or a big loss so felt it was important to be specific rather than generalise simply based on your singular experience and successful ASIC prosecution of Drummond.

As the UMIS will be a fight against both Storm and the banks, this one will be dragged out over MANY years whereas proving the advisers were negligent brings in the PI Cover. I know this cover was inadequate but it might mean clients get at least a partial payment to keep them going.

I am not looking to open the UMIS argument up again, I think that both sides will have quite valid arguments for and against and it will be a much higher court than the forum that will make the eventual decision.

Hi Doobsy,

"As the UMIS will be a fight against both Storm and the banks, this one will be dragged out over MANY years whereas proving the advisers were negligent brings in the PI Cover. I know this cover was inadequate but it might mean clients get at least a partial payment to keep them going.

I think you and many others still do not understand the problems that exist with the PI insurance. I have fully outlined these to ASIC in my letter dated 21st December 2010. I will post this in full when time permits because I think you will find this of interest. However, a new wrinkle has arisen!

Earlier today I wrote to ASIC with regard to the PI insurance Storm had in place. I think you will also find this of interest!

Mr Greg Metcraft – Chairman
ASIC – Australian Securities & Investment Commission
GPO Box 9827
Melbourne VIC 3001
15th December 2011
Dear Sir,

Re: ASIC’s failure under the Corporations Act 2001 – SEC 912B to to ensure that Storm Financial had adequate and continuing indemnity insurance.

On the 21st December 2010 (1 year ago) I wrote to you with regard to the deficiencies that still exist in the Reg Guide 210 –“Compensation and Insurance arrangements for credit licensees.” To date I have had no reply!

In my letter I stated, “It peeves me no end that Helen and I have an airtight case against Mr Stewart Drummond, our former Storm advisor, and still we are powerless to act. He told us out and out lies (misrepresented) in order to get our names on the Storm SOA and we have written evidence of his mendacity. Yet, we can't touch him because the indemnity insurance that Storm had in place is not worth the paper it is written on.”

You have now charged Mr. Stewart Drummond with misleading and deceptive conduct, which reinforces our case. Can you therefore now tell me why we should not hold ASIC accountable because your Office failed to carry out its duties under Section 912B of the Corporations Act 2001?

When we signed up with Storm Financial we had to sign off on page 96 of the Statement of Advice relating to the aforementioned section:

“CORPORATIONS ACT 2001 - SECT 912B

Compensation arrangements if financial services provided to persons as retail clients

(1) If a financial services licensee provides a financial service to persons as retail clients, the licensee must have arrangements for compensating those persons for loss or damage suffered because of breaches of the relevant obligations under this Chapter by the licensee or its representatives. The arrangements must meet the requirements of subsection 2.

(2) The arrangements must:

[a) if the regulations specify requirements that are applicable to all arrangements, or to arrangements of that kind-satisfy those requirements; or

[b) be approved in writing by ASIC.

(3) Before approving arrangements under paragraph (2)[b), ASIC must have regard to:

[a) the financial services covered by the licence; and

[b) whether the arrangements will continue to cover persons after the licensee ceases carrying on the business of providing financial services, and the length of time for which that cover will continue; and

[c) any other matters that are prescribed by regulations made for the purposes of this paragraph.

(4) Regulations made for the purposes of paragraph (3)[c) may, in particular, prescribe additional details in relation to the matters to which ASIC must have regard under paragraphs (3)[a) and [b).

For the reasons stated in my letter dated 21st December 2010 (copy attached) not only was Storm’s professional indemnity insurance woefully inadequate in dollar terms, but it also lacked the capability to extend beyond the life of the cover because it had no “deeming clause”. This meant that any claims would need to be made within the cover period. In the case of Storm, this was impracticable because no one knew until well after the event that wrongdoing had taken place. Further, it was impossible to obtain the name of Storm’s insurers for more than a year because Worrells would not release the name of the insurer to us.

The way I interpret the CORPORATION ACT – SECTION 912B it is ASIC’s responsibility to ensure that adequate and extended insurance cover is in place so that compensation is readily available to retail clients if the “licensee ceases carrying on the business of providing financial services, and the length of time for which that cover will continue.

When we signed up with Storm Financial, we did so on the basis that we were protected by the Corporations Act for wrongdoing, and we could rely on this particular Section of the Act among others.

We now charge ASIC with failing to act in our best interests where Storm Financial is concerned by not ensuring that its responsibilities under this Section of the Act were met. Therefore, please explain why we should not hold ASIC liable for our losses which we would have claimed under Storm’s professional indemnity insurance if the insurance cover taken out by Storm had been one that is required under the Act.

Yours sincerely,


VICTOR F. AINSLIE

There is no question in my mind that ASIC's culpability in the Storm debacle has been covered up. As the public watchdog it was asleep on the job. We should therefore get a new watchdog!

I wonder if ASIC will reply to this letter?

 

[doobsy]

Ta Frank

Did not realise they had it structured that way. I know in our case we needed to have run off cover for advice given under our ex-boss before we set up own own shop, in case they stopped holding an AFSL.

I would think the PI should cover advice given when the PI was in force but I would not be surprised to find out that this is not the case.

 

[Frank Ainslie]

Ta Frank

Did not realise they had it structured that way. I know in our case we needed to have run off cover for advice given under our ex-boss before we set up own own shop, in case they stopped holding an AFSL.

I would think the PI should cover advice given when the PI was in force but I would not be surprised to find out that this is not the case.

Here's an extract from my letter to ASIC last year (21st December 2010) that will further clarify the situation for you:

"There are two areas in particular with regard to "Professional Indemnity Insurance” that the Storm Financial saga has highlighted as major weaknesses in the system:

The first is the amount of cover in monetary terms that was taken out by Storm Financial. The total sum of Storm’s insurance - $25-45 million or so dollars - in a business with a turnover of hundreds of millions of dollars was simply ludicrous. Why someone in your Office never picked up on this is beyond me. Unfortunately, this National Credit Act has not fully addressed this issue either because it has totally missed the point in the first place?

The point is that even if Storm Financial had professional indemnity insurance in place for M$500 or more, we, the investors, would not have been able to claim against such an insurance cover because Storm had no provision for such contained in the policy.

“Claims made' policies - such as professional indemnity and directors' and officers' (D&O) insurance - only provide cover for claims made against the insured during the policy period. They invariably include a deeming provision, under which the insurance is extended to claims made outside of the policy period, provided they arise from circumstances notified to insurers within it. Without the deeming provision, the insured would be left without cover for such claims. They will not attach to the policy for the year in which the claim is made, since the relevant circumstances will have been disclosed to the new insurer, who will have excluded the claim from cover.”

The sentence, “They invariably include a deeming provision, under which the insurance is extended to claims made outside of the policy period, provided they arise from circumstances notified to insurers within it” is of particular relevance. You may recall that Storm’s professional indemnity insurance came up for renewal in December of 2008. Any claims that we had on Storm’s professional indemnity insurance were extinguished at that time which really makes the National Consumer Credit Protection Act 2009 (National Credit Act) a bit of a joke unless the Insurance Contracts Act is amended to accommodate circumstances such as these.

Let me quote you part of an article by ‘FindLaw Australia’s Michael Gill entitled, ‘Section 54 Review of the Insurance Contracts Act:

“Particular problems have emerged in relation to the operation of section 54 of the Insurance Contracts Act upon claims made and claims made and notified policies. The benefits extended to insureds by section 54 have been gradually extended by the courts. In particular, in the 2001 case of FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd, the High Court applied section 54 to a deeming clause in a professional indemnity policy. A deeming clause can extend an insured's cover even if no claim is made against the insured during the period of insurance. It extends cover provided that the insured gives written notice during the period of insurance if it becomes aware of any occurrence which might subsequently give rise to a claim against it. An insurer has been obliged to indemnify an insured who failed to notify circumstances discovered during the currency of a policy unless prejudice could be proved.

Since Australian Hospital Care, insurers writing claims made and claims made and notified policies have tended to omit deeming clauses from their policies. This leaves the insured to rely on the statutory right given by section 40(3) of the Act. It has been held by the New South Wales Court of Appeal in Gosford Council v GIO General Limited that section 54 does not apply in relation to the statutory right provided by section 40(3) but, as the Report rightly points out, 'there is still some uncertainty because the High Court may well reverse the effect of the decision in Gosford Council v GIO General Limited'.

The Report indicates that there was strong evidence that the judicial interpretation of section 54 was a factor having material impact on the professional indemnity insurance market in Australia. Some insurers, particularly London insurers, had withdrawn from the market, or had altered their policies in an effort to reduce the impact of the decisions. Others made it clear that they would withdraw if those alterations were found by subsequent judicial decisions to be ineffective. The reviewers also report that even where cover remained, the cost was increasing alarmingly and the comprehensiveness of the cover was declining.

The Report concludes that legislative reform is necessary in relation to the operation of section 54 on claims made and claims made and notified insurance. It recommends that section 54 be amended so as not to apply to a failure to notify circumstances that might give rise to a claim. This would amount to a statutory reversal of the High Court decision in Australian Hospital Care Pty Ltd.

Section 40(3) only gives a statutory protection to an insured where notice of facts that might give rise to a claim is made as soon as was reasonably practical but in any event before the insurance cover provided by the contract expired. The Panel has recognised that this could give rise to unfair results and has recommended an extended reporting period of 45 days after expiry of the insurance policy. There is also a recommendation that insurers provide a pre-expiry notice to insured of their need to notify circumstances, unless there is, to the insurer's knowledge, a broker inolved.”

 

[Frank Ainslie]

Storm Financial – The reasons why we and others entrusted that firm with our money- (Part 1)

This forum has been full of innuendo about Storm Financial, its financial model (a one-fit all plan) that it promoted and the mindset of the investors that used the services of that company.

We’ve had all sorts of extreme views from the Stormies having a cult mentality through a whole range of other things including ‘greed', ‘lacking in commonsense’, 'high rollers prepared to gamble everything’, ‘gullible fools that would believe anything' and so on! You name it and we Stormies have been accused of it. It’s a little like the Lindy Chamberlain case where she was found guilty based on evidence that was later found to be a load of rubbish! None of it was true and nor is it in our case!

I will now endeavour to explain why we and thousands of others placed their trust in Storm. However, in order to do so I need to be somewhat long-winded. Unfortunately, there is no other way because we relied heavily on what we were told at the time and what appeared in the SOA. These aspects need to be considered to put this all in context. Therefore, I will be posting this explanation in 3 parts.

Out the outset, let me say that nothing I or other Stormies can say will satisfy those that have decided our guilt in advance because they are in their own space. No matter! Here’s the unadulterated truth. Take it or leave it for what it is! Just don’t ask me to explain any further!

Our story begins in late 2006. The world was a different one then from what it is today. As I remember it was full steam ahead where the share markets were concerned. Not that that meant anything to us at the time because we had other things on our minds. For one we were looking to sell our shopping centre and retire

We began to look around for something we could sink our money into that would provide a return at little risk and offer growth over the long term. We considered allocated pensions and we also looked at other investment alternatives. One was a financial plan that a Westpac financial planner proposed that cost us $850 to have completed..

One of Helen’s sisters then mentioned Storm Financial. She and her partner were also looking for somewhere to invest their money. Storm had been suggested to her by friends who had been with that firm for some years and their investments had shown continuous growth in that time. Consequently we attended some Storm seminars together in late 2006 and early 2007.

What struck us at once about Storm was the number of clients it had, its track-record in the industry, and its infra-structure which instilled confidence in us that our investments would be safe.

“From 1993 to 2008 40,000 people placed their trust in Storm Financial and several banks." [Piggy Banks” DVD]

Storm was certainly no fly-by-night company operating out of a back-room somewhere on the gold coast but rather a substantial financial advisory firm with an impressive data-base of clients including some celebrities. Further, many of its clientele were made up of people that had been in business all their lives and were certainly not simple minded as some have suggested on this forum.

We also were impressed by the software systems it professed to have in place that would ensure that our assets were in safe hands. When one walked into Storm's Brisbane Office, there were a number of staff sitting at consuls which lent to this impression. Further, our financial adviser could quite readily bring up graphs on a screen detailing our assets. It was quite impressive the way he was able to manipulate the figures. What we didn’t know at the time was that Storm’s systems did not track all the borrowings such as house loans and margin loans. In other words, it was only half a system and was therefore incapable of reflecting true ratios.

As for the ‘Statement of Advice’ our adviser presented us with, it rang no alarm bells at that time because it seemed to suggest a financial strategy that was basically sound. Of course, if someone like Doobsy had read through it, he would have viewed it with an experienced eye and would have been able to see at once that it was a plan that entailed a high risk factor because it was based on double-gearing. It should be remembered, however, that we were inexperienced investors which is why we sought out Storm in the first place. Consequently, we relied entirely on the expertise of our Storm financial adviser to give us what we asked for – a financial plan ‘suitable to our needs’ based on ‘low risk’ and ‘long term growth’. Indeed, the SOA seemed to reflect this in part.

SOA - Page 9 “…we believe our recommendations should be based on your needs.”

The basic strategy of the SOA was to convert any assets such as our house to cash and invest in the market on a broad front.

"SOA – Page 10 “Our approach is to increase the SIZE and QUALITY of your asset base so that it provides you with income to fund your investment business and lifestyle activities."

Our asset base at that time was:

"SOA – page 17” The asset base you have accumulated to date is: Property - $400,000, Shares $33,890, and cash $1,210,392 (including an estimate for our shopping centre because it had not yet been sold)"

The dangers of doing this were not immediately apparent to us because we thought that with the pending sale from our shopping centre (we eventually received $1million for this in August 2007) together with our other assets, this would have been more than sufficient to cover any borrowings. Further, if a market down-turn was experienced, we could easily pay back any loans we had taken out and get out of the market place.

"SOA – Page 18 “You will see that you are slightly overexposed to Property - an Asset that is unlikely to bring you substantial income or capital growth. 24% of your assets is held in Property, compared to our guidelines of 14-20%. Shares are under-represented within your existing asset base - this is the Asset that will bring substantial income and capital growth, reducing your reliance on income from your work. You currently have 2% of your asset base in Shares, while we suggest that 48% is effective for building wealth. Holding Cash assets will not make you wealthy, but sufficient Cash holdings are required to maintain flexibility and liquidity within your portfolio - you will see that your 74% relative to our suggested 38%, makes your current portfolio overweight in Cash."

What we failed to realize then was that the cash we ended up with from borrowing together with the cash we already had would be eroded away by Storm’s fees, margin loan interest, housing loan repayments and our “living expenses” of $8,000 per month which Storm assured us was covered by our investments. However, the projected return on our investments calculated by Storm (that would cover all these overheads and grow our portfolios) never materialised so we virtually ended up funding ourselves in the end.

"SOA – Page 22 “Capacity to Invest - Normally the capacity to which a person should consider investing should also be a function of the market at the time of investment. In a period of substantial profits or growth in the markets preceding entering new investments, one should be much more careful of the level of exposure to higher debt and reliance early on profits. If the markets have performed particularly well for a few years prior to entry, it is likely to take longer for good growth to be seen again. Lower exposure to the market at this time along with larger buffers within your plan, allows you also to take advantage of the potential to consider recovery portfolios should the market fall after entry.

If a period of flat or low growth for several years preceding the investment time has been experienced, one can consider taking debt levels higher in the knowledge that the average of the market will be experienced by rising returns in the coming years. It is usually unlikely to see flat or low returns for more than two or three years if we look historically. Whilst you cannot always rely on historical data to predict the future, it gives us a general view when working within the viability testing that we do, and the safety margin needed to keep you comfortable and protected.

Similarly, if the market has had substantial falls preceding the investment, this compounds positively the reasoning to consider higher exposure. The need for large buffers within your plan is not as great given the upside potential of the market.

Our recommendation notes a middle ground between the above two paragraphs. Whilst the markets have been flat, low and decreasing in the different sectors, we have suggested taking a reasonably cautious approach to enable you to take advantage of the lower market initially as well as leave capacity within your buffers for recovery steps should the markets drift lower after entry. This approach also keeps you more away from any potential margin call risk.

SOA – Page 22 Investment Growth - The viability test assumes NO GROWTH in the share investment for the remainder of this financial year, and for the next 2 years. This shows that even without sharemarket growth, the Cashflow remains viable and does not depend on growth in the share Investment. Following this period of time, modest growth of 6.55% per annum in the Sharemarket is required to keep your Cash Reserves growing.

 

[Frank Ainslie]

Storm Financial – The reasons why we and others entrusted that firm with our money- (Part 2)

"Please refer to the below graph, which shows that from 1st January, 1980 to recent, the All Ordinaries has returned 9.69% Growth and further 4.63% dividends per annum making a total combined return of 14.32% pa. Please note these returns do not include any additional value our Build/Recovery steps would enhance on the return."

There is nothing in any of this to suggest that this plan was risky. In fact, Storm’s SOA was reassuring because it seemed to indicate that Storm was taking a conservative approach and one very much in keeping with our wishes.

"SOA Page 62 - Using Market Volatility

Our rejection of the strategies employed by active fund managers does not mean that we advocate the passive management of investors' funds - merely that the activity should not rely on forecasting future returns in particular companies or sectors of the market. The term 'passive management' has come to be synonymous with Indexing, meaning that the fund manager is empowered only to ensure the investment exposure tracks that of the market; they do not make decisions about which shares to buy, nor about the timing of the trading activity.

We suggest that while investors' funds are best invested in a passively managed Index Fund, the portfolio can be actively managed by using any opportunities to build the asset base, that arise from events that have already occurred.

By observing the effect that market occurrences have on portfolios, and invoking at pre-set trigger points a pre-determined set of actions, we believe that active management of the portfolio can enhance the market returns delivered by an index fund. This type of active management does not hand the decision-making on to fund managers, especially considering that they have actually been shown to subtract value in the majority of cases. It involves only a process of planning (before the event) the required activities for each possible outcome in the market, and invoking the appropriate action for the events that unfold in the market. The strength of our system is that it relies solely on the observation of events that have already occurred, and invoking predefined actions at pre-determined trigger points. We do not attempt to guess where the market is headed next, nor do we attempt to 'time' the activities based on forecasts of future market movements. This can be contrasted with the approach generally taken by active fund managers, where effort and expertise is used in an attempt to predict where the market or individual stock prices will move next.

Investment Distribution - We have assumed that you will receive dividends on your Share Investment at the rate of 3.95% per year. Generally, distributions are paid at about 4-6% per year, so the use of only 3.95% will underestimate the revenue contributed to the plan from this source. Distributions are usually reinvested; however they do form part of your overall pool of Reserves, and can be redeemed at anytime.
Borrowing Parameters

Margin Call Test

SOA – Page 26 “You will see from the Margin Call Lending to Valuation Ratio (LVR) that the value of your Margin Loan relative to the value of your Share assets should not exceed 79.84%. If this occurred, you would be in Margin Call and the lender would require you either to repay some of the loan, or offer more security for the loan.

Your post-plan Margin Lending Ratio is at 49.17%, which is well within our recommended guidelines as being prudent."

Again, this statement suggests a cautious approach!

The 3 layers of protection before a Margin Call could occur are:

1. A 49.97% buffer before a margin call would occur if you offered your cash Reserves as additional security to the Margin Lender. This equates to being able to withstand a fall in the market of about 3714 points from its current level.

2. If you were to purchase additional shares during a market fall and offer these as additional security, you have a 41.82% buffer before a Margin Call occurred. This is the preferred option in the event of a market fall, as it means that you are purchasing successively cheaper assets as the market declines. This equates to being able to withstand a fall in the market of about 3109 points from its current level.

3. If you offered no additional security to the margin lender at all, then there would be a 35.67% buffer to Margin Call. This equates to being able to withstand a fall in the market of about 2652 points from its current level."

The safety levels stated were again reassuring!

"SOA Page 29 – “…additional Investment steps may be funded from Cash Reserves that have been set aside for this purpose. Also, capacity to purchase additional securities may have been left in approved but indrawn borrowings with your margin lender. This is evident from the difference between your actual margin lending ratio of
49.17% being less than the recommended maximum allowable LVR of 59.53%.

SOA Page 30 - Estimated costs associated with bank borrowings are listed here. Again, these have been inflated to build in additional security to the plan.

Investment fees are payment for the financial advice you have received and the implementation of these Recommendations. It also pays for the purchase of the Brokerage on your Share Investments and their growth, so you incur no costs in switching funds, or redeeming and reinvesting those same funds. The right to the Brokerage is a valuable asset as it is valid on the Investment and its growth for an unlimited number of trades, and for an indefinite period of time (while you remain a client of Storm Financial Pty Ltd ONLY).

Your Contribution - There are no regular contributions required for this plan. We have allowed drawings of $100,000 per annum to help meet the cost of living expenses. The plan will also meet your loan repayments.

Cash Reserve Levels - The estimated level of your Cash Reserves is documented for each of the 17 financial years detailed in the Cash flow. Recall that your Cash Reserves Dam is the amount that remains after all of the revenue for the Plan is received and all of the expenses associated with the portfolio have been paid. If the level of Cash Reserves rise over time, this indicates that the Plan is bringing in more revenue (including "Your Contribution') than it is costing to run, or that it is making a 'profit'.

SOA Page 37 - Default Risk is the chance that a company you invest in will default, and as a result the shares in that company become worthless. In most cases of default, investors have been unable to foretell that the company was experiencing difficulties - otherwise they would presumably have sold their shares! Because of the unreliability of selecting which companies will not default, we suggest that this risk can best be managed by diversification rather than by trust in your (or an adviser or manager's) forecasting ability. By ensuring that your funds are spread across many companies, your portfolio is at once exposed to the low-risk, medium-risk, and high-risk companies that will do very well, and to the low-risk, medium-risk, and high-risk companies that will do poorly, and some will inevitably collapse. By diversifying across all of the companies in the market, your exposure to each of these companies is indexed to ensure that default risk represents a negligible danger for your portfolio.

SOA Page 61 - Risks Associated with Borrowing to Invest

Borrowing to invest introduces a new element of risk to any Financial Plan. As well as magnifying gains and losses as described above, using shares as security to borrow investment funds can put the investor in the position of margin call. This occurs if the listed price of shares falls below a level that would cover the lender's loan to you, and then the lender will ask you to contribute the difference. This ensures that the lender's exposure for the shares remains the same.

In his book Scams & Swindlers: Investment disasters and how to avoid them, True stories from ASIC, Bruce Brown gives us some very useful advice.

For most investors, particularly if you have an average income, it is wise to only borrow a limited percentage of the price of 'the shares or units if you want to gear into the market. Although this means the number of shares or units you can buy will be less, so the value of the potential profits and tax breaks will be less, it also means there is less chance you will suffer a margin call. ASIC (1988J Pages 138·139.

This quote highlights a very important facet of our Recommendations. We have advised that you use borrowings to facilitate the purchase of business assets. In so doing, we have used strict guidelines on the amount of those borrowings, and have related them to the size of your asset base. As has been explained within this document, should you implement these Recommendations in full your overall debt ratio would be 48%, which is made up of liabilities of 80% of the value of your home and other Property assets, and 49.17% of the value of your Share*based assets.

These debt levels are well within our guidelines as being prudent. Adequate arrangements have been made to handle market volatility and the associated potential for margin call - these have been fully described and explained in the section of this document entitled Your Post-Plan Position."

 

[Frank Ainslie]

Storm Financial – The reasons why we and others entrusted that firm with our money- (Part 3)

"You will be informed of your trigger points on implementation of the plan, and at each step in your Journey to Capitalism. If the market index moves through your trigger point, simply call us (you may remembered that I queried this at the time) and we will review your position in light of the new market conditions. If there is no activity on the portfolio for any significant length of time, we will arrange to review your position to ensure that the plan is still optimal for your financial and personal circumstances. Of course, you can request a review of the portfolio at any time, or you are always welcome to discuss any issues impacting on your finances with us.

This activity can be expected to enhance the returns of the portfolio beyond the market average that is delivered by the indexed Investment. It should be noted however, that any build or recovery portfolios that may be constructed merely add to the attractiveness of the core Investment.

SOA Page 85 - Cash reserves of around $285,000 will be your primary form of protection from the effects of varying returns from your Share Investment. The plan also builds in capacity to take advantage of buying opportunities and handle this inevitable market volatility. This capacity is incorporated within the unused capacity for borrowing using the Shares as security for the loans (these are termed Margin Loans).

As explained, these Cash Reserves are a part of your Investment, and under no circumstances should they be viewed as finance for consumption spending. They should be maintained within business-use accounts, with close monitoring of the spending that is financed from these funds. These Reserves should only be spent following consultation with us; failure to discuss the use of these funds prior to spending decisions being made may jeopardise your Plan. Of course, any additional savings into these accounts will facilitate extra building steps in your investment, and so shorten the time taken for you to be able to live off the income from your capital.

SOA Page 87 - When the market goes down losses are also magnified. For this reason, your gearing level must be prudent, and your Cash reserves sufficient to allow you to persevere during periods of negative returns. We have addressed both of these issues in detail in this document. Our Viability Testing evaluates your ability to handle the variability of returns associated with a Share Investment. The Cash flow attached as Appendix B shows that we have made provision for adequate Cash Reserves to act as a buffer between the changing value of your investment and the requirement to consistently meet your commitments.

Should you implement these Recommendations, your position regarding debt and equity would be as illustrated in the pie chart below. The optimum range for debt ratios is that which will allow wealth creation to be maximised, yet take account of the constraints imposed by managing debt. Generally, you should owe no less than 40% and no more than 60% of your total assets; as always, it is important to emphasise that the debt must be incurred to purchase good quality assets. These should be considered as a guide - your actual liability ratios will fluctuate within this range according to age and the stage in the Investment process.

SOA Page 91 - If your trigger points are not breached within a six months period, we will contact you to review your investments and overall plan with you."

Reading back through this today without the benefits of hindsight, it still seems reasonable to me!

What people fail to realize however is that what we were told in the SOA was at odds with what Storm Financial then did!

* The revenue that the investments earned did not cover the interest paid out on the borrowings, the Storm fees, and living expenses so the cash reserves were being whittled away.
* There were no effective software systems in place to monitor our investments. The house and margin loans were not included so the ratios were pure bull****! Why do you think Storm was using spreadsheets in the end using data from the CBA?
* Storm’s covert arrangements with the Banks made a nonsense of the agreed trigger-point ratios.
* And so on.

People have asked us why we then continued to pump money into Storm in 2008 when all the signs were there that the markets were going bad. One could just as easily ask, “Why did the Banks keep lending money to Storm’s clients in 2008 when the storm clouds were gathering?” The Banks are financial institutions and are therefore expected to be prudent. We were investors relying completely on our financial adviser's advice. We were committed to supporting the plan Storm gave us because we had agreed to abide by their strategy and had already paid Storm considerable fees up front. Further, we were being reassured in the latter part of 2008 that there was no need to worry. “Storm had everything in hand!”

Just to give you an idea of just how devious our particular Storm adviser was, in August 2008 after we returned from Europe, the sister-in-law who first mentioned Storm to us contacted Drummond because she was getting a little concerned about the share markets world-wide and particularly the happenings in the USA. She was about to retire from her job as a public servant and asked Stuart whether she should. “No worries!” he said. “Everything is good! There’s more chance of me throwing myself out a window than there is Storm going bad!” He then persuaded her to retire (which she did that month) and sink her retirement super in Storm – some $200,000 plus dollars. She is now back working at the place she retired from!

Some will say how foolish was she but they little realize the effect of Storm’s confidently asserting that we had nothing to worry about. Remember that the banks didn’t make margin calls on most of their clients until everyone was well and truly fried. By the time most of us were cashed down, we were in the centre of a financial vortex. The index fund managers had suspended sell-downs because they were inundated and they all fiddled around whilst our assets burned. Many landed up in negative equity well over 100%.

Looking back, we, the investors that signed up with Storm took our eyes off the ball to a certain extent. Whilst there was nothing alarming in the SOA, we should have had some one else, or maybe more than one financial adviser run his eye over Storm's plan first. But then what would he or she have found. There was nothing outwardly deceptive in the plan. Certainly, people could have been advised of the dangers of double-gearing and decided whether they wanted to run the risk. But what other flaws are immediately apparent? Perhaps Bunnyip can enlighten us with his wisdom.

In our particular case, deception was used to get us to sign up because we were told lies to start with. Further, the advice was inappropriate to our circumstances. A case, I believe, can now be made for Storm simply using our assets for its own end. The data to date suggests that Storm adopted this strategy somewhere between 2006 and 2007, selecting people with considerable assets that would suit their purposes. The Court will decide whether there is any substance to this.

I’ll end on this note. Many that were caught up in Storm had reached the end of their working lives and were looking forward to retirement. They had finally achieved their financial goals after years of hard work. They sought financial advice because they believed they were doing the right and proper thing – the sensible thing. They assumed that Storm and the Banks that they borrowed from were ethical and above-board. They also assumed that there were regulations in place that would protect their interests. They found that they were wrong.

Their biggest mistake though was they placed their TRUST in financial institutions that betrayed that trust for personal gain. These people could have been your parents, your friends or your neighbours - anyone in fact.

Should we tolerate this type of behaviour or do something to change it! I think we all know the answer to that one!

“Beware of false prophets, who come to you in sheep’s clothing but inwarly are ravenous wolves.” - Mathew 7:15

 

[Garpal Gumnut]

Thanks Frank.

It certainly appears that Storm had a plan to target a group of hardworking high asset individuals.

The more I read your account the more it sounds like a cult.

Read my entry on cults on the previous page or look it up on wikipedia.

gg

 

[bunyip]

Looking back, we, the investors that signed up with Storm took our eyes off the ball to a certain extent. Whilst there was nothing alarming in the SOA, we should have had some one else, or maybe more than one financial adviser run his eye over Storm's plan first. But then what would he or she have found. There was nothing outwardly deceptive in the plan. Certainly, people could have been advised of the dangers of double-gearing and decided whether they wanted to run the risk. But what other flaws are immediately apparent? Perhaps Bunnyip can enlighten us with his wisdom.

Sure Frank, I'm more than happy to 'enlighten you with my wisdom'.

First of all, I couldn’t care less what was in Storms SOA.

Rather than assessing Storms strategy based on what they said in their SOA, I believe a far more effective assessment process would have been to.........
* Jump on Google and do some simple research into stockmarket crashes and margin loans.
* Call half a dozen rival Financial Planning firms and see what they thought of the strategy, and what they were offering themselves.
* Call some stockbroking firms and get their views.
* Run a good old common sense test over the strategy – consider that if you triple or quadruple your market stake through mortgaging your home and gearing aggressively, you’re buying yourself a double-edged sword that would magnify your losses once the market inevitably turned bearish.
* Realise that even if margin calls had kicked in on time, and even if the investment scheme was all above board without any illegality or collusion or skullduggery, your level of gearing would still ensure that your losses were substantial, even if you could have held on.
* Realise from your market research what could have happened to your ability to hang on if there was a repeat of the 1929 crash where the market took a quarter of a century to regain its losses.
* Think for yourself rather than placing so much trust in a bunch of salesmen because they had qualifications and belonged to a well-regarded professional body.

I personally would never have invested heavily in something that I knew nothing about, particularly when a lot of borrowed money was involved.
And in your personal case, given that you were 65 years old and had more than enough money without any borrowing to produce sufficient passive income to fund a very comfortable retirement, I can’t understand why you felt any need to go near Storm and take on such an ambitious strategy.
Perhaps you can throw some light on this particular aspect – why did sign on with Storm? I’m not asking you about how or why you thought they had a you-bute strategy that was worth mortgaging your home and going into debt for.
I’m simply asking you why you didn’t just buy some houses and a basket of high yielding blue chips shares with a good record of paying paying decent dividends, as well as sink a portion of your funds into cash deposits.
I’m sure all of these investment avenues must have been known to you - these three are the most common and basic investment and asset classes.
You could have been safe and secure with no debt and no stress.
Did you consider doing things this way, Frank, rather than going down the Storm route? If not, what were your reasons?

 

[Solly]

Thanks Frank.

It certainly appears that Storm had a plan to target a group of hardworking high asset individuals.

The more I read your account the more it sounds like a cult.

Read my entry on cults on the previous page or look it up on wikipedia.

gg

GG

Why do I feel that some people are going to end up in "The Creek" after all of this washes out ?

S

 

[Julia]

I've just read most of the three part post by Frank. I did skip some of the repetitive parts, I admit.

My impression (and that's all it is, but it's endorsed by the excerpt from the short doco apparently made by ex Storm investors) is that it was a cleverly designed piece of propaganda, designed to sweep off their feet those with minimal investment experience and an unhealthy level of trust.

There are several trigger phrases amongst it all designed to reassure that 'we are looking after you'.

I'm a reasonably experienced investor but getting a clear picture of "the plan" from that verbose document was beyond me. If I'd been considering investing with Storm, I'd have had to toss it aside and ask them to express it in much more straightforward terms, with flow charts and pictorial representations of what the funds would be doing.

I absolutely do not believe that any first time/inexperienced investors would have had a clue what that stuff really said, so convoluted was it with terms they would not have clearly understood.

A prudent person, in such a circumstance, would have either walked away or demanded detail that they could truly understand.

Human beings, however, are peculiar creatures in that we are reluctant to display our ignorance, so rather than ask questions in order to properly understand what is being proposed, we prefer to accept that warm and fuzzy reassurance that

"these are the professionals, of course they have our best interests at heart, and it doesn't matter that I haven't a clue what they are actually planning to do with my money, I don't want to look foolish by saying I don't understand how it's all going to work."

I could go through all the three posts you have put up, Frank, and insert comments where warning bells would have gone off for me, or where I'd have just walked away, but

(a) that will only engender your further resentment and provide no actual insight for you, given your confirmed stance in the matter, and

(b) like SJG, I've just run out of energy to continue trying to ensure that those who have been so caught up this time are not affected similarly in the future.

You will all pursue the course you have decided upon, making no allowance for the possibility that others may in fact be capable of offering objective evaluations.
So be it.

 

[maccka]

I'm a reasonably experienced investor but getting a clear picture of "the plan" from that verbose document was beyond me. If I'd been considering investing with Storm, I'd have had to toss it aside and ask them to express it in much more straightforward terms, with flow charts and pictorial representations of what the funds would be doing.

I absolutely do not believe that any first time/inexperienced investors would have had a clue what that stuff really said, so convoluted was it with terms they would not have clearly understood.

A prudent person, in such a circumstance, would have either walked away or demanded detail that they could truly understand.

Human beings, however, are peculiar creatures in that we are reluctant to display our ignorance, so rather than ask questions in order to properly understand what is being proposed, we prefer to accept that warm and fuzzy reassurance that

"these are the professionals, of course they have our best interests at heart, and it doesn't matter that I haven't a clue what they are actually planning to do with my money, I don't want to look foolish by saying I don't understand how it's all going to work."

Hi Julia,

I believe that many people didn't realise that they didn't understand their 'investment' until it was far too late. They had been to so many hours of education seminars, had read so many pages of SOAs (and in many cases multiple SOAs), asked many questions, demanded detail that they thought they understood, seen hundreds of graphs and 'learnt' so many new financial jargon words that they didn't know that they didn't know. They were unconsciously unconscious of their lack of understanding.

Unfortunately that often the way of many of life's hard lessons. You don't realise the problem until after you've tried unsuccessfully to apply something you've learnt, it goes bad and it is too late. The only way to get value out of the lesson is to recognise the problem, deal with it and move on with the aim to have learnt from the experience and not repeat it.

cheers
Maccka

 

[Solly]

"Reprieve for CBA in margin loan case

THE Commonwealth Bank has persuaded a Federal Court judge to strike out significant portions of two damages suits brought by customers who took out margin loans to invest in share funds managed by Storm Financial.

However, Justice Nye Perram will allow the pair to amend some parts of their statements of claim, including allegations of lack of good faith and unconscionable conduct."

More by Elisabeth Sexton @ smh.com.au

 

[Solly]

As as result of the hearing on 14 December 2011,
a further hearing is to be held on:

21 December 2011
ASIC unregistered managed investment scheme proceedings
Federal Court, Brisbane
Justice Reeves
Level 7, Harry Gibbs Commonwealth Law Courts Building
119 North Quay
Brisbane QLD 4000

From : https://storm.asic.gov.au/storm/storm.nsf/byheadline/Next Court Dates?opendocument

 

[Garpal Gumnut]

GG

Why do I feel that some people are going to end up in "The Creek" after all of this washes out ?

S

Unfortunately Solly, I doubt it.

Most penalties will be civil, $20,000 here, $250,000 there. Those responsible are collecting cash in that event.

Unless some criminal activity is alleged, nobody will go to gaol.

It is the nature of these scams, unless something criminal was done in panic, e.g. in the last days of Storm's existence.

gg

 

[bunyip]

Hi Julia,

Unfortunately that often the way of many of life's hard lessons. You don't realise the problem until after you've tried unsuccessfully to apply something you've learnt, it goes bad and it is too late.
The only way to get value out of the lesson is to recognise the problem, deal with it and move on with the aim to have learnt from the experience and not repeat it.

cheers
Maccka

I absolutely agree with you on that point, Maccka.

And I have no doubt that some Stormers have done exactly that – recognised where they went wrong, learnt from the experience, and moved on with their lives. That was precisely the attitude of the only Storm victim I’ve spoken to face to face – an old school mate who I caught up with at a school reunion.

Unfortunately though, we’ve seen from this forum that there’s still a hard core of Stormers who apparently have little concept of how and why they got burnt. Those of us who are experienced and reasonably successful in investment matters have spent considerable time and effort in trying to enlighten these people so they can avoid making similar mistakes. I realise that some of them don’t have enough time left to ever be in a positions to invest again, however, if they receive a compensation package then they might have a few hundred grand to do something with. And from what I’ve gleaned from some of the attitudes expressed on here, it wouldn’t surprise me if some of them got burnt all over again. I don’t say that in a sarcastic sort of way, but rather because I genuinely believe it based based on what I’ve seen.

Also, the future generation might learn something valuable from this thread. People who are perhaps only teenagers now might read this forum in ten years time and get some insights into the importance of thinking for themselves and doing some simple research before committing vast sums of borrowed money to risky investments.

I’ve got a pretty thick skin, yet at times it disappoints me that we’ve been ostracized for trying to help people. We’ve been called unintelligent, slow on the uptake, inflammatory, heartless, and many other derogatory terms. The irony is that those saying we’re unintelligent and slow on the uptake are the ones who blundered into the snare of a conman, whereas we were switched on enough to avoid doing so.
Such is life – throughout history there are many stories of people who were criticized, disliked and reviled, sometimes even executed, because they were forthright and honest.

 

[DocK]

Hi Julia,

I believe that many people didn't realise that they didn't understand their 'investment' until it was far too late. They had been to so many hours of education seminars, had read so many pages of SOAs (and in many cases multiple SOAs), asked many questions, demanded detail that they thought they understood, seen hundreds of graphs and 'learnt' so many new financial jargon words that they didn't know that they didn't know. They were unconsciously unconscious of their lack of understanding.

Unfortunately that often the way of many of life's hard lessons. You don't realise the problem until after you've tried unsuccessfully to apply something you've learnt, it goes bad and it is too late. The only way to get value out of the lesson is to recognise the problem, deal with it and move on with the aim to have learnt from the experience and not repeat it.

cheers
Maccka

Good post Maccka - "unconsciously unconscious of their lack of understanding" would have been a perfect fit on a lot of ex-clients I'd say.

Julia, I'd also add that another human trait is to believe and trust our family and friends more than perhaps we should (when it's not their area of expertise), hence the power of word-of-mouth referrals. Storm relied heavily on referred business from existing clients.

 

[SJG1974]

Having read Frank's snippets from his SoA, I must admit that as someone who would consider myself to have some investment smarts, I struggled to understand what the strategy actually was by reading these snippets.

I seem to recall that for many clients the SoA was well over 100 pages, and yet the strategy was so simple that it could have been explained by some straight forward tables and charts in probably 3 or 4 pages. As Julia said, I don't know how any unsophisticated investor could have possibly understood what was going on there.

I agree with Julia and DocK that some of the failings of human nature probably came into play for people with all this...

* The desire to run with the herd (if all these people are benefiting from what Storm are doing, then I don't want to miss out);
* The absolute trust in "authority figures" (if these people with all of their experience and credentials are saying this is the way to go, then it must be);
* A reluctance to show "ignorance" (Better to remain silent and be thought a fool than to speak out and remove all doubt); and probably a few others.

I guess whan you look at those and other things combined, I can see how people were sucked into believe this was something that it wasn't. Again, a hard lesson learned.

Perhaps Storm's way of trying to justify their high fee was to prepare such a big and verbose SoA? What it does do is camouflage the risks involved so that by the end of the document, you are so confused that you simply put all of your trust in your adviser to do the right thing. I am sure clients would be much more discerning if they had their time over again.

Given gg's definition of a cult, it did have all of the makings of one.

 

[doobsy]

Got some clients coming in but looking forward to adding some comments this afternoon.

 

[doobsy]

Where to start – first of all – amazing the difference some background gives Frank – see how many people now better understand and therefore are not as critical.

On the size of the SOA – I have no doubt it was there to confuse clients. If you have signed 50 pages before you get to the advice and 80 pages before you get to the fees, what chance do you have.

Also when the same story over and over had been rammed down the throats of clients in the “education process” and the advisers had ready made answers and graphs for all the common questions, then eventually a client will believe all else they thought must be wrong.

I have always been in the camp that I could never blame the investors for getting sucked in, it was the slickest sales pitch out there, but that did not change my opinion that they should not be put in a better position than average joe who did it himself or went to a normal planner and is still down on their investments just because of Storms complete failure and the banks inadequate actions.

Bunyip – I gotta disagree with your post. Google might have helped but we were neck deep in a bull market and the bulls to bears ratio was probably 5:1. The rival firms may have helped but I know we aren’t in the business of ripping apart another plan unless we are going to get the business which adds the extra time and costs to the client. The rest is wonderful but again you look to place a level of trust in the guy telling you 1929 was a long time ago and a 50% fall was seriously unlikely.

Frank – I will go through your stuff and point out what would have set me off – consider it an education process for the forum:

Property – an asset unlikely to bring substantial income or growth – This will bring them down. If there is nothing else this will do it. Property is a legitimate asset class and as you should have known from experience produces income and growth over time. The word that jumps out at me is “substantial”. Listed and unlisted property has struggled badly over the past few years and in some cases done much worse so it wasn’t the answer but excluding it when you are asking for an income driven investment portfolio is plain dumb.

The whole capacity to invest spiel is utter BS. The first para has merit but they then contradict that in the 2nd saying they ignore that and have their own viability testing. Markets had a period of flatness but on the end of a 7 year bull run as part of a longer 25 year bull run.

Modest growth of 6.55% per annum? Modest? Maybe if we are at the start of a bull run.

Lets all pick the time period to show growth well above this – 1980 to recent – perfect. All ords year end figures 1980 = 624, 2007 = 6229. But what about before that – 1969 = 401.88, 1979 = 417.82 Growth was 0.35% per annum

Using “passive” instead of “index” to describe managers was straight up to make clients more comfortable. What are you invested in? Oh a passive manager so it is all ok.

The dividend reinvestment I have always felt was an error by Manny. If he had been taking the cash to the cash dam to fund living expenses etc rather than assuming he could time the sale of units to top up the cash dam I think clients may have even survived. Their shares ratio kept increasing and the cash ratio kept decreasing.

Margin call testing – Whoop de do if you don’t take any action and don’t believe it could happen. They were guilty of both.

Default risk again was a nicey way of making client feel they were getting diversification when in fact they were getting only one asset class. Unless picking individual stocks, any fund would have exposed clients to 40-60 stocks which would have encompassed about 80% of the ASX 200 if you go on volume rather than number of stocks.

Nice of them to decide what was “prudent”. Another good word – note to self – must start using it more.

No mention in the margin call scenarios that should a margin call not be met and clients have their positions extinguished, then they would be left with a house debt. I would see this as something that should have been point #1 in the “Risks and disadvantages” section that was so hard to find.

Adequate arrangements have been made to handle market volatility and associated potential for margin call – LIARS!!!!!!!!!!!!!!!!

The viability testing wasn’t worth a pinch of S#%t. No adviser that uses projections is going to show a client what happens with long term negative returns are they because they end up with no client. Hate projections, always have. Hate the fact it assumes a nice orderly straight line growth scenario. I have asked our software guys to allow me to override in certain years and put in random negative returns to give more realistic idea of what would happen.

Frank, with or without the banks atrocious handling I again say it was storm that screwed you, the banks just held you down and laughed.

 

[Julia]

Hi Julia,

I believe that many people didn't realise that they didn't understand their 'investment' until it was far too late.

Either you understand something or you don't. If you don't understand absolutely clearly the process on which you intend to embark, especially with so much at risk, why wouldn't you ask questions until you did? If such clarification wasn't forthcoming after all this 'education' I just don't get why you would go ahead.

Julia, I'd also add that another human trait is to believe and trust our family and friends more than perhaps we should (when it's not their area of expertise), hence the power of word-of-mouth referrals. Storm relied heavily on referred business from existing clients.

Sure they did. It was a very healthy bull market. Everyone and his dog were making money.

You, DocK, at least did understand what you were doing, had assessed the risk and concluded - given your age - the risk was worth taking. Then you had enough knowledge to get out when you saw it all going bad. That's so different from blindly following the herd without understanding why they were making the money they were.

I might have misunderstood, but I've had the impression that some investors went ahead despite their confusion about the so called education process, instead of because of it, just because they were so impressed by the accumulating wealth of family and friends.

We'll never know, of course, but I wonder if these folk had come onto a forum like ASF (and there are plenty of others) and asked that forum "what do you think about this strategy?" and received the inevitable "Don't touch it" "Very, very risky, especially if you're close to retirement" etc etc responses, whether they would have been deterred, or if their desire to be part of the action being so enjoyed by people they knew would have allowed them to ignore such caution.

Perhaps Storm's way of trying to justify their high fee was to prepare such a big and verbose SoA? What it does do is camouflage the risks involved so that by the end of the document, you are so confused that you simply put all of your trust in your adviser to do the right thing.

Yep. The document seems designed to emphasise the potential client's lack of expertise and encourage the "just trust us" approach.

Given gg's definition of a cult, it did have all of the makings of one.

I don't know what gg's definition of a cult is but here's a formal definition:

cult/kəlt/
Noun:

1. A system of religious veneration and devotion directed toward a particular figure or object.
2. A relatively small group of people having religious beliefs or practices regarded by others as strange or sinister.

Synonyms:
worship - religion - adoration

Hardly applies here imo.

Bunyip – I gotta disagree with your post.

What, specifically, do you disagree with in what Bunyip said?