Storm Financial Group

DocK said:

OMG! I find myself nodding and agreeing with a good deal of what Frank has just posted

For myself, I'd like to see the entire industry move to a "fee for service" basis, and get rid of the commission system entirely. Same for real estate actually. It has always seemed unfair to me that if investor A has 20K and investor B has 500K, and they wind up with basically the same plan and investments, that investor B ends up paying so much more if both cop the same yearly management fee when in reality the amount of work done on each plan wouldn't differ by much. Same with selling properties - there may be more advertising etc on the more upmarket properties, but not enough to warrant the difference in commission most times. I'd love to see a move to a negotiated fee for the service to be offered. IMO it would lead to a much more honest industry as it would remove a lot of the impetus for directing funds to the products that pay a higher commission, or the continual ramping up that storm carried out, and would see planners paid for the service they provide, rather than the product, much the same as accountants. If my tax work takes 10 hours that's what I pay for - not the amount of the refund obtained, or a % of my turnover for the year. You get the point.... To me it denotes the difference between a salesman and a professional. Many years ago I worked for a little while for an insurance salesman, and I was gobsmacked by the trail commission he continued to earn on policies written years before, although he hadn't spoken to the client for years and had no intention of doing so as they were "tapped out". Seems dishonest to me to earn income year after year for a one-off service. Charging a fee for the time spent doing a review of the plan and investments, at mutually agreed upon intervals, seems much fairer imo - much like the mid-year tax planning you pay your accountant for.

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DocK I think you will find that the industry is moving this way towards fee for service. There are also moves afoot to have clients sign off on their yearly fees so they can see what they are paying.

The issue of commissions has more been with those inactive clients of an adviser. Say someone who saw an adviser 5 years ago with $100,000 and the adviser put that money into a managed fund. While the client may never see the adviser again, the adviser still picks up his %% trail commission for doing SFA. I know they are trying to eliminate this.

I reckon firms who have based their business on commissions will find the going very tough over the next few years. Commissions already have a bad name out there, and it won't be getting any better. I wouldn't want to be a planner relying on commissions for my supper.

However, I don't think this was an issue for Storm and its clients per se. The clients knew that their 7% up front equated to so many dollars and they signed off on that. They were aware they were paying astronomical fees, but for whatever reason they felt it was value for money.

The disclosure requirements on our industry are better than any other industry. Please provide a single example of where the seller discloses what he is getting paid, how it is getting paid, the costs of the underlying recommended product etc etc.

All the layers are there so that everyone can make some money – no argument there. Lets look at a car salesman – sells the car – gets paid his wage and probably a commission on the car, maybe a higher commission depending on the sales for the month. Car dealer takes their slice. Government takes their bit. Importer takes their bit and then manufacturer gets the cost of the car + their markup

Unless you watch a farmer pull a vegetable out of the ground in front of you then sell it directly to you, there are layers upon layers of fees in everything we buy. We disclose how much we are getting paid – WHAT MORE DO YOU WANT? You are not dealing with the layers above so who cares what sort of deal they have negotiated?

If I buy a TV from Harvey Norman I deal with whichever store I walk into. If I can negotiate a better deal, the store misses out on the extra profit, maybe the salesman doesn’t make as much commission on that sale. I don’t deal with the franchisee which is Harvey Norman. I don’t care what deal he did with Sony in China and how much he is making on the TV before he sells it to the individual store.

Onto the SOA – there is a standard SOA structure. Again, mine is about 30-40 pages and you can find the advice and fees in the first 15 pages. Storm’s were filled with crap and BS cashflows and projections that looked impressive but really just meant it was hard to track anything. They sold this as extra compliance. I saw it as confusing. You want to go ASIC on anything when they audited Storm pre crisis – go them on the fact they push for “clear and concise” advice. Storm’s SOAs were nothing like that.

I don’t see fixing the problems as too hard. I see governments fiddling with things that aren’t broken and making it worse for consumers. Oh and look through the new regs and apart from no commissions on borrowings and better regs around margin lending, nothing in there would have made any difference to a single storm investor.

As others have mentioned, getting good advice is a bit of a lottery. That isn’t just financial advice. That is ALL advice. Don’t make me provide examples of medical, accounting, business, advertising, etc etc. Work it out.

If you can get an insurer to provide the insurance cover I am all for it. As I see it my clients don’t need it.

“Rife with shysters”?? HAHAHAHA. One firm, what about 50 advisers in an entire industry. I think you find that most other examples of clients losing money is not FP, it is people that bypass us and go direct. On the numbers, we all know that only 3000 had been “Stormified” the rest are probably happily still sitting in their MLC super funds. I don’t blame investors but I certainly don’t think those who have done nothing wrong need to feel some sort of blame because we as an industry didn’t stop it. We tried. This point seems to be missed over and over again. WE TRIED. ASIC was contacted numerous times.

I will finish saying that nothing in the proposed changes will affect anything I do in business and will not change or improve my clients lot in life. It will add extra BS I need to go through and possibly lead to clients missing out on advice. Do you know how I expect my business to continue to grow? By continuing to do the right thing and knowing that it will lead to more business. Good service, good advice no matter what markets do will lead to more business. Those who don’t provide it, great, those clients will end up coming to me.

SJG1974 said:

DocK I think you will find that the industry is moving this way towards fee for service. There are also moves afoot to have clients sign off on their yearly fees so they can see what they are paying.

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Signing off on yearly fees is one thing, knowing how much your investment return has been affected by other hidden commissions and kick-backs is quite another. Still, it's a damn good step in the right direction.

The issue of commissions has more been with those inactive clients of an adviser. Say someone who saw an adviser 5 years ago with $100,000 and the adviser put that money into a managed fund. While the client may never see the adviser again, the adviser still picks up his %% trail commission for doing SFA. I know they are trying to eliminate this.

I reckon firms who have based their business on commissions will find the going very tough over the next few years. Commissions already have a bad name out there, and it won't be getting any better. I wouldn't want to be a planner relying on commissions for my supper.

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Yes, this is an example of what I feel is simply dishonest and unethical, if not actually illegal. It has long been the accepted way in the FP and insurance industry - and is likely the reason for a lot of people taking control of their own investments and investing directly to avoid the ongoing "management" fee, paid, as you say, for sfa.

However, I don't think this was an issue for Storm and its clients per se. The clients knew that their 7% up front equated to so many dollars and they signed off on that. They were aware they were paying astronomical fees, but for whatever reason they felt it was value for money.

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I didn't say this was an issue for the storm clients - we mostly knew that the 7% upfront was instead of the usual annual management fees and it would have wound up in my favour over the long term - however the long term was not realised and it wound up being very expensive in hindsight. A lot of people on this thread love to go on about the astronomical fees, but perhaps don't realise that the ongoing annual fees were very much less than the usual managed funds sold by most FP's. My comments were about the FP industry in general, and the direction in which I would like to see it move, and could equally apply to the insurance and real estate industries.

doobsy said:

RE the warranty paragraph. Again I come back to advice. We sell advice. You were sold bad advice. I don’t know how you get a warranty for bad advice. I have seen shocking advice provided by professionals. Accountants recommending SMSF for clients that don’t understand them and don’t have adequate super balances, business structures that don’t protect the clients and their families, bad estate advice from solicitors, horrible advice from Centrelink professionals. Again I ask why not blanket everyone?

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Doobsy,

I appreciate your work on here. It is good to have some perspective from someone in the industry particularly considering so many are prepared to **** can the whole industry due to one rogue outfit.

I would be interested in your take on this from an FP perspective....

From what I can gather, from the time clients signed with Storm to the time margin calls weren't made in late 2008, the main thing that Storm could be accused of is providing inappropriate advice to clients.

I would think that proving advice is inappropriate would be very difficult. Storm can say that clients sat through seminar after seminar, they had a huge SoA presented to them and had clients sign every page to indicate they understood what was being recommended, and the clients signed the forms to borrow, reborrow and invest in the index funds. The strategy was presented to the clients, and the clients accepted it and went ahead with it.

Now common sense screams out that the advice was inappropriate- the majority of Storm prospects knew this and walked away. But then again many clients threw common sense out the window when they saw the potential results this strategy could provide and therefore downplayed the risks they were taking.

Common sense suggests that a retiree with in excess of $1m in financial assets doesn't need to double gear into the share market to generate his desired $45,000 per annum income. But does that make the advice inappropariate?

If the clients want to do it, then does it become appropriate for them?

It strikes me that proving this would be very difficult, and therefore, it will be almost impossible to have rules and regulations in place that can protect people from this in the future?

Cheers

Dock and SG

Yes there is a push for fee for service but it is difficult.

Ongoing commissions for inactive clients is a rip off and should be stopped. No argument.

How we charge an ongoing active client should be up to us. We are different to accountants because we are not "transactional" advice most times. We provide ongoing advice on a daily, weekly, monthly situation. Unless we time each instance we think about a client we can't charge that way.

Example - markets fall in a heap, logically you want our adviser to be thinking about you - new monies to take advantage of low markets, a rebalance to ensure adequate cash, a centrelink update since investment values are down. Do we invoice? What each month? each quarter?

What about the client accumulating super that I am giving advice on? All external cashflow is going into their mortgage as it should be. How do I charge? They don't want another cost to come out of their cashflow.

It also leads to people not calling. They don't call to update us because they think that will cost them money. In reality it may cost them more by not updating us. We want clients to call.

Lawyers and Accountants provide singular transactional advice and charge on an hourly basis. BUT even accountants who have HNW more complicated clients who they need to be high touch with will set an annual retainer rather than an hourly system.

SJG1974 said:

Doobsy,

I appreciate your work on here. It is good to have some perspective from someone in the industry particularly considering so many are prepared to **** can the whole industry due to one rogue outfit.

I would be interested in your take on this from an FP perspective....

From what I can gather, from the time clients signed with Storm to the time margin calls weren't made in late 2008, the main thing that Storm could be accused of is providing inappropriate advice to clients.

I would think that proving advice is inappropriate would be very difficult. Storm can say that clients sat through seminar after seminar, they had a huge SoA presented to them and had clients sign every page to indicate they understood what was being recommended, and the clients signed the forms to borrow, reborrow and invest in the index funds. The strategy was presented to the clients, and the clients accepted it and went ahead with it.

Now common sense screams out that the advice was inappropriate- the majority of Storm prospects knew this and walked away. But then again many clients threw common sense out the window when they saw the potential results this strategy could provide and therefore downplayed the risks they were taking.

Common sense suggests that a retiree with in excess of $1m in financial assets doesn't need to double gear into the share market to generate his desired $45,000 per annum income. But does that make the advice inappropariate?

If the clients want to do it, then does it become appropriate for them?

It strikes me that proving this would be very difficult, and therefore, it will be almost impossible to have rules and regulations in place that can protect people from this in the future?

Cheers

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Proving it will come back to "know you client" needs, objectives, risk tolerance etc.

What storm did and will fall back on is they "ongoing education" or 6mth indoctrination process so that by the end clients were signing off that post "education" their needs and objectives were different to reflect their new understanding and that their risk tolerance had changed because they now understood all about markets.

Don't know how most will go. Some will be easy. Older retirees should be easy.

doobsy said:

Dock and SG

Yes there is a push for fee for service but it is difficult.

Ongoing commissions for inactive clients is a rip off and should be stopped. No argument.

How we charge an ongoing active client should be up to us. We are different to accountants because we are not "transactional" advice most times. We provide ongoing advice on a daily, weekly, monthly situation. Unless we time each instance we think about a client we can't charge that way.

Example - markets fall in a heap, logically you want our adviser to be thinking about you - new monies to take advantage of low markets, a rebalance to ensure adequate cash, a centrelink update since investment values are down. Do we invoice? What each month? each quarter?

What about the client accumulating super that I am giving advice on? All external cashflow is going into their mortgage as it should be. How do I charge? They don't want another cost to come out of their cashflow.

It also leads to people not calling. They don't call to update us because they think that will cost them money. In reality it may cost them more by not updating us. We want clients to call.

Lawyers and Accountants provide singular transactional advice and charge on an hourly basis. BUT even accountants who have HNW more complicated clients who they need to be high touch with will set an annual retainer rather than an hourly system.

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OK, you raise some valid points re the fluid nature of the service you provide. I'd still argue that charging a % of the funds managed is unfair. Perhaps an annual retainer on top of the initial fee for service for the original plan would be fairer. An amount commensurate with the service to be provided, rather than based on a % of the client's wealth.

doobsy said:

Dock and SG

Yes there is a push for fee for service but it is difficult.

Ongoing commissions for inactive clients is a rip off and should be stopped. No argument.

How we charge an ongoing active client should be up to us. We are different to accountants because we are not "transactional" advice most times. We provide ongoing advice on a daily, weekly, monthly situation. Unless we time each instance we think about a client we can't charge that way.

Example - markets fall in a heap, logically you want our adviser to be thinking about you - new monies to take advantage of low markets, a rebalance to ensure adequate cash, a centrelink update since investment values are down. Do we invoice? What each month? each quarter?

What about the client accumulating super that I am giving advice on? All external cashflow is going into their mortgage as it should be. How do I charge? They don't want another cost to come out of their cashflow.

It also leads to people not calling. They don't call to update us because they think that will cost them money. In reality it may cost them more by not updating us. We want clients to call.

Lawyers and Accountants provide singular transactional advice and charge on an hourly basis. BUT even accountants who have HNW more complicated clients who they need to be high touch with will set an annual retainer rather than an hourly system.

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I agree doobsy. Financial planning is very different to seeing a lawyer or accountant.

I don't have a problem with commissions per se, as long as the client understands and agrees to them and know what they are paying. As you pointed out, for many people, they may prefer to pay this way becuase it doesn't immediately impact their hip pocket, their daily cashflows and the like.

But they do have a bad name out there. Industry Funds have rammed this down people's throats for years and it appears from what I have read that it could be a struggle for those planners who rely on them in the future.

SJG1974 said:

I don't have a problem with commissions per se, as long as the client understands and agrees to them and know what they are paying. As you pointed out, for many people, they may prefer to pay this way becuase it doesn't immediately impact their hip pocket, their daily cashflows and the like.
.

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I agree. Some people will find a fee for service too expensive and will not seek financial advice. They don't mind, however, a commission between the 'product' and the planner as long as it's clearly disclosed.
Just so we know what we're actually talking about here, Doobsy could you perhaps give an indication of a fee for a new client to do all that you'd have to do, i.e. risk assessment, consideration of all their circumstances, projected plan for the next X number of years etc?

Btw, on the issue of ongoing trail commissions where the adviser has not had any contact for god knows how long, the client can stop this. I have a small lifetime annuity, taken out several years ago. I have never seen the person who sold me this since but realised a couple of years ago that he was probably still getting commission on this. Contacted issuer of the annuity, Challenger, and was told "don't worry about it, it's not coming out of your pocket". "Once it's in place there's nothing we can do about it".

I didn't find that acceptable so wrote to the CEO, making the point that cumulatively all these commissions they were paying when no service was being provided, must lead to less profit for Challenger so effectively they were being unfair to their shareholders.

The trail commission was stopped.

Julia said:

....Btw, on the issue of ongoing trail commissions where the adviser has not had any contact for god knows how long, the client can stop this. I have a small lifetime annuity, taken out several years ago. I have never seen the person who sold me this since but realised a couple of years ago that he was probably still getting commission on this. Contacted issuer of the annuity, Challenger, and was told "don't worry about it, it's not coming out of your pocket". "Once it's in place there's nothing we can do about it".

I didn't find that acceptable so wrote to the CEO, making the point that cumulatively all these commissions they were paying when no service was being provided, must lead to less profit for Challenger so effectively they were being unfair to their shareholders.

The trail commission was stopped.

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Good but was the commission returned to you in some form or retained by the provider, which is usually the case?

Dock

Most of the newer generation will be moving to a fee based on the service provided. Quite often this may be shown as a percentage of funds managed but is worked out based on the level of service taken up.

Julia

Each client is individual, if it is a simple process and a client is going to become an ongoing client we try to minimise upfront costs where possible. If it is more transactional - age care assessment, assisting in getting a SMSF set up etc - then we will charge a fee to offset time spent. We charge a initial consult fee for 2 reasons, one to get rid of tyre kickers - why should we work for free - and two so that people take us seriously and we are re-imbursed for the time spent on that initial fact finding. That includes 2-3 meetings and all the background work getting authorities in place with super and investments, reviewing insurances etc. We then see if we can offer any help and discuss fees for SOA, ongoing service etc if applicable.

Judd said:

Good but was the commission returned to you in some form or retained by the provider, which is usually the case?

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Judd- will have been retained by Challenger.

This is the argument of many advisers. Most product providers charge the same whether you go direct of via an adviser. Only difference is if you use an adviser then they will pay the commission to them. So client is no worse off. This may change but if it doesn't then using an adviser at least gives you someone to contact.

No different to a general insurance broker. Price is the same but in the event of a claim you can at least deal with someone local rather than direct to the multinational company.

Again with the 2 sets of rules but I don't get a breakdown of what the teller, the branch manager and the bank receive for writing my home and contents cover and yet I pay more for that than I do my income protection.

Judd said:

Good but was the commission returned to you in some form or retained by the provider, which is usually the case?

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Retained by Challenger of course. As evidenced by my assertion that they're disadvantaging their shareholders if they continue to pay a fee that is not being earned.

No reason why it should be reimbursed to me. It's a deal between the provider and the adviser. I'm getting exactly what I paid for.

doobsy said:

Bring in the insurance but allow each client the chance to take it up or not.

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doobsy said:

If you can get an insurer to provide the insurance cover I am all for it. As I see it my clients don’t need it.

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I can't see insurance companies falling over themselves to provide this. How could you insure against bad advice?
Just think about all the so called experts who - at the start of the GFC - widely advised investors to just hold on, it will all be just fine, when they should have been focusing on preservation of capital in people close to or in retirement especially.

If these people had held insurance (against what exactly?) would they have expected the insurance companies to cover all their losses?
Just seems totally unrealistic to me.

DocK said:

I didn't say this was an issue for the storm clients - we mostly knew that the 7% upfront was instead of the usual annual management fees and it would have wound up in my favour over the long term - however the long term was not realised and it wound up being very expensive in hindsight.

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This method of charging was pretty smart on Storm's part, in that it subtly locked people in for the longer term.
As DocK points out, if you stayed with Storm for ten years the p.a. fee was not unreasonable.

Julia said:

I can't see insurance companies falling over themselves to provide this. How could you insure against bad advice?
Just think about all the so called experts who - at the start of the GFC - widely advised investors to just hold on, it will all be just fine, when they should have been focusing on preservation of capital in people close to or in retirement especially.

If these people had held insurance (against what exactly?) would they have expected the insurance companies to cover all their losses?
Just seems totally unrealistic to me.


This method of charging was pretty smart on Storm's part, in that it subtly locked people in for the longer term.
As DocK points out, if you stayed with Storm for ten years the p.a. fee was not unreasonable.

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Problem with this sort of fee is it was bringing forward future fees rather than a single transactional type fee. By bringing forward future fees why then would the adviser need to look after and service the client? They already have 10 years worth of fees, sit back and who cares if that client leaves in year 4. Focus on new clients which will bring in even more fees.

I have discussed this previously but I see it as a major problem in their model and the cashflow for the overall business. When the new clients stopped, so did all revenue into the business. Storm would have folded as an advisory group no matter what CBA did, the revenue had stopped as existing clients were fully tapped out and no new monies were coming in. How would they have paid the bills? And the bills were large due to the wages and fancy cheese and all the rest that Storm clients grew accustomed to.

Again no offense to storm victims but WTF were they thinking? Who pays for 10 years in advance on anything?

The other issue with the Storm fees was they charged the 7% on the geared up amount and again and again every time they geared the client further.

A client with $400,000 of assets who suddenly has $2,000,000 invested via gearing is paying his 7% up front fee on $2,000,000 ($140,000). Then he pays it again and again every time his friendly Storm adviser gears him up further!

If that client went to probably 90% of other advisers, he would have had a strategy for the investment of his $400,000 Allocated Pension, without gearing, and say he paid 2% p.a. to his adviser on the $400K, is then paying $8,000 p.a.

That client would need to invest for 18 years before he is in front!

The problem with the comparison that Storm sold is that the majority of advisers would not have provided the same advice, so fee comparisons would have been meaningless!

doobsy said:

Dock

Most of the newer generation will be moving to a fee based on the service provided. Quite often this may be shown as a percentage of funds managed but is worked out based on the level of service taken up.

Julia

Each client is individual, if it is a simple process and a client is going to become an ongoing client we try to minimise upfront costs where possible. If it is more transactional - age care assessment, assisting in getting a SMSF set up etc - then we will charge a fee to offset time spent. We charge a initial consult fee for 2 reasons, one to get rid of tyre kickers - why should we work for free - and two so that people take us seriously and we are re-imbursed for the time spent on that initial fact finding. That includes 2-3 meetings and all the background work getting authorities in place with super and investments, reviewing insurances etc. We then see if we can offer any help and discuss fees for SOA, ongoing service etc if applicable.

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Doobsy, I'm interested to know how much the initial consult fee you charge is, if you're willing to divulge. No obligation, of course. The reason I ask is this is partly why I wound up with storm in the first place. I'd previously sought advice from FP's, and each time had to pay an initial consult fee, only to find they were pushing a narrow range of products/managed funds which upon further investigation were performing just at or below market, after management fees. Naturally the "consult fee" was non-refundable as their time had been "spent" - even though I was unimpressed with the plan they offered and didn't wish to proceed with it. Unless you hit upon a FP you're happy with it can prove to be a costly exercise by the time you find one you're comfortable entrusting your money with, and whose plan seems more in your favour than their own. As someone said - red warning lights weren't flashing above storm's offices, neither are there green flashing lights above yours I'd guess? You said yourself that getting good advice can be a bit of a lottery - if one has to pay for several initial consults before even getting a plan in place it's no wonder more and more people are opting to bypass the FP altogether.

In my business we often spend considerable time putting quotes and tenders together, without charging for the time spent, in the knowledge that if we get the job it will be well worth the trouble. I'm quite sure we'd miss out on a fair amount of business if we were to start charging all first-time clients for quotes. I get that you don't want to work for free - but it doesn't give a prospective client confidence that you'll be sure to come up with a plan that'll work for them if you want to be paid just to sit down with them. Again, I know it's standard practice in your industry, and It's not my intention to have a go at you personally, but it's another facet of your industry I feel is due for a change.

doobsy said:

Problem with this sort of fee is it was bringing forward future fees rather than a single transactional type fee. By bringing forward future fees why then would the adviser need to look after and service the client? They already have 10 years worth of fees, sit back and who cares if that client leaves in year 4.

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Good point. But if the sales pitch from Storm had already persuaded clients to take up the proposed ultra risky strategy, and have them accept that they're in it for an extended time, it's hardly a stretch to persuade them that it's cheaper to pay one fee up front rather than ongoing annual fees.

Your subsequent revelation that the fee was charged on the geared up amount and again when that gearing was increased blows me away. I'd imagined it was charged just the once on the initial amount the client brought in

Again no offense to storm victims but WTF were they thinking? Who pays for 10 years in advance on anything?

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I wouldn't either, for anything. But, as above, if clients had been inspired to place so much trust in Storm that they accepted the strategy, I can see that such trust could extend to paying fees in advance (well, if it were just on the initial amount anyway).

DocK said:

Doobsy, I'm interested to know how much the initial consult fee you charge is, if you're willing to divulge. No obligation, of course.

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I've already asked this and Doobsy hasn't divulged same. That's fair enough.
I expect it varies considerably according to individual circumstances.
I'd still be interested in a ball park figure, though, Doobsy.

"Storm class action moves to mediation
Settlement not assured

Mediation talks will begin next year between Storm class action participants and a number of Australian banks."

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More by Kate Kachor @www.investordaily.com

"Local gets keys to Storm duo's pad

Going, going, gone. Townsville residents will no doubt be delighted their monument to corporate indulgence, the former home of Storm Financial founders Emmanuel and Julie Cassimatis, will remain in local hands."

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As reported here; http://www.brisbanetimes.com.au/business/local-gets-keys-to-storm-duos-pad-20111206-1oh3y.html

I'm seeking urgent confirmation from sources on the ground, if reports can be verified that a stately gentleman smoking a stogie ,clad in a pin-striped suit and fedora was recently seen alighting from an Arnage in the vicinity of Melton.....