Storm Financial Group

[SJG1974]

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.

To hazard a guess, fees would have been a motivator for him here...reinvest in more units = greater ongoing fees.

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.

The above seems like an obvious attempt to mislead.

I haven't read the full SoA, but based on Frank's snippets, it seems all they focussed on was the LVR with the margin loan, not their entire LVR.

doobsy, perhaps you can correct me if this is wrong (but it seems right to me)...

We have a scenario where:

Client borrows $400K against house
Combined with $600K of own investments, to make $1m
Then gears this up again to have a margin loan portfolio worth $2m....

So total debt is $1,400,000
Total equity is $2,000,000
Margin Loan LVR is 50% (as they would count the borrowings against the house as equity)
Total LVR is 70%

In this scenario, it would take a fall of 30% in the investment, for the client's total LVR to be 100%:

Total debt still at $1,400,000
Total equity is $1,400,000 (having fallen by 30%)
Margin loan LVR is 71.4% ($1,400,000 of equity divided by margin loan of $1,000,000)
Total LVR 100% (i.e. no equity left)

At this point, the fall in the investment hasn't even triggered a margin call...by the time the margin call comes, the clients will be well and truly in negative equity (assuming my figures are right)!

My thoughts as I have repeated ad nauseum are that if you are borrowing money, you would want to understand the potential ramifications completely before you sign on the dotted line, particularly when using the borrowings to invest in a volatile asset such as shares. It would seem that the SoA left no way in which the clients could realistically understand the potential ramifications...and as I mentioned before , the SoA seems like it was so confusing that it should have attracted some suspicion.

 

[doobsy]

Julia

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.

I touched on this - I cannot think of how much investment info I read on a daily / weekly basis and yet only 1 source was talking about sub prime prior to 2008. In the middle of the crisis everyone knew but I am sure Frank will back me up and confirm that the advice was stay in, now is the worst possible time to sell, don't crystallise losses etc etc.

* Call half a dozen rival Financial Planning firms and see what they thought of the strategy, and what they were offering themselves.

Again - touched on this. Very expensive and time consuming. Most planners will tell you to go away or will need to go through their whole fact finding process. What happens if the advice is legitimate, by law we can't say the advice is ok without completing the fact find etc and why do that just to tell the client the first adviser is doing the right thing.

Maybe one second opinion without letting them know what the first plan is. If there are MASSIVE differences then you start to question don't you.

* Call some stockbroking firms and get their views.

OK, but a broker only makes money by trading so just as big a conflict here. Don't know any brokers who were telling clients to sell.

<http://www.theage.com.au/news/business/us-to-lead-new-plunge-of-rollercoaster/2007/09/08/1188783556754.html>

Here are 2 supposed well respected economists telling people to get in or stay in. They are employed by banks or brokers, it is their job to be bullish.

* 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.

Absolutely agree but every risk, every question was downplayed. EC was and still is the master of spin. He learnt in the heady MLC insurance days and most of those guys could sell ice to eskimos. By the time Frank hit the seminar he had 10 years of this sort of model under his belt and had heard it all and had the answers ready.

* 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.

No argument.

* 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.

No argument but Storm had answers for this. They talked of growth being "exponential" and how technology was now accellerating growth. The old ways were gone and the new ways were taking over. It takes either losses like we have seen since 07 or EXTENSIVE reading to know otherwise.

Margin Loans in 2000 = $7 billion, 2007 = $38 billion. It was becoming normal unfortunately.

* 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.

Yes and No - Yes always look and look again when there is money involved. No in the fact that normal advisers are there to help and make life easier, just not Storm advisers.

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.

Storm were telling him property and cash wouldn't do the job.

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.

I'll let him answer this but maybe he didn't want the hassle. I got plenty of clients that don't want to worry about it so they outsource it to me.
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?

 

[doobsy]

To hazard a guess, fees would have been a motivator for him here...reinvest in more units = greater ongoing fees.



The above seems like an obvious attempt to mislead.

I haven't read the full SoA, but based on Frank's snippets, it seems all they focussed on was the LVR with the margin loan, not their entire LVR.

doobsy, perhaps you can correct me if this is wrong (but it seems right to me)...

We have a scenario where:

Client borrows $400K against house
Combined with $600K of own investments, to make $1m
Then gears this up again to have a margin loan portfolio worth $2m....

So total debt is $1,400,000
Total equity is $2,000,000
Margin Loan LVR is 50% (as they would count the borrowings against the house as equity)
Total LVR is 70%

In this scenario, it would take a fall of 30% in the investment, for the client's total LVR to be 100%:

Total debt still at $1,400,000
Total equity is $1,400,000 (having fallen by 30%)
Margin loan LVR is 71.4% ($1,400,000 of equity divided by margin loan of $1,000,000)
Total LVR 100% (i.e. no equity left)

At this point, the fall in the investment hasn't even triggered a margin call...by the time the margin call comes, the clients will be well and truly in negative equity (assuming my figures are right)!

My thoughts as I have repeated ad nauseum are that if you are borrowing money, you would want to understand the potential ramifications completely before you sign on the dotted line, particularly when using the borrowings to invest in a volatile asset such as shares. It would seem that the SoA left no way in which the clients could realistically understand the potential ramifications...and as I mentioned before , the SoA seems like it was so confusing that it should have attracted some suspicion.

All correct

Many people use home equity to avoid the chance of a margin loan but yes Storm were big on focussing on margin loan LVR not overall gearing levels. Guess they felt with the extra from the house, the extra LVR and the cash dam they would never get sold out. This was the biggest flaw, if nothing else there should have been arrangements to protect the home. But that would have meant selling into a dropping market and their golden rule was don't crystallise losses - markets will always come back and hit new highs.

Their modelling also assumed growth. We have seen no growth for 4 years now, most Stormies would be struggling becuase there has been no growth to help fund the interest costs. LVR's would have been going north in a hurry because of capitalised interest.

Frank - did they suggest capitalising interest in June 2008 to you? Without that tax deduction clients would have paid some tax but it might have given them more scope to handle the market drops if interest was accruing or being paid on a monthly basis.

 

[Julia]

Doobsy, thank you for responding to my query about what exactly you objected to in Bunyip's post. Because you don't use the Quote Tags to indicate which post you are referring to I'd assumed it was Bunyip's latest post. Apparently it wasn't because in your answer you are apparently referring to a previous post by B.

It's also a bit difficult to understand from your post which are Bunyip's comments and which are yours. If you have a look at this thread
https://www.aussiestockforums.com/forums/showthread.php?t=2737&highlight=tags

you'll be able to make everything more clear for all of us to read.

 

[bunyip]

Doobsy

If I walked into your office and told you I had a million dollars to invest, and asked you to put together a suitable investment plan for me, approximately how much would you charge me?

I think you may have already answered this in an earlier post, but I can’t be bothered trolling back through scores of posts to find it.

 

[doobsy]

Bunyip. Each case is individual obviously but to give an example of one that i am in the middle of:

Simple $1m net after a prop settlement. Charged usual $275 for initial process. As 58yrs and 56 yrs old and not interested in smsf it is to be split 600k / 400k into retail super. We will look to set annual flat fee of around $7,000 as plenty to do in next few years prior to retirement.

If $$to invest was smaller then might charge an SOA fee depending on how complicated the advice was and how much implementation is involved. Ie rolling multiple supers in, running ttr strategy, setting up sal packaging etc

 

[Frank Ainslie]

More by Elisabeth Sexton @ smh.com.au

Hi Solly,

When I read this article this morning I was most concerned because the implications for we Stormies are significant.

Fortunately, I am now able to report that Sexton has completely misread the judgment which was most favourable to Irving and Oliver . I think she must have received a skewed Press release from a CBA Client.

In fact it's all systems go in relation to the margin loan issues with many sticking points being ruled in favour of Irving and Oliver (and by default, we Stormies).

It goes go to show you that you cannot believe everything you read in the newspapers!

 

[bunyip]

Bunyip. Each case is individual obviously but to give an example of one that i am in the middle of:

Simple $1m net after a prop settlement. Charged usual $275 for initial process. As 58yrs and 56 yrs old and not interested in smsf it is to be split 600k / 400k into retail super. We will look to set annual flat fee of around $7,000 as plenty to do in next few years prior to retirement.

If $$to invest was smaller then might charge an SOA fee depending on how complicated the advice was and how much implementation is involved. Ie rolling multiple supers in, running ttr strategy, setting up sal packaging etc

OK thanks - so an initial consultation fee of $275 to find out the basics of what you’d recommend?

At that rate, assuming that most FP firms would charge similar, I think I’d be checking out a few firms after consulting Storm, particularly if I was staring down the barrel of well over a hundred grand in upfront fees to implement Storms plan, as Frank was.

 

[Garpal Gumnut]

OK thanks - so an initial consultation fee of $275 to find out the basics of what you’d recommend?

At that rate, assuming that most FP firms would charge similar, I think I’d be checking out a few firms after consulting Storm, particularly if I was staring down the barrel of well over a hundred grand in upfront fees to implement Storms plan, as Frank was.

I'm sure Frank had his reasons, but he hasn't really explained them.

I still reckon Storm was a cult and the unwitting went in like the children at Hamelin, at a time when we were in a bull market.

gg

 

[Solly]

I'm sure Frank had his reasons, but he hasn't really explained them.

I still reckon Storm was a cult and the unwitting went in like the children at Hamelin, at a time when we were in a bull market.

gg

GG

I had lunch with my Stormer mate today, a sort of monthly catch-up to do a health check on things, so to speak and to celebrate the Christmas cheer.

I mentioned your reference to Storm being a cult. He was quite taken back by that observation. He couldn't agree but he never participated in the bonding trips away or the Gilbert and Sullivanesque events.

Although he couldn't agree with the cult association, he did concede that there were some very passionate advocates of the Storm strategy.

It's a fine line.

S

 

[Garpal Gumnut]

GG

I had lunch with my Stormer mate today, a sort of monthly catch-up to do a health check on things, so to speak and to celebrate the Christmas cheer.

I mentioned your reference to Storm being a cult. He was quite taken back by that observation. He couldn't agree but he never participated in the bonding trips away or the Gilbert and Sullivanesque events.

Although he couldn't agree with the cult association, he did concede that there were some very passionate advocates of the Storm strategy.

It's a fine line.

S

Solly mate,

This is from the Oxford English Dictionary.

cult

Pronunciation: /kʌlt/
noun
1a system of religious veneration and devotion directed towards a particular figure or object:
the cult of St Olaf
a relatively small group of people having religious beliefs or practices regarded by others as strange or as imposing excessive control over members:
a network of Satan-worshipping cults
a misplaced or excessive admiration for a particular thing:
the cult of the pursuit of money as an end in itself
2a person or thing that is popular or fashionable among a particular group or section of society:
the series has become a bit of a cult in the UK
[as modifier]:
a cult film

Derivatives

cultic
adjective
cultish
adjective
cultishness
noun
cultism
noun
cultist
noun

Origin:
early 17th century (originally denoting homage paid to a divinity): from French culte or Latin cultus 'worship', from cult- 'inhabited, cultivated, worshipped', from the verb colere

So if you take the religion out of it, and the devil etc., the whole Storm show had a charismatic leader, who delivered sermons that nobody understood and which provided them with great wealth before the GFC.

I believe that people taken in, were in thrall at Manny and his minions and the spiel they gave.

And this is not to say they were greedy by the way, but money was the piper's song they followed.

gg

 

[Julia]

Solly mate,

This is from the Oxford English Dictionary.



So if you take the religion out of it, and the devil etc., the whole Storm show had a charismatic leader, who delivered sermons that nobody understood and which provided them with great wealth before the GFC.

I believe that people taken in, were in thrall at Manny and his minions and the spiel they gave.

And this is not to say they were greedy by the way, but money was the piper's song they followed.

gg

Well, that's a very different definition from that given in my copy of the OED.

I'm a bit disturbed about anyone encouraging the thought that Storm investors had had their minds invaded by some sort of esoteric force.

I'd have thought they were already feeling disempowered enough by having been taken in by Storm, and do not need to be considered as mind controlled. Seems insulting to me.

 

[Garpal Gumnut]

Well, that's a very different definition from that given in my copy of the OED.

I'm a bit disturbed about anyone encouraging the thought that Storm investors had had their minds invaded by some sort of esoteric force.

I'd have thought they were already feeling disempowered enough by having been taken in by Storm, and do not need to be considered as mind controlled. Seems insulting to me.

So how do you explain the many Storm clients who still feel that Manny was blameless in their misfortune, and that it was all the banks and the GFC.

It is just a view, and I do not expect a cult following because of it.

gg

 

[Solly]

Solly mate,

This is from the Oxford English Dictionary.



So if you take the religion out of it, and the devil etc., the whole Storm show had a charismatic leader, who delivered sermons that nobody understood and which provided them with great wealth before the GFC.

I believe that people taken in, were in thrall at Manny and his minions and the spiel they gave.

And this is not to say they were greedy by the way, but money was the piper's song they followed.

gg

GG

It's now 3 years ago when Pennie and I were with my Stormer mate and his wife at a Christmas function and it was very obvious to me that Storm had the death wobbles. I remember bringing up the issue that the prognosis was critical and it was probably terminal. This statement was met with disbelieve, I remember that I was very quickly brought to account with statements along the lines, "Don't worry, EC is very experienced in the field, he has huge property holdings and a lot of money, he is well connected, he knows what he is doing, there's nothing to worry about, everything will be alright".

I don't know about things being a cult but I definitely saw evidence of a charismatic authority beholding my friends. Their belief that EC would get them through this crisis at that time was unshakable. A few weeks later it was my friends who were shaking, shivering and dry retching in a corner of their lounge room after they realised they lost a whole lifetime of effort and savings. That image has stayed with me to this day and probably is the prime motivating force that keeps me on this case.

S

 

[Frank Ainslie]

I'm sure Frank had his reasons, but he hasn't really explained them.

I still reckon Storm was a cult and the unwitting went in like the children at Hamelin, at a time when we were in a bull market.

gg

Hi GG,

I think everyone's getting a little carried away here. You all make it sound like Storm was a one off. It wasn't!

http://www.themonthly.com.au/monthly-essays-paul-barry-cult-green-2701

The Storm's of this world occur because the Government, ASIC, and those other reponsible for controlling the financial sector can't get it right. We've had so many financial scandals over the years (the Bonds, Skases, and so on) and so many company collapses where investors and creditors have lost everything. It's time the powers that be got their act together and fixed it instead of trimming around the edges.

Whilst these ineffectual systems exist, there will always be victims.

 

[DocK]

I'd really like to know if there are actually very many ex-clients who still have favourable feelings towards Manny & Julie.

I've never been a member of sicag or had much contact with other ex-stormers, so don't have a feel for the way E & C are viewed by the majority. Given all that's been exposed I find it hard to imagine there could be any supporters remaining, but would be genuinely interested to know how they're now regarded, particularly up north where their base was strongest. I noticed that the "high profile" supporters that once appeared on their website were very quick to either distance themselves or remain totally silent on their involvement, undoubtedly under advice from their managers in order to avoid the taint of guilt by association?

Would any sicag member care to post what the general consensus of opinion is within that group?

 

[Frank Ainslie]

Parliamentary Joint Committee on Corporations and Financial Services
Committee conclusions on Storm Financial

"3.123 All share market investors were exposed to the dramatic market fall of late 2008, and many realised losses on their portfolios. However, few now find themselves in such dire circumstances as Storm Financial's former investment clients.
3.124 As the events of 2008 demonstrated, Storm's model was not capable of withstanding a severe market downturn. Its success was predicated on the market continuing to rise indefinitely. The buffer and LVR settings proved to be such that, when the market fell rapidly, there was insufficient time and capacity to put accounts back into order before they fell into negative equity. The responsibility for this failure to resolve margin calls may well be shared between several parties, but that does not change the fact that the strategy failed.
3.125 The committee is of a clear view that Storm's aggressive leveraged strategy, in combination with the failure of multiple parties to appropriately monitor and manage margin calls at the height of the market volatility, were of disastrous effect for Storm's investment clients. The effects are greatest on those for whom this strategy simply cannot be considered appropriate advice””that is, those who were at or near the end of their working lives, with limited capacity to rebuild from scratch in the event that all their assets were lost and they found themselves in negative equity. This is not to detract from the losses of other investors; they have also suffered markedly from the combination of circumstances that occurred.
3.126 It is not the role of the committee to make findings of blame. It notes, however, a recent statement by Mr Ralph Norris, CEO of the CBA:
In truth, a degree of responsibility rests on the shoulders of banks, individuals and the regulator to a greater or lesser degree, and primarily on Storm Financial, who provided the financial advice as a licensed adviser.
3.127 The committee also records its serious concerns with regard to the following matters:
· the apparent provision of one-size-fits-all advice to Storm's investment clients, without the appropriate regard for their personal circumstances (including their life stage and asset base) that section 945A obligations require of advisers;
· the unacceptable confusion or disagreement between Storm and its lenders about how margin calls would be managed and who was responsible for which parts of this process; and
· the inappropriate and ultimately devastating delay or failure, particularly by the CBA, to make direct contact with margin loan clients when it became apparent that Storm was not successfully acting as an intermediary to clear margin calls.
3.128 Claims that the banks were unable to provide accurate information about the status of margin loan accounts during the period of extreme market volatility are also deeply troubling. However, the committee notes evidence from the banks that they used the same approach to margin call management with all the advisory groups they dealt with (numbering in the thousands), yet Storm Financial clients were the only group who en masse failed to be appropriately notified by their advisers of the true status of their margin loan accounts. This points the committee towards the inescapable conclusion that there was something about Storm”” be it their staffing and resourcing levels, their computing systems, the degree of leverage in their model, their understanding of their responsibility in relation to margin calls, or a combination of these and other factors””which led to an inability to receive, handle and resolve margin calls during the critical period before their customers went into negative equity and were sold out of the market."
The committee does recognise that the rate at which market conditions were changing, taken together with the number of client accounts that would have been going into margin call at the same time, would create a formidable administrative burden. However, Storm is alone among the advisory groups in having ended up in a situation characterised by such catastrophic losses for its clients.
3.129 Finally, the committee acknowledges that it is not necessarily appropriate to recommend reform in response to a particular collapse or event. Isolated corporate failures, no matter how painful their impact for those caught up in them, are not necessarily indicative of, or caused by, regulatory failure. The mass of evidence the committee has received in relation to the collapse of Storm Financial has, however, contributed to the committee's broader understanding of the current operation of Australia's financial products and services sector and of the provision of financial advice. In Chapter 5 of this report the committee considers problematic issues in the sector in a broader context, and in Chapter 6 the committee makes a series of recommendations for reform, which are in part informed by the committee's extensive deliberations on the collapse of Storm."

 

[Garpal Gumnut]

A few of the characteristics of cults would apply to Storm Financial.

• A charismatic leader.
  
• An offer of great wealth.
  
• A feeling of exclusivity.
  
• Possessing knowledge not available to others.
  
• A need to enrol friends and family in Storm.
  
• A continuing faith in the model in spite of setbacks
  
• Ignoring the opinions of non-believers.
  
• A feeling of belonging to a group with knowledge not possessed by others.
  
• Separation from friends not agreeable to the model.

gg

 

[ROE]

I read some of the SOA and man that was some crazy long document ... If I have to read something like that I just probably wouldn't be bothered ...too complicated I like to keep thing simple... and I'm complete lost on this section and I been in the market for a while...

"SOA Page 62 - Using Market Volatility"

When I get confused I usually walk away, there are a few companies report I read and the one I got confused I leave it at that.. I read a Macquarie banks book once, I got confused so I leave it alone.

 

[Julia]

So how do you explain the many Storm clients who still feel that Manny was blameless in their misfortune, and that it was all the banks and the GFC.

Given that it's quite beyond me to explain the minds of anyone who decided to invest in a strategy that put their home at risk, let alone double gearing into the market, I'm not sure why you think I should be able to explain whatever they may presently think about Manny.

Are there are really 'many Storm clients' who feel Manny was blameless? I don't know, but I don't recall many on this thread making that claim.

What we are seeing of course is the focus on blaming the banks because obviously they have more capacity to pay any compensation.

And it's not unreasonable to say the GFC is another cause of their downfall. Had we still been in that roaring bull market that was happening when they became involved, they'd have all been congratulating themselves about what a great choice they had made in their selection of a financial adviser.

Hi GG,

I think everyone's getting a little carried away here.

Agree.

Whilst these ineffectual systems exist, there will always be victims.

Exactly what do you want to see put in place and how will whatever that is protect people from believing what they want to?

Extract from Frank's link to the SMH article:

Dr Irving and Dr Oliver borrowed $13.8 million and $11.1 million respectively to invest in funds based on stockmarket indices marketed by Storm, which collapsed in 2009.

In December 2008, the bank closed Dr Oliver's account with a balance of $193 and charged him a penalty of $277,000.

Dr Oliver claims he would have realised $3.5 million if the bank had alerted him the previous month that his loan-to-security ratio exceeded 90 per cent.

Dr Irving alleges the bank wrongly converted his fixed loan to a variable loan and he was left $1 million in debt after the bank sold his investments.

So hard to believe people were using sums like this in such a highly geared strategy.