Storm Financial Group

[Frank Ainslie]

STORM’S STATEMENT OF ADVICE (Part 2) Continued

Security

3. Risk
It occurs to me that I should also include ‘risk’ in my comments on “Security’’ before proceeding with Part 3 of this exercise. The ‘high-risk” nature of Storm’s plan has been been debated on this forum at length so I feel that it is worth mentioning at this point.

The SOA was, I believe, designed in part to ease the fears of those investors that may have had concerns about any risks that might be involved.

You will note that the following statements were made by Storm in its SOA to play down the risks associated with this scheme. In so doing, Storm made "all the right noise"s but then ignored its own advice:

“Page 10 of the SOA
“Safety depends on information. Our models and engineering is to give this information clearly. Proper testing is done on all aspects of a recommended plan to ensure informed decisions can be made.”

"Page 37 of the SOA
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. Share selection risk and default risk will be explained further in the section entitled The Index Approach.

Page 42 of the SOA
Recommended Debt Levels

The ratio of liabilities to total assets gives us a measure of the extent to which the portfolio is geared. We recommend that this ratio be above 40% so that sufficient leverage can be used to speed the wealth creation process. However it is important that the level of borrowings is low enough to maintain safety; we suggest that no more than 60% of the asset base is represented by borrowed funds. The liability ratio that is suggested in your individual circumstances will take into account your stage of life and the stage you are at in your investment process.

Liabilities that exceed 70% of the value of assets are very difficult to manage, and leave no margin for error. The volatility that we must accept in markets would have the potential to cause a situation of negative equity i.e. falling asset values may mean that you have borrowed more than the value of assets. This situation is dangerous to the viability of the investment program, and may leave the investor worse off than before they invested. It also induces anxiety in investors and this tends to cloud decision-making. This level of debt should be avoided.

The optimal liability to asset ratio is between 40% and 60%. These levels give sufficient leverage into a growing asset to increase returns while maintaining safety and guarding against the effects of volatility in asset prices. Recall that a debt incurred to buy high quality liquid assets can be repaid at any time, and this reduces its significance. Providing the debt is used to buy such assets and the level of cash reserves is sufficient, we consider the range of liability to asset ratios to be prudent when used as a part of this overall plan, including the safety parameters upon which it has been based.

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.

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.

Page 76 of the SOA

Successful negative gearing has 3 essential elements:

1. A careful selection of the asset to be purchased to try to ensure maximum capital gain

2. A borrowing plan tailored to minimise risk 'Fail safe' strategies in case things go wrong

3. Negative gearing is usually undertaken to buy property and shares, and we can expect the values of both to rise in the long term, but this may not occur in the short term. Negative gearing should produce good results over the long term, but anybody going into negative gearing must ensure they can accommodate the risks involved; primarily the risk in negative gearing into shares is that the asset values vary by large amounts over the short term."

When I first evaluated the SOA Storm had provided for us, I found these statements reassuring, as I’m sure many others did. For one, these statement implied that Storm were mindful of our desire not to invest in anything that carried a high degree of risk. Indeed, we had stressed this on more than one occasion, as indeed, I am sure many others did! I assumed (a dangerous thing to do, I know, in any business venture) that Storm would act on their own advice, and in so doing adequately insure our investments against rises and falls in the share markets by monitoring our portfolio and advise us appropriately when action was deemed necessary

Storm, to my mind, by making these statements were mindful of our wishes in this respect and had confirmed that it had the necessary systems in place to ensure that our investments would be adequately protected and any risks would be minimized. Therefore, for some on this forum to state that we had an overwhelming desire to gamble with our money by entering into a high risk strategy with Storm is completely false.

How did one member put it, “But once Frank walked into that Storm office and they dangled those dollar signs in front of his eyes, the astute and capable man became reckless and imprudent, and his capacity for clear thinking abandoned him.” Anyone that knows me well enough will tell you that I am circumspect by nature so short of having a complete mental aberration, the last thing on my mind when employing Storm as my financial adviser was to give them “carte blanche” with the money Helen and I had taken a life-time to acquire. I think I can speak for most ‘Stormies’ when I say this!

Incidentally, I can see nowhere in Storm's SOA that this was a "high risk scheme" that we had agreed to adopt. Storm's SOA suggests just the opposite!

Unfortunately, we now know that Storm “talked the talk but didn’t walk the walk!”

 

[Julia]

Frank, I find even just the volume of words used by Storm in these extracts from the SOA offputting. It's as though Storm's intention has been to so overwhelm clients with impressive sounding, but obfuscating, verbosity that the client will agree rather than appear foolish if they are actually bewildered by what it all means.

They have repeated their soothing sounding assurances of 'monitoring your investments' and clearly this has worked for those who went ahead.

Regarding the extract from another client's submission:

In the period from October to December 2007 our "Current Gearing Level' was showing as: 61.54% (Current Loan Balance $1,686,153.00: Market value $2,739,735.00) which, according to STORM and our advisor, would represent a very acceptable situation - a safe gearing level, a no worry situation and an ideal time to further invest.

In fact we took another 'step' and invested a further $66,000.00 in December 2007.

BUT it seems to us that what really should have been not only visible, but also added to the loan balance to see the REAL LVR and true level of debt, was the additional $380,000.00 debt of borrowings against the house. This was after all borrowed along with the Macquarie Margin Loan with the sole purpose for investment into the Indexed Trusts.

yes, of course the home loan should have constituted part of the calculation.

But I just cannot comprehend how anyone who has borrowed $380,000 against their home could fail to take this into account when considering their position.

Did anyone even say to their advisor: But what about our home loan?
Shouldn't this be taken into consideration when we're discussing the LVR?

I'm not here wishing to be critical. I'm just totally puzzled that such an integral part of the whole deal was apparently just ignored.

On the risk aspect, the extracts you have provided show how they diverted concern about the risk involved in the double gearing (which so far at least doesn't really seem to be referred to much at all) by waffling on about diversification in the market.
It all sounds pretty good but imo diversification of itself is absolutely not enough to ensure safety. If the whole market falls, as it did, you are not at all protected.

When some of us here have discussed risk we have been referring to the double gearing for people at or near retirement. Storm seem to have glossed over this and offered glib sounding reassurance that just being in a diversified index fund would be protective. Sadly, you now all know otherwise.

 

[Frank Ainslie]

Frank, I find even just the volume of words used by Storm in these extracts from the SOA offputting. It's as though Storm's intention has been to so overwhelm clients with impressive sounding, but obfuscating, verbosity that the client will agree rather than appear foolish if they are actually bewildered by what it all means.

They have repeated their soothing sounding assurances of 'monitoring your investments' and clearly this has worked for those who went ahead.

Regarding the extract from another client's submission:



yes, of course the home loan should have constituted part of the calculation.

But I just cannot comprehend how anyone who has borrowed $380,000 against their home could fail to take this into account when considering their position.

Did anyone even say to their advisor: But what about our home loan?
Shouldn't this be taken into consideration when we're discussing the LVR?

I'm not here wishing to be critical. I'm just totally puzzled that such an integral part of the whole deal was apparently just ignored.

On the risk aspect, the extracts you have provided show how they diverted concern about the risk involved in the double gearing (which so far at least doesn't really seem to be referred to much at all) by waffling on about diversification in the market.
It all sounds pretty good but imo diversification of itself is absolutely not enough to ensure safety. If the whole market falls, as it did, you are not at all protected.

When some of us here have discussed risk we have been referring to the double gearing for people at or near retirement. Storm seem to have glossed over this and offered glib sounding reassurance that just being in a diversified index fund would be protective. Sadly, you now all know otherwise.

Hi Julia,

Because this will be a long exercise, I will not be answering any questions from posters until it is finished so I hope you and everyone else will bear with me on this. However, that doesn't mean that I will not be heeding what posters are saying in their postings to me on this subject. In fact, I would encourage people to raise questions such as you have done because I intend to cover these questions when I eventually summarize the SOA and state what lessons I and others should have learnt from our dealings with Storm.

I also believe that by the end of this exercise everyone will better understand WHY people used the services of Storm and HOW they were basically deceived. This will, I trust, then lead to a more constructive and objective discussion based on the facts rather than on assumptions or suppositions.

Whatever, there are certainly lessons to be learnt. In order to give some meaning to the Storm debacle, I think we all have to understand the mistakes that were made, admit to them, and hope that others can learn from our mistakes and avoid another Storm.

 

[Frank Ainslie]

STORM’S STATEMENT OF ADVICE (Part 3)

Growth

The second reason for our investing using the services of Storm Financial was to offset inflation and promote growth of our asset base over time. Helen wanted to leave a legacy for her children and grandchildren and we thought this was one way of achieving this. Our financial welfare was already secure at that time. However, we wanted to ensure that "down the track" they, the children and grandchildren, had an easier passage through life. There were many people in Storm that were past retirement age, and I am sure many of them shared our sentiments too.

Contrary to what many may think, we did look at other alternatives before deciding to use the services of Storm. Allocated pensions were considered and we paid Westpac to provide a financial plan for us as well. However, the emphasis always appeared to be on an erosion of our capital over time rather than growth and Storm’s financial plan seemed to offer a viable alternative to this erosion.

Some years down the track, people still ask, “But why Storm? It was obviously a con!” That’s just the point. It wasn’t! What we know about Storm today is a far cry from what was known then. Storm had a track record of success. In fact Storm’s business relied to a large extent upon referrals. This meant that people that were in Storm then had to be happy with what Storm was doing or they wouldn’t have recommended that firm. We, ourselves, knew people that were in Storm for some years and their capital had grown as a consequence. Whether their capital had grown in a real sense is something I will be commenting on in due course. For now, I will stick with the subject in question, namely "growth".

We were not concerned that Storm’s plan was long-term because our goal of leaving a legacy was a long-term objective anyway. Besides, we were not big-spenders (as some would believe) but had a fairly modest lifestyle. Indeed, at that time we had no debt and we certainly didn’t have any financial worries so “getting rich quickly” was certainly not a consideration when we thought about signing up with Storm! Why should it be when we were already rich with $1.7 million in assets?

Storm’s SOA had this to say about growth and investing for the long haul:

“Page 24 of the SOA

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.

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.

Now it’s important to understand that any growth mentioned here was over and above the plan’s other benefits; namely all expenses met in relation to the plan and $100,000 per year in “living expenses” which would be met by the returns on our investments. Sound good to you? It sounded good to us as well! If our cash was being eroded away by everyday living anyway, why not put it to work growing over time by investing as Storm had suggested. To us it seemed like an ideal situation.

And please, for those that can't get their heads around $100,000 per year, that doesn't mean that we would be spending that much money in any given year! Many 'Stormies' including us saved much of this for "a rainy day!" Unfortunately, the Storm that eventually arrived has been lasting for some years now, and any money put aside is well and truly gone! But I digress!

Unfortunately, we all know NOW that Storm’s projections were doomed to failure in a falling market. Quite frankly, in retrospect, I have severe doubts whether Storm’s forecasts of growth were sustainable in markets that continually kept rising (and we know they don’t) but more on that later in the posting I will make dealing with “Viability”.

For those members that have insisted that this was a “get rich quick scheme” the SOA is proof enough that people signed up for the long-term with steady growth in mind:

“Page 40 of SOA
In order for the benefits of these higher average returns to be exploited, the investment must be held long enough to allow us to discount the volatility of returns, and allow us to anticipate benefiting from the general upward trend in the market. It is crucial that the investment horizon be distant enough for the increased volatility of returns of a geared investment to be accommodated, both by the portfolio and the investor. We suggest that a minimum timeframe of 5-10 years is appropriate for this kind of investment.

Page 44 of SOA
The key to successful investing in the medium to long-term is consistency.

Page 51 of SOA

Timeframe '"

This is a medium to long-term plan for building wealth. A minimum of 5 to 7 years should be allowed before you expect to be spending profit from the investment. Furthermore, we advise that when using gearing a time frame of 7 to 10 years is even more appropriate.

If nothing else this makes a bit of nonsense of those that claim that we were all in it for a quick buck! If such were the case, we sure had our wires crossed!

 

[bunyip]

Incidentally, I can see nowhere in Storm's SOA that this was a "high risk scheme" that we had agreed to adopt. Storm's SOA suggests just the opposite!

It’s not at all surprising that Storm wouldn’t tell you their strategy was high risk....their objective was to sign you up, not frighten you away.
Storm Financial was a licensed Financial Planning firm, yet the service they offered bore little if any resemblance to the range of services offered by most Financial Planners.
The reality was that Storm were basically a bunch of commission salesmen with a vested interest in signing up clients so they could milk them for 7% commission on every dollar invested.
To that end, they were always going to make their product sound good, just like any salesman does.

I’ve never yet come across a salesman who told me the worst features of the product he was trying to sell. Sales people would never make a sale if they did that.
This highlights the importance of doing your own research to find out if the product you’re considering is seriously risky or defective in design. The salesman certainly isn’t going to tell you.

 

[bunyip]

If nothing else this makes a bit of nonsense of those that claim that we were all in it for a quick buck! If such were the case, we sure had our wires crossed!

I may be wrong, but I can’t recall anyone suggesting that you were in it ‘for a quick buck’.

We have however, made the quite reasonable suggestion that by using heavy borrowing to greatly increase your market stake, you were obviously hoping for a corresponding increase in the level of profits.

 

[bunyip]

Some years down the track, people still ask, “But why Storm? It was obviously a con!” That’s just the point. It wasn’t!

Frank

I have no wish to rub salt in your wound or to hurt your feelings in any way, but I have a very different view to your belief that Storm wasn’t a con.
And because this forum encourages expression and discussion of views, I’m going to express mine. If my views upset you or anyone else, then I’m sorry, but there’s not much I can do about that.

I don’t see any possible way that you could have known that Storm wouldn’t act on the trigger points in accordance with your agreement. Nor can I see any way that you could have known that Storm would not manage your investment as they agreed to do, but instead would sit on their hands and do nothing while the market caved in and the value of your investments evaporated.
I don’t see how you, I or anyone else, no matter how smart they were, could have known these things in advance.

However, there’s one thing you could have known that would have shown the Storm strategy to be a high risk con scheme that completely misrepresented the facts in regard to the safety measures that were supposedly going to protect your capital from major loss.
The ‘thing’ I refer to that you could have known about was past market crashes. In particular, I refer to the 1987 crash that wiped 20% off the market overnight, 25% in one day, and 50% in a little over a month.
If you’d looked at the ‘87 crash and asked yourself ‘OK, what effect would a similar crash have on my proposed portfolio’?...you would have discovered that the result of such a crash would be catastrophic loss of your capital before the market reached the trigger points that supposedly would safeguard the bulk of your capital.

You obviously spent considerable time and effort evaluating Storm’s SOA, but I believe your real focus should have been on researching the history of the stock market to make yourself fully aware of just what the market was capable of dishing out to you.
If you’d done that, and discovered the enormity of the ‘87 crash and many others before it, and then considered the very real possibility of such crashes repeating, I believe you would have made the prudent decision to walk away from Storm without even bothering to look into their SOA.
I can see how their SOA made the strategy look appealing to investors, I can see how it was skillfully worded to downplay the risks. But a few minutes of market research via the internet, or by talking to a stockbroker, would have quickly shown the ‘safe and conservative’ Storm strategy to be high-risk and downright farcical.

 

[doobsy]

I would love to point out some of the "key points" in Franks posts as an education for others in the forum but happily am VERY busy here at work. I will look to get back in here soon.

 

[SJG1974]

Frank,

What exactly were the trigger points (regardless of who was expected to monitor them)?

Did Storm set them as say a $$ value of the portfolio, or an LVR as such? Did they put these in writing? How were you to know when your portfolio reached them?

Did they explain to you why they didn't act on them when they were hit, or did they pass the buck back to you?

 

[Frank Ainslie]

Frank,

What exactly were the trigger points (regardless of who was expected to monitor them)?

Did Storm set them as say a $$ value of the portfolio, or an LVR as such? Did they put these in writing? How were you to know when your portfolio reached them?

Did they explain to you why they didn't act on them when they were hit, or did they pass the buck back to you?

SJG,

I'll answer everyone's questions when I've finished this exercise! I'm old and I'm therefore easily distracted!

I would ask everyone to keep these questions coming though because it gives me a reference point for my summary later.

 

[Frank Ainslie]

STORM’S STATEMENT OF ADVICE (Part 4)

Lifestyle

Our third objective was to “live in comfort and do those things that freeing up our time now allows us to do such as travelling and the like." Certainly, these were our aims, and I would think the majority of people (75% or so being past retirement age) that signed up with Storm had similar goals”.

With the assets we already had, we could have achieved these aims anyway and still have had enough money left over for the grandchildren. Furthermore, sticking our money in the bank (which would have been risk free) and just live off the interest of our capital would have gone a long way to doing this. However, the fact is that we didn’t and we are now paying for our mistake. Dwelling on this is a pointless exercise in futility because we invested using the services of Storm and we must now live with the consequences.

Having said this, this does not excuse what Storm and the Banks have done because anyone that entrusts their money to financial advisers and financial institutions have a right to expect that any dealings with financial advisers and Banks is “above board” and their assets will be protected because these parties have a fundamental “duty of care” which is obligatory. Therefore, if any dishonest, deceptive or misleading conduct is identified, then those that entrusted their monies to such parties have the right in Law to recover what they have lost. To live in a society where such practices are tolerated or condoned is unacceptable to any law-abiding or fair-minded citizen. Fortunately, we live in a country where the rule of law still prevails and consumer laws are prevalent. We are therefore hopeful that the wrongs that have been done will be identified and those that have broken the Law will be suitably punished and we will be compensated accordingly.

One of the things that the courts will now have to decide is whether the financial model Storm offered to its clients was, (1) ‘suitable’, (2) ‘viable’ and (3) whether it was ‘conscionable’. By ‘conscionable’ I mean was it legally or ethically right, proper or fitting?

How does this relate to 'lifestyle'? Well, when all is said and done, Storm was offering its clients a lifestyle whereby they could live out their lives financially free and in comfort. We need therefore to consider whether what they offered to achieve this was indeed suitable to their clients' needs, viable in the long term, and was within the Law. Therefore, I will now deal with these three aspects.

1. Suitability

A “one-fit” financial plan (we now know) was not a suitable vehicle for Storm’s clients because investors have individual needs and their circumstances are not all the same. This is a tenet where financial advice is concerned and should have been a prerequisite when Storm was handing out advice. That is one of the charges that ASIC has now laid against Storm and one the former directors of Storm will have great difficulty defending.

Because the majority of Storm’s clients were past retirement age, the overall philosophy of Storm’s financial model, and its suitability for their individual needs, bearing in mind that they did not agree to the “high risk” nature of Storm’s plan, and thought instead that the risks were nominal, will play a key role in establishing whether the directors of Storm were reckless or even worse in adopting such an approach.

Mr. Brett Walker (a financial expert) prepared a report on Storm's investment model at the behest of the Liquidator, Worrells, which was placed into evidence during the public examination process carried out by in 2009.

In relation to whether clients of Storm should have ever been advised to mortgage their home for the purpose of investing the loan proceeds in index funds (as was Storm's advice to many clients) Mr Walker stated:

“I believe the risk capacity of the clients would have excluded their primary residence from any investment-related strategy unless there was clear evidence before the advice provider that the clients were people with a risk tolerance significantly higher than the average retail investor.

It is my opinion that the level of risk tolerance required of a person being asked to embark on a gearing strategy using their primary residence as collateral whilst also borrowing funds and securing that loan against the assets being invested into (in this case unlisted index funds) is such that fewer than 1 % of the population would be considered a suitable "fit".

And It is my observation that the majority of financial advisers specifically exclude each client's primary residence from their assessment of "available" investment assets for the very simple reason that, to recommend someone use their home as collateral to invest in potentially volatile investment markets would not be in the interests of the majority of clients.

And I am of the view that gearing to meet one's financial objectives is an option that should only be proposed to people who (in the advice provider's sincere and objective view) have the appetite for the risks associated.

And in my opinion there are very few people (especially those who would be characterised as "retail clients") who would be a good fit for this type of investment strategy.

In my opinion the inclusion of the family home in any investment strategy is an indication that the investment strategy is unsound unless there is clear evidence of the attendant risks (e.g. losing the home due to falling markets) being within the risk appetite of the client.

In order to reach that conclusion a professional advice provider would need to establish through some objective means that they had tested and assessed the client's attitudes and psychology in relation to such a risk-taking scenario (i.e. pledging their primary residence in pursuit of speculative gain) and that testing and assessment would need to have displayed a clear preference for the assumption of that risk.

In my opinion the suggestion that a client include and thus employ their primary residence in their investment portfolio can rarely be in the interest of the client.

In my opinion suggesting to the clients that their residence created an exposure of any kind to the investment property sector was fallacious in the context I have seen it used in the Statement of Advice

In my experience the primary residence is most often considered by professional financial advisers to be an "excluded asset" when it comes to designing investment portfolios. The reason for this approach is that for most advisers the risk of a client losing their primary residence in pursuit of an investment objective the adviser has recommended is a risk too great for them (the adviser and the client) to contemplate.

As stated in the prospectus issued by Storm, new and existing clients were subject to "an extensive education process", relating to the proposed investment. Further the formal advice which clients received was long and detailed. The accuracy and relevance of the material included in the education process and the formal investment advice was closely examined during the public examination process.

In section 6 of this Report we summarised the relevant statues governing the contents of Statements of Advice (SOA) and in the annexure to this report we reproduced the relevant legislation. In short the statues make it an offence to provide a SOA which is defective or misleading in a material particular.

The SOA that Storm normally provided to clients included propositions with which Mr Walker, the liquidator's expert, disagreed. Among the propositions which Mr Walker disagreed with were the following.

• The proposition that it is necessary for a client to gear to meet his or her financial objective,

• The proposition that a clients family home should generally be treated as an investment asset, as opposed to treating it as sacrosanct

• The use of the term "claytons debt" by Storm when referring to funds borrowed by clients in pursuance of the advice given by Storm. In that connection Mr Walkers observes:

Given the likely public awareness of the term "clayton's" as a term that implies the opposite of "real" or "actual" it seems likely to me that the use of the phrase "Clayton's debt" would have suggested to Storm clients that the use of debt to finance the acquisition of income-generating capital was preferable to the use of debt to do anything
else within the context of their investment goals. In my view the use of such a term would suggest to a reasonable person that anything labelled "Clayton's debt" was not really a form of debt at all. In my view that is an inappropriate use of the term.

• The inclusion of a chart which compares growth and dividends on shares to just growth (without rent) on property. In that connection Mr Walkers observes:

I am of the view that it is a flawed comparison. In my opinion you cannot competently compare asset classes (especially assets within the growth sector} unless you compare growth and income components of each. It is clear to me that the table creates the distinct impression that Shares are an asset class far more likely to provide capital growth over the long term than Property (even Sydney*based residential property). I am unaware of the precise impact including rental income would have on the numbers in the table but am of the view that such information would tend to show Property in a more favourable light than is implied in the table as it appears in the SOA.

• The prediction that it is likely "property prices will remain flat or decline over the next 5 to 15 years in real terms".
In my opinion this is a sweeping statement that appears (whether deliberately or inadvertently) to include cyclical property sectors like commercial and industrial as well as residential sectors. (To be continued)

 

[Julia]

I don’t see any possible way that you could have known that Storm wouldn’t act on the trigger points in accordance with your agreement. Nor can I see any way that you could have known that Storm would not manage your investment as they agreed to do, but instead would sit on their hands and do nothing while the market caved in and the value of your investments evaporated.
I don’t see how you, I or anyone else, no matter how smart they were, could have known these things in advance.

Agree. Therefore you were indeed 'conned'. This is an evaluation against the integrity of Storm.

These con artists are everywhere. I have just escaped being conned myself.
Deciding to have a new house built I sought plans and prices from 7 builders.
Chose one on the basis of (a) his good reputation, (b) his capacity to create a good plan from my sketch, (c) his estimate of cost, taking into account the standard inclusions.

Gave the go ahead to have the designer do the detailed drawings a few weeks ago, making sure the builder knew I wanted the specifications completed and the contract ready for signing well prior to 30 April which was the cut off date for a $10,000 building grant from the Qld government.

With the designer's advice I agreed to an extension of the outdoor patio area which builder advised would cost around $4000 more. There was also some manipulation of the actual house space making some rooms larger and others smaller, but absolutely remaining within the same total sq metres.

The specifications and contract failed to appear until I was about to give up on these arriving prior to 30 April. They were finally emailed on Saturday late afternoon, 28 April and consisted of around 50 closely printed pages, much of it in jargon unfamiliar to me.

Reading through the specifications I noticed that an item included in the list of inclusions supplied with the original estimate (security screens to all doors) was not included in the final document and instead only fly screens were allowed for.

Further, although the only extension of sq metres was the above mentioned approx $4000 for the additional patio area, the final price was over $35,000 more than the estimate. No breakdown of this considerable amount was given.
I phoned and asked for this. The response was surprise and some resentment.
It did, however, arrive via email a few hours later.
There had been an additional 7sqm added to the house itself according to the list of additional costs. There was no detail as to where this was supposed to have occurred and I am quite certain the plan had not been extended in any such way.

Some of the other additional costs were reasonable, e.g. retaining wall in front of house to cope with sloping block.

I sent an email pointing out the discrepancy between the originally included security screened doors all round and the fly screens quoted for in the final document, and asked if he wanted me to make a note correcting this on the copies I had of the specifications or if he wished to replace that page, making the appropriate correction.
Whichever, I made it clear that I expected the originally quoted inclusion to appear in the final document.

No response.

So it seems all the documentation was intentionally left to the last minute on the assumption that I'd just sign off on it all without actually checking it thoroughly.
When it was made clear that wasn't going to happen, he has apparently decided I'm not the sort of client he wants after all.

So a lucky escape probably. Faced with that mountain of paper with time being so short, I did consider just assuming it would all be OK, but am very glad I didn't.

I don't mean to divert the essential focus of the thread but offer the above anecdote as yet another example of how it is reasonable to take the view that many people have as their guiding principle in life the willingness to rip off others.

STORM’S STATEMENT OF ADVICE (Part 4)

Lifestyle
With the assets we already had, we could have achieved these aims anyway and still have had enough money left over for the grandchildren. Furthermore, sticking our money in the bank (which would have been risk free) and just live off the interest of our capital would have gone a long way to doing this. However, the fact is that we didn’t and we are now paying for our mistake. Dwelling on this is a pointless exercise in futility because we invested using the services of Storm and we must now live with the consequences.

Yes, and this is the great pity of Storm's willingness to take advantage of you.
An honourable adviser would have pointed out what you now realise, i.e. that you could have invested very conservatively and still absolutely achieved your aims.

Having said this, this does not excuse what Storm and the Banks have done because anyone that entrusts their money to financial advisers and financial institutions have a right to expect that any dealings with financial advisers and Banks is “above board” and their assets will be protected because these parties have a fundamental “duty of care” which is obligatory.

I'd have once thought so too. But the very fact that that the government enquiry came up with the 'revelation' that 'advisers should act in the client's best interests'
is testament to the fact that no such ethical approach existed in the case of Storm.

We've ad infinitum made the point that a few simple calculations would have allowed you to see that you could have just stuck the funds in the bank and still achieved your desired level of income, so no need to labour this again, especially as you now are obviously very aware of this.

In relation to whether clients of Storm should have ever been advised to mortgage their home for the purpose of investing the loan proceeds in index funds (as was Storm's advice to many clients) Mr Walker stated:

“I believe the risk capacity of the clients would have excluded their primary residence from any investment-related strategy unless there was clear evidence before the advice provider that the clients were people with a risk tolerance significantly higher than the average retail investor.

It is my opinion that the level of risk tolerance required of a person being asked to embark on a gearing strategy using their primary residence as collateral whilst also borrowing funds and securing that loan against the assets being invested into (in this case unlisted index funds) is such that fewer than 1 % of the population would be considered a suitable "fit". ............

Good for Mr Walker. Hope his testimony carries the appropriate weight. Completely agree with his comments.

 

[bunyip]

So a lucky escape probably. Faced with that mountain of paper with time being so short, I did consider just assuming it would all be OK, but am very glad I didn't.

Not a ‘lucky’ escape, Julia – you avoided being conned because you thought for yourself, were prudent, astute and circumspect, and you didn’t just accept something at face value without thoroughly looking into it.

Fortunately, three out of four people who approached Storm were careful like you were, and they walked away after reviewing the strategy.

 

[StumpyPhantom]

Not a ‘lucky’ escape, Julia – you avoided being conned because you thought for yourself, were prudent, astute and circumspect, and you didn’t just accept something at face value without thoroughly looking into it.

Fortunately, three out of four people who approached Storm were careful like you were, and they walked away after reviewing the strategy.

+1

It's a sad indictment of our society today that I consider my propensity to think the best of people I come across to be a personal failing

 

[Solly]

Not a ‘lucky’ escape, Julia – you avoided being conned because you thought for yourself, were prudent, astute and circumspect, and you didn’t just accept something at face value without thoroughly looking into it.

Fortunately, three out of four people who approached Storm were careful like you were, and they walked away after reviewing the strategy.

bunyip

"three out of four people 'allegedly' walked away after reviewing the strategy"

This also has not been tested.

S

 

[Julia]

Not a ‘lucky’ escape, Julia – you avoided being conned because you thought for yourself, were prudent, astute and circumspect, and you didn’t just accept something at face value without thoroughly looking into it.

Bunyip, I consider I was lucky that he displayed his greed where I could discover it and withdraw. Otherwise I'd have gone ahead with the project and would not have known where I was being ripped off, viz poor quality materials etc or building practice not up to what it should be. I'd have had to trust him on this.

You could say that this would have been a similar situation to the Storm investors trusting Storm's assurance that their investments would have been monitored to prevent catastrophic loss.

I don't know. Perhaps it's a meaningless comparison.

 

[bunyip]

bunyip

"three out of four people 'allegedly' walked away after reviewing the strategy"

This also has not been tested.

S

Fair point – but it doesn’t really matter what percentage walked away. A former Storm adviser said it was 75%. OK, it might have been 60% or 50% or 80% – the point is that many people walked away after reviewing the Storm strategy.
It’s been stated on this forum that ‘even savvy investors couldn't have seen through the Storm strategy’ (or words to that effect) – but clearly many people did see through it – the story of one of them appears in Post 6940 on page 347 of this thread.

Whatever the figure, it’s clear that there are some investors out there who avoided being conned by Storm because they're astute and switched on like Julia is. Perhaps the only positive in the entire debacle is that the number of people burnt would have been much higher if it wasn’t for the prudence of the many investors who rejected Storm’s strategy.

 

[Frank Ainslie]

STORM’S STATEMENT OF ADVICE (Part 4)

Lifestyle (Continued)

Mr. Brett Walker went on to say:

"I say this even though the content of page 15 appears to be focused exclusively on residential property. The term "property prices" is unqualified and might therefore suggest to a retail client that property as an asset class was unlikely to be as effective an investment option as the managed funds Storm was recommending to them.

In my opinion the statement seems aimed at eliminating property as an option for consideration under the "Journey to Capitalism" concept being promoted by Storm. When considered in the context of page 9 of the SOA and the advice provider's presumed expertise in investment decision making it seems highly likely to have put paid to any consideration by the client that property was a viable alternative for investment gearing or other purposes. Given the sheer breadth of the property market (by State, region, sector (commercial, industrial, residential}, structure - listed, unlisted, individually held, pooled etc.,and the very real likelihood that different sectors within it will experience different demand and supply impacts over time I find the blanket prediction at page 15 to be an unreasonable prediction, particularly given the apparent context of its use.

Mr Walker also states in his report:

Since 1992 I have reviewed hundreds of both Statements of Advice (since 2002) and Financial Plans (prior to that). ln that time I can recall only one other instance of a piece of written advice that the advice provider required the client to sign an acknowledgement at each page that they had read and understood it. In the context of a 110 page document such as the Storm SOA, I find it extremely difficult to believe that a client (even one who has been drilled in the process through a course of meetings over 183 days) could make sense of the majority of the content within the SOA.

I am not aware of the context in which each page was signed but would be surprised to be told that the advice provider read and explained the import of every word of every page to every client as they signed each page in acknowledgement of their understanding.

One of the cornerstone rules in relation to SOA content is contained in sections 9478(6} and 947C(6} which requires that "the statements and information included in the Statement of Advice must be worded and presented in a clear, concise and effective manner. 'In my view the SOA is unclear, verbose and ineffective'.

I mean "unclear" in that the SOA fails to establish in my mind what the relevant personal circumstances of the client are, hence rendering its advisory content invalid. I mean "verbose" in the sense that the 110 pages (plus appendices) does not appear to do anything more than deliver the message I summarised above: That is

(a) Re-finance your home loan to enable those borrowed funds (net of any existing mortgage debt repayment) to be applied to the acquisition of unlisted managed investments - presumably outside of the superannuation environment.

(b) Make sure the new loan is "interest only" in order to minimise the repayment amount.

(c) Take out a margin loan that will be secured against the value of investments into unlisted managed investments.

(d) Invest any income generated (net of repayment of interest on each of the above loans) by the above investments back into the same unlisted managed investments.

I mean "ineffective" in the sense that the SOA appears to avoid or ignore any need to assess what the clients actually want to achieve and to then assess that in terms of what they can afford to risk and what they can bear to risk in pursuit of that objective.”

I think it is safe to say that a prima-facie case has clearly been made for the “unsuitability” of the Storm plan in respect of the majority of (if not all of) Storm’s clients that were double geared in this way. I doubt whether Clarence Darrow (a famous American defense lawyer) could successfully defend Storm’s directors’ against these charges, but it will be interesting to see Storm’s lawyers try! There may yet be more charges to come if it is shown that Storm’s directors’ “misleading and deceptive conduct" was intentional and their financial strategy was consequently promoted for an ulterior motive? Profit could well be one such motive!”

2. Viability

For me, the question that has been on my lips these last few years has been, “If Storm’s plan was not a viable one, how was it that it seemed to succeed long term for many investors that had been with Storm for a number of years leading up to the GFC?” After all, these long time clients of Storm had been singing its praises for some considerable time and were telling others to join Storm too! As I have already stated, much of Storm’s business came from referrals.

This is a genuine question by the way for those out there that insist this was a ‘con’ because one would think that if it were, such would have been exposed long before the GFC came along? The definition of a confidence trick is, “an attempt to defraud a person or group by gaining their confidence”. At the end of this exercise you will need to decide whether Storm’s scheme was just that! For now though, we need to figure out why Storm’s scheme appeared to be successful on the surface - (after all, Storm was not around for ‘two minutes’ but rather for some years!). We also need to understand how the plan actually worked in practice, and why it eventually led to such catastrophic losses for many that invested using Storm Financial.

(a) Storm’s success before the GFC.
Looking back, what gave us the confidence in Storm was the ‘feed back’ we received from many of its clients. I remember sitting in the reception area of Storm’s Office in Brisbane on more than one occasion listening to people there telling us how pleased they were with Storm and how their portfolios had grown considerably over time. I’m sure many other ‘Stormies’ had the same experience. What really was the state of that company then and did anything in its financials give us any clue?

The Worrells Report (23rd March 2009) supplies this information:

“A financial snap shot of the Storm Group taken at 30 June 2008 provides a very positive view of its financial position. In regard to the year ended 30 June 2008 the Group:
• Earned gross revenue of $69.9 million, which was an increase of nearly 57% over the prior year.
• Recorded a net gain in value of $7.08 million from assets available for sale.
• Disclosed a profit before tax of $37.5 million, which represented an increase of 263% from 2008.
• Had net assets of $13.72 million
• Had cash and equivalent resources of $24.9 million
It also appears that at that time the Group had excellent relations with its bankers and clients. Further, internal marketing reports submitted to the board of directors suggested that the “pipeline” of potential clients remained healthy, and consequently an ongoing income stream could be anticipated."

It doesn't sound like a shaky company to me?

"And yet, just over six months later, Storm was insolvent and had appointed Voluntary Administrators,which culminated in a cessation of business, the Commonwealth Bank of Australia (the Groups bankers) had appointed Receivers to take control of most of the Group’s assets and many clients held Storm liable for losses on the share market that they had incurred amounting to many millions of dollars.
The initial catalyst for the dramatic reversal of Storm’s financial position was, without a doubt, the very large and sustained drop in the Australian share market. Whether the company could have withstood the drop in the share market with the assistance of its bankers; whether the investments recommended by Storm to its clients were appropriate in most cases; whether the Fund Managers managing client investments acted appropriately and whether the actions of Storm and its directors following the drop were appropriate, are all issues that have been called into question. They are also issues which will require detailed and sustained inquiry, perhaps with the assistance of the courts, before a final judgment can be made.”

The words stated above, “And yet, just over six months later, Storm was insolvent and had appointed Voluntary Administrators, which culminated in a cessation of business” are most telling. Was this due to the GFC alone or was there something more sinister at work here? That’s what we will try to decide at the end of this exercise.

Incidentally, the question must also be posed, “What would anyone have uncovered about Storm prior to its collapse?” Very little if anything, I suspect. The company was in good shape and had a history of success. ‘Cassandra’ might have been dubious but there was nothing to suggest to us mere mortals, that invested using the services of Storm, that this was a big scam. Whether it was or not is something else again and one that still needs to be determined in the Courts. I will draw my own conclusions at the end of this exercise, but we need always to remember that people in this country are innocent until they are proven guilty. Anything I therefore state in this regard under ‘Consionability’ which follows on from this topic is merely speculation and should be treated as such. However, on the evidence to date, things are not looking too flash for the directors of Storm.

(To be continued.)

 

[Julia]

For me, the question that has been on my lips these last few years has been, “If Storm’s plan was not a viable one, how was it that it seemed to succeed long term for many investors that had been with Storm for a number of years leading up to the GFC?” After all, these long time clients of Storm had been singing its praises for some considerable time and were telling others to join Storm too! As I have already stated, much of Storm’s business came from referrals.

This is a genuine question by the way for those out there that insist this was a ‘con’ because one would think that if it were, such would have been exposed long before the GFC came along?

There shouldn't be any mystery about this. The happy investors referred to above were participating in the strategy during a bull market. Of course with that massive leverage they were doing well.

A whole different story when the market turned and the leverage meant your losses were magnified in contrast to the profits being magnified during an uptrending market.

 

[Ijustnewit]

Here are some ideas for thought of why many people walked away from Storm without signing up . I will base these ideas on my 25 years plus experience in Sales and Marketing in the Retail Sector . I think some of these ideas and marketing facts can be also be applied to any product from a can of baked beans to financial services. Everyone is open to their own opinion, so believe what you will and no offence. I am not trying to incite another riot as this Forum as it is heading in a most positive direction and would like to keep it that way
So here goes, Fact 1: Retail sales conversions (from the customer making and inquiry to placing a purchase ) runs at approx at about 30 %. That means 70 % will walk away and not follow through or purchase elsewhere.
No one has a 100% conversion rate. That's why advertising has to be constant and sometimes abrasive I think a good example is all those Harvey Norman adds we love 24/7.
Also that's why Retail Managements set the K.P.I 's ( key performance indicators ) at around 50% conversion rates for staff. It's the old carrot and stick trick for the hope of that bonus. Give them a target above the Fact 30% but not too far away, and yes sometimes they will achieve this. But on average it will fall back to the magic 30%. They get the best from the staff and don't have to pay as many bonuses.
Fact 2 : Modern Marketing now mainly uses three main ways to bring increased sales.

The first is what we call Ego based or need based marketing. As in The flashy car , The nice shoes.

The second and most popular is Fear Base Marketing . As in Funeral Insurance Plans and creating a need and putting doubt out there.

The third and greatest growing is Word Of Mouth . As in My mate told me , You can Like Us on Facebook , Can I have you email at the completion of a sale , And those Gift vouchers that encourage previous customers to come back for % off , the list goes on and on.
So I believe that most people (70%) that walked away from Storm just where shopping and that's it. Sure there may have been the occasional Financial Guru that saw through the Plan and dismissed it as a Scam. No different to somebody that has a heads up on certain cars and their problems and won't buy that make. But remember on average only 30% of people convert their need into reality.
It's very clear to me now that Storm where well ahead on their Marketing when it came to Fear based Marketing. Remember most people took up the offer of Storm to manage their finances because they wanted to secure their future and their kid's and grand children's.(incidentally it's the same type of avenue Labour and the Greens are taking to sell the Carbon Tax) Fear based, Storm took advantage of this factor by putting the fear of god that into people.
Word of Mouth , probably the most used method. It was in my case and I know Frank has mentioned it as well. Here is fact!! I know Storm paid a finders fee to clients to direct business to their door. This is unfortunate as it meant that whole families and the next generation have been wiped out as well as friends.
I wish I'd been in that 70% but as they say **** Happens. I'll be working when I should be retired but what is done is done. Compensation if any would be great and it would help me on cutting back on the sell out bin at Woolies and I found some great clothes at vinnes so it hasn't been all bad. I believe in reincarnation, so there is always the next life for all those dreams.