The attempts by Storm Financial to shift all blame for the demise of their empire and the loss of wealth by so many of their clients would be laughable if it was not serious. They are putting out the view that they were not responsible for monitoring client’s margin loans, it was up to the lenders to do so.

 

A lender is not licensed to give advice.  They can only give you the factual situation and request that you take the appropriate action.  It is the adviser who gives the advice and determines the best strategy for the client.  Ask any responsible financial planner and they will tell you that the last thing they would want is the lender contacting their client before they had the opportunity to do so.  As their adviser it is their responsibility to monitor the state of each loan and to take whatever action possible to prevent a margin call.  After all this is part of why you engage the services of a financial planner. 

 

Sure margin loan records may not be always accurate but the Storm advisers had access to the investment fund records and so they knew the correct values (if they cared to check) and they have no excuses.

 

It is not good enough to say ‘I didn’t know’.  If they didn’t, and that is unlikely, they should have and deserve condemnation for it.

 

POSTED: 30-Sep-2009

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The Industry Superannuation Funds have been crowing for years about how much better they are from their opposition, the retail funds. More recent results show this position reversed and have Master Trusts leading the pack.  So who is the best?  Well that depends of course on who you compare yourself with and the period you want to compare.

 

These performance figures are nonsense.  The most commonly compared fund is a so-called Balanced Fund. No two balanced funds are the same, having differing asset allocations and strategies and that is going to give you a different result no matter how good or bad the manager is.

 

The following illustrates the stupidity. The MTAA Fund was lauded as the top performing fund just a year ago.  This year they are at the bottom. Why? Most funds have an allocation to property. With most retail funds, this allocation is via property securities, which are property trusts listed on the stock exchange and these are valued daily like shares. Most Industry funds have significant direct property holdings which are only valued when the funds decides to do so. As the stockmarket fell so did property trusts. Direct property didn’t fall because the fund initially chose not to revalue, obviously fearing the worst. MTAA finally bit the bullet and revalued and went from the penthouse to the basement in one go.

 

Now, as direct property values continue to fall back to realistic levels, those with unlisted property are now under-performing as the listed property market rises resulting in Master Trusts outperforming their industry counterparts. It’s all a bit silly isn’t it?

 

Performance is a long-term thing and should only be measured that way. Unfortunately, all industry participants use these figures as a marketing tool.  Don’t fall into the trap that any one fund is “the best”.  Sure, it might be today but to quote Scarlett O’Hara, “… tomorrow is another day”.

 

POSTED: 24-Sep-2009

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Financial Guru is a strong advocate of obtaining financial planning advice. Whilst some people manage their finances well, the overwhelming bulk would gain some benefit from receiving advice on building, protecting and managing their wealth.

It is unfortunate though, that an industry that can provide so much assistance suffers from such a poor reputation and continues it seems to shoot itself in the foot. (Mind you, it has a lot of assistance from the Industry Superannuation funds and others.)

The worst aspect of this is that it can deter people who really need it from getting advice. Consider the following.

·         Every industry has its crooks. Where there is money, you are going to attract the charlatans, the quick money merchants and outright criminals.  No laws, regulations, or diligent regulator will have any effect on them. Like the plague, they will always be with us.

·         The overwhelming number of advisers are honest, knowledgeable and have their clients best interests in mind. They hate the crooks more than you do.

·         Notwithstanding good intentions, there is a wide variation in skill levels and the quality of advice being given.

·         A good adviser will concentrate on giving good advice. The product comes second.

·         Some advisers specialise and others are GPs. You choose what suits you.

·         If you go to a bank (or other institution), you shouldn’t be surprised if you finish up in a bank product. It’s your choice.

·         You can’t legislate common sense. How many people fall for the Nigerian scam each year in spite of all the publicity? How many fell for the Wattle scam when common sense tells you that 50% interest is simply not possible?  

Knowledge is power so do some reading first.  If you are not comfortable with the advice, don’t take it.  If you are not comfortable with the adviser, find another but don’t be deterred from getting advice. There are more good guys who do their best every day, than there is the other variety. 

Unfortunately though, there is no test you can give which will tell you whether the adviser is honest, has integrity and is looking after your best interests. ‘Caveat Emptor’ – Buyer Beware.

POSTED: 22-Sep-2009

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It is time for a change.  As a regulator of the industry, ASIC has been a failure. It is time that the advice giving part of the industry had its own regulator. ASIC is too big, has too many responsibilities and most importantly, does not understand the industry it regulates. Worse than that in fact, it has negative views toward the financial planning industry. The industry deserves better.

POSTED: 22-Sep-2009

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On 8^th September 2009, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) tabled its report on the inquiry into aspects of the agribusiness Managed Investment Schemes (MIS).   These schemes have been in the news a lot recently with the collapse of Timbercorp and Great Southern. 

 

MIS fall into two main categories, forestry (eucalypts and other species for woodchips, hardwoods like mahogany and teak), and non forestry (such as olives, various nuts and fruits).

 

Last year, the government legislated to ensure that those investing in regulated MIS forestry schemes were entitled to a tax deduction for their investment.  Non forestry was not part of this legislation and the ATO decided that the non forestry was not entitled to a tax deduction.  This was challenged by the MIS industry who mounted a test case against the ATO, which was decided against the ATO and in favour of the schemes. This did not please the farming lobby which has been lobbying for a denial of tax deductions to investors.

 

The PJC just tabled report made just 3 recommendations. They were:

 

Recommendation 1 –

That the government considers investigating and modelling the effects of amending the ITAA 1997 to ensure that tax deductions for non-forestry agribusiness MIS investment under the general business deduction provisions of the ITAA 1997 only be permitted to be offset against future taxable income from the same MIS.

 

Recommendation 2 –

That the government amend the Corporations Act to require ASIC to appoint a temporary Responsible Entity when a registered managed investment scheme becomes externally administered or a liquidator is appointed.

 

Recommendation 3 –

That ASIC require agribusiness MIS to disclose the qualifications and accreditation of third parties that provide expert opinion on likely scheme performance.

 

Recommendations 2 & 3 make a lot of sense ands should be enacted without delay. 

 

If Recommendation 1 is enacted it will stop investors claiming upfront tax deductions and effectively kill the non forestry investment sector. Whilst the farmers may be happy, the investment in this sector has allowed development of new varieties of fruits, the growing of varieties not normally grown here and the scale which lowers our dependence on imported fruits. 

 

If this is legislated, you have to ask who will provide that innovation. Farming of this sort is a long term investment which requires significant capital investment that just can’t be provided by the family based farmer.  If an investor is willing to provide that and is prepared to wait many years to get their return they should be entitled to tax relief for it.

 

Without tax concessions there will be no money and without money there will be no innovation.

 

POSTED: 11-Sep-2009 

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There are over 400,000 Self Managed Superannuation Funds (SMSF) in Australia and the number is growing by tens of thousands a year.

Over the last few years, since the ATO assumed responsibility for SMSF’s it has been on a learning curve ascertaining how they are run, where the money is invested and how they are managed. It has been setting up surveillance measures to gather information so as to better manage this huge number of funds and ensure compliance.  After all it is simply not possible for them to individually audit each fund even every few years let alone annually.

Their surveillance has identified an increasing number of breaches of compliance rules.  Many of these, probably the vast majority of them, are through ignorance rather than any deliberate flouting of the rules.

The biggest number of breaches, totalling 19.1% for the 2008 year, related to loans to members or their relations, followed by breaches of the in house assets test at 15.6% and assets not being held in the name of the trustee at 13.6%.  The ATO has been endeavouring to educate trustees on their responsibilities to reduce the risk of non compliance, but are struggling against the rapidly increasing number of funds.

In an effort to stem the rising tide, the ATO has stepped up its campaign by concentrating on the activities of auditors. Every fund must be audited each year. The auditor’s responsibilities are to ensure that the fund is maintained in accordance with all laws and regulations, that the assets of the fund exist and are separate from the members own assets, amongst other things.

Where a breach is identified, the Auditor now must report the breach to the ATO.

The ATO obviously believed it is easier to manage a much smaller number of auditors than try to check every fund.  After all, if the auditor fails to do the job properly they will lose their auditing capability.  So if you have a SMSF, be prepared to undergo a more thorough audit than previously and to pay more for the privilege.

POSTED: 07-Sep-2009

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Recently a self managed superannuation fund was made non-complying when it was found to be in breach of the rules. The ATO rarely uses this power that it has and the fact that it has this time (and had its decision ratified by the Administrative Appeals Tribunal) is a warning to all SMSF’s to ensure that they have their house in order.

 

This is the most serious action that the ATO can take against a fund as it means that the fund loses its concessional tax treatment and the assets of the fund (less non-concessional contributions) are taxed at the top marginal rate.

If that happens, you lose up to almost half of your money in one go!

In this case it was a serious breach where the fund breached the in-house assets rule. Under the in-house rule, a SMSF must not invest, lend or lease to related parties (including members) of the fund more than 5% of its assets. This fund did just that, and did not repay the loan until 4 years later which was 2 years after the fund auditors alerted the trustees to the breach.  The ATO does not take action like this lightly and it indicates a hardening of attitude toward trustees who flout the rules.

POSTED: 07-Sep-2009

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Enough has been written about the Townsville based Storm Financial to fill a book. Probably, by the time this is all over, someone will have written one.  With finger pointing going on everywhere, it is all but impossible for the average person to find out what went wrong.  If you are expecting the current Ripoll Inquiry to do that then you are going to be disappointed. The Terms of Reference all but guarantee that this will end up being another exercise in finding a scapegoat.  That’s a shame because it will be another opportunity missed in a long list of government inquiries more interested in political outcomes than preventing reoccurrences.

So what did go wrong? Whose fault is it?

Was it all Storm Financial’s fault? Certainly they must bear a huge part of the blame. Their ‘one size fits all’ model clearly wasn’t appropriate for everyone.  They defend their model saying they only had one type of client, those who subscribed to their philosophy and investment strategy.  That only holds good however if the client fully understands the model, and the associated risks.  It is clear that many didn’t.  

What about the advisers? By all accounts the advisers were mostly all well experienced, each with many years in the industry. The adviser role is to understand the clients, their tolerance to risk and level of understanding and to provide advice that matches the clients expected outcomes.  It appears that in many cases they failed to do so. Why? Were they blinded by the huge amounts of money they were making?  Were they just too greedy? Perhaps some were, who is to know. It is clear that they did not keep their clients informed of the state of their loans and in some cases, it is alleged that information on the state of people’s investments may have even been concealed from clients until it was too late. The advisers also engaged in the practice of double gearing, that is borrowing against the home and then using the borrowed funds as security to borrow additional funds from a margin lender. This is a no no as it means that the client has no equity in the deal. Ultimately it was the advisers who were at the coal face talking to clients, it was the adviser who owed the duty of care, it was the adviser who gave the advice and so they must take a large part of the blame.

Is the commission system the main culprit? Were the excessive commissions the main problem? Would banning commissions stop a reoccurrence? The Ripoll Inquiry will certainly make this finding, but that claim simply does not stack up.  The investors all knew what they paid and it is silly to argue that if it had been paid as a fee rather than a commission, the outcome would have been any different. It was the advice (and in some cases probably the lack there of) which was inadequate, not the amount paid for it or how it was paid, excessive though it may have been.   

So it is the client’s fault? In some cases, probably yes at least in part. Many were sophisticated investors and business people who understood the risks and were prepared to take them. They couldn’t foresee a downturn of the magnitude that we have just endured anymore than anyone else and have suffered the consequences. Many investors however (probably the majority) were not sufficiently skilled, educated or financially aware enough to understand the risks and trusted the Storm advisers who provided their clients with a level of comfort that depended on the good times never ending. Of course the good times never last anymore than the bad times do.

What about the banks, surely they knew what was going on? The CBA who it seems was the biggest lender, either directly or via its subsidiary Colonial Geared Investments, has already admitted some culpability and the other banks are under pressure to do likewise. It is alleged that its systems for monitoring fund values (the security for the loans) was not up to scratch and they failed to ensure borrowers were adequately informed. They were also aware that many borrowers were double geared. Certainly it is arguable that they should not have pulled the plug, winding up the funds and calling in the loans, but looked to protect the clients by managing their way through the downturn. After all it (presumably) was a market related problem and as time has shown, there has been a marked recovery since then.  Nevertheless it must also be remembered that most of the money invested went into Storm’s own funds which were invested with Colonial First State, also owned by the Commonwealth Bank. So CBA was lending through one door and getting paid interest and the money was coming back in via another where they were making management fees.  With a conflict of interest like this, no wonder the scrutiny of loans was less than ideal.

Should ASIC have done something?  Most probably.  ASIC certainly knew about the model. But to be fair on them it did unravel very quickly and no doubt caught them by surprise. But frankly anyone who looks to ASIC to save them money is going to be sorely disappointed.  Never in its history has ASIC every saved anyone a dollar. It is always too late by the time they step in, the damage having always been done by then.

Can a Storm Financial happen again?  Will the inquiries going on now into the financial services industry in general and Storm in particular come up with a solution? Of course it can happen again and it will happen again. The current crop of inquiries will name scapegoats, tell us what we already know and recommend new regulations which will not go one jot toward stopping reoccurrences but will sound good politically. They won’t help because you can’t regulate against stupidity. There are always people out there that want to believe the lies they are told as there are people who will tell them what they want to hear.  There will always be high risk schemes that naive people will go into unaware they could lose everything. A million inquiries won’t stop that. 

POSTED: 07-Sep-2009

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