A survey commissioned by the Australian Taxation Office (ATO) has discovered what anyone in the financial planning industry could have told them at a fraction of the cost. That is, that the government stuffed it up when it reduced the maximum contribution limits to superannuation.
Ask anyone in the street for a comment about superannuation and you are likely to get the same response “They keep changing the rules.” This survey emphasized this, pinpointing consumer and industry concern at policy changes as well as the negative impacts of changes to contribution caps.
The survey made it clear that the Government’s tinkering had done nothing to generate certainty among those approaching retirement age or those advising them. According to the survey, “The perceived frequency of reform generates distrust and unease in planning superannuation strategies over a life cycle. Consumers are confused and disenchanted; the superannuation system seems complex enough without having to constantly monitor and understand changes to regulations.”
It also says “There are deep-seated fears that the age pension will be abolished and that there will be no safety net for those who have inadequate superannuation at the point of retirement. These concerns are compounded by changes such as the implementation of concessional caps which impact on longer term superannuation funding strategies.
“Across the consumer group there is worry and guilt about superannuation, and a strong sense of disempowerment.”
As financial planners all know, it is only later in a person’s working life that they have sufficient funds to dedicate to retirement needs. Then the government pulls the rug out from under their feet. “This change to the system is seen to be self-defeating and to have sent the wrong message to people who require encouragement to maximise their superannuation contributions when they have sufficient disposable income to do so,” the report said.
“A lot of people actively strategise to maximise their superannuation contributions towards the end of their working life and these legislative changes have invalidated this strategy. It has resulted in some people diversifying investments away from superannuation into areas where caps do not apply, and losing the tax advantages of contributing directly into superannuation.”
If the government wants to cut down the Social security bill then it must put in place rules that will encourage the individual to accumulate funds for his or her retirement.
It is a fact that most working people don’t have enough superannuation to retire. It takes a lifetime to accumulate sufficient funds which is something that the well superannuated politicians and the fat cats of the public service who accumulate a very generous retirement benefit via a very hefty contribution from the public purse, tend to forget. They have little empathy for the rest of Australia when it comes to superannuation. They forget that compulsory superannuation is a relatively recent innovation and even at the current 9% level which has only existed for 8 years, the retirement benefit will be less than what most people need.
It is to be hoped that the government will realize its mistake early enough to rectify it. Not to do so will only increase the cost to tax payers of the future and leave many retirees much poorer in their golden years.
POSTED: 09-Nov-2010
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The Financial Guru is a strong supporter for the need for people to seek advice. Financial products are complex, tax is complicated and the ability for people to do their own research diminished by the sheer breath of skills areas to be covered. That’s were a skilled adviser can help, drawing the strings of ownership (which in part determines taxation), risk tolerance, income needs and product together into a cohesive plan tailored for the individual.
So it was interesting to read of the results of a survey by CoreData of a Mystery-Shopping exercise conducted across the financial planning industry. Reportedly the survey disclosed that the services provided by advisers from the Industry Funds Financial Planning (IFFP) group are not as good as independent financial advisers (IFAs) and bank-aligned planners.
It reported that whilst IFFP advisers showed a good understanding of the basics, they had a limited ability to meet customers’ planning needs. Apparently, they found it difficult to build relationships with clients and cater for individual situations that deviated from the norm. We wonder if this was because of their narrow focus on Industry Superannuation funds rather than the broader view that financial advisers need too take.
CoreData said “The IFFP model appears to be restricted and limited both in terms of the solutions its advisers can offer and also around the notion of an ongoing service proposition”.
The research was based on 480 shadow shopping events conducted by more than 200 people who were aged between 45-60 years and between two to 20 years from their expected retirement date and who held more than $150,000 in investable assets or superannuation.
The Industry Fund Network believes they are on a winner providing salaried advisers to service their huge membership base. What they miss however is the incentive for advisers to perform. Whilst independent financial advisers are willing to put the work into keeping their knowledge up to date and building their businesses, the salaried adviser has no incentive to go the extra yard and as a result they develop a ‘take it or leave it’ attitude which appeared to come through in the survey results. This is reinforced by the data that shows IFAs also outperform the bank aligned salaried advisers.
At the end of the day, how can taking away incentive and restricting the breadth of advice be good for consumers?
POSTED: 21-Jan-2010
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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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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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Predictably, Storm Financial is to be wound up. Not too many people will shed tears about that no doubt. The loss to investors from this will be significant and nothing short of a disaster for many. Should the Storm advisers be accountable, or is it just bad luck, the stockmarket is to blame?
It is obvious that the investors trusted their adviser, and they should be able to do this. The financial services industry runs on trust, indeed couldn’t function without it. The failure here was the model. The Storm model was a one size fits all model which was built for the good times and good times don’t always last. Any adviser worthy of the name should have recognised the risks in the model. Certainly there were warning signs, but are we expecting too much from “unsophisticated” investors to recognise these. The adviser is required by law to take into account each client’s individual circumstances and tolerance to risk. It appears that this didn’t happen here and the advisers must be held accountable.
It will be up to the courts to sort the liability issues out and in the meantime, ASIC must step up to the plate and call the advisers to account. Neither of these actions will give much joy to those whose financial future is in tatters, however.
POSTED: 20-Jan-2009
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The press is currently running stories about a Queensland-based financial planning group whose clients are suffering severe debt stress. It seems this group has been recommending that clients borrow against their homes and invest these funds into the same planning group’s own badged sharemarket products, which was administered by a major financial institution. There is nothing wrong in borrowing for investment. In fact, it can be a very tax-effective method of investing and can accelerate returns.
Reportedly however, this group then used the borrowed funds as collateral to borrow additional funds from a margin lender and added that to the investment. This increases the risk significantly and it would seem from press reports that most investors were unaware of this increased risk.
Strategies such as this will work whilst the market is going up. Once however the music stops, as it always does eventually, then problems will set in. Broadly, this is how it works.
Let’s say you own a home worth $1 million and you borrow $500,000 against it from the bank to invest in the sharemarket. Assuming you can afford the interest on the loan (which is tax deductible) and you allow enough time for the market to work. The market then drops by 45%, (which it has done over the last year). Your investment is now worth $275,000. The bank is not concerned about your loan as you are paying the interest each month and they have your house as security, worth twice the loan value. You - as the investor, whilst not happy at the value of your investment, at least have the time to wait until the market recovery which will inevitably come.
However, let’s say that with the original $500,000 of borrowed funds as security, you obtain another $500,000 from a margin lender. Again let’s assume that you can afford the interest on $1 million. The $1 million you have invested in the sharemarket drops 45%. Your investment now is worth $550,000 and you have $1,000,000 in debt.
Your bank lender is still unconcerned, but it’s a different story with your margin lender. The margin lender generally will only lend you a percentage of the funds invested (usually about 75%), the difference being their security margin (like the deposit on a house). So now your loan is 91% of the value of the investment which makes the margin lender very uncomfortable. So that your margin lender doesn’t lose money, they ask you to either put in more security (cash or other investments), or they will initiate a forced sell-down of your investments to repay the loan. To avoid the forced sale, you are looking at finding almost another $140,000. For those who can’t raise the extra cash, the outlook is grim.
It seems that this is what has happened with a very large number of people in this case, and reportedly many people have had to sell their homes to repay their debts. Some of the luckier ones have sold out of their investment and repaid the margin loan, and now have a debt on their homes that has to be repaid.
This financial group has reportedly devastated thousands of Australian’s lives leaving many with nothing - no savings, no superannuation and no home. It could have all been avoided.
There are a number of lessons here. Firstly, don’t ever think the market will keep going up. Downturns happen regularly. Most are not as severe or long lasting as the 2008 one, but there are no guarantees. Secondly, do not over borrow. You need to have some equity in any investment. If you are over-leveraged, a small downturn can be devastating. It is far better to build wealth slowly than suffer financial devastation from which there is little or no recovery.
Each of us is different in our tolerance to risk. Some will be comfortable taking on additional risk for the possibility of a larger gain, whilst others will not be so inclined. The important thing is to know your risk tolerance level and be sure that your borrowing level matches that. Always consider the downside risk. Negative markets always recover but that is of no comfort if you do not have the financial resources to outlast the down times and reap the benefits of leveraging your investment when the turnaround comes.
Every investment has risk attached. Know what that risk is and if you are not comfortable with it, don’t do it.
POSTED: 18-Dec-2008
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