Investors are ‘MAD AS HELL’!
It has been nearly six years since Worrells were appointed to financial planning firm, Storm Financial Limited, in January 2009. Since then, we have experienced a prolonged ‘Global Financial Crisis’, an Australian mining boom and contraction, bank related scandals, the collapse of several timber plantation investment schemes, and inquiry after inquiry into various sectors of the finance industry.
Any recent reading of the business news sections highlights that the financial planning industry is a hot topic. Even comedian Shaun Micallef had a recent bash at the industry in his MAD AS HELL show.
Storm in a tea cup
Storm Financial had a single investment strategy for clients and its promoters said it wasn’t for everyone. In fact, they often quoted only one in four of potential clients became ‘Stormified’ and took up their strategy of gearing-up assets (including the sacred family home paid off over a lifetime of hard work) and investing all the proceeds in the share market, often with further gearing on those shareholdings. This singular investment strategy was much maligned when the world’s markets overheated and wiped out the share value, leaving behind substantial margin loan shortfalls for clients resulting in losses of homes and retirement savings.
Rolling the dice in Dysart
Worrells continues to see firsthand other failures of ‘all eggs in one basket’ investment strategies. We have a mounting number of bankruptcies arising from failed investments in real property in once booming mining hotspots. For example, when the Dysart mines were at their peak, rental properties were in high demand and property spruikers drummed up investors from all over Australia. Teachers, public servants, engineers and many others were led into negative-geared (or thereabouts) strategies buying up property upon property at peak prices—based on high paying mining tenant rents. Now the mines have cut back or even shut down and the spruikers long gone, the investors are left holding a time bomb. Properties with a $400,000 mortgage are now selling for a quarter (or less) of the original purchase price and no future rental income on the horizon. Any so-called tax advantages are long forgotten when the investor can no longer service the mortgage and faces bankruptcy.
Forests of debt
With the most private registered trustees-in-bankruptcy in Australia, we have also seen a few other similar strains of undiversified investment flops. Several of our bankruptcy appointments, and numerous more enquiries, have been to help clear the forests of debt relating to failed investments in timber plantation schemes and the like. ‘Use all your surplus income to support an investment which will help you save tax’, said the spruikers. Any Australian farmer will warn of the risk of putting all your money in a single crop, in one of the world’s most drought ridden continents. Again investors were left to fend off debts when their tree plots or allocations of timber failed.
The wheels of justice are often slow moving. The Australian Securities & Investments Commission (ASIC) took legal action in 2010 against the CBA, BOQ and Macquarie in relation to their dealings with Storm Financial and its clients. Only this year did they reach an agreement that the banks agree to pay substantial amounts to aggrieved clients. ASIC is still battling Storm Financial’s directors. Interestingly, for some time now, a focus is on moving financial advisors’ remuneration away from a trail commission basis to a more upfront fee basis. And yet, Storm Financial used an upfront fee model that ultimately led to its downfall when new clients for Storm Financial dried up at the onset of the GFC.
However, ASIC recently had its budget slashed to the tune of $120 million over the next four years. ASIC’s annual report, which outlined the cuts, indicates that key monitoring areas like superannuation, insolvency, corporations, and investment banking are expected to have reduced surveillance staff and funding in 2015. ASIC’s allocation for regulating the financial advisory industry avoids the carnage, however it notes it still expects its overall ability to monitor the industry will decrease.
All this means that ASIC’s tough regulatory job just got tougher! Meanwhile the spruikers will do what they do best—spruik!