What’s your view of what went wrong with Storm?

As with everybody else, Storm has been caught up in a black swan event whose magnitude is beyond anything that has happened before. Its speed is blistering and the depth will penetrate all of society.

Storm was on the front line in both the asset and credit market and given that Storms model encompassed both sides of this ledger as opposed to typical financial planning which just promoted products then we were bound to find difficulties earlier than most.

However, Storm would have weathered this – Storm’s system has proven over two decades of success that it would have weathered this, had it not been for the panic of the CBA.

You’ve said publicly that you believe the CBA is at fault. Why?

The CBA was integral to the Storm process of advice. They provided the bulk of the home property finance for clients, the bulk of the margin loans and the bulk of the clients’ investments in Colonial/CBA managed funds.

Storm had a strong relationship with the CBA built over many years and all records will show that this relationship was fruitful and problem-free to all parties – clients, Storm and the CBA.

However, the only time when Storm and the clients needed the CBA’s help, they let us all down and mounted a campaign to deflect any responsibility and accountability away from themselves, and their role in the client problem, onto Storm.

Can you tell me about how Storm’s business model operated?

The Storm model acknowledged the following:

1. Most people have insufficient assets to fund a reasonable lifestyle let alone a more desirable lifestyle
2. That most assets in the capitalist system commence life as a debt.
3. The traditional planning approach was to utilise products with the limited capital available to them and then have that capital consumed over time (ie. allocated pension type products) and hope that the capital did not run out before the person’s expiry.
4. Accordingly, if someone wants or needs a plan that does not diminish their limited capital and/or has the hope of higher capital whilst generating the return required, then the use of leverage is appropriate.
5. The need for balance between risk and return and levels of debt were paramount to the Storm model. An average overall debt level between 40 per cent and 60 per cent was the norm leaving the advice conservative as evidenced by the decades of success through large market movements and negative events.

Why didn’t you stop selling the product when the sharemarkets plunged?

Storm’s business was advice not product.

In hindsight, were clients too heavily geared?

No.

In hindsight, if we had known the global crisis would create the changes to the world so quickly we obviously would have acted differently - as would all businesses affected by the turmoil. The reality is the speed and depth was astonishing.

Please note that it took falls in the market worse than the All Ordinaries had ever seen for Storm clients’ gearing levels to be increased beyond acceptable levels and even then only 20 per cent of geared clients were at those higher levels.

The problems arose for these affected clients when the CBA failed them in the margin call process.

In hindsight, we wouldn’t have trusted the CBA.

Do you think the advice your advisers provided was appropriate?

Yes.

Yes.

What none of us understands is why the CBA failed, abandoned and destroyed us (Storm and clients) even after Storm plead with them for assistance and posed a viable, sensible solution to avoid the bloodshed that has occurred.

To what extent have you personally and financially been affected by this?

Completely.

Storm as a firm, the Cassimatis family, Storm advisers and key staff were all invested in the same way as clients were. Hence, our investments are wiped out and houses at risk.

We intend to keep fighting to find a solution for affected clients and to regain our business and personal reputation which the CBA has set out deliberately to undermine.

What do you want to say to the clients who have lost their homes and are facing financial ruin?

We are bleeding for our clients and understand totally their plight. Because of this understanding we are in the front line fighting for everyone.

We hope the CBA does not force people out of their homes. We hope the CBA will come back to the table to discuss a solution for affected clients and we again plead with them (as we have through many pieces of correspondence to Ralph Norris) to work with us to find a solution.

Comments (32)

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Questions for Storm
written by Interested, February 09, 2009

Kristen, I wonder if Emmanuel would clarify the following.
Q - What went wrong with Storm?
In my mind there are two parts to this Q, what was the "rescue" plan? and could this be critiqued by respected people in the Financial and Business world, we would all then be in a better position to comment.

(a) the investment process for the clients
i - what was the rescue plan for the "20% of geared clients were at whose higer risks"
ii - what was the rescue plan for the other clients.
iii - what was the rescue plan to move clients from cash with 100% security (magin loan) back to the index (70%)
iv - would this rescue plan be offered to all clients, or only chosen ones

(b) the financial viabliity of Storm Financial(Company). Reports say that Storm was unable to meet it operational expenses, for some time in the second half of 2008, and in December, defaulted on loan conditions, and the CBA recalled the loans.
The Storm model (fees) were based on as Storm would put it "different to typical financial planning". In essence all Storm did was Capitalise a projection of future fees that would normally be charged by "typical FP".
i - Reports claim the over $80million of these fees were collected during the "Black Swan" triggered event.
ii - Year 2008 - operating profit $26million and Dividend to Founders $24.1m -what provision was made for future service obligations to clients?
iii If say at least half $12.1m was left in Storm - would storm still be operating today.Not to mention the other $2 million in Dec 2008.
iv - What is the rescue plan for Storm - the FP Advice entity.

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If you wish hard enough it may come true!
written by Phil..., February 09, 2009

Emmanuel, if you rub it hard enough maybe you will get a surprise! One size does not fit all and 7% is a blatant rip off, and to try and blame a soft target like the CBA is delusional, or maybe this is the start of your leagl defence! Stand up and take they blame like you took the 7%!

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Director
written by scott Beeton, February 08, 2009

I feel that everyone forgets that clients are not stupid. Clients always have an involvement in the decision making process. They take the upside but cannot handle the downside. Experts predicting this huge downfall seem to be in the many now. A question I ask the great community. What would happen if the property market collapsed mare than 43%. That is right we all would be stuffed in particular our banks. The question moving forward is a much greater one. Will individuals take responsibility for their own actions? I guess given lawyers and ASIC are involved the answer will be no. The responsibility will all be passed to someone else. Wake up people what is happening in the market place is allot bigger than anyone of us imagined. Just ask all the analyst. Gee they were on the money as well weren't they.

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Director
written by Venn Williams, February 08, 2009

I think we are missing the point .Lets look at what Cassimatis said in the interview and quote.. "Storm as a firm, the Cassimatis family, Storm advisers and key staff were all invested in the same way as clients were. Hence, our investments are wiped out and houses at risk."

Sorry but Storm was not an investent club.. where we all invest "the same way"

Storm was a Financial Advisory Firm where each client should be invested acording to their risk profile,age, and financial goals.
Anything else is not acceptable.

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Can someone explain ...
written by Don't get it ..., February 07, 2009

... why Storm Financial's collapse should affact an clients' margin loans? If the margin loan is set up between the client and the margin lender, then why does it matter what happens to storm? If my firm goes bust tomorrow, my clients are unaffected (except they have to find a new planner).

So why are all these reports about "clients losing money in Storm Financial"? How many client shad invested IN storm?

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Brendan - You Can't be Serious
written by John Makka, February 06, 2009

Brendan, you say
"It is also worth noting that for many years Storm provided a great return for many people and an opportunity to escape their situation."
(Storm didn't - the markets made the money, as did anyone who invested. The difference is when the markets turned down, most investors still have an investment, and their house. Storm clients have gone from the Penthouse to the Outhouse - simply because of the advice.

Very few people were able to predict the financial crisis which occurred and under normal circumstances most would have no reason to complain. (Agreed, but how many Advisers would "gear up" when the Index was at 6,800and if Storm did what process did Storm have in place to manage this - it crippled them in 2000 (they loaned money to clients), and now slaughtered them in 2008)

There's no doubt that a lot of people have been hurt and my heart goes out to these people. (your heart goes out and then you smack they in the face with your next comment).

However these people must also ask themselves why they were prepared to take such huge risks.(because they put their faith and trust in what Storm told them - it now up to Storm to explain why it all went wrong - and it was not the Black Swan"" - but rather the Wolves in Sheepskin)

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Loan guide to how much can I borrow
written by Phillip, February 06, 2009

I assume that investors did not initially inform the CBA that they were going to borrow further via margin loan.
However at review time (lets increase the borrowing based on teh increased equity in home and index portfolio) the loan broker or banks loan officer would or should have been informed of all the income and expenses and the investments and margin loan. I did an example of a storm client on the CBA website and the result was a vast reduction in allowable loan under their own CBA guidelines. Increased home borrowing should never have happened.......but they did. Sure Storm is responsible, but their partner in this, the CBA should sholder some of the blame, not for the margin calls (that they did when the LVR was nearly 100%, but for making the loans in the first place.

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What a bunch of wowsers! Not a positive comment from anyone - unbelievable!!!
written by Brendan, February 06, 2009

Having been an adviser for many years I understand the importance of a sensible investment strategy, but I also understand that there are many clients who are prepared to take the risk to make good money.

Storm's approach seems to be appropriate for those people and I am sure that those people were aware of the risk that they were taking.
It is also worth noting that for many years Storm provided a great return for many people and an opportunity to escape their situation.

Very few people were able to predict the financial crisis which occurred and under normal circumstances most would have no reason to complain. To prevent organisations like Storm from operating through a process of legislation is completely against the capitalist system.

There's no doubt that a lot of people have been hurt and my heart goes out to these people. However these people must also ask themselves why they were prepared to take such huge risks.

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More Regulation
written by HP James, February 06, 2009

Given the mood of this typically Socialist Federal Government I think all of us in the industry can now look forward to more regulation, thanks to the antics of what is clearly inapproriate advice.

I'm not so concerned about 7% fees (although this is at least twice market rates) if their clients were receiving value for money.

However, if you're about to lose your home - as well as your investments and savings - after paying even $1.00 for such advice to gamble on the market, I'm not sure any regulatory body should view this advice as appropriate.

We already operate in one of the most regulated industries in the world and I can just see Sen. Sherry sharpening his pencil in Mr Rudd's office right now. Get ready for more red tape and higher costs to do business in this industry.

Storm has let us all down, not just their clients, and as if things aren't hard enough for the legitimate Advisors already.

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Conservative???!!!
written by Bob, February 06, 2009

Why are all the STorm clients who have been stormified for a decade or more losing their homes after experiending strong market rises?

Because the gearing levels were never allowed to become more benign.
Start with $500,000 and lend $500,000 and the $1,000,000 double to $2mill, but gearing levles have gone from 50/50 to 75(client equity)/25. According to Storm this was no good, gotto restore it back to 25/75 so borrow another $2mill, take portfolio to $4mill with $2.5mill in debt and charge 7% on the new $2mill. If the Storm "advisors" had left the long term clients enjoy their gains, they would not be in the irrecoverable position they are in today. Greed compelled them to ratchet up the gearing any time that equity reared its head.

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Total disgrace to the FP community
written by Andrew Lowe, February 06, 2009

Storm Financial is a total disgrace to the FP community. They lost the plot and wanted to use CBA as the scapegoat. The entire issue lies with their aggressive product flogging and not taking into consideration the clients' risk tolerance and level of understanding. CBA role is to manufacture the produce and distribute the products via Storm who is supposed to provide appropriate financial advice. This is a classic case of exploiting the media to appeal to unsophisticated clients that Storm has nothing to do with it.

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...
written by Otis, February 06, 2009

What about the former Storm advisors who have now started up under new Proper Authorities ? Come on ASIC - wake up !

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Fees
written by Martin, February 06, 2009

Having read more than half a dozen Storm plans over the past weeks, I am absolutely intrigued how Storm has been able to convince their clients that 7% up front fee's were reasonable, considering the investments utilised were certainly nothing special.

Yet I have no doubt many of their clients would have complained in the past to their bank about something as simple as a $5 account keeping fee.

I am dumbfounded how regulators can totally overlook the strategies these people were inflicting on their clients.

Perhaps if regulators spent less time worrying about disclaimers and more on appropriate strategies we would have less pain inflicted on investors and the professionalism of our industry.

The FPA needs to start taking some responsibility rather than simply defending rogue elements that continually destroy our credibility and ultimately the affordability of advice for those that most need it.

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How Could Clients Agree to the Fee????
written by Carl Carlson, February 06, 2009

"
Taking the equivalent of a years average weekly earnings in commisions on deals $500K to $1000K is unbelievable.
I wonder how any client could have agreed to these costs?
Storm clients have missed out on basic financial planning of matching clients needs and objectives within their risk profile.

"

Get your hands on one of their Statements of Advice (aka "The Business of Making Money - Your Journey to Becoming a Capitalist") and you'll see exactly how. After you read the presentation you'll see how everyday people with no comprehension of any other world apart from that described by Storm would sign up in droves. After being Stormified they not only see the fee as cheap, but also view the advice as conservative.

As Donald Rumsfeld (kindof) said about Iraq - "You don't know what you don't know" and all most of these people knew about investing came from the incredibly slick machine at Storm.

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Income is vital
written by Jenny M, February 06, 2009

In my almost30 years of working in this industry I have never seen or heard such utter, ubbridled, self serving greed. All advisers and I have been proud to call myself one understand that a client absolutly must have a cashflow to maintian their living in spite of any advice that we offer. To blame banks , the market or any other event including the changing phases of the moon simply do not cut it.
Retirees are not so greedy if they understand the risks to negatively gear unless they are multimillionares and most of them are too smart. These people preyed on simple folk and gulled them into bigger risks simply becasuse the risks could not have been explained and disclosed fully and in depth.Most Aussie women when asked in their retirement years "would you invest if there was a chance you could loose you house" would flatly refuse.

The Storm disaster has been generated by them and they should be stripped of all they own to make restitution

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Financial Planner
written by John Geisker, February 06, 2009

Storm groups model appears to be product flogging at its worst given indications of 6-7% commission payable. What ever happened to fee for service within this business.
Taking the equivalent of a years average weekly earnings in commisions on deals $500K to $1000K is unbelievable.
I wonder how any client could have agreed to these costs?
Storm clients have missed out on basic financial planning of matching clients needs and objectives within their risk profile.

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Appauled
written by Appauled, February 06, 2009

I don't know whats more disgusting: Emmanuel Cassimatis or the advisers that chose to work for Storm Financial.

Common knowledge of the industry, morals and ETHICS should have been telling their staff members how ludicrous a 7% upfront fee is and that gearing is not appropriate for all people (in particular retirees, who have worked their entire lives now only to have their live savings ripped away from them).

Shame on them all.

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Time for FPA to take a stand!
written by Vince, February 06, 2009

I have read that Jo-Anne Bloch feels that the FPA has acted appropriately in dealing with Storm Financial. And that it is not useful for the FPA to be seen to be criticising Storm and that there is more to the story than has been reported to date. Well we now have Mr Cassimatis' written statements and nothing I have read leads me to feel that the FPA should be even handed in this case.
It is time for the FPA to take a stand on behalf of the majority of it's members and speak out against this misguided individual. A risk model based on even the past 25 years of market movements would have provided sufficient evidence that this model was fraught. I think that future court action and/or a Government enquiry will indicate that to be the case and together with the large up front fees was based not on sound advice and consideration of the client - but on pure greed! I'm sure that the dividend stream paid to Storm's owners over the past 10 years will be ample evidence.
I would be interested to know if and when the FPA and ASIC were first contacted by professional planners to voice their concerns regarding Storm and their model...
So please take a stand and make an example to your members and more importantly to our clients and the wider community.

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You Can't Be Serious
written by John Makka, February 06, 2009

What utter rubbish, the biggest mumbo jumbo I have ever heard – Please Mr Cassimatis, a little less of the rhetoric and some reality please.

(1) Surely the Storm Model as did every other advice model have factored in a possible “significant” drop in the Capital Value of the All Ords Index.
For goodness sake, taking a 10 year or 20 year view any fool could see that a true “Long Term Capital Value” (assume 6-6.5%) would be 4,000 to 4,500 points not 6,800 (be it for one day only) = overvalued by 34%-42%.

(2) Even the so called “Black Swan” in fact is part of history. When the Market goes up, it will rise greater than long term trends, and when it falls it falls below true value. So the drop to 3,300 (be it for one day) should not have been a surprise. The correction of 1987 taught us this.

(3) From what I read, Storm’s model failed in the dot.com boom, as Storm had to loan clients money, which has yet to be repaid (that was 8 years ago and the past 4 were boom times for Capital Markets). To me this would suggest that even in good times the debt could not be repaid.

(4) If the CBA would have come to the rescue this time. How long would this have taken to repay, on top of the other outstanding loans. As a CBA shareholder I say well done CBA.

Please, who are you trying to convince that you are not responsible - it can only be yourself - sorry we don't buy it.

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What is a margin loan?
written by Jeff K, February 06, 2009

If you recommend a client uses a margin loan product, then you and your client agree to the margin lenders terms. If you get a margin call you have 24 hours to deliver cash or securities to restore the margin. If you cannot achieve this then you need to sell assets or the margin lender can sell them for you. Margin lending is an aggressive investment approach. Margin lending delivers accelertated returns - up and down.

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GAMBLING
written by Pablo, February 06, 2009

Even our most aggressively invested client, could not lose their house.

Storm advisers put their clients in a position where it was possible to lose their home. They gambled and lost.

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Take Responsibility
written by Sue , February 06, 2009

The Storm Model is just that - a model - and a prescriptive one at that - one size fits all - same for everyone - gear, gear, gear. This whole issue stems from inappropriate advice delivered "factory style".

Financial Planners have a fiduciary responsibility to protect their clients - gearing is not a conservative strategy - period.

Who is Emmanuel kidding when he says that upfront commissions of 7% is an industry average - that's "product" or "model" flogging - from every angle. A client investing $500,000, would pay $35,000 to Storm - that's not value - that's not even fair - that's a ripoff.

Perhaps CBA is guilty for lending against primary residences of retirees...but ultimately the planner has the duty of care to their client.

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...
written by Ba-zing!, February 06, 2009

I stopped taking this interview seriously after reading the following sentence:

"As with everybody else, Storm has been caught up in a black swan event whose magnitude is beyond anything that has happened before."

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Beggar's Belief
written by Andrew Rafty, February 06, 2009

So Storm believed that the CBA would not call their loans in when the margin was exceeded? obviously this belief must have been based upon something of substance ie; written documentation.

If not, Storm/ Cassimatis are (putting it mildly) a little bit naive. Banks and other institutions have always acted according to what is in their best self-interest; shareholders expect them to act this way. Generally these decisions are short-term motivated and disregards the needs of other parties. Institutions, especially banks have a consistent track record of doing what they did to Storm and their clients and it astounds me that Storm thought otherwise.

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Spinner
written by Mal, February 06, 2009

Emmauel is spinning so hard he has 'flipped' out!! I think he knows noone in the industry could believe his bizarre and ludicrous justifications and explanations. But he is trying to look good for his former clients and the general public - from which a jury pool will one day be selected. I hope the authorities make an example of this person. I do not know which is worse - the poor and self interested advice given to the detriment of clients OR his self-righteousness after the disaster.

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Wow
written by Wally, February 06, 2009

What a phenomenal demonstration of denial. I guess that's driven by a combination of blind arrogance and defense counsel's advice.

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...
written by Norman, February 06, 2009

Storm geared one of my clients in their late 60's and retired. The spouse now has over 100k in tax losses (to 30 June 07) she would never use.

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Who's he trying to convince?
written by Dave from Perth, February 06, 2009

Blame the bank, blame the system, blame the global financial crisis. He blame's everyone but himself. Whilst I don't disagree that the strategy and risks is appropriate for some aggressive investors - the "Prescriptive Aproach" (Storm's own words from their own fact find to clients) hardly fits the risk profile of thousands of retirees. Also in their fact find they say the strategy can make clients feel uncomfortable - well they are feeling a lot worse than uncomfortable at the moement.

The storm national business development manager - a supposed "financial planner" for 30 years didn't even know what a co-contribution was. Maybe there just wasn't enough fees in it to make it worthwhile learning?

Gearing at 40-60% is conservative eh? And here I am thinking that a conservative investor wouldn't gear at all. Financial markets have fallen 50% in the past - they will again. The strategy was a snatch and grab and although CBA were complicit in knowing what was going on - the fiduciary responsibilty lies between the adviser and their client.

Gear up, load up and we'll slug you 7%. Sounds like a great plan for everyone. I'm sure there'll be penty of fancy mirrors in the Cassimatis household - perhaps a deep look inside one of them might find a resolution - however i won't hold my breath.

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...
written by Bryan, February 06, 2009

if it wasn't so sad, most of Emmanuel's comments would be funny.

How exactly did CBA fail Storm's clients in the margin call process? By notifying them? This is the role and responsibility of the recommending planner. That CBA had to notify Storm's clients of the margin calls speaks volumes about the "planners" at Storm. Another exmample of people no longer taking personal responsibility for their actions.

Let's not even get started on the comment regaring 'advice not product'. I've reviewed a Storm plan for a 54 year old couple and superannuation was not mentioned once (other than in the list of assets) I wonder why that was? Perhaps because the Storm adviser was incapable of recommending superannuation due to the lack of a 7% entry fee...a great example of 'advice not product'.

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Partner
written by Adam P, February 06, 2009

When you keep lying to yourself you may actually start to believe it. The more Mr Cassimatis keeps blaming the CBA the more he hopes this defence will hold up. But unfortunately whilst the CBA gained significant profit from the Storm / CBA relationship, Storm ultimately provided the advice. And as the CBA would NOT support the margin loans when they were beyond there limits, as per the margin loan contract states - the CBA sold down. Not overly friendly by the CBA given the size of the relationship, but still within the rules.
Sorry Mr Cassimatis, one day you may actually see that gearing every Tom, Dick and Harry up to the gills is not advice - it is flogging a product or running a cooke cutter operation.

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Disgrace
written by Anthony, February 06, 2009

Storm's model and other such models is a disgrace. To blame debt providers like CBA totally is gutless and irresponsible. This bloke should take much of the blame himself.

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...
written by bewildered, February 06, 2009

Melbourne Storm coach Craig Bellamy's cliche count isn't as high as this bloke's.

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