The Australian Securities and Investments Commission (ASIC) has now banned 13 financial planners as a result of the collapse of Westpoint, and finally got a conviction against one of Westpoint’s principals, Neil Burnard. It’s to be hoped the firms affected have had a good hard look at themselves and make sure it doesn’t happen again. Westpoint should at the very least be a reminder about the importance of sticking to approved product lists. It should also have led to fundamental reforms of the financial planning industry, but it didn’t – and won’t.

The new Minister for Superannuation and Corporate Law, Senator Nick Sherry, has no plans to do anything about the conflicts inherent in the payment structures for planners. And now another shocker has popped up: Lift Capital, a margin lender that pooled its clients’ collateral and has now gone broke with great loss of wealth. Financial planners who were not only paid trailing commissions, but also often received cheap margin loans themselves, marketed its margin loan products.

Are these exceptions, rather than the rule? Of course. The real problem with financial planning is not the departures from approved product lists and platforms, and the small corruptions of the few. The real problem is that most financial advisers need their clients to invest in managed investment products in order to get paid. The vast majority of the products are fine, or at least they’re not toxic. Well, they’re not very toxic. But it’s not so much the products that are the problem – it’s the fact that most advisers only get paid by selling them.

But there may be some reform coming, even if the Government is not interested in the subject. ASIC’s chairman, Tony D’Aloisio, has just celebrated his first 12 months on the job by announcing the first major restructuring of the organisation in 10 years. He plans to replace the four “silos” into which it used to be divided with 17 smaller units – one of which will be devoted to financial advice. Having mopped up after the Westpoint disaster, and now Lift Capital and Chartwell in Geelong (which was not promoted by financial planners), we can probably expect ASIC to become more proactive in supervising the industry.

A good place to start would be to clean up the practice of using margin loans to double dip, which has been exposed by the collapse of Lift. Lift had 1600 individual clients through 80 financial planning groups. As with all margin lenders, the advisers were the real clients, and Lift paid them a trailing commission of 0.55 per cent. The market leaders in margin lending usually pay a trail of 0.5 per cent.

But that difference in fees wasn’t the only reason Lift managed to carve a niche away from the big margin lenders. It was also because Lift offered higher loan-to-valuation ratios (LVRs) on listed investment companies (LICs) than the others. LICs often trade infrequently so their liquidity is low. That was important for financial planners because many of them put a high proportion of LICs into their clients’ portfolios. A higher LVR produces bigger portfolios and bigger loans, and therefore more commissions. That’s because the advisers not only get a commission on the loan from the lender, but also a percentage fee for managing the larger portfolio. All shares put up as security for Lift loans were transferred to a company called Lift Capital Nominees No. 1, which is the beneficial owner of all of the shares as trustee for all of the borrowers.

Part of the official wash-up of this crash should be an examination by ASIC’s new financial advice team of double dipping by financial planners. How much of it is going on? And to what extent do the banks profit from triple- and quadruple-dipping: charging advice fees plus lending fees plus investment management fees plus interest margins on the loans?

Alan Kohler has been a financial journalist for 37 years and is currently the publisher of The Eureka Report, an online, independent publication for investors

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