There’s never been a more important time to be a financial planner.
And there’s never been a more important time for the financial planning community to demonstrate unequivocally – to the public, to regulators and to politicians – that it offers a high-quality, professional service.
So it’s with a mixture of anger and disbelief that planners have reacted to letters sent by the financial planning group Storm Financial to that firm’s clients, purporting to advise clients what to do during the current global financial crisis.
If you have not seen the letters, ask a colleague if they’ve got a copy they can show you – they’ve been circulated reasonably widely, and one of the letters, dated October 1, can even be downloaded from the website of the Sydney Morning Herald. To generalise, the gist of past advice provided by Storm to a large number of its clients was to gear heavily and invest in growth assets.
While markets were climbing, that strategy worked. Professional Planner understands that capitalising interest was also a key part of the strategy, so that as markets rose, so did clients’ debt. But heavy falls on the world’s sharemarkets have caused Storm to rethink its strategy, and to communicate its change of heart to clients. The ire of the planning industry has been raised for two reasons.
First, the actual advice contained in the letters (more on that in a moment).
But second – and just as annoying – is Storm’s apparent attempt to communicate quite complex information and ad- vice to clients in a generic letter – with no particular regard to a client’s individual circumstances.
As one planner wrote to Professional Planner: “Why are we talking about ‘recommendations’ in a piece of mail-merge correspondence directed to a wide audience? I’m sure I heard somewhere financial planners are supposed to provide advice appropriate to an individual’s particular circum- stances.”
Quite right. Even if the advice conveyed is sound, the manner in which it has been communicated to clients (and presumably put into effect by the planning firm) simply beggars belief.
The “authorisation” for Storm to act on clients’ behalf reads as follows: “I/We confirm we accept the recommendations outlined above and authorise Storm Financial to instruct the relevant margin lender/fund manager to take the necessary action to achieve this on our behalf.”
The letter outlines two possible courses of action, and says that in some cases both courses will have to be followed, without making any effort to define which course of action is appropriate to the reader.
One of the Storm letters – dated October 8 – advises clients to switch “up to 100 per cent” of their geared portfolios to cash, in order to weather the global financial crisis. The firm advises clients not to use the cash raised to pay down debt, but instead to maintain borrowings and sit out the worst of the financial storm.
It says the objective of moving to cash is to maintain “a critical mass of asset in your portfolio”. With margin lending interest rates sitting at or near the 10 per cent a year mark, the “advice” raises the clear possibility of clients paying interest on a margin loan at or near 10 per cent a year on an asset earning around 6 per cent a year. Further, Storm advises clients to stay in cash and await its signal to re-enter the market.
“It is important that all market movements be monitored closely (and Storm will do this) so that the cash can be switched back into equities to gain from any upswing in the future,” the letter says.
“This technique we have used successfully in past highly volatile times (eg September 11) and is tried and tested and not something new.” Consider this statement:
“Selling or converting to cash (switching), by its nature, carries a capital gains and/or losses consequence which may be positive or negative however this may have its own benefits. Our experience tells us these tend to be neutral when considering the results of resetting of capital gains clock when you re-enter the market.”
Unless Professional Planner is very much mistaken this statement constitutes tax advice, or could be taken by the reader to constitute tax advice, yet has no regard to the specific circumstances of the reader.
Where is the Statement of Advice setting out the reasons for the advice, the analysis of the effect of the “switching” (apparently different from a “disposal”) strategy on each client?
In the letter dated October 8, the managing director of Storm, Emmanuel Cassiamatis, writes that the firm has been “attempting to find a way to bolster [clients’] position by improving buffers and increasing resistance of your portfolio to downward market movements”.
No one is debating that desperate times call for desperate measures, and that clients who geared heavily into markets may be in need of some radical strategy surgery – it’s a planner’s job to recognise when circumstances change and to take appropriate steps. But it requires a lot more than a one-size-fits- all mail-out.
The level of anger among planners over the Storm letters is palpable.
This kind of approach to the job gives all planners a bad name. And it could scarcely have come at a worse time.
While the industry is under intense scrutiny from regulators and the public to prove that it can deliver a valuable and professional service – one that is constructed clearly in the best interests of clients – the storm damage could be incalculable.