As the clean-up after Storm begins, Kristen Paech assesses the damage to the planning industry and considers how further tragedies can be avoided.

Financial planners are once again in the firing line following the collapse of Storm Financial. Tales of clients burnt by the implosion of the Townsville-based dealer group have permeated the mainstream media, and indiscriminately tarred all planners with the same brush. The financial losses borne by retirees and other clients, whose debt levels spiralled out of control on the back of the equity market derailment, are both tragic and tangible.

What remain less quantifiable are the ramifications for the financial planning industry, an industry that has worked so hard to distance itself from its roots in the product-flogging life insurance industry, and to build a reputation as a profession.
One thing that is clear is the level of anger on the part of many financial planners, who see the debacle as blight on their good name.

A blog posted on the Professional Planner website after Storm announced it had gone into voluntary administration received numerous comments from website users, many of which centred on the appropriateness of Storm’s advice.

“If Storm’s advice is shown to be inappropriate for the client’s needs and objectives, Storm should be accountable,” website user Will wrote on January 14.

“From what I have read, it seems their advice is consistently inappropriate. Triple geared retirees who are capitalising their margin loans into index funds and getting charged 8 per cent TRAIL!… oh boy. The general community need financial advice and Storm is screwing it up for the decent planners out there.”

Another user, Carl Carlson, wrote: “Let’s be clear. In the current climate we all have our war stories. I’m aware of some hair-curling stuff which has been undertaken by ‘renegade’ planners within a large, reputable dealer group.

“The difference in the case of Storm is we aren’t talking about the isolated, irresponsible actions of an individual which, when identified, can be rectified by a responsible licensee. We are talking about broad-based, irresponsible, unsustainable gearing levels promoted by the licensee itself which were, in hindsight, only able to last as long as they did as a result of the unique settings afforded to them by third-party product providers.”

It is now up to the regulator, the Australian Securities and Investments Commission (ASIC), and the courts to decide whether or not the advice provided by Storm advisers was indeed inappropriate. Slater & Gordon Lawyers is acting on behalf of Storm clients and the Storm Investors Consumer Action Group, which was set up in the wake of the collapse. Damian Scattini, practice group leader in the Brisbane office, says the firm has been approached by 800 people seeking restitution.

He describes the advice provided by Storm as “perilous” and is attempting to sort out the problems for “these poor individuals who are left blinking in the sunlight with nothing”.

“It was terrible advice that was given in the first place, it was inappropriate advice; advice that was designed to line the pockets of the advisers to the peril of the customer, and the banks were willing partners in that,” Scattini says.

“I am hoping parties recognise their huge joint problem and are able to sit down and work through that problem so everyone walks away with just some skin off. We’ll either be sitting down at a table talking about it, or in a court room yelling about it.”

In the aftermath of the storm, the industry has once again come under public scrutiny, with even planners themselves questioning the practices on which Storm’s business model was predicated. Financial Planning Association of Australia (FPA) chief executive Jo-Anne Bloch has been attacked by her own membership for failing to publicly condemn Storm’s actions, or even to distance the industry body and its members from the fallout. Storm Financial was a principal member of the FPA (the Association terminated the membership on January 12) and 10 of Storm’s advisers were members. Four of the 10 members are Certified Financial Planners (CFPs).

Also responding to a blog on the Professional Planner website, an anonymous user wrote: “Storm had some CFPs as advisers and was also a principal member of the FPA, which means that they are to adhere to the FPA’s so-called “code of ethics”. Obviously these [sic] code of ethics and everything with the FPA is up for interpretation.”

The FPA commenced an investigation into Storm in early November last year, with ASIC following suit on December 12.At a corporate level, Bloch says charges were laid; however they became redundant after the company went into voluntary administration, forcing the FPA to terminate Storm’s membership as required under its constitution.

The investigation continues at an individual level, with two of Storm’s 34 financial planners in the hot seat. Bloch and deputy chief executive Deen Sanders flew to Townsville in early February to talk to FPA members, Storm clients and the media.

Responding to criticism, Bloch says the FPA must adhere to due process and requirements under its constitution, which are in place to protect all members. She points out that Storm’s business model had some “unique qualities”, and highlights the need for meaningful education of clients.

“A whole bunch of clients have found themselves in a difficult situation because of aggressive strategies, but [those strategies] could have been right for some clients,” she says.

“There has to be greater symmetry of knowledge on both sides of the equation from a financial planning and a client point of view. One assumes that clients would go into high-risk strategies with their eyes wide open but when you’re doing well and the markets are buoyant, are you really focusing on an exit strategy should things change? There doesn’t appear to have been an exit strategy for when the markets went in the other direction.”

She adds: “We’re going to have to start thinking about meaningful education around the strategies that people do generally understand and can relate to, even when things are looking good.”

Surprisingly, Bloch does not believe the FPA’s campaign for professionalism and to promote the value of advice has been damaged by the ensuing scrutiny.

“I’m realistic enough to say that we were always going to have to deal with challenges to the system,” she says.

“We have a strong regulatory environment, the FPA has a strong code of ethics and rules of professional conduct, and we’re able on both fronts to hold people to account. Whether its ASIC, the FPA or the courts, we all have a process of complaints and we have to go through that process, which doesn’t help those clients involved… but there’s no way to foolproof a system.”

True as this might be, times like this call for close examination of the processes employed by the industry’s watchmen. For the sake of clients, and to protect the reputation of upstanding planners, it is vital that the warning bells ring loud and clear the next time around.

The FPA has an annual self-assessment process for principal members in the form of a question- naire. Members are also “risk-rated” by the Association, with a high risk rating prompting the FPA to contact the member.

Bloch says a high risk rating doesn’t always result in investigative action, but it certainly neces- sitates discussion. Separately, the FPA is able to act on complaints lodged by the public, members and others, with client complaints the most significant trigger for an investigation.

The Storm investigation kicked off after complaints and client concerns were fed through to members, and relayed to the FPA.

“Invariably the first point of call is to go back to the licensee, look at the internal dispute mecha- nisms, determine the nature of the complaint andso forth,” Bloch says.

“We’re able to substantiate the complaints and use evidence-based material, which gives everyone the confidence that we’re not just going on a wild goose chase, because some cases are more obvious than others; but you have to be able to apply the same process across the board.”

ASIC was not able to elaborate on its monitoring system or investigative processes. An ASIC spokeswoman says the investigation
is wide-ranging, and the Commission has been speaking with a range of industry stakeholders and former Storm investors.

“We encourage people to provide ASIC with information via our Infoline, but as to whether that would set an investigation in motion is not some- thing we could say with any certainty,” she says.

“It is not appropriate to go into the detail of our complaints management or investigative processes.”

Many of the lessons to come out of the Storm debacle are not new, but serve as a healthy reminder for both planners and clients.

“It goes back to the age-old principles of diver- sification, understanding risk and return, and being prepared for when things go in the wrong direc- tion,” Bloch says.

“This is not new, so the question financial planners are asking is: How do we really prepare our clients for the inevitable change in cycle; how do we get them on board to be able to withstand that; and how do we advise them for the long term?”

Andrew Moylan, consultant at The Encore Group, believes it is helpful to examine Storm’s business model in determining what went wrong and how such problems can be avoided in future.

Storm clients were charged an upfront fee of 7 per cent of assets and invested in Storm-branded index funds developed by Colonial First State and Challenger.

Storm’s philosophy was to maximise clients’ wealth through heavy use of leverage.

Professional Planner understands that capitalising interest was also a key part of the strategy, so that as markets rose, so did clients’ debt.

“From a cashflow perspective, Storm’s model was dependent on upfront fees,” Moylan says.

“If your business is upfront fee-driven, you don’t have a long-term [model]. You need to have a cashflow revenue stream that is much more con- sistent with an ongoing and a long-living customer contact base.”

He adds: “We have learned in Australia, and I quote [economist] Don Stammer: ‘The economic cycle lives’. You have to have a business model that’s set for the economic cycle rather than just perma- nent growth. You need a business model that runs the whole cycle.”

And not only that. Justin Hooper, managing di- rector of Sentinel Wealth Management, says Storm also highlights the need for differentiation between types of advisers.

“I still think we’re paying lip service to the client,” he says.

“We have to take a long hard look at what constitutes a profession and stop categorising everyone in the same way. I would like to see different labelling; product seller, technician and principal wealth strategist.”

Under this model, Hooper argues, there is more clarity for the consumer around the service they are receiving.

“I think there will be another backlash against financial planners and a number of people will become DIY [investors],” he says.

“We have to use this as an opportunity. It’s an opportunity for the advice industry to be more specific about those three categories and it’s also an opportunity for us to re-examine the way we train advisers. The training has to be targeted to the role. Other than technical training, most training is still sales training – how do we get someone to buy more of the product I want to sell? That’s fine for the ‘product expert’ but not for the ‘wealth strategist’. The need there is more around helping the client and the adviser to understand the deeper issues and the ‘sell’ is the life journey.”

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