Some off self-managed super fund performance data led a client to question her accountant’s “advice”. Mark Story reports on how a referral to a financial planner saved her.
Like a lot of time-poor medicos, the late Melbourne specialist Dr Tyler Noll was infinitely better at making money than knowing how to put it to good use. Several years ago, unbeknown to Tyler (64) and wife Kathy (63), they had become dangerously over-exposed to the family accountant.
As well as previously managing the books for Noll’s former practice, the accountant had also been put in charge of investing the family’s personal finances. Having successfully gained their confidence, he’d convinced them to put all of their personal wealth – comprising around a dozen direct shares, and some managed funds – into a self-managed super fund (SMSF), based on the perceived tax benefits.
At face value, this seemed like an idea they were willing to let their accountant execute. But after three years of trying to decipher little more than the random balance sheet entries he provided, neither Tyler nor Kathy had a clear idea of their net wealth position.
With the SMSF fund balance showing a substantial loss without either a valid reason – especially given the otherwise buoyant (pre-GFC) economy – or explanation by the accountant, Kathy started to smell a rat.
Taking stock
Fuelling Kathy’s suspicions that something wasn’t quite right was a paucity of fund performance data, which amounted to little more than a poorly constructed balance sheet.
“When I mentioned this dilemma to a swimming buddy, she immediately referred me to Michael Burton – her financial adviser for over eight years – for a complete review of the fund,” says Kathy.
At his first meeting with the Nolls, Burton – a former accountant – found disturbingly large and inexplicable discrepancies between one year’s balance sheet and the next. Based on an original investment of $720,000, the value of the Nolls’ SMSF had plunged to $480,000.
On closer investigation, Burton discovered that the family accountant had, over several years, withdrawn more than $300,000 from the fund for his personal use – including trips to the UK to watch an Ashes test match at Lord’s.
“Unfortunately the accountant requested and was provided with – under duress – an authority by the trustees when the fund was established to transact on the account,” says Burton.
As if misappropriation of funds were not enough, it was subsequently discovered that the accountant was little more than a glorified book-keeper working as a contractor for a suburban accountancy practice. And to add further insult to injury, because the rogue accountant had no financial planner’s licence, there were no grounds on which he could legitimately exercise an authority to transact on the client’s behalf.
Vulnerable state
Having placed such implicit trust in an accountant/adviser who was clearly not acting in their best interests, the Nolls had unwittingly ended up in a highly vulnerable position. And given that Tyler was now retired, Burton says the family’s ability to recover from lost savings looked grim.
To further complicate matters, adds Burton, the Nolls’ four grown-up dependents – all with varying degrees of disability – also needed to be provided for financially. Much of this was expected to be provided for via a lump sum benefit from a death and TPD insurance policy taken out by Tyler some years earlier.
Prior to Tyler’s death, a claim was made on the TPD policy of $690,000 that was subsequently contributed to superannuation as a non-concessional contribution – with $450,000 vesting to Kathy and the balance of $240,000 to Tyler’s member account.
Covering expenses
Following lengthy ailments caused by post-war trauma and exposure to chemicals while serving during the Vietnam War, Tyler finally died in 2009. At the time of his death, the Nolls had been living on a Department of Veterans’ Affairs Sickness Benefit.
Once that stopped, Kathy had to find $60,000 to cover the family’s annual living expenses – which included taking care of her elderly mother.
“Following Tyler’s death, I needed to ensure that Kathy’s cost of living requirements were provided for in the most tax-effective way,” says Burton.
In the normal course of events, he says, the SMSF would have been quickly closed following Tyler’s death – especially as Kathy had no understanding of her responsibilities to the fund as its sole remaining trustee. However, Burton suggested that the SMSF remain open – albeit under a newly appointed accountant – for the express purpose of recovering lost money.
Pay-back time
No fraud charges were ever laid against the former accountant; but after 18 months of investigation and legal action, Burton finally managed to recover the entire $350,000 stolen progressively from the account, together with interest. He also tried to claim against the employer’s professional indemnity (PI) insurance policy, but unfortunately the accountant had no PI cover.
“We were over the moon to finally have [our] lost funds recovered, as we never expected to see them again,” admits Kathy.
To ensure that the fund could maximise tax-free benefits to the children, $210,000 was withdrawn from Tyler’s account and recontributed to his account. Kathy’s balance was now $865,000 and Tyler’s account balance was $655,000.
New strategy
At Burton’s instruction, the SMSF fund was finally closed, and the managed funds were cashed-out before being reinvested – after considering Kathy’s risk profile and objectives – in the rebadged Lachlan Wealth Management – Super and Pension Wrap.
As Kathy neither wanted to be directly involved in investment decisions nor had the necessary knowledge or confidence to do it competently, Burton says it made sense to give her the diversification – including small-cap, large-cap and international exposure – that a multi-manager approach could offer.
Given the Nolls were comfortable with quality “blue chip” fully-franked stocks, which were held in the self-managed super fund, this basket of ASX-listed shares was transferred to the wrap account structure. Both member balances were then converted to market-linked pension streams, which upon Tyler’s death became a reversionary tax-free benefit to Kathy. A drawing of $60,000 annually would require a return of slightly less than 4 per cent, while maintaining the capital balance.
Future-proofing
Following Tyler’s death, Kathy started coming under greater pressure from son Tony to receive an early death benefit payment so that he could purchase his own residence. But Tyler’s binding death benefit nomination – recommended by Burton, and naming Kathy as the preferred beneficiary – ensured that the payment of the superannuation benefits could not be challenged.
“I also recommended that the trustee of the SMSF be changed from Kathy and Tyler to a corporate trustee to avoid transfer of title on Tyler’s death,” says Burton.
He advised against an early estate benefit payment to Tony, to avoid any inequalities following any subsequent benefit payments to the remaining children. As an alternative, Burton suggested that pension payments be increased and the additional income be used to help Tony and brother John relocate to a more suitable residence.
“If the issue of equality is considered an issue, a loan account could be created on behalf of Tony and dealt with under the equalisation clause of the revised will,” Burton says.
Estate planning
Burton’s next consideration was to develop an effective estate planning strategy which, due to the children’s various disabilities – preventing two of them from working – took on added significance. With the assistance of the necessary third parties, Burton developed an estate plan incorporating legal wills and powers of attorney.
“As they had a very old will, written before they had children, the Nolls didn’t have powers of attorney [either] financial or medical in place,” recalls Burton.
He says it was important not only to maintain but to maximise, where possible, any Centrelink benefits for the children upon the death of both Tyler and Kathy – using Special Disability Trusts and Protective Trusts managed by non-family trustees.
While they are limited in their uses, Burton says Special Disability Trusts do currently provide an Asset Test exemption of $563,000 for the principal beneficiary, provided it meets certain requirements as prescribed under legislation. And it’s the level of disability, adds Burton, that determines whether this type of trust can be used.
“A Centrelink gifting concession [of] up to $500,000 combined is now available for eligible family members of the principal beneficiary,” explains Burton. “This allows assets to be gifted to disabled children without reducing the person making the gift’s Centrelink entitlements.”
Over-exposed
In 22 years of providing financial advice, Burton had never seen a professional couple experience so many unnecessary exposures across so many facets of their lives: Professional negligence, accountant fraud, children’s permanent disabilities, terminal ill-health, insufficient consideration to effective estate planning, and no understanding of superannuation law or their duties as SMSF trustees.
“While Tyler had been the strength behind the family, his illness had allowed their former accountant to take advantage of the situation and fraudulently withdraw substantial amounts of benefits from the member accounts,” says Burton.
He says the degree to which the Nolls’ four disabled children relied on their remaining parent for financial support only accentuated the importance of estate planning, which had been so comprehensively overlooked.
Equally important, adds Burton, is the need to address estate planning matters while the parents are in a fit and compos mentis state to do so rationally.
“With Tyler not deemed to be of ‘sound mind’ when a new will was signed just prior to his death in hospital, a previous one written some 15 years [earlier] had to be reverted to,” says Burton.
Family affair
On reflection, Burton says his role as financial adviser for the Nolls was as much about managing financial performance as it was about addressing immediate and longer-term family needs at a more holistic level.
“We deal with a lot of medicos like Tyler who are running so fast with their careers that even the most perfunctory tasks relating to their personal/financial affairs are often neglected or charged to third parties,” says Burton.
“Without adequate scrutiny, this makes them easy prey for those who plan to take advantage of the positions of great trust placed in them.”
As a planner, Burton could have limited his involvement to the financial performance; but he felt it was his responsibility to the client to attempt to recover stolen funds. The Nolls were not in a position to take the former accountant to court, due to Tyler’s medical condition. But Burton says the threat of legal action, and potential damage to the accountant’s reputation in the community, was sufficient leverage to have the stolen funds fully repaid.
Relationship management
Once Kathy’s financial dilemmas were successfully dealt with, Burton says it became clear that what she valued equally was having a mentor to help tackle life’s unexpected hurdles. As a case in point, to relieve the burden of managing her health, Burton recommended that her mother, now 92, be cared for within a nursing home.
According to Kathy, it gave Tyler considerable peace of mind, knowing that Burton would be there for her after his death. And as Burton was a part-owner in Lachlan Partners, Kathy says Tyler also took comfort in the fact that she wouldn’t subsequently be lured to another planning firm.
“As I’m so busy with family, I’m not really savvy with money, and so I completely trust and rely on Michael’s advice,” says Kathy.
Burton is convinced that those planners who bother to forge deep and meaningful relationships with clients will ultimately succeed in this business.
“It’s a matter of being able to discern the situation and provide the best possible outcomes,” adds Burton. “To do that, you need an intimate understanding of financial planning, and know when to bring in someone else.”
THE PLANNER
Michael Burton
Director, Lachlan Partners, Melbourne
An authorised representative of Lachlan Partners, Burton is a Certified Financial Planner, Certified Practising Accountant and member of the Institute of Chartered Accountants of Australia. A founding member of Lachlan Wealth Management when it was established in 2004, Burton gained an initial exposure to strategic financial consulting in 1990 when he joined Bain and Co (later to become Deutsche Bank Financial Planning), after a 15-year career in various accountant positions. He specialises in building, protecting and maintaining the wealth for predominantly high net-worth clients in the greater Melbourne area.
Advice structure
Lachlan Partners offers five primary service lines: Wealth Management Accounting; Tax and Audit Services; Business Advisory; Property Advisory; and Personal and Business Insurance Advisory, all in a strictly fee-for-service environment. In addition to a set rate for an initial consultation, fees are based on both funds under advice (FUA) and the volume and complexity of advice required. Having concluded early in his professional career as an accountant that fee for service is more honest and transparent, Burton was keen to adopt this model for Lachlan Partners from day one. Any remaining trails are refunded back to clients, together with GST.
History
Feeling decidedly out of his depth, the accountant responsible for establishing Tyler and Kathy Noll’s SMSF three years earlier finally recommended that they bring in a financial planner to help identify some appropriate income-bearing asset classes. It was a swimming buddy of Kathy’s who, in 2006, subsequently recommended that Burton be charged with sorting out their financial affairs.
Strategy
Before making any recommendations, Burton’s primary goal was to provide the Nolls with an accurate assessment of their overall financial position. Given that an initial evaluation suggested every facet of the Nolls’ financial position had been decidedly mismanaged, much of Burton’s initial strategy was based on: Rectifying their SMSF fund and its associated tax issues; identifying how Tyler’s substantial death and disability insurance cover should be appropriately administered following his passing; and putting their estate planning back on a sound footing.
