Investor protection? That horse has bolted

Reading the headlines last week about the collapse of Trio Capital and calls for compensation is once again shutting the gate after the horse has well and truly bolted.

I wonder how many of those self-managed super fund (SMSF) investors understood two vital pieces of information: the risk they were taking with their money, and the commission their adviser stood to earn from their investment.

The risks of investing via managed funds are not limited to the risk of the end asset held failing to perform as expected. Investors also need to understand the risks they take on when handing their money over to a fund manager to manage.

There are many roles in such a relationship, often performed by different organisations – from custodians to fund managers to financial advisers. All have a duty of care to the end investor, although for some this seems to get lost in the day-to-day bustle of “high finance”.

In the end, investors need to know that the people looking after their money are qualified to do so, are ethical and have investors’ interests as their prime focus.

With Trio, I understand that advisers could have received a commission of up to 4 per cent of initial (and subsequent) deposits, plus up to a further 1 per cent per annum on the invested funds.

Here’s an example: on a $100,000-superannuation investment, the adviser could receive up to $4000 upon placement of the investment and then continue to earn up to $1000 per annum as an ongoing commission. How many of the Trio Capital investors knew and understood these numbers?

Did they receive services from their advisers that related to the commission paid? And, the big question in my mind is – would those advisers have placed their clients’ money into Trio Capital if there were no commissions on offer?

The Financial Planning Association Code of Professional Conduct, which incorporates the Code of Ethics, states as its first principle, to “place the client’s interest first”.

Financial planners have an obligation to their clients to ensure their investment recommendations are based on sound research and will meet the objectives of the clients. What research did advisers perform on Trio, especially when the responsible entity was changed? Did they understand the risks to which their clients’ funds were exposed?

This sad chapter in history will hopefully be the last with new legislation coming into play from July 1, 2012, under the Future of Financial Advice reforms, banning financial advisory firms from receiving commissions or kickbacks for product-related advice.

My heart goes out to those who have lost so much hard earned money in this failed scheme and it highlights again the importance of understanding your investment.

Chris Morcom is director and private client adviser at Hewison Private Wealth

Note: A recent poll conducted by PPO found a third of readers believe nothing can be done to prevent scandals like Trio from occurring.