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Transparency required

A massive financial planning nightmare well and truly became a reality over the holiday break with the Townsville-based Storm Financial put into receivership. The collapsed company owed $78 million to creditors and left behind wealth-crushed customers, with 700 joining a class action with law firm Slater and Gordon.
Many of the casualties in this tragic crash could have been saved these losses if regulators — ASIC and the past Federal Ministers responsible for administering the industry — had not been asleep at the wheel.
Also, if the Financial Planning Association had a much bigger whip and were prepared to use it to protect the name of their members, there might have been less losers from this sorry saga.
There is a paucity of transparency in financial planning in this country and therefore too many clients of financial planners are left in the dark. Typically the hard questions are only asked when the ‘you know what’ hits the fan. The lack of education and understanding for mum and dad investors were underlined by a story in the Byron Shire News.
Believe it or not, one 68-year old client who lost $3.4 million with Storm, told the newspaper that he “won’t hear a word against the company which set him on the path to economic ruin”.
Copping losses with the stock market down 40 per cent is all part and parcel of being a long-term investor with a solid exposure to the stock market, but I believe Storm overcharged and over-leveraged their clients.
Last year I wrote a story about Storm without naming them for legal purposes but I invited ASIC to contact me as I wanted to spill the beans on what I thought was outrageous.
One woman came to me and asked if I thought a $70,000 charge for a financial plan was right? The plan recommended the sale of properties, margin loans into the stock market before it dived in November 2007 and it also recommended that her husband cash in his defined-benefit super fund. There aren’t many planners who would come at that.
No one from ASIC contacted me. One CEO of a leading financial institution told me he informed regulators about Storm’s practices to the highest levels but he thought he had been ignored.
It has been regulator slackness and disengaged governments that permitted the sub-prime home loan problem, which has been at the core of our financial markets meltdown.
The current main man at the federal Government level is Superannuation and Corporate Law Minister, Senator Nick Sherry, who is promising to make changes to improve transparency in the financial planning industry.
His plan for financial planning includes a national margin lending regulatory regime and  new short-form, plain English product disclosure documents, which will include all fees and charges, including commissions paid by margin loan providers to advisers who sell the product.
There will also be a raft of super changes, which I will look at next week but be warned significant changes are afoot. But what about the big issue of fixing up financial planning so we can stamp out Storm-like problems in the future.
One of the country’s most respected thinkers on super is chartered accountant, Robert M.C. Brown. He has owned a financial planning business and is blunt on failed reforms of the past.
“We can regulate the industry and require disclosure and transparency until 'the cows come home', but the problems will never be resolved until the industry's leadership concedes that remuneration is the principal driver of behaviour  —both good and bad,” he insists. “Regulation and disclosure are necessary, but alone, they will never result in the industry becoming a true profession.”
Brown is not comfortable with financial planners accepting commissions that can sway judgment and he dislikes consumers being charged more just because they have more money, which happens with percentage charges.
He argues industry leaders know he is right.
“However, the consequences of addressing the real issues are unthinkable, because without the controlling and biasing influence of percentage remuneration structures the power of dealer groups and financial institutions will be significantly reduced,” he says. “That's simply unthinkable for most of them, and serious analysis of it is deliberately deflected by reference to the importance of choice, transparency and disclosure.
“All of these are worthy objectives, but they won't resolve the issue.”
In less fiery moments, Brown admits total transparency of how customers are charged and what they are charged is better than what prevails at the moment. He likes an hourly rate for financial planners, just as accountants and lawyers generally price their work, but most of all he wants deception taken out of the pricing for financial services.
“Surely, if the sub-prime crisis teaches us anything, it is that remuneration drives behaviour,” he says. “This is a worldwide phenomenon and it's not isolated to a few rogues in the US. The fundamental problem is the corrupting influence of the financial services industry's structure, not just a few 'bad apples' in it.
“If we cannot learn that lesson from recent events, we will repeat the crisis again and again and again.”

I don’t think all financial planners are tarred with the one brush but we need to pretty up the picture of the industry. 

Published on: Wednesday, January 28, 2009

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