Financial Planners causing untold harm to investors

Financial Planning Litigation

“Far too many times in this industry have we seen individuals with little to no actual training – both technically and practically – causing untold harm to investors and by extension to the planning industry,” former Liberal Leader John Hewson said in an interview with IFA.

Words of Wisdom

In a world of over regulation  this is one industry that has been left behind.Financial Planning Litigation

Many financial planners can complete a very short course – less than a week, at times – to give them a “qualification” to provide financial advice. And even more alarming, these financial advisers are exempt from the taxation agent services regime until 30 June 2013 and can give taxation advice.

That means that someone with no training at all in income tax legislation can provide tax advice to unsuspecting clients!!!!! It takes years of study and experience to gain a tax agent’s licence.

Why would anyone accept any advice from a financial planner who has no taxation training, other than a short course in financial planning, and very little ‘real world’ training.

Time and time again, many of these planners are found to be no more than salespeople working for a commission and causing untold grief to their clients.

The Age newspaper published the following article in February 2013:

“What happened at Macquarie was this: there was an internal review of compliance in the bank’s stockbroking unit in 2008.

The findings were a shocker: 87% of the brokers in Macquarie Private Wealth were in breach of regulations and compliance standards.

The findings of the internal audit by the adviser services unit were that some 365 advisers of the 420-strong team coast to coast were in breach of compliance”.

Why would anyone trust their life savings to a “salesman”?

It is my opinion that choosing a Chartered Accounting firm with both qualified chartered accountants and qualified financial advisers would be a no-brainer for anybody in business looking for appropriate professional advice.

My own personal experience from being involved in picking up the pieces after poor financial advice provided by poorly-qualified planners has been nothing short of mind-blowing, and the stupidity of some of the advice simply amazes me.

Over the years, I have come across the following examples in various forms:

  1. Provision of tax advice. Many advisers gave incorrect advice, but one even told the investor that tax accountants don’t usually advise doing what he was advising. Yes, and there’s a good reason for that – because it was incorrect taxation advice which would incur severe penalties if or when caught.
  2. Advice to use margin loans to double your return. One such adviser stated that after 8 years at 9% return per annum, a $400,000 investment would be worth $800,000, despite the following:
    • the cost of borrowings was 8.5%
    • the cost of managing the shares was a client service fee of 1% and a tailored investment service fee of 2% (with a minimum of $20,000 – on a $400,000 loan, this actually came to 5%)
    • The client was being charged 11.5% to 14.5% to make a return of 9%. He was never going to make any money. It was costing him more than he could ever have made! On top of this, there was also a performance fee of 20% of the excess return over 8.75%!!! Many adviser firms charge fees which preclude a profit from ever being made on such investments.
  3. Advice to enter into agriculture schemes with 100% funding. The interest on the funding was 11% per annum, and additional fees to the advisers were staggering; the only person that could ever have made money was the adviser. Most investments do not make 11% per annum return and experience shows that neither do these .
  4. Advice to invest in products contrary to the appropriate risk analysis of the investor. For example, in one case, the risk analysis suggested 5% investment into agribusiness but 100% was allocated. It is often the case that the client’s risk analysis is not actually taken into account when providing advice.
  5. Often, the wrong structure is advised for a particular investment, which has happened in a number of the matters I have been involved in. This is because the adviser does not have the knowledge or experience to provide appropriate advice. Some time ago, I was at a talk for financial advisers where the speaker was advising on tailoring trusts around property purchases, and the adviser next to me told me she was going to advise her clients to use trusts. I tried to explain to her the shortcomings of using trusts for some situations, and that you need to provide advice for the “proper structure” for each client. In many cases, trusts are not the correct vehicle for property – eg if a property is negatively geared, there is no tax benefit in using a trust if the trust has no other income. There are also land tax issues in trusts, but she wouldn’t listen. It wasn’t my problem but was a potential problem for her clients. Trusts are the latest craze, the special ‘secret’ that financial ‘gurus’ use to increase their authority.
  6. Transferring an investment property/holiday home into a superfund. Two people have run this past me prior to taking, or in these cases not taking, the advice. Thank heavens they questioned the advice. Penalties for non-complying superfunds are extraordinary. The adviser also didn’t advise them of the fact that a transfer would cause capital gains tax to be incurred in their own names and stamp duty would also be incurred on the transfer. He didn’t realise that a transfer was a “sale”. At another financial planning talk that I attended, one of the financial advisers at our table, who was the only non-accountant at the table, said that he purchased his home through his superfund, negatively geared it and lived in it!!! He CANNOT do this and will incur severe penalties if caught. I think he thought he was giving us some great advice until he was put in his place by myself and the other tax accountants at the table.

Analysis of financial products needs to be undertaken and by someone who can actually analyse. For example, it was easy to analyse the margin scheme detailed above and note that, whilst the $400,000 may double in 8 to 10 years, the cost would not allow for a profit and was certainly not appropriate for the risk involved. Analysis of the agribusiness would have alerted the adviser to the failings of the scheme.

Another problem is that people do not want to pay for advice. The big players pay large amounts to their advisers because they sell their products – so, in fact, you are paying a lot for the advice, you just aren’t told about all of the fees. While you are advised of the direct fees payable to the adviser, you are not advised of the fees the investment manager makes.

You, the investor, should be able to ask questions and receive correct, well-thought-out advice and answers from your adviser that are not restricted to the limited knowledge of many advisers, or outside their areas of expertise, or outside their range of products.

Should I buy an investment property? Many advisers would say no because they don’t get a commission or bonus on such an investment.

What entity should I use to buy this? A trust – maybe; a superfund – maybe; a company – probably not; a partnership – maybe. Only analysis and knowledge of the client’s whole situation will provide the right answer.

Should I use borrowings to invest? Maybe, only analysis will provide the right answer. How do I avoid someone making a claim against my estate? Properly set up structures can assist.

It is my opinion that only an accountant/financial planner with experience in tax legislation (and this takes many, many years of training, experience and research) with knowledge of your particular business situation, and who is not tied to an institution, can provide proper complete financial advice including structure advice, taxation advice and financial advice.

Get a second opinion if you need one – this is your largest financial asset outside your home and, if you want to retire someday, you need to look after it.

The team at Dolman Bateman is well-qualified, with business and finance degrees, tax agent licences, financial planning diplomas and many, many years of experience.

Manage your own superfund and don’t pay exorbitant fees to platform managers and financial advisers who do no more than sell you their products.

If you have any questions, please call Fiona Bateman on (02) 9411 5422.