Question: How to compare the price of a client-centred fee-only financial advisor with the “free” services supplied by a broker?
Answer: In the second instance, the bill comes much later and at potentially far higher cost.
Pursuing sales people masquerading as advisors has been a major focus in the past year for the Australian Securities and Investments Commission, a watchdog which shares this column’s view about the risks of investing “outside the flags“.
In one of its most high-profile recent actions, ASIC instigated court proceedings against the promoter of a fraudulent investment scheme that robbed hard-working Australians of more than $100 million in retirement savings.
Shawn Richard pleaded guilty to two charges of dishonest conduct and a third of making false statements in his role as investment manager of the Astarra Strategic Fund and its associated retirement savings plan. 1
The two funds invested money raised by a company called Trio Capital in a complex hedge fund-of-funds product in the British Virgin Islands via Hong Kong. These funds were in fact a scam in which payments were siphoned off to related parties, including Richard himself—who received $6.4 million.
The Astarra Strategic Fund allowed investors with as little as $1,000 to invest in its vehicle, which curiously had reported only three months of negative returns since its inception in 2005 until its wind-up early in 2010. This included the period of the global financial crisis. Planners were paid a commission of up to 4 per cent up front for tipping their unfortunate clients into this fund.2
ASIC has not only been cracking down on outright fraudulent financial investment schemes. It also is increasingly vigilant about otherwise legitimate operators who it finds fall short of the high professional standards of advice it sets for licensees.
In recent weeks, the commission accepted an enforceable undertaking—an agreed action enforceable by a court—from Australia’s largest independent financial planning network, Professional Investment Services or PIS.3
The regulator was concerned that PIS had failed to comply with several of its licence obligations in areas such as training advisors properly, maintaining risk management systems, keeping proper records and dispute resolution.
Only last year, ASIC reached a private settlement with PIS on behalf of 247 investors in the failed property scheme Westpoint, which borrowed from small investors to provide high-risk mezzanine finance to residential property developments. The company collapsed in 2006, owning hundreds of millions of dollars. Financial planners promoting the scheme were paid commissions of up to 8 percent.
In each of these instances, ordinary people were poorly advised, often by glorified salespeople whose interests were aligned with the product providers paying them, not with the customers they purported to represent. The ultimate price paid by the victims of these schemes was much greater than the fee they would have paid to a client-centred advisor working for them.
The global financial crisis was a painful episode. And no-one can guarantee that markets won’t go down again. This is the price paid for investment risk, the flipside of the returns seen in the good times.
But there is simply no need to risk one’s hard-won financial capital by trusting in facilitators and salespeople who masquerade as advisors, who do not meet the high standards of the planning profession and who put the client’s interests last.
That’s the price of bad advice
Article provided by Jim Parker, Vice President, DFA Australia Limite