Future Funds Blog

June 2014 report

Ascend 7 - Monday, July 14, 2014

After a great run, the Australian sharemarket (ASX 200) dropped away at the start of June and then semi-recovered towards the end of the month, to finish down by 1.8% for the month, but still up 12.4% for the full financial year. The ASX 200 Accumulation index earned 17.4% for the year, meaning that the top 200 stocks in Australia paid an average 5% dividend yield for the year - a fascinating result compared to term deposits! At the same time international shares inched forward in unhedged funds (0.4% for the month), but 1.6% for Hedged funds. The Australian dollar has continued to trade in a very tight band between $US 0.93 and $US 0.95 for the last several months, but overall it's fair to say that International Shares have outperformed Australian shares over the last twelve months regardless of whether you use hedging or not. My suspicion is this will continue to be the case for the next twelve months too.

Not unsurprisingly, the Reserve Bank again kept interest rates on hold at 2.5%, but the tone has once again changed, back to a slightly gloomier outlook for the Australian economy. This means rates might stay low for even longer. All in all though, the results for the last year have been quite good and we are very happy with the performance of the 5 Future Funds model portfolios. We will summarise the results for the portfolios next month, but you can see for your attached report how you have personally gone.

The big news in the last 4 weeks has been the belated mea culpa by CBA in relation to several of its advisers. As this is all pretty close to home, I thought I'd take some time to discuss this a bit further.

Following a Senate Inquiry looking into the performance of ASIC in relation to its oversight of financial advice, it became apparent that CBA had been less than diligent in its own oversight responsibilities, and, in all likelihood, this lead to additional loses by its affected clients. It begs the question, what did that bad advice look like, and what should have been done that wasn't?

In the first instance, there was the case of Don Nguyen, a CBA branch planner, who apparently lost his clients literally millions of dollars. It appears this happened because he was placing up to 100% of the funds of those unlucky enough to meet him into Listed Property funds. He apparently did this because Listed Property had been the best performing asset class leading up to 2008 (and subsequently the worst through and after the GFC). The real question is whether he may have been "incentivised" by bonuses or other rewards to skew his recommendations so dramatically. It appears that he forged or altered client's risk profiles to show most clients he met were rated as "Aggressive", and hence able to put 100% of investments into more volatile investment options such as the Listed Property Funds. Obviously this goes against investment rule number one of not having your eggs in one basket, but CBA's clients obviously trusted what the adviser told them. CBA's failure here was that regular audits alone should have picked up this blanket approach to risk profile outcomes and investments, but it appears they didn't want to upset a "productive" adviser. A simple check of his clients paperwork would have identified the inconsistent signatures and identical question responses.

In the second case, a Queensland based Financial Wisdom adviser Rollo Sherriff was encouraging clients to engage in investments that were very similar to that used by Storm Financial. That is, getting retirees with ample existing assets to borrow against their homes, and invest even more money into the sharemarket. Whilst that might be sensible for a working investor with an appetite for risk, it's an inappropriate strategy for someone with no income, and a shorter investment horizon. When the GFC hit, unsurprisingly the aggressive gearing he used caused huge losses. What's really disappointing about this case is that the adviser was expelled by the FPA in 2006, but again as a big producer, was kept on by Financial Wisdom, on the grounds that his supporting paperwork was fine. Again, there was no appreciation by CBA of the increased risks he was generating for his clients unnecessarily. He was eventually sacked in 2010.

CBA's response to the Senate Inquiry findings has been to offer every client of Commonwealth Financial Planning and Financial Wisdom, in the last 10 years, the ability to have their advice reviewed. The details are here;


CBA CEO Ian Narev said "The events considered by the Senate Committee occurred during the Global Financial Crisis, at a time when most people, even when well advised, were losing money on their investments. The matter of how to compensate affected customers was complicated. Our principle was to put customers back in the position they would have been had they received suitable advice. We have already paid $52 million in compensation to more than 1,100 customers of specific advisers who were identified as having provided poor advice."

Ian Narev also said that he expects further compensation payments to be "insignificant" to CBA's financial result, which probably should be translated as CBA believing they have now dealt with most of the problems (so why hold an "open review" other than for appearances, you might well ask!). The biggest gripe most observers have had with the whole CBA approach is that they appear to be calling into question the advice of 99% of their advisers who have provided solid advice, rather than acknowledge their failings as identified by the Senate Inquiry i.e. providing a timely response to received complaints and fully compensating the affected, rather than attempting to barter them down in corrective payments.

As part of the chorus of responses to the CBA announcement, the Financial Planning Association ('FPA") pointed out that using an FPA member improves your odds of getting good advice, but it's not absolute - only 7% of ASIC cases in the last 5 years involved FPA members. If your adviser is a Certified Financial Planner (CFP) and an FPA member, then that adviser has had less than 1% historical likelihood of providing of negligent or illegal advice. As an FPA Member since 1999 and a CFP since 2002, I'm required to abide by the FPA's Code of Ethics ( http://fpa.asn.au/standards/fpacode/ ) - an appropriate guiding light for anyone that wants a long term career giving financial advice and has their clients best interests foremost.

As I pointed out last month, we were quite disappointed with the underlying sales culture we saw growing at Financial Wisdom. In retrospect, our decision to depart has been vindicated by what's turned up through these enquiries. I suspect that CBA's belated apology and open review won't be the end of it because they haven't dealt with their own oversight failures. The biggest irony out of all this though is that the original target of the Senate Inquiry, being ASIC, seems to have dodged most of the flack despite their role as the final overseer of investments in Australia.

Ultimately, we know that working carefully and appropriately with clients can lead to big improvements in their financial outcomes, and that regular reviews of those plans and the broader state of affairs is paramount to keeping the positions they have achieved healthy. Hopefully you agree!

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