AVOIDING WESTPOINT-STYLE LOSSES
AVOIDING WESTPOINT-STYLE LOSSES
Suggestions from a financial planner.
By Travis Morien, Financial Adviser.
Disclosure: I am a fee-for-service financial planner. These are my sincere opinions.
I'm not sure I agree with Neil Jenman about recommending people get independent legal advice every time they get financial advice.
Lawyers do not have the qualifications to give financial advice; and, also, this would result in a doubling of the fees everyone has to pay for financial advice.
If I tell a client to invest in ABC Super fund, the most a lawyer can do is read my Statement of Advice to check that I have dotted all the legal i's and crossed the t's from a compliance point of view. Have I explained the costs and risks in the way required by the law, disclosed my conflicts of interest properly etc?
Whether or not the ABC Super Fund is actually any good is not a legal matter.
If I had been foolish enough to recommend Westpoint's mezzanine schemes, the lawyer would not be passing judgment into the viability of Westpoint itself, merely on whether the legal form of my recommendation was acceptable.
The central question of whether or not Westpoint was safe to invest in is an investment issue best answered by a financial analyst (or in the case of Westpoint, by a forensic accountant!), not a lawyer.
Knowing that large commissions are paid doesn't necessarily mean the person knows that the product isn't any good (though the odds of this being the case are elevated!) and the legal form of disclosures merely requires that the advisor disclose the commission actually paid. Commissions vary for types of products and there are often different commission structures which make it even more confusing.
The best way to avoid problems with commissions is to rebate them to clients and work on a fee for service basis (as increasing numbers of advisors are doing these days).
I would, however, endorse the following general principles when dealing with an advisor:
* Your portfolio should be diversified.
Beware an advisor who has recommended the whole portfolio be invested in only a handful of products and asset classes, especially if this is irreplaceable retirement funds.
Heartbreaking stories of people who have lost their entire nest egg to Westpoint would not have occurred if people diversified. At most, a high yielding mortgage product should constitute 5 or 10% of a portfolio. No more. Needless to say, if the advisors involved had paid even the slightest attention to the imperative of diversification, the Westpoint fiasco would have been insignificant.
* Products with high yields are NEVER low in risk.
If it doesn't look risky, it is only because you haven't spotted the risk.
Property does not deserve its gold plated reputation as being inherently low in risk; many people have lost a great deal of money in real estate.
The risks are higher than usual for active forms of property investment such as development and renovation, and second or subsequent mortgages are far more risky than first mortgages.
It is a basic principle of finance that borrowers will not pay a higher yield than they have to. Investments which yield more than standard yields are more risky than average.
* Commission based or fee-for-service.
Numerous investigations (such as the ASIC/ACA quality of advice surveys) have found that commission based advisors give poor advice more frequently than fee-for-service advisors.
If you are concerned that commissions are going to compromise the quality of advice, go to a fee-for-service advisor who will rebate commissions back to you.
* Getting a second opinion can be a good idea.
Seeking the advice of another financial planner would be more appropriate than seeking the advice of a lawyer, though this could be quite costly.
Centrelink has a team of specialists called the Financial Information Service or FIS. They are not licensed to give financial advice, but they are able to discuss issues with you and talk in more general terms about the appropriateness of particular strategies.
A FIS Officer ought to be able to spot an obvious flaw like having an entire portfolio invested in loans to a developer.
Travis Morien
Authorised representative and director of Compass Financial Planners Pty Ltd
Australian Financial Services License 286175
http://www.travismorien.com
Phone 61 8 9332 0544
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This article is taken from the Jenman website.
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