Four Corners – A Question of Emphasis and Timing!

The recent Four Corners episode on Commonwealth Financial Planning prompted me to write this short piece. I even got sufficiently agitated to make this video

Let it be said that I am not in any way attempting to defend anyone in this article, merely to point out a fundamental flaw in the way the story was presented. In fact, I believe strongly that the advisers mentioned in the story were culpable, that their actions were likely illegal, and that the clients concerned were probably entitled to compensation. My issue is that the reasons for that viewpoint are not the reasons outlined in the story.

Whilst I have no douEmphasisbt that the advice provided to the clients outlined in the story was just plain wrong, and evidence of a flawed advice process, poor oversight by the bank and systemic issues around remuneration, there are a couple of points which in my mind ought to be made in the interests of informed debate.

Despite poor advice, a flawed advice process, and the oversight issues outlined in the story, the fact is that there would have been no story had the clients not suffered loss. In my view poor advice is not just poor because of a negative outcome, allow me to explain.

  1. Timing is everything

Let’s say the clients mentioned (Mr and Mrs Blanch I believe) had approached the adviser in question in November 2007, and he had recommended an investment portfolio consisting of 100% investment in the ASX. I appreciate this is extreme, but will serve to illustrate in the absence of information in respect of the actual investment recommended. Let’s say they invested $260,000 at that time (the amount mentioned in the story). By November 2008, their portfolio would indeed have halved in value as mentioned in the story to $148,941. By March 2009, the story would have been even worse, with the balance now around $140000. This is assuming no draw downs, and does not allow for income generated, just market movement. In the words of the story, half of their life savings have disappeared.

Let’s say the same clients approach the same adviser in March 2009 and make the same investment. The balance of their portfolio is today $396,000.Timing

Does either of these outcomes have any bearing on the quality of the advice provided to the client? Obviously not, but in the second case we may never have heard the story, or if we had, a less well educated member of the public might well be recommending the services of our “rogue planner”. The fact that someone’s investment balance went up or down is evidence of neither good advice nor bad advice, what needs to be examined is the advice process, the justification for the advice, and the degree to which the adviser had the best interest of the client at front of mind when providing it. I appreciate that this is more difficult to explain than simply “Mr and Mrs Blanch lost half their life savings”, but it is the true story which needs to be told, not just the one which is easy to explain.

  1. The full story needs to be told

In the case of Mr and Mrs Blanch, we are told that they had been self funded retirees for more than twenty years, that Mr Blanch had been a school principal, and that they wanted a retirement income of $1500 per month.  What does this mean exactly?

Was Mr Blanch in receipt of the old scheme NSW State Super, whereby he could receive up to 75% of his final salary for life, and was the $1500 per month goal in addition to this? If he had commuted his pension at some point in the past and taken a lump sum, was the $260,000 remaining all that was left? What of the advice he received back then to commute the pension? If Mr and Mrs Blanch applied for Aged Pension even allowing for $260,000 in savings, the monthly payment would be more than $1500, what other assets are involved in the case? There is obviously more information needed, things are not precisely as presented I fear.

In any event, a competent adviser would likely go into greater detail with Mr and Mrs Blanch as to how their lifestyle needs could be met with only $1500 per month, because in my experience, this is hardly enough.

  1. Do the maths

If in light of question 2 above, we assume that what was really meant was that the $260,000 was expected to produce $1500 per month, we can go to the calculator and see what the outcome would be if they just went with cash investments of some sort. Lets say we could get a 4% rate on a term deposit, Mr and Mrs Blanch will have an annual shortfall on their retirement income need of about $8000 p.a. which they will need to fund out of their savings balance. Won’t take long for their savings balance to halve in value, and we have not made any allowance for inflation yet.

The point to be made here is that if the income produced by a retirement nestegg is less than the amount being withdrawn from that nestegg, the balance must fall, its just simple arithmetic. Whilst the halving in value would not have been as dramatic, my calculations indicate that at that rate of drawdown, and with that level of income being generated, Mr and Mrs Blanch would have drawn down half of their nestegg in about ten years, and all of that without the intervention of an adviser.

  1. Take a look at the big picture.

In my view, any adviser who did not recommend Mr & Mrs Blanch apply for the aged pension was just as negligent as our “rogue planner” who recommended some poor investment choices. If we assume as implied in the story that all they wanted was $1500 per month (I dispute this see 2 above) then all of this income need could have been obtained from government support. Why are we even having this conversation?

When planning a revenue stream for a retiree, all potential sources of revenue need to be explored in order to maximise the likelihood of them meeting their goals and to preserve whatever capital they have for as long as possible. Failure to do this means the adviser has just not done his job. Over a long period of time, the foregone income support would far outweigh investment losses.

The actions of the advisers mentioned in the Four Corners story cannot be excused, defended or forgiven. The way in which Commonwealth Financial Planning systemically provided poor advice outside of the clients best interests is the reason why Senate Enquiries and Courts have found against them, but this failing is not as a result of negative outcomes. Poor advice, and a poor advice process can lead to positive outcomes, yet remain poor. Similarly good advice, and a good advice process can sometimes lead to negative outcomes in the short term, because none of us has a crystal ball. What we can say is that is that over the medium to long term you are far more likely to maximise the probability of achieving your goals if you obtain good advice.​

If Mr and Mrs Blanch had invested in 2009, they would likely not have been complaining, but in my view the adviser would still be culpable.

In our business, “Non-Aligned” is so fundamental that it is entrenched in everything we do. This is just one of the ways in which we protect ourselves and our clients from the kind of cultural issues outlined in last night’s Four Corners. We are not aligned to any financial institution. For us non-aligned means we are free to choose those strategies and products which best meet the needs of our clients. If you want to see more about what we mean by non-aligned, check this short video.

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