The financial planning quagmire

Stockholm Syndrome is a psychological process whereby a hostage identifies with their kidnapper, to the point of defending the kidnapper’s reasons for their own capture.

For the past eight years ASIC appears to have been suffering from a similar condition, with only the very public revelation of wrongdoing rather than wrongdoing itself provoking action. Only with the Senate hearing into ASIC’s performance is the regulator emerging from its captive state to see the true state of financial planning at Commonwealth Bank.

The daily revelations of big bank malpractice and regulatory inaction is a real-life horror show. In her work covering ASIC’s investigation into Financial Wisdom and Commonwealth Financial Planning, both owned by CBA, Fairfax’s Adele Ferguson reported on a ‘mystery shopper’ exercise conducted by ASIC in 2007.

Covering 51 randomly selected planners, the advice of 38 of them was rated as ‘critical’. According to an ASIC letter sent to the Tim Gunning, CBA's former general manager of wealth management, in February 2008, the reason for a ‘critical’ rating included ‘fraud and dishonest conduct’, ‘deliberate or reckless failure to disclose fees, costs, charges, relationship and warnings’ and ‘no evidence of appropriate advice’.

Financial correlation

Surely the bank would be keen to rid themselves of these planners, especially as two similar surveys at CBA’s Financial Wisdom’s branch in Cairns and Commonwealth Financial Planning’s Bankstown office in 2006 revealed similar concerns? Err, no. It got rid of just 12 and kept the rest.

The annexures in ASIC’s letter to Gunning give a hint as to why that may have been, detailing cases where ‘the product recommended was more expensive than the client’s existing product’ and ‘the recommended product would cost the client $6,280 more than if he had remained in the existing product’.

Even ASIC put two and two together, stating that there might be a ‘correlation’ between the amount of business that representatives wrote and CBA keeping them on. But ASIC did not pursue the 26 ‘critical’ planners CBA kept on its payroll and on Saturday – a full eight years after it became aware of problems at Commonwealth Financial Planning and Financial Wisdom – Ferguson revealed that nine still work for the bank.

Eight months after the Gunning letter, whistleblower Jeff Morris warned ASIC about dodgy planner Don Nguyen and the bank cover-up of his activities. After substantial prodding, the corporate cop stumbled to its feet and dusted down its excuses.

But for the Senate inquiry, Morris and a handful of Fairfax reporters led by Ferguson, ASIC may well have been happy to let the matter slip. It’s one of the more obvious examples of regulatory capture, one that even former insiders claim favours big business.

Nevertheless, before the inquiry began ASIC head Greg Medcraft was tirelessly defending the indefensible, claiming that ‘recent media reports have tried to cast doubt on ASIC's good work and smear our staff and culture’.

Medcraft should have held fire on the messenger. The Senate investigation reveals ASIC doing a far better job of casting doubt on the quality of its work than even its most aggressive and cynical critics.

Misplaced trust

Fortunately, Medcraft appears to be recognising the nature of the relationship his organisation has with its kidnapper, although in a whiny ‘jilted lover’ kind of way. Here’s Fairfax’s Georgia Wilkins on CBA’s artisanal compensation process and hand-crafted disclosures:

‘In a Senate estimates hearing on Wednesday, ASIC chairman Greg Medcraft expressed his strong regret that the regulator had been misled by the bank over the compensation, which involved $51 million being paid to victims on an unequal basis.

He said the bank had failed to be upfront with ASIC in advising of its decision to change the process. “I think it is fair to say that the level of trust and confidence was misplaced by us”.’

How’s that saying go? No shit Sherlock? If ASIC can’t trust CBA, why should we?

Let’s put these facts together. In 2006, an ASIC survey established concerns with CBA planners. Between February 2007 and 2008, it randomly surveyed another 51 planners, finding 75% of them to be poor in some form or other. CBA ditches 12 planners but keeps 26 of them – who just happen to be good sales performers – on the payroll. ASIC does nothing.

Whistleblower Jeff Morris rocks up after the regulator fails to respond to his initial contact in 2008. It takes a further 16 months for ASIC to act, which doesn’t include telling Morris to claim whistleblower status so he had protection against retaliation and discrimination (although he was told to ‘get out with what you have left’).

CBA appears to have based its compensation on something other than the sums its clients lost and the pain they endured. It misleads ASIC on a number of issues, including the number of claims paid.

Meanwhile, ASIC throws the book at environmental activist Jonathan Moylan, who released a clearly fake ASX announcement. Moylan faces up to 10 years in jail and a fine of up to $765,000. CBA’s dodgy planners continue on their merry way.

Because of his experience, Morris urges potential whistleblowers to ‘think twice’ before calling ASIC. Then, in the face of budget cuts, Medcraft urges more whistleblowers to come forward.

Horror story

You couldn’t make this stuff up. This is movie material, surely, either as satire or horror – the truth is simply too implausible. Year by year, the evidence piled up on ASIC’s desk but it took a Senate hearing for the regulator to realise its trust with Commonwealth Bank was, after many gloriously happy years, over.

Senator Williams summed it up: ‘I'm sick of hearing about people getting their nest eggs robbed. I expect the industry to be cleaned up and I want a regulator that is feared, not a wimpy group of bureaucrats.’ Good luck with that, Senator.

Due to budget cutbacks, Medcraft recently warned that the corporate plod would no longer be ‘on every corner’ and that investors must take more responsibility for themselves. Greg, mate, we knew that years ago. Prove to the taxpayer you can do the job properly and they might give you more money. Carry on like this and you don’t deserve a budget at all.

There’s a nasty combination of issues here. First, Australia’s tax and investing laws are complex. Navigating them requires good advice because investors can’t acquire the necessary expertise themselves.

Second, most planners operate in a sales rather than an advice-driven culture. In fact, the vertical integration of the financial planning industry, where over 80% of planners are controlled by a major bank and many of the rest are associated with AMP, is structured to deliver poor advice.

Thirdly, investors want good advice but have no way of establishing whether they’re getting it, which is why they’re seeking advice in the first place. They think they’re getting advice but are often getting sold to. And ASIC, with its rich history of ineptitude and Medcraft’s latest warning, won’t protect them.

Many Share Advisor members could benefit from good advice but understandably don’t want to enter the quagmire of trying to find it. Which is why on Wednesday we’re going to publish a list of questions for you to put to planners touting for your business. It will help you weed out the crooks and incompetents and give you an evens chance of finding someone you can actually trust, which, really, is the heart of the problem.