Don’t make this $250,000 mistake…

I really feel for consumers when it comes to choosing an adviser.  There are stories galore where clients have lost thousands of dollars through what I would like to call dodgy investments or just really bad advice.  It could be anything from shiny salespeople selling over inflated property(don’t get me started on this one, I have seen far too people sucked in by the promises of riches only to be hundreds of thousands worse off) to just plain bad advice.

I hear a story at least once a week where a consumer has been taken for a ride and subsequently lost thousands of dollars and confidence in the advice industry has been lost.  I’m not just talking about financial advisers either, it includes accountants and other so-called experts in the advice industry.

I’m not surprised you the consumer is wary of the financial planning industry.  There are however many advisers, I included, striving to change that.

Here, I am going to walk you through a real-life example(names and exact details protected), of a new client that recently come on board and we are currently helping them make a claim against a previous adviser and their licensee to recover around $250,000 that was lost due to bad advice.

We will walk you through the lessons learned and what you can do to protect your self when seeking advice.

The Facts prior to facing the wrath of bad advice…

My client was retired and had his money invested in what we call an Account Based Pension, a tax-free investment that was paying him a regular income to meet his living expenses.  Something that had been set up many years ago and was meeting his current needs.  He was very comfortable with his arrangements.

The client had excess cash sitting around that he wanted to be invested.  He was looking for better than bank interest and had no real need for the capital.

He had been with a previous adviser for many years until he left the business.  In the interim he was introduced to another adviser however that adviser had little contact with my client.

So my client, made a decision to look around for another adviser given he was not receiving any advice or regular contact with his adviser.

Why would you ever want to stay with someone who is not providing you with a service?  Dum on the advisers part as this was a good client to any advice business.

He started looking around and found someone he had known for a while.  On seeing this adviser, the adviser provided advice to change his from his current tax-free structure to a Tax Bond which is taxed at 30%.

He was told by the adviser that the investment structure would be tax-free which was totally incorrect.  But what was he to do, he trusted the advice was the right thing to do, although he felt a little pressure.  In hindsight, he should have asked further questions about the reasons for the change in strategy and the adviser’s experience in this space.

He was provided with a Statement of Advice, however, there were many important pieces of information missing.  I have listed them below:-

• No disadvantages were included in the advice.
• No concrete reason for the change in the product.
• What was being lost in making the changes?
• Why the change was in the clients best interest.

What is a Statement of Advice?

For most who have never sought advice, you would know what this is.  But given the amount of regulation, our industry has the legal eagles require us to provide to our clients a document outlining the advice, the reasons why it is appropriate, how the advice will put the client in a better position, the costs, the strategies or options considered and any cons of the advice or disadvantages of the advice.  To be honest these should be simple and easy documents to read, however, due to the complexity sometimes they are difficult to understand.  We are trying to change that.  Nevertheless, when receiving financial advice from anyone you are legally required to receive one.

In my client’s case, this represented serious flaws in the advice provided by the said adviser.

It didn’t stop there.

As mentioned above the client also had excess cash, over $200k he wanted to be invested.  So the adviser in question advised the client to place it into an investment the adviser was running.  The adviser explained that it was safe and that he would receive regular income from that investment.  He was also told that it was tax-free and would not be counted for Centrelink purposes.  All were incorrect.

And to top it off there was no document stating what the advice was, why it was in the clients best interest and what all the pros and cons were.  Important information my client did not receive that might have changed his decision to invest with the adviser.

Subsequently, we made a phone call to this adviser and in talking to him found out the funds had been invested in a high-risk lending scheme and the money had all gone.  The said adviser was apologetic, however, that was no consolation to my client who now had mounting losses of $250,000 plus.

So, where did it all go wrong?

Firstly, through no fault of my client, the critical information was not given to my client.

As an adviser, by law, we are to act in the best interests of our clients and when giving advice we must consider all pros and cons while ensuring any advice given places the client into a better financial position.

Clearly, in this case, the key information was not given to my client to make the right decision.

He was not told the consequences of implementing the advice, ie that it was a higher tax rate, that he would not be able to invest in an account based pension in the future & that there would be a market impact on the sell down and re-purchase of the investments in the various products.  All of which was not included in the Statement of Advice.

The advice to invest the other $200k, was not given in writing and the risks were not clearly disclosed by the adviser.  Clearly, information that may have changed the decision of my client and saved him from a loss of some $250k.

I suspect also the reason behind the changed investments had more to do with the ability to charge a fee.  We have since found the adviser was no experienced in this area.

We are in the process of pursuing this claim with our client to try and recover some if not all of his lost funds.

What lessons can be learnt from this and how can you protect yourself?

1. Ask lots of questions, by law the advice is meant to be in your best interest, not the adviser.  Ask how is this going to put me in a better position?
2. Ask, what am I missing out on?  Ask what do I lose from making these changes?
3. Always check the fees, if you are paying more make sure it is for the right reasons.
4. Never ever invest money in an investment the adviser is running on the side.  Ie. property trust or mortgage fund.  It is ok if they are running an investment portfolio for which they have a sound investment philosophy.
5. Never ever be pushed into the advice.  You must feel comfortable with the advice been given.  If you feel this way, let the adviser know and if they cannot compromise or come up with something you are more comfortable with I would thank them for their time and depart.
6. Ensure everything is in writing.
7. Rarely are investments guaranteed.  Therefore keep asking until you are comfortable with the answers given.
8. If the adviser is trying to push you into a product the organisation has an interest in, ie bank then you would want to be asking some hard questions about why this is better than what you are in.
9. If you feel that the adviser just isn’t getting you, it’s a good sign that they may not be the right adviser for you.
10. If it sounds too good to be true, then it probably is.

Now, I don’t want you running scared when seeking advice, there are many great advisers out there that truly have your best interests at heart.  It’s a matter of having your radar up and looking out for the points I have listed above.  I welcome the hard questions, it really means my clients are invested in the outcome.

Many Australians shy away from advice, but many also seek advice too late in life when there is little that can be done.  Good advice can really change your life, it can put everything in perspective, help you focus on the right outcomes and literally save you plenty of money in the long run.

Great advice means you get to stress less about money and you have a more certain future and in most cases helps you lead a better life.

My advice, embrace it with caution and never be afraid of asking the hard questions.

Hope that helps.

If you feel someone would benefit from the information contained in this blog, do them a favour and feel free to send it on.

Make it a Great Life!

Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth

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Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at date of publication. This is an online information blog. It does not imply an offering of securities.