The Australian Financial Review recently drew attention to the perceived shortcomings of the financial planning industry in this country. This a subject dear to the heart of Jamie McIntyre, 21st Century Education founder and a long-time critic of the financial planning industry.

About 50,000 Australians are estimated to have lost a combined $2.7 billion after a string of disasters in which financial planners were a key distribution channel. These disasters include Westpoint, Centro Properties Group, MFS (now renamed Octaviar) and margin lenders Opes Prime and Lift Capital.

Financial planners can take at least some of the blame for some of these recent huge financial disasters that have left thousands of people with losses of millions of dollars, in many cases their hard earned retirement savings.

In June 2008 it was announced that a dedicated financial advice team within ASIC (Australian Securities and Investments Commission will seek to increase competition among financial planners and overhaul their disclosure of fees, risks and relationships that may create conflicts of interest.

ASIC is currently suing eight financial planning firms who recommended Westpoint 'promissory notes' with around 4,300 investors standing to lose $320 million. Westpoint paid commissions of 10 percent and more to advisors recommending its 'promissory notes' offering 12 percent per annum, paid monthly. Planners from some of the countries biggest firms flocked in. Almost 400 complaints have been lodged with FICS against planners chasing high commissions who missold Westpoint products. By April 30, 2008, planners have been found guilty in 70 panel hearings.

Centro Properties operates shopping centres all over Australia and in some other countries as well as managing property funds. 15,000 investors in two of their unlisted funds have had redemptions frozen on $3.7 billion of investments.

Opes Prime and Lift Capital were margin lenders who collapsed in the wake of the credit crunch. 2,800 investors are $820 million out of pocket in their dealings with these two companies. Financial planners who recommended these companies received free or discounted loans.

Anyone living on or near the Gold Coast was impressed by the rapid rise of MFS and the wonderful publicity it received in the local and even national business press. Local television even broadcast footage of their Annual General Meeting chaired by former politician and ambassador Andrew Peacock.

In January 2008 MFS lost 70 percent of its capitalisation in a few hours when it was revealed they needed to borrow $500 million to repay a loan. MFS was also behind a $1 billion New Zealand financial planning firm that poured tens of millions of dollars of investors money into three high-risk investment companies that collapsed in the last six months of 2007.

As Crikey.com reported in late January 2008, "...the real calamity comes from the complete destruction of value in the traditional MFS financial services business. A financial institution simply cannot close the doors on withdrawals and survive, as MFS did yesterday to the 10,000 investors in its $770 million Premium Income Fund. And why did those 10,000 investors back MFS? Because it paid huge commissions to their financial planners.

"At its core, MFS demonstrates the huge flaws and conflicts in Australia's financial planning industry. The majority of its directors were Gold Coast lawyers and financial planners who are now getting blown away in margin calls after clearly not following standard advice about risk management and diversification."

Financial planners are one of the most complained about industries in Australia and in 2007 the Financial Planning Association received investigated complaints against 130 of its members.

Around 85 percent of financial planners are aligned to or employed by a bank or large financial institution. Financial planners receive a range of commissions (often unstated, which is a major and ongoing issue) including an up-front fee, which is known to be even more than 10 percent in some instances. They also receive a trailing commission and a in some cases a volume rebate as well as in-kind benefits such as shelf-space fees and discounted loans.

McIntyre says you must understand that most financial planners are not trained at a high level in investing and in most cases they are not successful investors themselves. "If a financial planner is going to show you how to become financially independent, to retire wealthy and to live your dreams one day, then the obvious question to ask them is why haven't they done it themselves."

Investors are now realizing the high price they are paying or have paid in the past for often worthless advice as the appeal of dealing with financial planners wears thin and the spotlight turns on their fees.

Note: Jamie McIntyre is currently authorised to provide general advice and dealing services in Derivatives, Deposit Products, Managed Investments and Securities (ASIC No. 321 315).

21st Century Education have a range of books by Jamie McIntyre available, including:
What I didn't learn at school but wish I had
What I didn't learn from my real estate agent but wish I had
What I didn't learn from my financial planner but wish I had
What I didn't learn from Google but wish I had

These books are available from good bookshops or from:
www.21stcenturypublishing.com.au
Phone 1800 999270
email jmoulton@21stca.com.au