financial planning - in australia
how do you know what you really own ?
how do you find an unrestricted AFS licensed advisor ?

Much of the information contained in this lesson is not generally known by the investing public.
The paper contains information drawn from a variety of sources available in the public domain. Full citations provided.
Each item, while important individually, may not have much significance. But collectively they tell a different story.
We leave you to draw your own conclusions. We hope it helps.

financial advisers
There are 45,000 "financial advisers" in Australia of whom less than 1,000 hold AFSL licenses.
The remainder are registered representatives of licensed holders. Many of the licenses are restricted.

the distinction between "planners" and "advisors"

Providing financial advice in Australia requires an AFSL (Australian Financial Services License) which is administered by ASIC (Australian Securities Investment Commission). According to ASIC, as at August 2009, there are 4600 licenses on issue, many of which are restricted. According to Jo-Anne Bloch, CEO of the FPA (Financial Planning Association) there are 900 fully licensed Financial Planners in Australia with unrestricted licenses. A license holder can appoint an employee as a "registered representative". There are 45,000 registered representatives who are classified as "financial advisers". This creates a distinction between Financial Planners and Financial Advisers.

How would you find one of the 900 unrestricted fully licensed operatives?

Three subsidiaries of Great Southern Plantations obtained restricted licenses and duly appointed 350 advisors as authorized representatives.

Storm Financial
Great Southern Plantations

common characteristics
In each of the above disasters, a shared characteristic has been the Financial Planning industry pouring $ billions of clients money into the schemes. And losing the lot.

SoA - statement of advice
AFSL licensing requires a Financial Planner to provide the client with a "statement of advice" in writing. It "should" be appropriate to the clients circumstances. It is a document capable of review by any other finance professional or practitioner. A copy should be kept in a safe place.

the best advice ever seen
The following from two articles by a New York Times Finance columnist who got suckered.

articleNY Times
articleNY Times

If you require financial advice then :
• go to a fee-for-service financial advisor and obtain written advice or a written plan, then
• go to an accountant and have it reviewed for soundness, then
• go to another fee-for-service financial advisor and get a second opinion, then
• execute the plan yourself, and
• never allow the advisor to implement / execute / invest for you.
• never give the advisor signing authority on your behalf
You won't see this type of advice from the industry in Australia. Or the financial media.
In 10 years I've never seen anything come close to it.

this article has disappeared
• Shop around. The first 1 hour consultation should be free.
• Interview a number of financial advisors.
• Don't pay a fee for this as it is interviewing the services offered, not asking for financial advice.
• Check the adviser is licensed. (Check with ASIC:
• Ask for a financial services guide. (This should outline their services, and fees)
• Ask if they are independent and not a member of a dealer group.

set up fees
A Financial Advisor may seek to charge an initial set-up fee. Don't. A set up fee applies only to the proposition the Financial Advisor, having prepared a plan as per the preceding paragraph, will then implement it, and then manage it. If faced with this proposition, re-read the preceding two sub-headings, and begin again.

multiple practitioners
It is not uncommon for women to consult multiple medical practitioners for particular purposes : a general practitioner for general requirements, a gynecologist for female issues, and a medical practitioner specializing in preventative medicine. A colleague once used three different law firms. One for family law, one for estate law, and one for business requirements. Now most of the larger professional practices, whether medical, legal, or accounting, have separate departments specializing in each area.

The Superannuation Highway
[source] alan.anderson [business spectator]
The Superannuation Highway has an on-ramp at the start, no off-ramp, and multiple toll-booths clipping ticket every step of the way. In one sense the Financial Planner is merely the last toll-booth at the end of the chain, whether they be a member of the Association or not. The fees versus commissions issue is down towards the bottom of the ladder in this debate. The industry as a whole should divulge all tolls, not just the last toll. If a member of a superannuation fund received a quarterly statement showing total fees clipped from their ticket they might wake up and start to take control.

SMSF - self managed super funds
If your SMSF was set up by and is administered by a Financial Planner, then
• do not use the in-house accountant to prepare the accounts, and
• do not use the in-house auditor to prepare the audit
• use an independent auditor to prepare the accounts and perform the compliance audit.
• use an independent auditor to conduct a balance sheet audit once every 3 years. Or as desired.

legal action by authorities
In the last 2 years ....
In America there have been at least 50 arrests of prominent people and charges laid for financial fraud. In NZ the Serious Fraud Office and regulatory authorities have made approx 10 indictments for financial fraud. In Australia there have been none. You can't rely on the regulators. You need to take protective measures yourself.

smsf audit merely a statement of tax compliance
[source] reproduced from
The purpose of an SMSF audit is only to determine whether the SMSF has followed the tax department enforced SMSF rules, it has no other legal requirement. The standard government produced SMSF audit report template, that the auditor must report on, that the only certification required of the auditor. Whether the transactions are fictitious or not doesn't matter, so long as the tax compliance is valid.

Many financial planners employ in-house accountants who register with ASIC as compliance-auditors. It is probable they are tax-specialists and not audit-specialists. The prospective client should interview the compliance-auditor and determine their qualifications and what range of service they get for their audit-fee.

fraud and the auditor
An important lesson for the auditing profession has arisen from the Bernard Madoff Securities fraud in America. In that instance Madoff produced monthly statements that were fictitious. Today most people will have been on the receiving end of sophisticated email scam / spam using authentic logos and letterheads inducing people to believe they are communications from banks. Right now it is not too hard using modern desk-top publishing to produce authentic looking bank statements or brokerage statements or any other securities statement. In the hands of a (bad apple) financial advisor (with signing authority over a clients account) who finding themselves in strife, are likely to swindle their client (because they have the means to do so). This now provides an increasing responsibility for auditors who will need to verify (vouch) the existence of every financial asset. They can no longer rely on a bank statement or a broker's statement. They can no longer rely on the representations of the financial advisor.

fiduciary responsibility
source: Yahoo Finance - Ben Stein - 30 June 2009
The investment advisors who funneled millions into these investment accounts should be held to account. They have a fiduciary responsibility, meaning they have to put the client's interest ahead of their own, do stringent investigation (i.e. due diligence), and avoid even the appearance of conflict of interest. Clearly, in many, many cases, none of these requirements were met.

[source] reproduced from
Westpoint was not a "public company" thus not required to publish audited accounts. So how would your balance-sheet auditor verify the asset existed. They couldn't. In the 1990's there was the case of the National Safety Council ("NSC") which claimed it had $300 million of assets stored in containers around the country. Those containers were the bulk of the balance sheet. The auditors never checked them. When the mud hit the fan, they found empty containers. The assets didn't exist. The same rule applies in the Westpoint case. If there were no audited accounts that the SMSF auditor can point to and rely on, then he/she should have checked himself that the asset existed, especially where a substantial part of the fund is invested in that company. Otherwise, if the auditor cannot verify or satisfy himself of the existence of the asset he should qualify the accounts.

buy and hold - disadvantages
[citation] Institutional Broker [permission obtained]
Every major development over the past 8 years has benefitted proprietary trading by merchant banks and hedge funds. And who do they extract their profits from? Moms and Pops and Super Funds who are restricted by very stiff mandates and who in general are plain vanilla, long/short equity and often long only. (buy and hold strategies). Whereas proprietary desks are like highly agile jet fighters, able to maneuver quickly, at speed, and carrying a variety of weapons in their arsenal. Super Funds are like big, slow bombers. Sluggish, with one type of bomb on board. Buy-and-hold practitioners are fodder to the proprietary-predators.

due diligence
An essential task is due diligence. Whenever investing in a scheme, whether executing the transaction yourself or not, it is essential to research the background of the principals. More especially so if the planner is the executing agent. Two recent high-flying examples involved discharged bankrupts. Bankruptcy is administered by ASIC. Once a bankrupt is discharged the public record is deleted. A cursory search of the internet doesn't disclose the information. One of the few avenues open is to use a solicitor or accountant who can obtain a full credit report. It's not available to the public. There are also credit-reporting agencies available who will do it for a fee.

Search here. Australian Government. Fee $20   National Personal Insolvency Index

how do you know you own it
sourceNY Times
US investors are now questioning their account statements. How do I know it's real.
Tony Guernsey has been in the wealth management business at Wilmington Trust for four decades.
But clients have started asking him "How do I know I own what you tell me I own?".

what has derivatives and trading got to do with all of the above ?, or
what has all of the above got to do with derivatives and trading ?
Professional Fund Managers use derivatives to insure their portfolios. Whenever the market becomes overvalued they sell "SPI200 futures" to lock in the current portfolio valuation. As the market falls, any loss in value of the portfolio is offset by an equal profit of the "SPI200 futures". If the market doesn't correct itself, the futures are simply closed out. The simple reason is the transaction costs of selling physical stocks is high whereas the transaction costs of futures is nominal. The cost of insuring $½ million portfolio is 3 futures contracts with a total transaction cost of $50 to open and close. By comparison, the brokerage cost of selling and re-purchasing $½ million of shares is high at approximately $2000. So high in fact it is a disincentive to active portfolio protection. Few if any Financial Advisors emulate the Professional Fund Managers in this regard.

If you didn't know this you should conduct due diligence and inform yourself.

For SMSF's it is essential to acquaint yourself if you wish to equal or better the average index fund.

We can be consulted on these matters.

not accounted for, or disclosed, or published

In addition to the listed fee-extractors are "custodians" and custodial costs

[sourceSydney Morning Herald 20 June 2009
Ever wondered why your superannuation account barely seems to register a rise when the share market is booming but suffers catastrophic losses when the inevitable downturn occurs? The answer, of course, is fees.

here's where it gets tricky
When bank customers deposit money in a bank account, the banks have what is known as a "float" at the end of each day. That float is used by the banks to trade the currency markets overnight. Any proceeds are not passed back to the customer. It goes into the banks coffers.

Fund Managers
In the same way as banks have a float, fund managers have a similar float. When they invest super funds in the market, the acquired shares are not held in the individual names of members, they are registered and held in the name of a "Nominee Company". Examine the list of top 20 shareholders of the top 20 companies. The fund managers use that float to (a) lend to short sellers, (b) write covered options, (c) write insurance contracts as described above. They make a motza from it. And the proceeds do not find their way back to the members. That's on top of the fees they charge.

how investment statements should be accounted for







Initial Investment


Aquisition Costs

ie Brokerage

Fund Managers Fees

+ Comissions Paid **

Trustees Expenses

Advisors Fees

- Rebates Received **


Residual Investment


Current Valuation


























As an absolute minimum, during the annual review, insist on "viewing" the underlying source documents that substantiate the annual statement.

nb: Commissions paid by Fund Managers and Rebates received are compensating amounts. Disclosure assists in the evaluation of costs.

UK based FSA bans commissions
In June 2009 the UK based Financial Services Authority proposes banning commissions altogether, effective from 2012. There will be two categories of advisor. Independent and Restricted. The restricted category will be any advisor employed by a bank or insurance company. A key reason given for the proposals was all cases of fraud involving financial advisors were commission based advisors.

there is a problem
there is no lobby group representing the consumer.
The past twelve months has seen considerable debate the financial advice industry seeking solutions how resolve the conflicts of fees. The main driver has been the Joint Senate Committee conducting enquiries into (a) Financial Products and Services in Australia, and (b) The Governance, Efficiency and Operation of Australia's Superannuation System.

We have examined the Terms of Reference of the enquiries, the submissions, and the transcripts of the various enquiries.
The interesting features were :-

all of the submissions are from the "majors", the Fund Managers, the Lobbyists, identified as the "Key Stakeholders"

The following is a list of "Peak Bodies" or lobbyists
Association of Super Funds Australia - (ASFA)
Australian Share Lenders Association (ASLA)
Australian Masters Securities Lending Association (AMSLA)
Australian Council of Superannuation Investors (ACSI)
Australian Financial Services Association (AFSA)
Investment and Financial Services Association Limited (IFSA)
Australian Financial Services & Securities Dealers Association (AFSSDA)
Finance Industry Council of Australia (FICA)
Australian Financial Markets Association (AFMA)
Association of Superannuation Funds of Australia (ASFA)

The one discrepancy is there is no lobby group representing the consumer side of the debate.

no solutions so far
Much of the debate so far has been around the fee structures and recommendations for banning commissions. There has been no debate about the Licensing system and the lack of distinction between Unrestricted and Restricted licenses and the ability of one license holder to appoint many representatives who are then held out to be Financial Advisors.

the real problem
The real problem in the Investment Funds and Superannuation industries is the common identity of both the Product Providers and the Fund Managers. The Banks are the main Product Providers and Fund Managers who in turn own the major insurance companies. These "few" organizations control 80 percent of the total funds under management. Who in turn employ the majority of Financial Advisors as Authorized Representatives, appointed under a handful of Licenses. The Financial Advisors are employees of and paid by the Fund mangers. They do as they are told.

doctrine of separation of powers
The doctrine of separation of powers needs to be applied.

The problems will not be solved until there is structural and physical separation between each of the three sectors.
Distinction here is made between The Funds, The Trustees, The Fund Managers, Product Providers.
There has been no discussion about aggregation at all. The Lobbyists are controlling the debate.
If "separation" of the sectors was implemented, the "advice" problem would disappear and merely become one of regulation.

the fall guys
By focusing the problem on the methods of remuneration and commissions, the lobbyists are clouding the issue with misdirection.
The financial planners and financial advisors are being set up as the "fall guys"

they're slowly catching on
SMH 13 November 2009 Michael Pascoe states "My inside source reckons the only way Cooper can remove the rampant conflicts of interest would be by breaking up the vertically integrated manufacturers, administration platforms and distribution networks."

Business Spectator 12 November 2009 Alan Kohler states "A further necessary change that's needed to avoid the unintended consequence of massive industry consolidation is for the big integrated players to be broken up."

Through the eyes of a derivatives trader / educator / forensic accountant / economist.

I'm not a registered financial advisor, therefore I'm prevented from giving financial advice. My field is influenced by the investment industry. I come in contact with the clients of financial planners. I see what's happening on a daily basis.

The following are some observations

In 10 years the Superannuation Industry has grown to $1 trillion and the Financial Planning industry has grown with it. Some recent financial failures involved financial planners. When major failures occur, the news media are all over it. Announcing the event and how much is involved. Then it disappears off the radar. No investigative reporting. No details of how it happened. No news outlet follows the event through to its conclusion. The print media is dying. Financial journalism is dead. Victims are left to wonder what happened. The means of obtaining information are disappearing. The distribution of information is concentrating into the hands of a few. How can investors better inform themselves and learn from these mistakes and protect themselves?

To obtain a thorough understanding requires following disconnected articles spread across many publications, over many months. The items presented here have been collected from a variety of sources and assembled to tell a story.

Additional information