When the GFC hit, like investors worldwide, many of our clients lost money.
Some of our clients were psychologically ready for it – after all we had been predicting a cataclysmic event since the mid 2000’s however we did not anticipate it would come so soon. Some of our clients were genuinely shocked and terrified when it happened.
My firms were not alone in having clients who lost money in the GFC. This sounds a little trite. I only say it because sometimes I felt singled out – like it was only my clients who lost money. People blamed me personally.
I heard stories of heartache and suffering from my clients and when other people in the industry laughed and moved on, I had sleepless nights and health issues, worried sick that we could have done better. It was heartbreaking for me and the stress unbearable.
And here’s the thing – it would have been so much easier for me just to walk away from all this. At any time I could have stemmed my own personal losses.
The Sin of Over Leverage
Fact was, contrary to what most people think happened, we “simply” committed the sin of over leverage, something I regularly warned against in my seminars and books but clearly didn’t heed myself.
To be fair it was easy to do in the heady mid 2000’s when the company made it on BRW’s Fast 100 so rapidly were we growing. I always knew it wouldn’t go on forever, but the timing was bad.
We had committed to 5 floors of office space, and a large debt to fund our acquisitions and growth plans. They drained over $3million a year from our coffers and after the slow down, that was all our net profit and then some.
My CFO came to me straight after the GFC hit and told me to batten down the hatches, fire just about everybody – he suggested I keep just 12 – keep in mind we had 170 staff at that time and we were still advertising for more, and ride it through. I didn’t listen.
To me the GFC presented a world of investing opportunities that I thought would excite our clients – quality shares and property at bargain, never to be repeated prices.
I thought our clients would enthusiastically embrace this golden opportunity but they were bashed and bruised and put their wallets away.
It soon became obvious that the GFC was going to be worse than we thought and we started to have to pay compensation to some of clients which totalled in the millions.
I Could Have, and Probably Should Have, Walked Away
In 2010 I was presented with a choice by my bankers. Personally guarantee the debts of the company and fund the negative cash flow, or have the companies placed in the hands of a Receiver.
Logically, I made a bad choice. I threw all my positively geared assets in with the massively negatively geared business and destroyed my $20million fortune to “save” the companies. It could have paid off, maybe even should have paid off, but it didn’t.
I sold all my assets to keep my financial services companies operating. To keep all the staff employed so that they could look after the needs of our clients. To handle compensation claims where necessary. I put my own money into the companies when their cash flow wasn’t sufficient. I lost far more than those companies ever made me.
Fact is if I HAD walked away the outcome would be almost the same for Freeman Fox – broken up and sold to the highest bidder, but would have been significantly different for me – I would have retained the bulk of my net worth, and I would have avoided the pain of the next three years which turned out to be the worst of my life.
But we did kick some goals during that time…
A number of our investments were “structured products” that enabled the client to borrow 100% of the investment. They were for a fixed term (usually 3 to 5 years) and were capital protected. So if the market went down the clients’ investment was protected.
Yes they had to continue to pay the interest, but they did not suffer any losses from the capital.
Of course the market did go down and those funds became “cash locked”. Fully invested in cash with no chance of recovery.
I spent $2 million of my own money to get those funds in the best possible position after the GFC.
We approached the providers and negotiated with them outcomes that were significantly better than any other firm I know of. We cancelled commission agreements, agreed to forego fees, and committed the resources of the company to call every client involved and explain their options. 94% of the funds were reinvested, and it worked.
All of the funds ended up with a capital gain from that point ranging from 11.46% to 64.45%. The average was 20.95%, with tax benefits offsetting at least some of the interest paid.
I fully understand how draining having to continue to pay interest on the loans could be on your resources because I had committed $7million to investing in those funds and had to keep paying interest despite all my other issues.
But the outcome was significantly better for our clients because of my efforts and the efforts of our team to make it so. Eventually those revenue streams were sold back to Macquarie.
We “only” had a small number of claims go through to the Financial Industry Ombudsman Service at the time I managed the company – less than 1% of our clients. And the majority of those cases (more than 80%) were ruled in our favour.
We pretty much knew going in what the outcome would be because when a client complained we were genuinely concerned about their wellbeing and tried to handle them to the best of our ability with the resources we had.
In the rare case we had made a mistake in our advice we took responsibility and we offered compensation. If not, we tried to explain what had gone wrong and why. We stepped them through it and tried to help them make sense of it. Mostly we succeeded but some clients walked away convinced we had done something wrong even though logically we could demonstrate we hadn’t.
Some of our clients were of the belief that I personally should refund every cent that investors lost but that was a ridiculously high burden not applied to any other person in financial services, Regardless it was well beyond my means even at the peak of my wealth. What I did do is I personally paid the huge Professional Indemnity Insurance fees to ensure our clients continued to have coverage and fund any shortfall from my own funds.
And here’s the thing. Presuming you had been in a position to hold your investments almost all of them would be back in front by now.
And you know what? The majority of our clients, even those who had lost a lot, accepted that, understood their position, took responsibility for their own decisions and moved on.
Emotions Ran High
I was in financial services for over 20 years and my reputation remained intact because we always kept the best interests of clients at heart. That doesn’t mean we didn’t make mistakes, we did. That doesn’t mean I always got it right, I didn’t. But when we did mess up we did our best to fix it.
It’s not an easy business. People’s money is in your hands. And yes, there are winners and sometimes there are losers. People hate losing money and they often end up hating the person they blame for that loss. Emotions run high.
And for everyday people those losses are felt harder because of the time and effort necessary for them to make it up.
My goal of being in the industry was to help people. Of course I did well out of it for years too. I had a great lifestyle and all the trappings that a great company with great profits brings.
But you can’t survive for 20+ years in that industry if you are repeatedly doing things wrong. You just can’t. There’s too much scrutiny, too much compliance.
I hope people will consider the long history of the company, the significant benefit that much of my work did, and the gains that many clients have made following the investment strategy I laid out.
It is heartbreaking to me that any client of mine lost money through any investment in any of our companies. But also many clients have been set up for life using the philosophy I have taught.
It is also important to state that a significant number of our recommended investments did perform in line with or better than the market after the GFC, and many clients have benefited from that.
The markets are now booming again, shares are hitting highs, property is skyrocketing. I hope that everything we taught my clients stand them in good stead to take advantage of and prosper in this new boom.
The Greed of a Few
Around this time 5 Stockbrokers hatched a plan to leave and take all the company’s clients with them despite the fact that their employment agreements prevented them from doing so. Of course the clients were always free to do what they wanted but the staff were prevented by their contracts to solicit them to leave, and that’s what they did, and more. Anybody reading this who owns a business would know how much of a betrayal this is.
Hard to imagine such vitriol was the outcome of a pay dispute. When they came to us only two were even Licensed Brokers, and none of them had more than a handful of clients. We took them on, trained them, gave them access to our client list and supported them with marketing and systems. And they prospered. Two years later they were all earning well over $100,000p.a. each, with a few earning over $200,000p.a. Most people would thank their lucky stars to be in such a great position having walked in with next to nothing.
But no, that wasn’t enough for these greedy guys. They wanted more. You see, we paid them 30% of all the revenue they created but they wanted 50%. They held us hostage. Fact is the company relied on the broking revenue to survive. And they knew it. But instead of agreeing to our plan to phase the change over 12 months they decided to walk out enmass.
They secured huge sign on bonuses (up to $80,000 each) and the 50% commission they demanded with one of our competitors and they timed their move when the company was at its most vulnerable.
They banked on our inability to respond (no staff = no service = no clients) and busily went about telling clients all sorts of fantastical things to get them to move. I was told by one client a lie they were spinning was that we were going broke and they would lose all their money if they didn’t leave. Fact is clients’ money was held by our custodian and we could never and would never access it – it was never in danger regardless of what happened to the company.
They didn’t succeed in taking all our clients but they did get about 1/2 of them. We managed to score two terrific new Brokers who were marvellous and indeed won back a lot of business over the next year or so but our margins were so thin by then a cash flow crisis ensued.
In 2008 we had successfully sued former staff who left in a similar manner gaining compensation for the company for loss of revenue. To protect our shareholders we commenced the same legal action against these former staff.
Since then there had been a number of precedents of companies in similar positions to us winning their suits so, given the water tight nature of our contracts, we had a very good chance of succeeding. The former brokers had a lot to lose and so they resorted to a tactic familiar to many desperate people – lying. They went to the media with fantastical stories of wrong doing, all in an effort to get us to withdraw the legal action against us and make me look bad.
Everybody they approached ignored the story when they heard our side, except one, who ran a negative story accepting their accusations as truth.
It hurt me deeply that, after 20 years in the business, without a blemish, right at the end I was personally attacked and smeared by people I now have no regard for, and, due to the constraints of my contracts I had no personal ability to fight back.
Ironically only my reputation was damaged. Our clients clearly knew it was rubbish, as the company only lost 6 (out of 13,000) after the report, all my friends were unequivocal in their support, and after exhaustive investigations not one regulator found anything to support the allegations. And yet, due to the lasting power of the media there was no vindication.
My reputation was permanently damaged and the former staff never had to face court.
In the End it Came Down to the Weather
Ironically the tipping point came from a highly unexpected direction – cyclones.
Another pride and joy of mine – a multi-award winning island resort in the Whitsunday’s had been hit, along with everybody else up north, with successive cyclones, bad currency exchange rates and falling demand. Many resorts closed, never to reopen, some sold for a fraction of their value, and I simply did not have enough capital remaining to rebuild, so we put it into Administration.
That threw another $7million in “bad debt” on top of Freeman Fox’s position with the bank.
By the end of 2012 after successive hits to the company, and my net worth the writing was on the wall. The bank said, “sell everything and we won’t pursue you personally”, so I commenced the final sale process of my remaining assets to pay down my debt.
By the middle of 2013 only a small part of the business remained – that of the former Financial Coordinators Australia which now held 300 or so clients.
One potential buyer had been “sniffing around” the business for over a year conducting considerable due diligence.
Finally, he made an offer for the company which was acceptable to my bankers.
It was a very strange circumstance. He refused to retain lawyers, refused to listen to my advice about the running of the company and bought the entity of the company and not just the assets (which most lawyers would advise against).
At the time of the sale Freeman Fox was Liquid, Compliant, Insured and Operating as a Going Concern. It’s client base was people all with investments in Colonial First State. In addition the previous business of Financial Coordinators Australia (FCA) was sold with approximately 80 clients with individually managed accounts. My understanding is that FCA was split out from the other asset, was on sold and is still operating.
Frankly, after 3 long years of torture I was happy for the company to be sold and to be done with my bank, who fulfilled their promise and released me from my person guarantees.
And yet it was obvious that the new owners did not know what they were doing. I had agreed to stay on as Responsible Manager for the AFSL to give them a hand but I became so concerned by what was happening I felt it necessary to resign.
I was very much surprised to discover just a few months later the business had been put into Administration by the new owners resulting in ASIC revoking its AFSL and subsequently the business being placed into receivership.
An inglorious end for something that had started out with such a grand vision – “financial freedom for everybody!”
Good bye Freeman Fox – you gave me some of the best and worst years of my life, but you will always be fondly remembered because of the magnificent people, team, colleagues and clients who I met along the way and was glad to be of service to.
And thanks to my dear Dad – it was all because of you!