Admitting “failure” is not an easy thing to do.

Investing can be high risk and the opportunities for people to misinterpret, inaccurately implement, and over stretch are high.

We are aware of clients who have lost from small to significant amounts of money through all these issues.

One of the lessons taught in our seminars is the need to take personal responsibility for your position in life.  To accept you’ve largely got where you are today, good and bad, through your own actions and inaction and the only way to change your position is to take positive action in a new direction, accepting the risks of those actions and planning strategies to overcome them, then taking responsibility for both the successes and failures those action brings.

It is the only way to succeed or learn.

There is no failure except in no longer trying.

In addition to teaching people how to invest for themselves, in the past our principals, investors and stakeholders operated companies such as financial planning, stockbroking, and funds management where clients were given investment advice. At the time of sale there were approximately 13,700 clients in all areas of the companies that had received advice.

It is important to note that we are not required to give you the following information but do so in the spirit of full disclosure…

At all times our staff were trained to consider the risk profile of the investor, portfolio balance (some high risk, some medium risk and some low risk), future objectives of the clients and their financial position.

Areas where clients lost money included:

  • Venture capital opportunities in high risk companies – 3 companies that we promoted as investments failed to perform and resulted in significant lose of capital compared to the starting investment (approximately 900 clients were exposed to this type of investment);

 

  • Tax Optimised Investments such as Tree Plantations – very few of our clients (less than 20) were exposed to this type of investment – many of the companies promoting this type of investment went into receivership after the government changed the tax rules – our clients still owned their tree lots but in most cases had nobody to manage them, and still needed to pay the loans on them, however they did received 100% of the tax deductions;

 

  • One of our in-house managed fund suffered a technical failure of the mandate that resulted in losses of approximately 40% of the original capital value invested;

 

  • 100% Geared Structured Products – these products were initially promoted as low risk investments because they had built in capital protection.

 

Clients borrowed 100% of the funds to invest and then paid (between 6.5% and 8.5%) interest on the loan for a set period (usually 3, 5, or 7 years).  At the end of the period if the investment had fallen they were protected, if the investment had risen they got 100% of the gain.   The risk to the client was the total cost of the interest over the period of the loan.

 

Due to a unique circumstance (both the share market and interest rates falling simultaneously) these investment became “cash locked”.  In other words, instead of being invested in the market where capital gain and excess income was possible they were invested in cash where the yield from that investment only covered the capital guarantee.  The client had to continue paying the interest with no chance of getting a capital gain or income from the investment .

 

Approximately 1,700 of our clients were exposed to this style of product.

 

In a feat that, as far as we are aware, is unmatched in the industry, we negotiated with the providers of these products, and in the case of the vast majority of them, were able to unlock the investment and get them back into the market.  Due to the performance of the share market most of those finished “in the black” with capital gains, even though the overall outcome was most likely a loss (due to interest payments).

 

Two issues arose:

 

  1. Where the client was unable to continue to pay the interest and had to redeem the investment early – in this case the capital guarantee did not apply and the client would have had capital losses, losses from the interest paid and penalties for breaking the loan early. These clients were dealt with on a case by case basis and if this caused financial hardship were able to ask for and often received financial assistance to deal with the issue.

 

  1. These products were all sold to clients prior to the Global Financial Crisis (GFC) and were originally considered low risk due to the capital guarantee that applied. They were widely promoted and virtually every merchant bank offered some form of them and they were invested in by not only our clients but tens of thousands of others. Post GFC a review of the products retrospectively deemed them high risk due to the complicated nature of how they were invested and the level of gearing involved (100%).

 

This resulted in a number of clients who’s risk profile was low, seeking and gaining compensation through a complaints process.

 

We handled each of our complainants on a case by case basis which included the client having the option of having the case dealt with by the Financial Industry Ombudsman Service.   A small number of clients were compensated for their losses where the investment was deemed to be inappropriate to them at the time of their investment.  Unfortunately just because an investment lost money does not necessarily mean that the advice given was inappropriate at the time it was given, and therefore a client would be entitled to compensation.

Statistically low rate of loss

It is important to state that these investments only relate to approximately 1,700 of our clients (the number of actual clients was less due to many investing in multiple products) with exposure to these products out of a total of approximately 13,000 – ie approximately 12%.

Even then the majority of these clients accepted these failures with good grace as part of investing and appreciated our efforts to minimise their losses.   In pure statistical terms the number of our clients who experienced loss was low and in almost every case it was a part of the acceptable risks they took in their investing profile.

However we accept that even though it was a very small number of clients statistically, these losses represented a significant reduction in their net worth.  We appreciate that for those people, no matter how small a number they were, financial loss would have been very stressful and debilitating and have great empathy for each and every person affected.

For any person that we found, that for whatever reason, the investment could reasonably have been predicted by their adviser as not appropriate for their needs at the time of investing we compensated the client in one manner or another.

The bulk of investments – diversified portfolios of quality managed funds

The remainder of the clients were invested in broad based, diversified portfolios of shares, managed funds, index funds and cash which generally would have performed as well as, if not better than the market.  If the client had held those investments throughout the period they would most likely have performed very well.

This “book” of clients was sold at a very high value reflecting the quality of not only the client but the underlying investments in their portfolios.

Lessons Learned

The lesson that you can take from this as an investors is to only invest in products, shares and funds where you understand what the investment is, what it’s risks are and to remain diversified both in markets and underlying investments.

The remainder of our “failures” can really be summed up by saying that the client exited the investment at a time that resulted in losses rather than holding onto the investment until the market rebounded.

 

This is an unfortunate situation, especially where the client did not heed our advice and acted out of fear or poor decision making.

 

We hope that you appreciate our transparency and realise that virtually every financial services company on the planet had clients who lost money during the GFC if the client realised those losses by selling.  However we also hope that you appreciate that very few of them will tell you of their failures so that you can honestly and accurately assess their performance.