A letter sent by Queensland-based Storm Financial to its clients has raised industry eyebrows and revealed the group’s client base may be under increasing threat of margin calls.
The correspondence to clients, which Money Management has obtained a copy of, prompted financial planning industry figures to question whether the group’s advice is tailored and customised to client needs and objectives.
Storm Financial has made no secret of its strategy, which is to encourage the use of debt, or margin lending, to ‘optimise’ its clients’ personal balance sheets.
The group has grown substantially by acquiring financial planning practices along the East Coast, before “converting” the firms’ existing clients (many of whom have no previous exposure to geared investments) to the “Storm model”, according to its prospectus prepared in anticipation of last year’s failed float.
The Storm model sees clients geared into Storm-branded indexed products developed in conjunction with Colonial First State and Challenger, with clients paying fees of around 7.5 per cent.
This strategy appeared to work well during the recent bull market, with the group claiming it has a higher volume of profit per planner than any other group in Australia. But a dramatic fall in investment markets has led the group to advise clients to switch to cash to avoid margin calls.
The letter, dated October 8, and signed by Storm Financial executive chairman and joint chief executive Emmanuel Cassimatis, stated that with markets “moving speedily downwards É we now find that it may be necessary to recommend that you switch up to 100 [per cent] of your portfolio to cash”.
The group said this action was required to avoid clients having to dispose of assets or sell down assets to reduce debt.
Storm said its strategy to avoid margin calls would “keep you in the game and still standing through this crisis”.
“Whilst not perfect, nor without risk, we believe it contains less risk than leaving you open to [the potential of a margin call],” the letter stated.
Storm said it would monitor market movements closely so cash could be “switched back into equities to gain from any upswing in the future”.
The letter went on to add that those clients who pre-paid interest on their margin loans could potentially obtain a refund of any remaining interest pre-paid for 2008 in order to reduce debt, at a possible price of “25 per cent of the interest refund amount”.
“In some cases, both of the two actions above may need to be taken,” the letter stated.
The letter said while switching to cash carries capital gains tax implications, “our experience tells us these tend to be neutral” when a client re-enters the market.
The group proposed two additional options: do nothing and risk “permanent, irrecoverable losses”; or find additional security to increase buffers.
Storm said, should markets continue to fall, client options are limited.
The letter alluded to previous correspondence recommending clients switch up to 50 per cent of their portfolio to cash, but nonetheless instructed clients to “please sign this document as well”.
Money Management has sought an explanation from Storm Financial regarding the content of the letter, but at the time of going to print, Storm had not responded to interview requests.
Money Management understands further correspondence from Storm has also been sent following the October 8 letter.
In last year’s prospectus the group said it had 13,000 clients with $4.5 billion of funds and loans under administration at June 2007. It said at the time that 3,080 clients had invested in Storm-branded indexed products, with the remaining clients of firms acquired by Storm “yet to convert to the Storm model”. But this was not for lack of trying on Storm’s behalf, with the group seeking to “convert” these clients, who represent “a significant growth opportunity” for the group.
Colonial First State chief executive officer Brian Bissaker said this was a matter for Storm.
