Intricate structure. Inherent leverage. Larger than average commissions.
Does any of that ring a bell? If not, it should.
The Australian financial planning industry is again the subject of severe criticism over the collapse of an agricultural managed investment scheme (MIS) specialist, Great Southern. And, again, the recipe for disaster involved a product that was intricately structured, highly leveraged and delivered larger than average commissions to planners.
If that sounds familiar, it is because it was much the same recipe quoted following the collapse of the Westpoint Group.
But let us be very blunt about MISs. They are, at base, tax minimisation devices. What is more, they are devices that are readily embraced by investors hoping to avoid writing a large cheque to the Deputy Commissioner of Taxation at the end of a financial year.
Other commentators have pointed to the folly of investing in agribusiness schemes and have noted the contradictory nature of a strategy that involves investing $1 in a loss-making venture to extract a 50 cent tax saving.
None of that matters, however, in circumstances where those very same investors can point to 10 per cent commissions being paid to advisers and suggest that their planners had a vested interest in recommending an investment in an MIS.
And if financial planners imagine that they are not being blamed in the most severe terms, they ought to read some of the blogs that have been established in the wake of the Great Southern collapse.
What planners ought to point out, however, is that when it came to recommending investments in MISs, accountants were more likely to have played a role, particularly when the investors had aspirations to reduce the level of their tax exposure.
But, irrespective of whether people were persuaded into an MIS by a planner or an accountant, the thing that will last longest in the minds of the public and commentators is the belief that some of the investments carried with them 10 per cent commissions.
All of which tends to reinforce the good sense of the decision by the Financial Planning Association to recognise the deficits and gradually move away from a commission-based remuneration model.
In a very real sense, planners ought to have regarded recommending to clients that they invest in an MIS in the same manner they regarded recommending to clients that they take out a margin loan. They ought to have ensured that the client fully understood all the risks and benefits and, indeed, what the planner stood to make out of the transaction.
It is already clear that the Federal Government is thinking about regulating around investments in MISs in much the same way it has acted with respect to margin lending.
The collapse of Great Southern has indisputably served to further damage the reputation of financial planners. In so doing, it joins a lexicon that includes Westpoint and Storm Financial. Planners ought to reflect upon why they were so exposed.
Mike Taylor
