Advisers at DOD Bookkeeping, which received an $11 million penalty last week, received as much as 40 per cent of their remuneration via a bonus, according to court documents.
DOD, formerly known as Equiti Financial Services, was penalised over $11 million on 24 April after the Federal Court found it breached conflicted remuneration rules. Equiti FS provided financial advice to clients and offered self-managed superannuation fund (SMSF) establishment and administration services.
Each of the relevant clients were advised to establish an SMSF and to roll over their existing superannuation into the newly established SMSF.
Statement of advice
The 165 SOAs in evidence followed a template format and contained a significant amount of common, or boilerplate, text where allocations to property and growth assets were higher than the client’s risk profiles. In some cases, the asset allocations which resulted after implementation were “strikingly different” to those suggested in the SOA.
Of the 165 clients who received advice, only six already held an SMSF.
For all clients, the SOAs were not tailored to their needs with identical stated objectives and almost identical wording. There was no evidence of the consideration of alternative investments or their advantages and disadvantages for the respective clients.
In terms of ongoing cost, the average increase in cost from enacting the recommended advice was “well in excess of the existing costs” ranging from 2.5x to 3.3x the existing costs clients were paying, depending on whether property expenses were included.
The defendant charged the clients an SMSF establishment fee (either $900 or $1,650); SMSF warrant costs of $3,850, and SMSF administration costs of $2,376 per annum.
Court documents noted each client provided authority to proceed on the same day that the SOA was provided to them, indicating there was insufficient time to consider the advice and the advice was not presented in a way where they could make informed decisions.
“A particular feature which rendered inappropriate the advice given to each of the clients was the lack of tailoring of the advice to the particular clients. That is, each individual or pair of clients was advised to establish an SMSF and to cause the trustee of the SMSF to purchase a property, regardless of their individual circumstances. In other words, a ‘cookie-cutter’ approach to the provision of advice was in use.”
Bonus payments
Equity FS then paid $130,250 in bonuses to the three financial advisers who provided template advice to clients to roll over their superannuation into SMSFs and use those funds to buy property through a related entity, Equiti Property Pty Ltd.
Court documents showed individual bonus payments totalled between $750 and $1,500, but collectively added up to significant sums. Across the three financial years, 136 bonus payments were made to three advisers whenever a settlement of real property occurred following advice to invest in real property.
For example, for the 2017 financial year, Adviser ZZ received $101,750 in bonuses which represented 40.7 per cent of their total $249,442 annual remuneration. Adviser YY received $94,500 in the same financial year, representing 40 per cent of their $235,846 annual remuneration.
For Adviser YY, 45 bonus payments were made in the 2018 financial year relating to SMSF purchases, which totalled $45,000, and 36 payments for Adviser ZZ, representing $36,500.
Justice Scott Goodman said: “I am comfortably satisfied that the availability of, and expectations to receive, the bonus payments could reasonably have been expected to have influenced both the choice of financial product recommended to, and the financial product advice given to, the defendant’s clients by the advisers.
“In particular, the pattern of conduct of the payment of bonuses (including the number and quantum of such payments), following the purchase of properties where such purchases had been recommended by the adviser, could reasonably have been expected to have created an expectation on the part of the advisers that future recommendations to purchase properties would similarly be rewarded by bonus payments.
“The conclusion that there was a reasonable expectation that the existence of the bonuses could reasonably have been expected to influence the advisers’ recommendations and advice is strengthened by the evidence as to the proportion of the bonus payments to the advisers’ total income.
“It could reasonably have been expected that the advisers would have been influenced to favour a course which created (or maintained) a higher income for themselves.”
