In the past eight years more than 170 financial products representing $38 billion of investor money have been frozen, failed or were fraudulent.
The hit list, which has been sent to politicians and key industry players, comes as David Murray finishes his report on the Financial System Inquiry.
Almost a third of the list includes collapsed funds such as agribusinesses Timbercorp and Great Southern and the scandal-ridden Astarra funds, LM Capital funds, Opes Prime and Storm Financial.
The remaining 70 per cent of products on the list are predominantly so-called zombie funds which were frozen during the global financial crisis due to a lack of liquidity. These funds include Commonwealth Bank of Australia's seven Colonial First State mortgage funds, which were suspended in November 2008 with $3.2 billion in funds under management.
Most of the 61,000 client account balances have been repaid but during the period of suspension, when unit holders did not receive income payments. CBA, like many other institutions, continued to charge their customers management fees and the financial planners continued to receive a trailing commission.
The fact that this list of 171 products is dominated by the big financial institutions highlights the dangers of the vertically integrated model. It is a model that is being scrutinised by Murray in his report, which is set to be handed to Treasurer Joe Hockey later this month. How far it will go is subject to intense debate.
Against this backdrop the Association of Independently Owned Financial Professionals (AIOFP), a group of planners who aren't owned by the big institutions, compiled and distributed the list to the country's decision makers. Its executive director Peter Johnston argues product failure is the main reason people lose money – not the financial planners.
"Advisers don't build, approve, rate or administer financial products."
Using the analogy of a pharmaceutical company producing a bad product, he argues the regulator goes after the source of the problem: the manufacturer rather than the distributor.
"In our industry everyone runs for legal cover, blames the advisers for not being educated and the product manufacturer avoids accountability . . . if product manufacturers continue to make flawed products, consumers losses will continue."
Crisis in confidence
The lobbying comes as a crisis in confidence grips the financial planning industry, following exposés of scandals inside two of the biggest institutions, Commonwealth Bank of Australia and Macquarie. Both have set up compensation schemes for more than 500,000 customers who may have received shoddy financial advice over the past decade or more.
The scandals laid bare some major issues in the industry, including the minimal standards of education and professionalism, which require less training and education than a hairdresser.
Moves are afoot to lift the standards of planners and introduce a national register which will include the names of advisers, work history, educational qualifications, membership of a professional body, any sanctions or bans and who holds the licence.
This is a good start, but more needs to be done, particularly given plans to wind back some financial planning reforms by the Abbott government.
AIOFP's list of failed and impaired products that have caused varying degrees of pain to consumers, widens the spotlight to include the role of the other gatekeepers in the financial services eco-system – a system that is riddled with conflicts.
The Australian banking system is highly concentrated. In the past 15 years banks have been buying up the wealth management industry and now own or are aligned to almost 80 per cent of the financial planning industry. It means they can clip the ticket at each level, from the manufacture of products and platforms to managing the funds and using planners to flog their products.
These institutions then "shop around" to get a positive rating for their products so that they can include them on an approved product list. The problem is most research houses get paid to rate the products.
All 171 funds on the list paid a research house for a positive rating. In the case of Timbercorp, it paid between $30,000 and $35,000 for each product rating on its 33 different schemes. (ASIC has imposed greater disclosure obligations, but this hasn't had much impact.)
Murray's interim report stopped short of looking at whether banks should own wealth management divisions or financial planners. It appeared to be saying the vertically integrated egg was too hard to unscramble and the best that could be done was make it easier for consumers to identify if the planner was employed or tied to a big bank or financial institution.
Behind the scenes the banks are fighting tooth and nail to keep the status quo, particularly given the swelling pot of superannuation money.
Matthew Rowe, the outgoing chairman of the Financial Planning Association (FPA) says financial products should be built to the same standards as other "high impact/risk" consumer products such as motor vehicles, medicines, electrical goods and food.
He says others in the financial system chain have not been held to the same standard or been scrutinised to the same level.
"If a company fails, the directors can be held to account to creditors – why not the same for investors/unit holders?"
The collapse of agribusiness Timbercorp and the toll it has taken on the lives of thousands of people is a stark reminder of this. Timbercorp wasn't manufactured by one of the big financial institutions, but without the financial backing of ANZ Bank and a few others, it would never have got off the ground.
Financial planners raked in more than $90 million in commissions from flogging Timbercorp, with many of the big four banks and AMP's financial planners involved.
Timbercorp, which was described in a Senate hearing as a Ponzi scheme, also puts the spotlight on the role of research houses, many of which give a rating to products such as Timbercorp for a fee.
Michael Bryant, who was responsible at Timbercorp for getting research houses to rate the 33 managed investment schemes, describes research houses as a "Teflon raincoat" for financial planners.
Bryant, who left Timbercorp six months before it collapsed, would take research houses on trips to see the olive, mango and almond projects, wine and dine them, and then pay money to get a rating on each of the products. This gave the products the credibility of an independent research rating, which the planners would then use to spruik the product. "I was a whore," he says.
With moves to wind back Future of Financial Advice reforms the hope is that Murray will make some tough recommendations to protect the country's retirement savings.
If all else fails, Labor senator Sam Dastyari is chairing a couple of Senate inquiries to keep the spotlight on financial wrongdoing. The first kicks off in Melbourne on Wednesday into managed investment schemes with Timbercorp, the role of ANZ, the liquidator and ASIC taking front and centre.
With 200 victims around the country expected to show up, along with a couple of whistleblowers and some time allocated for ANZ if a representative takes up an invitation to speak, the city's Town Hall is expected to be packed to the rafters.Author: Adele Ferguson
Source The Sydney Morning Herald