Happy and less happy compliance matters

[ May 15, 2015 ]

Some Happy Compliance Matters

It’s great to see some really good SOAs coming through. The really good ones break from the “switch the super then switch the insurances” mode and instead explore what the client can do to improve their own financial position. The “Dover Way” is spreading, and we are seeing SOAs that:

  1. discuss the client, a NSW solicitor, setting up a SMSF and borrowing to buy the office suite his practice is based in (emphasizing the benefits to the SMSF, and de-emphasizing the benefits to the business, so there is no unintended breach of the sole purpose test);
  2. include a graphic time-line of expected critical events over the next 25 years, and confront a 45 year old client with some “well, what are you going to do about it now” type questions. This seemed an effective strategy, and the adviser said it really prompts clients to act now;
  3. encourage the client to buy management rights to a group of apartments, and a manager’s residence, as the next phase of their working lives (with all capital gains, including capital gains on the manager’s residence tax free under the small business tax concessions). You will appreciate that Dover encourages you to encourage clients to start or buy businesses. They are the best investments. Great to see the idea getting traction;
  4.  explore ways to helping young adult children enter the (very hot) Sydney property market now rather than having to wait another five years. The NAB’s limited 20% guarantees work very well here;
  5. reflect on what a 60 year old single man, with net wealth of only $400,000 and a low income should be doing now to improve his financial future (the sad truth was “not much except keep working as long as you can’); and
  6. recommend a 76 year old single female client, ex-teacher, lodge a FOS complaint against the previous adviser for putting a “moderately conservative client’ (the previous adviser’s words, not ours) into a very aggressive, and now frozen, in-house investment managed by the same AFSL. I am visualizing some of my own teachers from forty years ago and finding myself angry that an AFSL could actually do this to them in their old age. The complaint will get a lot of energy from me.

Turning to some less happy compliance matters…

Dover Does Not Allow Conflicted Mono-Product Practices

We had a friendly interchange with an adviser looking to leave a big institution owned AFSL so he can recommend property to his clients. Unfortunately there is a bit of an understanding gap between our concept of what is an appropriate property and his. We say it has to be not off the plan, not an apartment (perpetual harbor views excepted) and not connected to a developer or a marketer. He said it should be connected to his family’s property development company…. He is not coming on board as a Dover adviser, I am happy to say. It was an accident waiting to happen. He seemed like a nice guy so we took the time to explain that a conflict driven mono-product practice is not a valuable practice and is not a viable practice. This is because if the clients make profits, great. But if the clients make losses FOS will make you compensate the clients… And eventually the clients will make losses. In summary, a really dumb business plan.

Don’t Trade Your Clients’ Share Portfolios

Speaking of really dumb business plans. This week we have been “in discussions” with an adviser who “expressed interested” in trading his clients’ share portfolios. He is not allowed to do this. There are numerous reasons for this, most of which relate to our fear of FOS, our abhorrence of large damages orders and our interest in complying with our licence terms and the Corporations Act. Let me expand. First, trading client shares is a great way to lose your client’s money. If you are buying and selling shares frequently in anticipation of short term price movements you will almost certainly lose, and if you do not its good luck not skill. And your good luck will not last: the laws of probability will quickly bring you back to the pack. Eventually you will lose. Its literally virtually certain. Second, the share market is stacked against you. The dice is loaded. High frequency trading uses the biggest and best computer models run by the biggest and best mathematical brains on the planet. Do you really think you can beat these guys? Third, Dover’s licence does not allow individually managed accounts, (glad I got that off my chest!) and trading a client’s shares can easily cross the line to become an IMA. If it does you are on your own, and uninsured. If your clients lose (and they probably will) and then complain (and they probably will) you will be:

  1. on your own. We are not going to help you;
  2. personally liable for 100% of their losses, plus interest and costs, and without any professional indemnity insurance;
  3. successfully prosecuted by ASIC, with the sanctions including fines and banning orders; and
  4. humiliated by ASIC publicizing its actions within the profession and by directly contacting each of your clients.

Fourth, trading shares is a breach of the Corporations Act, because it’s fundamentally not in the client’s best interests and not appropriate to the client. Further, it almost certainly breaches the rule that all financial product advice has to be in writing, usually in a statement of advice but sometimes in a record of further advice format Fifth, trading shares breaches Dover’s rules. The list is long, and includes our rule that all share investments must be for a minimum holding period of ten years and that all clients must be treated as conservative unless they believe otherwise and a reasonable financial planner would agree with this.

Are there any exceptions to the rule against share trading?

No. There are no exceptions to this rule against share trading. It’s not allowed and that’s that. Any adviser engaged in share trading will be immediately terminated as a Dover adviser, a contravention report will be lodged with ASIC and legal action will be taken to recover any losses.

A book on financial planning

Many of you will be aware that I have recently completed a book on financial planning for doctors. You can access it here:

Please feel free to use materials from this book and its examples in it with your own clients. They apply to all clients, not just doctors (although I admit there is not much on CentreLink planning to be found here). The materials in the second part of part 10 dealing with tax efficient investing are particularly relevant. We look at how the choice of investment combined with the choice of investment structure can dramatically and legitimately reduce the effect of tax on investment returns, leading to much better results for clients. It would be great to see these materials reflected in Dover SOAs.

Another book on financial planning, this time for Dover advisers

I am half way through another book on financial planning, intended to help Dover advisers create bigger, better and more valuable practices. It will be on the (new soon to be released) Dover website and be in the same form and style as the doctors’ books linked in above. To this end I am locking myself away for a month or so to complete it, and hope o have it and a brand new website completed early in the new financial year. Please bear with me in this period, and address all questions, criticisms, concerns and conflicts to Yin and Flo and Peter and the others on the Dover team.

The Dover Group