Storm Financial. A Simplified Case Study Of What Went Wrong And Why Everyone Is Angry.


Nana's lost everything!

Nana’s lost everything!

I was reminded yesterday that unless they’re in the financial sector or directly involved, most Australians don’t know what happened at Storm Financial. All they know is that whenever they hear the name mentioned in the news, it’s usually followed by a video clip of a person who looks very angry, very upset or both. So I thought I’d prepare a case study to explain, what allegedly happened so that you can be forewarned, next time someone promises you wealth beyond mention.

Disclaimer: At the outset, I want to say that I was never employed with Storm Financial and have only innuendo, industry rumour and clients stories to base this case study on.

Nana Jones

When Peter Jones Jr. first received the call from his mum that his Nana had lost her life savings, he was at first upset for her. That pain quickly turned to anger once he saw her and heard her story and realised that she’d lost more than just a few dollars in a term deposit. She was now, homeless.

When Nan and Pop first got married, they bought a little home in Nundah, a family oriented suburb in Brisbanes Northside. There were plenty of schools around for the family that was on its way and a train station, a short walk away which Peter Jones Senior would use for 40 years to take him backwards and forwards to the factory he worked in a few suburbs along the line.

Everything went according to plan, they raised their kids, they paid off their mortgage and built up a small nest egg. Pop retired and saw out his days helping Nana in her garden.

After he died, Nana’s Age Pension was reduced to 66% of what her and Pop used to receive as a married couple. Too proud to ask her family for help to pay the bills, medical costs and general living costs that were now starting to seem insurmountable, Nana reached out for help. One of the ladies at her bowls club referred her to a Financial Planner she was seeing.

Most Financial Planners are good people. This one wasn’t.

Given that her problem was cashflow, Nana’s Financial Planner, John, advised she use the equity in her home to buy a portfolio of shares in managed funds, which he said would provide her with an investment return larger than the cost of borrowing the money to invest. The money would be invested in companies she knew he said. Household names. And it was.

There were two problems though, one was that the economy and investment markets had been booming for years and secondly it was mid 2007.

Why Nana is homeless

Nana’s home was worth $500,000 when she saw her Financial Planner and the bank he referred her to, lent her $400,000 (to a pensioner!), This adviser then used that $400,000 as security for a margin loan of $800,000 with another lender. Nana now has total debt and investment portfolio of $1.2Million.

When the markets crashed in 2008 her portfolio fell with it to $600,000 and she was forced to sell. As a result she had $600,000 in debt remaining, so the bank which is now owed money, takes her $500,000 home and she is left homeless with a $100,00 debt to her bank.

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Know your risks

All financial strategies carry risk, even leaving your money in a bank account can be risky. Before you employ any strategy, make sure you understand each and every risk you could confront before moving forward. Seek advice from a Financial Planner, if your Adviser glosses over the risks, or fails to explain them to your satisfaction, don’t sign a thing. There are lots of really wonderful Financial Planners out there who genuinely want to help you achieve the financial security you seek. Get a second opinion, if you feel that would help. A good Planner will welcome the scrutiny.

No amount of “potential” investment return is worth losing the roof over your families head.

2 thoughts on “Storm Financial. A Simplified Case Study Of What Went Wrong And Why Everyone Is Angry.

  1. paulineferguson

    The sad part is that John probably thought this WAS a good investment strategy, and from his point of view (not his money) it was. I guess it’s easier to take risks when it’s not your money, your home or your grandmother. 🙂

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  2. rodneybukuya Post author

    In Johns defence Pauline, we’d had years of positive returns, all higher than 10%, and the economic commentators of the day were saying that we’d entered an era of super cycles and that the old rules no longer applied.

    I remember attending a seminar in November of 2007, where a VERY well respected person in the industry made the statement that the credit crisis that had just started was a short term blip, advised the attendees to “load up” with everything they could, even sell their mothers home if they could and ride the massive recovery that was supposedly about to happen.

    Thankfully, I was too scared to follow those particular pearls of wisdom, but given the mans standing, I’m sure that some advisers would have followed suit.

    The flip side is that if the markets had have boomed for even another 2 years, many people would be hailing Storm Financial as heroes.

    damned if you do, damned if you don’t in this profession.

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