Chapter
6 - Retail investors
We did not have the knowledge, skills or expertise to
independently scrutinize the advice we were given. We trusted the professional
conduct of the adviser with which we dealt. We invested on this basis.[1]
6.1
Many of the investors in agribusiness MIS saw themselves as
unsophisticated investors—'just average hardworking Australians' trying to
achieve financial security for the future. Some were single, some had young
families while others were approaching or already in retirement. A number had
never invested before and were looking for a stable and safe income stream.[2]
In this chapter, the committee turns its attention to the behaviour of
investors in an attempt to understand what motivated many of them to invest in an
MIS without fully understanding the risks involved. It goes to matters such as the
vulnerability of retail investors, trust and consumer protection.
Behavioural economics
6.2
The majority of growers who wrote to the committee described themselves
as inexperienced even naïve investors seeking 'a good return' on their
investment. For those approaching the end of their working lives, securing a
reliable income for their future retirement was important.[3]
Appreciating their limited understanding of financial matters, the investors
sought professional advice. As one couple explained:
It would be easy to dismiss us as greedy investors getting
caught up in global events. However, the facts are that we are an ordinary,
diligent family, with no history of prior investments of any sort (apart from
our home), seeking advice from financial experts to help us support ourselves
in retirement rather than relying on a pension.[4]
6.3
The growers who gave evidence to the committee assumed that they were
correct in listening to, and taking advice from, professionals knowledgeable
about, and experienced in, financial matters. They thought they could depend on
this information.
6.4
Studies in behavioural economics highlight the fact that consumers'
reliance on advice makes issues of trust and persuasion of central importance
in the retail investment market. One study in particular found that generalised
trust in advice can influence people's preparedness to invest in risky assets.
Personal interactions that elicit confidence may enable an advisor to persuade
or influence a potential investor, merely by inducing positive emotions. Some
consumers may be especially receptive to financial advice in the presence of
perceived expertise.[5]
Indeed, consumers may allow themselves to be influenced by advisers because
they come across as 'likeable' and therefore 'trustworthy'.[6]
6.5
Consistent with such findings, ASIC's survey on retirement advice found
that as most people lack the knowledge and expertise to assess financial
advice, they use proxy measures instead. It gave the following example:
...the client may be influenced by the adviser's confidence,
approachability, friendliness or professional manner. Or they may simply view
the adviser as the expert in what is generally a complex subject matter, and assume,
as a result, that the advice and service is high quality.[7]
6.6
Importantly, however, the survey noted that these subjective evaluations
rarely agree with the technical assessment of the quality of advice provided.[8]
Likewise, the recently released report on Australia's financial system recognised
the findings of behavioural economists showing that individuals are 'prone to
making systematic errors in decisions that involve assessing risk and
uncertainty', such as when making investment decisions.[9]
6.7
Put bluntly, Mr Jeff Morris, former financial adviser, stated that
people invest in 'rubbish products which they themselves do not understand'
because their adviser wears a nice suit, sounds plausible and has 'command of
the jargon'.[10]
Trust
6.8
The actions of many investors who made representations to the committee attest
to the findings of behavioural economists that investors rely heavily on their
advisers' suggestions and are highly susceptible to their recommendations.[11]
For example, the committee heard numerous accounts of growers simply signing
the form placed in front of them by their adviser.[12]
They assumed that the adviser was working in their best interests and naively
believed them. One such submitter stated:
I trusted Holt Norman & Co with my family's future, but
unbeknown to me these accountant/financial advisers were reaping huge
commissions and bonuses while sinking me into enormous debt...
To some degree, I accept responsibility for my own
predicament. I definitely should have asked for clarification about the
documents I was asked to sign. But my consultations with Bill Norman were often
informal and we would make light of my inability to understand investment
schemes. He would reassure me that investments were his speciality and that I
did not need to worry about the details. I only needed to sign and return any
paperwork that arrived in the mail.[13]
6.9
Many growers spoke of the confidence they gained from their adviser, who
was able to convince them of the merit of the proposed investment. They were
persuaded that the investment was secure: that the MIS was 'government
endorsed, solid, long-term and supported agriculture in Australia'.[14]
For example, a 'trusting client' of the Holt, Norman, Ashman Baker firm for
nearly 30 years, spoke of the principals' nice demeanour and friendly chats'
and believed there was no need to question their motives or practices.
According to the client, however, the principals saw him as 'a soft mark,
another sucker to sting'.[15]
Likewise, another investor stated that he trusted 'a professional' but has been
made 'to look like a fool'.[16]
6.10
The majority of investors who wrote to the committee, described
themselves as conservative investors who opted for a 'low risk' profile.[17]
A number made clear in their evidence that they had informed their adviser that
they were not risk takers and wanted to ensure that their existing assets were
well protected. For example, one investor informed the committee that:
We were at a point in our lives where we recognised our
middle-income earning capacity was not going to be greatly increased in coming
years as we brought up our young family and we wanted to find a low-risk way to
make long-term investments that would secure our future. Our combined knowledge
of finance was perfunctory and other than two tiny share market parcels...we had
never been confident to invest in the share market.[18]
6.11
Frequently, investors told the committee of their expectations that
advisers would put clients' interests first or at the very least give
appropriate advice.[19]
As one grower stated:
I advised him that I did not want to be in high risk
investments and that I had put my trust in him as I had no knowledge of these
types of investments. I had a young family and needed to put their needs first
and I would be putting my trust in his financial advice.[20]
6.12
Yet another spoke of being unaware that his adviser, with whom he
thought he had a 'professional customer/client relationship' and held in a
position of trust, could be involved in a situation best described as 'not
morally right'.[21]
Understandably, he argued that financial advisers should have been above
reproach.[22]
Mr Peter Mazzucato, an investor in Timbercorp, informed the committee
that:
The only product that was discussed was MIS and in particular
investments with Timbercorp. I had never hear[d] of MIS schemes prior to this.
I did not know that there was any risk in investing in these schemes and
confess to being totally naïve about investments outside of buying a house.[23]
6.13
Mr Mazzucato told the committee that after a short discussion his
financial planner convinced him that Timbercorp would be a good investment. He
was told that it was government backed; would provide an income stream for 23
years; was absolutely safe with no risk at all; and that literally thousands of
people had been investing in these products for years. Consequently, Mr
Mazzucato was eager to get involved with the scheme and, as with so many other
investors, concluded—'After all, what was there to lose?'[24]
6.14
According to the growers who gave evidence to the committee, the advice
sounded legitimate. As one grower told the committee, 'yes we were at fault as
well; for trusting, for believing and for following the advice we received'.[25]
The sense of betrayal by a trusted adviser was a dominant theme with another
suggesting:
We trusted this professional, unaware that he was acting as a
sales representative for MIS recommending these investments motivated by his
own financial plans rather than ours.[26]
6.15
Yet another told the committee that, at the age of 27, he tried to be sensible
with his money and invest with the hope of purchasing his own house and ultimately,
as a long term goal, of being a self-funded retiree. He was not sure of the
best way to go about achieving his modest goal but assumed that 'a financial
advisor and the laws governing them would help me invest my money in a smart
and safe way'.[27]
He was advised to invest in Great Southern grape vines 2007 and 2008, described
by his adviser as a safe, government endorsed product with tax deductions,
which, to the grower's mind, 'added to the security of the product'. [28]
Another stated:
The way it was presented we believed (perhaps naively) that
not only would we then be certain of being self-funded in our retirement but we
would also be investing in Australia.[29]
6.16
Many simply could not fathom how they ended up in such a predicament,
especially when they thought they had taken necessary precautions. One couple spoke
of the stress that the entire system had caused and feared it was here to stay,
and 'all because we did the right thing—earned money honestly, invested after
expert opinion was sought, paid our taxes, saved for self-funded retirement
within the guidelines'.[30]
6.17
Mr Peter Jack, investor in Timbercorp, who was advised by both his
financial adviser and accounting firm, stated:
As the product was brought to us by our financial planner and
then confirmed as a viable and legitimate product by our accountants we
undertook to invest in Timbercorp with the opinion we had sought the right
advice.[31]
6.18
Many investors assumed that they were receiving expert advice.[32]
Voicing the experiences of many of the growers, one investor explained:
We did not have the knowledge, skills or expertise to
independently scrutinize the advice we were given. We trusted the professional
conduct of the adviser with which we dealt. We invested on this basis.[33]
6.19
In some cases, the trust had developed over many years especially with
accountants who for years had been advising their clients on taxation.
Mr John McDonald explained that, as a long standing client, he did
not question the conduct of his adviser to the point where, in his own words,
he would 'stupidly' not read documents thoroughly and would simply follow the
directions "'Sign here; sign here". It's a done deal".[34]
He explained:
That trust developed over 20-odd years, and the habit of not
reading documents properly before signing them built up over a similar period.[35]
6.20
Trust was also a critical element in following the advice to borrow to
invest in the schemes.[36]
One couple informed the committee that after receiving advice they went home
and crunched some numbers. At that point, however, they started having concerns
as to how the numbers would work if they took out another loan, in addition to
the 2007 scheme. According to the investor:
I started getting nervous. So back we went to Steve [adviser].
He truly was a great salesman. After showing him all my spreadsheets and
concerns and explaining our situation we walked out of his office, having
agreed to sign up to the 2008 scheme, our minds at rest that it would all be OK!
To this day I have no idea how he persuaded us to do this. But he sounded so
sure of himself and we trusted him completely as did many other of his clients
who seemed astute and knowledgeable.[37]
6.21
A single, mature-aged woman informed the committee that she had received
advice to invest in Timbercorp shares, $50,000 worth, financed through Timbercorp
Finance. She said:
Call me naïve, but I went to a financial planner as I
expected that they would give me SOUND advice. By the time I signed the release
form it was only days before the end of June 2008 and I had no awareness of the
financial concerns.[38]
6.22
Along similar lines, another investor, who was unaware of the need to
take out additional loans for management fees, stated simply that she 'stupidly
trusted her adviser'.[39]
Yet another grower stated:
The thing I am most upset about is how I trusted the
financial advisor, believed the Timbercorp documentation and advertising propaganda.
It is clear the company was selling something they had no intention of delivering.
If I borrowed money from a person selling a house and I did not get the house
they would not get any money, this is the same. Simple.[40]
6.23
Ms Michelle Johnson told the committee that she quizzed her adviser
about the security and soundness of her proposed investment scheme. Before
agreeing to the suggested level of commitment, she spoke with her adviser about
being a single mother and how she did not wish to risk her financial security. Ms
Johnson explained further:
I asked him outright if there was any risk of losing my home
because I would not proceed if this could happen. He reassured me that this
could not occur with his system. He stated his plan for me was long term investments
for a tax effective income stream to be able to own my own home and be
comfortable in my retirement, and that Timbercorp investments were endorsed by
the ATO.[41]
6.24
Mr David Abraham stated simply that he took advice supported by the
graphs his advisers produced, which showed 'the way tree harvesting would be
able to repay interest and capital as well as give me a long term investment
return'.[42]
He referred to what appeared to be 'good financial advice'—charts, graphs,
'inspiring' seminars and 'hype' from Navra Financial Services and Great
Southern.[43]
One couple reported that their questions about the complex nature of the
schemes and requests for more detail were greeted with reassurance that this
was the adviser's 'field of expertise and that he would take care of things...'[44]
6.25
The same stories of investing in good faith on the understanding that
the scheme would produce a good return in years to come were repeated with the
following description just one of the many almost identical accounts:
We were told it was a scheme completely backed by the
government to support Australian agriculture. The whole point of the investment
according to Steve [adviser], was that it was self-funding and that we should
not expect high Forestry managed investment schemes returns or pie in the sky
profits. It was sold to us as a conservative pension fund of sorts to assist in
retirement with only a very modest return.
...
We double checked with him what would happen if it all went
belly up—we were told there was insurance to cover this, and there was no way
we could lose on it. He re-iterated over and over that this was a safe, self-funding
investment. We checked what we'd been told with Tony's boss who referred us to
Steve, along with his extremely conservative accountant—same story.
We honestly thought we were investing in a nice, safe
investment, a product that was endorsed and supported by Australian government
legislation, and that nothing could go wrong.[45]
6.26
Mr Shane Richards captured the experiences and sentiments of many growers
who wrote to the committee when he stated:
The plight of myself and many other borrower investors cannot
be seen as just a group of dissatisfied people who took a gamble and lost, but
a group of people who put their trust in what they were told and in the hands
of the people charged with running the scheme...[46]
6.27
Clearly, investors formed the view that not only had advisers abused
their position of trust but that the consumer protection regime had also failed
them. As most of the small investors intimated, they did not have the
knowledge, skills or expertise to scrutinize independently the advice they were
given: they trusted the professional conduct of their adviser and invested on
that basis.[47]
One couple maintained those involved in selling the schemes:
...have received government licenses that authorise them to
make what the ignorant investor believes are expert and well researched,
personalised plans but...the sad reality today is that the Australian consumer
has more protection buying an item that costs just a few dollars than when they
invest thousands, even millions through these so-called professionals.
Something needs to be done and these unscrupulous accountants/financial
planners need to be held accountable.[48]
Committee view
6.28
Evidence before the committee highlighted the vulnerability of retail
investors and their high susceptibility to a persuasive financial adviser. It
underscored the importance of consumer protection. Indeed, this report abounds
with accounts of investors following the advice of their adviser because they
truly believed that the adviser was a professional: an expert who would act in
their clients' best interests irrespective of economic incentives that might
influence that advice.
6.29
It should be kept in mind that the examples provided in this chapter
represent only a sample of the submitters who referred to the trust that they
placed in their adviser. The committee cannot put a figure on the number of
people who have suffered because of the inappropriate product promotion of MIS
and the accompanying poor financial advice. Some investors conceded that they
were gullible or naïve and should have done more to ensure that they were
investing wisely but, without doubt, trust played a major role in persuading them
to invest in MIS. In the following part of this report, the committee looks at
the conduct of the advisers, promoters, product producers and financiers and their
motives in marketing and selling these products to retail investors.
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