The stories are flooding in from Storm Financial clients in shock. Very sad stories. Storm founders and directors remain bunkered down with crisis management PRs batting off the media.
Regulators and politicians are still nowhere to be seen.
After consultations with Colonial - which ran the Storm-branded index funds and pulled the plug on Storm last week then hit its clients with margin calls - the Financial Planners Association (FPA) has organised a panel of advisory firms which Storm clients can contact for an independent view of their plight. We will deal with some feedback on specific clients in a tick.
Meantime, the two biggest margin lenders to Storm clients appear to be Colonial Geared Investments (owned by Commonwealth Bank) and Macquarie Margin Lending.
Both it seems offered LVRs (loan to valuation ratios) on Storm funds of up to 85%. In other words, they would tip in 85 cents in each client dollar for exposure to the Storm funds.
Considering that the LVRs approved for products of the biggest index fund manager in the world, Vanguard, are only 75%, the leverage of Storm clients could be considered extreme - especially as many were retirees.
And even more so if the 10% ''buffer'' is taken into account. That is, there are reports of Storm clients whose margin call was not triggered until that 10% buffer had been exhausted. In other words, there may have been an effective LVR of 95% provided to unsophisticated investors.
It should be noted that although it is Storm which can be blamed for recklessly advising its clients to gear into the stock market, not to mention use their homes as collateral, the margin lenders would have been aware of the risks.
'Betting against winter'
Now to reports on two Storm clients (identity withheld) from one financial planner on the FPA panel. The panel is nationwide. Here's what the planner has to say:
''I have been aware of Emmanuel Cassimatis (who founded Storm with his wife Julie Cassimatis) since he was an MLC agent in Townsville in the early 1990s. It has been a widely held view for a number of years within our profession that the Storm model was not sustainable (as one commentator recently said, it is like betting against winter).
''However, despite numerous reports by numerous individual practitioners to the regulators and industry bodies over a number of years concerns have fallen on deaf ears until now when anecdotally it may be too late for the thousands of investors exposed to the carnage.''
Case one
A young couple in their late thirties - family home paid off. Saw Storm late 2007 seeking advice re use of surplus cash flow and equity in home. Home was geared and then proceeds from that loan geared again through a margin lending facility.
They are now back to where they were 10 years ago. Mortgage against home at around 80%. As late as September they were contacted by Storm to take advantage of a "buying opportunity" (margin call?) and tipped another $25,000 into the funds.
They were charged an entry fee for satisfying their margin call too. Then in October they received that letter to sell everything to cash and await further instruction about re-entering the market. TOTAL LOSS $175,000 to 200,000.
The re-entry strategy is also puzzling. All but $10,000 of their funds are now sitting in cash accounts which the margin lender treats as 100% for LVR purposes.
To move this money back to managed funds or blue chip shares means moving to an investment that has an LVR of at best 75% (Telstra is 80%).
(Interestingly, Storm had arrangements with some margin lenders that allowed them to gear to 85% against their badged funds even when these lenders had their own index funds that they only lent 75% against).
I digress. Changing from cash to an investment with a 75% LVR means the client will have to either reduce the loan or find additional funds to meet the LVR. It is not just about re-entry at the appropriate time but also about finding additional cash.
While we are waiting for the re-entry (Halley's Comet might re-enter too) the clients are in a fixed-rate facility at 9.5% and earning 4.5% on their funds. Fees in excess of $25,000.
Case Two
Retirees in their sixties.
A seven-figure superannuation balance in conservative portfolio in November last year and owned their own home worth upwards of $500,000
Quite conservative and needing income of around $45,000 per annum in retirement. Took a while to invest but invested all the same in March 2008.
Money withdrawn from super and geared along with 80% of equity in home. Today total debt is in the vicinity of $1.5 million and portfolio of $1.3 million is in cash earning 4.5% (loans again were fixed at above 9%). Re-entry has been discussed here also but again same issues apply. Fees over $150,000.
Total loss in excess of $1 million in nine months.
These people have been decimated not only financially but also psychologically and emotionally.''
'Stormified'
On another matter, there have been references made to the fact that Storm aggressively bought up other practices prior to listing.
Most of these were already "authorised representatives" of Storm and had been "Stormifying" clients for many years.
The Cassimatis clan convinced them to roll their businesses into Storm on a scrip basis on the promise that when they listed they would own a share of the greater merged entity. These guys have literally torn up many millions of dollars however not nearly as much as their clients have lost.
Their clients were already "Stormified" well before the float was due to take place (it was about hyping the float more than anything else).
mwest@fairfax.com.au
BusinessDay
