Save your friends from financial ruin
Date November 16, 2013
On a recent trip to South Africa, I met an Australian expat whose entire family nest egg, absent their home, is threatened by the collapse of Gold Coast-based LM First Mortgage Income Fund.
She had been put into the fund by a (non-Australian, offshore) financial planner, who encouraged the family to move their money (all of it) from several balanced funds into this mortgage fund because of "higher, safe returns".
It worked well for a while, until the unexpected happened. The financial planner collected significant fees from LM.
Admirably stoic about the whole experience, this poor woman nonetheless had quite a few questions for me. How can something that is safe collapse? (It was never safe, it was just made to look so.)
How can the government let 20,000 retirees or near retirees lose their money? (How can it bail out every reach-for-yield scheme that goes bad without encouraging more of them?)
How could my financial planner have done this? (The planner was paid handsomely to do so.)
She had so far been unable to get any answers to her family's predicament, and thought I might be able to help because I worked "in finance".
Unfortunately, other than to point out that it might be time to seek legal advice, I couldn't help her. I don't know much about the fund and it's not my area of expertise.
Nor could I help in the many similar heart-breaking stories I've heard over the past decade working at Intelligent Investor, caused by collapses such as those of LM and Storm Financial. When the liquidators are in, it's too late.
But we might be able to save other people from making the same mistake, and you can help by sharing this article or passing on the two simple rules contained herein.
Start with your family and friends and bear in mind that the people most in need of your help will be the ones least likely to listen – the people who have no interest in financial matters and just want someone else to make sound decisions on their behalf. This is completely understandable, and no different from when I seek the services of a plumber.
But there's a massive difference between a wet kitchen floor and personal financial ruin. So here are the two simple rules of thumb everyone should use to avoid financial ruin from a single corporate collapse:
2. If your advisor ever suggests you break rule 1, fire them immediately.
That's it. But remember that these rules are your own personal responsibility; they can't be outsourced.
Diversification is the most important investor protection available – understand it, practise it and ensure your advisors practise it also. Grab whatever cliche you need to remember it ("Don't put all your eggs in one basket" is the most popular one).
The tragic error of my new acquaintance wasn't to lose money in a mortgage fund collapse – unfortunately these things happen – rather, it was to lose all her money in any one investment. If you practise diversification, you can make a lot of failed investments without ending up on the bread line.
Diversify among different asset classes, among different individual investments and among different structures (putting all your money into five different Storm Financial products, for example, is not adequate diversification).
If anyone ever encourages you to move all your wealth into one investment or a cluster of investments, they're almost certainly biased in some way – most likely due to financial incentives.
This may be subconscious; they may even believe they're working in your best interest, but they're delusional at best. Sack them.
If they're a friend, be polite at dinner parties but don't discuss money with them ever again. If you need it, seek better advice (preferably fee for service).
Collapses such as those of LM Mortgage and Storm are not one-offs. They happen with every economic cycle. I'd love to click my fingers and prevent every hard-working saver from losing their nest egg in the next financial collapse.
Unfortunately, the solution isn't that simple; but it is simple enough. If you make it your mission to help your family and friends, remember these two rules, you might save yourself a painful conversation after the next corporate collapse, and you'll be saving them so much more.