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Think twice before hiring a financial planner

In financial planning, as in much of the finance industry, there’s a particular set of standards or rules your planner must follow in order to deal products and give advice. Arguably, the most important rule is that a planner cannot recommend any financial product that is ‘not suitable’ for the client.

When your planner has been deceitful or misleading in any way, the regulator for the finance industry is the Australian Securities and Investment Commission (ASIC). It is responsible for maintaining fairness in the industry. However, doubts of its effectiveness to deal with problems are exemplified no better than in the case of Don Nguyen.

Don was one of Commonwealth Bank’s (ASX: CBA) senior financial planners and was known as one of the best. He was notorious for his ability to draw in new customers to CBA’s financial planning arm, known as CFP. He was known to give cash payments to branch staff for referrals and in 2007 wrote $39 million for the company, 3.5 times his target.

However, by the beginning of the GFC, some clients and other financial planners were becoming worried about his dealings. In October 2008, five employees blew the whistle on the CFP culture that allowed fraud to exist.

The men sent a fax to ASIC, which was later obtained by Fairfax Media, explaining Nguyen’s dealings with clients. Some interesting things were contained in the document, one of which was “the risk profiles of the clients, whereby all, including the retired, the disabled and the unemployed, opted for aggressive high-growth strategies”.

One group of retirees was shocked when they found out that of the $260,000 they invested with Nguyen, only $92,000 remained in their savings account shortly after. Their risk profile was moderate, but the funds were dumped in speculative high risk investments. He was rumoured to have over 1,300 clients.

Another victim, an 88-year-old woman allegedly signed a document saying higher income was not important and was charged $30,421 for his service, $16,732 of which was commission to Nguyen. Many other clients have come forward with larger losses but have settled with CBA for less than they deposited because of the severe distress the situation was causing to their families.

Eventually, two years after the letter was sent to ASIC and the CBA falsified documents to try to manipulate clients, the bank created a voluntary compensation scheme.

The move was welcomed by ASIC, which thanked the bank for its “co-operative and consultative approach”, but it still took almost a year before any cases were settled.

Foolish takeaway

Looking at financial instruments and tables can be daunting for anyone who hasn’t had experience in the industry or never undertaken any formal education to understand it. Trust becomes a very important part of financial planning. Clients trust you with their hard earned cash and sometimes it might seem to them that it’s not the hassle. Just like when you buy a new car, shop around a little and do not go for convenience. Planners have a list of products they can sell under their “FSG” or “Financial Services Guide”. Many banks will only offer their customers products from their own institution. That’s why Nguyen would have been rewarded by the CBA for bringing in so many clients.

It’s your money, take a look at a ‘boutique’ firm and make sure to not only look at their prices, culture, manner and professionalism but also their FSG. Ask them to explain the products and why it is ‘best’ suited to you. They may say it is “not suitable”, but don’t take that for an answer, it’s your money, get the “best”. If they don’t offer a product you want and know is good, don’t be afraid to walk away.

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Motley Fool contributor Owen Raszkiewicz has no financial interest in any of the mentioned companies.

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