Thursday, February 18, 2010

My proposed bet with Peter Johnston from the Association of Independently Owned Financial Planners: an Astarra follow up

The Association of Independently Owned Financial Planners is a rival to Financial Planning Australia as an umbrella group for financial planners in Australia.  Financial planning in Australia is a big business because Australia – unlike America – has a privatized social security system called “superannuation” and financial planners are the front-end for the sale of many superannuation products.

The industry has had its share of scandals (see Storm Financial and Westpoint) but there are many fine operators in the industry and I am unashamedly admit that some of my best friends are financial planners.

That said – the AIOFP was closely associated with Astarra – a fund of funds and distributor of funds which was closed recently by the Australian securities regulator after a whistle-blowing letter from your blogger.  [I wrote about Astarra and my role in precipitating the investigation here though I can’t claim too much credit – a reader of my blog suggested that I look at it.]

Anyway – back to the AIOFP.  According to this article four financial planning groups – all members of the AIOFP – represent about 90 percent of the funds in the “Astarra Strategic Fund” (now known just as the ASF).  The strategic fund is the main black hole in Astarra – and the administrator has said that they cannot prove the existence or value of the foreign assets of the ASF.  They said this possibly to quiet media claims by the AIOFP that the assets have been found.  The AIOFP just wants the strategic fund taken out of liquidation – and presumably valued on the the basis of assets that they claim they can find. 

Now my guess is the administrator – who intends to liquidate the ASF – is accurate.  The assets of the ASF are pieces of paper which state that there are assets there but real proof of the existence of the assets cannot be found and liquidation is the only way to determine what is recoverable.  But as said – the AIOFP has a different opinion and wants to sack the administrator.

Peter Johnston of the AIOFP suggested that I wrote my letter to regulators motivated by “professional jealousy”. 

This is of course defamatory. 

I am a hedge fund manager: I am motivated by money. 

Professional jealousy is a counter-productive (and defamatory) motive because – frankly – it just stands in the way of what I should be doing.

And so – being motivated by money - when Peter Johnston offered me a bet on whether the money would turn up I leapt on the chance.  I offered $100 thousand to be escrowed either by Morningstar or the Sydney Morning Herald.  [I have since offered Peter three for two odds.]  And he backed out.  (The Sydney Morning Herald CBD gossip column reported the story this morning.)

Peter is of course a coward – he backed out of the bet – but that has not stopped him from boasting to the press about how his organization has found the ASF money and that all is well.  Worse – his members have been telling their clients that their money will turn up and their superannuation (meaning their entire retirement savings) will be unimpaired. 

Now this article names the financial planning companies that have – as Peter Johnston notes – about ninety percent of the claims against the ASF.  I know many victims do not know they are victims because their financial planners say that they are going to be alright.  And maybe they will.  Maybe the money will turn up as Peter Johnston says it will.

But Peter Johnston is a coward and will not carry through with his bet.  That however does not stop at least one financial planning group (or at least some financial planners) telling their clients that their money is safe.  If they believe that maybe they could take the bet Peter Johnston backed out of.  If they are certain enough to tell their clients that their money is safe then they should be certain enough to take that bet.

The Sydney Morning Herald has said they are willing to be the escrow service. 

And I look forward to spending the winnings.


John Chew said...

Before the Internet, Peter would have gotten away with it. But today, every person who can google and uses facebook/twitter/blogs is part of the press.

There should be a blacklist for financial planners who have given self-serving advice that enriched themselves while impoverishing the less sophisticated and vulnerable.

One can understand why they do it but it doesn't make them any less culpable.

Anonymous said...

wow - make sure you let us know how it turns out and how much money they eventually recover.

Anonymous said...

Why would anyone use a financial planner?

At least check how much commission the planner is receiving before investing in any funds.

I believe the best Australian funds manager (Platinum) do not pay commission, so I wonder how
many planners avoid recommending that company.

John Hempton said...

The main reason for using one of the planners and their wraps is that they also provide a superannuation compliance service. Super compliance is expensive and difficult if you do it yourself.

Other people use them because they need their hand held. That is not wrong but the people do need to be careful they are not victims of the unscrupulous elements of the industry.


Anonymous said...

how many people and how much money is at stake?

Don said...

Cowardice..ouch..Thoroughly entertaining John. Looking forward muchly to the next instalment in this

John Hempton said...

How much money? Good question - probably between 100 and 200 million - about 10 thousand people - most losses a small part of retirement savings - some losses near total.

Unknown said...

I must say I thoroughly enjoy that blog and all the associated stories. Thank you, John!

Alex C said...

Got to give stick it up to the financial planners.

I remember sitting in on an internal presentation on a product that would pay a one-off 10% commission to planners on funds invested. It was an absolute joke, though no one batted an eyelid at the fee. Thank goodness the project never got off the ground and I've since left the company.

Anonymous said...


keep up the pressure

Anonymous said...

As for the Bush example of cutting marginal tax rates, like Clinton did on Cap Gains, this pretty much demolishes your 'faith-based' inaccuracies against the efficacy of lowering marginal rates:

CBO predictions of Tax Revenue in August 2003, post the passing of tax cuts, note the 1-yr lag before things really get going, economy-wise:

In $Billions 2004 2005 2006 2007

Predicted $1,825 $2,064 $2,276 $2,421

Actual $1,880 $2,153 $2,407 $2,568 Total

Unexpected Surplus $55 $89 $131 $147 $422bn

The CBO was off by almost $400bn in just 4 years. And they projected 30% growth to begin with!

In the first 3 years of the Tax Cut, growth averaged 4%, and an ALLTIME US record OF 12 quarters of 3%+ GDP growth in a row.

investmentgardener said...

I admire the way you use your skills to uncover such shenanigans. Even more so, you admit that you are motivated by personal gain. The better your reputation, the more attractive your fund will be. There is no wrong in that, although you do run considerable risks with your reputation. But I guess you are the best person to assess that risk.

In the mean time, may you serve as an example to other talented financial people, so they realize there are ethical ways to use their skills.

john said...

Association of Incestuosly Owned Financial Products

john said...

The AIOFP stance on this is must be unnerving to the Financial Planning industry. Surely they should be leading the way, on behalf of their members clients, to bring to justice those that have committed this fraud? Unless of course, they were so deeply in cahoots with the perpretrators that they are trying to save their own skin. If this is the case, then the AIOFP charter is untenable. What does ASIC and the FPA say?

Anonymous said...

John, few questions

1. Can you please explain for us any motive that Johnston and Seagrim would have for their obvious "corpse cuddling" of Shawn Richard?

2. Also explain why ASIC haven't put out a statement to the market about the stage and interim results of their enquiry.

I have heard rumours in the industry that ASIC were up in Hong Kong before Christmas and are going again very shortly. This being the case why haven't they reported back?

3. Also your views on why Johnston front footed it in the media and told everyone IOFP were getting a private investigator? When it is something you would do without telling the world.

Anonymous said...


If you read this section of the HK ordinance:

Pressure should now be put on ASIC to reveal their interim findings to stabilise the fund in question and give some assurances/certainty to investors.

It is clear that investigations are underway in Hong Kong, yet those involved cannot talk subject to Hong Kong law which prohibits such communications.

The only people who can tell us what is happening is ASIC themselves. So far - silence. ASIC at some point have to make a statement about what they have found.

John Hempton said...

I agree that ASIC at some stage have to make a statement. The liquidators statement re ARP Growth and ASF as to not being able to verify the EXISTENCE of the assets is the best we have so far.

I gather ASIC have legal restrictions here as to what statements they can make.

I wish I had all the details myself...


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