How to protect yourself from Ponzi planners

After all the reforms, how do we trust anyone with our investments?

What’s this? A financial planner jailed for stealing money! Graeme Walter Miller got six years last week for a Ponzi scheme and you have to ask, after all the reforms, how do we trust anyone with our investments?

Miller’s case is exceptional even by the dismal standards of rogue advisers.

There was no intention of guiding clients towards building wealth. Instead, Miller’s scheme quite literally invested none of the money he received from nine key clients over four years.

More than $1.8m was misappropriated as Miller played a game — taking money in and paying some of it back out in dividends while pocketing large amounts — as first demonstrated by Charles Ponzi in Boston in the 1920s.

Former financial adviser Graeme Miller (right) leaving the Downing Centre Court in Sydney. PICTURE: NCA NewsWire/Adam Yip

If, as an investor, you are exceptionally diligent you can check and see if an adviser has qualifications or whether they are a member of the Financial Planning Association.

Before you are ripped off, you could check with the Australian Securities and Investments Commission to see if the adviser has a clean record.

After you are ripped off you could make a complaint to the Australian Financial Complaints Authority.

But in that crucial passage of play when an adviser is suggesting what you do with your money, you are still very much on your own.

Miller’s case made headlines thanks initially to the presence on the books of two rugby league personalities.

But his typical customers were couples who had worked and saved all their lives to get to the point they could sit opposite a financial planner and actually have enough in their bank account to be taken seriously. (The backstory here is tragic in that the former planner now accepts responsibility for his actions but had suffered a loss in the family at the time of the offending).

How Miller got away with it for so long should raise alarm bells.

It seems wilful misappropriation of money by an adviser is always extremely hard to stop.

Think of Bernie Madoff in New York who gained trust over a lifetime while steadily building his giant Ponzi scheme.

Or think of Miller in the town of Myocum, NSW, building a reputation as a trusted adviser for decades and then going rogue over four years to 2017.

What can be done?

There are two more lines of defence for any investor dealing with a financial adviser beyond ASIC or AFCA.

The first is through the increasing power of FASEA (the Financial Adviser Standards and Ethics Authority), which is charged with overhauling standards in the financial advice sector through national exams and a range of related initiatives.

Just now, the FASEA regime is putting a new broom through the sector and the result is the exodus of thousands of advisers who do not wish to follow its guidelines. In fact the industry is shrinking and this is no bad thing if we get a higher standard overall among the 20,000-plus operators in the sector.

The second line of defence is personal. Any investor has the ability to make sure they do not hand over money directly to an adviser — rather they can invest directly in the products the adviser recommends. For example, putting money directly into an Exchange Traded Fund is considerably less risky than asking a random financial adviser to do it for you.

Doug Turek, a veteran of The List: Australia’s Top 100 Financial Advisers, says: “For many years you’ve had the notion of a custodian, a third party that stands between the adviser and the money you have invested. It was a simple and powerful defence for investors. Whenever you do not have a third party between the client and the adviser there are always dangers.”