David French | 21/08/2013 10:46:53 AM

This article was originally published as 'Storm' in http://www.themorningbulletin.com.au/ on 10th August 2013. Image borrowed from www.couriermail.com.au

The dumbing down of education and the reliance on one's own feelings as a reasonable basis for decision making are topics previously addressed in the column.

It seems to me that we have moved from a situation where few were relatively tertiary educated, but educated to a high standard, to one where a shallower style of tertiary education is available to most everyone. And we have moved from a system of highly organised (definitely flawed and perhaps over-bearing) religion as a source of self-reflection to one where daring to question the crowd is deemed heretical. The popular default now is a reliance on feelings and bureaucracy.

The outcomes of this interaction are important. Take the failure of Storm Financial for example. Storm sold a dream - a dream of wealth with little risk and no effort. People who bought the dream were often hard workers, successful in business, but not formally educated (whether in finance or otherwise). The people selling the dream were often not educated either, and those that were clearly weren't deep thinkers.

Interestingly, Storm did not initially fail as a company, or even as a result of its product recommendations. From what I have seen, the underlying investment recommendations were actually OK, but it seems Storm advised all clients to borrow heavily, with initial borrowings used as a deposit for additional borrowings. When markets turned sour, the layers of borrowings offset the natural (but admittedly imperfect) protection offered by a fairly standard portfolio of managed funds. The bad economic conditions were pervasive, and because everyone had borrowings, most all of the clients lost money - a lot of it. And that is what brought the company down.

As a result of Storm (and others) the new Future of Financial Advice rules were implemented. Indeed, following the GFC generally, the whole world is paranoid. Society cries out to be protected, but discounts the substantial costs associated with protection, however imperfect. The additional regulation, reporting, review processes, capital, compliance committees, complaints agencies, insurance, lawyers, Product Disclosure Statements, Statements of Advice - it all costs money.

Amongst the ra-ra sessions, champagne and client trips, the failure of Storm could have been avoided if potential clients had just asked a few simple questions. Like, do I really understand this? Is the person explaining this stuff qualified and experienced? What happens if the market falls? That's the difference between logic and feelings.

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