Australia: Financial Advice and Risk Taking in the Stock Market: Part 1

Last Updated: 18 October 2010
Article by Jim Parker

1. Value of Financial Advice - author Jim Parker

2. Risk Taking - Active v. Index Management - author Amy Horan

The article below was originally written by Jim Parker in February 2009 and has been reproduced with his permission.

Investors grappling with extreme market turmoil, as we have seen, often question the value of financial advice. Perhaps the more pertinent question to ponder is the cost of bad advice. That unrecoverable cost has been evident on several fronts in the past year amid revelations of multiple investment scandals, in which thousands of people have been robbed of their retirement savings.

Even properly advised investors found unprecedented market volatility difficult to deal with. But the pain was compounded for those who were victims of incompetence, deceit and, in some cases, outright fraud.

Among the accused was disgraced financier Bernard Madoff, who swindled investors of $US50 billion in a 'Ponzi' scheme, a scam in which early investors are paid with money from later investors. Clients are still trying to work out exactly what he did with their money after investigations revealed he never bought any of the blue chip stocks and Treasury bills he listed on their statements each month. No sooner did the Madoff case start to fade from the headlines, that it was revealed that another wealthy financier, Robert Alan Stanford, had been charged by US regulators with a $US8 billion fraud.

Stanford was accused of misleading investors by telling them their money was in unusually high-yielding certificates of deposit, when in fact the vast bulk of it was in illiquid real estate and private equity investments. Here in Australia, thousands of average people suffered devastating losses as a result of the $A100 million collapse of Storm Financial. Storm was an advisory group which shoehorned clients into highly-leveraged equity investments irrespective of their age, existing assets or risk appetites. Many of those clients not only saw their equity portfolios decimated, but lost their homes and businesses. Some were left owing money due to their margin loans exceeding the value of their investments.

In Japan, a flamboyant businessman named Kazutsugi Nami was arrested and charged with defrauding investors of $US2 billion, in a scam that involved him making promises of a 36 per cent annual return. A futon salesman by trade, Nami went as far as issuing his own money called 'divine yen'. Fellow schemers were alleged to have swapped this for goods sponsored by his company.

While each of these episodes is distinctive, they share a common characteristic, in that people were lulled into investing in something that, in normal times, might have seemed too good to be true. That's the nature of long bull markets.

People start to focus exclusively on return, rather than the risk which drives return. This provides an opportunity for purveyors of bad advice or plain scam artists to ply their wares. So it's worth reflecting at this time on exactly what constitutes good advice and how investors can recognise it when it is offered to them.

First, good financial advice is not about providing a forecast. The smartest advisers are not those who seek to divine what will happen next in the markets, but the ones who help their clients to make smart decisions about their money to secure the capital market rate of return. This kind of advice is not based on a hunch or guesswork, but on financial principles backed by long observation and research.

Second, good financial advice is about structuring an investment strategy that is right for the individual, not one that reflects what the adviser is trying to sell or what will earn them the most in fees and commissions. It has to match each person's appetite for risk, while helping them reach their investment goals.

Third, good financial advice is about ensuring clients' portfolios are structured around risks where there is an actual relationship with return. The scandals listed above largely resulted from people not understanding, or not being told, the sizeable risks they were taking in chasing 'guaranteed' returns.

Fourth, good financial advice means ensuring investors understand what they are investing in, and that the management of those assets is handled transparently and with a great deal of integrity.

Fifth, good financial advice involves advisers being upfront with their clients about what they can and can't control. If investors want to enjoy long-term equity returns, they need to be exposed to the equity market. That means they can't avoid being exposed to a market downturn. However, they can ameliorate controllable risks such as fees, taxes and their degree of diversification.

Sixth, good financial advice means keeping investors disciplined in their chosen asset allocation even when things seem hopeless. Good advisers remind their clients that falling prey to short-term anxiety, and dumping their asset allocation to shelter completely in cash, may not best serve their longterm wealth. It just means they forego equity market returns and are placed at risk of missing the bounce in risk assets when it comes.

For the victims of the likes of Madoff, Stanford, Nami and Storm there is little or no chance of retrieving their original capital, save what they might secure in a class action. Some have lost everything. By contrast, investors who have been advised properly have plenty of reason to hope. Their diversified portfolios may be down, but they can take comfort from the fact that potential returns are now at extraordinarily high levels and that, if they keep their nerve, they are positioned for the recovery when it comes.

That is the value of good advice.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.