Raymond Tatnell’s financial adviser told him the investment was ”a no-brainer”. He was right.
Tatnell lost money and has now brought a case before the NSW Supreme Court against his advisers from Westpac and Macquarie Bank, which made the product.
There is rich irony in the ”no-brainer” recommendation because MQ Gateway, which Macquarie marketed to Westpac and which Westpac in turn sold to its clients, took considerable brains to concoct – perhaps too many brains. MQ is one of those ludicrously complicated products that entails taking out a large loan to buy units in a derivative and then another loan to meet the interest payments on the first loan.
Tatnell’s case goes to the heart of the debate over the Future of Financial Advice reforms that the government sought to wind back until the Sinodinos affair put the amendments on hold last week.
Macquarie’s MQ is the embodiment of an overly complex and leveraged investment with excessive fees and low transparency. Boiling it down, Tatnell is claiming his Westpac advisers didn’t understand what they were selling but simply trotted out the Macquarie line that it was ”a no-brainer” and ”couldn’t help but make money”.
Another irony in the ”no-brainer” claims is that MQ was also marketed as ”capital protected” and tax-effective. In short, it purported to have the lot.
Where MQ really did have the lot was on the fee front. The commissions are not stipulated in the Tatnell pleadings. However, a former Macquarie banker with knowledge of the product estimated that, in selling Tatnell a $12.5 million ”Structured Product Investment Loan facility” and a ”Capitalised Interest Assistance Loan”, the Westpac salesmen stood to make $543,000 in upfront fees and trailing commissions from Macquarie.
When contacted last week, the banks declined to comment on either Tatnell’s fees or on the fees on MQ products in general. Suffice to say that they amount to a formidable conflict of interest. The more in loans, the more in fees.
In 2007, Tatnell told his Westpac adviser he was seeking a conservative investment. In July the following year his Tatnell Holdings withdrew its investment at a loss of more than $400,000. In May 2011, Tatnell’s investment in the fund and the loan matured at a loss of more than $900,000. Typically with such products, although ”capital protected”, there are early withdrawal penalties. Tatnell’s claim of misleading and deceptive representations, however, is based on disclosure – what he was not told.
‘MQ and Macquarie failed to disclose to Westpac the significant leveraging risks (of both the units in the fund and the loans), that the indices … were price only indices,” says the writ. Further, there was a failure to disclose the way the returns were calculated (using averaging over 12 time periods). Such financial engineering, it is alleged, ”made it unlikely or extremely unlikely that a unit holder would receive a return on the investment that would be equal or greater than the interest payable on the loans”.
”There were limited or very limited market scenarios in which the product would provide investors with a return.”
Rather than relying on its own research or independent evaluation of the MQ series, Westpac relied on Macquarie’s own ”highly optimistic” research. ”The assets should double in value,” Tatnell was told. Yet the research, he says, was ”substantially funded by the fund”.
“[It] was based on assumptions that were beneficial for the projected performance of the product and thus did not represent the fund’s likely performance in average or adverse market conditions.”
Westpac’s advice appears to have been cavalier in that convenient rather than accurate representations were made as to the nature and the likely performance of MQ Gateway. Whether Westpac knew this ”no-brainer” was not a good chance of making money is debatable. But it ought to have known. And when plonking its clients’ life savings into such products it has a duty to understand them.
For the banks there is a risk this lawsuit might morph into a broader action. Financial planners have sold billions in MQ Gateway products.
The moral of the story is that when you see the two words ”structured product”, watch out.