Five lessons from the collapse of Storm Financial
Tuesday, January 13, 2009/
Storm Financial’s stumble into administrator’s hands wasn’t just a result of the financial crisis – its strategy left it badly exposed and distracted. JAMES THOMSON picks over the remains and looks at the salient lessons for every entrepreneur.
By James Thomson
Storm Financial’s stumble into administrator’s hands wasn’t just a result of the financial crisis – its strategy left it badly exposed and distracted.
The collapse of Townsville-based financial planning group Storm Financial has placed a dark shadow over the savings of 13,000 Storm clients, who had invested more than $4 billion with the company.
While investigators and administrators are likely to face a long battle to salvage something for these investors and other creditors, the collapse provides some instant and important lessons for entrepreneurs.
Earlier this year, Storm’s high-flying founders Emmanuel and Julie Cassimatis were valued at a staggering $450 million by Brisbane newspaper The Sunday Mail, after the pair had led the company on a turbo-charged growth spree, acquiring a large number of financial planning businesses along the eastern seaboard.
Less than 12 months later, the company that the Cassimatis family started 35 years ago is in the hands of administrators. But while the extraordinary crisis in global financial markets has been devastating for the company, the couple’s management style and strategy left the group horribly exposed.
Here are five lessons from the collapse of Storm.
Your model must be strong enough to survive the business cycle
Storm Financial was a boom-time business. While the company was established 35 years ago and had seen off incidents including the sharemarket crash of 1987, the Asian financial crisis and a couple of Gulf wars, it really only rose to prominence in the last five years as world financial markets entered a roaring bull market.
Storm was able to produce impressive returns for investors by advising them to borrow heavily to “amplify” the performance of their portfolio. While markets were soaring, the model worked brilliantly, and client numbers and funds-under-management grew quickly. But when the market turned, the margins calls started, and Storm was sunk.
Storm’s founders could never have predicted the severity of the financial crisis, but it was not until October 2008 that they advised clients to start getting out of equities and into cash. By then it was too late for Storm and its clients.
Spend your money on the things that matter
Emmanuel and Julie Cassimatis apparently had a thing about toilets. According to one former staff member, the couple hated going to fine dining restaurants where the food was great but the restrooms were dirty and disgusting – they said it immediately made you wonder what the kitchen was like. As a result, the bathrooms at the Cassimatis’ lavish Townsville home and Storm’s $5 million Townsville headquarters were said to be opulent– a signal to visitors that Storm’s attention to detail was all-encompassing.
“We tell clients all the time how much we value them, and this building is an extension of that in showing them we really mean what we say,” Emmanuel Cassimatis said of Storm’s HQ.
The couple also regularly hosted clients and staff on trips to exotic locations such as the Mediterranean and South Africa (some clients and staff paid, others were given trips as rewards) and were well known for expensive corporate functions.
Client relationship management is important, team building is great and building a corporate brand is essential, but they should never be allowed to steal an entrepreneur’s focus.
Timing is everything
Storm’s attempt to float on the Australian Stock Exchange in late 2007 was an absolute disaster.
For starters, the company had its timing all wrong and was trying to sell the float just as global financial markets were starting to head downwards and the company’s debt-fuelled model was starting to wobble.
Second, the float seemed poorly organised. Storm was forced to delay its IPO by one month because of conflicts with its reporting dates, and fund managers who saw Storm’s presentations remember a shabby and disorganised sales pitch, with Storm executives openly bickering with the company’s corporate advisers.
Not surprisingly, institutional investors laughed Storm out of town and the float was eventually pulled due to a lack of support.
Expansion should never come at any price
You only need to visit Storm’s website to see how desperate it was to grow its financial planning group at virtually any price. “We’re expanding across Australia and now buying quality financial planning practices for top dollar,” the website says. Storm promised to pay financial planners “above industry standard” for the businesses, and pay in a shorter time than is usual (50% upfront and 50% in 12 months).
While Storm does not seemed to have been in huge debt when it collapsed (CBA’s loan to the company is reported to be around $10 million, which isn’t much given Emmanuel and Julie Cassimatis took out around $24 million in dividends in 2007-08) it appears the jump from small Townsville firm to national network was just too much.
Commonwealth Bank of Australia had long been Storm’s key lender and an important partner, with many Storm clients holding margin loans with CBA and its subsidiaries. But as Storm has inched closer to the brink, the relationship has deteriorated quickly.
On 24 December, Storm went to the Federal Court to apply for an injunction preventing Commonwealth Bank from further communicating with its clients, arguing that letters the bank sent to Storm clients in early December were misleading and may have exacerbated client losses.
In early January, Storm released a media statement declaring the court had agreed with its claims, when in fact Justice Greenwood had dismissed Storm’s application and said the matter needed to be tested at trial. CBA was deeply unimpressed.
The relationship between lender and a failing company is always going to be fraught with problems, but Storm did not make its task of staging a last-minute rescue any easier by engaging in a feud with its key lender.
See also Storm Financial collapses into administration in today’s Briefing.