100 In its final written submissions IOOF argued that attention should only be given to the data that related to the actual business at the relevant time, not another business at a different time. It pointed out that in 2004 Capstone had 45 offices across Australia, $300 million funds under advice and about 4,300 clients. Accordingly, IOOF submitted that it was not valid to compare the customer profile of this large group in 2004 with that of Foxeden and the Taylors in 1999.
101 By way of contrast with the Shepparton figures, IOOF pointed out that the average financial planning investment of a Mildura client who was also a building society customer as at 22 April 1999 was only $23,140. As an illustration of the effect of inflation and of the growth that would occur after the making of the initial investment, IOOF also pointed out that by 30 June 2004 the average financial planning investment of the 50 Shepparton clients of Capstone had grown to $223,113. However, the plaintiff(s) argued that it did not matter that some of the figures were from 2003 and 2004, because their case was that they would have had those funds under investment over a six year period, that is up to 30 June 2005. Even though a client might make only a small initial investment, that did not mean that more significant investments would not be made over time.
102 IOOF further submitted that, even though it was common ground that the IOOF term depositors would have been a likely target group for conversion into financial planning clients, as at 30 June 1999 the amount of the average term deposit was only $16,920 at the Mildura branch and $19,062 at the Frankston branch, although it was accepted that the average term deposit per customer would have been slightly higher. Moreover, 72.55% of the term deposits at Mildura and 70.96% at Frankston were less than $15,000. However, at Mildura the remaining 27.45% represented 134 accounts with an average investment of approximately $45,250. Of these accounts, 22 held more than $70,000 on term deposit, at an average of about $117,080 per term deposit. The averages per customer would have been higher. At Frankston there were 115 accounts of more than $15,000 invested with an average investment of $50,528 per account. Of these accounts, 19 held more than $70,000 on term deposit, at an average of about $139,330 per account. Again, the averages per customer would have been higher. Further, as at 30 June 1999, the 79 savings and term deposit accounts of more than $30,000 held by depositors who were not financial planning clients of Foxeden, had an average investment totalling $78,482. The top 40 term depositors at Mildura, representing about 10% of the accounts, each had funds invested on average of $91,382. At the same date, the 65 savings and term deposit accounts of more than $30,000 held by the depositors who were not financial planning clients of the Taylors, had an average investment totalling $78,709. The top 36 term depositors at Frankston, representing about 10% of the accounts, each had funds invested on average of $71,954.
103 IOOF also analysed the available information for the 126 financial planning clients of Mr Taylor who were also as at 30 June 1999, depositors with the Frankston branch of the Building Society. It showed that as at 30 June 1999 the average investment of these 126 was $45,274 and as at 23 August 2004 was $107,221. IOOF also pointed out that these averages compared unfavourably with the averages put forward in respect of the Shepparton clients - $45,274 compared with $139,717 as at 30 June 1999 and $107,221 compared with $223,113 for mid 2004.
104 The plaintiff(s) placed great emphasis on what was called the 80/20 Rule, that is, that about 20% of the customer base of a financial institution represented about 80% of the total funds available to be invested. Thus, its reservation referred to above, that it could increase the average investment per client if the claimed number of financial planning clients lost was reduced, made some sense. The 80/20 Rule fits comfortably with the evidence of Mr Hawksworth and Mr Taylor that during the notice period they would have focused their attentions, in the first instance, on the depositors, particularly the term depositors, with the greatest amount of funds invested.
105 It was also pointed out by the plaintiff(s) that in their Claims no allowance had been made in the calculation for the loss of additional clients who would have been obtained by them through referrals from the additional financial planning clients who were depositors of the Building Society. I accept the evidence that much of a financial planner's business comes from such word of mouth referrals and have taken it into account in reaching my figures.
106 The greatest difficulty I have with Foxeden's average investment figure of $70,000 and the Taylors' figure of $59,000 is that they do not seem to me to be based on any analysis of the actual amounts invested by clients at the respective branches in June 1999. For example, the average claimed by Foxeden was significantly higher than that by the Taylors, even though on many comparative calculations the depositors at Frankston had a higher average than those at Mildura. Nor do the two sets of average investment figures seem to pay any attention to the numbers of clients holding the larger deposits. In what follows, I have attempted to rectify these defects in the approach by the plaintiff(s).
107 In the welter of figures for Foxeden set out above, the one that impressed me as the most relevant and helpful was that as at 30 June 1999 a total of $8,101,482 was held in 169 savings and term deposit accounts of more than $15,000 each by depositors who were not financial planning clients of Foxeden, at an average of approximately $47,937 per account. Everyone agreed that it was sensible to assume that the customers who held these accounts would have been the primary target for Foxeden's drive for more financial planning business. This is not to say, however, that all of these customers would have attended a "prospecting appointment", or that, if they had, they would have become clients. Assuming, not strictly accurately, that the 169 accounts represented 169 potential clients I have calculated that 51 would have become clients, by assuming 50% (or double the earlier figure) would have attended a "prospecting appointment" with Mr Hawksworth or Mr Smart and that 60% of these would have become clients. Given the evidence about the existence of other more substantial assets held by the depositors outside the Building Society accounts, it seems to me not unreasonable to proceed on the basis that each of these 51 new clients would have had on average an amount of $143,811 to invest, or three times the average amount of $47,937 in the 169 savings and term deposit accounts.
108 As far as the remaining 161 new clients are concerned, they would have had to come from those depositors holding the 526 savings and term deposit accounts of between $2,000 and $15,000 and the 1,070 such accounts of less than $2,000. The average amount in the 526 accounts was approximately $6,234. Again, it seems to me not unreasonable to proceed on the basis that each of the 161 new clients would have had on average an amount of $18,702 to invest, or three times the average amount in the 526 accounts.
109 By my calculations, 51 clients with an average financial planning investment of $143,811 and 161 clients with an average investment of $18,702 would generate funds of $10,345,383, or approximately $48,800 for each of the 212 new clients of Foxeden.
110 Similarly, with the Taylors the figure that impressed me as the most relevant and helpful was that as at 30 June 1999 a total of $6,398,027 was held in 127 savings and term deposit accounts of more than $15,000 each by depositors who were not financial planning clients of the Taylors, at an average of approximately $50,378 per account. Again it is these customers who held these accounts who would have been the primary target for the Taylors' drive for more financial planning business. But not all of these customers would have attended a "prospecting appointment", or if they had, would have become clients. Assuming, not strictly accurately, that the 127 accounts represented 127 potential clients I have calculated that 46 would have become clients, by assuming 60% (or double the earlier figure) would have attended a "prospecting appointment" with Mr Ken Taylor or his son and that 60% of these would have become clients. Again, it seems to me not unreasonable to proceed on the basis that each of these 46 new clients would have had on average an amount of $151,134 to invest, or three times the average amount of $50,378 in the 127 savings and term deposit accounts.
111 As far as the remaining 187 new clients are concerned, they would have had to come from those depositors holding the 347 savings and term deposit accounts of between $2,000 and $15,000 and the 979 such accounts of less than $2,000. The average amount in the 347 accounts was approximately $6,388. Again, it seems to me not unreasonable to proceed on the basis that each of the 187 new clients would have had on average an amount of $19,164 to invest, or three times the average amount in the 347 accounts.
112 By my calculations, 46 clients with an average financial planning investment of $151,134 and 187 clients with an average investment of $19,164 would generate funds of $10,535,832, or approximately $45,220 for each of the 233 new clients of the Taylors.
The Rates of Commission
113 IOOF did not really dispute the average rates of 3% for up front commission and 0.39% for the trail commission. Ms Murone said that the use of these rates "does not appear unreasonable" and Professor McMaster also supported them. I accept the validity of these figures.
The Length of Investments
114 Although there seemed to be no real challenge during the damages hearing to the claim that the likely period of the lost investments would have been seven years, IOOF in its final written submissions argued that it had "no evidentiary foundation". This was despite the fact that Ms Murone, IOOF's own expert witness, accepted that seven years was "not unreasonable". IOOF submitted that broad industry wide statistics were an unreliable source of information and were likely to be higher than the average length of duration for the potential clients at the Mildura and Frankston branches. I do not agree. In the absence of any other evidence I see nothing wrong with using broad industry wide statistics. Nor do I accept that simply because some of the potential financial planning clients had relatively short term deposits of around 12 months or less that this was any indication of the likely length of their financially planned investments.
The Appropriate Discount Rate
115 Finally, there is the question of the appropriate discount rate. This is required, in my opinion, to take into account two separate matters. The first is to build into the above calculations the degree of probability that the above matters might not have come to pass in part or at all. After all, the figures are simply my best estimates of what might have occurred in terms of the plaintiff(s) receiving some financial return, direct or indirect, from the new clients gained in the notice period and five years thereafter. Notwithstanding the reductions made in my calculations to the number of new clients and the amount of the average financial planning investment, I consider that in order to cater for these risks a discount of between 20% and 25% still needs to be applied.
116 The second matter to be taken into account is that any lost income would have been received over time and not all at once on 1 July 1999. It was assumed for this purpose that 50% of the amount invested would have been invested in year one, 25% in year two, 12.5% in year three, 7.5% in year four and 5% in year five and that in each year only 50% of the trailing commission on the amount invested in that year would be received in the year it would have been invested because it would have been progressively invested over the course of the year and paid monthly.
117 Although the parties agreed that there had to be a discount to establish the net present value of any amount received over time, they disagreed over the appropriate rate. Professor McMaster simply used the average monthly interest rate on 90 day bank bills in the period from 1 July 1999 to 30 June 2004 of 5.22% per annum. Ms Murone, on the other hand, applied a 10% to 15% discount rate. She regarded this as the rate applicable to the future income stream of a financial planning business with a moderately low risk of attaining the projected income. She said that this future income stream was still susceptible to the normal vicissitudes affecting any business - the ongoing health of key personnel; the effect of new competitors; changes to the local environment affecting customer flows; the ebb and flow of the financial services industry generally, and so on. It was submitted that none of these risk sensitivities were taken into account by a discount for the mere time value of money. It seems to me that Ms Murone's approach was the correct one, and therefore that a 10% to 15% discount should also be applied.
118 Adding the two discounts together leads to a range of 30% to 40%, and I have decided that the appropriate discount rate to use is the mid-point or 35%.
Quantifying Foxeden's Lost Chance
119 The result of the above is that, in my opinion, the appropriate calculation of Foxeden's lost chance to earn financial planning income over time is as follows: