Do Investment Platforms Offer a $1.2 Billion Umbrella?

One of the very few benefits of being a business journalist is that you are always ready for a rainstorm.

So, during a recent bucketing I happily unfurled a nearby complimentary Equity Trustees golf umbrella which did a fantastic job of keeping the rain off.

The really big question that regulator ASIC is interested in, though, is whether the Equity Trustees’ investment platform will be as successful in protecting some of the 11,000 investors who have lost $1 billion due to the collapse of the Shield Master Fund and also the First Guardian Fund.

Court Action to Test Trustee Liability

ASIC has started court action against Equity Trustees (ASX: EQT) that will test the culpability of the super trustees of large investment wrap platforms for what happens when a fund on the platform collapses.

The answer will be vital not just for the 137-year-old Equity Trustees but also for all of the platforms and for the thousands of investors who are coming to terms with the loss of much of their superannuation and what might be done to replace some or all of their money.

Together with Maquarie’s wrap platform, the potential losses for super investors arising from the Shield collapse alone are $480 million.

There have also been reports that Macquarie (ASX: MQG) is already in talks with ASIC about trustee liability for platform investments.

Other platforms such as Netwealth and Diversa are also involved,

Financial Planners Anxious about Big Payout

It is also a burning question for financial planners, who if past actions around the 2022 collapse of wealth manager Dixon Advisory are repeated, will be on the hook to finance the industry-funded last resort compensation scheme.

For the Dixon collapse that cost the financial advice profession a staggering $135m, a number that could fly much higher due to these later collapses.

On the surface it seems patently unfair for financial planning firms to end up paying for this alone if platforms the investments appeared on get away scot free.

Indeed, many financial planners are still angry about footing the bill for Dixon and would be ropeable about paying more money for an even bigger debacle.

Industry body the Financial Advice Association Australia (FAAA) has been pushing for the financial advice sector’s contribution to be capped at $20m annually, and for the government to cover the excess cost from a broader range of sectors.

FAAA chief executive officer Sarah Abood has labelled the current funding mechanism “both unfair and unsustainable”.

The other issue with the CSLR is that claims are capped at a maximum payout of $150,000 per Australian consumer, which would still leave large losses for many Shield and First Guardian investors.

Platform involvement could help those with super losses

If the courts find that platform trustees are liable for some of the compensation payments, that may be a vital step in at least partly restoring the fortunes of the investors that lost money in the Shield and First Guardian collapses.

It might also help to justify the massive resources ASIC is putting into this investigation, with 40 investigators poring over every legal angle to try to understand the steps that led to these massive and unexpected losses.

The real-world effects of these collapses on thousands of people who have lost in some cases their entire superannuation savings is hard to overstate, with many in a state of disbelief at what has happened to them and suffering from stress and even major psychological issues as well.

Platforms are effectively supermarkets containing a forest of investment options but in this case there was some terrible items that the supermarket operators should never have allowed on the shelves.

At the very least, they need to be much more careful about checking the bona fides of every single investment option they house – something that a significant financial penalty might serve to reinforce.

Compensation looks highly uncertain

The uncertainty about whether they will be compensated for any of their losses and when is also a major topic of conversation on chat groups that have sprung up in the wake of the collapses.

With $4.3 trillion invested across the Australian superannuation system, these collapses and how they will be resolved will also be extremely important in the trustworthiness of the sector as a whole.

ASIC’s actions will amount partly to closing the stable door after the horse has already bolted but the stench of high-pressure sales techniques, fake review websites used to generate sales leads, illiquid investments, outright terrible investments to related parties and massive marketing fees must be eradicated to retain confidence in the superannuation system as a whole.

Are we Better Off After Hayne Royal Commission?

Otherwise, the everyday investor is entitled to ask are we actually better off after the reforms following on from the Hayne Royal Commission which led to a fairly thorough rewriting of the superannuation landscape and saw most of the big banks exit the sector.

While many of the practices outlined by the Hayne Commission were outrageous, for many investors paying unwarranted commissions and fees is still very much better then losing their entire superannuation savings!

As well as the pressure being applied to the platforms, there is a significant amount of pressure on ASIC to wrap its arms around the problems exposed by these collapses and make sure they never happen again.

The future of the investment platforms which are increasingly used by financial planners to wrap investments into and simplify fund administration, is also a very important question.

The platform industry is booming and now holds $1.2t in investments, including $850b in superannuation, so getting the regulatory settings right for this part of the industry will be vital.

There is little doubt that investors took a lot of comfort from having the names of the wrap platform operators such as Macquarie and Equity Trustees attached to their investments – comfort that in this case was totally misplaced.

It Pays to Limit the Number of Intermediaries Charging Fees

As for the everyday investor, I think the take home message is to keep as close to your investment as possible, with the minimum amount of fee-sucking intermediaries as possible.

For those who really don’t want to be involved in the day to day for their superannuation, finding a low fee, well performed industry or retail super fund and choosing the right investment classification could well be the best option.

Even those who want to choose their own investments should carefully check out the options for low-cost direct options via a super fund before pulling the trigger on a financial planner/platform led self-managed super fund (SMSF).

An SMSF does provide the ultimate vehicle for individualising your super account and combining accounts for family members but it comes with a very high financial hurdle to pay for the extra annual auditing and accounting fees plus fees for financial advisers and platforms if used.

Buying shares, bonds and ETFs directly through your SMSF or low-cost direct investment fund certainly looks more attractive than it did given the perils and costs that can be associated with using the platform funds supermarket.