The fallout from Shield and First Guardian is likely to stifle future platform innovation as trustees shy away from risk as well as leave investors with fewer investment options.
According to financial services lawyers Nathan Hodge and Stephen Jaggers, partners at King & Wood Mallesons, the collapse of Shield and First Guardian will have lasting effects on the platform industry.
This saw thousands of consumers and superannuation members invest in two investment products Shield Master Fund and First Guardian which later collapsed. Since then, ASIC has taken action against superannuation trustees Diversa, Equity Trustees and Macquarie as well as platform Netwealth.
Commenting on how the fallout from this will affect the platform sector, both agreed it will limit future innovation.
“There will be less innovation for platforms in the future, at least in the short term,” Hodge said on a KWM podcast. “If platform operators become more averse to risk, then innovation and risk don’t work together.”
Jaggers agreed, stating: “Product innovation will likely be stifled; in terms of the balance between innovation and risk, I see trustees placing more emphasis on limiting their own risk. The risk-reward equation for trustees is a bit out of kilter when you see how much Macquarie is paying in compensation.
“I see investment menus becoming far smaller, less choice for members, less choice for advisers, probably lower risk, and that will happen across the spectrum whether they be super or non-super.”
Macquarie Investment Management has agreed to pay $321 million in compensation to superannuation members affected by the Shield and First Guardian collapse and ASIC is urging Equity Trustees to take a similar action. Platform Netwealth has agreed to pay $100 million to compensate super members who invested in First Guardian.
Another impact that Shield could have would be regarding the decisions made between the boards of the superannuation menu and those of the investor-directed portfolio service (IDPS) menu as it will be harder for boards to justify why an investment is used on one menu and not on the other.
Hodge said: “I can see IDPS trustees adopting the super trustee due diligence and monitoring standards, even if they don’t legally have to do so.
“For an investment that’s on both IDPS and super menu, an IDPS operator will look to adopt the one approach. If [the super trustees] identify issues with that investment as part of their due diligence then on the IDPS menu, it doesn’t mean they have to do exactly the same thing on both, but if they decide to do one thing for the super menu then the board are almost on the back foot if they decide to do something different for the IDPS menu.
“The question isn’t ‘what will you do’ but ‘why didn’t you do that’? Pointing at the super wrap option.”
Jaggers added: “They have different boards so they could conceivably make different decisions, but it would be a big call for an IDPS board to say ‘this didn’t pass the super test but we think it is OK for our investors’. That would be a very hard thing to do.”
