Future Focus: How to avoid losing your super
The collapse of First Guardian has many investors questioning whether they can trust superannuation. Here’s how to safeguard it.
Many investors have been wary after First Guardian left their members blindsided. The collapse of the superannuation fund has wiped out the majority of most members retirement savings.
These losses occurred in an asset that many thought was safe, backed by the Government and safeguarded by regulations – how can you be sure that this won’t happen to you?
To safeguard against future investors facing similar losses, it is worth looking at what caused the issues with First Guardian and how investors can lower the risk of this happening to them.
What happened?
First Guardian Capital operated a range of funds that promised high returns. Investors were specifically targeted by salespeople generating leads from a website masquerading as a super comparison tool.
6,000 Australian investors had switched $590 million of their savings to this superannuation fund since 2019. The fund collapsed in May 2024 and suspended withdrawals. Investors are recovering small portions of their funds as liquidators try and sell illiquid assets in an attempt to recoup some of the investors’ savings.
On the surface, these investors felt that superannuation was a safe investment that would be locked away for decades. First Guardian promised ‘low-risk’ investments secured by property with high returns. Attractive yield, low-risk in a low interest-rate environment. What could go wrong?
What went wrong
There were a few problems brewing that led to First Guardian’s failure. The main issues were problematic loans with conflicts of interest, illiquid assets and poor oversight. Investments were gathered from questionable financial advisers on commission structures that rewarded funds transferred in, rather than operating in the best interests of the client.
Members of First Guardian believed that they had gotten guidance from financial advisers that matched them to a fund that had appropriate diversification and asset allocation that aligned to their age and risk tolerance. In reality, the funds were invested in risky property developments that were tied to individuals with personal relationships with the fund managers. Adding to the risk the loans were under-secured and when developers failed to repay, conflicts of interest exacerbated issues with the collection process. Investor interests were put last at every step.
What to look out for in your fund
Is it too good to be true?
Like anything else in life, if it’s too good to be true, it probably is. When you start to hear low risk and high – or guaranteed – returns it is a red flag.
One investor interviewed by the Australian Financial Review revealed that the salesperson who recommended First Guardian said that the funds had returns 1-2% more than his current fund. Although that was not an eye-raising amount it is challenging to consistently outperform by that amount over the long-term.
Dig deeper into any strategy that is showing or promising this level of out-performance,
Related to this is understanding what you’re investing in.
Know what you’re getting yourself into
I am a huge advocate for investors understanding what they are investing in, and how each investment will perform in different conditions. My advocacy is personal as I’ve fallen into the trap of not doing appropriate due diligence and investing in funds which I didn’t understand.
When I first started my investing journey, I bought managed funds that had impressive names and track records. It turns out that all four of the managed funds I had invested in were variations of the same meaning they had the same underlying exposure. Over long time horizons, this concentration could have been a disaster.
The same goes for superfunds where names like ‘Balanced’ may be anything but. There’s no industry guidance or set regulations for what a fund should contain based on even common naming conventions.
Understand more than the fund name.
For example, across the industry Balanced funds can vary drastically. Australian Super’s Balanced option can hold a range of Aussie shares between 10 and 45% - it currently holds 24.8%. A balanced fund with Rest Super can hold between 11-21% Australian shares – it targets 16%. Then – you look at QSuper’s Balanced option – they’ve got 25.5% in Aussie equities. There are additional discrepancies in the allocations to each asset class in each option. It is important to understand the underlying holdings because over period of 30-40 years, a misallocation at an early stage could cost you hundreds of thousands of dollars.
For First Guardian, there was opacity around the assets that they were investing in. Most were highly illiquid assets. All funds must manage liquidity to ensure that there’s enough for withdrawals, but superfunds in particular must manage this as they have mandated withdrawals for those in retirement. It was clear post-mortem that there was a lack of concern for liquidity. Redemptions had to be halted to allow for a semi-sensible disposal of the illiquid assets in the fund.
This information should all be disclosed in the Product Disclosure Statement (PDS) and should be reviewed carefully. You should pay particular attention to the PDS and the Fund Profile document if you are recommended the product by a sales or product aligned representative.
Lastly, understand how the asset classes you are invested in operate. Many Australians believe that property is ‘safe as houses’ (pardon the pun). Property comes with its own risks. Firstly, there are many types with ranging risks and returns – there’s commercial, residential, infrastructure. The main risk with property is that it is illiquid and if the investment fund isn’t managed properly, it could result in a fire sale to dispose of the asset.
The second risk is that there’s a certain level of opacity around unlisted assets. I’ve written a detailed article about it here, but there is controversy over how the assets are valued which is especially tricky when it comes to superannuation where there are constant and regular withdrawals. Manage your exposure to unlisted assets that face these risks.
Look for the right protections
There are several levels of oversight that are non-negotiable for investors. Ensure that there are clear separations of powers. All of this information should be available through the PDS. There should be:
- An established Responsible Entity (RE), legally responsible for managing the superfund.
Separated from:
- Independent, third-party custodians that are usually bank-owned that safeguard your assets.
Separated from:
- A regular auditing and reporting process that is transparent.
If you are being recommended a product by an adviser or a representative of a fund, ensure you are asking the right questions. I’ve written an article on how to find a financial adviser here, but some questions specific to this situation are:
- Will you receive a commission if I am to follow your advice?
- How does this investment suit my situation and circumstances?
- Can you please give me your recommendation in writing, including the rationale for this investment?
Final thoughts
It is extremely disappointing that so many Aussies have experienced the consequences of the First Guardian collapse. Their retirement outcomes are reduced. These were every day Australians that were doing what is encouraged – taking control of their financial futures and trying to maximise their outcomes.
Investors should not be discouraged from doing so and trying to personalise their investments to improve their retirement outcomes. However, it should be done with a healthy dose of scepticism and research into what suits your needs. Even if the investment products are legitimate and above board, the financial services and product industries pour money into marketing and slick pitches. Having an idea of what your goals are and what will help you achieve them will help you see past this to find what’s right for you.
Although regulations are there to try to protect investors as much as possible from bad actors in the industry, instances like this cannot always be prevented. The First Guardian collapse is a painful outcome and a reminder of what can happen when investors do not do their due diligence.
Invest Your Way
For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.
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