This episode is a timely deep dive into superannuation safety following the collapse of First Guardian Capital. Mark and Shani break down what went wrong, the warning signs investors missed, and the due diligence steps you can take to protect your retirement savings.

Topics Covered:

• What happened in the First Guardian collapse

• The difference between investment risk & product risk

• How to spot red flags in super funds

• Why liquidity and transparency matter for your retirement

• Questions to ask any adviser or salesperson before switching funds

• Why due diligence is still essential in a regulated system

You can find the transcript for the episode below:

Shani Jayamanne: For the past five years, we’ve released a weekly podcast 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.

Mark LaMonica: We’ve shared our journeys, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor instead of the investments. It’s a guide to successful investing with actionable insights and practical applications.

Jayamanne: You’re able to pre-order the book through the links in the episode description.

LaMonica: Thank you for your continued support and we look forward to helping you invest your way.

LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

So, Shani, we do need to address why this podcast is coming out late.

Jayamanne: It is. Do you think anyone is keeping track?

LaMonica: I think there are people devastated all over the country. But normally, it comes out obviously Sunday morning.

Jayamanne: We had a few fallen soldiers in the Investing Compass team.

LaMonica: That is true. Do you want to elaborate on that or…?

Jayamanne: Well, you went to a wedding in the US. You were only in the US for maybe three or four days.

LaMonica: Four nights.

Jayamanne: Four nights.

LaMonica: It’s a long way to go.

Jayamanne: It is.

LaMonica: For four nights.

Jayamanne: You were there for a wedding?

LaMonica: I was.

Jayamanne: And you came back, and you had no voice. Nothing.

LaMonica: No voice.

Jayamanne: Yeah.

LaMonica: That is true.

Jayamanne: And you were just going to soldier on and just whisper into the mic to make sure that we didn’t miss an episode because we haven’t missed one for five years.

LaMonica: I know. It was a good track record. I obviously ruined it, but…

Jayamanne: And then Will got ill.

LaMonica: And then Will got ill.

Jayamanne: Yes.

LaMonica: And to be completely fair, you got ill as well, although it didn’t actually impact any of this.

Jayamanne: No. Yes, anyway. We’re all okay now.

LaMonica: We apologize that this is late. We’re all relatively okay.

Jayamanne: Yes.

LaMonica: What are we talking about today?

Jayamanne: So, my dad asked me a question a few weekends ago and he asked whether his super was safe.

LaMonica: And what did you say?

Jayamanne: Well, it’s hard because when you do work in the industry, you know how many protections there are for super and for super members, but it’s particularly hard when you hear a story like what happened to the members of First Guardian to prove that it’s an exception, not the rule. But I explained why I am sure his super is safe and what those protections are. But I also thought there’s probably a lot of investors out there who are wondering whether their super is safe.

LaMonica: Yeah. And I think we hear from a lot of people that control in transparency is a big plus for having a self-managed super fund or SMSF. But of course, an SMSF is not for everyone. There are many people out there where it doesn’t make sense for lots of reasons. So, it could be the balance isn’t high enough, the super balance isn’t high enough to justify the fees. You may not have the time to administer and manage your self-managed super. You might not have the desire to manage your own investment. So today, we’re going to go through, you mentioned it earlier, but what happened with First Guardian, where it failed and what that can teach us about lowering risk within our superannuation funds.

Jayamanne: That’s right, Mark. And normally we talk about risk from an investment risk standpoint, but we rarely talk about product risk. So why don’t we start with what happened?

LaMonica: Okay. So, First Guardian Capital operated a range of funds, and they promised high returns. So, investors were specifically targeted by salespeople, and they were generating leads off of a website that was masquerading as a super comparison tool that we’ve all seen are out there. So once somebody went on to this, they would be called up by these salespeople and they’d be then given general advice and that is an industry term, meaning that that’s advice that’s not specific to you and your personal situations. But of course, that advice would point people towards First Guardian products.

So, 6,000 Australian investors switched $590 million in savings into the superannuation fund and that is since 2019. So, the fund collapsed in May of 2024 and withdrawals were suspended. And how it stands now is that small amounts are trickling back to investors since the liquidators have taken over and they’re basically selling these illiquid assets that were left in the fund to try to get back some of investors’ savings.

Jayamanne: So, all around, not a good news story. It’s actually a really dire situation for many of these investors. They’ve entrusted their superannuation to this company, their savings, that’s supposed to sustain them during retirement and on the surface, these investors felt that superannuation was a safe investment that’s locked away for decades and this superannuation fund was promising low risk investments secured by property with high returns.

LaMonica: Attractive yield, low risk, all in a low interest rate environment. What could possibly go wrong, Shani? So, you took a deep look into this. You wrote an article on it. So, what did go wrong?

Jayamanne: Well, there were a few problems that were brewing that led to First Guardian’s failure. The core issues were that there were problematic loans with conflicted interests, illiquid assets and poor oversight. And partnered with this, they rewarded questionable financial advisors or individuals qualified to give advice on commission structures that rewarded funds transferred in, when really, they should have been operating in the best interest of the person that they’re advising.

LaMonica: So, a question I had when I read your article, and I think a question a lot of listeners might have is, we had this whole Royal Commission into this around advice and commissions and everything else. So how was this allowed?

Jayamanne: Yeah. So, the individuals directing funds into First Guardian may not be financial advisors in the sense that we all know. So, when I used to work at a fund manager, we used to have internal salespeople that were like this, and they were qualified to give advice, and they would direct client funds because it would be to internal funds. And their performance was measured on the flows they retained or attracted.

LaMonica: So, they weren’t so much advisors as they were salespeople that were qualified to give advice.

Jayamanne: And on top of this, the members of First Guardian had believed that they had gotten guidance from financial advisors to match them to funds that had appropriate diversification and asset allocation that matched their age and their risk tolerance. And this is not what they got.

LaMonica: It isn’t. In reality, the funds were invested in property developments that were tied to people with personal relationships with the fund managers. And on top of this, the loans were under-secured. And when the developers failed to repay the loans, there was this natural conflict of interest. So, it’s like asking a friend or family member to repay their loan. So, they’re going to be treated to different terms, and you would if this was a pure business contract at arm’s length, which is what it should have been.

Jayamanne: Yeah. So, what we’re really seeing here is investors’ best interest being put at last at every step, basically.

LaMonica: So that’s basically what happened. Let’s move on to what’s important now. How do investors avoid getting into this situation? So ultimately, no situation is completely unavoidable, but there are many ways to reduce risk so that this doesn’t happen to you.

Jayamanne: And the first question to ask is, is it too good to be true? Like anything else in life, if it sounds like it is, it probably is. And if any investment scheme is offering something that’s extremely attractive and it’s guaranteed over long time periods, that should raise a few eyebrows.

LaMonica: The AFR covered this collapse a lot. And one of their articles included an interview with a member of First Guardian. And he said that the salesperson who recommended First Guardian said the funds had returned 1% to 2% more than his current fund. And for long-term investors, this can mean a really meaningful difference to retirement outcomes. But at first glance, that’s not an eye-watering amount. It’s not something that immediately rings alarm bells, especially for an investor who may not be that engaged with their superannuation, an investor likely to use something like a super comparison tool. It’s also worth understanding how viable the returns are to consistently achieve. One way to do this is to compare the return that they’re offering to a broad market index with similar assets. The return is much higher over multiple periods. Dig deeper to understand how they’re bridging that gap.

Jayamanne: And that’s how we come to doing the work, to understand what you’re investing in and what you’re getting yourself into.

LaMonica: We’re both huge advocates for investors having a deep understanding of what they’re investing in. If you do, you’ll know how that impacts, how the environment impacts, how that investment will behave and perform.

Jayamanne: And I’m an advocate for this because I’ve fallen into the trap of not doing this and being invested in funds where I had no idea what the underlying assets were. When I first started my investing journey, I invested in 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 with the same exposure. So, over long time horizons, this concentration could have been a disaster.

LaMonica: And one of the places we run into this for super funds is a “balanced fund”. And there is no industry guidance or set regulations for what a fund should contain based on the name and convention. So, it’s important that investors understand more than simply the fund name.

Jayamanne: Okay, so let’s go through an example. So, across the industry, balanced funds can vary drastically. Australian Super’s balanced option, it can hold a range of Aussie shares between 10% and 45%. It currently holds 24.8%. A balanced fund with the Rest Super can hold between 11% to 21% Australian shares. It targets 16%. Then you look at QSuper’s balanced options, they’ve got 25.5% in Aussie equities. There are additional discrepancies in the allocation to each asset class in each option. So, it’s important to understand the underlying holdings because over a time period of 30 or 40 years, a misallocation at an early stage could cost you hundreds of thousands of dollars.

LaMonica: And for First Guardian, the situation was worse. So, it was really opaque about what people were actually investing in. And mostly what it turned out to be is highly illiquid assets. So, one of the things that all funds need to manage is liquidity. And that’s just to make sure there’s enough for withdrawals. But super funds in particular need to manage this as they have mandated withdrawals for people that are in the retirement phase. So, it was clear postmortem that there was a lack of concern at First Guardian for liquidity. Redemptions had to be halted to allow for a semi-sensible disposal of these illiquid assets in the fund.

Jayamanne: And unfortunately, there is no fun way to be a responsible investor. All of this information will be found in a product disclosure statement or a PDS. So, it’s a document you should review before parting with funds or transferring over your retirement savings. You should pay particular attention to the PDS and the fund profile document if you’re recommended the product by a salesperson or a product aligned representative.

LaMonica: Yeah. And it’s also really important to understand how the asset classes you’re invested in operate. And I know this will come as a surprise to you, Shani. But Australians are very interested in property. They are. And they think it’s one of the safest assets that you can invest in.

Jayamanne: And (Ray’s) actually did a survey of some of their investors and the results show that a large proportion of investors believe that property is the safest investment compared to cash. But property comes with its own risks. And as the resident property skeptic, Mark, do you want to go through the risks?

LaMonica: The first thing is that there are many different types of property and the risks and return profiles for all of them are very different. So, there’s commercial property, residential infrastructure. And the main risk with property, which we’ve mentioned a couple of times, is that it is illiquid. And if the investment fund isn’t managed properly, it could mean that there needs to be a fire sale to try to convert that asset to cash.

The second big thing to consider is that there’s a certain level of opacity around unlisted assets. Shani, you wrote an article and the whole thing was on unlisted assets. And Will, we have a link in that in the First Guardian article. So, now you have to go to Shani’s First Guardian article and then go to another article on unlisted assets. But really, what you’ve talked about is that there is controversy around how these illiquid assets are valued. And it’s particularly tricky with superannuation funds because there are constant and regular withdrawals and contributions as well.

Jayamanne: Exactly. So, it’s important that investors manage their exposure to unlisted assets that do face these risks.

LaMonica: And another large issue with First Guardian where there are conflicts or there were conflicts of interest, is there a way that investors can do due diligence to reduce this risk from occurring?

Jayamanne: Yeah, I think there’s several levels of oversight that are non-negotiable for investors. So, the way that you can guard against what happened and check that their separation of powers is again in the PDF. So, there should be an established responsible entity or an RE. This is a firm responsible for managing the superfund. This should be separated from an independent third-party custodian. They’re usually bank-owned. So, you’ll see JPMorgan, Perpetual, HSBC, those some of the common ones. They keep your assets and safeguard them. And lastly, a regular auditing and reporting process.

LaMonica: And I think we need to talk a little bit about the advice that people receive to actually – that directed them into First Guardian. So, if you’re ever being recommended a product by an advisor or a representative of a fund, you need to ask the right question. So, some of the questions that you can ask are, will you, as in the person recommending it, receive a commission if you follow their advice? How does the investment specifically suit your situation and your circumstances? And can you give the recommendation in writing, which also includes this rationale for why the investment is appropriate?

Jayamanne: So, I think it’s extremely disappointing that so many Aussies have experienced the consequences of this First Guardian collapse. Their retirement outcomes are reduced. These were everyday Australians that were doing what is encouraged and what we encourage too, and that is taking control of their financial futures and trying to maximize their outcomes.

LaMonica: And one of the lessons we want to reinforce is that we don’t think people should be discouraged from doing this, so discouraged from trying to take control of your financial future and improve those retirement outcomes that you achieve. But you do need to go through this process or any investment process with a healthy dose of skepticism and make sure and research into why a particular investment suits your needs. Even if those investment products are legitimate and above board, the financial services and product industries pour all this money into marketing to try to get you to invest in something. So, you need to have an idea of what your goals are and what will actually help you, what investments will actually help you achieve your goals and make sure that you can make that judgment if something is right for you.

Jayamanne: And although there are regulations that try to protect investors as much as possible from bad actors, in the industry you can’t always prevent these issues. The First Guardian collapse is a really painful outcome for a lot of Australians and a reminder to all of us about what can happen if there’s not enough due diligence done.

LaMonica: Great. Thank you guys very much for listening and we again apologize that this is a couple of days late. But we will be back on track next Sunday. Thank you.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve 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.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

The book is currently in presale which is an important time to build momentum. If anyone would like to support this project you can buy the book now. Thanks in advance!

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