How Licensees became underwriters of investment returns – and why Shield and First Guardian may finally change that.
The adviser doesn’t manage the money…
The fund manager makes the investment decisions…
The research house gives it a “Favourable” rating…
The platform conducts due diligence before hosting it…
The trustee / responsible entity signs it off…
…But the financial advice industry foots the bill.
If you’ve followed my commentary over the years, you’ll know I’m no stranger to defending licensees and financial planners against disproportionate regulatory burdens and unfair industry dynamics, crystallising a phenomenon long festering beneath the surface of Australian financial services regulation: the transformation of financial advice as underwriters of investment performance.
The Implicit Performance Guarantee
We know how the system works: A financial adviser recommends a product. The product is on the licensee’s Approved Product List. It’s on the APL because the research house rated it favourably. The platform conducted its due diligence. The trustee approved it for the investment menu. The client invests.
The investment fails to perform as expected. Or worse, collapses entirely.
The adviser is blamed. The advice must have been defective. The best interests duty must have been breached. The recommendation was not “appropriate”. The Statement of Advice must have been flawed. And so the licensee – or just as relevantly today, the industry via the Compensation Scheme of Last Resort – compensates the client for investment losses. AFCA rubber stamps the ignominy.
The adviser didn’t manage the fund. Didn’t select the underlying assets. Didn’t conduct the audits. Didn’t approve the product for the platform. Didn’t rate it favourably. Yet the licensee bears the financial consequences of the investment’s failure.
This is certainly how AFCA interprets and applies the law. Walk through the complaints data and you’ll see a consistent pattern: where investments fail, licensee liability follows. AFCA’s Annual Review confirms that over 30% of investment and advice complaints in 2024-25 concerned ‘failure to act in the client’s best interests’. This number will only increase. Investment underperformance triggers complaints, and complaints trigger adverse determinations against the licensee. AFCA’s current rules say you cannot complain if it ‘only concerns the investment performance of a financial investment’. Yet this jurisdictional limitation is otiose, because it slams wide open recourse against advisers for recommending the products in the first place. The resulting moral hazard leaves us where we are today, while the platforms and trustees which ultimately enabled the products escape AFCA jurisdiction.
The correlation between investment outcome and adviser culpability is axiomatic. AFCA’s Lead Ombudsman rubs salt into the wound by touring the nation to tell us all how bad advisers are, and dazzle us with his latest insights on how losses caused by advisers should be calculated and remediated to clients.
ASIC, in kind, dutifully fulfils its functions by sending the adviser out to pasture and rebuking the licensee.
And the entire industry pays the direct price through the CSLR levy.
The Perverse Incentive
The irony is profound. Most Australians don’t have a financial adviser. The latest figures tell a stark story: there is now just one authorised adviser for every 1,800 Australians. With approximately 15,000 registered advisers serving a population exceeding 27 million, the overwhelming majority of Australians invest without professional advice. Adviser numbers will fall again from 1 January when the transition measures for education cease.
Yet under the current regulatory regime as AFCA and ASIC like to imbue, those who do invest through an adviser effectively receive a performance guarantee. If the investment fails, someone compensates them – the licensee, or ultimately the CSLR funded by the remaining advisers in the industry.
If you invest your superannuation directly, you bear the investment risk. If you invest through a financial adviser, and that investment fails, you have recourse to compensation. You’d be mad to invest other than through an adviser!
Except, of course, that the perverse incentive structure has decimated the advice profession. The CSLR levy was recently estimated at around $130 million for 2025-26, potentially exceeding $8,600 per adviser. These numbers will only double once the Shield and First Guardian rubbers hit the tarmac, and that doesn’t take into account further adviser losses. The industry has spoken of the ‘disproportionate and wholly unfair’ outcomes for advisers, who are ultimately ‘paying the price for failed products and individuals who have left the industry’. The FAAA has warned it could ‘bankrupt financial advisers’.
The Shield and First Guardian Reckoning
Enter Shield Master Fund and First Guardian Master Fund. The collapses have put at risk some $1.2 billion of retirement savings of over 11,000 Australians. It is a catastrophe of epic proportions.
But here’s what makes Shield and First Guardian different – and potentially transformative for the industry. For perhaps the first time, ASIC has woken up to the reality that investment failings operate across the entire stakeholder spectrum. Not just advisers. Not just licensees. But platforms, trustees, research houses, lead generators, and responsible entities.
Consider the breadth of ASIC’s recent enforcement activity. Civil proceedings have been commenced against SQM Research – the first time the regulator has ever taken action against a research house – alleging misleading representations in the ‘Favourable’ ratings it published for Shield. ASIC has alleged that SQM failed to obtain the information needed to properly assess Shield, failed to consider inconsistencies in the information it received, and made misrepresentations that understated related-party exposure and asset allocation. ASIC Deputy Chair Sarah Court has described research houses as ‘important gatekeepers’ forming ‘part of a critical line of defence against poor quality investments’.
Macquarie, which hosted Shield on its Macquarie Wrap platform, has agreed to compensate approximately 3,000 investors to the tune of around $321 million. In doing so, Macquarie admitted it broke the law by failing to properly monitor the investment. This is a platform – not an adviser – acknowledging its role in the failure and bearing financial responsibility for it.
ASIC has commenced proceedings against Equity Trustees as trustee for the AMG Super and Super Simplifier platforms, alleging failures in both onboarding Shield and ongoing monitoring, and – most recently – against Diversa Trustees, alleging failures to conduct adequate due diligence before allowing its members to invest, and to conduct adequate ongoing monitoring. Netwealth and Diversa Trustees have separately applied for government assistance to remediate clients. APRA has convened roundtables reminding trustees that ‘the involvement of a financial adviser in recommending products on a platform doesn’t absolve them from their legal obligations’.
Licensees InterPrac and MWL Financial Services face civil penalty proceedings. Lead generators are in ASIC’s crosshairs. Former adviser Ferras Merhi faces allegations of unconscionable conduct, with ASIC alleging his businesses received nearly $18 million in upfront advice fees and over $19 million in marketing payments from entities associated with First Guardian. Travel restraint orders prevent him from leaving Australia.
Even the auditors are under scrutiny. ASIC has confirmed that investigations ‘encompass numerous lines of inquiry into the conduct of a large number of entities and individuals which range from lead generators, platform providers, funds and individuals involved in those funds through to auditors’.
About time…
The Risk Reweighting
So, the silver lining for advisers in the Shield and First Guardian failures: the reweighting of risk exposure across the stakeholder spectrum.
For too long, advisers have been positioned as the scapegoats for systemic failures. But Shield and First Guardian have exposed what many of us have long known: advisers are only one small link in the entire ecosystem which we call financial advice and investment management. The products had to be created by a responsible entity. Approved by an auditor. Rated by a research house. Onboarded by a platform. Approved by a trustee. Added to an APL by a licensee. And sometimes marketed by lead generators. And only after all that, recommended by an adviser.
This is not to suggest that licensees and advisers should be let off the hook. Criminal action is likely against some of the individuals involved in the Shield and First Guardian failures, and rightly so. Bad actors deserve to be expelled from the industry. But it is a salient reminder that advisers are not the only participants responsible for ensuring that investment outcomes are sound. And it is well past time that AFCA and ASIC were reminded as such.
Cristean Yazbeck
Managing Director, Hamilton Blackstone Lawyers
cyazbeck@hamiltonblackstone.com
www.hamiltonblackstone.com
