How dodgy super advice destroyed Peter’s life savings
Advocates say stronger protections are needed to save others from poor financial advice.
Peter* has been working in the mining industry for over 20 years.
At 64 years of age, he says the long overnight shifts at the Queensland mine that he flies in and out of are starting to take their toll on his body.
“I was hoping that at the end of next year I would be able to retire with a comfortable income,” he says. “But because of the situation I’m in now, I’m scared I might have to work another 20 odd years to get some kind of amount of money to survive on or until I drop.”
Peter’s dire financial status has been caused by the collapse of the First Guardian investment fund, a fund his financial adviser encouraged him to invest over $440,000 – almost his entire superannuation savings – in.
First Guardian collapsed earlier this year amid allegations from the Australian Securities and Investments Commissions (ASIC) of conflicts of interest among its directors and millions of dollars being paid out to entities associated with the directors in a way that misled investors.
The corporate regulator is continuing to investigate First Guardian and the Federal Court has appointed liquidators. However, with a long line of creditors and staff wages to be paid out before retail investors like Peter get a cent, it’s unlikely Peter will see any of his superannuation investment returned.
Revealing a bigger issue
According to financial rights advocates, Peter’s case highlights bigger issues in the financial advice sector of superannuation. They’re calling for loopholes that allow questionable sales tactics to be closed and for important protections for consumers to remain in place, responding to a push from some in the industry to wind them back.
“The financial adviser told me that I only have a few years to go until retirement, and it’s better I move into a higher growth account, so I thought ‘he knows what he is talking about, I’ll go with what he says’,” Peter recalls.
Jessica Spence, Director of Advocacy (Policy) at Super Consumers Australia, says the investment advice Peter received was “surprising” especially given that the First Guardian investment fund was only made available to invest in by four of the almost 100 superannuation funds in Australia, indicating that most super funds thought it wasn’t a good product for their members.
Now he’s thinking, ‘well, I’m going to have to work until I die’, and I think that’s just devastating – Jessica Spence, Super Consumers Australia
“I’m not a financial adviser, but I have to say I was pretty surprised that someone reaching retirement would be advised to invest their entire pension pot in one fund that’s only available from a couple of super funds in Australia and that seems to be pretty high risk speculative,” she says.
“This is someone who is looking forward to retirement. He’s thinking about what he’s going to do. He’s having chats with his wife and all of a sudden now he’s thinking, ‘well, I’m going to have to work until I die’, and I think that’s just devastating,” she adds.
Consumer protections needed
Phil Anderson, general manager of policy, advocacy and standards at the Financial Advice Association of Australia, the peak body representing financial advisers, says that without a doubt, the advice Peter received was bad advice and likely illegal.
“There is no question that this advice will be in breach of the law,” he says.
“So the solution is not necessarily to change the law if it’s already in breach of the law. We should be setting the law based upon the actions of the majority, not for responding to the rogues in the industry that create all these problems. I don’t think there’s anything fundamentally wrong with the law.”
The recent collapse of three separate managed investment schemes – Shield Master Fund, Australian Fiduciaries and First Guardian – has led to losses of $1.2 billion from over 12,000 people.
Why previous reforms shouldn’t be wound back
The federal government is considering changes to the financial advice rules in order to make it easier for people to get advice.
One of the major reforms it is working on involves reducing the obligation on financial advisers to give advice that is in the best interests of their client. Advocates are understandably concerned about the impacts such a change could have.
Another major proposed reform, which is also worrying to advocates, is introducing a new class of adviser with lower qualifications who only provides advice about the products of the company the adviser works for.
Spence says the case highlights the importance of reforms that were made to remove conflicts of interest following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, also known as the banking royal commission.
It’s also a case in point illustrating why the customer best interest duty protections shouldn’t be wound back, as some in the industry have advocated for.
People would do themselves a favour by replacing the word financial ‘adviser’ with financial ‘salesperson’ – Andy Darroch, Independent Wealth Advice
Andy Darroch, a financial adviser from Independent Wealth Advice, says cases like First Guardian highlight that there is not too much regulation in financial advice as some in the sector claim.
“People would do themselves a favour by replacing the word financial ‘adviser’ with financial ‘salesperson’. Australians pay tens of billions of dollars of fees to financial advisers every year. A huge chunk of this is a colossal waste,” he says.
“I don’t think it’s ridiculous to say 99 out of 100 times fees are the driving factor behind recommendations. Advisers and the businesses that both licence and employ them are so often hopelessly conflicted, and almost always it’s the client, not the adviser, who loses out.”
Cold calls and loopholes
Spence says Super Consumers is increasingly concerned about the ways in which financial advisers are cold calling customers, sometimes referred to as ‘hawking’, and offering “super health checks” or pitching financial advice that may backfire.
Some financial advisers are using third parties to get around the anti-hawking laws, which were brought in following the banking royal commission, loopholes which Spence says need to be closed.
“It’s a real problem because people feel like they can really trust their financial adviser and in some cases, they aren’t acting in their best interest,” she says.
Advertising on online social media platforms is another major way unscrupulous financial advisers are reaching clients.
ASIC recently launched a new campaign on its Moneysmart website, warning customers about high-pressure cold-calling and social media advertising of superannuation-switching services.
ASIC Deputy Chair Sarah Court told CHOICE that many older Australians are nearing retirement and their fears of not having enough to retire on makes them vulnerable to falling prey to one of these operators.
“We’ve been concerned about the number of investors involved that have had their superannuation exposed to what we consider to be very high risk investment – it is happening on an industrial scale,” she says.
“We’ve got the anti-hawking laws, but I think what this is telling us is that there are loopholes, potentially, that people are seeking to exploit,” Court adds.
Compensation Scheme of Last Resort
Another reform brought in following the banking royal commission – and after years of campaigning by advocates such as CHOICE – is the Compensation Scheme of Last Resort (CSLR). It’s designed to compensate victims of financial misconduct when a financial firm has gone into liquidation and can’t pay a compensation award.
Given that both the First Guardian fund Peter invested in and the firm that advised that he do so have gone into liquidation, he may be eligible for some funds from the CSLR, though these payouts are capped at $150,000. This will depend on having a favourable outcome after filing a complaint with the Australian Financial Complaints Authority (AFCA).
The CSLR is paid for through a levy on licensees in the financial services industry, which is reviewed each year. Some in the financial advice industry have criticised the CSLR and questioned the viability of the scheme due to large levies they have had to pay to compensate consumers.
Anderson says the CSLR risks are becoming “unsustainable” for the financial advice industry. “If cases like this break the CSLR, then that’s not a good outcome for anyone,” he says.
When contacted by CHOICE, AFCA declined to comment on how many complaints they had received that related to First Guardian.
“AFCA is receiving complaints about this fund but we are at early stages of investigation and complaints are not uniform,” a spokesperson says.
Using ASIC’s Moneysmart Superannuation Calculator, we determined that it would take someone in a similar situation to Peter around 24 years of working to earn back the $440,000 in superannuation he has lost. If he receives the maximum CSLR payout, it would take him around 15 years.
“Without the CSLR, Peter would be relying on the Age Pension to fund him through retirement and that really is putting the taxpayers on the hook, instead of making the financial advice industry pay for the damage that it’s causing,” Spence says.
Responsibility on the super funds
Peter was first encouraged to move his funds to the superannuation fund AusPrac, so they could later be invested into First Guardian. AusPrac was one of only four super funds in Australia that allowed investment in First Guardian.
We sent detailed questions to Diversa, the trustees for AusPrac, asking whether they had adequate protections to prevent questionable investment products being offered on their platform and whether these protections had failed in the case of First Guardian. They declined to comment.
Spence says super funds need to take responsibility for the products being offered.
“The rest of the industry decided that this wasn’t going to be a good fit for their members, only these four funds decided it was going to be okay and I think they’ve really let their members down by making it available to them,” she says.
“Trustees really ought to be doing some very careful work to satisfy themselves that the investments they’re making available to their members are safe.”
Court says the complex role of trustees and the extent of their responsibilities is an area ASIC will continue to investigate.
She says there are a range of players and conduct issues that need to be investigated, from the cold callers, to the financial advisers and what role commissions or kickbacks play.
Another issue Court mentions is the conflicts of the fund and the obligations trustees of superannuation companies have to make sure only responsible investment options are offered on their platforms.
Peter’s lost retirement
For Peter, not only has he lost almost all of his hard-earned retirement savings, he has also lost his faith in the financial system.
“I don’t know how we can all trust these super funds, because if this is happening to mine, who’s to say it’s not going to be happening to someone else’s?” he asks.
He says he is trying to remain patient and let the liquidators’ work and his AFCA complaint run its course.
“I try not to stress about it, my wife stresses more than me,” he says. “It feels like we are in limbo, I’ve got no idea what the future holds.”
*Not his real name
