Should advisers be worried about the Shield Master Trust?

On the surface, the turmoil surrounding the Shield Master Trust – a registered managed fund promoted by Keystone Asset Management – appears not to be of concern for the broader advice community.

In February, the Australian Securities and Investments Commission (ASIC) halted offers made by Shield, citing issues ranging from disclosure failures and misleading statements in the product disclosure statement (PDS), before successfully seeking to have the Federal Court freeze the fund’s assets in June.

Later in June, the court appointed Jason Tracy and Lucica Palaghia of Deloitte to have full control of the bank accounts, before eventually making them the voluntary administrators of the fund at the end of last week.

Most of the headlines around Keystone, Shield, and director Paul Chiodo have been focused on ASIC’s allegations that investor funds were used for a range of lavish expenses, such as a penthouse in Chiodo’s wife’s name and an event with boxer Floyd Mayweather.

Unlike some other embattled funds, Keystone did not employ financial advisers that were caught up in the struggles of the fund. This is in contrast with other collapses that have followed the Dixon Advisory debacle, which have also involved an advice component.

Melbourne financial advice firm United Global Capital (UGC), for instance, entered liquidation in August after ASIC cancelled its Australian Financial Services Licence (AFSL), with the Australian Financial Complaints Authority noting that it is considering whether complaints against UGC will be covered by the Compensation Scheme of Last Resort (CSLR).

Later that month, a CSLR payment prompted ASIC to announce it had cancelled the AFSL of former national financial advice business Libertas Financial Planning.

Libertas, which was acquired by Sequoia Financial Group in August 2019, went into liquidation in May 2023. In a statement at the time, Sequoia said it planned to consolidate AFSLs, with management making the decision to transfer Libertas’ operations and customers to InterPrac Financial Planning and Sequoia Wealth Management.

Both of these are likely to see advisers picking up the tab for a blend of product and advice failures, though at a much smaller scale than Dixon.

Speaking with ifa, Financial Advice Association Australia (FAAA) general manager policy, advocacy and standards, Phil Anderson explained that a situation like UGC is the most concerning due to the similarities with Dixon.

“We’ve been worried about these vertically integrated groups like Dixon Advisory and UGC, which were doing the same thing, and then it’s linking that to something that goes horribly wrong,” he said.

However, the regulator has also raised concerns that there are ties between cold-calling operations and advice firms that recommended investing in Shield – a topic that the regulator has been highlighting in recent months.

Advice involvement in Shield

Where things start to become a concern for the advice sector is that ASIC has noted it is aware that authorised representatives of four AFSL holders have provided financial advice recommending that clients invest in Shield: InterPrac Financial Planning, MWL Financial Services, Financial Services Group Australia, and Next Generation Advice.

Importantly, there is no suggestion from ASIC at this stage that either the AFSLs, advice firms associated with them, or any specific advisers have been involved in financial misconduct.

However, it has directed clients that “have a complaint or require further information regarding the financial advice” they received to contact the AFS licensees.

Similar to the issues surrounding the Shield fund itself, any complaints that result in a determination against one of these licensees would need to be covered by that licensee, not advisers through the CSLR.

Of course, that ceases to be the case if that licensee happens to enter insolvency – which in the case of Next Generation Advice, has already happened.

According to an ASIC public notice, on 23 August, liquidators were appointed for Next Generation Advice, which still lists 12 authorised representatives.

While InterPrac is a larger licensee and would have a greater ability to withstand the impact of Australian Financial Complaints Authority (AFCA) determinations if its advisers were found to have engaged in misconduct, MWL Financial Services and Financial Services Group are both smaller entities, with eight and 15 authorised representatives, respectively.

ifa requested details on whether there had been complaints related to any of the licensees and if the Shield fund had been lodged with AFCA, however, the complaints authority said there was no publicly available information at this stage.

Speaking with ifa, CSLR chief executive David Berry said that although there is little concrete information to go on while ASIC’s investigation into Shield and related entities is ongoing, the situation is “something we’re watching”.

“It’s one we’re watching closely. At this stage, we just don’t have any idea of the size or impact for CSLR, but it’s big on ASIC’s agenda at the moment,” Berry said.

‘Is this another one added to the bill?’

The FAAA’s Anderson told ifa that issues such as these are going to need to be understood on a “case-by-case basis”.

“Everything that happens, you then need to look and say, ‘Might there be a risk that this business will go into administration?’” he said.

“Might they get to a point where they pay out half of them and then realise they don’t have enough; might they make decisions to go into administration early so that it ensures that there’s a fairer distribution of available funds to impacted clients?

“It’s going to be case by case, that’s the problem.”

The likelihood of massive fallout for advisers is minimal, Anderson added, with isolated instances easier to contain.

“If individual advisers who are operating as individuals, then it is less likely, if there’s appropriate controls in place, that we see something that is a black swan-type matter like we’re seeing with Dixon Advisory,” he said.

“So, there are certain attributes that you have to see before you fear this. Being involved with pushing a particular product that fails, or having a terrible strategy that’s exposed to a market crash like Storm Financial, it has to be something that was systematic, rather than just individual, isolated cases.”

Instances such as Shield, however, put additional strain on advisers because there is a constant fear that every “problematic situation” could land on the profession’s CSLR bill.

“Every time you hear of something going wrong, you’re going to be checking, ‘OK, what’s the capital behind that? Business? How many advisers do they have? Is it likely to go into administration?’

“We’ll be putting a completely different lens on all of these scandals, I guess you could call them, or problematic situations, breaches of the law, where you’re constantly fearful. Is this another one that’s going to get added to the bill?”