No link in the chain is being spared from scrutiny as the fallout from Shield and First Guardian’s collapses continues, particularly as the corporate regulator signals its investigations will be wide-ranging.
Noting that these scandals have “raised serious concern across the investment community”, SQM Research managing director Louis Christopher has sought to defend his firm’s role in providing a favourable rating for the funds, adding he is “deeply disheartened by the events that have unfolded”.
Prior to ASIC taking action against the funds and the responsible entities entering administration, SQM had rated both Shield and First Guardian at either 3.5 or 3.75 stars.
“These ratings reflected an ‘investment grade’ classification under our methodology, but they were at the lower end of that scale,” Christopher said on LinkedIn.
“Ratings in this range may reflect characteristics such as limited operating history or areas of governance requiring monitoring. It’s also important to note that many platforms set a minimum threshold of 4 stars for product inclusion.
“Both funds were subsequently downgraded when we became concerned about limited disclosure, irregularities and a lack of information from the fund managers.”
As the research house boss pointed out, even the strongest rating it had provided to either fund came with a caveat.
SQM’s methodology breakdown and rating guide on its website is clear that any fund in the 3.5 to 3.75 range includes a strong recommendation that advisers “conduct additional due diligence over and above base requirements when considering such rated funds”.
However, some of the media coverage that detailed these ratings in relation to the failed funds “has not presented our ratings in full or accurate context”, Christopher said.
“Publicly available commentary and statements from various parties suggest that the failure of the funds may involve irregularities in investment activities and the movement of investor funds,” he added.
“It appears that these matters may not have been fully disclosed to ASIC, investors, advisers, platforms, or SQM Research. We understand that ASIC has been investigating these matters for a significant period of time and that questions remain.
“We’ve been in ongoing contact with our adviser and platform clients, and we appreciate their continued trust and understanding. We remain available to support all stakeholders during this period and welcome any questions regarding our research process or individual ratings.”
The response follows The Australian Financial Review reporting that, according to an anonymous source, Netwealth has decided to part ways with SQM.
Netwealth has not officially announced a decision and Christopher has refuted the claim.
Just last week, ASIC chair Joe Longo echoed the regulator’s recent messaging on these firm failures, stressing that while bad financial advice is “obviously a key part of this problem”, it’s far from the only one.
“There are a whole range of other entities that are involved in this process that we’re looking at – for example, the lead generators, the research houses, the superannuation trustees, and the managed investment schemes,” Longo said at an FSC event in Sydney.
“Because of the number of entities involved, it can be difficult even for experienced investors to spot the problems here and what’s really going on.”
He added: “When we look at these examples, we see that the various players across different sectors each represent just one aspect of the problem – a problem in my view that needs a holistic response from industry, regulators and from government.”
SQM Research should lose its AFSL over this work. Any adviser will likely be banned; they should also be too.
Let’s be clear: SQM Research rated Shield and First Guardian at 3.75 stars – labelled “Favourable” and “suitable for inclusion on most APLs.”
Now Louis wants us to believe that a 3.75-star rating was somehow “low” or cautionary. That’s revisionist spin. SQM’s own published scale shows that:
3.5 stars = Low Investment Grade
3.75 stars = Approved / Suitable
4 stars = High Investment Grade
So 3.75 was not “low” at all — it sat above “low” and just 0.25 below “high.” Advisers and platforms relied on this rating in good faith, because that’s exactly what a research house is paid to provide: an informed, reliable judgment on product quality and governance.
If SQM now says 3.75 was a red flag, then the entire ratings system is meaningless. You can’t call a product “Favourable” and “suitable for inclusion” at the time, then after the collapse claim it was always meant to be seen as a warning.
Investors and advisers deserve better than spin. SQM Research needs to own its role in giving these funds legitimacy — because without that “Favourable” rating, they don’t make it onto the platforms in the first place.
Very disappointed to see the role of auditors here. By the way, question for ASIC, what about role of the CUSTODIANS of these MISs/Funds? And some comments here about 3.50/3.75 seem to be ignorant of SQM’s rating scales (intentionally or not), as they seem to suggest as if 3.75 is a 75% distinction mark at Uni, not knowing that the anything below 3.50 is actually NOT INVESTMENT GRADE i.e. FAIL.
This comment from SQM Research is an attempt to defend the indefensible. Advisers and investors are not “ignorant” — the negligence lies with SQM Research itself.
Two separate funds received a 3.75-star rating. That’s not a one-off mistake, it’s a pattern of negligence.
SQM’s own ratings guide stated that a 4-star rating was “High Investment Grade.” To now argue that a fund just 0.25 stars below that level was one to be avoided is completely disingenuous.
It is a revisionist and misleading interpretation of SQM’s own methodology. The reality is simple: SQM Research applied favourable ratings to funds that should never have passed basic due diligence. That is negligence.
The lessons from the GFC have not been learnt. Maybe this outcome is due to the fact that so many experienced advisers have now left the industry that were around in 2008.
The advisers that witnessed the collapse of so many property syndicates,mortgage funds and unlisted assets, not to mention the Ponzi property schemes .The result of which caused heartache not only for the investors but the advisers that relied on the so called independent reports from research providers.
Do they really know what they are doing? Or is it a tick and flick exercise.
The dog that barks the loudest in the financial planning industry seems to get fed by the media and promoted, it is these players that are often the worst and cause the most damage.
It is the unsung heroes that continue to do their part and carry on, genuinely helping their clients only to be disgraced by the dogs in the industry.
They know who they are.
The dogs being the regulated entities monitoring the managed fund?
Such as the auditors, SQM Research, Macquarie, Equity Trustees.
Advisers relying on independent investment research houses and super platform trustees aren’t at fault here.
The processes of investment research are not designed to pick up fraud. Indeed they rely on auditors, responsible entities/trustees, custodians, accountants, and regulators to all do their part appropriately to ensure a fund is suitably established and managed from an operational perspective. The investment research comes in to judge the investment team and process to make a judgement if that will enable the strategy to deliver the return objective specified in the disclosure documents. The process relies on honest disclosure of portfolio exposures and processes. There is a level of assessment of governance and operation but that is in the context of delivering the returns not forensic fraud detection. So it is not the fault of platforms, advisers or research. None of these groups are here to uncover fraud and we don’t live in a Minority Report world where crimes are known before they occur.
The question that needs answering is what is on the interprac APL
No it’s not that’s a complete naive and misunderstood question. The apl is available online and clearly for only investment recommended products from lonsec and sqm. Hence the issue with some rating the provider 7.5 out of 10 or 3.75 out of 5. When they stole investors money. The product providers lied stole and you’re questioning the licensees apl. Classic victim blaming
Obviously funds that SQM Research rated as “Favourable” are on the APL. That is what the article is about.
Is having funds rated by a research house on your APL bad? I would think it’s a prerequisite.
Obviously platform trustees like Netwealth, Macquarie, Equity Trustees and Diversa added it to their approved super investment lists too.
The research rating given by SQM and platform super trustee approvals of the investments have nothing to do with advisers or even the AFSL.
You can’t defend the indefensible which is exactly what he is trying to do here SQM is just one in a long line of failures in due diligence of First Guardian which all flows back to ASIC who should never have allow David Anderson to operate an Investment Fund in the first place after concerns were raised against him in 2019.
Every person who has lost money in First Guardian deserves better than this there are failures all along the line and nobody so far is willing to take responsibility it all about shifting blame it starts with Daniel Mulino & ASIC. Mr Mulino needs to acknowledge the failures and show support for the victims, ASIC need to admit their failures and the failures by the other government agencies.
There are hundreds of people involved here in regulation, governance, advisors etc etc and everyone involved in the financial services sector should hang their head in shame that this was allowed to happen it tarnishes the whole industry and unless something somehow changes will no doubt happen again.
The question still not answered is why sqm was licensed by interprac and as they were according to the ASIC register, was this not seem as a conflict of interest by all involved including ASIC?
Sqm aren’t licensed for advice? They are a ratings house. What are you talking about? SQM provide independent research about investments that advisers trusted, but the ratings were misrepresentative – investment grade 7.5 out of 10 or 3.75 out of 5. Their false ratings implied security of assets that were instead stolen. This doesn’t have anything to do with interprac.
Poor excuse get our money back so we can live our lives
The fact they gave these funds a rating at all needs to be questioned.
Funds get a rating for one reason, to go onto platform.
There were a lot of shady characters that needed a rating on these funds to start the fleecing, they got the rating ( hey 3.75 out of 5 isn’t bad to a reasonable person or potential client is it ), got onto mainstream platforms, and bang there goes your retirement savings.
The ratings houses cant walk away from this one no matter how much they spin it, you will need to take some heat as well, you were after all a very important part of the chain, and you also profited from it. There is no denying that.
If you put it out there that your business is one that rates managed funds to ensure they are investment worthy and one goes belly up like this you cant just wipe your hands of it, no you will need to put those hands into your pocket and pay for your mistakes, mistakes that cost people a lot of money.
My math not mathing
They gave at least 70% of the maximum rating, and are trying to wash their hands of responsibility by saying it was at the “lower end of the scale”? these investments had lots of conflicts and cross ownership all red flags Louis, you rated the Shield Master Funds as 3.75 stars out of 5. This rating’s label was called “Favourable” and included the statement there are no corporate governance concerns or they are minor in nature.
Yet Canberra’s corrupt bureaucrats allow ratings houses to give Hesta’s Balanced Fund with APRA Heat map stated 94% Growth Assets to be named: Yep a “Balanced Fund”
In other recent news AustralianSuper’s executives lost $1.1 billion to exposure to Pluralsight. It is always the advisers fault. Not the product manufacturer,Accoutants, auditors, lawyers, not the research house, not the regulator, just the adviser.
The government now want super funds to give nudges what on earth could go wrong.
It is always the adviser’s fault…
clearly, we failed to “conduct additional due diligence over and above base requirements when considering such rated funds”
People wont understand the sarcasm in your comment. It is disgusting how advisers are treated in Australia. This is a product failure foremost, platform failure second, then advice failure for concertration into one investment in portfolios. Advisers have little to in most cases (except for literally less than 5 advisers) NOTHING TO DO WITH THIS
well said
Let’s be clear about what Louis has admitted here: he rated the Shield Master Fund and First Guardian as investable.
Now, in retrospect, he’s pointing to SQM’s methodology guide—which now states that a 3.5 to 3.75-star rating requires advisers to conduct “additional due diligence over and above base requirements.” But that disclaimer was only added recently, after issues emerged with these funds. When these funds were originally rated, no such qualification existed. In fact, a 3.75-star rating was labelled as “Favourable,” with explicit language stating that there were “no corporate governance concerns or they are minor in nature.”
And yet now we’re being told that a 3.75-star rating is somehow low or cautionary? That’s difficult to accept, especially when SQM’s own published rating scale shows that a 2.5-star rating is typically where a product becomes avoidable or subject to redemption recommendations.
Let’s not forget what investment research houses are for: to perform detailed due diligence and assess the integrity and suitability of investment products. That’s the core function. It’s entirely reasonable to expect a higher standard of rigour, especially when publishing a “Favourable” recommendation.
Now, instead of acknowledging the role SQM played in giving these funds a platform, Louis appears in comments blaming advisers for using the very research he published. Is the real problem that advisers read and relied on SQM’s own reports?
It’s disappointing to see continued attempts to shift responsibility onto financial advisers when it’s clear that SQM Research failed to properly identify the governance risks in these cases. The credibility of the ratings process should be under just as much scrutiny as the advice process.
I agree with your comments, but what I would like to know from Louis is whether SQM actually did the required due diligence. Did they understand what assets were being held?
Did they even review the funds financial statements? Were they audited? These are really basics steps that any group issuing a rating should be across.
If they didn’t, you have call into questionnaire whether they have the require competence to offer research services.
Agree, all care no responsibility.
Since when is a score of even 3.5 out of 5 considered poor (for anything)?
And exactly what is an adviser expected to do?
Force their way into head office, demand access to documents and the right to cross examine all key persons in the organisation?
If a fee is paid to a research provider to undertake this type of due diligence they are liable. Financial advisers are not research houses.
Ummn. Where can you point to him blaming advisers?
The comment is around the broad publicity not just this article which is the first to mention the ratings failure a bigger contribution than advisers. They are also mentioned because advisers will ultimately pay out of pocket the refund investors. Not the actual parties at fault, through the compensation scheme of last resort
Allegedly fraud on behalf of the property group and the alleged bucket shop planners and the alleged super swappers call centers
Allegedly
It’s always allegedly with ASIC. Throw as much mud as you can and hope something sticks. ASIC couldn’t care less about the truth, they are just peddling their own narrative and controlling the story in the media as usual. They are very very sick.
Interesting when there is a product failure the research houses never carry any blame, even when they investigate the fund and fail to say don’t use the fund. It is always the advisers fault. Not the product manufacturer, not the research house, not the regulator, just the adviser. Has the government worked out yet why there is a shortage of advisers, and no one wanting to become an adviser?
“Both funds were subsequently downgraded when we became concerned about limited disclosure, irregularities and a lack of information from the fund managers.” – So did they let ASIC know? But they still rated them as a suitable investment too….
Who made this scoring scale. I think there is a problem when a ‘low’ score is 3.5 to 3.75 out of 5. A low score should be 2.5 and lower.
SQM Research have on their website their ratings scale including where a 3.75 stands. It’s pretty clear a 3.75 is far from the highest rating they issue, though noted investable at the lower end. The question is, given there were many comparable higher rated funds under the SQM scale, why did some groups go all in on these funds?
Would guess that their internal investment committees instructed their advisers to use those funds.
This is the only logical answer. Advisers whilst required to operate in the best interest of clients are still at the mercy of their employers and thus a conflict emerges, do what we say or find another job.
Didn’t SQM Research rate not only 1 failed fund but 2 failed funds as Favourable. Seems to be a pattern of SQM negligence here. How else can you explain multiple failures in their research?
The two funds were connected with each other.
Macquarie had them on platform, met their vetting. Who are much larger than afsl. How are ratings houses and platforms able to benefit from the investment, then wash their hands when the proverbial hits the fan. Why arent the fund managers in jail?
Another deflection by SQM. Pathetic.
No one forced SQM to rate the fund as Favourable – but they did.
SQM admits it’s ratings meant it was investable.
Kickbacks?