Netwealth failed to vet First Guardian, court finds as ruling raises bar for super fund gatekeepers

Advisory firm Netwealth allowed more than 1300 Australians to invest $128.5 million in First Guardian, including virtually all their super, before pulling the troubled fund from its platform, the Federal Court found on Thursday.

Justice Timothy McEvoy found Netwealth failed to gather enough information or make sufficient independent inquiries to understand the investment risks, then failed to warn existing investors about concerns it held over the fund.

The ruling could raise the bar for super trustees offering members investment menus, putting greater pressure on them to vet and monitor funds and warn members when problems emerge.

Netwealth has already paid more than $100 million in compensation to affected members after admitting its failures, part of ASIC’s wider crackdown following the collapse of First Guardian and Shield, which took about $1.1 billion from roughly 11,000 Australians.

Justice McEvoy declared Netwealth Investments and Netwealth Superannuation Services breached their obligation to provide financial services “efficiently, honestly and fairly”.

Members were allowed to put up to 100 per cent of their accounts, less a minimum cash holding, into two First Guardian options despite Netwealth not having enough information to properly evaluate the risks.

The court also found members were not warned the investments could become illiquid and those still invested were not told about Netwealth’s concerns after it removed First Guardian from its menu in December 2022.

ASIC did not seek a financial penalty against Netwealth after it cooperated with the regulator and agreed to compensate affected members in full. The court ordered Netwealth to pay ASIC’s legal costs.

First Guardian was added to Netwealth’s investment menu in March 2021 and remained available until December 2022, when the platform stopped accepting new money into the fund.

By then, hundreds of members had built up significant exposures. When First Guardian later froze redemptions in May 2024, 1084 Netwealth members still had about $100.6 million invested.

ASIC has used the collapse to target the platforms and trustees that acted as gateways for retirement savings into First Guardian and Shield, arguing they cannot simply rely on financial advisers or member choice to police investment risk.