Hedge Clippings attended Financial Newswire's conference this week, where a major topic centered around the failure of Shield and First Guardian. Most panel speakers (and attendees who commented) seemed to think there was a collective failure at all stages of the distribution chain. While this may be the case, Hedge Clippings is of the opinion that the vast majority of individual financial advisors - in other words those who did not allocate or recommend Shield or First Guardian products to their clients - are not to blame even though under the Compensation Scheme of Last Resort they end up footing part of the bill.

Nor should the finger be pointed, or blame apportioned, to those dealer groups and platforms which did their research, and declined to add Shield and First Guardian to their respective APL's or platforms.

Which of course leaves responsibility with those who did, or were involved in the distribution chain. Leaving aside the perpetrators - i.e. those directly behind the schemes - the first link in that chain is the research house, (in this case SQM), that provided a research rating which enabled the products to be added to APL's and platforms. Without a rating, it is almost impossible to get distribution.

SQM have previously claimed (although this is likely to be tested in court in due course) that they could not be expected to be able to uncover fraud, given that it had not occurred at that stage. However, we would maintain that they should have been able to see what others saw (such as HUB24, Lonsec etc), which were clear red flags, conflicts of interest, and instances of related party involvement in key positions, and compliance, which a proper due diligence process should have uncovered.

Next in the distribution chain come dealer groups' and platforms' research and compliance departments, which accepted the SQM rating without conducting sufficient due diligence of their own. Unfortunately, over the past 8-10 years, the industry has become overly used to seeing, or treating a research rating as a "box-ticking" exercise, and a necessity for widespread distribution, and not as a starting point for their own due diligence.

There is an argument that if research reports are genuinely robust, then they should be able to be relied upon, but as noted above, the industry has become more concerned about the "Rating" rather than the content of, or thoroughness of the report itself.

Finally, we come to the honest end advisor, who always seems to bear the brunt, in spite of being the least able to conduct individual research on every product on their dealer group's APL. Either the research houses need to improve, or the industry needs to move away from the issuer-pays research model, which is inherently conflicted.

If you don't believe that's the case, check out FundMonitors data, which shows that a disturbingly large proportion of funds with long-term bottom-quartile performance (as shown by a one or two star quant rank) continue to receive "recommended" or "highly recommended" ratings.

Our advice: "Let the numbers do the talking"!