Article by Jonathan Shapiro (Australian Financial Review)
The recent collapse of Dixon Advisory (a wholly owned subsidiary of Evans and Partners), one of the nation’s largest wealth managers, has exposed the heavy personal and financial cost to clients of the firm’s highly conflicted business model.
Last Wednesday, the remnants of Dixon Advisory, the once-proud wealth management firm formed more than 35 years ago by the nation’s pre-eminent pensions expert, Daryl Dixon, met its most undignified end.
Facing multiple class actions that alleged the firm provided conflicted advice that resulted in large losses, Dixon Advisory filed for voluntary administration.
It closes a dark chapter for the Australian wealth sector as a model that should be studied by academics for the ruthless efficiency and scale with which it transferred the wealth of its customers to its proprietors and destroyed the firm.
So what did Dixon Advisory do that was so egregious that it came to this?
The firm was established with noble intentions to assist ordinary Australians in managing their wealth and retirement savings.
It established self-managed superannuation funds for its clients and guided them to the most suitable investments providing sound and affordable advice. In some respects, it is exactly what Australians needed and still need.
But it went horribly rogue.
Dixon Advisory’s investment team ventured into manufacturing products to sell to their clients, again with noble intentions. In the aftermath of the global financial crisis, unloved corporate bonds were paying attractive rates, so Dixon Advisory packaged them up into a fund.
And when there was an apparent opportunity – such as distressed US apartments on the US east coast that could be bought with an overvalued Australian dollar – it was quick to respond by setting up a fund.
But that fund, the US Residential Masters Fund, proved the undoing of Dixon Advisory.
The potential to gouge fees – from managing the properties, renovating them, buying and selling them – proved irresistible.
Dixon’s management also could not resist expanding the fund into an ever-larger fee-gouging Frankenstein. The property-buying rampage made the URF a financial and political force in New Jersey City.
Dixon Advisory clients not only owned units in the fund but the debt and hybrid capital, while the dividends were tipped back into the fund through dividend reinvestment programs that they had to opt out of.
That left the majority of Dixon clients over-exposed to an over-geared, over-capitalised, over-charging entity that no student of prudent portfolio construction could ever sanction.
Insult added to injury
The beginning of the end was the 2018 float of Evans Dixon – formed by the merger of Evans & Partners and Dixon Advisory.
By going public through the sale of shares to supporters and clients of the firm, it became apparent just how reliant the group was on the fees from one single internal investment product, the URF.
To add insult to injury, clients were strongly encouraged to buy into the initial public offering of the very business that was ripping them off at the moment it became unsustainable.
Dixon Advisory maintained it was acting in the interests of its clients, and the advice was to keep the faith with the URF.
The reality, whether by design or coincidence, was that most of the decisions that the URF management took – from loading up on debt to the renovation rampage – increased fees for the firm and investment risk for the clients.
In fairness to Dixon Advisory and its parent, Evans & Partners, not all of the products were duds.
In fact, some are among the best-run performing listed assets available. E&P has also worked hard to clean up the mess and restore as much value as it could through the URF and the equally challenged New Energy Solar Fund.
But these efforts were not nearly good enough to make up for the overexposure to the poorly performing URF. Worse yet, while the securities were listed on the ASX, all the holders were other disgruntled clients, complicating the exit.
We have covered more than our fair share of financial scandals in which victims have been separated from their cash.
But the most empathy should be extended to Dixon Advisory clients who are materially worse off for putting their faith in this slickly marketed firm.
They were typically middle-class Australians who built their wealth by working loyally and consistently over many years either in the public or private sector.
Dixon Advisory clients were not trying to get rich quick or cut corners or were guilty of naivety. They earned every dollar and were responsible enough to appreciate their limitations, and so sought affordable and trusted advice.
What they got was anything but. For the past four years, many of those clients have been fighting hard to get compensation and for a tinge of justice.
But it has been an equally demoralising experience and many have written to myself and my colleague Carrie LaFrenz.
The first port of call was the Australian Financial Complaints Authority, the financial ombudsman, but that has been so slow, time-consuming and cumbersome as to be a further drain on the already depleted resolve of the clients.
The corporate watchdog finally intervened with a case of its own, but that ended with a modest penalty that had no direct benefit to clients.
Class action law firms also expressed an interest from an early stage, but they too have moved slowly.
Their prospective cases have been plagued by doubts that there would be any recourse to recover the funds.
Those concerns were clearly justified now that Dixon Advisory has formally failed.
For Dixon’s clients, they have been failed by the firm they trusted and the system that has failed woefully to protect or compensate them.
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