FPA warns advice may be compromised by choice performance test
The Australian Prudential Regulation Authority (APRA) may be cutting across advice provided by financial planners and the maxim that past performance is not an indicator of future performance by forcing choice superannuation funds to inform members if they fail the performance test.
The Financial Planning Association (FPA) has told the Treasury review of the Your Future Your Super regime that professional financial planners actively educate and support clients to “understand that past performance is not an indicator of future performance”.
“For this reason, the proposal for APRA to direct failure notices to be sent annually is inconsistent with this message,” it said.
“To this point, it would seem more relevant for disengaged super fund members to be warned of poor outcomes on a more frequent basis as opposed to those members who have made the decision and are actively managing their portfolio of choice products themselves or with the assistance of a professional financial planner,” the submission said.
The FPA said that unlike MySuper products, choice superannuation products were generally used by members who were actively managing their retirement benefits.
“In many cases, they have engaged the services of a professional financial planner who has provided them with advice in their best interests based on their goals, objectives, and financial position. Most clients will also enter into an ongoing advice service with their financial planner and therefore receive ongoing monitoring of their super funds performance from their financial planner in relation to their goals,” the FPA said.
“For this reason, the portfolio of choice funds recommended by a financial planner are often designed to meet specific client performance objectives over specific time frames and can be recommended (and often actively managed) to manage a variety of risks for clients,” it said.
“As an example, three clients with similar risk profiles and asset allocations can be recommended portfolios with different characteristics as follows: a younger client with a long term investment time frame from their super can benefit from a highly volatile investment portfolio which benefits from the purchase of units at a discount; an older client closer to retirement will benefit from a more stable, lower volatility portfolio with a focus on growth; while a client in retirement will benefit from a portfolio which focuses on income generating investments to minimise the sale of units when funding their lifestyle.”
“A second issue is that timing of investment is an important factor considered by financial planners when recommending choice super products. Applying a static measurement period from 1 July to 30 June each year by APRA, doesn’t account for the active management undertaken by the client’s financial planner when making investments and switches,” the FPA said.
“A related issue the FPA is concerned by with a ‘one size fits all’ approach to each benchmark given ‘similar’ choice products are often managed in very different ways. While some choice products will follow index investing methodologies to reduce cost and active management, others may be specifically actively managed to take advantage of particular events or investment philosophies, others may use fund of fund models and actively or passively fund managers, others will use only listed investments, while others may use predominantly unlisted assets, and finally there are a number of products which now use glide paths to manage risks for specific cohorts of members over different time periods.”
APRA are a bureaucracy which is well out of control. They lack any proper oversight from the government and carry on like cowboys.
The very worst thing about them is that they abdicate their responsibility to be accountable to the consumer by refusing any contact with said consumer. Instead they refer every consumer contact or comcern to AFCA.
The best thing the government could do is to #defundAPRA
Perhaps, but ASIC and AFCA are far worse. Overhauling the biased, persecutory culture of ASIC, and removing financial advice from AFCA’s jurisdiction, should be higher priorities. I would rather a stupid regulator like APRA, than malevolent ones like ASIC and AFCA.
Here’s a scenario for the dumbass APRA numpties to consider. Four portfolios – ten year period.
Portfolio top quartile: in January each year, buy all the top quartile funds in terms of performance , hold for 12 months, then sell them, buy the ‘new’ top quartile funds in terms of performance.
Portfolio second quartile: in January each year, buy all the second quartile funds in terms of performance , hold for 12 months, then sell them, buy the ‘second’ quartile funds in terms of performance. Do the same for third quartile funds…
Portfolio bottom quartile: in January each year, buy all the worst performing funds, hold for 12 months, then sell them, buy the ‘new’ bottom quartile funds.
Then publish your outcome AFCA and you will hang your heads with shame and embarrassment.
I’ve done this research myself.
The bottom quartile strategy outperforms the other three by some margin. Why? Because the top performing funds have made investment bets that have paid off, the bottom performing funds have investments that are about to…that’s why good financial advisers track asset classes amongst other things!
Imagine running a performance test after a 9-year bull market. It’s as if the people coming up with these ideas have no investment knowledge at all. Let’s reward the largest risk takers just before a correction. I’ll wager that a lot of the so-called underperformers did a lot better than their high returning peers during the 2022 sell off. And what is this so called ‘performance?’ Anyone worth their salt knows you only generate excess returns via favourable unlisted asset valuations when managing such large pools. How can you generate ‘outperformance’ when managing $20bn+. The public has been sold a lie and seems to believe that somehow these large super funds have found exceptional talent able to stock pick their way to alpha. What a load of garbage.
Please can we put the knowledgeable people in charge again. At least someone who has some idea from whence long-term returns are derived (i.e. beta).
….And the FPA had to explain this to APRA? Who is regulating the regulator, Yes Minister.
Lets not forget the discrepancies and utter fraud that comes from the way super fund assets are allocated, and how APRA allow 25% of unlisted assets to be allocated to the Defensive side of the coin. That said, Host+ choose to allocate 50% to Defensive…FFS how is a Planner supposed to deal with that…?
I note several under performers made the comment that they hired an asset consultant to ensure their funds were invested in the same manner as every other super fund which surprise surprise resulted in “average” returns made the following year. I can’t see how Super funds getting together at the start of the year and all deciding that 23.5% in Australian Equities (or whatever the average figure is) is the go for 2023 so that they all achieve the exact same return, and don’t fall foul of the average is good. Can’t see how that is a good thing for consumers.