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Is ASIC qualified to second-guess advisers on choice super?

Mike Taylor30 August 2023
Blind businessman with dart

ANALYSIS

Financial advisers have seriously questioned whether the Australian Securities and Investments Commission (ASIC) has the necessary internal expertise to make an appropriate judgement about advice around particular ‘choice’ superannuation products.

Responding to Financial Newswire’s report that ASIC will be looking at the role of financial and their licensees in the distribution of underperforming choice products, advisers questioned the ability of ASIC to seriously second-guess recommendations made based the adviser’s knowledge of the client’s personal circumstances and in accordance with Approved Product Lists (APLs).

The complexity of applying the superannuation performance test to advised ‘choice’ products has already be acknowledged by the Australian Prudential Regulation Authority (APRA) and Treasury has received multiple submissions pointing to the difficulties.

Major accounting group, CPA Australia told the Treasury in May that it was one thing to hold trustees of superannuation funds to account for underperformance but it was entirely another thing with respect to judging strategic asset allocation.

“As has been pointed out by a number of professional associations, the performance test focuses on the execution of an investment strategy not on the investment strategy itself,” the submission said. “It is possible that an investment option may underperform in relation to the performance test but show strong relative performance on a net returns basis.”

At the same time, the Financial Advice Association of Australia (FAAA) pointed out that Wrap products operated very differently to other superannuation products.

It then made the following points:

  • Financial advisers typically recommend financial products, including investment options, based upon the selection of products by an AFSL’s investment committee that often will be guided by research prepared by leading research houses.
  • In terms of a superannuation Mastertrust or Wrap product, the recommended investment options could be in the form of model portfolios, that are broadly used by advisers within that licensee. These model portfolios are carefully monitored and are subject to change over time as the licensee and research house assess the ongoing performance of each option.
  • It is possible that from time to time a product or an investment option will go on “hold”, and no longer be recommended to new clients. This does not mean that it is necessarily classified as a “sell”, as there are invariably a range of consequences in switching funds or selling an investment option, including tax considerations, and in terms of super accounts the potential loss of insurance cover (particularly where the client’s health has deteriorated). As a result, within a portfolio, an investment option that is on “hold” may stay a part of the portfolio of a client for some period of time. A common warning in financial services is that past performance is not a predictor of future performance. This applies in both the context that past good performance is not a predictor of future good performance and past poor performance is not necessarily a predictor of future poor performance.

The FAAA pointed out that the research houses, in recommending products (including investment options), will have given thought to the investment performance over a reasonable period of time, however this may not be as long as the ten year period proposed in the performance test.

“Neither will they have designed these model portfolios with the implications of this performance test in mind,” it said.

“Our concerns are as follows:

  • An investment option with good recent performance may still fail the performance test which is assessed over a ten-year period. This should not be an important factor for clients who have not held the product for ten years, and have achieved a good return.
  • The notification to the client does not differentiate between a marginal fail and a significant case of underperformance.
  • It will not be entirely obvious to the client from the notification, if this is a case of one of seven investment options that have been assessed as failing, or all seven options. That would need to be explained to them by their adviser.
  • Simply having one or more investment options that are assessed as failing, does not mean that it would be in the best interests of the client to change funds entirely or to sell the investment option(s) that are impacted.
Mike Taylor

Mike Taylor

Managing Editor/Publisher, Financial Newswire

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Anon
6 months ago

The other big issue with the performance test is it only focuses on performance. It ignores important factors such as service level, insurance, and other potential benefits. However the APRA prescribed language “failed” funds must use in notifying members precludes any discussion of these factors.

Plenty of members will be cajoled by APRA into switching to other funds where they lose insurance benefits or employer top ups, or can’t get decent information from their fund to support contribution strategies.

Brad
6 months ago

The performance test has always been seriously flawed. Just another example of the government ramming through idiotic ideas that come from a committee or Roundtable of unprofessional pseudo advisers.
Judging a fund purely on the basis of near term past performance is one of the first things an adviser is taught not to do. Also judging purely on performance is also a no no. It goes to show that the committee that came up with this nonsense has very little understanding of advice itself or they have a political agenda.
It’s completely devaluing the work an adviser does to make an investment choice in the first place. The only place this makes sense is in the world of industry funds where almost all participants receive no personal financial advice.

Anon
6 months ago
Reply to  Brad

The performance test is based on long term performance, not short term. However in so doing, it penalises funds that have improved performance in recent years via changing investment managers or strategy, or reducing investment fees. As with most ASIC/APRA regulation, it has been designed to favour the entrenched union funds.

Corrupt Bureaucrats Off their heads again
6 months ago

Communist ASIC & APRA.
Why don’t ASIC & APRA simply just close down ALL other Supers besides Industry Super.
Industry Super with their 94% Growth Assets so called Balanced Funds.
Industry Super with their 50% Unlisted made up Valuations, that only ever go up in value.
Industry Super with their so called Defensive Assets of Property, Infrastructure, CDO’s etc.
It’s patently obvious the end result ASIC & APRA are aiming for.
ASIC & APRA along with Industry Super = REGULATORY CAPTURE CORRUPTION at its worst.

David Smith
6 months ago

ASIC is demonstrably and utterly ill-equipped to be regulating the provision of any financial services. The sooner they are relieved of that obligation, the better off everyone will be.

Billy Bob Cunningham
6 months ago

This article starts off talking about ASIC and then discusses the performance test, which is APRA’s area. Have two articles been spliced together, or something been edited out?

Anon
6 months ago

APRA does the performance test, but ASIC persecutes advisers. ASIC will take APRA’s performance test results and use them as ammunition for further adviser persecution.

For example if an adviser recommended an unhealthy client stay in their employer’s default super fund because it had large amounts of auto accepted insurance that the client’s employer paid the premiums for, and APRA then said the fund failed the performance test, ASIC would be able to use that as a reason to persecute the adviser even though the client is clearly much better off.

RFH
6 months ago

This just seems like ASIC have wanted to add another arrow to their quiver, so it gives them another tool to be able to go after advisers. Has Choice CEO, Alan Kirkland, been on record for similar views regarding choice super investment options overseen by advisers? Seems like good timing this comes out now that Kirland lands a plumb job under ASIC, who have obviously funded Choice.