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