By Jayson Forrest
Leah Sciacca (ASIC) provides a recap on the key findings of ASIC's Report 779 and the role of super trustees, financial advisers and advice licensees in monitoring investment underperformance.
Released in February 2024, ASIC Report 779 — Superannuation choice products: What focus is there on performance? — examines the role of superannuation trustees, financial advisers, and Australian financial services licensees in influencing the investment options that make up member superannuation portfolios as part of a choice superannuation product.
Primarily, ASIC’s review considered the focus on performance, because investment in persistently underperforming choice products adversely impacts the retirement outcomes of its members.
Leah Sciacca
ASIC
Report 779 focused on superannuation trustees, financial advisers, and advice licensees in response to persistent failures of investment options to perform as anticipated. We looked at these groups because each have important roles in the financial services ecosystem.”
Addressing the IMAP Advice in Action 2024 conference in Sydney, Leah Sciacca — Senior Executive Leader, Financial Advice and Investment Management at ASIC — says the report highlights the fact there is often insufficient focus on performance and a lack of transparency about continuously underperforming investment options, with the regulator providing a number of key messages for the industry.
“Report 779 focused on superannuation trustees, financial advisers, and advice licensees in response to persistent failures of investment options to perform as anticipated,” says Leah. “We looked at these groups because each have important roles in the financial services ecosystem.”
According to Leah, superannuation trustees are the gatekeepers of the options made available in any of the products they offer. Advisers recommend options to their clients, which are based on their investigation and assessment of those options, and what might suit their clients’ individual circumstances. Advice licensees are responsible for ensuring their advisers act in the best interests of their clients and provide appropriate advice. And in doing that, they typically approve investment options for use by advisers.
She adds all three groups each significantly influence the make-up of a choice member’s superannuation investment portfolio, and members rely on them to ensure that options and products are delivering for their retirement income goals.
We found there was sometimes an over-reliance on external research and ratings for the assessment of market suitability of choice investment product.”
Super trustees
“Super trustees play a significant role in improving retirement outcomes for members, by considering performance when deciding which options to offer and how to offer them to members, and taking actions to further the financial interests of members when investment options do not perform as anticipated,” says Leah. “They play a crucial role that cannot be outsourced by relying too heavily on ratings houses or on advisers.”
In terms of ASIC’s findings for super trustees, ASIC found that the due diligence policies of some trustees lacked detail or were poorly drafted, making their process difficult to understand. As such, it was not always clear how and the degree to which performance was factored into the assessment of investment options.
“We found there was sometimes an over-reliance on external research and ratings for the assessment of market suitability of choice investment product,” says Leah.
Of particular concern were examples of members linked to an adviser who did not have an ongoing relationship with that adviser and had not received advice from their adviser in the preceding two years. However, these members continued to make investments into the underperforming options through their superannuation fund, possibly as a result of automated investments of their super contributions.
In review of its findings, Report 779 outlined some key messages for superannuation trustees. These include:
- Trustees treat performance as a priority when selecting investment options;
- Do not use research ratings as the sole criteria for including an investment option;
- Do not implement a set-and-forget strategy with investments;
- Consider the best financial interests of members;
- Consider that not all members receive advice; and
- Communicate underperformance effectively.
ASIC doesn’t have a view that underperformance itself or underperformance for a particular number of years should automatically result in a recommendation to switch products. What we do expect is that advisers treat performance as a primary consideration when advising their clients
Financial advisers
Advisers play a key role in meeting the superannuation retirement needs of Australians. Good quality financial advice can help super members grow their superannuation balance before they retire and make the most out of their super savings in retirement. Whereas poor quality advice can significantly affect members’ financial positions and retirement outcomes.
As part of its review undertaking, ASIC examined 88 advice files across 26 licensees, looking at about nine investment options that all routinely failed to meet the performance benchmark as disclosed in the PDS.
Of those 88 files, 22 included a recommendation for a full replacement or redemption of the underperforming option, and the remaining 66 files recommended to hold, increase or partially reduce the existing investment in the underperforming option.
“These included 11 files that contained advice deficiency relating to the underperforming option that were a major factor in the adviser failing to demonstrate compliance with the Best Interest Duty and appropriate advice obligations,” says Leah. “This raised concerns about clients suffering financial detriment.
“Our major concerns with these 11 files were they: did not demonstrate that the adviser had conducted a reasonable investigation and assessment of the underperforming option; did not identify underperformance; and did not explain why it was appropriate for the client to retain the option, despite the underperformance.”
Report 779 highlighted three key messages for financial advisers when acting in their clients’ best interest when advising on investment options:
- Financial advisers undertake a reasonable investigation of investment options to detect underperformance;
- Do not over-rely on advice licensee product approvals or external research ratings; and
- Clearly explain the basis of the advice to clients.
“ASIC doesn’t have a view that underperformance itself or underperformance for a particular number of years should automatically result in a recommendation to switch products,” says Leah. “What we do expect is that advisers treat performance as a primary consideration when advising their clients.”
However, she emphasises that when an adviser recommends a product to a client, whilst that advice relationship is in place, there is an ongoing obligation on the adviser to monitor the continuing performance of that product for the client.
“To the extent that there is an ongoing advice relationship in place, there is an ongoing obligation on the adviser to monitor investment performance for the client,” says Leah. “Naturally, once that advice relationship is discontinued — and ASIC’s review did find some clients doing that — then there is no obligation on the adviser for the performance of that product.”
To the extent that there is an ongoing advice relationship in place, there is an ongoing obligation on the adviser to monitor investment performance for the client. Naturally, once that advice relationship is discontinued then there is no obligation on the adviser for the performance of that product.”
Advice licensees
ASIC also considers advice licensees as a ‘gatekeeper’ in terms of the performance outcomes for advised members. The choices that licensees make about which investment options are approved for use by their advisers can significantly influence whether those advised members hold underperforming options.
ASIC reviewed information obtained from 21 licensees, including policies and processes relating to the approving of investment options, the use of approved product lists, and ongoing monitoring of underperforming options.
“In almost all cases, the same nine underperforming options that were the focus of our advice file reviews were on an advice licensee’s APL or otherwise approved for use by the licensee,” says Leah.
The review found that six of the licensees based their product approvals solely on the availability of options within certain superannuation choice products or on a product research rating, without the licensee having conducted further research or applied additional consideration.
Of the 17 advice licensees with an APL, there were only two that changed their internal rating of the underperforming option on their APL from ‘approved’ to ‘hold', or removed the option from the APL. A further seven licensees indicated they specifically considered historical performance of the underperforming option, with four of these licensees identifying the option as underperforming and retaining records of why the option continued to be approved for use by advisers, despite the poor performance.
ASIC’s review identified four key areas for advice licensees to better manage investment underperformance. These include:
- Licensees should treat performance as a primary consideration when approving products for use by advisers or managing their APLs;
- Have rigorous processes to detect underperforming options that have been approved for use by advisers and address these in a timely manner;
- Do not over-rely on super fund investment menus or external research ratings; and
- Address underperforming options.
Not seeking to make judgement calls
According to Leah, ASIC’s review of superannuation choice products was not intended to provide a proscriptive measure or benchmark for underperformance in terms of comparative returns or timeframes. She also adds the review was not designed to determine whether a particular option should be made available or recommended to members. “We focused on how trustees prioritise performance in offering investment options, rather than seeking to make judgements about whether a particular option had underperformed.” When conducting its review, ASIC acknowledged that investment performance can fluctuate over time and not all instances of underperformance are a reason to change investment options. However, Leah adds that if an option is persistently underperforming and maintained on an investment menu, or approved for use by advisers, there should be a clear and demonstrable rationale for doing so, in the interest of members.
About
Leah Sciacca is Senior Executive Leader, Financial Advice and Investment Management at ASIC.
Leah spoke on ‘The role of advisers in monitoring underperformance’ at the IMAP Advice in Action 2024 conference in Sydney.
To read more about ASIC's Report 779, CLICK HERE.