In June, the government announced it would include Choice and superannuation wrap products in the YFYS performance test, with Financial Services Minister Stephen Jones confirming the government would extend its scrutiny beyond the MySuper options.
“The performance test administered by the Australian Prudential Regulation Authority has been effective at shining a light on underperformance in the MySuper sector,” said Mr Jones at the time.
“The Albanese government is updating the benchmarks used to measure fund performance and extending the scrutiny to many more products in the Choice sector where we know there is significant underperformance.”
With the performance test results set to be released on Thursday, 31 August, any clients that are in a trustee-directed product (TDP) that has failed the test are required to be informed by the trustee within 28 days.
Speaking with ifa, Philip Anderson, general manager for transformation and policy and advocacy at the Financial Advice Association Australia (FAAA), said advisers need to be on the front foot.
“Some clients will be oblivious to it, and I guess so be it, but others will pay attention. This will get media coverage, so there will be a whole host of people who are very uncomfortable that they are in a product that has been deemed to have failed,” Mr Anderson told ifa.
“They may then, as a result of that, form a judgement as to whether they have gotten poor advice. But there’s a whole range of reasons why their product may have failed.”
He cautioned that it is important to look at the reasons why a super fund or an investment option has failed the test before making a “knee-jerk reaction” to get out of a product.
“Some of the reasons that it may have failed is that this has been assessed over an eight-year period, which will be extended to 10 years,” Mr Anderson said.
“They may be in a product that’s been going very well for four years and they may have only been in it for four years. The thing that has contributed to the failure might have happened a period of time ago, which doesn’t mean that they should be responding to it right now. There are issues around the assessment methodology as well that we have provided feedback on.
“Even if a client is in a product that has been assessed as failing, it doesn’t mean that they should move. With wrap products, there’s deep considerations around the tax treatment. Tax isn’t recognised until the disposal of the product happens in a wrap product. So, forcing someone to dispose of their investments in that wrap product may, liquidating the investments, may lead to the recognition of capital gains tax that they could otherwise defer.”
He added that proactive engagement from their adviser, including an explanation for the product’s failure, would make a “world of difference” to a client. Moreover, Mr Anderson suggested arranging a meeting with the client to debrief and talk about their options.
“Having that support from their adviser will help them to avoid making decisions on their own, which will ultimately lead to their disadvantage,” he said.
“What we’re saying is, pay attention to this. It’s not far off now. It’s going to be in front of us fairly shortly, so get on the front foot. Make sure that you’re communicating with your clients who are impacted. Make sure that you’re set up for it and that you’ve got access to data on which clients have which products so that you can respond quickly.”
RG 53 says that past performance is not a reliable indicator of future performance.
APRA now produces their heatmap with details of poor performing products and makes the trustees write to their members to encourage them to switch funds or products.
Is this an admission that past performance is a reliable indicator of future performance, or is it APRA needing to make it look like they are doing something? Should ASIC be changing RG53?
RG53 deals with [b]promotional[/b] material that is likely to be construed as “misleading”, specifically those that use information about past performance or which make more general representations about good or superior performance (RG53.2.2)
The guide further explains that promotional material has a greater risk of being misleading if:
– Uses past performance information to support a claim about an entity’s skill or good performance (7.3)
– Uses past performance in a manner that implies it constitutes a projection illustrating the likely future value of an investment (8.1a)
– It does not draw attention to the fact that past performance will not necessarily be repeated. (8.2)
There’s nothing inherently wrong with reporting past performance; what DOES matter is the context in which it’s used.