ASIC report 779

The Australian Securities and Investment Commission (ASIC) published Report 779 Superannuation choice products: What focus is there on performance? (Report 779) in February 2024. The report:

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.¹

ASIC concludes that although choice superannuation product members are the ultimate decision makers in relation to their portfolios, super fund trustees, financial advisers and Australian Financial Services (AFS) licensees must take steps to:

support members in earning good net returns from their superannuation investments
address and reduce member exposure to persistently underperforming options where appropriate.

This article, for financial services professionals, explains ASIC’s expectations of trustees, financial advisers and AFS licensees in Report 779, and what actions each of the parties, especially financial advisers, may take in response.

Background

Regulatory focus on superannuation performance has broadened in recent years, and may broaden further still. The Australian Prudential Regulation Authority (APRA) has administered annual performance testing of MySuper products since 2021, and broadened the test to trustee directed products (TDPs) in 2023 – see the article Sharpening the focus on member outcomes: Addressing underperformance in superannuation for more information on the test as it applies to TDPs.

As the choice product segment now comprises more than one third² of total superannuation savings, it is expected that the regulators (APRA and ASIC in particular) will continue to further monitor and provide guidance on performance issues.

ASIC’s review

ASIC reviewed 10 super fund trustees, 29 choice product investment options, 88 advice files from 26 AFS licensees and 21 AFS licensee product approval and approved product list (APL) processes. The information collected related to the period 1 April 2021 to 16 November 2022.

Broadly, ASIC’s review focussed on, where available within the fund, an investment option from APRA’s Choice Heatmap showing ‘high heat’ (indicating poor performance or high fees) and two options (or more) identified by the super fund trustee.³ The investment performance of each option was compared to the benchmark noted in its product disclosure statement (PDS).

ASIC’s findings – general themes

ASIC indicates in Report 779 that super fund trustees, AFS licensees and financial advisers all have responsibility to monitor and take action regarding under-performing investment options within superannuation.

Super fund trustees cannot rely on financial advisers and/or AFS licensees to take action, and likewise AFS licensees and financial advisers cannot rely on super fund trustees’ management of their product menus alone to account for under-performing investment options in their clients’ superannuation portfolios.

Similarly, financial advisers cannot solely rely on their AFS licensee’s APL changes or approval processes to determine whether an under-performing investment option should remain in a client’s portfolio.

In ASIC’s view, there is room for improvement for all parties – super fund trustees, AFS licensees and financial advisers.

ASIC’s findings – super fund trustees

ASIC reviewed 29 underperforming investment options from 10 super fund trustees, including a range of platform products.

ASIC examined the process for choosing investment options to offer on the product menu, and noted some trustees’ due diligence policies were poorly draft and lacked detail. Furthermore, it was unclear to ASIC how performance was factored into the investment selection process.

Although all 10 trustees had some performance monitoring system in place, flagging of under-performing investment options and taking further steps was limited.

Twelve investment options significantly underperformed (annualised returns of between 4.2% and 6.7% less than the PDS disclosed benchmarks).

ASIC noted that it did not see evidence of trustees comparing actual returns to return objectives or sending targeted information to members where there was prolonged underperformance.

ASIC also made the following observations:

For super fund trustees to monitor and manage investment options with a performance focus, they must have:
- clear and comprehensive policies
- sufficient resourcing to actively assess option performance, and
- robust data and reporting arrangements to support performance monitoring.

Additionally, super fund trustees:

need to present members with investment options that are likely to promote good financial outcomes for members, rather than simply providing a broad selection of options.
must apply specific and measurable return objectives for investment options and ensure that parameters for closer monitoring or identifying underperformance are recorded, objective, specific and focused on member outcomes.
must decide, based on the best financial interests of members, how to act if options are not performing as anticipated. If a trustee considers leaving an option available to members is in the best financial interests of members, then the trustee should be able to clearly explain its reasoning, supported by data and analysis.
should consider how to communicate about underperformance effectively. This includes providing information about performance against return objectives and sending targeted messages to affected members.
should be aware of members who may not be receiving advice and consider their information and communication needs, particularly where the product is designed for members receiving advice.

ASIC’s findings – financial advisers

ASIC used the data from the 10 super fund trustees to identify financial product advice provided by financial advisers to their clients regarding the investment options which had significant underperformance (referred to above).

This included review of 88 advice files, covering nine underperforming investment options. A full replacement or redemption of the underperforming investment option was noted in 22 of the 88 files.

The remaining 66 files involved a recommendation to invest in, or retain, the underperforming investment option. Seven of the files had a recommended portfolio weighting of 100% to an underperforming investment option.

Some files clearly explained why an underperforming option was being recommended despite the underperformance, and some files contained records of investigation and assessment of the options, including consideration of AFS licensee research and TMDs.

However, other files did not demonstrate that the financial adviser conducted a reasonable investigation and assessment of the underperforming option, identified the underperformance, or explained why it was appropriate for the client to retain the option despite the underperformance.

ASIC made the following observations and statements:

Financial advisers should treat performance as a primary consideration and consider information from a range of sources to develop and support their recommendations.
ASIC expects that a financial adviser will investigate and assess investment options to detect and address underperformance when reviewing a client’s existing options.
Financial advisers should be careful not to over-rely on AFS licensee product approvals or external research house ratings. The fact that an option is approved by an AFS licensee or has a minimum external research house rating does not mean that an adviser can ignore the performance of the option when providing personal advice.
Regardless of whether a financial adviser’s recommendation is to acquire, retain or redeem an underperforming option, they should explain why that recommendation is appropriate despite the underperformance.
Advisers should also keep appropriate records of how they have complied with their obligations.

ASIC’s findings – AFS licensees

ASIC used the data from 21 AFS licensees, reviewing their APLs and investment approval processes, and their consideration of underperforming investment options.

Some licensees’ APLs were based solely on the superannuation platform product menu, or minimum research house ratings, without further research or consideration.

ASIC noted that:

AFS licensees must have adequate risk management systems
Although there is no requirement for AFS licensees to have an APL, they are often used:
- to assist advisers in providing good quality advice and complying with their legal obligations
- as a risk management tool to help AFS licensees comply with their legal obligations.
The fact that an option is included on a superannuation choice product’s investment menu or has a minimum research house rating does not mean that an AFS licensee should otherwise ignore performance.
AFS licensees should have rigorous processes to detect underperforming options and address these in a timely manner. Historical performance should be considered, including against the option’s performance benchmark in the PDS.
The steps that should be taken where an option is detected as underperforming may include:
- communicating with advisers
- restricting the circumstances in which the option might be recommended, or
- removing the option from APLs or approvals.
AFS licensees should also retain records of the steps they have taken to detect underperformance and monitor investment options approved. This includes the AFS licensee’s decision making and communication with advisers about how to manage underperforming options held by their clients.

Summary points

ASIC emphasises multiple times throughout Report 779 that both AFS licensees and financial advisers ‘should treat performance as a primary consideration’. However, the focus of Report 779 is very much on underperforming investment options.

Ideally decisions to cease further investment into, or part/full redemption of, an underperforming investment option should be made by the client, preferably with the assistance or upon the recommendation of a financial adviser.

Bulk redemption of multitudes of clients’ interests in underperforming assets at the instigation of an AFS licensee or super fund trustee is not an ideal outcome.

Nonetheless ASIC’s view is, understandably, that both AFS licensees and super fund trustees have very important roles to play in ensuring that super fund members are invested in assets that perform to expectation.

Financial advisers and AFL licensees should expect more, and more frequent, communications from super fund trustees about underperforming investment options as a result of Report 779. Super fund trustees are more likely to soft close and/or close underperforming investment options, and possibly remove options from their investment menus, as a result of Report 779.

AFS licensees may choose to review and improve their APL processes and communications to financial advisers in light of the comments in Report 779.

Financial advisers should endeavour to proactively address underperforming investment options with their clients, and document their reasoning for investing in, continuing to hold, or redeem underperforming investment options.