Phil Anderson (left), Edwina Maloney and Mark Oliver

The extension of the Your Future Your Super performance test to trustee directed products will leave advisers with an increased workload to deal with clients who will now receive failure notices from their super funds.

APRA released the YFYS results on Thursday morning which for the first-time included trustee directed products (TDPs).

There were 96 trustee TDPs that failed to meet the test benchmarks, which included 76 of 305 platform products and 20 of 500 non-platform products.

Financial Advice Association head of policy Phil Anderson says there are implications including capital gains tax events if a client is taken out of a fund or the potential loss of insurance which isn’t taken into consideration by the test.

“Ultimately, it’s the client outcome that’s critical and we don’t want rash decisions being made that could have potential long-term negative consequences for clients,” Anderson tells Professional Planner.

The association has been vocal in the lead up to the results on the implications of the inclusion for choice products for advisers and their clients.

Anderson says the results have the potential to cause alarm for clients, possibly “undermining their confidence” in their adviser.

“It’s acknowledged that the recommendations to go into these products take into account personal circumstances and they may still be absolutely appropriate despite the fact they might have failed test,” Anderson says.

AMP and Insignia own and operate 75 per cent of the failed TDPs – AMP’s NM Superannuation, as well as Insignia’s OnePath and Oasis Fund Management (both acquired from ANZ), and Nulis Nominees (acquired from NAB/MLC Wealth).

Both AMP and Insignia, whose MySuper options passed the test, publicly stated support for the YFYS test but criticised the inclusion of Choice products.

AMP group executive of platforms Edwina Maloney says the extension of the test this year to “a small subset” of wrap investment options will cause confusion and potential harm to consumers invested in them.

“In its current form, the test applies a ‘one size fits all’ methodology to these wrap investment options which, in some cases, are designed to offer different risk characteristics and performance outcomes than contemplated by the test,” Maloney says.

Amid a financial adviser shortage and the Quality of Advice Review aiming to simplify the advice process, advisers will be required to spend unnecessary time helping consumers understand these “confusing outcomes”, rather than helping more clients, she says.

“AMP continues to urge the Government to reconsider the test methodology for wraps, improve transparency and to address the immediate issue of providing tax relief for consumers having to exit products which haven’t met their performance benchmark,” Maloney says.

Back to the future

The YFYS was first introduced two years ago and only covered MySuper products with so-called choice investment options to be included later.

There were 13 products that failed in the inaugural test in 2021, followed by five in 2022, and just AMG Super this year, which has failed three times in a row.

Acclaim Management Group, operator of the AMG MySuper product, closed the fund to new members last year and on Thursday announced it would be wound up.

It is working with Equity Trustees, the fund’s trustee, to ensure AMG MySuper members “receive the best outcome” following the termination of the option.

Australian Retirement Trust will also close down the QSuper Socially Responsible option off the back of the results, which returned 4.5 per cent p.a. during the timeframe of the test.

In the 2023 test, APRA found the median administration fees and costs for platform TDPs were the highest at 0.54 per cent of assets, compared to 0.27 per cent for non-platform TDPs and 0.26 per cent for MySuper products.

However, Anderson says the methodology around fees works based on the size of the investment being $50,000 in the test which doesn’t take into consideration that platforms often offer a lower variable fee for larger investments.

“What that means is something that’s uncompetitive at $50,000 might be quite competitive at $200,000, but it’s been assessed on a balance of $50,000,” Anderson says.

“Typical asset balances for wrap products is more than $50,000, that’s one of the contributing factors.”

Communication breakdown

Trustees of products that failed to pass the benchmarks must notify their members of the test outcomes by 28 September and cannot accept new members into products that have failed for two consecutive years.

Anderson says “the clock is ticking” on trustee requirements to send the messages to impacted members and the association would like for product providers to proactively communicate with the impacted advisers so they are briefed on the details for why an option failed.

“We’re very much awake to the fact that this is going to result in quite a bit of work for advisers to make sure their clients understand the implication of this announcement and have access to advice to ensure they do make the right decisions as a result,” Anderson says.

Insignia head of superannuation and chief distribution officer Mark Oliver says the firm is being proactive with advisers and helping them navigate which clients may be impacted.

“We certainly encourage those members and clients to work closely with a financial adviser who we’re confident has been considering their interests all the way through,” Oliver says.

“Our role is about supporting the adviser to the extent a client connects with them in light of this.”

According to figures supplied by Insignia, the test impacted around 5000 of their members with $350 million – less than 1 per cent of total members and assets in its super funds.

“It’s disappointing to see this many members impacted, albeit small, but we’re very keen to ensure advisers have the right information and the clients have the right information to make the right decision,” Oliver says.

Cleaning house

WTW investments director Jonathan Grigg says the platform numbers are inflated because the underlying strategies are often across multiple platforms.

Jonathan Grigg

“You see the same names pop up even though it’s the same strategy, it’s offered in four different places, so it pops up four different times,” the investment consultant says.

Oliver says part of Insignia’s problem was that whilst the underlying investment strategies may be fewer in number they multiply when you’ve collected several platforms under one entity.

“It’s the variation of administration fees means there are different outcomes for different cohorts of clients in the same investment option,” Oliver says.

“The number of failures is greater than the number of underlying investment options and that’s because the same investment option can appear in multiple platforms each of which will have a different administration fee.”

In Insignia’s case, it is still migrating products of legacy systems that will operate under a different fee structure in future.

“In some cases, we’ll introduce a better fee from the administration fee perspective for those clients transitioning to the new platform,” Oliver says.

“We’ll continue to address the underlying investments as well, such that we’re not relying on a single strategy to make sure that we address these test failures where we can.”

Maloney says in many cases investment options that haven’t met the test’s benchmarks are legacy funds that have been closed.

“Advisers and their clients have chosen to remain invested in these options because they have assessed that moving will not be in the member’s best financial interest due to capital gains tax, transaction costs and potential loss of valuable insurance arrangements,” Maloney says.

“Members could suffer financial detriment if they choose to move now as a result of the test, without first seeking advice.”

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