ASIC warns on identifying but not acting on underperformance

The corporate regulator wants clear evidence that persistent underperformance of superannuation choice products is being scrutinised, even if action isn’t ultimately. 

ASIC Commissioner Alan Kirkland told the Professional Planner Researcher Forum despite being released nine months ago, Report 779, which examined the decision-making process in relation to superannuation choice products that persistently underperformed, has continued to generate significant industry attention. 

“We expect the end users – trustees, advisers and their licensees – apply their own rigorous processes in considering researcher ratings in their own decision making,” Kirkland told research industry leaders in the NSW Blue Mountains. 

“They’re subject to their own obligations under the Corps Act and the licences they hold, and they can’t outsource those obligations to research agencies or indeed to anybody else.” 

But Kirkland clarified that acting on underperformance was a step beyond what the regulator requires, and instead the issue was the lack of documentation or acknowledgement of underperformance.   

“To be clear, our objective in this review was not to make our own judgements whether a particular option should be made available or recommended to members or withdrawn from members,” Kirkland said.  

“Nor do we seek to provide a prescriptive measure or benchmark for underperformance.” 

The report had recommended trustees should have sufficient capacity to manage investment options, including clear and comprehensive policies, resources, and data and reporting arrangements. 

“We don’t have a view that underperformance should result in any particular action or recommendation; it is our view that persistent underperformance should be identified and considered, and we should be able to see that has occurred if we come looking,” Kirkland said. 

Kirkland said he appreciates that performance can fluctuate over time, and this isn’t a reason to switch investments in and of itself. 

“Our point of interest was that if an option was persistently underperforming and maintained on an investment menu or approved for us by advisers there should be a clear rationale in the interests of members that explains why the option continues to be available,” Kirkland said. 

“Overall, we found an insufficient focus on performance and a lack of evidence around how super trustees, advisers and licensees were considering persistently underperforming options.” 

Kirkland said the recurring theme from the regulator’s investigation was inadequate consideration of underperformance and overreliance on research houses.  

“Where there’s undue reliance on research reports, that creates risks for investors, especially where there are conflicts of interest – actual, apparent or potential – that might impact the independence and therefore reliability of research and ratings,” Kirkland said. 

“Research that’s not credible can damage confidence in the research sector itself and in the financial system more broadly.” 

Kirkland said the regulator expects material conflicts to be clearly disclosed along with an “appropriate” level of transparency. 

“And most importantly that the research is produced on sound methodologies and produced to a high quality,” Kirkland said. 

Kirkland said advisers should be taking reasonable steps to detect underperformance of investment options and not over-rely on advice licensee product approvals or external research ratings. 

“Where a product persistently underperforms, advisers should consider where action is necessary and communicate a recommendation to their client, including the reason why the recommendation is appropriate based on that client’s individual circumstances,” Kirkland said. 

Licensees should also have their own rigorous processes to detect when options that are approved for use have underperformed and to address those in a timely manner.  

“They should consider historical performance including against the options performance benchmark in the PDS [product disclosure statement],” Kirkland said. 

“Here, again, they shouldn’t overly rely on the recommendations and ratings of others. The steps that a licensee should take if they detect underperformance will depend on the circumstances, they might include communicating with advisers, restricting the circumstances in which the option be recommended or removing the option from APLs.” 

But while Report 779 has generated more interest in the advice ecosystem among advisers, licensees, researchers and platforms, the regulator noted super trustees should not rely on a minimum external investment rating as a sole criterion for inclusion on their investment menus.  

“They should effectively monitor performance with reference to specific and [measurable] return objectives, and clearly defined parameters for identifying underperformance or where closer monitoring might be needed,” Kirkland said. 

“Where options are not performing as anticipated, they must decide how to best act, considering the best financial interests of members that includes effectively communicating underperformance and taking into account the needs of members who may not be receiving advice.”