The managed account space needs a standardised method of assessment to prevent underperformance, the Professional Planner Researcher Forum has heard.
David Bell, executive director of The Conexus Institute*, said that he did not see a level of industry standardisation of performance assessment.
“It’s a growing sector,” Bell said told an audience of senior research professionals in the NSW Blue Mountains this week.
“If stories come out of dispersed client experience, stories come out about underperformance that’s not explained to clients, some little spot tests by regulators, at some point, greater amounts of attention would come onto the space.”
Bell said he was not seeing much regarding industry standardisation in the managed accounts space and compared it to the superannuation sector where most of the institute’s research has been focused.
“Superannuation was a sector that said, we actually assess performance against CPI plus benchmarks, we all do performance assessment,” Bell said.
“Then the regulators said, you’re actually not doing this consistently with each other. It’s all dispersed. We’re going to put in place a blanket test. So that’s probably the analogous situation.”
However, not everyone in the room agreed with the assessment that the emerging sub-sector in the advice ecosystem needed more accountability.
Angela Ashton, director and founder of Evergreen Consultants and Evergreen Ratings who provide managed accounts said it’s something “definitely being measured” but not being tested.
Bell asked Ashton how consistent the performance assessments were for the separatenly managed accounts that Evergreen runs for multiple platforms.
“They’re fairly consistent – to be honest, I would say that some are more strict, like some platforms are stricter than others, around what they perceive to be underperformance,” Ashton said.
“There may be a little bit of this, sort of, you know, not exactly the right benchmark, depending on the platform, but I don’t really see that as a massive issue.”
Bell said he was of the view that “being ahead of the curve and having industry standards is a very good defence measure mechanism, because it suggests that we’re a good self-managing sector”.
The Your Future Your Super performance test provided a backdrop to the discussion.
The YFYS performance test came about due to a coalition policy based on recommendations of the 2019 Productivity Commission review of superannuation. Despite being heavily contested by industry bodies and opposition, it was passed as legislation.
“Once you have something that’s implemented with a very strong consumer-led message behind it, you can never retract it, because the minister who took that away would be known as the minister who removed consumer protections,” Bell said.
“The design intention was really to protect consumers from being continuously exposed to underperforming super funds, and particularly those members who are disengaged.”
Despite this intention, the test is “backwards looking” with many flaws, such as ignoring the value of asset allocation decisions and not accounting for good risk management.
Failure to pass the performance test can be detrimental to a trustee, especially if they do not pass a second time. Since the introduction of the test, 14 MySuper funds have failed the test at least once and 13 of them merged.
“I think what’s happened in reality is that a first fail is semi-terminal, and the reason for that is because it’s not just a regulator to fund role that’s playing the game here, it’s the role of media,” Bell said.
“If you fail the performance test, you’re going to be on the front page of certain newspapers. And trustees can’t handle that, and that’s going to lead to a sequence of events, which generally leads to you merging in with someone or closing your fund.”
Some funds, to ensure they pass the test, make dramatic changes, often reductions, to their menu.
SuperRatings executive director Kirby Rappell said as the test expands there will be more rationalisation of investment menus.
“In terms of behaviour…if we look at someone like an AMP signature super…their menu shrank by about 70 per cent so rather than being at risk of failing the test, they proactively reduce their menu,” Rappell said.
*The Conexus Institute is a not-for-profit think-tank funded by Conexus Financial, the publisher of Professional Planner.
