While the corporate regulator has scrutinised the use of investment research and ratings by advisers and licensees, it has expressed no interest in having greater direct oversight over the veracity of the underlying methodology.
The admission was made by ASIC Commissioner Alan Kirkland at the Professional Planner Researcher Forum who had also expressed the regulator’s concern over advisers, licensees, platforms and trustee overreliance on research house ratings as part of ASIC Report 779.
The report, released in February, examined the decision-making process in relation to superannuation choice products that persistently underperformed.
But asked whether ASIC had any interest in inspecting the quality of work conducted by the research houses, the regulator was cautious.
“I wouldn’t say it’s something ASIC has got really detailed views on,” Kirkland told Professional Planner in an exclusive interview following his speech to the forum.
“If we were looking at research ratings at any point in time, we’d fall back on what are the obligations of the people providing that rating and the people relying upon it.”
Kirkland said if research agencies are licensed, they already have general obligations to adhere to, particularly along the lines of avoiding misleading, deceptive misconduct.
“They’re pretty low bar to be honest and I would hope that’s not one that many people in this room are worried about.”
The Commissioner was also challenged over whether it was appropriate from some research houses to have at least 70 per cent of their ratings as “recommended” or “highly recommended”.
Out of focus
While the regulator is yet to place any greater attention on the research process, Kirkland said there were concerns over the due diligence done by other entities to properly vet those ratings.
“If trustees or licensees or advisers are relying on those ratings, they need to understand the basis of the ratings and form their own view about the weight they attach to those ratings when making their own decisions about including investment options or providing personal advice,” Kirkland said.
Kirkland pointed to an example where all that was required to be included on an investment menu was to have a “neutral” rating.
“That raised questions for us whether the trustees involved were actually applying their own independent judgment,” Kirkland said.
But the industry hasn’t only had to grapple with the underlying meaning of the report, it’s also had to confirm two very contradictory views: past performance doesn’t guarantee future performance, but also past performance should be monitored and acted on.
Kirkland dismissed any potential cognitive dissonance, arguing the purpose of the report was to make sure licensees and trustees had mechanisms in place to identify and potentially act on underperformance.
“The underlying assumption [is if] there is a product has been recommended by an adviser and included in investment menus, it’s because it’s considered to be in the best interest of the client or best financial interests of members and presumably the performance benchmarks are part of that calculation,” Kirkland said.
“If you have a situation where over a number of years those performance benchmarks are being set then just as a matter of logic it should consider some sort of review process to say we are still confident this product is right for this investment menu, right for this individual client.”
Kirkland added the answer could very well be a “yes” which is acceptable to the regulator if there is a clear and documented rationale.
“Our concern is where we saw poor processes or no record of processes at all. That persistent underperformance was even being identified let alone being acted upon.”
Other implications
Kirkland acknowledged there are other factors like tax implications and personal preferences articulated by the client that can be factored into the choice made by the adviser.
“Ultimately, it’s about giving advice in the best interests of the client then acting upon the client’s instructions if they’ve been properly advised,” Kirkland said.
“If there’s a record that you’ve gone through those steps to an appropriate level of detail then ASIC is unlikely to have a problem.”
Asked where the regulator sees the impact of the outcomes expected from Report 779 versus the Your Future Your Super performance test led by APRA, Kirkland said the latter was more prescriptive with clearer consequences for failing to meet that test.
“In our case it was more about seeing underperformance relative to the benchmarks and the PDS [product disclosure statement] as a flag,” Kirkland said.
“That was throwing up orange or red flags around the performance of an option and what were the processes of the various entities to respond to that. It’s really important to see them as different tests with different purposes.”
