FPA points to faults in proposed Choice performance test

The Financial Planning Association (FPA) has argued that the proposal for APRA to direct failure notices to be sent annually is inconsistent with the understanding that past performance is not an indicator of future performance.

“Professional financial planners actively educate and support clients on the understanding that past performance is not an indicator of future performance. For this reason, the proposal for APRA to direct failure notices to be sent annually is inconsistent with this message,” the FPA said.

“To this point, it would seem more relevant for disengaged super fund members to be warned of poor outcomes on a more frequent basis as opposed to those members who have made the decision to actively manage their portfolio of Choice products themselves or with the assistance of a professional financial planner,” the group argued.

However, acknowledging that it can often be expensive and complicated for financial planners to compare costs and the performance of Choice options for clients, the FPA explained that while it opposes the proposed benchmarking and failure notices, it believes a fund performance and cost comparison tool maintained by APRA is a “welcome development”.

“In saying this, we believe this could be better accomplished through mandatory and standard data feeds which can better assist professional financial planners and interested superannuants actively monitor their investment performance in a bespoke manner,” the group said.

The FPA explained that, unlike MySuper products, which by their nature are designed for disengaged members of super funds, Choice products are generally used by members who are actively managing their retirement benefits.

“In many cases, they have engaged the services of a professional financial planner who has provided them with advice in their best interests based on their goals, objectives, and financial position.

“Most clients will also enter into an ongoing advice service with their financial planner and therefore receive ongoing monitoring of their super funds performance from their financial planner in relation to their goals,” the FPA said.

“For this reason, the portfolio of Choice funds recommended by a financial planner are often designed to meet specific client performance objectives over specific time frames, and can be recommended (and often actively managed) to manage a variety of risks for clients,” it added.

As an example, the FPA explained that three clients with similar risk profiles and asset allocations can be recommended portfolios with different characteristics as follows: a younger client with a long-term investment time frame from their super can benefit from a highly volatile investment portfolio which benefits from the purchase of units at a discount; an older client closer to retirement will benefit from a more stable, lower volatility portfolio with a focus on growth; while a client in retirement will benefit from a portfolio which focuses on income-generating investments to minimise the sale of units when funding their lifestyle.

A related issue, the FPA said, is the “one-size-fits-all” approach to each benchmark given “similar” Choice products are often managed in very different ways.

“While some Choice products will follow index-investing methodologies to reduce cost and active management, others may be specifically actively managed to take advantage of particular events or investment philosophies, others may use fund of fund models and actively or passively fund managers, others will use only listed investments, while others may use predominantly unlisted assets, and finally there are a number of products which now use glide paths to manage risks for specific cohorts of members over different time periods,” the group said.

The FPA added that it would welcome the opportunity to discuss with the Treasury the issues raised in its submission.