Pass or fail: Capitalising on the performance test

I have little doubt that every adviser in the country has received the inevitable comparison to AustralianSuper’s “Balanced Fund” returns at least once. Similarly, I am sure multitude of clients have ceased relationships with long-standing advisers in pursuit of said returns despite disclaimers that “past returns are no guarantee of future returns”.

We all know that the investment playing field isn’t always even, with clients requiring and demanding greater transparency when engaging with a financial adviser but receiving little if any on the other side. The recently adopted “Performance Test”, while clearly not perfect, stands out as a rare levelling of this playing field and ultimately a generational opportunity for the financial advice industry.

The rather simple nature of the test is widely expected to result in a shift back towards passive or index investing, particularly for the cohort of funds that have been underperforming or are at risk of underperforming the dedicated benchmarks in the coming years. This is the first opportunity.

Financial advisers by their nature are “active” investors. Whether advising on a broad strategic asset allocation and implementing it passively or managing a portfolio of direct investments across multiple asset classes, advisers have the ability to shift portfolios more aggressively. That’s not to say advisers should be going to cash or loading up on risk, but rather they are more easily able to identify potential risks and inform clients of them to make their own decisions.

Transparency has long been a bugbear of investors, politicians and others competing with industry funds, and was partially addressed in the performance test. While transparency can be difficult for advisers during times of volatility, as their clients know every single investment they hold down to the cent, it represents a key differentiating point.

Industry funds will continue to keep significant amounts of their underlying assets private given the perceived importance when negotiating their potential sales, so advisers should embrace the opposite and provide as much transparency as possible as regularly as clients wish.

A key part of transparency is in the regularity and quality of reporting. The performance test will deliver outcomes on an annual basis, while most large funds provide a statement only every six months. The financial advice industry has seen a significant investment in reporting in recent years, with an expanding stack of technology available to help advisers engage more regularly with their clients, and ultimately attract more.

Delivering a more regular, transparent client review, at least on a quarterly basis, with real action points is something larger funds simply cannot hope to achieve.

While environmental, social and governance-focused investing is all the rage now, few have been able to succinctly deliver a message and truly highlight what their business stands for. This is true of both industry funds and advisers.

On the one hand, most industry funds are so large their investable universe almost requires them to hold infrastructure and other assets that they may not otherwise own. Similarly, an index approach to equity investing, particularly in Australia, naturally results in weightings to the mining sector.

Advisers, on the other hand, being in control of their own destiny, are in a position to decide their own internal approach to sustainable and responsible investing and only work with those who share the same views. That is, advisers are in a fortunate position that they can carve out their own niche of clients rather than seeking to craft strategies for millions of members.

Ultimately, whether advisers are able to leverage this opportunity or not comes down to communication and getting their message across. Whatever that may be.

Drew Meredith, director, Wattle Partners

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.