Advisers to expect increased workload as YFYS test gets expanded
The FAAA has warned advisers to be alert if clients are in an underperforming super fund as the performance test is increased to certain trustee-directed Choice products.
Philip Anderson, general manager for transformation and policy and advocacy at the Financial Advice Association of Australia (FAAA), discussed with Money Management how the APRA annual performance test has been expanded to ‘trustee-directed products’ this year.
These are multisector products where the trustee or related entity is also the investment manager.
The change was brought in earlier this year following a review of the performance test by Treasury.
While the performance test has been in place since 2021, Anderson said the inclusion of trustee-directed products will have a greater effect on advised clients and create more work for advisers.
This is particularly the case as APRA has already warned one in five Choice investment options significantly underperformed benchmarks with an eight-year history, representing $10 billion of member benefits.
In the latest April heatmaps, APRA said over an eight-year time horizon, 39 per cent of open Choice investment options fell below benchmark compared to 21 per cent of MySuper products. The figure was even higher for closed Choice options at 67 per cent.
“This issue is even more pronounced with legacy products. Thus, whilst the exact affected product count is uncertain, it could be substantial. This is likely to impact many advisers and many advised clients,” Anderson said.
Any members of funds which fail will receive a failure notice and, in some cases, clients could receive multiple notices if they are in different investment options.
The FAAA is concerned clients will be anxious about the notices and unsure whether to switch funds which could have implications on their tax or insurance, especially if they are approaching retirement.
“The performance testing regime has merit, and notifying clients when they are in a poorly performing product is appropriate. There are, however, potential implications for clients, including generating anxiety and doubt about their current super and advice arrangements.
“Whilst the government prescribed message, issued by the trustee, will be to consider moving to another fund or investment option, it is essential that clients get advice and carefully consider the merits of moving or making changes. Switching funds has significant implications, including with respect to insurance arrangements.”
Anderson urged advisers to ensure they are in communication with their clients to ascertain if they need to switch or not, and whether it will be in their best interest.
“It will be essential that advisers explain all these considerations to their clients.
“Clients in Wrap products must consider potential tax implications, especially if they’re on the brink of retirement, where recognising tax gains might be best deferred until they are in the tax-advantaged pension phase. In other situations, the benefits of moving might be outweighed by associated costs.
"Obtaining personal advice that considers their individual circumstances is critical. This is likely to create a lot of work for financial advisers and they need to prepare for this and respond as soon as possible.”
The performance test results for 2023 will be released by APRA on 31 August.
AUTHOR
Laura Dew
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Performance tests are a great idea if they focus on long term rather than short term performance. If the Government is serious about genuine super choice then removing the barriers to rollover is key. CGT, buy/sells and Centrelink implications all prevent members from being able to move as is needed.