Advisers face difficult conversations around super fund switching
The extension of the APRA performance test to trustee-directed products could lead to difficult conversations for advisers if tax events mean their clients are unable to switch funds, according to a panel.
Earlier this year, the annual APRA performance test was extended to trustee-directed products with 96 funds failing the test, which included 20 of 500 non-platform products and 76 of 305 platform products.
Three-quarters of the failed trustee-directed products were concentrated in products offered by only four trustees: N. M. Superannuation Proprietary Limited, NULIS Nominees (Australia) Limited, Oasis Fund Management Limited, and OnePath Custodians Pty Limited.
If consumers sit in a fund that has failed, they receive a letter outlining the failure and a suggestion they consider switching to a fund which has passed.
However, a panel of platform experts have raised questions regarding whether it will be possible for all members to switch. For some, there may be alternative reasons for choosing a specific fund such as religious or ESG reasons outside of performance metrics.
Speaking at the Citi Investment Summit in Sydney, Kelly Power, chief executive of superannuation and investments at Colonial First State (CFS), said: “If you’re actually going to tell someone to move out [of their fund] and that’s not necessarily in their best interests, that’s difficult for anyone to justify,” she said.
“There has to be a way to actually solve that problem, getting people out of those legacy products.”
Observing the difficult conversation consumers might have with their advisers upon receiving a letter about their performance test, HUB24 chief executive Andrew Alcock worries it could lead to many potentially choosing to part ways with their adviser.
“It’ll create unrest and it’s actually not good for consumers the way it’s being done, in my humble opinion,” he said.
Alcock and Matt Heine, joint chief executive of Netwealth, both raised the tax consideration of super funds and the potential implications of switching funds.
“[Capital gains tax] is a massive issue, so if they’re going to be progressing down that path and asking members to move to better performing funds, they will have to solve that CGT problem on rollovers. If that occurs – and it’s something I never thought I’d see in my lifetime – I think that creates some really interesting opportunities for the funds that are gaining momentum, not so much for the funds that are falling off,” Heine said.
“We’re talking about somebody’s view of what a performing fund is. Portfolio construction is different at different times, and might not have performed today, but next year, you should have been in those assets,” Alcock added.
“I can’t see the government giving up that tax revenue, happy days if they do because there’ll be money moving left, right and centre, but I don’t think it will happen and I don’t think what’s being communicated is fair.”
Earlier this week, Financial Services Council (FSC) chief executive Blake Briggs explained he believed CGT relief should be extended to trustee-directed products in the same way as MySuper funds.
“What is not openly talked about is the fact that the vast majority of these products are closed to new investors and the reasons why existing members are usually in them is for tax reasons, they can’t roll out simply without getting a tax event.
“When [the government] sees the next suite of failures when performance testing is done at the back end of this year, and they see consumers getting upset because they have received a letter from the government saying their product has failed, advisers will get phone calls from their client saying, ‘Why did you put me in a product that failed?’
“The government has designed a process where the failure of investment products will be communicated directly to the consumer and conveyed in very blunt language, and the adviser is usually cut out of that process. They will not receive a copy of the letter the government is sending and the first they may be aware of it is when they get an upset client.”
AUTHOR
Rhea Nath
Recommended for you
Insignia Financial has announced a board director will be stepping down next year after almost a decade amid a board refresh.
Zenith Investment Partners has appointed a Brisbane-based business development manager, who previously led Fitzpatrick Private Wealth Partners as a director and senior adviser.
Praemium has said it is open to investing in artificial intelligence “in a big way” as it believes it can transform the business and details how it is already being used by the firm.
Sequoia has shared its strategic initiatives for FY25, including organically increasing its licensee market share and restructuring its specialist investment arm.
To be fair, if the first time you are hearing that one of your clients is invested in a failed product is from the client themselves then you deserve to lose the client, I do not believe for a moment that many advisers would ever find themselves in that position.