YFYS test changes pose ‘downside risks’

The Financial Advice Association of Australia (FAAA) and Chant West remain concerned with how the Your Future, Your Super performance test amendments could impact financial advisers and fund member outcomes.  

Sarah Abood, chief executive of the newly-formed FAAA, voiced her reservations about the Treasury’s draft regulation to amend the superannuation performance test.

“It is disappointing that, as the leading association for the financial advice profession, we have not been directly consulted with, despite this matter having a substantial impact upon our members,” she said.

The proposed changes included prospectively increasing the testing period from eight to 10 years to encourage longer-term investment decisions and calibrating key benchmarks to ensure funds were not unintentionally discouraged from investing in certain assets.

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Abood highlighted the lack of mention of financial advisers in the Treasury’s draft statement, despite them being a key stakeholder. 

“Financial advisers are very much involved in the recommendation of Choice superannuation products. There has been no impact analysis undertaken, meaning that there has been no consideration of the impact of this reform on financial advisers and their clients,” she added. 

The CEO remained wary of the introduction of performance testing on Choice products and the impacts it would have on advisers’ client relationships. 

“It is essential that it is fair and does not treat certain products in a way where the performance results are skewed,” Abood said.

Downside risks could include clients being encouraged to change products that may not be in their best interests.

“We are supportive of a message that encourages clients to consider the performance of their fund, but not one that scares them into making changes without accessing advice,” Abood continued.

The FAAA made five recommendations in its submission to Treasury earlier this month:

• Ensure financial advisers are involved in consultation and the roll-out of these provisions
• Amend the performance test model to take account of the way master trust and particularly wrap products typically operate
• Provide roll-over relief to consumers where a trustee or fund manager closes an investment option and transfers the investors to a different option
• Improve the wording of the proposed notice to acknowledge that there may be good reasons to continue to hold an option identified as underperforming and that consumers should speak with their financial adviser before making any changes
• Require providers to ensure a copy of the notice is provided to each member’s adviser at or before the time it is sent to the member

Ian Fryer, general manager at Chant West, also expressed his concerns about the YFYS test. 

Namely, the changes measured a fund’s implementation of an investment strategy, instead of how well it sought to improve member outcomes. 

“In its current form, the performance test will still drive many funds to focus on passing the test rather than targeting strong risk-adjusted returns for their members, which is what they need to do as super funds and trustees,” Fryer said.

Testing on Choice products was another worry, particularly with how fees were treated in platform products. 

“The balance used for the administration fee component of the performance test is $50,000 for all types of products. While this may work for industry funds and master trusts, it makes no sense for platform products where the average balance is over $250,000,” Fryer said.

“Some of these products have high dollar-based fees and low percentage-based fees. These work well for members with $250,000 or more, but look expensive for balances of $50,000.”

This could put some wrap products between 50 and 150 bps behind the test metric. However, if an account balance of $250,000 was used, it would be only marginally behind the benchmark fee and more fair overall, Fryer believed.