Check against delivery

Thank you Aleks for that introduction. Thank you to Conexus for the invitation to speak today. And thank you, everyone, for joining me. Good morning to you all.

I would like to begin by acknowledging the Dharug and Gundungurra people as the traditional owners and custodians of the land we are meeting on. I pay my respects to their elders past, present and emerging – and extend that respect to Aboriginal and Torres Strait Islander people here today.

I’ve been invited to speak to you about ASIC’s super choice report. Or to give it its full title: ‘Report 779: Superannuation and choice products: What focus is there on performance?’ [REP 779].

While we published this a little over nine months ago, there continues to be a lot of interest in its findings and implications. Including – I’m told – among the audience here today.

I’m delighted to hear that because there is a lot to be learned from this report. And because it fits squarely within ASIC’s strategic priority of better retirement outcomes and member services.

That was one of five refreshed strategic priorities for 2024-25 announced in August.

And, while this includes our work to drive better services for members of superannuation funds and their beneficiaries, including people making death benefit claims, our work under this priority is not limited to super.

It also includes a focus on compliance with legal obligations by entities and individuals involved in the rating, selection, monitoring and approval of investment products. As well as entities and individuals involved in the provision of financial advice.

One of our key functions set out in the ASIC Act is to promote the confident, informed participation of consumers and investors. And this includes promoting informed decision-making around investment options and products.

It’s against that backdrop that we looked into superannuation choice products and, in particular, the role of super trustees, financial advisers and advice licensees in relation to persistently underperforming products.

But before I go into the detail of the report, I want to say a few words on the role of research houses.

This group was not explicitly included in the scope of our review. But, as we worked through the review, over-reliance on others in the advice ecosystem emerged as a consistent theme. This included over-reliance on the ratings provided by research houses.

The role of research houses in the super choice sector

The work of research houses is important to the fair, efficient and transparent operation of financial markets – and, when it comes to the super choice sector, research houses play a particularly important gatekeeping role.

Investment research and product ratings help members, super trustees, financial advisers and advice licensees filter through investment options. The quality of the research and rating process has a significant impact on the quality of the options presented to investors and the quality of the advice they receive.

Where, however, there is undue reliance on research reports, this creates risks for investors. Especially where there are conflicts of interest – actual, apparent or potential – that may adversely affect the independence and, therefore, reliability of those reports.

And, of course, research that is not reliable or credible can damage confidence in the research sector itself and the financial system more broadly.^[1]

We expect material conflicts to be clearly disclosed. We also expect an appropriate level of transparency around report production. Most importantly, we expect that research is founded on sound methodologies – and produced to a high quality.

Importantly, we also expect the end-users – namely, in this case, trustees, advisers and their licensees – to apply their own rigorous processes in considering research and ratings within their decision-making. They are subject to their own obligations under the Corporations Act and the licenses they hold – and can’t outsource those obligations to research agencies.

Report 779: who and what we looked at

Turning now to the detail of our report. I’ll start with who and what we looked at.

Our review focused on three groups: super trustees, financial advisers and advice licensees. We chose these groups because each significantly influences the make-up of a choice member’s superannuation investment portfolio – and members rely on their support to choose investment options and products expected to deliver them better retirement outcomes.

Specifically, we examined their practices and decision-making in relation to investment options and products that persistently failed to perform as anticipated.

To understand how super trustees prioritise performance in offering investment options, we drew on a sample of investment options using APRA’s Choice Heatmap.

We also asked trustees to identify their worst-performing options – based on the relevant objectives set out in each investment option’s respective product disclosure statement. We then obtained information about their actions and practices in relation to the identified options.

In total, we collected a sample of 29 options from 10 trustees. In all cases, the options were older than five years, giving us a reasonable performance history to draw from. Each option had over 100 members and was open to new members. Direct term deposits, direct shares and fixed interest options were excluded from the scope.

Because we asked trustees to identify their worst-performing options, the relative performance of these (against the benchmarks used) varied.

To be clear, the objective of our review was not to make judgements about whether a particular option should be made available or recommended to members. Nor did we seek to provide a prescriptive measure or benchmark for underperformance.

We appreciate that performance can fluctuate over time and not all instances of underperformance are a reason to switch.

But if an option is persistently underperforming and maintained on an investment menu or approved for use by advisers, there should be a clear rationale, in the interests of members, that explains why the option continues to be available.

Report 779: what we found

Turning now to what we found.

Overall, we observed that there was often insufficient focus on performance and a lack of evidence around how super trustees, financial advisers and advice licensees were considering persistently underperforming investment options.

We also observed a tendency toward over-reliance on others.

Some trustees over-relied on the fact that members were advised. Some advisers over-relied on the advice licensees’ product approvals. Some licensees over-relied on options being included in trustees’ investment menus.

Another notable theme, which I have already touched on, was an over-reliance on research house ratings when choosing options for investment menus, approving options for use by advisers or providing personal advice.

Based on our analysis, some trustees and licensees mainly or only used minimum acceptable ratings in their decision-making processes.

Key findings: super trustees

In relation to super trustees, we observed that some due diligence policies lacked detail and were poorly drafted, which made their process difficult to understand. Further, it was not always clear how, and to what degree, performance was factored into the assessment of investment options.

There was sometimes an over-reliance on external research and ratings in the assessment of choice investment options. In the case of two trustees, other than some administrative checks, a minimum neutral external research rating was the only criteria to be satisfied before an option for some asset classes was included on their investment menu.

Of the 29 options identified by trustees, 24 had not met the performance benchmark in the product disclosure statement for five or more years. Of those 24 options, 12 were identified under the trustees’ own processes for performance monitoring.

However, during our review period, trustees flagged for monitoring or took other steps for only seven of these. Additionally, for eight of these, at least 90% of members were advised.

We also reviewed the advice files for 138 members – and found that at least 27 of these, who were linked to an adviser, did not have an ongoing advice relationship and had not received advice from the adviser over the preceding two years.

In spite of this, these members were making investments into the underperforming options through their superannuation fund – possibly as a result of automated investments of their superannuation contributions.

Key findings: financial advisers

In relation to financial advisers, we looked at 88 advice files across 26 advice licensees, focusing on advice on about nine investment options that all persistently failed to meet the performance benchmark in the product disclosure statement.

Of those 88 files, 22 included a recommendation for a full replacement or redemption for the underperforming option. The remaining 66 recommended to hold, increase or partially reduce an existing investment.

These included 11 files that contained deficiencies relating to each adviser’s lack of investigation and assessment of the underperforming option. These deficiencies were a major factor in the advisers failing to demonstrate compliance with the best interests duty and appropriate advice obligations – and raised concerns about the clients suffering detriment.

Of those 11 files, seven had a recommended portfolio weighting to an underperforming option of 100%.

Late last month, the Financial Services and Credit Panel (FSCP) suspended the registration of an adviser for three months. ASIC referred the adviser’s conduct to the FSCP following this review. A significant factor in the FSCP’s decision was a lack of sufficient evidence on the clients’ files demonstrating why the previous recommendations in the statement of advice remained appropriate.

Key findings: advice licensees

We reviewed information obtained from 21 advice licensees. This included policies and processes relating to approving investment options, the use of approved product lists (APLs) and ongoing monitoring of underperforming options.

We also collected information about their consideration of the same nine underperforming options that were the focus of the advice file reviews.

From this sample, 17 advice licensees maintained an APL covering superannuation investment options. In almost all cases, the underperforming options in our review were on a licensee’s APL or were otherwise approved by a licensee.

During the period of our review, two of these licensees changed their internal rating of the underperforming option from ‘approved’ to ‘hold’ or removed the option from the APL.

A further seven licensees indicated that they specifically considered historical performance of the underperforming option, with four of those identifying the option as underperforming and retaining records of why the option continued to be approved for use by advisers despite the underperformance.

That said, six of the 17 licensees with an APL appeared to base their product approvals solely on the fact that options were available within certain super choice products or had attracted a minimum external product research rating, without records to indicate that the licensees themselves had undertaken any further research or consideration of the underperformance.

Overall observations

If I was to sum up the key themes from our observations across super trustees, financial advisers and advice licensees where we identified concerns, they would be:

• Inadequate consideration of underperformance; and
• Over-reliance on the views or actions of others, including research houses.

Action points

With those findings in mind, I want to paint you a picture of what good looks like for each of the groups in our review.

Action points: super trustees

Starting with super trustees.

When selecting investment options, trustees should not rely on a minimum external investment rating as the sole criteria for inclusion on their investment menus.

They should also effectively monitor performance, with reference to specific and measurable return objectives and clearly defined parameters for identifying underperformance or circumstances where closer monitoring may be required.

Where options are not performing as anticipated, they must decide how best to act, considering the best financial interests of members. This includes effectively communicating underperformance – and taking into account the needs of members who may not be receiving advice.

Action points: financial advisers

Financial advisers should undertake reasonable investigations of investment options to detect underperformance and not over-rely on advice licensee product approvals or external research ratings.

Where a product persistently underperforms, advisers should consider whether action is necessary and communicate a recommendation to their client. Including the reasons why the recommendation is appropriate, based on that client’s circumstances.

Action points: advice licensees

Advice licensees should have their own rigorous processes to detect where options approved for use by advisers have underperformed and address these in a timely manner.

Among other things, they should consider historical performance, including against the option’s performance benchmark in the product disclosure statement. Here again, they should not over-rely on the ratings and recommendations of others.

The steps that a licensee should take if they detect that a product is underperforming will depend on various factors. These may include communicating with advisers, restricting the circumstances in which the option might be recommended or removing the option from APLs or other approvals.

And, as I indicated at the outset, ASIC does not have a view that underperformance should result in any particular action or recommendation. It is our view, however, that persistent underperformance should be identified and considered, and we should be able to see that has occurred, if we come looking.

Research houses

Finally, returning to the role of research houses – which, as I indicated, emerged as a theme during the course of this review.

Research houses that provide general advice must comply with the general licensing obligations, as set out in section 912A of the Corporations Act.

These obligations are core to the provision of financial services. They include: doing all things necessary to ensure that financial services are provided efficiently, honestly and fairly – and having adequate arrangements for the management of conflicts of interest.

In addition, there are a range of prohibitions that apply, including in relation to misleading or deceptive conduct, dishonest conduct and unconscionable conduct. Ensuring that research is based on a robust and defensible methodology will reduce the risk that the licensee responsible for the research breaches these obligations.

Users of research should not over-rely on it. They should apply their own professional judgement to their decision-making – informed by their own rigorous processes. It is also important that they can and do account for the limitations of research and ratings.

But their capacity to do so is vastly improved where research houses are transparent about the way in which recommendations or ratings are produced, which includes acknowledging any limitations of the approaches they have applied.

Conclusion

In closing, I hope that we see the work of supporting ‘better retirement outcomes’ as a whole-of-sector endeavour – which requires the combined contributions of a wide range of entities and individuals, each conscious of their own role and obligations.

That includes super trustees – of course. But it also extends to all involved in the rating, selection, monitoring and approval of investment products and provision of financial advice.

^[1] Regulatory Guide 79 Research report providers: Improving the quality of investment research.