In the next decade, a silver tsunami will sweep Australia. Around three million Australians will reach retirement age, after a full working life of compulsory superannuation contributions.
It is a life stage that comes with a lot of promise – of travel, time with loved ones, and trying new things. But this promise can be broken if their retirement balances do not measure up to their aspirations.

Persistently underperforming superannuation investments impact members’ retirement objectives. In a new report from ASIC, we examined why members held funds in persistently underperforming investment options across the choice product segment.

Super Choice report

Around $1.1 trillion of Australians’ total retirement savings are invested in the choice product segment.

The decision of where to invest these savings is one of the most important a member will make – and is often made upon recommendation from a financial adviser.

However, a 2018 Productivity Commission inquiry and APRA’s annual Choice Heatmap have highlighted persistent underperformance of some investment options within the choice sector.

In 2023, APRA found one in five choice investment options with an 8-year history significantly underperformed the investment return benchmarks.

To understand why some choice super fund members remained in these poorly performing investment options, we looked at what trustees, advisers and advice licensees did in relation to performance.

Superannuation stakeholders, including financial advisers, each have a responsibility for assisting Australians to achieve good retirement outcomes. Financial advisers have an important role, and members trust them to act in their best interests when providing advice about how to achieve their retirement objectives.

Performance

It was clear that some members holding choice products were relying on financial advisers to optimise their superannuation investment returns.

ASIC reviewed 88 advice files across 26 advice licensees, focusing on advice provided about nine investment options that all persistently failed to meet the performance benchmark disclosed in the product disclosure statement.

These members sought advice to make an informed choice, however, ASIC found that financial advisers were not always addressing underperformance where relevant to the subject matter of the advice. In some cases, advice clients were not informed about the persistent underperformance of their investment options and that there may be better alternatives.

We also found some members had not received advice from the adviser linked to their superannuation account over the preceding 2 years but were still making investments into one of the underperforming options. This was possibly as a result of automated investment of their regular superannuation contributions.

Where to from here?

Our review has identified five actions for financial advisers and advice licensees to improve retirement outcomes for their clients who are members of choice super funds.

For advisers, this includes:

• Conducting a reasonable investigation and assessment of investment options to detect and address underperformance when relevant to the subject matter of the advice. This includes treating performance as a primary consideration and considering information from a range of sources to develop and support recommendations. Advisers should be careful not to over-rely on advice licensee product approvals or external research ratings. The fact that an option is approved by an advice licensee or has a minimum external research rating does not mean that an adviser can ignore the performance of an option when providing personal advice.

• Explaining the basis of the advice. This should include communicating underperformance and why the recommendations are appropriate despite the underperformance and based on the client’s relevant circumstances.

For advice licensees, this includes:

• Taking reasonable steps to ensure their advisers comply with financial services laws, including the best interests duty and appropriate advice obligation. This includes ensuring advisers conduct a reasonable investigation and assessment of the client’s investment options when relevant to the subject matter of the advice to enable them to detect and address performance issues.
  
  

• Having adequate risk management systems. Even though there is no requirement to have an approved product list (APL), they can assist advisers to provide good quality advice and advice licensees to comply with their legal obligations. Additionally, when approving products for use by advisers or managing APLs, advice licensees should treat performance as a primary consideration. They should have rigorous processes to detect underperforming options that have been approved for use by advisers and address these in a timely manner. Historical performance should be considered, including against the option’s performance benchmark in the PDS.
  
  

• Ensuring that records are kept of the advice and how their advisers have complied with the best interests duty and related obligations. Advice licensees should also retain records of the steps they have undertaken to detect underperformance and monitor investment options approved for use by their advisers. This includes the advice licensee’s decision making and communication with advisers about how to manage underperforming options held by their clients.

These actions require financial advisers and licensees to treat performance as a primary consideration when assisting their clients to meet their retirement objectives, as part of an industry focus on better assisting fund members to achieve good investment outcomes that ultimately support stronger outcomes in retirement.

ASIC is Australia’s corporate, markets and financial services regulator.Access the full report ‘REP 779 Superannuation and choice products: What focus is there on performance?’ here.