The super fund performance test headlining the government’s recently passed Your Future, Your Super bill has the potential to become a real part of the financial advice process, with advisers needing to consider the implications of repeated failure by funds to meet the test’s annual benchmarks.

From July 1 this year MySuper funds must notify members if the fund doesn’t meet an annual performance benchmark set by APRA, with funds being blocked from accepting new members if they fail over two consecutive years. The results will also be published by APRA online.

The test, which is designed to prevent people from entering into persistently underperforming funds, could place an extra obligation on advisers to monitor the performance of APRA-regulated funds more closely.

If advisers fail to flag a fund’s performance test failure with a client, it has the potential to become a breach of best interest duty according to Minter Ellison partner and regulatory lawyer Richard Batten.

“It will become part of the market information that advisers will need to be across,” Batten says. “You don’t necessarily need to pull someone out of a fund if it fails the test but you’d certainly want to pay regard to it.”

While poor fund performance would typically come up organically as part of most advice annual reviews, Batten says the fact that APRA is actively highlighting underperformance puts more onus on the adviser to weigh up the client’s options.

“Certainly as part of the annual review process it’s a factor that would need to be taken into account,” he says. “If you consistently failed to do that you have the beginnings of a liability case.”

Can’t be ignored

According to Sean Graham from compliance consultancy Assured Support, the performance test is an “emerging issue” for advisers.

“If the fund failed the test twice it would be a lead indicator and they would have to address it, they can’t ignore it,” Graham says.

Like Batten, Graham agrees that a failure in the test shouldn’t automatically lead to a recommendation that the client switches funds.

“Look at it this way, even if a research house changes their view on a fund the obligation is on the adviser to look at it through the lens of best interest duty,” he says. “That comes down to their ability to consider the research and put the underperformance into context.

“If a fund fails repeatedly you’d expect at that point the adviser would have had a considered look at the alternatives and is probably inclined to move them out, but you also have to look at what’s been lost in terms of insurance or other ancillary benefits,” Graham continues.

“You don’t want to make decisions based on short-term performance, but after the second one there is a case to say the first was a warning, it’s time to do something unless there’s a compelling reason not to.”

Advisers won’t be notified directly about fund performance by APRA, but the prudential regulator has indicated that the results will be available in an online portal.

Compliance methodology

Along with advisers, licensees may need to build performance test factors into their compliance metrics and the engineering of their approved product lists.

“It should be in the licensees’ methodology to start screening out super funds that consistently fail, but that should be the case anyway,” Graham says.

“Licensees will probably want to build something into their compliance systems, information and alerts.”

Professional indemnity insurers may also be interested in seeing the performance test integrated into licensee processes, Graham says, but it shouldn’t be a major consideration.

“Products do go on and off APLs all the time,” Graham adds. “I don’t think they’ll be too concerned, PI insurers are primarily looking at the methodology and research behind the APLs.”

Silver lining

Some experts are more sanguine about the impact the performance test might have on the advice process.

According to Ian Knox, former chair of licensee Paragem and board member at ratings house Lonsec, any obligation on advisers in respect to the test may go past best interest duty and land on fiduciary responsibility.

Knox says he understands the premise of the debate, but doesn’t think there’s grounds for legal liability.

“Remember, even if your APRA-approved fund doesn’t perform well it is still approved by APRA in the first place,” he says. “And performance is meant to go in cycles.”

Depending on whose estimates you believe, ten to 50 per cent of funds are immediately at risk of failing the test. An analysis of APRA’s own data shows 25 of the 90 MySuper funds on its heatmap are likely to fail.

According to The Conexus Institute executive director David Bell, fund failure notices could actually spark waves of previously unadvised consumers to seek advice.

“I actually think it could be a great opportunity for advisers, there could be hundreds of thousands of members in funds that fail this test,” he says. “How many of them might be prompted to ring an adviser instead of trying to figure out what to do about it?”

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