media release

02/359 ASIC issues discussion paper on the use of past performance information in investment ads

Published

The Australian Securities and Investments Commission (ASIC) today released a discussion paper on the use of information about the past performance of investments in advertisements and other promotional material.

‘ASIC wishes to ensure that past performance information is used responsibly in advertising and is not misleading’, said Peter Kell, ASIC’s Executive Director of Consumer Protection.

‘An undue emphasis on past returns can lead to consumers having unrealistic expectations and making poor investment decisions’, Mr Kell said.

To address these issues, ASIC will issue a guide to assist industry on the use of past performance information in advertising. A draft guide has been released today as part of the discussion paper.

‘Past performance information is widely used in marketing by the financial services industry so it is important that consumers see information that will assist their decision making about investments’, said Mr Kell.

Mr Kell also signalled that ASIC will take action where past performance information will clearly mislead consumers.

Key provisions of draft guide include that:

  • if an ad includes past performance figures, it should give a five year return figure in addition to figures for any other periods;
  • ‘hypothetical’ or ‘simulated’ past performance figures should not be used in ads;
  • past performance figures should be up to date;
  • information about returns should be balanced with key information about risk;
  • promoters are encouraged not to give undue prominence in ads to past performance information; and
  • returns should be calculated after all on-going fees have been deducted.

‘This proposal continues ASIC’s commitment to improving the quality of information available to retail investors’, Mr Kell said.

‘ASIC is also looking at how education initiatives can help consumers understand the best way to use past performance information.

‘We are encouraged by the positive initial reactions from industry to our proposals. Industry associations are keen to extend good practice’, Mr Kell said.

Earlier research, which is summarised in the discussion paper, shows that:

  • Past performance information is used in advertising for many products in the financial services industry including managed funds, super funds, financial advisers and investment newsletters.
  • Most advertisements for managed funds contain past performance information (often prominently). Frequently, past performance figures only cover short, unrepresentative periods (eg one year).
  • Promoters choose varying methods for displaying past performance information, resulting in poor comparability and omission of important information.
  • Academic research commissioned by ASIC indicates past performance is a weak and unreliable predictor of future performance over the medium to long term.
  • Past performance information can be misleading if not balanced with other relevant factors such as risk.
  • Many consumers appear to put undue weight on past performance when choosing individual investments.

ASIC will accept comments on its draft guide until 15 November 2002.

The discussion paper, draft guide and two related documents can be obtained from ASIC’s website at www.asic.gov.au or by calling ASIC’s Infoline on 1300 300 630.

The related documents are ‘Managed Fund Advertising’ by P. Gerrans and S. St Clair and ‘A Review of Research on the Past Performance of Managed Funds’ by Funds Management Research Centre.

End of release

 

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