Australian Securities and Investments Commission (ASIC) Information Sheet 274 covering guidance on providing SMSF financial advice has stipulated practitioners must assess the costs associated with this type of fund on a multi-faceted basis.
“ASIC has been pretty clear here they don’t want [an assessment of expenses] to begin and end at the costs of establishing the fund,” BT SMSF strategy national manager Neil Sparks told attendees of a recent technical webinar.
He pointed out the regulator has specified the costs involved with running an SMSF need to be evaluated when setting up the fund but in addition ongoing and annual expenses must be taken into account.
With regard to ongoing expenses practitioners need to examine these with their clients on a more granular basis, he said.
“[These] costs need to be broken down to consider things like optional costs and unavoidable costs,” he explained.
According to Sparks it is the regulator’s intention to have advisers discuss with their clients how the costs of an SMSF will vary over time.
“There also [needs to be] an acknowledgement that costs of running an SMSF will vary over its lifecycle depending on what phase the client is in, what types of strategies they are looking to undertake, and what kind of investments the fund will make,” he said.
He recognised the obligation of this type of expense analysis cannot be performed properly at a single moment in time.
“It’s important that these operating costs are assessed on an ongoing basis and, from an adviser’s perspective, the [most recent] advice shows that the costs of running the SMSF was assessed annually,” he said.
“So consider that from a review perspective when you’re preparing your review for a client. The expectation again is that you would review the account balance of the fund, the operating costs of running the SMSF, and compare those back to an alternative fund to make sure that the SMSF is still in the best interests of the client.”
On a final note Sparks informed practitioners ASIC wants them to monitor the change in the expense parameters of an SMSF when fund members are transitioning from accumulation phase to retirement phase.
To this end he said advisers must educate their clients about the resultant reduction in member balances during pension phase and how this may mean at some point the holdings of the SMSF are no longer large enough to justify the costs of operating the fund.
Earlier during the same presentation Sparks noted the release of Information Sheet 274 has provided greater clarity regarding the provision of financial advice for SMSFs.
