ASIC reports a font of good advice

The Australian Securities and Investments Commission has released two reports addressing specific issues around the provision of financial advice to SMSF trustees. John Maroney explains why advisers need to use these documents as an important source of guidance.

That old 19th century English saying, “the darkest hour is just before the dawn”, is very apt when it comes to two Australian Securities and Investments Commission (ASIC) reports – numbers 575 and 576 – on SMSFs. Although neither report gilds the lily on where SMSFs fall short, whether it be trustees or advisers, it’s our contention the overriding message is positive.

In essence, what these two reports – 575, titled “SMSFs: Improving the quality of advice and member experiences”, and 576, titled “Member experiences with self-managed superannuation funds” – are saying is the quality of advice is crucial to the sector. They then go into some detail about how this can be achieved.

For specialist SMSF advisers who take pride in their professionalism, these two reports, and the scrutiny they throw on the sector, should be welcomed as an opportunity to raise standards and strengthen advice practices that improve client outcomes. Indeed, the same logic can be applied to the banking royal commission, the Financial Adviser Standards and Ethics Authority (FASEA) reforms and the Productivity Commission report, all of which, we believe, will help lay the foundations for a more professional advice industry that can only benefit SMSFs. It might be dark, but the dawn beckons.

Considering the contents of the two ASIC reports, SMSF specialists need to devour them as there is so much relevant information in both documents to draw on. Take statements of advice (SOA), for example. Financial advisers are required to provide clients with SOAs when offering advice so they can assess it and decide whether to act on it. But as report 576 makes abundantly clear, SMSF members appear confused about SOAs as evidenced by the online survey where the interviews revealed both limited engagement and a poor recollection of their contents. Certainly the survey comments were revealing:

“I kind of looked at it. I flicked through it and I just couldn’t find anything in there that was worth reading.” (New member, Lily, Sydney),

“I looked through it, but it’s fairly above my head. I did have a look at it at the time. I didn’t read it word for word, flipped through.” (New member, Beth, Melbourne),

“I think it had an outline of our situation and lots of numbers.” (Established member, Jacob, Melbourne), and

“Yes it is all there for me. I think I am very smart, savvy, in choosing locations for the houses, but all the technical legal jargon, no I don’t understand it at all and I don’t need to understand it. Maybe I should try to have an understanding of it.” (Established member, Felicity, Sydney)

Quite clearly some advisers need to assess the relevance of the SOA in their client relationships. One question they need to consider is how clients use the document. Once completed and given to the client, is it allowed to gather dust? Or does it become an important part of the relationship, a living, breathing document that acts as a reference point when important decisions must be made?

Appendix 1 “Tips for advice providers” in report 575 outlines what advisers should tell potential SMSF trustees about their responsibilities, as well as setting out guidelines as to whether an SMSF is the best superannuation option for them.

The SMSF Association has always argued SMSFs are not for everyone. They obviously demand far greater involvement than an Australian Prudential Regulation Authority (APRA)-regulated fund and, in many instances, the need for specialist advice. So for ASIC to set out a road map as to the suitability of an SMSF is of enormous value for advisers and, ultimately, the client. ASIC’s red flags include:

  • client has a low superannuation balance and would have a limited ability to make future contributions,
  • client wants a simple superannuation solution,
  • client wants to delegate all the running of the SMSF to a paid advice provider,
  • client wants to delegate all the investment decision-making to someone else,
  • client does not have a lot of time to devote to managing their financial affairs,
  • client has little experience making investment decisions,
  • client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (as such, persons are prohibited from acting as a trustee), and
  • client has a low level of financial literacy.

On the issue of why people want to establish SMSFs, report 575 says the desire to control the investment decisions was a key driver both for new and established members, for example: “You’ve got more control with [an] SMSF because it’s yours. You’re the boss and you know exactly where it goes and what you’re investing in.” (New member, Bernard, Melbourne.)

What also emerged was dissatisfaction with APRA-regulated funds, portrayed as putting their own interests above those of members, for example: “You’re a very little number for them, they don’t care about you.” (Established member, Rick, Sydney.)

Property, too, was a factor both from the perspective of it being a safe and reliable asset class, as well as the fear of being locked out of the market. This should be a potential red flag for advisers. The association concurs. One-stop property shops that urge clients to establish an SMSF to buy properties via gearing, that is, limited recourse borrowing arrangements (LRBA), that are often off the plan and in a different state is one common strategy that can end in tears.

Specialist advisers who have their clients’ best interests at heart need to be cognisant of many factors when property is cited as the primary reason to setting up an SMSF. Issues that need addressing include the needs and circumstances of the fund’s members; does it involve an LRBA; high upfront costs of buying property; ability to repay the loan, especially if the unexpected happens; how the client’s retirement will be funded by the property investment; can the property be sold quickly; and what if the property can’t be rented for a period.

All these questions are particularly relevant, especially when debt is involved. Although it’s still the association’s belief LRBAs have a role to play in a properly structured SMSF portfolio, having the necessary safeguards around this debt instrument is critical. For example, limiting the use of personal guarantees is one option the association supports.

But first and foremost with LRBAs it’s highly advisable to have advisers who have specific SMSF qualifications to underpin their advice – a point specifically made in report 575. “Through this project, we have seen an unacceptable level of poor-quality advice despite the information and guidance … provided to the sector. We believe these results indicate a need to increase the education and training requirements for advice providers who provide personal advice on SMSFs,” the report says.

The report adds ASIC will be working with FASEA about a specific SMSF qualification for advice providers wishing to provide SMSF advice.

It is recognition by the regulator that SMSFs are complex vehicles that need to have access to high-quality and specialised advice. Higher standards of advice are, however, no panacea. No matter how well qualified, how experienced, how diligent, advisers can make mistakes. But by raising the bar, those mistakes can be minimised, which is essential when SMSFs have about $750 billion in funds under management and hold the retirement savings aspirations of about 1.1 million Australians.

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