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Last year, the Australian Securities and Investments Commission released two very relevant and important reports covering SMSF trustees and the advice provided to them. Tracey Besters examines these reports and highlights the most important lesson from them for advisers.

In June 2018, the Australian Securities and Investments Commission (ASIC) released its long-awaited report into the quality of SMSF advice. “Report 575: SMSFs: Improving the quality of advice and member experiences” and its accompanying research, “Report 576: Member experiences with self-managed superannuation funds”, are an interesting read – all 196 pages. These reports will certainly shape the way ASIC will view advice to SMSF members and trustees, and as such advisers need to understand the findings and impact of these reports. We can also find the nuggets of gold in terms of strategies that come from some of the answers and comments raised by the participants.

The purpose of Report 575 was, firstly, to conduct an in-depth examination of member experiences in setting up and running an SMSF, and secondly, to assess whether advice providers are complying with the law when providing personal advice to clients to set up an SMSF.

There are a number of important points we can take away from these ASIC reports. To start with I think it is always enlightening to read some of the comments made by trustees as part of Report 576. In fact, in this case some of the comments are downright terrifying.

By way of background to Report 576, in March 2017, ASIC commissioned an independent agency to undertake the market research. The research was conducted in mid-2017 as a mix of qualitative and quantitative research. The qualitative research was conducted as a series of 28 ethnographic interviews in Sydney and Melbourne. The participants included 10 new members (those that had established an SMSF in the preceding 12 months) and 18 established members (those who had established an SMSF in the preceding 12 to 36 months). It’s important to note both groups had received personal advice prior to establishing their SMSFs.

The quantitative research included a 10-minute online survey that was completed by 457 members who had established an SMSF in the preceding five years, which was again split between new members (those who had established an SMSF in the preceding 12 months) and established members (those who had established an SMSF in the preceding 12 to 60 months). The report does not indicate if the quantitative research members had received personal advice prior to establishing their SMSFs.

Some of the key findings were very interesting, including the following that came out of the online survey:

  • family members and friends or colleagues were collectively the main prompts for setting up an SMSF,
  • 32 per cent of members found running their SMSF to be more costly than expected (compared to 9 per cent of members who found it less costly than expected),
  • 38 per cent of members found running their SMSF to be more time-consuming than expected (compared to 15 per cent of members who found it less time-consuming than expected),
  • 33 per cent of members did not know an SMSF must have an investment strategy,
  • 30 per cent of members had no arrangements in place for their SMSF if something happened to them,
  • 29 per cent of members thought they were entitled to compensation in the event of theft and fraud involving the SMSF, and
  • 19 per cent of members did not consider their insurance needs when setting up an SMSF.

Clearly, these findings show more needs to be done to educate our SMSF clients and build the knowledge of members and trustees.

Let’s explore some of the actual member comments from the quantitative research as I think like me, you will be quietly terrified by some of them. All of the quotes are taken directly from Report 576 and are actual quotes of answers provided by some of the 28 participants.

Aside from the normal comments one would expect to see about wanting to take control of  investment choices, believing they can do a better job of investing than their existing Australian Prudential Regulation Authority-regulated superannuation funds or wanting to invest in property, I think the most enlightening comments are around the expectation of what their advisers will do and who will be responsible if it all goes wrong.  Here are a few examples:

Delegating decision-making to financial experts:

“I pay him to look after the fund and to offer me advice and for me to make the decision … What I expect is that if he sees it suddenly going down, down really fast, I expect a phone call saying I think we should pull it out of here…’” (Established member, Victor, Sydney)

Time spent running the SMSF:

“I said to the accountant [that] I’ll only go into this [on] the basis that we don’t have to do anything, we don’t have to worry about it… [I thought] that the accountant and her brother [the financial adviser] would look after absolutely everything and it hasn’t really worked out that way… for instance, we’re still having to deal with the agent in making decisions… the dishwasher at one stage broke down and I thought they would go through the accountant… but it’s [going] through us, it’s not [going] through the middle person… It’s really disappointing because I thought they’d be reviewing our shares [which the accountant had recommended be purchased in the SMSF] because we don’t know anything about shares.” (Established member, Brandon, Melbourne)

Beliefs about members’ legal responsibility:

“That is the obligation of the financial planner, I can sue him in the court if he does something wrong in there so he is more worried than me that he should not do anything wrong. I take him to court the day he does something wrong…’ (New member, Rashpal, Sydney)

In all honesty, each of these members have an unrealistic expectation of their accountants and advisers. Responsibility needs to be taken by the members of the SMSF to understand what they need to do and know as a trustee of the fund. As accountants and advisers, we need to be continually educating our clients and prospective SMSF members on the risks of this type of fund. We need to slow down the establishment process to ensure our clients and prospective clients do appreciate and understand what is required. In order to help us with the advice process, ASIC has provided an appendix to Report 575, titled “Appendix 1: Tips for advice provider”. It is a list of 38 points to cover off on the advice process to establish an SMSF and I think it is a very useful checklist.

As accountants and advisers, we need to be continually educating our clients and prospective SMSF members on the risks of this type of fund.

Tracey Besters

But what about the question raised at the beginning: what can ASIC Report 575 tell us about the number one must-do strategy for every SMSF?

If one of the key influencing factors of establishing an SMSF is control over the investments and decision-making, what will happen if the member is no longer able to manage the day-to-day running of the SMSF? What will happen to the control of the fund? What if the member is incapacitated and can no longer make any sound decision at all? This was addressed in one of the questions put to the online participants.

The following question was asked: “Do you have a plan in place if you are no longer able to manage the day-to-day running of the SMSF?”

Of the 457 answers provided:

  • 30 per cent have no existing arrangement in place,
  • 25 per cent have an existing arrangement for their financial adviser to “take over the running of the SMSF”,
  • 25 per cent have an existing arrangement with one of the trustees to “take over the running of the SMSF”,
  • 16 per cent have already “outsourced most of the running of my SMSF”, and
  • 4 per cent have an existing arrangement with one of the trustees to wind up the fund.

Now, if we consider the question in light of no longer being able to manage as simply meaning the members and trustees simply choose not to invest as much time and engage others to undertake this work, still under their choice and control, then we only have a control problem with 30 per cent of SMSFs or 178,818 funds (based on the total number of SMSFs being 596,096 as at 30 September 2018). So we would need to put in place arrangements to take over the running of the SMSF in the event the members are no longer able to manage. This may be as simple as some directions or a further engagement of services.

However, if we take the control problem one step further and start to think about what might happen if the member no longer has capacity to make decisions, then our control problem becomes a lot more of an issue. Once we start looking at capacity or rather incapacity of the member/trustee, we need to consider the requirements of trusteeship in light of the definition of an SMSF. As we know the definition of an SMSF under section 17A of the Superannuation Industry (Supervision) (SIS) Act requires that all members must be trustees (or directors of a trustee company) and if the member is incapacitated, then that member must be rolled out of the SMSF or alternatively replaced as a trustee. Failing to do so may result in the fund failing to meet the definition of an SMSF.

But here is the catch. Not just anyone can replace the member as a trustee in order to meet the definition of an SMSF. It must be the member’s legal personal representative. So having any old arrangement to take over the running of the SMSF may not cut it when it comes to an SMSF and remaining compliant with the SIS Act.

Going back to our answers to the question “Do you have a plan in place if you are no longer able to manage the day-to-day running of the SMSF?”, in light of incapacity could mean some 71 per cent of SMSFs have a control problem. This only affects a mere 423,202 funds in existence as at 30 September 2018.

So what are we going to do about it? The control problem can be resolved in four simple steps, but it is up to us as accountants and advisers to take the proactive lead on this one.  Here are the four steps for the control of fund strategy, as I like to call it, and the number one must do for every SMSF:

Step 1: Find out who is the person the member wants to make decisions on their behalf if they are no longer able to. The simple question to ask the member is: “If you were unable to make any decisions for your SMSF yesterday, who would you like to make decisions for you today?”

Step 2: Review the SMSF trust deed to ensure it permits the appointment of a member’s legal personal representative or the constitution if the trustee is a company. If not, seek some legal help to upgrade the trust deed and/or constitution.

Step 3: If the member does not have an enduring power of attorney document, then seek some legal help to have these documents drawn up to appoint the person named in step 1. Some online documentation providers can help with this. Also consider an alternative person if the first person is unable or unwilling to act as the attorney at the time they are required.

Step 4: If the member does have an existing power of attorney document, review any existing document of this kind to see if the attorney listed is the same person mentioned in step 1. If the attorney is the same person as in step 1, there may not be any further action required. However, check for any alternative person and also whether there are any restrictions around dealing with superannuation interests. Again seek some legal help to prepare new documents if required.

I have been harping on about the control of fund strategy for a few years now and the latest statistics show we still have a fairly large problem in this area. Let’s focus on changing the statistics and making sure the reason members actually set up SMSFs in the first place, that is control, is actually what they can have throughout their SMSF life cycle.

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