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Tailored deeds a risk for advisers

SMSF advisers must be mindful of purpose-built trust deeds as they might restrict the activities of a fund, which could result in an inadvertent compliance breach and possible legal action against the practitioner, according to a leading sector educator.

Speaking at the 2015 FPA Professionals Congress in Brisbane last week, AMP SMSF education national manager David Busoli referred to a recent circumstance where a simple matter of investing in global equities led to a serious compliance issue.

“One of the very respected advisers at the time … did a very good plan for a lady [including investing in offshore shares], but didn’t read the deed, assuming like all other deeds it would be as broad as possible in its powers,” Busoli said.

“But what the deed said was the fund was not allowed to invest in international shares.”

He said the financial plan resulted in a $300,000 shortfall as a result of the 2007 share market crash, placing the adviser at risk because some of the loss could be associated with going outside of the powers defined by the SMSF trust deed.

“One of the things you need to be very acutely aware of in this respect, and this is an SMSF thing, it’s not something to do with a retail fund or industry fund because you know you’re not looking at their deeds, is that if there is a loss suffered by the members and there has been a breach of a covenant, and the deed is a covenant, then anyone involved in that loss is automatically liable,” he warned.

“So in this case the adviser was an adviser with AMP and AMP had to write out a $300,000 cheque [for compensation].”

He pointed out the dealer group had to compensate the members of the fund regardless of their risk profiles because the breach of covenant made matters like this that potentially could be investigated irrelevant.

“So read the deed and make sure you prepare an investment strategy because those two things together would be very important in saving your bacon,” he said.

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