ASIC report reveals holes in SMSF advice

ASIC finds most advice given on setting up SMSFs didn't comply with law .

The majority of financial advice on setting up an SMSF does not comply with relevant laws, indicating a need for significant improvement in SMSF advice, according to the corporate regulator.

The Australian Securities and Investments Commission (ASIC) today released two reports: “Report 575 SMSFs: Improving the quality of advice and member experiences” and “Report 576: Member experiences with self-managed superannuation funds”.

ASIC reviewed 250 client files, randomly selected based on ATO data, and assessed compliance with the Corporations Act best interests duty and related obligations.

It found in 91 per cent of the files reviewed, the adviser did not comply with the best interests duty and other obligations, with non-compliant advice ranging from record-keeping to process failures to failures likely to result in significant financial detriment.

According to ASIC, in 10 per cent of files reviewed the client was likely to be significantly worse off in retirement due to the advice, while in 19 per cent of cases, clients were at an increased risk of financial detriment due to a lack of diversification.

It said it will be taking follow-up regulatory action, particularly where consumers have suffered detriment.

ASIC deputy chair Peter Kell said: “It is clear lots of people are setting up SMSFs without knowing whether this is the best option.

“The financial advice sector has significant work to do to lift their performance on this issue.”

The regulator also conducted market research, including interviews with 28 consumers who had established an SMSF and an online survey of 457 consumers who had established an SMSF. The research revealed many did not fully comprehend the risks of SMSFs or their legal obligations as trustees.

The online survey revealed 38 per cent of respondents found running an SMSF more time consuming than expected, while 32 per cent found it more expensive, 33 per cent were unaware the law required an SMSF to have an investment strategy and 29 per cent were under the impression SMSFs have the same level of protection as prudentially regulated super funds in the event of fraud.

“ASIC found there is a lack of basic knowledge of the legal obligations in setting up or running an SMSF,” Kell said.

“It is also concerning many people with an SMSF have not understood the importance of diversification, which puts their financial future at risk.”

ASIC also found some people had set up an SMSF to get into the property market and were using it purely for this purpose without a wider investment strategy.

Furthermore, more SMSF members are using one-stop shops where the adviser has a relationship with a developer or a real estate agent whose products the person is encouraged to invest in. This increased the risk of getting poor advice without considering the client’s personal circumstances and was not in their best interests.

ASIC and the ATO will increasingly focus on property one-stop shops, including sharing data and intelligence, and ASIC taking enforcement action where it finds unscrupulous behaviour.

The regulator said the reports will inform its surveillance and regulatory work in relation to the SMSF sector and it will take enforcement action when required, including ensuring licensees with non-compliant advisers carry out client reviews and remediation.

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