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Investments, Regulation

PC backs away from minimum balance position

The Productivity Commission has backed away from recommending a $1 million minimum member balance for SMSFs, but has recommended greater training for financial advisers and more disclosure around the creation of funds.

The commission released its final report into superannuation late last week, making 31 recommendations related to the wider sector, but only a handful of recommendations related to SMSFs and related advice.

Addressing the issue of minimum balances, the commission stated in the report: “A minimum balance is too blunt an instrument, but advisers should be prepared to justify to ASIC (Australian Securities and Investments Commission) why they are recommending any SMSF be established with a balance remaining under $500,000 beyond the initial establishment years.”

The commission examined the issue of expense ratios for funds with balances below $500,000 and noted the ratios were typically higher compared with larger balance funds. At the same time, it found expense ratios were the main driver for the lower levels of returns found in smaller balance funds.

The report, however, stated there was no implication that funds with balances below $500,000 were generating poor net investment returns and there was the possibility funds had low costs, high net returns and tax advantages to members that were not fully reflected in net returns data.

“Hence, the regulatory focus should be on ensuring that members understand the implications of their decision to open an SMSF, including through well-informed financial advice that is in the member’s interests,” the report added.

Along those lines, the commission recommended that specialist training should be required for those providing advice to set up a fund, adding “the forthcoming higher educational and training standards (commencing 2019) that will be required for financial advisers should go some way towards improving the quality of advice provided”.

The report also recommended ASIC produce a list of ‘red flag’ events about circumstances in which an SMSF could be inappropriate, and require financial advisers to provide this document to prospective SMSF trustees and have them sign it to confirm they have considered the issues documented by the regulator.

At the same time, the government should also extend ASIC’s proposed product design and distribution obligations to the establishment of SMSFs, according to the report, which claimed this was an area where “many of the most egregious cases of poor advice” had occurred.

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