SMSF advisers have been reminded that merely disclosing a conflict of interest is not sufficient when recommending an investment which should be in the best interest of the client and clearly documented as such, an SMSF legal specialist has noted.
DBA Lawyers senior associate Shaun Backhaus said a determination handed down by the Australian Financial Complaints Authority (AFCA) on 6 February related to risk profiling of two SMSF clients by a financial advice firm and the allocation of funds to higher risk, related party investments highlighted the need to clearly document investment advice.
The case concerned a couple, aged 64 and 59 respectively, who were the directors of a corporate SMSF with close to $1 million in funds who wanted after tax income of $80,000 with the flexibility to alter their portfolio and have access to funds dependent on circumstances.
As a result of these choices the financial advice firm considered the couple to be balanced investors and directed up to 50 per cent of their assets into defensive assets, up to 30 per cent assets with defensive and growth characteristics, and up to 35 per cent in growth assets.
AFCA noted the investments did not meet the allocation parameters set by the advice firm but also contained a high proportion of related entity investments varied substantially in their value and led to higher fees compared to alternate investments.
“This is a good example of what is your file keeping and how important that can be because it’s not always what you’ve done but whether your file will stack up since its not enough to disclose the conflict,” Backhaus said during a webinar presented by the law firm late last week.
“The rules require that you put the client’s interests ahead of your own and be able to demonstrate the additional benefits to the client.
“It’s incumbent on the adviser to be very clear about their reasoning for favouring the investment, and [in this case] none of it was documented.
“AFCA explained the rules around this and said while recommending related party and entity investments is not prohibited, if you do it you have to be satisfied that the investments are still in the best interests of that client, and that you’re prioritizing their interests over yours.”
Backhaus added that AFCA awarded compensation of around $254,000 to the SMSF members based on the return they would have received from a Vanguard ‘balanced fund’ for the time they were following the investment advice.
