An ASIC review highlights that some people are just not suited for self-managed superannuation funds (SMSFs) and the onus is on financial advisers to recognise when this might be the case.
By Zilla Efrat
A review by the Australian Securities and Investments Commission (ASIC) highlights some worrying flaws in self-managed super fund (SMSF) advice and a need for better record keeping.
ASIC’s report, released in June, reveals that around 90 per cent of financial advice on setting up an SMSF does not comply with relevant laws. Indeed, according to ASIC senior manager financial advisers Kate Metz, 11 per cent of SMSFs have been established for people who should not be in them.
In its review, ASIC also discovered that just under a fifth of consumers lack diversification in their SMSFs and are invested in a single asset class, usually property.
Metz concedes, however, that “in 62 per cent of cases we couldn’t tell, based on the files, whether clients were in a better position after receiving advice”.
Good record keeping is essential with SMSFs
Like Metz, CPA Australia senior policy adviser – superannuation, Michael Davison, suggests that in many cases this could be due to poor record keeping rather than inappropriate advice.
Whatever the case, ASIC believes 10 per cent of SMSF trustees are likely to be significantly worse off in retirement due to the professional advice they received.
Common adviser errors uncovered by ASIC include placing clients with low superannuation balances into SMSFs, or older people without sufficient income-earning longevity to make the structure viable.
ASIC believes 10 per cent of SMSF trustees are likely to be significantly worse off in retirement due to the professional advice they received.
“We found that 32 per cent of SMSFs were set up with a balance below $200,000 and there was often no reasonable explanation recorded in the client file for setting up a lower-balance SMSF,” Metz says.
Another common error was to set up an SMSF for individuals with poor financial acumen.
“We saw examples of people in SMSFs who had a number of outstanding credit card debts in their personal names,” Metz continues.
“These people were not able to manage their own financial affairs, so getting them to manage a SMSF is problematic.”
The property investment issue
Other common mistakes include allowing consumers to highly gear an SMSF to enter the property market.
In 45 per cent of cases, clients approached their adviser about setting up an SMSF because they wanted to invest in property, often through fear of being locked out of the market because of rising prices. In 42 per cent of cases, the adviser recommended an SMSF, with the trustee then entering a limited recourse borrowing arrangement to invest in property.
SMSF Trustee Education Program. This free online training program is an ATO-approved course designed to help trustees understand their role and responsibilities. Learn more.
“If a client wants property in an SMSF and the adviser doesn’t think [it] appropriate, the adviser should not set this up for the client,” Metz says.
“The client is asking for expert opinion by seeing an adviser [who] must act in the client’s best interest.”
As part of its research, ASIC reviewed 250 random client files based on Australian Taxation Office data. It also conducted 28 interviews with SMSF trustees and received 457 responses to an online survey.
Another concern is that the interviews identified a growing use of “one-stop shops” for property investments.
“We were most concerned when it looked like a conflicted situation, where the adviser provided advice to someone who didn’t have a big balance to gear up their super fund and invest in property and the adviser had connections to property and finance businesses,” Metz says.
Davison warns that the key message from ASIC’s review is that advisers must improve record keeping.
SMSF trustees want more from their advisers
“They need to demonstrate the advice they have given, why they have given it and why this advice is in the best interests of the client in their statements of advice [SOA] and other records,” he says.
“They should also show that they have considered factors such as the client’s age, financial literacy and other financial assets when giving advice.”
Keep the advice simple
It’s also vital to ensure clients understand the advice provided, Davison adds.
“It has to be more than just producing a 100-page document and telling them to go away and read it. You must ensure they understand what you are telling them and what they are getting into.”
Metz notes various ASIC studies have found many consumers don’t really understand the documents they receive, such as SOA, and often don’t read them.
“Advisers should ensure the information provided to consumers is reasonably understandable,” she says. “They should also [step-by-step] explain the important parts, so that consumers understand [them].”
38 per cent of SMSF members found running their fund more time-consuming than expected.
It’s also important to check whether a client has the time to manage an SMSF. According to ASIC’s online survey, 38 per cent of SMSF members found running their fund more time-consuming than expected.
Many lacked a basic understanding of their SMSF and legal obligations as an SMSF trustee. For example, in the online survey, 33 per cent did not know that an SMSF must contain an investment strategy and 29 per cent thought they were entitled to compensation in the event of it being subject to theft or fraud.
The bottom line, Metz says, is that advisers need to know their clients and provide advice specific to their individual needs.
“Just because someone comes in and says they want an SMSF doesn’t mean the adviser should automatically set one up for them,” she emphasises.
“[An] adviser really needs to test whether an SMSF is the right structure for a client, consider their financial acumen, understanding of diversification and whether their super balance is enough to make an SFSF a viable alternative to an APRA-regulated fund.”
The ASIC report is packed with tips to help SMSF advisers lift their game. Davison notes that advisers should also consider referring clients to CPA Australia’s online tool for SMSF trustees to help them better understand their basic responsibilities.
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