The Australian Securities and Investment Commission (ASIC) has released ASIC Report 575 SMSFs: Improving the quality of advice and member experiences detailing research into self-managed super funds (SMSFs). The research looks into member experiences in setting up and running an SMSF and whether advice providers are complying with the law when providing personal advice to retail clients to set up an SMSF.

Since the introduction of SMSFs in 1999, many consumers, motivated by a desire to gain control over their investments and financial futures, have opted for SMSFs over retail superannuation products. Today, there are more than 590,000 SMSFs holding assets worth nearly $697 billion. This figure represents 30 per cent of all funds held in superannuation.

SMSFs can be an appropriate option for many Australians, however they are not for all. Considering the immense and growing popularity of SMSFs, ASIC saw the need for consumers to be fully aware of the risks and obligations involved with moving their superannuation into a self-managed super fund, and wanted to highlight the important role that access to quality financial advice plays in guiding consumers to make the right decision.

Consumers can be caught out by the complexities of SMSFs

The report highlighted a number of areas where consumer expectations around SMSFs are misaligned with the reality of running one. The research found that 32 per cent of SMSF members found setting up and running their SMSF to be more costly than expected, and 38 per cent found running their fund to be more time consuming than expected¹.

Additional findings that highlight the lack of understanding consumers have around their SMSFs and their corresponding legal obligations as SMSF trustees include²:

• 33% of SMSF members did not know that an SMSF must have an investment strategy;
• 30% of SMSF members had no arrangements in place for their SMSF if something happened to them;
• 29% of SMSF members thought they were entitled to compensation in the event of theft and fraud involving the SMSF; and
• 19% of SMSF members did not consider their insurance needs when setting up an SMSF.

Adviser advice inadequate when it comes to SMSFs

An independent expert reviewed 250 client files as part of the research, where an adviser had provided personal client advice to set up an SMSF. The client files reviewed were randomly selected by ASIC from data provided by the ATO.

Unfortunately, the results indicated that there were a number of instances where the advice provided resulted in the client being worse off in retirement (10 per cent), at risk of significant financial detriment (19 per cent), or the advice provider did not demonstrate compliance with the best interest duty and related obligations (62 per cent)³.

It should be noted that of the 62 per cent of files deemed non-compliant, there was no sufficient evidence that the client would be worse off financially; simply that the file did not sufficiently demonstrate the client would be in a better financial position as a result of the advice.

Staying on the right side of giving SMSF advice

Consumers must access quality financial advice from an appropriately qualified and experienced financial planner to clearly understand the risks and obligations of an SMSF. The Financial Planning Association (FPA) will be developing training and support for its members in this area to ensure that Australians seeking advice in relation to SMSFs can rely on quality advice from FPA members.

The findings in this report clearly point to the importance of the Financial Adviser Standards and Ethics Authority (FASEA) education standard proposals, which the FPA has been championing. The FPA believes improved education and ethical standards and continuing professional development are crucial for the ongoing improvement of the standard of advice across the profession.

Should the FPA be approved as a Code Monitoring Body, SMSF advice will be one of the first areas the FPA would review.

Commenting on the report, Dante De Gori CFP®, CEO of the FPA, said, “There is no doubt that these results will focus the efforts of Code Monitoring Bodies, once approved, on the proactive supervision of SMSF advice,” added Mr De Gori. “This is a growing sector and good advice is imperative to ensure the best outcomes for those who choose a SMSF as the vehicle to manage their retirement savings.”

The FPA applauds the practical tips developed by ASIC and encourages all financial planners giving SMSF advice to review and embed these suggestions in their advice practice. These include tips for improvement in areas such as the role and obligations of SMSF trustees, the suitability of an SMSF structure, risks of an SMSF structure, investment strategy, alternatives to an SMSF structure and record keeping.

Read the full report to make sure you are giving the right advice when it comes to SMSFs.

Footnotes

¹ Pg 8

² Pg 8

³ Pg 9