ASIC unveils key findings from Report 575 on SMSFs.

ASIC recently released Report 575 SMSFs: Improving the quality of advice and member experiences, which outlines findings from a large research project that examined:

• 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.
• To examine member experiences, ASIC commissioned an independent market research agency to conduct a mix of qualitative research (interviews) and quantitative research (online survey).

This research highlighted these key findings:

• Family members, friends and/or colleagues were collectively the main prompts for setting up an SMSF, followed by advice from financial advisers and accountants.
• Members had a number of motivations for setting up an SMSF. Many members set up an SMSF to allow them to get out of an APRA-regulated super fund and gain control over their super.
• A number of members saw an SMSF as a vehicle for investing in property. Despite restrictions around the use of such property, they were motivated by a fear of being locked out of the property market and/or a desire to help their children enter the property market.

In the online survey:

• 32 per cent of members found running their SMSF to be more costly than expected, compared with 9 per cent of members who found it less costly than expected.
• 38 per cent of members found running their SMSF to be more time consuming than expected, compared with 15 per cent of members who found it less time consuming than expected.
• 33 per cent of members did not know that an SMSF must have an investment strategy.
• 30 per cent of members had no arrangements in place for their SMSF if something happened to them.

To examine whether advice providers are complying with the law, ASIC engaged an independent expert to review 250 client files where personal advice to set up an SMSF was provided to clients by an advice provider.

Where client files were assessed as being non-complaint, ASIC considered whether the client was likely to suffer significant financial detriment as a result of following the advice provided.

While it’s difficult to assess the long-term financial impact of setting up an SMSF, ASIC considered that:

• in a total of 26 files (10 per cent) reviewed, the client risked being significantly worse off in retirement as a result of following the advice.
• in a further 47 files (19 per cent), clients were at increased risk of suffering financial detriment as a result of following the advice.
• in an additional 155 files (62 per cent), the advice provider did not demonstrate compliance with the best interests duty and related obligations. This does not mean that clients were significantly worse off as a result of following the advice or that the advice, if implemented, would result in negative outcomes. However, these files did not demonstrate that the clients would be in a better position following the advice.

There were two areas in particular that led to a client file being rated as not having demonstrated compliance with the best interests duty and related obligations. These were where the advice provider had not demonstrated that they had:

• sufficiently researched and considered the client’s existing financial products; and/or
• based all judgements on the client’s relevant circumstances.

In the report, ASIC provides a number of practical tips for advice providers to improve the quality of their SMSF advice. For example, advice providers should:

• explain to clients the duties and obligations that each trustee has to comply with under the law;
• discuss the client’s superannuation balance and whether it’s likely to be cost-effective for the client to set up an SMSF;
• be familiar with the risks of an SMSF structure.

The full list of tips can be found in Appendix 1 of the report. For more details on the findings in Report 575 and consumer experiences with SMSF, click here.