ASIC has released information sheets to help advisers who are offering advice on self-managed superannuation funds (SMSFs) after ongoing compliance issues have been uncovered over long periods of time. It is an area ASIC is working to improve. These information sheets are a must-read for advisers wanting to avoid making any regulatory errors.
ASIC is warning advisers precisely what they are looking for when they inspect advisers giving SMSF advice – surveillance typically includes checking that advisers have considered the risk and costs of a switch to an SMSF for their client, and then discussing those with clients. The details of which follow.
The new advice for planners follows a 2013 consultation paper (CP 216) that garnered views on imposing specific disclosure obligations on SMSF advisers. Advice on self-managed superannuation funds: Disclosure of risks (INFO 205) and Disclosure of costs (INFO 206) is the end result of those talks and proposals.
INFO 205 Review
Advisers giving personal advice to clients regarding SMSFs must discuss the risks with their clients – SMSFs are not for everyone, and while they have proved an attractive concept, not everyone is able to successfully run their own SMSF. AFS licensees and advisers are being advised to give the relevant disclosures to their clients in person, regardless of whether the statement of advice (SoA) covers it in writing.
Advisers must, above and beyond the usual suspects (acting in the best interests of the client, providing appropriate personal advice, etc.) warn the client if the advice is based on incomplete or inaccurate information. All clients must be given an SoA for personal advice, but this is not the actual advice platform – it is merely a record of the conversation that should be happening with the client regarding their financial future.
Additional information must be included in an SoA if a product is being switched out. When speaking of SMSFs directly, clients must be told about the costs of the move, the benefits that are lost (including insurance), and importantly, just how much time they are going to need to dedicate to running their own SMSF, since the energy investment is not insignificant. Essentially, there should be no surprises.
The risks that must be discussed explicitly and listed on the SoA include:
The transferring of an APRA-regulated superannuation fund account balance releases the member from some government protections offered APRA-fund members, including replacement of money in the case of fraud or theft at the fund, but also if an investment turns out to be fraudulent or otherwise faulty, no compensation will be offered.
Insurance is lost when a member in an APRA-regulated fund transfers out. This insurance is usually very cost-effective, and default cover can be obtained without medical testing. The insurance rules really do change considerably when you shift it from one place to another, and it deserves very careful consideration, particularly total and permanent disability (TPD) cover. ASIC will be unimpressed in cases where the client already had life and TPD cover, but the risk in losing it was not discussed and listed properly.
If a client needs to make a complaint, some dispute resolution services are not provided to SMSFs – the main avenue cut out being the Superannuation Complaints Tribunal (SCT). The Financial Ombudsman Service or the Credit and Investments Ombudsman, however, may be able to help.
SMSF structures need careful consideration for tax and succession planning impacts
SMSFs may seem an attractive option for many investors, however they take a great deal of time and effort to manage effectively. Clients must understand what they are in for – tax, reporting, and actually knowing how to invest are all components clients need to learn about, and it is the adviser’s responsibility to point them in the right direction. Penalties are stiff for not obeying the laws regulating SMSFs, since crossing of the lines due to ‘ignorance’ is commonplace and not tolerated well by the regulator.
Developing an investment strategy to meet retirement needs is a legal requirement of every SMSF. An exit strategy is sometimes needed, so a Plan B to get out of the fund should be in place in case of need.
Extra information that must be included in an SoA are exit fees from their current fund, loss of rights and benefits, the loss of opportunities in a current product, tax repercussions, and anything else related personally to that client that may be impacted.
INFO 206 Review
The specific costs relating to SMSF set-up and management must be clearly laid out by advisers. ASIC will be specifically looking at the following areas for full compliance. Cost-effectiveness is of paramount importance when setting up or switching to an SMSF – losing money defeats the purpose of setting up an SMSF for retirement, so starting balances are recommended to be $200,000 or more to be competitive compared to a regular super fund.
This figure is based on Rice Warner research, however sometimes a $200,000 or less balance may be appropriate in certain circumstances. These might include when a trustee is willing to do most of the administrative tasks of the fund, managing its investments, or where a large asset like a business property or inheritance will be transferred into the fund soon after the fund is set up. Advisers must take care to properly advise clients on the work involved in saving money in an SMSF. Setting up, operating and winding up an SMSF attracts fees which must be laid out in full.
Unavoidable costs differ from those that may be opted into, which will depend heavily on the amount of admin the trustee wants to take on. Annual operating costs need to be compared with annual admin costs of the client’s regular super fund, and professional costs for admin tasks must be offered.
Unavoidable costs include the SMSF supervisory levy (tax office), annual reporting, audits, trust deed fees, and actuarial certification fee as applicable.
Optional costs include services such as professional investment fees, accounting costs, and some compliance costs related to winding up a fund and realising assets. At some point an SMSF may not continue to be the best way forward for a client, and this needs to be evaluated by an adviser on a regular basis.