AFCA has received more than 1,500 complaints relating to self-managed super funds, with lead ombudsman Shail Singh saying on the latest member forum that more recent complaints also concern the suitability of advice to establish an SMSF.
Alexandra Sidoti, AFCA’s dispute resolution specialist, said the dominant theme the authority is currently seeing is about whether the SMSF was suitable for the individual client in the first place.
“Often, the complainant will be disputing not just the investment recommendations made, but also the advice to invest via that SMSF structure. So, the SMSF product itself is a critical part of the complaint,” she said.
In these cases, Singh said the complainant was not previously in an SMSF and may have been in an industry or retail super fund, were advised first to establish an SMSF, roll over existing super, and make investments recommended by the adviser.
Sidoti continued that there are often two parts to the complaints, the first being the suitability of an SMSF, and the second, the actual investment recommendations.
“We’re seeing people who are coming to financial advice for the first time. Typically, these are not sophisticated clients. They don’t have an extensive investment history, perhaps other than the family home and often don’t have large super balances either,” she said.
“What’s happening is they’re coming to see an adviser, who is then recommending that they first establish an SMSF, roll over all their existing superannuation into that structure and then use that as an investment vehicle to make certain investments.
“Sometimes there’s a real issue where the advice can be driven by the investment recommendation they’re seeking to make, being the real reason for recommending the SMSF structure rather than really focusing on the suitability of the structure and whether that’s appropriate for that client, or whether they really would have been more appropriate remaining in an industry or a retail fund.”
Singh added this raises the question as to whether the person establishing the SMSF on advice has some responsibility, whether they are a passive participant or are responsible for going into the investment, rather than all responsibility being on the adviser.
“It can really depend on the individual circumstances of a complaint. However, I do think it’s important, from an advice perspective, to recognise that the adviser’s obligations are to assess the suitability of that structure for a client and whether that is in their best interests,” Sidoti said.
“You will sometimes see a situation where a client has heard about an SMSF structure from an accountant or colleague and they’re coming to the adviser already with a general interest in an SMSF, but that on its own isn’t a reason to recommend it. It’s the adviser’s obligation to then look at this client, make relevant inquiries and assess whether that structure is suitable.”
Any licensed adviser recommending SMSFs is asking for trouble. SMSFs recommended by a licensed adviser are a guaranteed investment for consumers. Once the SMSF is set up the member can take as much investment risk as they like within the SMSF, without advice. If that risk pays off they pocket the profits. If the risk doesn’t pay off they will claim the SMSF itself was recommended inappropriately, and will be guaranteed a good investment return anyway from AFCA’s morally hazardous “but for” methodology.
Let’s be honest here. More often than not an SMSF is created to allow for a property purchase. The accountant gets a clip, the builder gets a clip, the Real Estate Agent gets a clip and so on. It’s been rife for at least ten years. (If you can hold on long enough and property prices keep going up then you can be ok. The structure puts you behind initially with all these costs, usually reflected in an inflated purchase price)
Most of the ‘investors’ don’t have a clue what is going on. I have seen it happen with just $75k of FUM. I declined to join this gravy train but not everyone has.
What surprises me is that this seems to be news to AFCA….
It’s news to AFCA because accountants, builders, real estate agents and everyone else involved in SMSFs EXCEPT licensed advisers, are not subject to AFCA (nor seemingly any other regulators or laws). 95% of SMSF harm is caused by people who are not covered by an AFSL. But 100% of enforcement is directed at those who are. It is a model that ultimately fails to protect most consumers.