On Thursday, the Australian Securities and Investments Commission (ASIC) released a risk-based review of 100 financial advice files relating to the establishment of SMSFs identified concerns that 62 files failed to demonstrate compliance with the best interests duty, with 27 files raising significant concerns about client detriment relating to recommendations to set up an SMSF.
It found that around a third of advice files – 38 of 100 – demonstrated compliance with the longstanding obligation for advisers to act in clients’ best interests.
ASIC commissioner Alan Kirkland said people often set up an SMSF because they think it will give them more control over their retirement savings, but they aren’t suitable for everyone.
“SMSF trustees should be aware of the associated costs, responsibilities and risks. People who move their super from an APRA-regulated fund to an SMSF also lose important protections, including the benefits of prudential regulation and the ability to make a complaint about the fund or its trustees to AFCA,” Kirkland said.
“Financial advisers who recommend that clients establish SMSFs without properly considering whether it is suitable for their objectives, financial situation and needs, are not helping them take control of their future — they are placing it at risk.”
Peter Burgess, CEO of the SMSFA, said the review reinforces the importance of all consumers having access to competent, specialist advice when considering whether to establish an SMSF.
However, he warned that the findings should be viewed in context.
“It’s important to recognise that ASIC’s review was based on a targeted, risk-based sample of advice files, not a random selection,” Burgess said.
“The advice files examined situations where, on face value, the establishment of an SMSF appeared to be unsuitable for the client. As such, the findings are not representative of the broader quality of SMSF advice currently being provided across the sector and this perspective is important.”
Burgess also noted the subjective nature of assessing whether a consumer is, or will be, worse off as a result of the advice provided, particularly when evaluating long-term retirement outcomes.
“Nonetheless, the review highlights that more work is needed to ensure all consumers have access to competent, high-quality advice when making decisions about SMSFs,” he said.
He continued that the association strongly supports ASIC’s previous commentary that providing SMSF advice is a specialist area of practice, requiring appropriate competencies.
“Advisers must have the knowledge, skill, and technical competencies to provide SMSF advice confidently and responsibly,” Burgess added.
Also responding to the report, the Financial Advice Association Australia (FAAA) said it has highlighted some concerning instances of SMSF advice, however it echoed Burgess’ view that the review needs to be understood in context.
“It’s an important reminder that while SMSFs can be a great option for people looking for greater control and more flexibility in their superannuation, they are not for everyone,” the FAAA said in a statement.
“It’s very important to bear in mind that this report was targeted towards areas of SMSF advice that ASIC has assessed as high risk, focusing on 12 advice licensees. ASIC has said that the report is not intended to be representative of the financial advice sector more broadly.
“It’s also the case that only about 25 per cent of SMSFs are currently advised. This report does not cover consumer outcomes in the much larger unadvised segment of SMSFs.”
Additionally, Kirkland stressed the importance of maintaining high standards of personal financial advice in the context of this growth in SMSFs.
“Collapses like those involving Shield and First Guardian show us the worst-case scenario for what happens when people receive poor advice to switch superannuation funds and make high-risk investments,” Kirkland said.
ASIC’s review found that despite some licensees requiring advice to be pre-vetted before reaching clients, non-compliant advice continued to slip through the cracks, with 33 of the 47 files that contained records of pre-vetting still indicating a failure to comply with the best interests duty.
Similarly, while all licensees had policies managing conflicts of interest, in 24 of the 27 client files that raised concerns about client detriment, ASIC was concerned that the financial adviser failed to prioritise the interests of the client above their own interests or that of their advice licensee or an associate.
Kirkland said the report contains serious messages for both advisers and advice licensees.
“Financial advisers should be providing their clients with rigorous, well considered advice, not simply acting as order-takers. They should never place their own interests ahead of those of their clients,” he said.
Burgess said the association supports this view and strongly encourages all professionals in this space to undertake the association’s independent accreditation program and commit to ongoing professional development to maintain their competence over time.
The SMSFA also reiterated that SMSFs were not suitable for everyone and that establishing an SMSF is a significant decision requiring informed and impartial guidance.
“As the sector continues to grow, now representing nearly a quarter of Australia’s $4.3 trillion superannuation system, access to consistent, high-quality and ethical advice has never been more crucial,” Burgess said.
“Our focus remains on ensuring consumers can make confident, informed decisions about their retirement savings, supported by advisers who uphold the highest professional and ethical standards – and the findings of this report only strengthen our resolve.”
The ASIC review contains eight action points for advisers and four action points for licensees to improve their practices when it comes to SMSF establishment advice.
These included:
- Do not mis-sell SMSFs on the basis of control
- Consider the suitability of an SMSF for the client
- Do not recommend an SMSF if it will expose the client to unnecessary and inappropriate risks
- Prioritise the client’s interests over those of the financial adviser, advice licensee and associates
- Consider the client’s need for suitable and affordable insurance
- Include the basis of the advice
- Use professional judgement
- Keep good records
