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ASIC releases guidance on giving SMSF advice; low SMSF balances may not be cost-effective

On 23 July 2015, ASIC released guidance to improve the quality of SMSF advice provided to retail clients (investors) by issuing Information Sheet 205 Advice on self-managed Superannuation funds: Disclosure of risks (INFO 205) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206). Luis Vazquez and Terry Hayes, Thomson Reuters

ASIC said the information sheets aim to assist AFS licensees and their representatives comply with their disclosure obligations under the Corporations Act, and inform the risks and costs that an adviser should consider when advising on setting up or switching to an SMSF.

ASIC Deputy Chairman Peter Kell said:

"Setting up an SMSF is a significant financial step for consumers and many factors can impact their decision. It is therefore important that consumers receive good quality advice that will assist them in making informed decisions about their retirement savings."

These regulatory documents followed a consultation paper released in 2013 on proposals to impose specific disclosure obligations on SMSF advisers.

Disclosure of risks

Information Sheet 205 covers the following areas:

  • Relevant conduct and disclosure obligations include:
    • act in the best interests of the client (section 961B of the Corporations Act), provide appropriate personal advice (section 961G), warn the client if advice is based on incomplete information (section 961H) and prioritise the interests of the client (section 961J);
    • statement of advice (SoA) promptly given when advising the client (section 946A);
    • additional information in SoA when advice concerns replacing one product with another (section 947D).
  • Lack of statutory compensation — advisers should warn a client that SMSFs do not have access to the compensation arrangements under the SIS Act in the event of theft or fraud.
  • Impact on insurance — advisers should inform clients of the potential loss of insurance benefits of switching from an APRA-regulated super fund to an SMSF, that is, an APRA-regulated super fund generally offers a minimum level of life insurance.
  • Access to complaints mechanisms — advisers should warn clients of the lack of access to the Superannuation Complaints Tribunal (SCT) to resolve SMSF complaints.
  • The appropriateness of different SMSF structures — advisers should consider the most appropriate SMSF structure when establishing an SMSF as it has important tax and succession planning implications for clients.
  • Trustee obligations and the time and skills necessary to operate an SMSF — advisers should consider whether an SMSF is appropriate for a client in terms of the time and skills that may be needed to operate the SMSF and to generate the expected benefits.
  • Trustee obligations to develop an investment strategy — advisers should clearly inform SMSF trustees about an investment strategy that could feasibly meet members' retirement needs. SMSF trustees should be aware that certain transactions are prohibited (for example, lending SMSF funds to a relative).
  • Exit strategy — clients need to understand the cost implications of winding up their SMSF.

Disclosure of costs

Information Sheet 206 addresses the following points:

  • Cost-effectiveness of an SMSF — generally, ASIC says the costs of establishing and operating an SMSF with a balance of $200,000.00 or below are unlikely to be competitive in comparison to APRA-regulated funds and thus unlikely to be in the client's best interests. However, there could be circumstances when an SMSF with a starting balance of below $200,000.00 may be in the client's best interest, that is, if the trustee undertakes the administration and management of the SMSF (cost-effective) or the SMSF was established with a balance below $200,000.00 on the expectation of a large asset being transferred to the SMSF within a few months.
  • Advice on the costs of setting up, operating and winding up an SMSF — clients should be aware that there are unavoidable costs and optional costs applicable to setting up, operating and winding up an SMSF.
    • Unavoidable costs: annual SMSF supervisory levy, annual financial statement and tax return costs, annual independent audit fees, SMSF setting up fees, that is, trusts deed, etc.
    • Optional costs: ASIC fees to establish a corporate entity, establishment of a corporate trustee, ongoing SMSF administration costs, insurance costs, investment management fees, etc.
  • Advice on the continued suitability of an SMSF for the client — SMSF advisers should include an assessment of whether the client's relevant circumstances are significantly different from when the initial advice to set up an SMSF was given. This includes considering the ongoing appropriateness of the SMSF.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a wide range of SMSF topics.

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Georgia Borg
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