SMSFundamentals | Jul 02 2018
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Financial advisers in regulators’ sights over illegal advice to DIY super funds
-Property investment “one-stop shops” create conflicts of interest for advisers
-Clients are at risk of financial detriment due to insufficient diversification
-Trustees are surprised by costs and time involved in running their own super funds
By Nicki Bourlioufas
Nine out of 10 self-managed superannuation funds (SMSFs) are receiving bad financial advice, especially when it comes to property investments, prompting the corporate regulator and tax office to crack down on advisers who aren’t acting in their clients’ best interests.
The Australian Securities and Investments Commissions (ASIC) said last week it will join forces with the Australian Taxation Office (ATO) to take action against advisers whose clients have been found to have suffered financial detriment.
ASIC analysed 250 files randomly selected from tax office records and conducted an online survey of 457 clients, plus in-depth interviews with 28 clients who had set up an SMSF. In reviewing the 250 files, ASIC found the beneficiaries of 10% of the funds would be significantly worse off in retirement because of poor advice. In another 19% of cases, the advisers’ clients were at greater risk of financial detriment due to lack of diversification among different asset classes.
The SMSF sector comprised more than 590,000 DIY funds with 1.1m members as at June 2017. The sector is worth $712bn, accounting for about 30% of the $2.3trn-plus held in Australia’s superannuation system. The other 70% is held in retail, industry or public-sector funds that are regulated by the Australian Prudential Regulation Authority (APRA).
Releasing the findings on June 28, ASIC Deputy Chair Peter Kell said: “A healthy and robust SMSF sector is an important part of our super system. However, it is clear lots of people are setting up self-managed super funds without knowing whether this is the best option. The financial advice sector has significant work to do to lift their performance on this issue.”
ASIC found that many people establishing SMSFs do not fully understand the risks of SMSFs or their legal obligations as trustees. In the online survey, 38% of respondents said they found running an SMSF more time-consuming than they had expected, and 32% found it more expensive.
Thirty-three per cent did not know that SMSFs are required by law to have an investment strategy, and 29% mistakenly believed their fund had the same level of protection as prudentially regulated super funds in the event of fraud.
ASIC identified a growing use of one-stop shops, where the adviser has a relationship with a property developer or a real estate agent and encourages their clients to invest in their property developments. The one-stop shops often involve mortgage brokers and accountants as well, facilitating the investment process but creating potential conflicts of interest.
The practice increases the risk of people receiving advice that does not take account of their personal circumstances or is not in their best interests. ASIC and the ATO are planning to focus on these one-stop shops and will share data and intelligence.
ASIC will also take enforcement action where it sees “unscrupulous behaviour”. More broadly, it will use this research to shape its surveillance and regulatory work in the SMSF sector. ASIC will “take enforcement action as appropriate, including ensuring licensees with non-compliant advisers undertake client review and remediation”, the regulator said.
The full results of the ASIC research were released as Report 575 SMSFs: Improving the quality of advice and member experiences and Report 576 Member experiences with self-managed superannuation funds.
ASIC’s research is the just the latest in a series of findings that point to problems in the SMSF sector. The Productivity Commission recently found that returns in SMSFs with balances of less than $1m were less on average than the returns delivered by larger funds.
The difference between returns from the smallest SMSFs – those with less than $50,000 – and the largest – those with over $2m – was more than 10 percentage points a year, the commission said. As well, the Productivity Commission found that the costs for low-balance SMSFs are higher than for funds regulated by APRA.
The Royal Commission into Misconduct in the Banking, Insurance and Financial Services Industry, conducted by Commissioner Keith Hayne, has heard evidence of financial advisers encouraging clients to set up SMSFs, even where this was against their best interests.
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