In brief
ASIC has outlined its expectations for financial advice where the client is advised to set up a self-managed superannuation fund. ASIC has done so in two publications released yesterday – one deals with the risks associated with SMSFs (information sheet 205) and the other with the costs (information sheet 206). Blind Freddy can see ASIC doesn't think its expectations are being met. Senior Regulatory Counsel Michael Mathieson reports.
Like life insurance, an SMSF is often 'sold' by the adviser rather than 'chosen' by the client. Yet the decision to set up an SMSF is a very significant one and they will not be suitable for many people. ASIC is concerned. It says financial advisers are duty bound to make the associated risks and costs abundantly clear to their clients.
Risks
Chief among the risks, according to ASIC, is the fact that SMSF investors cannot access the compensation framework available to APRA-regulated funds in the event of theft of fund assets or fraud. This difference between SMSFs and APRA-regulated funds was illustrated starkly, and for some SMSF investors very painfully, by the Trio saga.
ASIC also points to the potential to lose life insurance coverage when leaving the APRA-regulated environment. It also notes that individuals may not have the necessary time and skills to operate an SMSF. In a statement that would doubtless gratify those offering APRA-regulated 'superannuation platforms', ASIC says:
There may be other options available for clients who may not be prepared to take on the responsibilities and obligations of an SMSF trustee. These options may still provide some of the benefits of an SMSF, such as a 'member direct investment facility' within an APRA-regulated fund.
Costs – and a 'better position'
Turning from risks to costs, ASIC is very concerned that an SMSF may not be cost-effective for many people. Here, ASIC sets a 'soft' minimum of $200,000 and reaches for the FoFA best interests duty as its stick to beat advisers with:
In many cases, a recommendation for a retail client to set up an SMSF with a starting balance of $200,000 or below is unlikely to be in the client's best interests.
This is because the costs of establishing and operating an SMSF with a low balance are unlikely to be competitive, relative to the likely costs in the APRA-regulated environment. And here is where ASIC's guidance becomes very interesting (at least to a financial services lawyer) – it says the client may not be in a 'better position' if they set up an SMSF.
The law doesn't require financial advice to leave the client in a better position. It does not even require the advice to be likely to leave the client in a better position. This notion of a 'better position' is a fiction created by ASIC – it is a gloss on the law, it does not represent the law. The FoFA best interests duty is concerned with the financial adviser's process when preparing and delivering advice. It is difficult to see how the sum to be invested, of itself, says anything about the thoroughness and quality of the adviser's processes.
ASIC expects the costs that are likely to be incurred in establishing, operating and winding up an SMSF to be discussed and disclosed to the client in considerable detail – in particular, the costs that are unavoidable as well as the costs that may vary depending on how much of the SMSF's administration the client intends to undertake personally.
ASIC's regulatory approach
Whatever the merits of ASIC's expectations, the particular approach it has taken to dealing with the issue is, again, very interesting. ASIC engaged in a consultation process before publishing these information sheets. It contemplated modifying the law to impose specific disclosure requirements on advice licensees and their advisers who give personal advice about SMSFs to retail clients. It ultimately decided not to modify the law. But it has issued specific and detailed 'guidance' in terms which suggest that, in ASIC's view, the difference between what the law says and what ASIC expects is essentially immaterial.
The adviser/client interaction
ASIC's report on its consultation process also indicates that, while there was a degree of 'consensus' on the broad topics an adviser should consider and discuss with the client, there was no 'consensus' on how the adviser should do so. That lack of consensus might have had a part to play in ASIC's ultimate statement on the matter:
The disclosures referred to in this information sheet should be provided to a retail client at the time of the advice – this will usually be by way of a Statement of Advice (SOA). However, as a matter of best practice, AFS licensees and their representatives should also give these disclosures to retail clients in person, regardless of whether the advice is (or will be) set out in an SOA.
Going by this statement it is not at all clear what ASIC 'requires'.
Once again, ASIC is talking tough about the quality of financial advice. And once again, the most interesting thing will be to see whether it does anything beyond the tough talk.