“A checklist cannot fly a plane. Instead, they provide reminders of only the most critical and important steps.”
— Atul Gawande
What is suitable and what is appropriate?
In the recently published INFO 274 “Tips for giving self-managed superannuation fund advice: ASIC, removed its regulatory preference (or “guidance”) about the required minimum balance for SMSFs. It’s retreat has been largely well received.
Information sheet 274 (which replaces Info sheets 205 and 206) is a clear and simple outline provided by a regulator trying to help advisers better understand what they need to do to meet their legal obligations when providing personal advice in this area.
Some Licensees issue checklists to help their representatives determine whether an SMSF (establishment or retention) strategy is appropriate for their clients. These checklists tend to mimic the ATO trustee declaration but, as Commissioner Hayne identified, mandating checklists tends to both frustrate the intent of the law and undermine adviser capability. In our experience, ticking a box does not necessarily evidence that advisers have critically assessed the suitability of the SMSF strategy and the capacity and capability of the each trustee to properly manage their fund.
In the first 6 weeks of 2023, the ATO disqualified 115 individuals from acting as a trustee or director of a corporate trustee. For the financial year to date this figure is 504. The ATO has warned for some time it was scaling up its surveillance.
It is also interesting to note that Michelle Levy has not recommended restoring the Accountants exemption. This means that advisers are still in the driver’s seat for SMSF advice and we would argue, need to own it more. Whilst accountants do a fantastic job with the tax aspects of a fund, the impact of an SMSF on achieving retirement goals is fundamental to advice.
At a glance, information sheet 274 commented on the value of advice and what advisers are obligated to consider:
- An adviser with specialist advice skills can assist a client to make an informed decision about how an SMSF can be of benefit to them than alternatives available.
- Other professionals involved in SMSFs such as accountants and auditors are unable to provide the level of strategic or product advice an adviser can.
- As each SMSF Trustee is ultimately personally accountable and responsible for the compliance of the SMSF, whether or not they outsource some responsibilities. An adviser is obligated to explain the implications of running an SMSF and therefore assist each trustee to determine whether they have the time, skills and interest in complying with Superannuation, corporations and taxation laws.
- An adviser can assist Trustees to understand all the costs involved in running an SMSF throughout its lifecycle. This is relevant in context of various methods used to calculate the overall performance of a fund. A higher balance in an SMSF with low cost to run does not necessarily equate to an SMSF being appropriate for a client. Conversely, a low balance with higher initial running costs does not equate to an SMSF being inappropriate. A deep discovery process undertaken with an adviser can help to better clarify a client’s objectives, situation and needs and determine how well an SMSF can address them.
- An adviser can advise on which trustee structure either corporate or individual is appropriate by providing a comparison of risks and benefits of each.
- An adviser can provide advice on the fund’s investment strategy which is required prior to any investment decisions being made. The strategy needs to be reviewed regularly and decisions in relation to personal insurance made. Ultimately investment decisions need to be made by the trustees in the best interest of their members. An assessment of whether there are assets of the SMSF which need to be insured also needs to be made.
- An adviser can advise on death benefit nominations and ensure they are valid.
- An adviser can advise on an LRBA as long as the obligation to ensure that the risks, costs and exit strategy is explained and understood.
- An adviser is obligated to assess future needs of the trustees by having an exit strategy from the outset to risk manage any unexpected events. If trustees die, become incapacitated, move overseas, change marital status or the balance changes, these are relevant circumstances of a client which can impact the suitability for the strategy.
What needs to be compared when advising an SMSF
- Obligations in relation to product replacement advice are unchanged for SMSF advice
- If the driver to set up an SMSF is because the trustee believes they can achieve a better return than a public offer fund, then calculation methods need to be contextualised. Whilst a like for like comparison from an existing fund may not be able to be made, assumptions do need to be explained.
- Protections – AFCA only deal with SMSF advice complaints in limited circumstances. In the event of theft or fraud, government compensation schemes are not available. Trustees need to resolve their own disputes or receive legal assistance.
- The Sole Purpose test means the fund needs to be maintained for the purpose of retirement or dependants upon death. Investment choices need to demonstrate that they are in the best interests of their members and aligned with the purpose of the fund
- When advising on SMSFs, use your FSG to explain the difference in complaints handling for SMSF trustees and the need to keep records for 10 years.
- Don’t just develop tick box suitability and appropriateness checklist’s modelled on the ATO guidelines. If using a checklist, document what factors you considered to make your professional judgement as to why an SMSF is an appropriate strategy for your clients and how you have illustrated that they are suitable to be trustees.
- Ensure your SOA explains in a tailored manner, based on the clients personal situation, the advantages and disadvantages of establishing an SMSF, retaining an SMSF, winding up an SMSF to alternatives available. Ensure it explains how you are placing the clients in a position to make an informed decision.
- Ensure the capacity of your clients, particularly aging trustees is documented. Ensure a succession plan or exit plan is in place for the trustees. If one is more engaged than the other, demonstrate in the file your effort to elevate knowledge and interest of the lessor engaged.
- Increase knowledge and confidence in the taxation benefits and implications of SMSFs and the various assets held in them. This will become more important if the proposed $3m threshold is introduced.
- Ensure systems and processes enable good visibility and reasonable assumptions in relation to SMSF cash flow. This will become particularly important if the proposal to tax unrealised gains is introduced.
- Whilst you may not be able to advise on direct property, cash flow advice and asset allocation advice in relation to funds with large illiquid assets are relevant circumstances of a client requiring consideration
- If you are only managing a portion of assets in a client’s SMSF, and you are not providing contributions advice to members, ensure your file clarifies who your client is as the scope may only be for the trustees and not the members