“Confidence comes from discipline and training.”
— Robert Kiyosaki
Exceptional outliers
“In 91% of files reviewed the adviser did not comply with Corporations Act’s ‘best interests’ duty and related obligations. The non-compliant advice ranged from record-keeping and process failures to failures likely to result in significant financial detriment. This included:
– In 10% of files reviewed, the client was likely to be significantly worse off in retirement due to the advice;
– In 19% of cases, clients were at an increased risk of financial detriment due to a lack of diversification.”
— ASIC, 18-192MR SMSF advice needs significant improvement
Most advisers are familiar with the view, attributed to ASIC, that 90% of SMSF advice is non-compliant.
It’s actually 91%.
If you missed that depressing pronouncement initially, you would have seen it repeated at the Royal Commission.
Smart compliance people would highlight the dangers of generalising from a small sample, but we don’t want to waste your time with technicalities; instead we want to share the best practices we’ve identified in our reviews of SMSF. Given our perspective, we’re much more optimistic.
Without being too ‘inside-baseball’ , our view is that “compliance” is a product of competence, confidence and capability.
We’ve frequently addressed competence and capability, but in this context, confidence is simply feeling assured of your own abilities, value, and worth.
After speaking with accredited SMSF practitioners, I’ve noticed that their confidence in providing SMSF advice has been challenged.
Some are so apprehensive that they’ve even backed away from providing SMSF advice at all. Others are only providing advice in relation to winding up an SMSF.
There’s no doubt that ASIC’s public position has affected their confidence to provide advice to to set up an SMSF or to Trustees to keep growing their SMSF.
Their apprehension may be legitimate given the increased level of scrutiny the sector has received in recent years both from ASIC and the ATO, as well as the increased documentation requirements expected of advisers to ensure their compliance with FASEA Standards.
And, in case you’ve forgotten, ASIC’s 2018 Report 575 found that over 90% of the SMSF advice provided in 250 files was defective and didn’t comply with best interest duty,
Read ASIC’s View of SMSF
Despite this apparent timidity, recent figures published by APRA in January 2021 demonstrate that over the five years from June 2015 to June 2020, the SMSF sector grew from total assets of $569 billion to $733 billion. In terms of fund numbers, there was an increase from 533,000 to 593,000 and approximately 33 new funds per day.
Clearly, some advisers have navigated their way around the challenges.
Here’s some of the practical steps they’ve taken to be counted among the 9%.
Best Practices
“……. you exceeded legal requirements and industry standards. Replicating, and embedding best practices, is the surest path to providing consistently good advice. Providing consistently good advice is the best way to mitigate your risks, differentiate yourself from your peers and improve your bottom line.”
— Assured Support
Checklists and educational tools
Many advisers use checklists and online educational tools to help assess and confirm the suitability of an SMSF strategy for clients as well as their capacity, capability and willingness to be trustees.
These tools are important.
The online survey conducted by ASIC at the time of their report revealed the following:
- 38 per cent of respondents found running an SMSF more time-consuming than expected;
- 32 per cent found it to more expensive than expected;
- 33 per cent did not know the law required an SMSF to have an investment strategy; and
- 29 per cent mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.
Read SMSF Member Views
These highly competent advisers start by asking their clients about their background and investment experience, but they then explicitly ask whether clients do have available time, how they understand the associated costs, benefits and implications of advice and test how well they comprehend their obligations.
They complement their discovery and engagement process with detailed record keeping. Instead of railing against file-noting, they comprehensively document their client’s responses to validate and reflect on file their client’s level of financial literacy and informed consent.
Their file notes evidence which specific educational tools have been made available to clients, document how the clients understanding has moved forward as a result of the information being conveyed and they do this in a structured replicable way prior to recommending the set-up of an SMSF and annually during reviews.
1. Review Trust Deed and Investment Strategy
Although they can’t provide legal advice, competent SMSF advisers don’t subordinate their understanding of the SMSF trust deed to a solicitor or accountant. Instead, they commit to their specialist knowledge by understanding the contents of the deeds to ensure their recommendations are consistent with their documented terms.
In terms of the fund’s investment strategy, any investment and insurance advice provided to trustees and/or members needs to be confirmed and aligned. If they’re not, these are either updated or a new strategy implemented.
On those rare occasions that the adviser hasn’t determined the investment strategy, they clearly state who has (ie the Trustees themselves or the administrator) and who executed/approved the strategy document adopted by the Trustees. And, consistent with their professional and ethical duties, they clearly explain whether, and to what extent, the strategy is appropriate.
2. Discuss Trust Structure
There are many existing SMSFs with individual trustees. Advisers demonstrating best practice are not passive in accepting individual trustees as simply being legacy and proactively take steps to clearly explain the pros and cons of individual vs corporate trustees.
They also evidence on file their consideration of their clients estate planning and how it impacts on trustee succession planning not only on death, but also in the event incapacity or marital break down.
3. Support Retail Clients
Confident and capable SMSF advisers have, in my experience, internalised their Best Interests Duty and FASEA standards to the extent that compliance is their natural state. These advisers go to great lengths to treat each trustee and member of an SMSF as an individual retail client and ensure that they engage each trustee equally. They also take extra care to ensure their advice is tailored to their differing risk appetites (segregating fund assets if required), financial literacy, technical interest and preferred method of engagement.
4. Model Insurance
Regardless of time to retirement, if insurance is required and held inside an SMSF, the better SMSF advisers use projection graphs and model alternative scenarios to ensure the client is informed about the potential impact of insurance premium on retirement goals.
If clients are holding insurance close to or beyond their retirement, confident advisers take a position to analyse the client’s asset position and make a determination if insurance is no longer required or can be reduced with cost savings then re-directed to re-prioritised goals.
5. Consider (ongoing) appropriateness
It should go without saying, but it needs to be said, the best SMSF advisers frequently ‘check-in’ to ensure that the SMSF vehicle (and the investment strategy) remains appropriate.
I appreciate that “all advisers” do this, but the better advisers don’t treat it as a perfunctory exercise but exercise critical judgement to ensure that their clients’ circumstances, capabilities and needs are still aligned with their arrangements.
I’ve seen some exceptional efforts made to address clients’ increasing frustration with, or disinterest in, their SMSF and more than one heroic effort by an adviser to persuade a determined client that their real capabilities, resources and needs are more important considerations than their personal preferences and investment aspirations.
There are a number of practical steps and techniques that the best advisers adopt to ensure that they don’t fall within the 91% identified by ASIC. If you’d like to discuss what those are, reach out to us.
