Financial planning strategies may be familiar, generally predictable, and relatively low-consequence, but recommendations that step outside this tradition aren’t necessarily “bad”. They’re simply high-consequence strategies that require a higher level of judgment, oversight, evidence and client understanding.

SMSF establishment, limited recourse borrowing arrangements, gearing, insurance replacement, retirement income structuring and complex entity arrangements might not suit everybody, but they can all be appropriate in the right circumstances.

Admittedly, they can also cause significant client harm when poorly scoped, weakly evidenced or inadequately explained, but real advice professionals understand their use.

For advisers, licensees and compliance teams, the question shouldn’t be “Is this strategy allowed?” The better question is: Can we prove this strategy is suitable, understood, affordable, sustainable and in the client’s best interests?

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Why “risky strategies” need stronger controls

High-consequence advice strategies usually share several features. They’re often complex, long-term, assumption-sensitive, challenging to explain and difficult for clients to either understand or unwind. A client who establishes an SMSF, borrows inside superannuation, replaces existing insurance or moves into a structured retirement income product may be making a decision with consequences that last decades.

That’s why a generic disclaimer or a boilerplate warning simply isn’t good enough.

An SOA disclosure that says “borrowing increases risk” or “insurance replacement may result in lost benefits” is barely adequate because it doesn’t prove that the advice is either understood or appropriate. It’s like telling someone that the ocean might be dangerous without checking whether they can swim, whether there’s a rip, and whether a lifeguard is present.

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The Code of Ethics lens

We can’t grapple with “risky advice” without appreciating the impact of the Financial Planners and Advisers Code of Ethics 2019. The Code requires advisers to, among other things, act with integrity, in the best interests of each client, obtain their clients’ free, prior and informed consent, ensure their advice is appropriate, consider broader long-term effects, keep complete and accurate records, and maintain relevant knowledge and skills.

For “high-risk advice”, Standards 2, 5 and 6 are particularly important.

Standard 2 requires the adviser to act with integrity and in the best interests of each client. Standard 5 requires the adviser to ensure that advice and product recommendations are appropriate to the client’s individual circumstances and that the client understands the advice, including its benefits, costs and risks. Standard 6 requires the adviser to consider the broader effects of the client acting on the advice, including the client’s longer-term interests and likely future circumstances.

These are questions of both evidence and ethics.

For these reasons, compliance shouldn’t simply ask whether the Statement of Advice contains risk disclosures. It should ask:

• How did the adviser test the client’s understanding?
• What reasonable alternatives were considered?
• Why was a lower-risk option rejected?
• What assumptions drove the recommendation?
• What happens if those assumptions are wrong?

For licensees, the issue is broader than adviser ethics. High-consequence strategies also engage the licensee’s obligation to maintain adequate compliance arrangements, supervise representatives, manage risk, ensure that financial services are provided efficiently, honestly, and fairly, and take reasonable steps to ensure that representatives comply with financial services laws. A “risky strategy” framework helps translate those obligations into practical controls.

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A better operating model

In our view, licensees should classify high-consequence advice strategies into practical risk categories and apply proportionate controls. The purpose isn’t to ban sophisticated advice, but to ensure that the level of review, evidence, and approval matches the potential harm to clients.

Please understand his approach doesn’t prevent advisers from recommending sophisticated strategies, it simply makes the governance oversight proportionate to the risk.

Strategy category	Examples	Required control response	Approval position
High-risk advice	SMSF establishment, insurance replacement, retirement income strategies, personal gearing, margin lending, complex structures	Enhanced adviser documentation, client-specific risk explanation, alternatives analysis, affordability testing, evidence of client understanding and targeted peer review	Advice may proceed if the file clearly evidences suitability, understanding, affordability, sustainability and best interests
Very high-risk advice	SMSF property, LRBAs, related-party loans, substantial insurance replacement, low liquidity, material concentration risk, vulnerable client indicators, retirement income strategies with limited flexibility	Mandatory compliance pre-vet before advice is presented, stress testing, exit strategy, specialist input where required, and documented rationale for rejecting lower-risk alternatives	Advice should not be issued until compliance or senior review confirms the strategy is supportable
Exceptional approval	Strategy appears inconsistent with the client’s risk profile, financial literacy, affordability, investment timeframe, liquidity needs, vulnerability indicators or capacity to recover from loss	Senior approval, documented exception rationale, clear explanation of why ordinary controls are insufficient, and evidence that the client understands the consequences	Advice should only proceed where the licensee accepts the exception and the file contains compelling client-specific justification

Once the strategy category is identified, the licensee should apply the corresponding control level. The category determines the level of intervention. The control level determines what must happen before advice is issued.

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How the control escalation should work

Licensees should utilise one of three control responses: enhanced evidence, pre-vet and exceptional approval. These controls aren’t interchangeable. They reflect different levels of strategy risk.

Control level	When it applies	What it means	Practical effect
Enhanced evidence	The strategy is higher risk, but still within ordinary licensee tolerance	The adviser may proceed, but the file must contain stronger client-specific evidence	The SOA and file must clearly evidence strategy rationale, alternatives considered, affordability, sustainability, client understanding, risk explanation and why the strategy is in the client’s best interests
Pre-vet	The strategy is very high risk or has known client harm indicators	Advice must be reviewed before it is presented to the client	The adviser should not issue the advice until compliance, technical or senior review confirms that the strategy is supportable
Exceptional approval	The strategy appears outside normal licensee tolerance or inconsistent with the client’s profile	Senior approval is required before the advice can proceed	The file must contain a documented exception rationale, clear evidence of client understanding, and compelling reasons why the strategy remains suitable despite the risk indicators

The escalation logic is simple. Enhanced evidence strengthens the file. Pre-vet prevents advice from being issued until it has been reviewed. Exceptional approval confirms that the licensee has consciously accepted a strategy outside ordinary tolerance.

The higher the consequence of error, the earlier the licensee control should apply.

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Identifying “Risky Advice Strategies”

1. SMSF establishment

Low balances, low engagement, trustee responsibility, conflicts, costs, investment strategy, insurance and exit strategy are key risks of SMSF establishment advice.

Advisers shouldn’t recommend SMSF establishment unless the file demonstrates:

• why the client needs control, flexibility or investment choice that cannot reasonably be achieved in an APRA-regulated fund;
• current and projected balance, including whether the balance is sufficient after setup, advice, administration, audit and investment costs;
• client trustee capability, including time, literacy, record-keeping ability and willingness to accept legal responsibility;
• comparison of costs, benefits and risks against industry, retail and wrap alternatives;
• insurance replacement or continuation analysis;
• liquidity analysis for pensions, tax, fees, insurance and unexpected expenses;
• investment strategy aligned to diversification, liquidity, risk and return objectives;
• exit strategy if the client becomes incapable, disengaged, widowed, incapacitated or unwilling to continue.

Simply put, enhanced evidence should be required for all SMSF establishment advice. Pre-vet should be triggered where the balance is below the licensee threshold, the strategy involves SMSF property, there is a related-party transaction, the client has low financial literacy, existing insurance may be lost, single-asset or single-sector concentration exceeds licensee tolerance, or the client is approaching retirement with limited capacity to recover from loss. Exceptional approval should be required where the recommendation involves a balance below $200,000 or the strategy appears inconsistent with the client’s financial literacy, liquidity, diversification or capacity to recover from loss.

Recommended licensee position:

ASIC doesn’t mandate a minimum balance to recommend or establish an SMSF. Older SMSF advice guidance referred to a $500,000 balance, but that threshold was removed when ASIC released INFO 274: Tips for giving self-managed superannuation fund advice in December 2022. ASIC’s current position is that balance is relevant but not determinative. Suitability depends on the client’s circumstances, objectives, costs, risks, trustee capability and comparison with their existing APRA-regulated fund. 

However, as a risk control, it’s prudent to treat SMSF recommendations involving balances below $500,000 as higher-risk advice and require enhanced file evidence addressing cost-effectiveness, trustee capability, investment strategy, diversification, liquidity, insurance, available alternatives and client understanding of ongoing obligations.

Recommendations involving balances below $200,000 may require exceptional justification and must be referred to pre-vet or senior compliance for approval before advice is issued.

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2. Limited recourse borrowing arrangements

The elements that make LRBA advice “risky” are leverage, liquidity, single-asset concentration, related-party loans, insurance and exit strategy.

The file should include:

• the reason borrowing inside superannuation is appropriate compared with not borrowing;
• stress testing at higher interest rates, vacancy, unexpected repairs, reduced income and fall in asset value;
• liquidity reserve calculation;
• evidence that the SMSF can pay tax, expenses, pensions, insurance and loan repayments;
• related-party loan safe harbour assessment where applicable;
• diversification impact;
• insurance adequacy review;
• exit strategy if refinancing fails, a member dies, a member becomes disabled, property value falls or rent stops.

LRBAs should generally be treated as very high-risk advice and require pre-vetting before advice is presented. Exceptional approval should be required where the arrangement involves residential property before any legislative ban commences, related-party lending, limited liquidity, material concentration, low member balances, or a client with limited capacity to recover from loss.

Recommended licensee position:

Treat residential SMSF LRBA advice as very high risk and generally unavailable for new recommendations once the residential LRBA ban commences, subject to the final enacted legislation, Royal Assent and commencement provisions. Any advice given before commencement should require senior approval or pre-vetting and must explain why proceeding now is in the client’s interests, rather than merely being a response to legislative urgency.

Business real property LRBAs should remain a permitted specialist strategy where legally available, but only with enhanced scrutiny, legal and tax confirmation, liquidity testing, related-party loan review where relevant, and clear evidence that the arrangement is suitable for the client and complies with SIS Act borrowing and investment restrictions.

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3. Personal gearing and margin lending

Gearing and margin lending advice may expose consumers to risks including magnified losses, margin calls, interest rate risk, cash flow strain, and unsuitability for low-risk clients. ASIC’s Moneysmart describes borrowing to invest as a high-risk strategy, even for experienced investors, because losses can exceed a client’s original investment. It emphasises that gearing magnifies gains when markets rise, but produces larger losses when markets fall. Then there are cash flow, capital, and home security risks to consider.

Given these risks, the file should evidence that:

• the client’s risk profile supports gearing;
• the client has surplus income and emergency reserves;
• the client can meet margin calls without the forced sale of essential assets;
• modelling includes market fall, interest rate rise and income disruption;
• the strategy remains suitable if returns are lower than expected;
• alternatives were considered, including regular savings or ungeared investing.

In practice, this means that an SOA for gearing or margin lending shouldn’t merely include and rely on a generic risk disclosure. It should contain client-specific warnings. For example, it should quantify the effect of a 10%, 20% or 30% market fall, show the impact on LVR, explain when a margin call would occur, identify the cash reserve required, test interest rate increases, and explain what assets may need to be sold. The warning should be close to the recommendation, not hidden in an appendix.

Recommended licensee position:

Personal gearing and margin lending should be treated as high-risk advice because they can magnify losses, create cash flow pressure, expose clients to margin calls, and place personal assets at risk. The strategy should only be recommended where the client has a demonstrated tolerance for investment risk, sufficient surplus income, adequate emergency reserves, capacity to withstand market falls and a credible strategy for meeting loan repayments or margin calls without forced sale of essential assets.

Enhanced evidence should be required for all personal gearing and margin lending advice. The file must evidence the client-specific rationale for borrowing to invest, the alternatives considered, affordability, cash flow resilience, tax assumptions, interest rate sensitivity, market fall modelling, and the client’s understanding of the risks.

Pre-vet should be required where the client has limited surplus income, low liquidity, a moderate or lower risk profile, material reliance on investment income, a high loan-to-value ratio, home equity or other essential assets used as security, or limited capacity to recover from loss.

Exceptional approval should be required where the strategy appears inconsistent with the client’s risk profile, financial literacy, investment timeframe, cash flow position, or capacity to meet margin calls or loan repayments under stressed conditions. The advice should not proceed where the client cannot absorb losses, meet margin calls, maintain repayments during income disruption, or understand that tax deductibility does not remove investment, capital, or cash flow risk.

Require a minimum client-facing warning like

“Borrowing to invest, including through a margin loan, is a high-risk strategy. It can increase your gains if markets rise, but it can also significantly increase your losses if markets fall. You must repay the loan, interest and costs even if the investment falls in value or produces less income than expected. If the value of your investments falls, you may receive a margin call and may need to provide cash, add security or sell investments at short notice. If you can’t meet a margin call, the lender may sell investments without waiting for markets to recover. If your home or other personal assets are used as security, those assets may also be at risk. Tax deductibility doesn’t mean the strategy is suitable, and it doesn’t remove investment, cash flow or capital risk.”

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4. Insurance replacement and large insurance recommendations

Switching insurance seems deceptively simple, but it contains a multitude of significant risks, including the loss of existing benefits, non-disclosure, premium sustainability, underwriting and affordability. Mistakes, negligence or recklessness can have profound consequences – financial and otherwise.

The file should include:

• side-by-side comparison of old and new cover;
• ownership, beneficiary and tax treatment comparison;
• exclusions, loadings, waiting periods and definitions comparison;
• confirmation not to cancel existing cover until replacement cover is accepted and in force;
• premium sustainability modelling over at least 5, 10 and 15 years, where relevant;
• rationale for sum insured;
• confirmation that the client understands underwriting risk before any existing cover is cancelled;
• underwriting pre-assessment where replacement risk is material;
• explanation of non-disclosure and the duty to take reasonable care not to make a misrepresentation.

Recommended licensee position:

Enhanced evidence should be required for all insurance replacement advice. Pre-vet should be mandated for trauma, TPD, or income protection replacement; replacement of older policies with potentially superior definitions; material premium increases; medical history issues; or any recommendation that may result in cancellation before replacement terms are known.

Exceptional approval should be required where the client is likely to lose valuable legacy benefits, has unresolved underwriting risk, or cannot sustainably afford the replacement cover. Existing cover should not be cancelled until the replacement cover is accepted, in force, and checked against the advice assumptions.

The file should evidence that the client understood underwriting risk, exclusions, loadings, altered definitions, premium sustainability and the consequences of losing legacy benefits.

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5. Retirement income strategies

Retirement income advice can be high-consequence because clients are often making decisions when their ability to recover from poor outcomes is diminished. A strategy that appears sustainable at commencement may become unsuitable if markets fall early in retirement, inflation rises, health costs increase, aged care needs emerge, Centrelink treatment changes, or the client lives longer than expected.

The central risk isn’t simply investment risk. It’s the interaction between investment returns, withdrawal rates, liquidity, tax, social security, product complexity, estate objectives and the client’s future capacity to make decisions.

For that reason, retirement income advice shouldn’t be assessed only by reference to the product recommended. The file should show how the adviser considered the client’s income needs, access to capital, risk tolerance, longevity risk, sequencing risk, family position, estate intentions, and likely future circumstances.

The file should include:

• a clear distinction between essential expenditure, lifestyle expenditure and discretionary expenditure;
• the client’s minimum required income and preferred income;
• cashflow modelling under base case, poor market, inflation and longevity scenarios;
• an assessment of sequencing risk, particularly where the client is drawing income from market-linked assets;
• the proposed withdrawal rate and why it is sustainable;
• the expected impact of fees, tax, inflation and product costs on retirement capital;
• liquidity analysis for health events, aged care, home repairs, family support and unexpected expenses;
• Centrelink and Age Pension analysis where relevant, including the effect of the strategy on assessable income and assets;
• comparison of reasonable alternatives, including retaining accumulation or account-based pension arrangements, changing drawdown levels, using cash reserves, annuities or lifetime income products, or adopting a staged implementation approach;
• explanation of any loss of flexibility, access to capital, death benefit treatment or estate planning consequences;
• a clear explanation that projections are scenarios based on assumptions, not guarantees or forecasts, including the effect that different return, inflation, spending and longevity assumptions may have on the outcome;
• Stress testing should be documented rather than assumed. Reviewers should be able to identify both the assumptions used and the rationale for selecting them.
• show that the client understood the trade-offs between income certainty, capital access, market exposure, longevity protection and estate outcomes.

Where an annuity, lifetime income product or other retirement income product with reduced flexibility is recommended, the adviser should explain in plain English what the client gives up in exchange for income certainty. This includes any restrictions on withdrawals, surrender value, death benefits, reversionary options, indexation, Centrelink treatment, and the circumstances in which the product may result in a poor outcome.

Pre-vet should be triggered where:

• the proposed withdrawal rate is materially higher than the licensee’s retirement income tolerance;
• the client has limited capacity to reduce spending if returns are poor;
• the strategy relies on optimistic investment returns or sustained income distributions;
• there is material sequencing risk in the first years of retirement;
• the client has low liquidity after implementation;
• the recommendation materially affects Age Pension or Centrelink entitlements;
• the strategy involves an annuity, a lifetime income product or another product with limited access to capital;
• the client is vulnerable, recently bereaved, cognitively impaired, heavily reliant on the adviser, or has limited financial literacy;
• the recommendation materially reduces estate flexibility or affects intended beneficiaries;
• the client is using debt, concentrated assets or illiquid assets to support retirement income;
• aged care needs are foreseeable but not adequately addressed.

Enhanced evidence should be required for retirement income advice where the client relies on the recommended strategy to meet ongoing income needs.

Pre-vet should be triggered where the strategy involves reduced access to capital, material sequencing risk, high withdrawal rates, low liquidity, Centrelink impacts, vulnerable client indicators or limited capacity to recover from loss.

Exceptional approval should be required where the client’s essential expenditure depends on assumptions that are optimistic, weakly evidenced or not adequately stress-tested.

Recommended licensee position:

Retirement income advice should be treated as high risk when the client has limited capacity to recover from loss, relies on the recommended strategy to meet essential expenditure, or gives up flexibility in exchange for income certainty. The advice file must demonstrate that the strategy is sustainable, liquid, understandable and aligned with the client’s broader long-term interests.

Where the strategy depends on assumptions about market returns, inflation, life expectancy, Centrelink treatment or future expenditure, those assumptions should be clearly disclosed, stress-tested and explained to the client.

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6. Complex structures

Complex structures can be appropriate where a client has a genuine need for control, succession planning, business continuity, investment flexibility, asset separation or intergenerational planning. However, they are high-consequence strategies because they often involve legal, tax, estate planning, accounting and asset protection issues that sit outside ordinary financial product advice.

For licensee purposes, “complex structures” should include recommendations or strategies involving trusts, companies, family groups, SMSFs, bucket companies, interposed entities, related-party arrangements, business succession structures, asset protection structures or material changes to ownership and control arrangements.

The key risk is scope drift. Financial advisers may identify a structure as relevant to the client’s objectives and explain the financial planning implications of using or not using it. They should not, however, provide legal, tax or asset protection advice unless they are properly authorised, competent and licensed to do so.

The advice file should show:

• why the structure is needed;
• why a simpler alternative is insufficient;
• what financial planning objective the structure is intended to support;
• what assumptions the adviser has made about tax, legal, estate planning or asset protection outcomes;
• whether those assumptions have been confirmed by a qualified legal, tax or accounting adviser;
• what specialist advice was recommended, obtained or declined;
• the establishment costs, ongoing administration costs and compliance obligations;
• who controls the structure and how control may change over time;
• how the structure affects succession, estate planning, death, incapacity, separation or business exit;
• whether the client understands the ongoing obligations, limitations and risks;
• whether the structure may create conflicts between family members, business partners, trustees, directors, beneficiaries or related parties.

Where the recommendation depends on a legal, tax, accounting or asset protection outcome, the file should evidence a referral to an appropriate specialist. The adviser should clearly distinguish between financial planning advice and matters requiring specialist advice. The SOA shouldn’t imply that a structure will achieve tax, legal, asset protection or estate planning outcomes unless the relevant specialist has confirmed those outcomes.

Pre-vet should be triggered where:

• the client is establishing or materially changing a trust, company, SMSF or family group structure;
• the recommendation depends on tax effectiveness, asset protection, estate planning or business succession outcomes;
• related parties are involved;
• control, ownership or benefit does not sit clearly with the client;
• the structure introduces material costs, complexity or administration burden;
• the client has low financial literacy or limited capacity to manage the structure;
• there is potential conflict between family members, business partners, trustees, directors or beneficiaries;
• the strategy involves debt, guarantees, related-party transactions or asset transfers;
• the adviser has not obtained, or cannot evidence, appropriate specialist input.

Recommended licensee position:

Complex structural advice should be limited to the financial planning implications of the proposed structure unless the adviser is properly authorised and competent to provide broader legal, tax or asset protection advice. Where the suitability of the recommendation depends on legal, tax, accounting, estate planning or asset protection outcomes, those matters should be confirmed by an appropriate specialist before advice is issued. The file must clearly evidence the advice scope, specialist referrals, client understanding, costs, control arrangements, ongoing obligations and the reasons a simpler alternative was not sufficient.

Minimum recommended warning:

Recommended warning should state: “This advice considers the financial planning implications of the proposed structure. It does not constitute legal, tax, accounting, estate planning or asset protection advice. You should obtain advice from an appropriately qualified specialist before establishing, changing or relying on the structure. The structure may involve additional costs, administration obligations, control issues, tax consequences and legal risks. These risks should be understood before implementation.”

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How licensees should implement this approach

Licensees should not rely on adviser judgement alone to manage high-consequence strategies. They should translate strategy risk into clear operating controls.

At a minimum, licensees should:

• maintain an approved strategy list that identifies high-risk, very high-risk and exceptional approval strategies;
• define pre-vet triggers for each strategy type;
• require enhanced file evidence for strategy rationale, alternatives, affordability, stress testing, client understanding, conflicts and exit strategy;
• embed minimum recommended warnings into advice templates while requiring client-specific risk explanation;
• require peer review or compliance pre-vet before advice is issued for very high-risk strategies;
• train advisers on the difference between disclosure, informed consent and evidence of understanding;
• calibrate file review standards, so reviewers assess substance, not just document completion;
• monitor outcomes after implementation, including complaints, cancellations, margin events, liquidity problems, replacement issues and client hardship;
• report high-risk strategy trends to Responsible Managers and boards.

The objective isn’t to eliminate professional judgment, but to ensure that professional judgment is visible, tested and supported by evidence. Likewise, licensees don’t need to ban high-consequence strategies. They need to decide which strategies require stronger evidence, which require pre-vet, which require senior approval, and what evidence must be present before the advice is issued.

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The practical message

For advisers, high-consequence strategies require better conversations, not longer templates. Licensees require clear pre-vet triggers and consistent supervision. Compliance teams need evidence that the client understood the recommendation, that reasonable alternatives were considered, and that the adviser tested the real-world consequences of the strategy.

Regardless of the inherent risk, a well-controlled risky strategy should be able to answer one simple question:

If you can’t answer this question positively, poor documentation may be the least of your problems.

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Further reading

What Does a Defensible Compliance Framework Look Like for AFSL and Credit Licensees?

Understanding Client Suitability: Beyond Standard 5

D’Oh: Better file-notes

How Do Clear Goals Strengthen Best-Interest Decision Making?

Why is ASIC’s Report on SMSF Advice (REP 824) a wake-up call?

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Frequently Asked Questions