“The recommended investment carried significant liquidity and credit default risks and was not appropriate given the SMSF required access to funds for an upcoming property settlement.” — AFCA Determination 851610
Recently, we wrote about the benefits, risks and consequences of templates and checklists.
In this article, we’ll consider templates and checklists with specific reference to SMSF advice.
While we’ll focus on appropriateness and the dangers of ignoring AFCA, we’ll address how templates can help you avoid costly mistakes when you’re providing advice to SMSF clients.
The background
It’s really important to understand that, while SMSF Trustees have less protections for dispute resolution than members of public offer superannuation funds, AFCA has made it clear in their SMSF Factsheet that SMSFs can seek AFCA’s assistance in certain situations.
This is the situation that Nextgen Financial Group found themselves in, as confirmed in the AFCA Determination 851610 and the subsequent and recent Federal Court Judgement Nextgen Financial Group Pty Ltd v WJ & V Drakoulis Super Pty Ltd [2023] FCA 789
Brief summary
The Trustees of the Drakoulis Super Fund received advice from an adviser at NextGen Financial Group. The Trustees made clear that their intention was to set up an SMSF to buy a property in the next 12-18 months and wanted to invest the funds in the SMSF into investments that would allow them the flexibility to do this.
While the initial advice was an SoA dated 16 August 2016 recommended cash accounts to invest the incoming rollovers, only 8 months later, there was advice provided on 19 April 2017, limited to investments only to invest almost all the SMSF funds into a medium risk loan fund, with a 1-3 year investment horizon. The recommendation was for a 1-year term; however, even beyond this term, the loan fund could withhold redemption of funds for up to 365 days if it was deemed to be unfair to other unit holders. This meant that there was a possibility that, for up to 32 months from the time the advice was initially provided, the funds could be unavailable for use as a property deposit.
What went wrong
Without going into the finer details of the case, the most significant learning point in this case is fundamental to best interests duty and the Standards; the risk levels and investment horizon for the recommended investment did not match the clients’ objectives, as it was made clear that the intention was to purchase a property within 12-18 months of the provision of the advice.
Granted, the adviser could not have predicted the fund’s subsequent collapse. However, the fact that the adviser failed to invest in assets that would have allowed the clients full access to their funds for their impending property settlement was clearly a breach of the best interests duty. The collapse of the fund meant that the clients were unable to settle on the property their SMSF intended to purchase, resulting in material loss.
We would also suggest that this advice could be considered a failure of Standards 4, 5 and 6, particularly with regard to the reliance on a PDS to explain the consequences and limitations of investing in the loan fund, rather than expressly explaining these to the clients and obtaining their free, prior and informed consent (which they likely would not have provided given the risks involved) and considering the broader interests of the client (ie what happens if the loan fund freezes or defaults).
Where templates could have helped
The limited advice provided on 19 April 2017 would have benefited from the appropriate use of templates and checklists to serve two purposes: remind the adviser of what has already occurred, and ensure that the adviser meets the client’s needs going forward.
We get it, advisers and practices are busy.
No one can remember every detail of every client from memory. This is what makes well-used templates and checklists, together with good file notes, so important in the process of providing advice that meets client needs.
Good SMSF advisers take steps such as keeping detailed objectives in the SMSF Investment Strategy and use a template like an SMSF Suitability Checklist to remind themselves of the Trustees’ objectives, their timeframes for investment, and the liquidity requirements of the Fund.
If these were checked and reconfirmed at every point of providing advice, costly mistakes such as the Nextgen case would have been avoided, because it would have been patently clear that investing the SMSF funds into the loan fund recommended would have been inappropriate.
Beware: SMSF template traps
Templates and checklists are really helpful, but they must also be used actively and constructively for the client’s relevant circumstances. We see too often checklists on client files with a series of tick-boxes that may address criteria that are relevant, but with no contextual explanation or re-visiting of critical issues that could prevent serious missteps such as the Nextgen case.
We’ve also reviewed hundreds of SoAs at Assured Support, where advisers scope out all SMSF needs except for investment of funds when the adviser has just been asked to invest funds by the Trustees. This exposes the adviser to the risk of missing crucial information about the Fund’s purpose, needs, and objectives that would have materially influenced their advice recommendations.
This case is a timely reminder that the adviser must exercise their professional judgment to inform clients of the impact of addressing only limited objectives in SMSFs, and how that impacts their overall Fund objectives from both a compliance and best interests perspective.
The way forward
Use well-designed SMSF templates and checklists to navigate through the advice process, but use them carefully and purposefully.
Don’t rely on them; rather, use them as active tools to ensure clients’ needs are constantly revisited. This helps ensure that the relevance and significance of the SMSFs and their members’ needs and objectives are reiterated and clarified, so that key objectives are captured and understood when providing SMSF (or any) financial advice.
If you have questions about the SMSF templates and checklists that you are presently using, please reach out to your Compliance Team, or reach out to us at help@assuredsupport.com.au
