Investments

The rise and rise of SMSF advice

With the rapid growth in people wanting to manage their own superannuation monies and the removal of the ‘accountants exemption’ from 1 July 2016, the Self-Managed Superannuation Fund (SMSF) market presents an exciting opportunity for advisers and their businesses.

The SMSF market

Between June 2010 and June 2015, the number of SMSFs grew from 414,000 to 557,000, an average growth rate of 6 per cent per annum1. APRA lists the total value of assets held by SMSFs at 30 June 2015 as $590 billion2 and according to Deloitte this is expected to grow to $2.23 trillion by 20333.

Traditionally, most SMSF members are aged between 45 and 64. But there is a growing trend of younger members in more recently established SMSFs. For SMSFs established in the June 2015 quarter, 75 per cent of members were under 55 years old1.

The SMSF Opportunity

The current licensing exemption allowing recognised accountants to recommend the establishment or winding up of an SMSF will be removed from 1 July 2016.

To continue providing this kind of advice, accountants will be required to either:

  • become an authorised representative of an Australian Financial Service (AFS) licence holder
  • obtain their own limited AFS licence or
  • obtain their own full AFS licence.

Alternatively, they may look towards creating strategy partnerships through referral agreements or joint ventures.

To take advantage of this opportunity, you should be actively engaging accounting firms to understand their intentions from 1 July 2016 and to promote what value you can add in the provision of SMSF advice.

ASIC guidance on SMSF advice

With their growing prominence, ASIC has released two information sheets on the Advice on SMSFs: Disclosure of costs (INFO 206) and Disclosure of risks (INFO 205).

These information sheets assist advisers to comply with their conduct and disclosure obligations under the Corporations Act. If you are currently providing advice on SMSFs or wants to take advantage of the SMSF opportunity, it is important you are familiar with the guidance provided within these information sheets.

In summary, ASIC believes that an adviser should consider, discuss and then disclose to clients the following costs and risks when providing advice on establishing, switching to an SMSF or winding up an SMSF:

  • the cost effectiveness of an SMSF
  • the costs of setting up, operating and winding up an SMSF
  • advice on the continuing suitability of an SMSF for the client
  • lack of statutory compensation
  • any impact on insurance for the members
  • access to complaints mechanisms
  • appropriateness of a corporate or individual trustee structure
  • the trustee obligations and the time and skills necessary to operate an SMSF
  • the trustee obligations to develop an investment strategy
  • the need to consider an exit strategy
  • where recommending switching to an SMSF, additional information should be included in the Statement of Advice (SOA) in accordance with ASIC information sheet INFO 182, Super switching advice: Complying with your obligations.

Looking at a few of these points in greater detail:

The cost effectiveness of an SMSF

In ASIC’s view, establishing an SMSF with a balance of $200,000 or less is unlikely to be competitive compared to an APRA regulated fund and unlikely to be in the client’s best interest. ASIC does acknowledge that there are circumstances where establishing an SMSF with a balance of $200,000 or less may be in the clients best interest (e.g. where the trustee is willing to do much of the administration of the fund making it more cost effective or a large asset of funds will be transferred into the fund in a short timeframe of setup (within a few months)). In this case, the advice is expected to clearly set out why the client is likely to end up in a better position, whether the intended investment strategy is appropriate and viable and why setting up the SMSF is in the best interests of the client.

Advice on the continuing suitability of an SMSF for the client

Where advice is provided to set up or switch to an SMSF, ASIC believes subsequent advice provided to the client should consider the ongoing appropriateness of the SMSF, including:

  • Where an SMSF established with a starting balance below $200,000, later advice should set out whether the client is still expected to be in a better position (e.g. if an SMSF is established with a balance below $200,000 with the expectation that a large asset will be transferred or a large contribution will be made to the SMSF within a few months, this could be confirmed in any subsequent SOA or Record of Advice (whichever is appropriate)).
  • If the SMSF balance drops below $200,000 is it still appropriate for the client?
  • Does the client continue to have the capacity, capability and time commitments for an SMSF?
  • If buying a property in the SMSF is a main consideration for setting up an SMSF, will a potential tightening in lending criteria impact on this decision?

The need to consider an exit strategy

ASIC is likely to look at whether SMSF clients have been made aware of what may be required to wind up their SMSF and the likely costs involved. An exit strategy for the SMSF should be considered and developed by the trustees.

According to the ATO, between June 2010 and June 2015 around 36,000 SMSFs were established each year while wind-ups averaged over 7,300 a year1.

Exit strategies may arise because of the death or disablement of a member, relationship breakdown, compliance requirements become too onerous or costly etc. The exit strategy may be more complicated where the SMSF holds large illiquid investments.

Seizing the opportunity

SMSFs represent an exciting opportunity for you to diversify and grow your business. In particular, advisers are well positioned to provide advice on retirement planning, estate planning and insurance, areas where accountants have tended to steer away from.

You should actively engage accounting firms to understand what their SMSF business model will be when the accountants’ licencing exemption expires from 1 July 2016 and to promote how you can add value in the provision of SMSF advice.

If you want to take advantage of this opportunity or continue to provide SMSF advice, you need to be familiar with costs and risks that ASIC believes an adviser should consider, discuss and disclose to clients when establishing or switching to an SMSF.

For additional information on ASIC’s guidance on SMSF advice, refer to our Technical Update – ASIC Guidance on SMSF advice available in the SMSF section of the Technical Library on Adviser Advantage. Or refer directly to ASIC information sheets INFO205 and INFO206 available at asic.gov.au

 

December 2018