Self-managed super funds can't afford to ignore royal commission
Warnings over the quality of advice, gearing within funds and returns should be taken very seriously by SMSF trustees, according to several experts.
Warnings over the quality of advice, gearing within funds and returns should be taken very seriously by SMSF trustees, according to several experts.
Self-managed super funds may have been excluded from the Hayne Royal Commission, but that does not mean trustees can ignore its findings.
The Turnbull government’s November 2017 announcement of a royal commission indicated it would “consider the conduct of banks, insurers, financial services providers and superannuation funds (not including self-managed superannuation funds)”.
However, despite their exclusion, SMSFs have not escaped the inquiry’s attention.
Commissioner Kenneth Hayne’s interim report released in September noted that SMSF advice constituted one of five main topics of financial advice sought by consumers, representing about a fifth of the Australian financial advice industry’s total revenue for fiscal 2017.
The report pointed to a bank example provided of “inappropriate advice of four advisers”. This included an adviser who “provided inappropriate advice relating to establishment of SMSFs and using limited recourse borrowing arrangements to fund the purchase of real property”.
It also referenced ASIC’s January 2018 report into financial advice, which found that some financial advisers had switched clients into new super arrangements that “gave less, charged more, or both gave less and charged more without any countervailing benefit”.
The report also queried whether grandfathered commissions on super and investment advice should be maintained, with the major banks all having subsequently announced plans to cease paying such commissions to their advisers.
In its submission to the royal commission, the Financial Planning Association of Australia accepted the “inherent conflict of interest” in the integration of a super trustee into an advice business.
“There is an incentive for the advice business to charge the superannuation trustee for services regardless of whether the service is in the best interests of any member or group of members,” it said, although suggesting it could also provide benefits for “at least some members of the fund”.
The FPA concluded that the conflict of interest could be managed by “ensuring the trustee function is separate from the advice function,” with any interactions on an arms-length basis.
91pc of SMSF advice files non-compliant
ASIC’s June 2018 report, SMSFs: Improving the quality of advice and member experiences found that in 2017, 79 per cent of SMSFs surveyed had used at least one adviser in the previous year.
A huge majority of the SMSF advice files reviewed by ASIC were non-compliant
Notably, it found that 91 per cent of 250 advice files it reviewed in relation to SMSFs “didn’t demonstrate compliance with the best interests duty,” with 10 per cent of those reviewed potentially risking the client being “significantly worse off in retirement as a result of following the advice”.
ASIC’s report also raised concerns over the strategy of “gearing through an SMSF to invest in property, which is being actively promoted by ‘property one-stop shops’…Our results suggest that, in many cases, this is likely to result in financial detriment to SMSF members”.
Adding to the pressure on advisers, the Productivity Commission’s April 2018 draft report, “Superannuation: Assessing efficiency and competitiveness” argued that the quality of financial advice provided to some members, including those with SMSFs, was “questionable”.
With the Hayne Royal Commission scheduling further hearings in November into policy issues, the super and broader financial sector will be watching closely for any clues into the final report, due by February 2019.
The SMSF Association’s Andrew Gale told the association’s February 2018 national conference that “although the SMSF sector is explicitly excluded [from the Royal Commission], history tells us royal commissions can go in unexpected directions”.
He said SMSFs could be impacted through three key avenues, including SMSF advice and recommendations to establish an SMSF by Australian financial services licensees. Larger funds might also seek to “deflect attention by pointing out issues with SMSFs,” such as minimum reasonable account balance sizes and limited recourse borrowing arrangements.
“Finally, there is a small possibility that the terms of reference of the Royal Commission are expanded to include SMSFs or related fields,” Gale said.
Royal commission confirms complexity
Liam Shorte, director at Verante Financial Planning, said the Royal Commission and recent ASIC reports had highlighted the complexity of SMSF advice.
“I believe we will see a move requiring SMSF advice to be provided only by those with a specialist accreditation,” he said.
“Already, dealer groups are moving to ensure greater efforts are made to ensure suitability of this solution for each client before any recommendation. ASIC and the ATO are also putting much more effort into identifying property spruikers and examining so-called one-stop-shops where clients never seem to get any third party advice.
“These moves can only be good for the sector, ensuring those moving into SMSFs are suited to running one, educated and supported to do so and that is in their best interest”.
In a media release following the release of the Royal Commission’s interim report, Treasurer Josh Frydenberg pledged to act on its recommendations, vowing “strong action to reform the financial sector”.
The potential impact of these reforms on bank profitability could flow through to shareholders, including SMSFs.
In the meantime, more legislative and regulatory change appears a certainty for 2019 as the financial industry nervously awaits Hayne’s final report.
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