ASIC slams SMSF advice, flags further education reform

ASIC will pursue further education requirements for financial advisers in a damning report showing 90% of financial advice provided in establishing self-managed superannuation funds is non-compliant.

Reviewing 250 client files from 102 different AFSLs, ASIC found 91% of files contained financial advice on setting up an SMSF that did not comply with the best interests duty or related obligations. Of the 102 licensees, 97 were found to have provided non-compliant advice.

ASIC identified several limited AFSL holders and providers operating under a limited authorisation that had also provided deficient advice.

As a result ASIC will engage with the Financial Adviser Standards and Ethics Authority (FASEA) to discuss a specific SMSF qualification for those wishing to provide SMSF advice.

"Through this project, we have seen an unacceptable level of poor quality advice despite the information and guidance that we have already provided to the sector. We believe these results indicate a need to increase the education and training requirements for advice providers who provide personal advice on SMSFs," ASIC said in its report.

The regulator said deficiencies ranged from record-keeping and process failures to failures likely to lead to profound financial detriment, with 10% of files demonstrating advice that would have left the client significantly worse of in retirement. A further 19% of files reflected an increased risk of financial detriment due to a lack of diversification.

Meanwhile, 62% were deemed to be non-compliant with the best interests duty though may not have resulted in any financial disadvantage.

According to the report, about half of all SMSFs established in 2017 were done so by an accountant, while 23% were established by a financial adviser between 2015 and 2017.

The financial advice sector has significant work to do to lift their performance on this issue as the review demonstrates that a lot of people are establishing SMSFs without knowing whether it's the best option, ASIC deputy chair Peter Kell said.

Additional market research conducted by ASIC found many consumers that had set up an SMSF do not understand the risks associated with structure, nor their legal obligations as SMSF trustees.

An online survey found 38% of respondents found running an SMSF was more time consuming than expected and 32% found it was more expensive than expected.

Most concerning, 33% were not aware they were legally required to have an investment strategy; and 29% were under the impression that SMSFs had the same level of protection as APRA-regulated funds in the event of fraud.

Kell said this is concerning as decisions about super are some of the most important a person can make.

"ASIC found there is a lack of basic knowledge of the legal obligations in setting up or running an SMSF. It is also concerning many people with an SMSF have not understood the importance of diversification, which puts their financial future at risk," he said.

Acknowledging the report, the SMSF Association said it will continue to work with ASIC and the SMSF sector to ensure that advice standards improve across the sector, particularly through SMSF education.

"The report has highlighted what the SMSF Association has been calling for over a long period - that advisers speaking to consumers about SMSFs should have specific SMSF education and qualifications underpinning their advice. To that end, we are pleased that in the report ASIC indicate they support introducing this requirement for advisers," SMSF Association chief executive John Maroney said.

Financial Planning Association of Australia chief executive Dante De Gori said there is no doubt that SMSF advice will now be a significant focus of those bodies selected to monitor compliance with FASEA's code of ethics for advisers, once they are approved.

"This is a growing sector and good advice is imperative to ensure the best outcomes for those who choose an SMSF as the vehicle to manage their retirement savings," he said.

ASIC compiled its report based on 28 interviews with SMSF members, an online survey of 457 members and a review of 250 new SMSF client advice files.

Read more: ASICSMSF AssociationPeter KellDante De GoriFinancial Adviser Standards and Ethics AuthorityFinancial Planning Association of AustraliaFPAJohn Maroney
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