Specialist SMSF advisers need only apply

The final report calls for additional requirements that financial advisers must comply with before they provide SMSF advice.

The Productivity Commission is again calling for specialist training for those financial advisers wishing to advise on SMSFs with the report suggesting the requirement form an extension of the new standards in place under the Financial Adviser Standards and Ethics Authority.

Further, the report has recommended that advisers be required to provide a document that clearly explains the key issues associated with establishing an SMSF. The document would highlight to clients any 'red flags' in deciding whether the structure is suitable for them, the report said.

This would make it easier for a client to question the advice they receive and benchmark its quality, the commission said.

Further to this, the Productivity Commission has determined that a minimum balance requirement is too blunt an instrument. This is in contrast to a suggestion in the commission's interim report that a minimum balance of $1 million be introduced.

Instead, the Productivity Commission has simply put advisers on notice, saying advisers should be prepared to justify to ASIC why they are recommending an SMSF be established with a balance remaining under $500,000 in the years that follow its establishment.

While the SMSF segment has delivered broadly comparable investment performance to APRA-regulated funds, many smaller SMSFs - those with balances under $500,000 - have achieved materially lower average returns in comparison to their larger counterparts, the commission found.

"Large SMSFs earn broadly similar net returns to APRA-regulated funds, but smaller ones perform significantly worse on average. This is mainly due to the materially higher average costs they incur (relative to assets) due to being small," the report reads.

"While some SMSFs expand quickly and perform better, others appear to start small and stay small."

According to the report, it was estimated in 2016 that 380,000 members are in smaller SMSFs that have been established for more than two years. This equates to about 200,000 SMSFs or 42% of all SMSFs.

While some may be benefiting from high returns or tax advantages, on average they are paying relatively high costs and facing low net returns, the report states.

The number of SMSFs has almost doubled since June 2006 from about 309,000 to more than 590,000.

Read more: Productivity CommissionASICFASEAFinancial Adviser Standards and Ethics Authority
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