SMSF advice tips, beyond having a minimum super balance

Half a million dollars was once considered the minimum balance threshold that applied when deciding whether an SMSF is suitable for a client. According to ASIC’s previous guidance, an SMSF would only be suitable if the client’s super balance was $500,000 or above.

As interest in SMSFs has heightened among Australians wishing to have greater control over how their retirement savings are invested, and technology such as investment platforms and administration software has made it more efficient to run an SMSF, more and more advisers have wondered whether such a threshold should prevail.

In ASIC’s updated information sheet 274 - Tips for giving self-managed superannuation fund advice (INFO 274), the regulator has indicated that balance is one of several indicators of suitability.

“INFO 274 is a positive step for the SMSF community,” said Neil Sparks, National Manager - SMSF strategy, BT. “It removes the confusion about whether financial advisers can recommend the establishment of a new SMSF to clients with less than $500,000 in their super.”

Published in early December, INFO 274 consolidates and replaces Information Sheet 205 - Advice on self-managed superannuation funds: Disclosure of risks and INFO 206 - Disclosure of costs. Outlined below are some tips for SMSF advisers stemming from the release of INFO 274, within the context of the broader regulatory framework for SMSF advice.

1. Be guided by examples where an SMSF may be suitable, even if the client has a lower starting balance

There may be circumstances when an SMSF with a lower starting balance is consistent with your client’s best interests. For example, if:

  • the trustee is willing and able to undertake some of the administration and management of investments, this may make a low balance fund more cost-effective.
  • a large contribution is planned to be made into the SMSF within a short timeframe of the fund being set up.

Alternatively, there may be circumstances when an SMSF with a higher starting balance is not in a client’s best interests because it does not meet their objectives, financial situation or needs.

INFO 274 contains helpful case studies to illustrate that an SMSF balance is only one factor a financial adviser should consider when determining whether an SMSF is suitable for their client.

2. Advisers must inform potential trustees/members of the costs and responsibilities of running an SMSF

When completing a cost analysis between a new SMSF and an existing fund, it is important that advisers clearly set out the costs of setting up, operating and winding up an SMSF, identifying both unavoidable costs and optional costs at each stage.

Although an SMSF trustee may outsource their SMSF responsibilities to professional advisers, the trustee is solely responsible for compliance with the fund’s trust deed, as well as superannuation, corporations and taxation laws. “Advisers should ensure the trustees understand and accept that they retain ultimate responsibility for the SMSF’s compliance obligations,” Mr Sparks said.

Advisers should identify whether the client has the time, skills, commitment, and experience to meet their trustee responsibilities. It would be beneficial to consider ASIC’s red flag guidance in 19- 277MR where it refers to ‘ref flag’ indicators identified in Report 575 that suggest when an SMSF may not be appropriate. Factors to consider include whether there are any signs of the trustee having low financial literacy, cognitive impairment, accessibility constraints or whether they are subject to coercion or elder abuse.

3. Comparisons between SMSFs and Australian Prudential Regulation Authority (APRA) funds should be made, including any loss of benefits, risks or other significant consequences

Clients should understand and accept the risks of an SMSF compared to an APRA-regulated superannuation fund including the loss of potential benefits in moving to an SMSF. Importantly, an SMSF does not have the same protections as an APRA-regulated fund, and is not eligible for government compensation in the event of theft or fraud.

Furthermore, SMSF trustees and members do not have access to the Australian Financial Complaints Authority and may be required to resolve their own disputes. “Scenarios that advisers may wish to run through with clients are the impact on the trustee-member relationship following a potential marriage separation or divorce,” Mr Sparks said. “Related to this, if members leave, the fund’s illiquid assets may need to be sold.”

4. Advisers need to educate clients about the development and implementation of the fund’s investment strategy

Advisers should ensure clients understand the requirement and purpose of the SMSF’s investment strategy, which provides the basis for the SMSF’s investment decisions and how members intend to increase their retirement benefits. Among other things, advisers must be satisfied that their client understands the investment strategy must be reviewed regularly, and they must consider whether to hold insurance cover for members.

Diversification can be misunderstood by clients, particularly those who may have a fixed view on the benefits of holding certain assets; for example, property. “This is an opportunity for advisers to explain the risks, possible returns – or not – and liquidity of fund assets,” Mr Sparks said.

5. Clients should be stepped through the differences between trustee structures

Advisers should discuss the advantages and disadvantages of different structures; for example, whether a corporate or individual trustee structure is suitable. Factors to consider include time, cost, compliance obligations, administration and reporting requirements, trustee succession planning and SMSF asset ownership considerations.

It may seem counter-intuitive but advisers must discuss an SMSF exit strategy at the time they are recommending the establishment of an SMSF. “Trustees may need to wind up their SMSF for many reasons and it is best that they are aware of the method and potential costs involved if the fund or investments need to exit earlier than anticipated,” Mr Sparks said.

More Information 

Lisa Parrett
Media Relations, BT
M: 0432 933 796