The SMSFs: Improving the quality of advice given to investors report, handed down yesterday, details the findings of a broad investigation launched in September 2012, which included a review of investor files that the regulator deemed likely to be "high risk" due to lack of assets in the fund (less than $150,000), among a number of other key factors including income, age and portfolio diversification.
Following its review of the sample, the regulator concluded that while "a majority of advice provided was adequate, there was also room for improvement in aspects of the advice-giving process", echoing the sentiments of ASIC commissioner Peter Kell, addressing a recent CPA Australia conference. The investigation also unearthed "concerning pockets of poor advice", the report stated.
Indeed, almost one third of the personal advice sample files reviewed (28.4 per cent) were found to be "poor", while 70.3 per cent were found to be reflective of "adequate advice" and only 1.3 per cent were considered "good advice".
The criteria relied upon when making this assessment included whether the advice complied with relevant legislation and provided adequate information about scope of advice, whether the advice was sufficiently tailored to the respective client and whether a consideration of the client's insurance and long-term retirement planning needs was evident.
"Much of this advice involved recommendations that investors set up an SMSF to gear into real property," the report stated. "Where this advice was inappropriate for the individual investors, we will be following up on these and taking regulatory action.
"Through our file reviews, we found that there was room for improvement in aspects of the SMSF advice-giving process.
"Given the risks associated with a DIY option, we think there are certain things advice providers and investors need to discuss and consider before setting up an SMSF."
The report lists a number of "issues to consider" that it recommends advisers should be discussing with prospective SMSF investors, including whether the investor understands the roles and responsibilities of being an SMSF trustee, whether they possess the investment knowledge and financial literacy skills required to run an SMSF, and whether they are familiar with the associated risks.
The report also calls on SMSF professionals to ensure clients are aware of alternatives to SMSFs and understand the respective advantages and disadvantages of APRA-regulated funds.
AMP SMSF head of policy and technical Peter Burgess said it was "encouraging" that most of the advice assessed was adequate.
However, the 28 per cent deemed poor or inappropriate highlighted that trustees need to ensure they choose an adviser with SMSF specific skills and training, he said.
"One of the main problem areas identified by ASIC is gearing and SMSF investors being pushed into inappropriate borrowing strategies using their SMSFs," he said.
Outside of advice, access to specialist and professional administration services is also important and can go a long way to mitigating some of the risks referred to in the report, he added.
Townsends Lawyers' principal Peter Townsend said documents can pose a problem. "Poor documents can kill your advice business," he said.
Advisers are also being drawn into getting funds established and property bought, which can be new areas for them on top of giving investment advice, he added.
"They get the research on investments right and now need to get the documents right [and] properly scrutinised - otherwise their [professional indemnity] cover will desert them," he said.