Spate of changes for SMSF advice in final PC report

While the inquiry was aimed at assessing the efficiency and effectiveness of the superannuation system overall, it also contained a number of recommendations aimed at the SMSF sector.

Backflip on $1 million minimum balance for SMSFs

Despite floating the idea of introducing a mandatory minimum balance for SMSFs in its draft report, the Productivity Commission decided against incorporating this as a recommendation in its final report.

The SMSF industry was largely opposed to the implementation of a minimum $1 million balance, with groups such as Class and BGL Corporate Solutions submitting data indicating that lower balance SMSFs still have the potential to generate substantial returns and that a mandatory minimum was mostly regarded as unnecessary.

Smarter SMSF chief executive Aaron Dunn said this is a positive outcome for the SMSF sector given the discussion around introducing a mandatory minimum of $1 million at one point.

“A lot of the responses to the draft report indicated that there shouldn’t be any mandated threshold. While thresholds are an important discussion point in a review, there are a variety of reasons why someone might set up an SMSF,” he said.

“They’ve made it clear in the advice context though that advisers should be very clear about why they might be recommending an SMSF where the client has a balance below $500,000.”

Verante Financial Planning director Liam Shorte said he would have no issues with justifying why he would need to recommend an SMSF for less than $500,000.

“The requirement would help foster a deeper conversation with new clients about long-term savings and contribution targets. A target or goal of $500,000 within a few years of commencement is much better than a blanket minimum balance requirement,” said Mr Shorte.

Red flags document for trustee clients

Another recommendation in the report is that when a client is advised to set up an SMSF, the adviser should be required to give them a document that clearly explains the key issues they need to consider in deciding whether an SMSF is right for them.

Mr Shorte said he fully supports this recommendation as it will help improve client education.

“To have a sustainable SMSF sector going forward we need to ensure that they are being used by people for their best interests and not for some property spruiker or person trying to build an SMSF business,” he said.

“I know in my case I only recommend an SMSF to about two to three out of every 10 prospects who enquire about them and provide alternative solutions for those not suited.”

Specialist training

The report also contained recommendations around the need for SMSF advisers to have a specialist training.

Both ASIC and the SMSF Association in their submissions argued that due to the unique aspects of SMSFs combined with the complexities of superannuation law, specialist SMSF education or accreditation should be a requirement to provide this kind of advice.

It also noted that FASEA has subsequently proposed that specialist SMSF training be considered a non-formal education component within its annual continuing professional development (CPD) requirements.

“Other options could involve incorporating an SMSF indicator within ASIC’s existing Financial Advisers Register or the ATO establishing an SMSF adviser register similar to its SMSF auditor register,” the report stated.

Mr Dunn said while this may be a good move given the unique nuances involved in providing SMSF advice, he also believes that the role of accountants and strategic advice for SMSFs should be revisited.

“There has been a lot of discussion and debate around the accountants’ exemption, the adviser construct and what role accountants may be able to play in that space as well,” he said.

“I think there is an opportunity in my view to re-explore strategic advice, as opposed to investment and product advice, and who can be involved in that part of the sector.”

Product design and distribution obligations

One of the other SMSF related recommendations made by the report was to extend the proposed product design and distribution obligations to SMSF establishment.

The design and distribution obligations were introduced into Parliament in September last year and once passed will require financial services companies to provide specific design requirements to ASIC that explain who the target audience for the financial product is.

Under the measures, financial service providers are required to specifically determine the segment of the consumer market that they’d be targeting with their service and ensure that the product is distributed in accordance with that determination.

Mr Short said he is unsure how this would apply SMSFs as the whole idea of an SMSF is that the trustees decide on the products and strategies they wish to use.

He also noted that many SMSF trustees do not use advisers so it is important to apply any rules to all new SMSF and their trustees not just those using an adviser.