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Investment strategy advice needs cautious approach
Accountants looking to provide effective investment strategy advice for SMSF trustees must tread carefully to ensure they are not contravening Corporations Regulations, warns an administrator.
In a blog, Heffron head of SMSF technical and education services Lyn Formica said trustees often turn to their fund’s accountant to comply with requirements to “formulate, regularly review and give effect to” an investment strategy.
“Accountants are generally prohibited from providing advice in relation to financial products unless they hold an Australian financial services licence (AFSL),” Ms Formica said.
“However, accountants can provide some services to SMSFs without being covered by an AFSL, either because the services are not financial product advice or they are covered by an exemption.”
As examples, provided accountants give appropriate warnings, she said an unlicensed accountant can provide a fund trustee:
- Factual information about investment strategies (for example, what trustees are required to consider, how to document one which will stand up to ATO/auditor scrutiny).
- Advice on the operation or structure of their SMSF, provided the advice is for the sole purpose of, and only to the extent reasonably necessary for, ensuring compliance with the superannuation legislation [Corporations Reg 7.1.29(5)(c)]. Importantly, this exemption does not apply to advice given in relation to SIS s.52B(2)(f) or Regulation 4.09 of SIS (i.e. the provisions requiring an investment strategy).
- Broad asset allocation advice within their SMSF (for example, what proportion of funds should be allocated across one or more investment categories) [Corporations Reg 7.1.33A].
- Advice on the tax implications of acquiring, holding or disposing of an interest in an SMSF or a financial product held through the SMSF [Corporations Reg 7.1.29(4)].
What accountants should and shouldn’t do
Ms Formica laid out some key points for accountants wanting to help SMSF trustees with their investment strategy.
DO
- Explain to trustees the things they need to consider in formulating their investment strategy.
- Help trustees articulate the investment decisions they have made using the correct terminology and language, and with sufficient detail to meet the ATO’s requirements.
- Compare the fund’s documented investment strategy with the fund’s actual investments at appropriate intervals, and identify where the trustees might be investing outside their documented strategy.
- Help trustees document the regular review of their strategy which may include helping the trustee to articulate a change in their strategy or confirm that no changes were required.
DON’T
- Provide a recommendation for the trustee to make particular investments through their SMSF.
- Advise the trustees on what the fund’s investment strategy should be (for example, what their target investment return should be and how to achieve this).
- Provide a recommendation for the trustee to modify their investment strategy or investments.
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Adrian Flores
Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.
You can email Adrian at adrian.flores@momentummedia.com.au.
How many SMSF's have failed due to a "poor" or lack of an investment strategy? - I say none.0- You'd be utterly wrong. The document simply reflects (as intended) the thought process the trustees put into any planned or unplanned investments. A multitude of SMSF's over the years have failed due to a poorly executed or thought out 'investments'.
Failure can either be a loss of capital or just as importantly, failing to do fulfil the goals it was meant to fulfil by an inadequate investment approach.
For you to state 'I say none', I imagine you're of the old school who thinks in only narrow terms and has 'been doing this for decades' and believes they don't need any further schooling in the matter, or else someone exceptionally green and yet to gain the experience that hopefully will broaden your thinking processes and knowledge.0
- An accounting firm recently included with SMSF returns a clearly templated LRBA investment strategy (not requested) that was so riddled with errors if the trustees had signed it they would have been making false statements. Some jobs are best left to a licensed adviser and/or specialist document providers or you just have to let the trustees face the ATO music imo.0
- This is a bit like throwing an arrow and then painting a target around it and calling it a bullseye shot.
It may be the way it "has always worked" but it is bad practice - what you have produced are not Investment Strategies. Strategies look forward and are used as a planning tool - it is not cobbled together in hindsight.
Any accountant who continues to prepare these documents and treating it as a secretarial function should take a long hard look at themselves.0- Well said, especially given the amount of time that these requirements and broader guidelines and opportunities to update one's thinking has been around.0
- I hate the term unlicensed accountant.
We are fully qualified, insured and competent accountants. However, we are not financial advisors. So it makes us unlicensed financial advisors.
So please get your terminology right.0- Ah no. You're not a financial adviser, licensed or unlicensed. May as well also claim that you're an unlicensed lawyer while you are at it as I am sure that part of your tasks is to help people understand corporate law at times.
Mind you, by your logic, if you are an 'unlicensed financial planner', by your own admission you're acting illegally - imagine you'd love the headline "Accountant acts as illegal unlicensed financial planner and provides advice'.
Talk about getting terminology wrong...0
- Playing the "advice" card is getting old. Everyone in this industry knows that SMSF clients are incapable of drafting an investment strategy or just plain wont. Even if you try to package it up with instructions on how to write one, they wont do it.
Drafting an investment strategy, like any other compliance document is not "advice", it is a secretarial function. If the trustees decide to sign it, it's theirs.
In practice, it works like this:
1. they set up a SMSF
2. maybe if they used a good SMSF lawyer, it had a default strategy resolution from day 1
3. They invest the money and at the end of the first financial year, you can see where it was invested.
4. You then draft a strategy so that the actual percentage allocations are nicely within strategic ranges.
5. Hey presto! They have an investment strategy that demonstrates it is being followed.
Any administrator or accountant who says they don't or has never done it that way, is a liar!
0- Just Sounds like you are justifying the practice of blaming the client for the accountant setting up the smsf (in most cases than not it is not in their best interest) and then drawing up a file note after the event to justify the lack of educated decision. Bet you charge well for this too.0
- Hey presto, this is what you get from a "trusted adviser" some one who is more than ready to circumvent the law.... No wonder most accountants dont want to be licensed to provide financial product advice....
And before you start up again, Superannuation itself is a tax structure. Retail, Industry, Corporate and SMSFs are all examples of financial products that can be used for someones superannuation savings.0
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