Advisers cautioned on best interests duty following SMSF costs data
Recent research indicating that SMSFs can be more cost-efficient than public offer funds for balances above a certain threshold does not justify SMSFs becoming the starting point for advice from a best interests duty perspective, a technical expert has warned.
The SMSF Association and Rice Warner recently released research analysing the operating costs of SMSFs and how they compare with APRA-regulated public offer funds.
The research indicated that the threshold at which SMSFs become competitive in terms of costs is lower than previously reported figures, including the $500,000 threshold used by ASIC in Information Sheet 206.
The research report showed that for balances of $500,000 and above, SMSFs are generally the cheapest alternative, particularly where the SMSF only has accumulation accounts.
The research has prompted questions from industry around whether SMSFs should be considered first for clients with balances above this threshold, given that they are generally more cost-efficient.
BT Financial Group national manager, SMSF strategy, Neil Sparks said that while the updated research provides a very useful benchmarking tool for the comparison between SMSFs and public offer funds, from an adviser perspective, an SMSF can’t be the starting point simply because its the cheapest option based on the research.
“We have to go back to the best interests duty. With the best interests duty, one of the first safe harbour steps is to firstly consider if making a product recommendation is necessary,” explained Mr Sparks.
“So, we have a starting position of ‘what product are you in today and let’s do the research on that’, which is why the initial fact find is so important. If the client is talking about direct property and direct investments in shares, for example, or other structured type products that aren’t available in a retail or industry fund, then of course that may lead to an SMSF outcome.”
Mr Sparks said the fact find is therefore absolutely critical.
“We’ve first got to start with the best interests duty in terms of what they’re in now and then determine whether to recommend a new product going forward. If the answer is that it makes sense to make a financial product recommendation such as an SMSF, then we have to do more research and more digging, assess all the available information, ask more questions if it’s necessary and then assess all of that to determine if the alternative product will deliver a better outcome than the existing product,” he said.
“So, unfortunately you have to start with where they are now, and if the answer is that’s going to solve the client’s needs, then we shouldn’t be recommending any change.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.