Building a fit-for-purpose mantra for advisers crucial across SMSF life stages

With the changing environment and its regulatory effect on licensed advisers in particular, Mr Crump said that what makes an SMSF fit for purpose is key to understanding how best they can provide their clients with advice and/or support that is appropriate to the needs of the client or their family.

“We’ve got all of these heavy documents, these heavy opinions that are being weighed in, and we as the advice providers are going to be held accountable to the standards that are set out in these announcements, advice information sheets, compliance guides and letters that are being put out,” he said at the SMSF National Conference.

“Licensed advisers have a lot of issues bearing down on them at the moment from ATO, ASIC, FASEA, and the whole environment within which we provide advice to our clients is evolving and it’s a consumer-led change in terms of the advice.”

Mr Crump said that practitioners need to be able to identify the dangers of inertia, its impacts on advice, along with the provision of ongoing support, and advice to SMSFs and their participants.

“Part of the role of the good adviser is to identify when the trustees are potential victims of inertia and then to identify what type of conversation they require to exert some force to ensure that the trustees are aware of the change in that state,” he said.

“As practitioners, we can provide numerous technical reasons for the establishment and maintenance of an SMSF, but we also have an obligation to the SMSF participants to ensure that the SMSF is only retained while it serves a purpose and there is no alternative arrangement that will provide a ‘better’ outcome for them.

“So, it’s having a today conversation and it’s having a tomorrow conversation with our trustee clients as well. The regulators are clearly on the record, if we have a client where we’re not having these conversations and they raise a complaint because something doesn’t fit, we need to prove that we had a conversation that we did consider that the superannuation fund was fit for purpose.

“Bear in mind, fit for purpose isn’t necessarily a today issue; it’s an ongoing issue and, more importantly, fit for purpose isn’t fully defined, so the way it works today will evolve into the future and whether an SMSF is fit for purpose will be assessed against tomorrow’s social criteria rather than today.”

Low and reducing overall fund balance

Mr Crump said this issue is particularly relevant for a person or a couple who have pension arrangements that are grandfathered, having commenced prior to 1 January 2015, noting that this was specifically called out in the ASIC Report 575 paragraph 297.

He noted the income assessed for these pensions will be related to the portion of the pension payments which exceed the annual deductible amount.

“With appropriate use of lump-sum payments (partial commutations), the pensions might produce nil assessable income for Centrelink purposes. However, as the balance of the pension accounts gets smaller, the impact of assessed income under the alternative deeming approach might be minimal or nil on any age pension entitlement,” he said.

“Without examination of alternatives, the unadvised or less firmly advised trustees and members might prefer to retain their existing arrangements, without undertaking any form of cost versus benefit analysis for retaining the SMSF and pension arrangements against the alternatives.

“The costs of maintaining an SMSF are likely to become more fixed with relatively small balances, while the alternative of a retail pension arrangement or even a simple joint personal investment portfolio is likely to involve proportionate costs at a lower level. As pension balances get smaller, the effect of one-off lump-sum drawings, such as for a car or home maintenance, can dramatically reduce the fund’s balance.”

Reduced member involvement and loss of capacity

When talking about reduced member involvement, Mr Crump noted this is not related to an involuntary action but a conscious or subconscious decision by the trustees to do as little as possible with the fund.

This involves not only outsourcing of the technical functions of administration, for example, but placing the investments in a fully managed platform or outsourced arrangement.

“In these circumstances, what role are the trustees performing and is the SMSF a de facto form of retail or public offer superannuation for them? If a trustee fully outsources the activities of the fund, they have effectively handed over control of the fund to third parties, but retain the risk of being a trustee under the auspices of the auditor and ATO as regulator,” Mr Crump said.

“If the SMSF provides a more cost-effective solution for the trustees and members relative to the alternatives, it is essential that the adviser has this conversation with the trustees and members and clearly documents this on their files.

“In the absence of that documented note, the conversation either did not happen or might as well not have happened if any future action or questions are raised. This reduction in involvement is likely to have arisen over time, as the SMSF should ideally have been commenced if the initial trustees were actively involved with all or some aspects of the fund at that time.”

Mr Crump said this “lack of interest” can occur on the death of the principal participant in the SMSF, that original person having a strong interest in the investment process in particular.

He said: “The spouse will often defer to the fund’s service providers without necessarily having an understanding of what the SMSF was or is currently about. It is not unusual for the service provider to then suggest that a second family member become a trustee or trustee director to continue the fund’s existence.

“That is the time for a more emotional personal consideration to be raised as to whether the SMSF remains an appropriate superannuation vehicle for the less engaged surviving spouse. 

“It’s time for a balanced discussion to be had with the surviving spouse and possibly supporting family members in these circumstances. In this context, ‘balanced’ requires a genuine review of the alternative arrangements and their relative merits and demerits.”

In terms of members having a loss of capacity, inevitably, those conversations include stories about people losing the capacity to make daily decisions on a consistent and reasonable basis. 

Compared with issues of reduced member involvement, in this case, it is involuntary on the part of the affected person but absolutely conscious on the part of the other parties, according to Mr Crump.

“With SMSFs that are closely advised, it is to be hoped that a robust conversation could be had early on in the cognitive decline process while the issue and its potential effect on the good conduct and financial ‘health’ of the SMSF are yet to develop too far,” he said.

“If these conversations (a bit like an informal ‘pre-nuptial’ agreement for loss of capacity) are not had in advance, it is a lot harder to make the better decision when they need to be addressed.

“This situation is at its worst when the investment of the SMSF is managed almost exclusively by the primary participant, who then loses capacity, and the partner or family is reluctant to intercede on the control of the investment process even though they acknowledge that poor decisions or non-decisions will occur.

“Powers of attorney might be available to be used but not invoked until very late in the process, out of respect by the partner or family for the person whose abilities have declined.”