Retirement income covenant creates impractical outcomes on SMSF advice

The submission noted that the issues emerge for SMSFs, given the nature of the structure and relationship between the trustee and its members. The ability to formulate and give effect to a broad strategy that is not intended to be member-specific or advice to members becomes problematic.

This leads to increased considerations that must be given to SMSF trustees when it comes to advice. Those that are advised will be receiving strategic advice, and actively considering the requirements of their fund’s investment strategy as well as the core components the retirement income covenant seeks to address.

Uniquely, SMSF members and trustees are one and the same, as they do not have the same arm’s length relationship to that of an APRA fund trustee and the cohort of members that need to be considered in their retirement income strategies.

The position paper notes that the formulation of a retirement income strategy will not constitute financial advice to fund members. This will be essential for APRA fund trustees. 

However, the SMSF Association noted that the practicalities and how it will likely work in practice substantially differs for SMSF trustees.

“The SMSF population comprises of 23.5 per cent single-member funds and 69.6 per cent two-member funds,” the SMSF Association said in its submission.

“When we consider the nature of the SMSF structure and the close relationship between the trustees and members, it will be difficult for the trustee to consider the ‘broad actions they will take to assist their members to balance key retirement objectives’ as suggested in the position paper.

“SMSF trustees are in a unique position to the APRA trustees, as they hold full knowledge of the member’s personal financial affairs. Of concern here is that the nature of that close relationship will cause SMSF trustees to be held to a higher standard. Would trustees be required to use their knowledge of the member’s personal affairs to structure an appropriate strategy?

“To what extent or degree would the trustees be required to seek financial advice? Further, what additional cost would be incurred, or compliance burden imposed? 

“The alternative outcome is a general strategy that is meaningless and becomes a tick-a-box exercise. How will unadvised trustees be expected to comply with the covenant?”

Most trustees are not professional advisers or sufficiently qualified, without support, to prepare a compliant retirement income strategy, according to the SMSFA. Education resources, detailed regulator guidance and access to toolkits and calculators will be essential.

The submission noted that if the preparation of a retirement income strategy will require the trustees to seek financial advice, problems will arise due to the limitations on obtaining advice and this includes limiting access to advice and cost.

“The financial advice sector is undergoing significant reform, and as a result, we have seen a significant reduction in adviser numbers, changes in business models and ideal client definitions, limited ability to obtain scoped or limited advice and increasing costs of providing and obtaining advice,” the SMSFA said.

“This is seeing increasing numbers of individuals unable to access essential advice. The costs of providing advice continue to increase due to the increased costs to advice businesses.

“Significant increases in adviser levies, professional indemnity insurance premiums, and the increasing regulatory and compliance environment has significantly increased the work involved in servicing clients in a compliant manner.

“These issues have also seen a significant reduction in appetite or ability to provide limited or scoped advice to clients. While we agree that SMSF trustees should be actively encouraged to seek financial advice, there will also be many, for various reasons, that choose not to do so. As noted above, there are also significant barriers for those seeking advice in accessing and obtaining that advice when it is desired.”

Additional effects on accountants and SMSF administrators 

As the Corporations Regulations 2001 sets out limited exemptions to the provision of financial advice, these exemptions, along with the definitions of factual information versus general advice, continue to cause confusion, according to the association.

“Often, there is the expectation by trustees that the accountant or administrator for the SMSF can assist with the preparation of a fund’s investment strategy and other matters. It is anticipated that trustees will similarly seek advice and assistance on the retirement income strategy with similar expectation from these professionals,” the SMSFA noted.

“Although intended to be general in nature, the retirement income strategy is required to consider retirement income products to suit the needs of members in the retirement phase. 

“This will require contemplation of various pension and income stream products. It is noted in the position paper that the range of available products will continue to grow and expand.”

An unlicensed accountant under Corporations Regulation 7.1.33A can only provide broad asset allocation advice.

However, importantly, the association said this does not extend to the class of product advice. Class of product advice extends beyond the broad asset allocation advice and can only be provided by an adviser authorised under an Australian Financial Services Licensee (AFSL).

“‘Class of product advice’ means financial product advice about a class of products that does not include a recommendation about a specific product. For example, an accountant covered by a limited AFS licence could provide class of product advice about mining shares or shares in the ASX 100, as long as that advice did not include a recommendation about a particular mining share or a particular share in the ASX 100,” the SMSFA explained.

“Similar issues arise where we look to the requirement for trustees in addressing the objectives. The example provided in Box 4: Examples of identifying trade-offs between objectives sees the trustee consider a strategic investment methodology to be used to manage risk, the development or offering of retirement income products and how it will benefit members in meeting their retirement income requirements.

“Likewise, when we consider the need for trustees to ‘regularly and comprehensively review the appropriateness, effectiveness and adequacy of their retirement income strategy including the assumptions underpinning it.’

“The advice required by trustees in meeting these obligations will likely extend beyond the provision of factual information and would be classed as financial advice.”

As a result, the association believes consideration needs to be given to the broadening of the advice landscape to assist trustees meet their obligations. A practical, consumer-centric approach is needed.

“A review of the advice that can be provided by accountants is urgently needed. Particularly with regard to the winding up of an SMSF where it is apparent that the SMSF is not appropriate for the individual in their circumstances or no longer fit for purpose,” the association explained.

“Further, there needs to be clear and specific guidance on how accountants or SMSF administrators can assist their clients to comply with the retirement income strategy covenant, and importantly, not be deemed to have provided financial advice.”