On Thursday (8 December) ASIC released Information Sheet 274 (INFO 274), which provides information to help advisers understand their obligations when giving SMSF advice and using professional judgement to assess whether an SMSF is suitable for a client.
INFO 274 consolidates and replaces two previous information sheets including Information Sheet 205 (INFO 205) and Information Sheet 206 (INFO 206).
Commenting on the revised guidance, the SMSF Association noted that ASIC has opted not to nominate a minimum threshold.
“It does point out, however, that fund expenses are proportionally higher, and net returns lower, for lower balance funds,” the SMSF Association said.
SMSF Association deputy chief executive and director of policy and education Peter Burgess said it was a significant breakthrough for our sector to have that $500,000 threshold removed.
“Earlier this year, and in light of fresh evidence in a University of Adelaide research report on the performance of SMSFs, the Association wrote to ASIC requesting that it review its guidance for Australian Financial Services Licensees and their representatives who provide advice to retail clients about SMSFs,” said Mr Burgess.
Mr Burgess noted that references in INFO 206 to SMSFs with balances below $500,000 as having lower investment returns and will often be uncompetitive compared with APRA-regulated funds was at odds with the findings of the University of Adelaide research conducted on a sizeable proportion of the SMSF sector.
“It’s worth repeating that the University of Adelaide research found no material differences in performance patterns for SMSFs between $200,000 and $500,000, so the notion that smaller SMSFs in this range deliver materially lower investment, on average, than larger SMSFs in this range is not supported by the research. The research shows that a more appropriate threshold is $200,000,” he stated.
“So, it’s extremely pleasing that the regulator has taken heed of this research and our representations on this issue and has removed references to the $500,000 threshold.”
Mr Burgess said that although the ASIC guidance no longer refers to a threshold balance, it’s important for advice providers to remember that the research found SMSFs with balances with less than $200,000 are likely to achieve considerably lower net investment returns compared with funds with balances of $200,000 or more.
“Therefore, unless a large contribution will be made into the SMSF within a short timeframe (such as within a few months) after the fund is set up, it’s unlikely starting an SMSF with a balance of less than $200,000 is consistent with your client’s best interests,” he said.
ASIC’s latest guidance, he said, also highlights the risks with SMSFs and the importance of seeking professional advice.
“The Association is very pleased to see such a prominent reference to the need for financial advisers to have specialist knowledge about SMSFs before providing advice and the important need for advisers to maintain this knowledge and expertise over time,” said Mr Burgess.
