The findings of the review identified that the financial advisers of advice licensees whose policies and procedures covered the SMSF suitability factors and additional SMSF considerations from ASIC’s Information Sheet 274, tended to demonstrate higher levels of advice compliance and their advice raised fewer concerns about client detriment.

“Advice licensees are responsible for the advice provided by their financial advisers. They must take reasonable steps to ensure their financial advisers comply with financial services laws,” it stated

“It is crucial that advice licensees develop and implement rigorous policies and procedures to ensure that their financial advisers comply with their obligations.”

ASIC found that pre-vetting, which involves reviewing the advice and related client file records before the advice was provided to the client, was often ineffective and that of the 47 client files reviewed for the report that contained records of pre-vetting the SMSF establishment advice, in 33 instances there were concerns that the financial adviser failed to comply with the best interests duty and related obligations.

This included 13 files that also led to significant concerns about client detriment in relation to the advice.

Furthermore, it found that the advice licensees who participated in the review had policies and procedures in place to manage conflicts of interest, however, ASIC was concerned about their effectiveness.

“We had significant concerns about client detriment in 27 client files, and in 24 of those files we also identified that the financial adviser failed to prioritise the interests of the client above their own interests or that of their licensee or an associate,” it stated

“However, these alone will not ensure compliance and SMSF suitability. Advice licensees should effectively test compliance to ensure that their financial advisers are meeting their obligations and only recommending an SMSF when one is suitable for the client.”

The report continued that there is no single risk indicator for always detecting financial adviser misconduct or identifying that an SMSF is not suitable for a client and it encouraged advice licensees to use a combination of risk indicators to help identify higher risk financial advisers or corporate authority

“To be effective, pre-vetting processes should involve a detailed assessment of the financial adviser’s compliance with the best interests duty and related obligations, including a comprehensive check of the suitability of an SMSF for the client,” it continued.

“Taking a risk-based approach to selecting instances of advice and client files for pre-vetting will increase the likelihood of identifying potentially noncompliant advice and adviser conduct.”

Moreover, it stated that advice licensees must have in place adequate arrangements to manage conflicts of interest that may arise when providing financial product advice.

“Internal policies and procedures for preventing and addressing potential conflicts of interest must be robust and effective. Advice licensees should ensure that they have policies and procedures for managing conflicts of interest,” it stated.

“They should also have monitoring arrangements in place to ensure that any non-compliance is identified and appropriately acted on. Advice licensees must take reasonable steps to ensure that when recommending an SMSF, their financial advisers prioritise the interests of the client over their own interests and the interests of their advice licensee and associates.”

Additionally, Statements of Advice must include information about conflicts of interest that might reasonably be expected to influence, or have been capable of influencing, the financial adviser in providing the advice.

“Advice licensees should also be alert to business models that lead to a one-size-fits-all outcome. That is, where the advice process does not result in advice that reflects the client’s relevant circumstances and often leads to a predetermined recommendation.”

The review found that from the 100 client files reviewed, for 38 files the financial adviser demonstrated compliance with the best interests duty and related obligations. For 62 files, the financial adviser did not demonstrate compliance with the best interests duty and related obligations.

“We have significant concerns about client detriment in relation to the SMSF establishment advice in 27 of these files. These client files related to a small subset of financial advisers,” it continued.

“The key issues identified included not basing all judgements on clients’ relevant circumstances, including inappropriately using the notion of control to justify recommending SMSFs without exploring what control meant to the clients, financial advisers acting as order-takers and not conducting a reasonable investigation and assessment of financial products, and not giving priority to the interests of clients where there were conflicts of interest, including in relation to advice to establish an SMSF to acquire off-the-plan properties through LRBAs.”