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Speaking in a recent BT webinar, BT head of public policy and technical services Neil Sparks explained that when advisers are undertaking an investigation and assessing whether an SMSF is appropriate there is often a lot of analysis around costs, features and benefits.
However, Mr Sparks stressed the importance of advisers also assessing the client’s financial literacy and their ability to understand complex structures.
“Those sorts of relevant circumstances do fall under the safe harbour steps. It’s a real non-financial assessment about the client’s sophistication, capability, willingness and even honesty to a certain extent,” said Mr Sparks.
In order to assess this, Kit Legal founder and head of legal Catherine Evans said advisers need to ask questions about the client’s background, what they do, and what they’re interested in.
“We often see nothing on file about these sorts of issues. The statement of advice will obviously list all the risks and all the things that the client needs to be aware of but there is no assessment by the adviser,” she said.
“[For example], are they are really a busy professional with no time but would be willing to pay someone to look after things for them? What’s their appetite for these sorts of things?”
Another major issue to consider when assessing whether an SMSF is appropriate for particular clients is vulnerability.
“An emerging issue is where one client out of a couple might be able to do it but the other can’t,” she said.
“Thinking about what the obligation is in those types of situations where there is that [best interests] duty for both clients is tricky.”
Mr Sparks said this can be an ethical conundrum for advisers particularly if by keeping one client in an APRA-regulated fund the SMSF for the client with the adequate interest and financial literacy no longer stands up from a balance perspective.
While Mr Sparks said it would depend on the circumstances, in these sorts of situations it would generally be best not to proceed with setting up the SMSF.
Advisers, he continued, would certainly want to keep the member lacking the skills for the decision making and responsibilities required for an SMSF in the APRA-regulated fund.
Some of the red flags that ASIC had said advisers should look for before recommending an SMSF is low level financial literacy, low balances and limited ability to make future contributions to super.
“Another red flag is if the client says that they want a simple solution. If they client has said that and they end up with an SMSF, then ASIC would be doing backflips when they saw that file.”
Issues such as a limited amount of time to devote to managing financial affairs or little experience with making investment decisions wouldn’t rule out an SMSF for a client, said Mr Sparks, but would be in the amber category or “proceeding with caution”.
“The adviser could probably deal with those issues by having the client outsource their administration and the client can also use the support of the adviser with investment decisions,” he said.
