Relevant conduct and disclosure obligations include:
- the best interests duty and related obligations, which require advice providers, when providing personal advice to retail clients, to:
- act in the best interests of the client (section 961B)
- provide appropriate personal advice (section 961G)
- warn the client if advice is based on incomplete or inaccurate information (section 961H)
- prioritise the interests of the client (section 961J)
- the requirement to give retail clients an SOA when personal advice is provided (section 946A) – if the SOA is not the means by which personal advice is provided, the SOA must be given as soon as practicable after the advice has been provided but, in any event, before the client acts on the advice (section 946C)
- the additional information that must be included in an SOA when the advice recommends replacing one product with another (switching advice) (section 947D).
When giving advice to retail clients on establishing and/or switching to an SMSF, clients should be advised on the risks and costs associated with setting up and/or switching to an SMSF.
Some examples of costs that should be considered by an adviser and disclosed to retail clients are set out below. For examples of the risks that should be considered and disclosed, see INFO 205.
Advice on the cost-effectiveness of an SMSF
An important consideration is whether the likely balance of the SMSF makes it cost-effective for the client. If it is not cost-effective, it is very unlikely to be in the client’s best interests.
Starting balances below $200,000
In many cases, a recommendation for a retail client to set up an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests. The costs of establishing and operating an SMSF with a balance of $200,000 or below are unlikely to be competitive, compared to a fund regulated by the Australian Prudential Regulation Authority (APRA). Therefore, the client may not be in a better position when compared to using an APRA-regulated superannuation fund.
Note: We arrived at the figure of $200,000 as a result of independent research from Rice Warner, our consultation on that research and our assessment on what may be an appropriate minimum starting balance for an SMSF.
However, there are circumstances where an SMSF with a starting balance of below $200,000 may be in the client’s best interests – for example:
- where the trustee is willing to undertake much of the administration of the SMSF and the management of the investments to make it more cost-effective, or
- where a large asset (e.g. business property or an inheritance) or funds in another superannuation account will be transferred into the fund within a short timeframe (e.g. within a few months) after the SMSF is set up.
There will also be circumstances when an SMSF with a starting balance of $200,000 or above is not in the client’s best interests because it does not meet their objectives, financial situation or needs. For example, the client may not have the skills, time or experience to adequately carry out the duties of a trustee.
Where advice is provided to establish an SMSF with a low balance, we would expect the advice to clearly set out:
- the circumstances that influence the adviser to believe the client is likely to end up in a better position, despite the SMSF having a low starting balance
- consideration of whether the SMSF’s intended investment strategy is appropriate and viable
- the reasons why setting up and operating an SMSF is in the best interests of the client.
Compliance tip: We are likely to look more closely at advice to establish an SMSF, to consider whether the advice complies with the best interests duty and related obligations, if the starting balance of the SMSF is below $200,000