Australian regulator fires warning over property advice for SMSFs (self-managed super fund) to borrow to invest in property; “We do not want to see SMSFs become the vehicle of choice for properties brokers.”

Regulator fires warning over property advice for SMSFs

April 19, 2013

Max Newnham

The Australian Securities and Investments Commission on Thursday released a report from a self-managed super fund taskforce it set up to look at risks in the sector. The report focused on the quality of advice given to people setting up SMSFs. Although the study showed most advice given was adequate or better, there were problems relating to funds borrowing to invest in property.ASIC does not have a direct role regulating SMSFs, because it is the Tax Office that regulates this fastest-growing area of superannuation, but it does regulate advice providers and other professionals associated with the SMSF sector. ASIC established the taskforce in September 2012 because of the ever-expanding growth in the number of SMSFs, an increase in geared investment strategies within superannuation and several prominent collapses of financial institutions and products.

The taskforce’s first major project was to look at the quality of advice provided to trustees of SMSFs where balances are $150,000 or less.

More than 100 files relating to setting up SMSFs were reviewed by the taskforce. In addition to the low value of balances as a criteria for selection, files with the following features were also selected:

• Older members that are close to retirement age.
• Members with low income.
• A single investment, more often than not property, with borrowing involved.

In the report, ASIC outlined the main reasons why people set up SMSFs. The top three were: members wanting to have greater control over their investments; the ability to choose specific stocks to invest in; and members making better investment decisions than externally managed funds.

However, another major reason given for setting up an SMSF was behind the taskforce looking at the quality of advice given in this area: SMSFs being set up as a result of the advice or influence of a third party.

The investor files chosen for review came after surveillance was conducted of 18 entities involved in the establishment of SMSFs.

These included financial planning and accounting entities selected on a combination of their size and prominence in the SMSF sector, their level of advertising and, in some cases, complaints received by ASIC.

Once the entities had been identified, ASIC gathered high-level information about the people seeking SMSF advice and this information was used to select the files for review.

Following review, the quality of advice was classed as good, adequate or poor. The study found that most investors were provided with at least adequate advice.

The main area of concern for ASIC, arising from the file reviews in which it regarded the advice as poor, related to SMSFs set up to buy property using borrowed funds. These SMSF trustees were considered to have received poor advice for the following reasons:

• The advice was not tailored to the investor’s situation and showed evidence that the goals of the investor were not properly considered.
• Suitable alternatives to using an SMSF were not considered.
• The investor’s long-term retirement goals were not given proper consideration.

ASIC commissioner Peter Kell, commenting on the major area of concern from the study, said: “We do not want to see SMSFs become the vehicle of choice for properties brokers.

”Where we see examples of unlicensed SMSF advice, or misleading marketing, we will take regulatory action.”