28/10/2015

The Financial Ombudsman Service ("FOS") has highlighted the four things that lead to most claims to FOS from people who believe they weren't properly advised about setting up a SMSF.

FOS has commented on mistakes advisers make in giving advice to clients in relation to self managed superannuation funds, that give rise to complaints to FOS.  They identified four key areas: low opening balance, insurance, limited recourse borrowing arrangement, and trustee obligations.  

Low opening balance

This is the thorn in every SMSF adviser’s side: the question of what is the appropriate amount to start an SMSF.

There is a presumption that SMSFs with a balance below $200,000 are not cost-effective for clients, which means that advisers recommending an SMSF with a low balance must demonstrate good reasons why it is still in the best interest of the client, in addition to meeting all their conduct and disclosure obligations.

This does not mean that an SMSF is automatically appropriate to anyone with a superannuation balance of over $200,000 as the opening balance is only one of the issues to be considered when deciding whether starting an SMSF is the right thing to do.  

Insurance

Another key aspect that sometimes is not communicated to clients clearly is what happens to the insurance cover they hold in a retail fund when switching to an SMSF.  

It’s simple. If they cease to be a member of the retail fund, their insurance cover ceases, so it is important not to jump the gun and close down a client’s existing fund too early. Advisers have to research what other options may be available to the clients, as members of an SMSF, so they have access to appropriate and affordable life and total and permanent disability insurance cover.

LRBA

FOS’s concerns about advisers’ advice in relation to limited recourse borrowing arrangements ties in with the requirement for SMSF trustees to develop an investment strategy which will allow the SMSF to meet the members’ retirement needs.  Advisers and trustees should work together to come up with an appropriate strategy and ensure it remains current throughout the life of the SMSF.

If the time comes for a recommendation to enter into a limited recourse borrowing arrangement, advisers must explain to their clients not only how the arrangement is appropriate for the SMSF but also the risks associated with this type of arrangement.

Trustee obligations
 
SMSFs are not for everybody and the regulators are concerned with people starting SMSFs just because they are popular, without fully realising they come with obligations on them as trustees.  Although SMSF trustees remain ultimately responsible for the management of the SMSF, they can fulfil their obligations by getting good quality advice and assistance from their accountant, financial planner and lawyer.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.