Another damning report from ASIC

We've become used to them by now. Damning reports from the Banking Royal Commission, and from regulators, on the poor quality of financial advice being delivered to many Australians.

The latest is from the Australian Securities & Investments Commission, and unfortunately the news isn't great for self-managed superannuation fund trustees.

In a new report just released, ASIC has found that 90 per cent of the financial advice given to individuals setting up their own super fund did not comply with relevant laws. And, it seems, a lot of the shonky activity has revolved around property spruikers convincing people to set up a SMSF for the purposes of buying property.

ASIC recently reviewed 250 SMSF client files that were randomly selected based on Australian Taxation Office data, and assessed compliance with the Corporations Act's ‘best interests' duty and related obligations.

It found that in 91 per cent of the files reviewed, the adviser did not comply with the Corporations Act, with non-compliant advice ranging from record-keeping and process failures to failures likely to result in significant financial detriment.

• In 10 per cent of files reviewed, the client was likely to be significantly worse off in retirement due to the advice;
• In 19 per cent of cases, clients were at an increased risk of financial detriment due to a lack of diversification.

ASIC Deputy Chair Peter Kell has stated that the standard of advice on SMSFs must improve.

“A healthy and robust SMSF sector is an important part of our super system,” Kell says. “However, it is clear lots of people are setting up self-managed super funds without knowing whether this is the best option. The financial advice sector has significant work to do to lift their performance on this issue.”

Our recent column, The reinvention of financial advice, flagged some of the appalling problems which continue to plague the financial advice industry.

ASIC noted that it will now be taking follow-up regulatory action, in particular where consumers have suffered detriment from improper financial advice.

The regulator also conducted market research, including interviews with 28 consumers who had set up an SMSF and an online survey of 457 consumers who had set up an SMSF. It found that a lot of people do not understand fully the risks of SMSFs, or their legal obligations as trustees.

• 38 per cent of respondents found running an SMSF more time consuming than expected;
• 32 per cent found it to more expensive than expected;
• 33 per cent did not know the law required an SMSF to have an investment strategy; and
• 29 per cent mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.

“Decisions about super are some of the most important a person can make,” Kell says. “However, ASIC found there is a lack of basic knowledge of the legal obligations in setting up or running an SMSF. It is also concerning many people with an SMSF have not understood the importance of diversification, which puts their financial future at risk.”

ASIC also found some people had moved to SMSFs as a way to get into the property market, and were using it solely for this purpose without a wider investment strategy.

ASIC's findings are supported by the recent Productivity Commission super report, which found smaller SMSFs (with balances under $1 million) delivered on average returns below larger funds, and that the costs for low-balance SMSFs are higher than for funds regulated by the Australian Prudential Regulation Authority.

ASIC and the ATO will have an increased focus on property one-stop-shops, which will include ASIC taking enforcement action where it sees unscrupulous behaviour.

It's another positive step in cleaning up the advice industry and getting rid of the bad operators in the SMSFs space.