Beware the property hard sell. ASIC is watching

Better late than never. Property spruikers be warned – the consumer watchdog has had enough, and a bunch of businesses who thought they were operating outside of the reach of the law are about to get a rude wake-up call.

The Australian Securities and Investments Commission has decided to make “geared property investment” a focus. Dodgy developers watch out. Financial advisers and accountants with an eye too firmly focussed on fees will also be caught in this web.

I wasn’t Robinson Crusoe when I first warned about it nearly two years ago. (SMSFs: Don’t buy the property spiel). Newspaper ads flogging their property developments as being perfect for SMSF geared property investment always seem to go too far. And for too long.

ASIC commissioner Peter Kell has outlined that action is now being taken.

“In the past year, we have seen an increase in the number of advertisements pushing property purchases through SMSFs. We do not want to see SMSFs become the vehicle of choice for property spruikers. Where we see examples of unlicensed SMSF advice, we will be taking regulatory action,” Mr Kell told an industry seminar recently.

Mr Kell said ASIC had serious concern about, particularly, the property development industry targeting SMSFs.

Part of ASIC’s job is to regulate financial products. And while real estate is not considered a financial product, an SMSF is a financial product.

That is, ASIC doesn’t regulate direct property investment. If mums and dads decide to purchase property, it’s out of ASIC’s hands. The rules change when a SMSF is involved.

ASIC opens the SMSF property door

Some property developers have been of the mistaken opinion that because they were selling property, which is not a financial product, that they were out of the reach of ASIC’s tentacles.

“Let me be very clear – a person requires an AFS licence if they recommend an existing or proposed member of a SMSF purchase a property through their SMSF ... it does not matter for licensing purposes that the underlying investment, real property in this case, is not a financial product.”

Mr Kell was speaking ahead of the release of a new report from ASIC into the SMSF sector.

ASIC doesn’t regulate SMSFs, per se. That’s the domain of the ATO. But ASIC does regulate many of the sorts of products that SMSFs invest in. And it has the power to regulate financial product advertising.

ASIC’s Report 337: SMSFs: Improving the quality of advice given to investors looks more deeply at the role played by accountants and financial advisers in setting up SMSFs, or recommending they be set up, and the level of advice given to those individuals who are looking to do so.

Advisers under scrutiny

ASIC studied more than 100 SMSFs for the survey. But it was no random selection. They very specifically targeted a few sectors of the industry, including bigger players and those advice firms with plenty of money to spend on advertising.

Essentially, they seemed to be concerned with finding out whether consumers were being recommended into SMSFs that shouldn’t have been and whether geared property was too big a focus.

That many people get inappropriately recommended to set up self-managed super funds is not news.

Neither is the fact that there are too many professional advisers (both financial advisers and accountants) offering advice to the sector that shouldn’t be.

And both advisers and accountants were found wanting.

While most of the advice was graded at least adequate, more than a quarter (28%) was deemed poor.

Accountants came under fire for providing advice in relation to the setup of the SMSF vehicle that went outside of the exemption they are given to provide advice here.

For example, if an accountant (one that doesn’t have a financial advice licence) makes a recommendation for a member to roll over another APRA-regulated fund, such as an industry or retail fund, their exemption no longer applies and they need an AFS licence.

Service providers were not outlining some of the complexities, duties and obligations of running a fund, such as developing and maintaining an investment strategy. They weren’t detailing that it takes more work to run a SMSF than to be a member of an APRA fund and that trustees are responsible for the fund, no matter what they outsource to financial advisers or accountants.

Catching undersized investment fish

Another target of ASIC’s survey was where undersized fish had been caught. And ASIC thinks the fishermen should have thrown a few of these back.

ASIC specifically sought out advice to set up SMSFs where less than $150,000 would be the starting balance of the fund.

“Where a fund balance is so low that it makes the SMSF unviable, we expect the advice provider to refuse to set up the SMSF.”

Clearly, the average SMSF is okay. The average fund balance is approaching $1,000,000, with average member balances around the $500,000 mark. But too many accountants and advisers were recommending “low balance funds” that simply couldn’t be justified. This included one with a balance of less than $11,000.

ASIC also divulged that it had hired Rice Warner Actuaries to put some numbers around what should be the minimums for opening and SMSF. That report is due later this year.

However, in my opinion, that’s reasonably simple. If you are prepared to do all of the investment work yourself and just leave some simple accounting work for the accountant, then you probably need around $200,000 to make it worthwhile. If you are going to involve reasonably developed advice from financial advisers because you don’t believe you have the investment expertise to make those decisions yourself, it should probably have around the $500,000 mark.

That’s not cut and dried. There are some people who could properly justify a SMSF with less than that. And there will be people who should have more than $500,000 in a SMSF before they start one, because they are going to have to pay for a lot of services.

ASIC was also critical of several pieces of advice where people were recommended into SMSFs when they couldn’t manage their own credit card and where they had come in specifically and wanted a low-cost, no-fuss option for their super. Professionals should be warning them off.

Low-quality advice

When it came to property ... 35% of the files chosen by ASIC had a geared property in it. That’s deliberately high, as they were focusing on that area.

“At least one” provider had a predetermined bent towards SMSF with geared property. Note that only 18 advice businesses were investigated.

In many instances, it wasn’t stated clearly enough the high upfront and ongoing costs of running a property, the costs of running a SMSF, property’s illiquidity, that property prices can fall and the dangers of leverage.

ASIC did outline that it had further plans afoot for dealing with the quality of advice provided to the SMSF industry. However, it acknowledged that the financial advice industry was undergoing a strong overhaul at the moment, so some recommendations were being pushed back until after the start of the Future of Financial Advice (FoFA) reforms, which start to kick in properly on July 1.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The Australian Taxation Office (ATO) has made it compulsory from July 1, 2013 for SMSF trustees to use a new rollover benefits statement form for all rollovers. From this date, all contributions that are transferred in a rollover and received by a super fund have to be reported to ATO by that particular fund, as the new form has no current year contributions information. The form and its instructions are available now at ato.gov.au.
• An Australian Securities and Investments Commission (ASIC) report has found that almost a third of advice given to SMSFs is poor. Particular problem areas include: when the advice isn’t tailored to the particular needs of the investor; when suitable alternatives to SMSFs aren’t offered; and when there is inadequate consideration of the investor’s long-term retirement planning objectives. While 70% of the advice in the review of 100 investor files was adequate, only one was deemed good by the regulatory body. “At the very least, investors need to understand the time, resources, compliance obligations and risks associated with do-it-yourself superannuation, before moving their superannuation savings out of an APRA-regulated environment,” ASIC Commissioner Peter Kell said. ASIC will be issuing a consultation paper on the costs of SMSFs as a result of its findings.
• The Institute of Public Accountants (IPA) and the SMSF Professional Association (SPAA) have signed a collaborative agreement that will strengthen the connection between the SMSF and public accountancy sectors. The two bodies will work together in areas including accreditation, advocacy, education, research and policy development and organisational efficiencies. “[It] will create a strong voice for public accountants engaged in the provision of advice and services to Australia’s $474 billion plus SMSF sector,” IPA chief executive officer Andrew Conway said. The agreement has been made just before the Future of Financial Advice (FOFA) regime and the new accountants licensing regime comes into effect on 1 July 2013.