Delivering SMSF advice

Brokers are dealing with more educated consumers, questions around SMSF products are on the rise, and setting up the fund has become much cheaper with costs dropping from around $8,000 to $4,000.

All these contribute to the new broking environment. And while some have had to change the way they do business to accommodate them, many are still yet to take the plunge. Of The Adviser’s Top 50 Elite Business Writers for 2013, there were still 42 per cent who didn’t offer SMSF products.

Taking the plunge

To understand compliant super funds, we  first need to look at the Financial Services Reform Act, which introduced and defined the concept of a financial product.

Chair of the Property Investment Professionals of Australia (PIPA) and CEO of Empower Wealth Ben Kingsley said regulators and the government had created a potentially confusing situation for brokers.

“According to the concept of a financial product, property isn’t considered one but a self-managed super fund is,” he says.

“Now when you’re looking at SMSFs, as they’re a financial product, the only people who can give advice on whether a self-managed setting is appropriate for someone is a licensed financial planner or an authorised representative of a licensed financial planner.”

While all non-planners were lumped in the same category at the time, accountants have since been given some leniency – but even they are limited in the advice they can give around self-managed funds.

This is driving many accountants to take the step up to becoming accredited financial planners, according to Rolf Howard, partner at Owen Hodge Lawyers and consultant at OHMortgage Solutions.

“Tax accountants have been concerned by this legislation for a period of time because many accountants have the skills and are exposed to opportunities that could put them in danger of providing advice,” he explains.

“Now, for an accountant to be able to give advice, they too would need to be accredited, although the process isn’t as onerous as the step up for a mortgage broker.”

While it is an easy step for a planner to offer credit advice, for brokers heading in the other direction it’s a massive hurdle due to the comparatively low entry level for brokers.

Keeping compliant

While some brokers will elect to move in the direction of a financial planner and offer a more rounded finance one-stop shop, many others have no intention of making such a drastic change to their business.

 The best advice is for brokers to stick with what they know, which is credit and loan products, advises Mr Kingsley.

“Brokers under NCCP [National Consumer Credit Protection] legislation are able to give advice around lending options regarding an SMSF, but they’re not allowed to give advice on the appropriateness and whether the SMSF is right for them,” he explains.

“What they can do is highlight from a credit representative point of view, the impacts and the structures around borrowing money for investment purposes.”

Mr Howard says certain situations that brokers find themselves in might require them to back out as soon as they can.

“There are just areas you need to avoid. For instance, if a broker is asked ‘Should I borrow in the super fund from a market provider, or should I borrow as myself and then lend into the fund,’ that would be dangerous ground for the broker,” he says.

While brokers aren’t accredited to give advice, many have worked in other areas of  finance or have a larger scope of experience, which means they may be able to give beneficial advice.  is is the pitfall that experienced brokers can fall into.

Mr Howard says that even if the broker knows the answer to a question, not only can they not answer it, they also cannot do anything that may influence the clients’ decisions.

“They can, however, stick to the facts.  They could say, ‘the interest rate that you will borrow at as an individual from the bank will be X, and the interest rate that the SMSF will borrow at will be Y’.

“If the facts overwhelmingly point to one option then that’s as far as you can go. It gets dangerous when a broker tries to ‘hint’ at what is the best course of action,” he warns.

Mr Kingsley agrees that if a broker sticks to the facts, there isn’t much to go wrong.

“Brokers can highlight that if you are borrowing through an SMSF, then you cannot release equity out of that property and re-borrow.  at’s stating a fact, it’s not advice,” he says.

Many brokers have forged strong relationships with their clients – some would consider them to be friendships – but the same rules apply.

“Brokers should make it clear to the trustee that the scope of work they can perform is setting up the loan. If you’re working with a team of specialists there should be strong communication between the financial planner or the accountant who originally set up the SMSF and the trustee who wants to potentially buy an investment property,” Mr Kingsley says.

Getting it right

The Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) are the two regulatory bodies keeping an eye on SMSFs.

The Australian Prudential Regulation Authority (AP ) and the Reserve Bank of Australia (RBA) joined ASIC in September in a warning to the public that they will be keeping close tabs on the SMSF space.

This is caused a stir amongst mainstream media, who began writing news articles around a seldom discussed topic.

This has caused a two-fold problem for brokers: more media coverage means more enquiries from ‘mum and dad’ investors looking for a ‘get rich quick’ scheme, while also highlighting the regulatory bodies’ crackdown.

But while Mr Howard believes ASIC won’t come knocking the moment a broker slips up, he warns if something goes wrong, the consumer will be looking for a scapegoat.

“In practice, no one will know the broker got it wrong until the super fund trustee has a bad outcome, and then they will look around for somebody to blame.

“There will need to be clear evidence the broker was negligent and if they are, the broker’s insurer would have to pay out – and ASIC may follow it with a penalty,” he warns.

Mr Kingsley says that it’s more than a case of ‘he said, she said’, and that like most legal proceedings, there needs to be evidence.

“If the consumer is seeking to obtain funds through losses due to bad advice, they would need to prove they were given financial advice through someone who is not regulated to give it,” he says.

“This means email and written correspondence will be brought to light, so brokers need to be aware of what they say across all communication channels with aclient.”