What is the interplay between the Code of Ethics and advice given to clients in the establishment and operation of SMSFs?
At $3.9 trillion[1], Australia’s superannuation sector is one of the world’s largest. Representing approximately 25 percent of this are SMSFs, which are subject to many rules and regulations. This article, proudly sponsored by GSFM, examines the growing SMSF sector and the ethical considerations relevant to advisers recommending SMSFs to their clients.
This year marks the 25th anniversary of self-managed super funds (SMSFs) in Australia. Over that time, SMSFs have broadened their appeal. In the early days, SMSFs were used by high net wealth investors, business owners and the self-employed; today they are just as likely to be established by non-business owning younger generations.
To illustrate, a 2019 report[2] found that the average age of members establishing SMSFs was 48.9 years. By 2023, Generation X (ages 45-59) represented 53 percent of new fund establishments, with Millennials (aged 28-43) following at 24 percent. Another recent report[3] also noted the propensity for younger Australians to take up SMSFs, with 48 percent of those surveyed aged 44 years or younger.
It’s not just the younger generations; more broadly, Australians’ interest in managing their own super continues to grow (figure one), despite the ongoing challenges of inflation, rates, market volatility and geopolitical uncertainty.
While the appeal to a broader cross section of investing Australians opens up a myriad of opportunities for advisers, it is important to remember that SMSFs are not appropriate for all investors and recommending an SMSF and advising its trustees requires that you meet regulatory obligations, including the Code of Ethics (Code).
Ethics and SMSFs
A self-managed superannuation fund (SMSF) is a privately run superannuation fund established for the sole purpose of providing retirement benefits to its members. An SMSF can have between one and six members, and – as any adviser who has worked with SMSFs knows all too well – are subject to numerous rules and regulations, subject to regular change.
ASIC Information Sheet 274 (INFO 274)[4] provides guidance to Australian financial services (AFS) licensees and their representatives who provide personal advice to retail clients about SMSFs. INFO 274 provides tips to help advisers comply with their legal obligations when giving advice about SMSFs, including:
- Understanding obligations when giving SMSF advice
- Using professional judgement to assess whether an SMSF is appropriate for the client
- Consideration of the risks associated with an SMSF
- Consideration of the costs associated with running an SMSF
- Factors to consider when advising a client to withdraw their superannuation from a fund regulated by the Australian Prudential Regulation Authority (APRA) to set up an SMSF.
For each of the subject matter areas included in INFO 274, this article will review the recommendations through the lens of the Code and the 12 standards that comprise it (figure two).
ASIC has a specific role in regulating SMSFs. The regulator considers contraventions of the Corporations Act, the SIS Act and the ASIC Act, and is responsible for regulating the following harms:
- Dishonest conduct and fraud (section 1041G of the Corporations Act)
- Misleading and deceptive conduct (sections 769C, 1041E, 1041F and 1041H of the Corporations Act; sections 12DA–12DC, 12DF–12DG and 12BB of the ASIC Act)
- Unlicensed advice (section 911A of the Corporations Act)
- Contraventions of the relevant conduct and disclosure obligations, including the best interests duty and related obligations (sections 961B, 961G–961H and 961J of the Corporations Act)
- Contraventions of the Code of Ethics (section 921E of the Corporations Act), and
- Contraventions relating to SMSF auditors (sections 128D–128H and 130F of the SIS Act).
Understand obligations when giving SMSF advice
Any adviser providing SMSF advice to their clients must comply with numerous laws, including:
- The conduct and disclosure obligations in Parts 7.7 and 7.7A of the Corporations Act 2001 (Corporations Act)
- The Financial Planners and Advisers Code of Ethics
- The Superannuation Industry (Supervision) Act 1993 (SIS Act).
Importantly, when providing personal advice to clients – including advice about establishing and managing an SMSF – advice providers must meet the best interests duty and related obligations:
- Act in the best interests of the client (section 961B)
- Provide appropriate personal advice (section 961G)
- Warn the client if advice is based on incomplete or inaccurate information (section 961H)
- Prioritise the interests of the client (section 961J).
The first standard of the Code requires advisers to comply with all relevant laws including the Code. While acting in accordance with all laws applies to all areas of financial advice, there are additional regulations specific to SMSFs that advisers must comply with.
ASIC also has requirements of AFS licensees. The regulator expects licensees to consider how their compliance processes and systems are relevant to providing personal advice about SMSFs, including in complying with:
- General obligations under section 912A of the Corporations Act
- Other obligations under section 961K or 961L of the Corporations Act.
ASIC also expects AFS licensees to ensure compliance processes and systems detect and address:
- Potential dishonest conduct and fraud or misleading and deceptive conduct
- The risk of providing unlicensed advice, including whether authorised representatives act outside the scope of the AFS licence authorisations or conditions.
Use professional judgement to assess suitability of SMSF
When determining whether an SMSF is appropriate or not for a client, you need to consider the client’s existing super fund/s and whether that or other retail or industry super funds may be better placed to meet their long term retirement funding goals.
You need to consider your client’s relevant circumstances and be sure that your client understands the implications of your SMSF advice recommendations. Establishing an SMSF may have serious consequences for your client, their retirement savings as well as their insurance cover. When providing clients with SMSF advice you should consider a range of factors, including the following:
What types of professional advice are appropriate?
Clients considering the suitability of an SMSF may benefit from advice from various professionals. When referring clients to SMSF specialists, it is important to comply with standard three and avoid any conflicts of interest that could arise as a result of the referral.
When referring to a third party SMSF professional, compliance with standard seven requires that you do not derive any benefits from that referral.
Providing personal advice to clients about SMSFs requires specialist knowledge. Before providing SMSF advice it’s important that you have and maintain SMSF knowledge and expertise, as required by standards nine and ten.
Before your client transfers their retirement savings from an APRA-regulated superannuation fund to an SMSF, you must ascertain that the SMSF is the right retirement savings vehicle for that client based on their circumstances.
By doing this, you will ensure that you meet the requirements of standards two, five and six:
- to ensure the SMSF is in your client’s best interests
- that you have reasonable grounds to be satisfied your client understands your advice, the benefits and risks of using an SMSF and the costs
- in making the recommendation to establish an SMSF, you have taken into account the client’s longer-term interests and likely circumstances.
Suitability is important for many reasons, not least because without it, you would not be acting in the client’s best interests. As well as being in breach of the Corporations Act (and therefore standard one), acting in a client’s best interests is explicit in standards two and five, as well as implicit in a number of other standards in the Code.
ASIC provides the following as factors to consider when determining the suitability of an SMSF for your client:
- Your client must understand and accept that although they may outsource their SMSF responsibilities to professional advisers (such as accountants or audit specialists), as the SMSF trustee your client is responsible for ensuring compliance with superannuation, corporations and tax laws
- Your client must have the time, skills, general interest, and experience to meet their trustee responsibilities
- The cost-effectiveness of an SMSF considering your client’s existing arrangements, relevant circumstances and other SMSF members
- Any relevant vulnerabilities your client may be experiencing, such as cognitive impairment, accessibility constraints or coercion/elder abuse
- Other arrangements that may provide some of the benefits of an SMSF, such as ‘a member directed investment facility’ within an APRA-regulated superannuation fund.
Finally, you must be satisfied that your client understands the advice, as well as the benefits, costs and risks of establishing and running an SMSF, and you must have reasonable grounds to be satisfied.
An area of concern for ASIC is where an SMSF has been recommended to a client and there’s been no consideration of whether the client has the time, skills and knowledge to operate an SMSF, or whether they are able to appropriately develop their skills and knowledge to operate an SMSF.
SMSF versus an APRA-regulated superannuation fund
ASIC requires you to consider whether your client understands and accepts the risks and differences of an SMSF when compared to an APRA-regulated fund. As well as helping meet the best interests duty and related standards, this will ensure you meet standard four – without an understanding of the differences between an SMSF and APRA regulated fund, as well as the somewhat onerous obligations of SMSF trustees, it could be argued that informed consent was not obtained.
When comparing an SMSF and an APRA-regulated fund, there are numerous differences that clients need to be aware of and understand. This needs to occur prior to the establishment of an SMSF.
Prior to the establishment of an SMSF, you need to ensure that your client understands their obligations as an SMSF trustee and the penalties that can apply for non-compliance. For example, a failure to follow SMSF regulations can result in your client breaching one or more of the myriad of requirements set down by the ATO. A failure to ensure your client is fully informed could result in a breach of standard six, that you fail to consider the client’s broader, long-term interests.
Some of the differences between SMSFs and APRA-regulated funds that you should discuss with clients include:
Protections in the event of theft or fraud
- Access to statutory compensation will differ; an SMSF does not have the same protections as an APRA-regulated fund and is not eligible for government compensation.
- While the client may have legal options in the event of theft or fraud, there is no certainty that compensation will be awarded. However, members of APRA-regulated funds are generally eligible for compensation in the event of theft or fraud.
Trustee complaints and resolution
- SMSF trustees (and members) may be required to resolve their own complaints.
- Clients should be aware of situations where disputes may arise, including:
- in the event of trustee relationship breakdown
- where member death benefits must be paid
- if a trustee/s considers that they have received unsuitable professional advice.
- Access to AFCA is only available to SMSF investors in certain circumstances, such as if they received advice from a licensed financial adviser and their complaint relates to the financial advice about the suitability of an SMSF, the SMSF investments or insurance products.
Client’s legal responsibilities as trustee
- You must be confident your client understands and accepts that as trustee, they are personally responsible for running their SMSF according to its trust deed and must ensure the fund complies with superannuation, corporations and tax laws.
- Your client must understand that:
- while trustees can use professionals or rely on other trustees to help run their SMSF, responsibility for SMSF compliance remains with the trustees
- all trustees share responsibility equally
- SMSFs are regulated by the ATO
- professionals who provide tax agent services must be on the Tax Practitioners Board register
- SMSF auditors must be registered with ASIC as an ‘approved SMSF auditor’ on the SMSF auditor register before they can sign off on SMSF audit reports
- all financial advisers who provide personal advice on SMSFs must be licensed by an AFS licence and registered with ASIC.
- Clients need to understand that a failure to comply with their obligations under superannuation and taxation laws can have significant consequences, such as the loss of tax concessions. All trustees are equally required to comply with trustee responsibilities and obligations and are liable for the actions of other trustees.
Your clients also need to be aware of the penalties they can face for non-compliance with superannuation, corporations or tax laws, including:
- Tax consequences, such as their SMSF losing its concessional tax treatment.
- Being disqualified from their role as trustee – this means they can no longer be members of the SMSF, and they are unable to start a new one.
- Civil or criminal penalties, depending on the seriousness of the breach.
The ATO can disqualify an SMSF trustee, or director of a corporate trustee, if:
- The trustee has contravened the rules.
- The ATO considers the trustee not to be a ‘fit and proper’ person for the role, having regard to the trustee’s personal character and circumstances.
SMSF costs
It is crucial that your client understands the costs of an SMSF throughout its lifecycle. These costs will vary based on your client’s relevant circumstances; examples are set out in figure three.
The second part of standard five requires you to be satisfied that your client understands the costs, risks and benefits associated with your advice. With an SMSF, there can be a cost-benefit trade-off between the time taken to appropriately administer the SMSF versus the expected returns and benefits. To comply with this standard, you need to have reasonable grounds to be satisfied with respect to this cost-benefit trade off.
The starting balance of an SMSF is one of several factors you should consider when recommending an SMSF, as this is relevant to its cost-effectiveness (and compliance with standard five). Statistical data[5] shows that fund expenses are proportionally higher, and net returns lower, for lower balance funds.
However, it’s important to note that there may be circumstances when an SMSF with a higher starting balance is not in your client’s best interests. This may be because it does not meet your client’s objectives, financial situation or needs, or requires time and/or knowledge that the client does not have.
Neither situation would be in the client’s best interest and a potential breach of standards two and five.
Suitable trustee structure
Appropriate advice that’s in your client’s best interests should include discussion about the trustee structure most suitable for their circumstances. Selecting the most appropriate structure – a corporate or individual trustee structure – can have tax and succession planning implications for clients. It can be costly to change structures, ownership of assets and trustees once the SMSF has been established.
ASIC takes a keen interest in whether clients have been adequately advised about SMSF structures and are likely to be concerned where:
- there’s no evidence the advice considered the appropriateness of the SMSF structure
- the client has been directed to a particular SMSF structure without consideration of its appropriateness.
This should include providing your client with a comparison of the risks and benefits of each structure; this will demonstrate compliance with a number of ethical standards, including those related to best interests (two and five), consideration of the client’s long term outlook (six) and competent advice (nine).
Factors to consider during the client discussion about a suitable trustee structure may include:
- cost, including the potential cost of changing the trustee structure in the future
- compliance with the SMSF trust deed, superannuation, corporations and taxation laws, the company’s constitution and the Corporations Act
- administration and reporting requirements
- trustee succession planning
- SMSF asset ownership considerations.
Trustee succession planning and exit strategy should be considered at establishment; this can help to reduce the impact of ‘unexpected’ events. They also need to understand the steps required to wind up an SMSF. This is relevant to standard six of the Code.
It can be helpful for clients to understand the reasons why they may need to wind up their SMSF, which can include:
- the SMSF proves not to be cost-effective
- trustee responsibilities become too onerous or too costly
- a trustee dies or becomes incapacitated
- disputes between trustees.
The investment strategy
SMSF trustees must develop an investment strategy to provide the basis for the SMSF’s investment decisions and ensure the SMSF is likely to meet members’ retirement needs. The trustees are responsible for their fund’s investment strategy and make all investment decisions, even if those decisions are premised on advice from professionals.
An SMSF can have a maximum of six members, which can limit the number or types of assets the fund can invest in. For example, a public super fund with hundreds of members has the scale to invest in private equity or direct infrastructure, investments that generally require significant investment capital to access.
It is important for your client to understand:
- they must have an investment strategy before they make any investments
- the investment strategy must be reviewed regularly
- they should consider whether to hold insurance cover
- the investment strategy should be in writing and all changes must be documented.
While you can assist your client to develop appropriate investment objectives and investment strategy for their SMSF, the client must understand that as trustee, they are responsible for managing the investments in the best financial interests of the SMSF members and in accordance with the law.
When documenting the SMSF’s investment strategy, the following points should be considered and discussed with your client:
- the fund’s investment objectives
- investment strategy and whether it is consistent with the trust deed
- members’ risk tolerance
- the types of investments the fund can make, including the likely risk/return profile of these investments
- implementation of investment decisions
- diversification
- death benefit nominations
- liquidity requirements to meet fund expenses, including retirement benefits.
ASIC’s guidance notes the importance to adequately consider and inform your clients about:
- the benefits associated with diversification
- the restrictions that apply to SMSF investments
- whether to hold insurance cover
- prohibited transactions, including lending the fund’s money or providing financial assistance to a member of the fund or their relatives.
Importantly, you ought to ensure your clients understand the costs associated with implementing your SMSF advice recommendations, including ongoing fees. As well as best practice, standard five explicitly requires you to be satisfied your client understands the costs associated with your advice.
In an audit situation, ASIC is likely to examine the advice clients receive about their SMSF investment strategy and whether this advice was appropriate to the clients’ risk appetite and investment goals.
A failure to provide appropriate advice about the SMSF’s investment strategy will likely breach a number of ethical standards including: a failure to meet best interests (standards two and five), the broad, long-term effects of the client acting on your advice (standard six) and financial product advice must be offered in good faith and with competence (standard nine).
Death benefit nomination
It is important to ensure your client has a valid death benefit nomination in place and that they understand the implications of not having a valid death benefit nomination in place. The death benefit nomination should be reviewed regularly, particularly where the client’s circumstances change.
Case studies
The following case studies are based on real events; however, the names of people and organisations have been changed, and some details altered. The case studies have been drawn from ASIC or AFCA and for each, potential breaches of the Code of Ethics are identified.
Case study one: Inappropriate SMSF establishment
Betty and Paul complained to AFCA in their personal capacities and on behalf of the corporate trustee of a self-managed superannuation fund. The complainants had been referred to Sam, an authorised representative of ACME SMSFs in 2019. Betty and Paul complained that the advice they received to establish an SMSF and use it as a vehicle to make a geared investment in a residential property was not in their best interests and inappropriate. The complainants want to be compensated for $205,050 for the losses related to the SMSF to resolve this case.
However, ACME SMSFs denies responsibility for the claimed losses as its representative Sam did not make a specific property recommendation. It also claims:
- the advice was in the complainant’s best interests and was appropriate
- Betty and Paul would have proceeded with the geared property investment strategy in any event.
AFCA determined that ACME SMSFs did not demonstrate that the advice to establish an SMSF and a property investment strategy was in the best interests of the complainants, as objectives and financial goals were inadequately investigated. Because the SMSF establishment was the core element of Sam’s advice, AFCA determined the advice fees should be refunded.
However, Betty and Paul were unable to establish that they would not have proceeded with the property investment irrespective of the establishment of the SMSF. Sam’s notes recorded that the couple articulated their wish to make this investment, hence his recommendation to establish the SMSF.
Accordingly, AFCA’s recommendation took the view that the complainants should be compensated $22,816.55, representing the advice fees paid by the SMSF between the 2019 SOA and the end of the advice relationship in 2023. However, the other aspects of the 2019 SOA were deemed to be appropriate and therefore no other refund or compensation was required.
From the details provided in the case study, Sam and ACME SMSFs potentially breached the following standards in the Code of Ethics.
Case study two: Inappropriate SMSF advice
The complainants, Melissa and Craig, lodged a complaint with AFCA both personally and as directors of the corporate trustee of their SMSF. Melissa and Craig received personal financial advice from Amber, an authorised representative of ACME Advice. The complainants made the following claims:
- Amber’s advice to establish a SMSF, roll over their superannuation balances from regulated superannuation funds into the SMSF, and enter into a limited recourse borrowing arrangement (LRBA), was inappropriate and not in their best interests
- Amber is responsible for Craig overpaying insurance premiums
- Amber is responsible for the complainants’ overpaying ongoing advice fees
- Amber is responsible for the complainants’ SMSF closure fees.
Melissa and Craig are seeking compensation from ACME Advice for their total losses of $343,911.88.
AFCA’s investigation found that the personal financial advice providing by Amber to the complainants was not appropriate and not in their best interests. The limited personal financial advice she later provided to the complainants was also found not appropriate, not sufficient and not in the complainants’ best interests. Further, AFCA determined that it was inappropriate for Amber not to reconsider the complainants’ circumstances at the time of the SMSF’s proposed property purchase (at the time the limited personal financial advice was provided). Finally, AFCA was satisfied that Amber’s failure to update Craig’s insurance details meant he overpaid insurance premiums.
In summarising its findings, AFCA noted the best interests’ duty is the obligation imposed on financial firms and their advisers to act in the best interests of a client when providing personal financial advice. The principle guiding the application of the best interests’ obligation is that meeting the objectives, financial situation and needs of the client must be the paramount consideration when providing advice. Clients seeking financial advice expect their adviser will act in their best interests and that, as a result, the advice provided will leave them in a better position. Section 916G says the provider must only provide the advice to the client if it would be reasonable to conclude that the resulting advice is appropriate to the client, assuming the provider satisfied the best interests duty.
AFCA’s findings included:
- Melissa and Craig had insufficient funds to warrant the establishment of an SMSF
- Melissa and Craig did not understand the establishment and ongoing costs of an SMSF
- the complainants did not have financial capacity to meet the competing financial goals established by the SOA
- Melissa and Craig did not understand the complexities and costs associated with purchasing a property and using limited recourse borrowing within an SMSF
- the recommended asset allocation was inappropriate
- the complainants were not suitable to be directors of the SMSF corporate trustee.
From the details provided in the case study, Amber potentially breached the following standards in the Code of Ethics.
Case study three: Failure to prioritise clients’ best interests
Paul referred a number of his clients to an SMSF administration business to facilitate the establishment of an SMSF without providing any advice or ascertaining their suitability or capability to act as trustees. Paul then advised those clients to rollover their existing APRA-regulated super funds into their recently established SMSFs.
An ASIC investigation found that Paul failed to prioritise his clients’ interests and failed to act in the best interests of his clients because he:
- provided cookie cutter advice – he failed to provide personalised advice that was consistent with his clients’ circumstances, objectives and the subject matter of the advice sought by his clients
- failed to make reasonable inquiries to obtain complete and accurate information about his clients’ relevant circumstances
- focused the advice to his clients on rolling over to SMSFs without adequately considering alternative options, such as whether his clients would be better off retaining their existing APRA-regulated super funds
- failed to adequately consider and provide information about the risks, costs and obligations of taking on the role of SMSF trustee
- was told by his licensee that he did not have the required expertise to advise on SMSFs generally, but still proceeded to provide SMSF advice to his clients.
Consequently, ASIC banned Paul from providing financial services for seven years. From the details provided in the case study, Paul potentially breached the following standards in the Code of Ethics.
It’s anticipated that more than five million Australian baby boomers will retire over the next decade. The importance of robust retirement planning has never been more critical. While SMSFs can be a powerful tool for individuals who seek greater control over their retirement savings and investment choices, the associated time, cost, and expertise required to manage such a fund can often outweigh the perceived benefits.
The regulatory obligations tied to SMSFs impose significant responsibilities and liabilities on trustees, which may not be suitable for everyone. This complexity can make SMSFs a less viable option for individuals without the necessary financial knowledge or the capacity to dedicate substantial time to compliance and ongoing management.
For financial advisers, recommending the establishment of an SMSF requires a deep understanding of the client’s unique circumstances, financial situation, long-term goals and risk tolerance. It’s essential to thoroughly assess whether the flexibility and control of an SMSF truly align with the client’s best interests, both today and into their retirement years.
Ultimately, the decision to establish an SMSF should not be taken lightly. It is not a one-size-fits-all solution, and what may work for one individual could be unsuitable for another. The role of professional advice is paramount in ensuring that clients are fully informed about the responsibilities, risks, and potential rewards associated with managing their own superannuation. In the end, the focus should always be on delivering a tailored retirement strategy that safeguards the client’s financial wellbeing, ensuring they are positioned to enjoy a secure and comfortable retirement.
———