ASIC has released further guidance in respect of how advice providers can meet the best interests duty obligations for advice given to retail clients in respect of self-managed superannuation funds and platforms. AISC's current views are found in the updated Regulatory Guide 148: Platforms that are managed investment schemes, and in ASIC Report 337: SMSF: Improving the quality of advice given to investors.
Paragraph RG148.177 describes a range of matters that advice given about platforms should cover including:
- the key features of the platform;
- how it is different from investing directly in the same financial products and/or securities; and
- the impact of investing through a platform (for example cooling-off rights, withdrawal rights, and voting rights).
In paragraph RG148.186, ASIC provides guidance on what it considers should be in a statement of advice recommending a particular platform and/or particular investments, including:
- the service offered by the platform and how the service will benefit the client in comparison to the client investing directly or through one or more other platforms;
- the range of investments offered through the platform, how they were selected for inclusion on the platform and whether they are appropriate for the client;
- the fees and costs associated with the platform and how they relate to other fees and costs, including fees and costs connected with the investments to be acquired through the platform and fees and costs connected with the delivery of the advice provider’s service;
- any significant tax implications from using the platform; and
- any significant implications if the client later wishes to leave the platform or is required to leave the platform in case of not opting in to receiving financial product advice or otherwise.
In addition to the above, paragraph RG148.187 details the matters that should be assessed by advisers when choosing to recommend one platform over another. These matters include:
- the existence of an investment or due diligence committee and the number of internal and external members of that committee;
- factors that influence the selection of specific investment on the platform menu, such as the extent to which market conditions, liquidity, asset allocation and diversification, research recommendations and the standard risk measures are determinative;
- whether there are any administrative or technological factors that influence selection;
- the extent to which selection is constrained by the range of products issued by or affiliated with related entities of the platform operator; and
- the platform operator's policies on how they will deal with investors who do not opt in to continue to receive financial product advice from advice providers and the implications for investors.
For more information, please see RG148.
Self-managed superannuation funds
ASIC conducted a review of files which were perceived as higher risk for SMSF members. A majority of files reviewed had one or more of the following features:
- had a fund balance of less than $150,000;
- older members;
- members with low income;
- borrowing; or
- investment in a single asset class.
In ASIC's investigation, they assessed one piece of advice as good advice as it had the following elements:
- considered the client's financial situation, needs and objectives, including their cashflow;
- covered insurance issues and recommendations about insurance were made;
- the scope of the advice was clearly communicated; and
- the statement of advice was logical, well-structured and easy to follow.
In April 2013, ASIC issued Report 337 SMSFs: Improving the quality of advice given to investors ("Report 337"). In Report 337, ASIC discusses some of their expectations in respect of advice on SMSFs.
One of the issues from Report 337 was that investors were not told that:
- the trustee is required to put in place, document and regularly review the fund's investment strategy;
- trustees are responsible for the fund even when they outsource functions;
- managing a SMSF takes more time and skill than participating in an APRA-regulated superannuation fund;
- restrictions apply to SMSF investments;
- there is no access to a statutory compensation scheme in the event of theft or fraud; and
- there is reduced access to dispute resolution bodies to resolve complaints.
As part of providing SMSF advice, ASIC recommends that advice providers discuss trustee obligations with the client and the duties and obligations that each trustee has to meet. Advice providers should direct clients to the relevant sections of the ATO website on the obligations of trustees.
In respect of whether to establish a SMSF, advisers should discuss and consider the following:
- suitability of SMSF structure;
- risks associated with SMSF structure;
- adequacy of insurance, or refer the client to an insurance specialist prior to establishing a SMSF;
- importance of an investment strategy and restrictions in relation to SMSF investments (e.g. sole purpose and restrictions in relation to acquiring assets from fund members or related parties); and
- consequences of switching from an APRA-regulated superannuation fund to a SMSF.
In our next newsletter, we will discuss in further details the 5 items listed above.
Licensees who provide financial advice to retail clients in respect of platforms and/or SMSFs should carefully consider RG148 and Report 337 to ensure that the advice provided to clients meets ASIC's standards.