Advice on self-managed superannuation funds: Disclosure of costs
This information sheet (INFO 206) provides guidance for Australian financial services (AFS) licensees (including limited AFS licensees) and their representatives who provide personal advice to retail clients about self-managed superannuation funds (SMSFs).
- the relevant conduct and disclosure obligations
- the need for advice on the cost-effectiveness of an SMSF – in particular, if the starting balance is below $200,000
- the need for advice on the costs of setting up, operating and winding up an SMSF
- the need for advice on the continued suitability of an SMSF for the client.
It provides ‘compliance tips’, which indicate the factors that ASIC is likely to look more closely at as part of our surveillance activities.
It should also help AFS licensees and their representatives comply with the conduct and disclosure obligations in Parts 7.7 and 7.7A of the Corporations Act 2001 (Corporations Act).
It focuses on the costs associated with setting up, operating and winding up an SMSF, and should be read with Information Sheet 182 Super switching advice: Complying with your obligations (INFO 182) and Information Sheet 205 Advice on self-managed superannuation funds: Disclosure of risks (INFO 205).
The disclosures referred to in this information sheet should be provided to a retail client at the time of the advice – this will usually be by way of a Statement of Advice (SOA). However, as a matter of best practice, AFS licensees and their representatives should also give these disclosures to retail clients in person, regardless of whether the advice is (or will be) set out in an SOA.
Relevant conduct and disclosure obligations include:
- the best interests duty and related obligations, which require advice providers, when providing personal advice to retail clients, to:
- 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 requirement to give retail clients an SOA when personal advice is provided (section 946A) – if the SOA is not the means by which personal advice is provided, the SOA must be given as soon as practicable after the advice has been provided but, in any event, before the client acts on the advice (section 946C)
- the additional information that must be included in an SOA when the advice recommends replacing one product with another (switching advice) (section 947D).
When giving advice to retail clients on establishing and/or switching to an SMSF, clients should be advised on the risks and costs associated with setting up and/or switching to an SMSF.
Some examples of costs that should be considered by an adviser and disclosed to retail clients are set out below. For examples of the risks that should be considered and disclosed, see INFO 205.
An important consideration is whether the likely balance of the SMSF makes it cost-effective for the client. If it is not cost-effective, it is very unlikely to be in the client’s best interests.
Starting balances below $200,000
In many cases, a recommendation for a retail client to set up an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests. The costs of establishing and operating an SMSF with a balance of $200,000 or below are unlikely to be competitive, compared to a fund regulated by the Australian Prudential Regulation Authority (APRA). Therefore, the client may not be in a better position when compared to using an APRA-regulated superannuation fund.
Note: We arrived at the figure of $200,000 as a result of independent research from Rice Warner, our consultation on that research and our assessment on what may be an appropriate minimum starting balance for an SMSF.
However, there are circumstances where an SMSF with a starting balance of below $200,000 may be in the client’s best interests – for example:
- where the trustee is willing to undertake much of the administration of the SMSF and the management of the investments to make it more cost-effective, or
- where a large asset (e.g. business property or an inheritance) or funds in another superannuation account will be transferred into the fund within a short timeframe (e.g. within a few months) after the SMSF is set up.
There will also be circumstances when an SMSF with a starting balance of $200,000 or above is not in the client’s best interests because it does not meet their objectives, financial situation or needs. For example, the client may not have the skills, time or experience to adequately carry out the duties of a trustee.
Where advice is provided to establish an SMSF with a low balance, we would expect the advice to clearly set out:
- the circumstances that influence the adviser to believe the client is likely to end up in a better position, despite the SMSF having a low starting balance
- consideration of whether the SMSF’s intended investment strategy is appropriate and viable
- the reasons why setting up and operating an SMSF is in the best interests of the client.
Compliance tip: We are likely to look more closely at advice to establish an SMSF, to consider whether the advice complies with the best interests duty and related obligations, if the starting balance of the SMSF is below $200,000.
There are many costs applicable to setting up, operating and winding up an SMSF that should be discussed with retail clients and set out in the advice. Matters that should be discussed and disclosed are:
- the costs that are expected to be incurred in establishing, operating and winding up an SMSF – in particular, which costs are unavoidable, as well as costs that may vary depending on how much of the SMSF’s administration the trustees are intending to undertake
- how the average annual operating costs of an SMSF compare with the annual administration costs of the client’s current superannuation fund or other APRA-regulated superannuation funds
- the cost of having professional service providers do some of the ongoing administration and management tasks for the SMSF.
Unavoidable versus optional costs
Some costs applicable to setting up, operating and winding up an SMSF are unavoidable, while other costs are optional and depend on decisions the trustee makes. Examples of unavoidable costs include:
- the annual SMSF supervisory levy (collected by the Australian Taxation Office)
- the costs to produce an annual financial statement and tax return
- annual independent audit fees
- costs relating to the establishment of the SMSF, including costs for a trust deed
- the fee for annual actuarial certification (when required).
Optional costs cover a range of services related to the structuring and administration of an SMSF that many SMSF trustees choose to pay additional fees for. These include:
- establishment of a corporate trustee, including ASIC fees to establish a corporate entity and the annual corporate trustee fee
- ongoing SMSF administration costs, including the cost of amending the trust deed of the SMSF
- professional investment advice fees
- accounting and book-keeping fees
- investment management fees (these fees may be unavoidable depending on the type of investments made)
- costs relating to the winding up of an SMSF, including compliance costs and transaction costs related to realising assets.
Examples of the SMSF costs that should be considered by the adviser and discussed and disclosed in the advice are summarised in Table 1.
Table 1: Examples of SMSF costs
|Costs associated with setting up an SMSF||
Costs associated with setting up an SMSF that are:
|Ongoing costs associated with operating an SMSF||
Costs associated with operating an SMSF that are:
|Types of costs associated with winding up an SMSF||Costs will include both compliance costs and costs related to realising assets. The nature of some of these costs will depend on the assets the SMSF invests in, but might include brokerage or agent fees.|
|The ‘opportunity cost’ associated with managing an SMSF||The time associated with managing an SMSF results in an ‘opportunity cost’ for the trustee. This cost is often overlooked as one of the costs associated with an SMSF structure.|
An employer’s default superannuation fund must offer a minimum level of life insurance, and so most investors will have some insurance cover through their APRA-regulated superannuation fund.An SMSF’s investment strategy needs to consider whether the trustees of the fund should hold insurance cover for one or more members of the fund. The costs of obtaining such insurance through the SMSF may differ from the cost of holding similar insurance through an APRA-regulated superannuation fund because of, for example, the lack of any ‘bulk discount’ for the SMSF.
|Investment costs||There will be costs associated with making investments through the SMSF. These costs will vary depending on the nature of the asset and also the frequency with which assets are bought and sold within the SMSF.|
Compliance tip: We are likely to look more closely at advice to set up or switch to an SMSF if the advice does not adequately disclose (including in the form of a comparison) or clearly set out the costs of setting up, operating and winding up an SMSF, noting which are unavoidable costs and which are optional costs. These costs should at least be described and, where possible, quantified.
See INFO 205 for further examples/suggestions of what risks advisers should consider and disclose to retail clients when giving advice to set up an SMSF.
Later advice should include an assessment of whether the client’s relevant circumstances are significantly different from when the initial advice to set up an SMSF was given. This includes considering the ongoing appropriateness of the SMSF.
For SMSFs established with a starting balance below $200,000, the later advice should also note whether the client is still expected to be in a better position. For example, if an SMSF was established with a balance below $200,000 on the expectation of a large asset being transferred to the SMSF within a few months, this could be confirmed in any subsequent SOA or Record of Advice (ROA): regulation 7.7.10AE of the Corporations Regulations 2001.
Further advice should also assess whether an SMSF that drops below $200,000 (e.g. while the SMSF is in pension phase) continues to be appropriate for the client.
The continued capacity, capability and time commitments of the client should also be considered.
- how the adviser assessed whether the SMSF advice continues to be suitable for the client
- whether the SMSF continues to be suitable for the client.
Where can I get more information?
- RG 36 Licensing: Financial product advice and dealing
- RG 175 Licensing: Financial product advisers—Conduct and disclosure
- RG 244 Giving information, general advice and scaled advice
- REP 337 SMSFs: Improving the quality of advice given to investors
- INFO 182 Super switching advice: Complying with your obligations
- INFO 205 Advice on self-managed superannuation funds: Disclosure of risks
- CP 216 Advice on self-managed superannuation funds: Specific disclosure requirements and SMSF costs, including the attached Rice Warner report, Costs of operating SMSFs.
- Call ASIC on 1300 300 630.
- Visit ASIC’s MoneySmart website.
- Visit the Australian Taxation Office website:
These free online courses, approved by the Australian Taxation Office, are directed at SMSF trustees, not advisers. However, in addition to providing advice to their clients, advisers could tell their clients about these courses, which will assist clients in understanding their obligations before establishing an SMSF.
- Contact your professional or industry association (e.g. the SMSF Association, CPA Australia or Chartered Accountants Australia and New Zealand).
- For information about our role, see www.asic.gov.au/our-role.
- For information about the laws we manage, see www.asic.gov.au/legislation.
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases your particular circumstances must be taken into account when determining how the law applies to you.
This is Information Sheet 206 (INFO 206), issued in July 2015. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.