Advice on self-managed superannuation funds: Disclosure of risks
This information sheet (INFO 205) 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 risks that should be considered by the adviser and disclosed to the client when providing personal advice about SMSFs, including:
- the lack of statutory compensation
- the impact on insurance
- access to complaints mechanisms
- the appropriateness of different SMSF structures
- trustee obligations and the time and skills necessary to operate an SMSF
- trustee obligations to develop an investment strategy
- the need to consider an exit strategy
- the additional information that must be included in a Statement of Advice (SOA).
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 risks associated with setting up and switching to an SMSF, and should be read with Information Sheet 182 Super switching advice: Complying with your obligations (INFO 182) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206).
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 an 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, the potential benefits that may be lost, the time commitment required and any other significant consequences if the advice is followed.
Some examples of risks that should be considered by an adviser and disclosed to retail clients are set out below. For examples of the costs that should be considered and disclosed, see INFO 206.
When advising a retail client to transfer (the whole or part of) an existing superannuation account balance from a superannuation fund regulated by the Australian Prudential Regulation Authority (APRA) to an SMSF, the client should be made aware that SMSFs are not subject to the same government protections that are available in APRA-regulated superannuation funds, such as statutory compensation in the event of theft or fraud.
Examples of appropriate disclosure when advising a retail client to set up an SMSF are:
- the client is taking themselves outside the compensation framework available to investors in an APRA-regulated superannuation fund in the event of theft or fraud on the fund
- the client will not be eligible for compensation under superannuation laws if the SMSF suffers loss as a result of theft or fraud in the underlying investment asset.
Even if no transfer is involved, when advising a retail client to set up an SMSF, advisers should make it clear that these government protections are not available to SMSFs.
Compliance tip: We are likely to look at whether the client received advice on the lack of statutory compensation when they received a recommendation to switch their superannuation from an APRA-regulated superannuation fund to an SMSF.
Advisers should consider a retail client’s need for appropriate and affordable life and total and permanent disability (TPD) insurance cover, and also include this information in the SOA.
Unless the SMSF trustee specifically takes out insurance for fund members, there may be no cover. Our experience is that life and TPD insurance is generally more expensive and harder to obtain for SMSFs than for larger APRA-regulated superannuation funds, which can often also offer default levels of cover without a medical assessment.
The lack of insurance cover may have significant consequences.
- not fully closing down the client’s existing APRA-regulated superannuation fund to maintain their existing life and TPD insurance cover
- not holding any life and TPD insurance, or
- replacing existing cover with a new insurance policy taken out by the SMSF on behalf of some or all of the members of the SMSF.
- the client had an existing life and TPD insurance policy, but the adviser did not consider the risk of losing this cover when recommending the establishment of an SMSF
- there was no consideration of the client’s life and TPD insurance needs when they are not yet a retiree and have not accumulated a superannuation balance to be sufficiently self-insured.
Retail clients should understand that certain dispute resolution mechanisms, such as the Superannuation Complaints Tribunal (SCT), may not be available to SMSFs.
However, the types of disputes and complaints that may arise for SMSF investors may be different from those in an APRA-regulated superannuation fund, and access to other complaints mechanisms may be available to SMSF investors (e.g. the Financial Ombudsman Service Limited or the Credit and Investments Ombudsman).
Compliance tip: We are likely to look at whether the adviser has explained that in switching to an SMSF, the client will not be able to access certain dispute resolution mechanisms (e.g. the SCT).
Advisers should consider and advise a retail client on the most appropriate SMSF structure when establishing an SMSF. Selecting the most appropriate structure (i.e. a corporate or individual trustee structure) can have important tax and succession planning implications for clients. It can also be costly to change structures, ownership of assets and trustees after the SMSF has been established.
Compliance tip: We are likely to look at whether clients have been adequately advised on SMSF structures. We are likely to be particularly concerned if a client has been directed to an SMSF without consideration of the appropriateness of the SMSF structure, or if the client has been directed to a particular type of SMSF structure without consideration of its appropriateness.
An SMSF is not for every retail client, even if they do have a significant amount to invest. Factors such as their financial literacy, understanding of the legal, taxation and other requirements, available time and general interest are all things to be considered. SMSF trustees need to understand the obligations associated with undertaking the role.
Obligations with which SMSF trustees must comply under superannuation and taxation laws include:
- maintaining the fund for the sole purpose of providing retirement benefits to SMSF members, or to their dependants if a member dies before retirement
- accepting contributions and paying benefits (pension or lump sums) to members and their beneficiaries in accordance with superannuation and taxation laws and the SMSF trust deed
- valuing the fund’s assets at market value for the preparation of financial accounts and statements
- having the financial accounts and statements for the SMSF audited each year by an approved SMSF auditor
- meeting the reporting and administration obligations imposed by the Australian Taxation Office (ATO).
Failure to comply with obligations under superannuation and taxation laws can have significant consequences (e.g. the loss of tax concessions). Even if one trustee is less actively involved, all trustees are equally required to comply with these trustee responsibilities and obligations and are liable for the actions of other trustees.
Advisers should consider whether an SMSF is appropriate for a retail client in terms of the time and skills that may be needed to operate the SMSF and to generate the expected benefits. Clients may outsource some of these functions if they do not have the time and relevant skills, such as investment management and administration of the SMSF. However, trustees are still ultimately responsible for the operation of the SMSF. Advisers should ensure clients are aware of this and consider whether the client is prepared to accept these responsibilities and obligations as an SMSF trustee.
Retail clients should be made aware that the degree of time and skill required may depend on how they choose to stay updated on current developments or changes in superannuation and taxation laws and/or whether they choose to operate their SMSF without the assistance of SMSF professionals.
There may be other options available for clients who may not be prepared to take on the responsibilities and obligations of an SMSF trustee. These options may still provide some of the benefits of an SMSF, such as a ‘member direct investment facility’ within an APRA-regulated fund.
Compliance tip: We are likely to look at whether clients have been adequately advised about the time, skills and obligations necessary to operate an SMSF and that, even if they outsource some aspects of managing the fund, they will remain ultimately responsible for complying with their responsibilities and obligations.
We are likely to be particularly concerned if an SMSF has been recommended to a client and there has been no consideration of whether they have 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.
Under superannuation laws, SMSF trustees must develop an investment strategy to ensure the SMSF is likely to meet members’ retirement needs. Such a strategy may consider whether the members of the fund have other retirement or investment savings they can draw on outside the SMSF and whether the SMSF’s investments are appropriately diversified.
SMSF trustees should conduct a regular review of the fund’s investment strategy to ensure it remains current. It is important that trustees understand:
- the benefits associated with asset diversification and investing across a number of asset classes (e.g. shares, real property and fixed interest products) in a long-term investment strategy, such as improving the risk and return profile of an SMSF
- there are some restrictions on SMSF investments
- certain transactions are prohibited, such as lending the fund’s money, or providing financial assistance, to a member of the fund or their relatives.
Where a limited recourse borrowing arrangement is recommended, trustees should be provided with an explanation of the associated risks and how this arrangement is appropriate for the SMSF.
Compliance tip: We are likely to look at what advice clients receive about their SMSF investment strategy and whether or not the advice was appropriate to the risk appetite and investment goals of the client.
Trustees may want to wind up their SMSF for a wide range of reasons (e.g. if the compliance requirements become too onerous or costly, or the more active trustee dies or becomes incapacitated). To make any exit as straightforward as possible, it is important that trustees consider and develop an exit strategy for their SMSF.
Compliance tip: We are likely to look at whether clients have been made aware of what may be required to wind up their SMSF and the likely costs involved.
If the advice is to switch from an existing superannuation fund to an SMSF, section 947D of the Corporations Act sets out the additional information that must be included in an SOA. Specifically, the SOA must set out the potential benefits that may be lost and any other significant consequences to the retail client if the advice is acted upon.
Examples include information about:
- the exit fees or any other charges applying to withdrawal from the APRA-regulated superannuation fund
- the loss of access to rights or benefits (e.g. insurance cover and eligibility for statutory compensation under superannuation laws in the event of theft or fraud in the underlying investment asset)
- the loss of other opportunities, including incidental opportunities associated with the existing product (e.g. access to free financial advice or discount health insurance)
- any tax consequences
- any other significant consequences for the client in changing their superannuation to an SMSF.
INFO 182 provides general information and compliance tips for financial advisers who provide ‘super switching advice’.
Compliance tip: We are likely to look more closely at advice to switch to an SMSF if the SOA does not clearly set out considerations (in addition to the costs) relevant to setting up, operating and winding up an SMSF.
Where can I get more information?
- RG 36 Licensing: Financial product advice and dealing
- RG 175 Licensing: Financial product advisers—Conduct and disclosure
- REP 337 SMSFs: Improving the quality of advice given to investors
- INFO 182 Super switching advice: Complying with your obligations
- INFO 206 Advice on self-managed superannuation funds: Disclosure of costs
- 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 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 205 (INFO 205), issued in July 2015. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.