On December 8 2022 ASIC released information Sheet 274 Tips for giving self-managed superannuation fund advice (INFO 274). This information sheet is designed to help Australian financial services (AFS) licensees and their representatives comply with their obligations when providing personal advice about SMSFs. INFO 274 consolidates and replaces Information Sheet 205 Advice on self-managed superannuation funds: Disclosure of risks (INFO 205) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206).
While most of the information contained in INFO 274 is similar to the information previously provided in INFO 205 and INFO 206, there are some important differences. Some of the key differences include:
- The removal of the $500,000 threshold as an indicator of the “appropriateness of advice” to establish an SMSF. INFO 274 does not refer to a dollar threshold but states the starting balance of an SMSF is one of a range of factors you should consider when recommending an SMSF.
- Understanding your obligations when giving SMSF advice. INFO 274 providers further detail about ASIC’s role in regulating SMSFs. It also provides further detail about the obligations of an AFS licensee and the importance of ensuring the AFS licensee has properly considered how their compliance processes and systems are relevant to providing personal advice about SMSFs. It also states that providing personal advice to clients about SMSFs requires specialist knowledge, so before providing SMSF advice it’s important that financial advisers have and maintain SMSF knowledge and expertise.
- Is an SMSF suitable for your client? INFO 274 provides examples of the factors to consider when determining the suitability of an SMSF for a client.
- What are the penalties for trustees if things go wrong? INFO 274 includes a new section on penalties and refers to the need for financial advisers to explain to clients the potential implications and consequences of non-compliance with superannuation, corporations and taxation laws.
- How much will an SMSF cost your client? Similar to INFO 206, INFO 274 provides an overview of SMSF costs. However, INFO 274 states you may consider and inform clients about SMSF costs using statistical information on SMSFs. While INFO 274 mentions the availability of ATO statistical information on SMSF costs and SMSF investment performance, it also cautions financial advisers on using the ATO’s published Return on Assets (ROA) performance figures for the SMSF sector as this is an indicator of performance across the entire SMSF sector and is not a direct comparison to APRA fund investment performance as the data inputs and methodology used are different.
SMSF Association comments
The SMSF Association welcomes the release of INFO 274. In particular, the removal of the $500,000 threshold as an indicator of the “appropriateness of advice” to establish an SMSF, is a significant step forward for the SMSF sector.
Research commissioned by the SMSF Association on the performance of the SMSF sector and released earlier this year by the University of Adelaide, found no material differences in performance patterns for SMSFs between $200,000 and $500,000. This means the notion that smaller SMSFs in this range deliver materially lower investment returns, on average, than larger SMSFs in this range is not supported by the research. However, it’s important to note the research did find that SMSFs with balances below $200,000 are likely to achieve considerably lower net investment returns compared with funds with balances of $200,000 or more. Even though the ASIC guidance no longer refers to a dollar threshold, it’s important for advisers to keep this $200,000 threshold in mind.
It is also pleasing to see specific reference in INFO 274 to the need for financial advisers to have specialist SMSF knowledge before providing SMSF advice and the importance of maintaining this knowledge and expertise over time. When informing clients of the costs of setting up and operating an SMSF, INFO 274 provides greater scope for financial advisers to consider and inform clients about SMSF costs using statistical information on SMSFs. In our view, the 2020 research released by Rice Warner on the costs of operating SMSFs provides the most practical illustration of SMSF costs including breakeven points with APRA regulated funds across a range of balance thresholds.
It is also pleasing to see an acknowledgement in INFO 274 of the drawbacks in using the ATO’s published investment performance figures for the SMSF sector to compare the performance of the sector with the APRA regulated sector. The University of Adelaide research on the performance of the SMSF sector addressed the issues referred to INFO 274 by using fund financial statement data to calculate an annual return for the SMSF sector which was directly comparable to the investment return calculated by APRA for the APRA regulated sector.
ASIC Senior Executive Leader – Financial Services & Wealth Group, Leah Sciacca, will discuss INFO 274 and ASIC’s key risk focus areas in session 4C: Protecting the hive – The BEEkeepers scrum! on day 2 of the 2023 SMSF Association National Conference. To register for #NC2023 please click here.
Written by Peter Burgess, Deputy CEO / Director of Policy & Education