CPD: Licensing just the tip of the iceberg for true SMSF compliance
Originally published in AdviserVoice.

The latest moves from ASIC indicate that it has drawn the line on SMSF compliance – and it’s a hard one. The message is clear: get your SMSF house in order now, or else. The question is, how? According to Richard Liverpool, Head of Sales & Marketing from Ignition Wealth, the answer may be simpler (and cheaper) than you think. It all comes down to appropriateness.

The SMSF sector is the fastest growing in the superannuation industry, accounting for an almost $650 billion chunk of Australia’s super pie. SMSFs also manage a disproportionately large percentage of funds relative to their super counterparts (see box below). So it’s easy to see why assuring the compliance and oversight of the sector has assumed growing importance both in the industry itself and with the regulator in recent years.

However, even as it acknowledges the massive opportunities SMSF growth offers, the entire advice sector is still grappling with the challenges that go with it. Right now, licensing compliance is top of mind. This is especially the case for accountants and others struggling with the “new” licensing regime, which took effect on 1 July 2016.

The latest information from ASIC’s SMSF “shadow shopping” project (see box below) should leave accountants in no doubt that they need to get their licensing situation in order. Today. Or rather, last year.

As ASIC commissioner Greg Tanzer put it when sounding the initial warning: “…if you decide after 1 July (2016) to give advice on establishing or operating an SMSF and you don’t have the requisite licence… you’re acting illegally … you’re joining the club with the investment scammers, the property spruikers, and all of the other people who choose to operate illegally.”

And in our view, the same can – and will – be said of advisers, as they become subject to SMSF scrutiny that extends beyond licensing requirements.

That’s because, for advisers who are already licensed and advising in the SMSF space, there are deeper SMSF issues at play. In fact, it’s a fair prediction that in the same way ASIC is now pursuing licensing issues with vigour, other SMSF-related advice activity will soon be under the spotlight. There are hundreds of billions of dollars and the financial futures of millions of Australians at stake. This latest shadow shopping experience is just the tip of the iceberg.

SMSF appropriateness and BID: the must-have partnership for compliance

Other SMSF activities likely to attract greater regulatory attention in the future are clearly those relating to Best Interest Duty (BID), that is, ensuring clients entering SMSFs have been properly advised to do so in light of their goals and circumstances, financial and otherwise. So, for example, as well as meeting financial criteria, a client should also be aware of and engaged in meeting their SMSF trustee obligations. It’s all about ensuring an SMSF is appropriate for the needs of each and every client and member of each fund. If you as an adviser can’t clearly show this, there’s the potential to end up in hot water.

Further, in looking at appropriateness, it’s important to understand that the criteria apply both to those considering an SMSF and existing SMSF clients. To hurdle the fiduciary bar, advisers will ideally be able demonstrate that all SMSF clients on their books are appropriate candidates for an SMSF (and vice versa).

Another prediction and natural next step on the regulatory front is that the underlying assets contained in SMSFs will also become a focus – and rightly so. Ensuring SMSFs include appropriate investment planning, diversification and asset allocation in line with the trustees’ financial situation, goals and life circumstances will be something every adviser should be able to demonstrate with ease. Or risk the penalties.

New tools the easy way to support SMSF compliance

The upshot is that the days of a relatively carefree approach to recommending and setting up a client in an SMSF, including simply because they asked for one, are well and truly over.

Years of experience in the sector, learning what works and what doesn’t, watching and tracking outcomes and other hard evidence has led to the development of useful, if more stringent, criteria to determine SMSF appropriateness.

Better still, the advent of digital advice technology means appropriateness criteria can be applied, documented and tracked, cost effectively and at scale, to deliver confidence in compliance – or highlight where more attention is needed. Being able to monitor and support clients in this way can also be a powerful retention tool, offering multiple touch points and opportunities to add value, upsell, cross sell and get more face time with high value clients.

So that’s the good news. The bad news is that to get confidence in compliance and value in ongoing client support, you need to choose the right solution. Too simplistic, and it’s not going to give you the depth of compliance you need. Too complex or unwieldy, and it’s likely to cost a lot, be hard to integrate and set up and likely lie on the shelf, unused.

Your 10-point SMSF appropriateness solution checklist

To be confident that an automated SMSF service offers risk management and high value advice support across your SMSF books, both existing and for new set-ups, look for one that offers:

  1. Compliance

Good financial advice begins and ends with compliance. Make sure the service you use delivers it, including registering advisers with the Financial Advisers Register (FAR) and ensuring you have the correct licensing for the level of advice you provide (limited, complex etc).

  1. Licensing

If you’re one of the many operators that doesn’t have the required AFS licence yet, look for a solution that enables you to work under someone else’s. That also means compliance is their remit, offering you further protection.

  1. Ease of use

Make sure the solution you choose is compatible with other software (and hardware) and easy to setup and use.

  1. Cost effectiveness

A good SMSF solution should not run into the thousands, but you may not get value from the cheapest on the market. Look for functionality, ease of use and level risk management and pay accordingly.

  1. Education

The choice of SMSF is not an easy one and involves complex consideration of multiple issues. Any service you use to support SMSF advice should offer clients information and education about different options and scenarios.

  1. Engagement

SMSF trustees must know what they’re getting into. They should be aware of their roles and responsibilities, the time they can expect to spend monitoring and engaging with their investment and the legal and ethical ramifications of so doing (or not). An effective tool should highlight this aspect of the SMSF product.

  1. Models and scenarios

A good solution will contain multiple financial modelling and other tools to enable clients and advisers to work up multiple scenarios so they can project likely outcomes and make informed investment decisions.

  1. In-person service option

Many clients and advisers are happy relying on a strong digital or online advice solution. However the option of a personalised check in to go through questions and answers with an adviser can add real value.

  1. Security

Ensure the solution you choose offers features such as secure log-in, strong encryption and powerful firewalls. If in doubt, ask.

  1. Experience

Look for a service provided by a reputable operator with a track record in the industry, preferably both on the advice and the digital solution side, especially in superannuation.


Why all the attention? The SMSF success story

As at December 2016, the following figures from APRA show the rise and rise of SMSFs.

  • About 585,260 SMSFs are managing $653.8 billion in assets
  • Thousands of new SMSFs are established every quarter
  • The average balance of an SMSF exceeds $1.1 million, with the ‘average’ fund balance around $1.17 million
  • Individuals running SMSFs control nearly a third (29.7% or $653.8 billion) of the circa $2.2 trillion invested via Australian superannuation fund
  • In 1998, SMSFs represented one-tenth (10%) of all superannuation money
  • In 2004, SMSFs represented 20% of all super fund assets.


Confusion and uncertainty: what ASIC shadow shoppers found

ASIC visited 20 limited Australian Financial Services licensees in 2016 and 2017 to see how they were operating and discuss compliance with their AFSL obligations.

Most were still establishing their post 1 July 2016 businesses; only half had provided advice at the time of the visit. This suggests significant lost opportunity to capitalise on the growth in the SMSF sector.

Licensees were actively seeking training and assistance in several aspects of the AFSL regime, particularly relating to ongoing compliance obligations and client engagement. A comprehensive SMSF tool should cover these educational and compliance requirements. ASIC has also committed to providing further education in these areas.

ASIC says it will also contact licensees with no advisers recorded on Financial Advisers Register (FAR) to remind them of their obligations. Limited AFS licensees with no recorded advisers on FAR are likely to be in breach of the law.

Other areas of concern identified during the visits included:

  • uncertainty regarding ongoing compliance obligations, including about the resources required to monitor compliance and steps required to comply with general licensee obligations
  • confusion about what information is required by the Financial Adviser Register (FAR) – nearly half the licensees had not updated the FAR with adviser information
  • where licensees had not yet provided advice about SMSFs they were uncertain about what documents need to be provided to clients, their content and when they should be provided. This included requirements relating to statements of advice, a key document.

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