Will SMSF advice be a test-bed for limited advice changes?
Market uncertainty and consequent volatility appear to be significant drivers of self-managed superannuation fund (SMSF) establishment.
Just as the Global Financial Crisis (GFC) confounded many commentators by driving an uptick in the number of SMSF establishments in 2008/09, there are already indications that a similar phenomenon is occurring as a result of the market uncertainty which has surrounded the COVID-19 pandemic.
Australian Taxation Office (ATO) data is unlikely to fully confirm this trend until later this year, but its data for calendar 2020 suggests that the pandemic uncertainty from around March last year to 30 December did not act as a particular brake on SMSF establishment.
What the ATO data revealed was that the lockdowns and other events which occurred during 2020 acted to reverse the number of SMSF establishments in Australia but that, overall, the numbers continue to rise.
What is more, the data covering SMSF establishments and wind-ups has to be seen in the context of the Government’s hardship early access superannuation regime, with wind-ups peaking in June.
The bottom line at the end of December was that there were 593,790 SMSFs in Australia compared to 582,080 a year earlier.
However, this needs to be viewed against the reality that ATO data from June 2019 revealed the number of SMSFs had stood at nearly 600,000, and that this represented an increase of 15% over the five years from 2014/15 (Graph 1).
According to the ATO data, the total value of assets held by SMSFs stood at just over $764 billion in December 2020.
It said the top asset types held by SMSFs by value were:
- Listed shares (27% of total estimated SMSF assets); and
- Cash and term deposits (20%).
Other crucial data provided by the ATO was that 53% of SMSF members were male, and that 86% of members aged 45 or older.
Australian Prudential Regulation Authority (APRA) data also proves revealing in demonstrating how SMSFs fared throughout 2020, indicating that while APRA-regulated funds took a hit during the period of superannuation early release, the assets of SMSFs remained comparatively stable (Graph 2).
The relatively mature age of most SMSF members is important because, as SMSF Association chief executive, John Maroney, pointed out to Money Management, the continuing rate of SMSF establishment needs to be weighed against the rate of drawdowns from SMSFs as people exit the workforce.
But Maroney is amongst those who have identified the volatility and uncertainty generated by the COVID-19 pandemic as having been a factor in what appears to be another period growth with respect to SMSF establishment.
He said he believed there was more interest in SMSF establishment among people looking to take control in the face of some of the uncertainty which had been generated by the pandemic.
Maroney’s views were endorsed by Deloitte superannuation partner, Russell Mason, who said that periods of volatility had always acted as a catalyst for people to consider an SMSF, but that he believed that other factors had been at play, not least the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and recent political criticism of the broader superannuation system.
Mason said he believed that the criticism of the system and associated negative publicity had undoubtedly prompted some people to consider whether they would be better off looking after their own interests.
As well, he said that it was now possible for SMSFs to access many investment options which had previously been regarded as the exclusive domain of APRA-regulated funds.
“The industry funds market has become more accessible,” he said.
That accessibility of the industry funds market for SMSFs has also served to gradually change the investment profiles of many self-managed funds from a situation 10 years’ ago where most funds held mostly cash or cash-like products plus some equities exposure to one where there is now a greater likelihood of exposure to managed funds.
This, in turn, has driven an increased need for financial advice – something which has been strongly recognised by the SMSF Association and made clear in the association’s pre-Budget submission.
The submission clearly reflects the absence of the so-called “accountant’s exemption” and the less than stellar history of the limited advice licensing which was intended to provide accountants with a vehicle via which to help clients beyond the initial set-up of their SMSF.
The submission argues in no uncertain terms that the “current regulatory advice model prevents SMSF trustees from obtaining the limited SMSF advice they require”.
“After years of continual regulatory change, we now have a framework that is complex and convoluted and hard to unwind,” the SMSF Association submission said.
“The SMSF Association has found that the advice process is lengthy, costly and prioritises the needs of Australian financial service licensees (AFSL) over consumers,” it said in what represented a direct hit at the inability of accountants to provide advice without an authorisation.
In doing so, the association called for greater flexibility to be injected into the limited advice regime with core amongst its recommendations being a call for the Australian Securities Investments Commission (ASIC) “guidance and explanation of how limited advice can be provided to take a more influential role to support financial advisers to provide limited advice where appropriate, despite current concerns of their AFSL”.
The less than stellar history of the limited licensing regime established to soften the blow of the removal of the removal of the accountants exemption explains why the SMSF Association has strongly advocated for its abolition in favour of something built around a flexible approach to limited advice.
“The SMSF Association believes that the limited licence framework has failed and hence should be removed and transitioned to a new consumer-centric framework,” it said.
“This may be in the form of a ‘strategic advice’ offering as indicated by ASIC in CP 332.”
“This is because:
a) The exemptions and legal obligations from the limited licence framework are complex;
b) The Financial Advisers Standards and Ethics Authority (FASEA) ignored the limited licence framework when designing its standards;
c) Poor take up of limited licences/licensees removing limited licence advisers because they are not profitable;
d) Execution only service is occurring frequently; and
e) The framework prevents SMSF trustees from obtaining the SMSF advice they require in a convenient and affordable manner (such as winding up an SMSF).
“Unfortunately, the current framework is restricting the SMSF industry and the professionals who dedicate their time to provide advice,” the submission said.
“We believe SMSF and superannuation advice lends itself to ‘strategic’ advice. In fact, the limited licence framework was built upon this premise. That is, advice is usually centred around making contribution or starting a pension in ‘superannuation’.
“Currently, there is increasing interest in the SMSF sector and more broadly about ‘strategic advice’. This is because many consumers demand strategic advice rather than advice on specific financial products. Additionally, with comprehensive advice out of reach for many Australians due to the costs, it is clear more are seeking piece by piece strategic guidance.
“With improvements to the way limited advice is offered out of CP 332, strategic advice could be the foundation on which a consumer focussed framework is built. This could ultimately allow appropriately educated advisers registered with the single disciplinary body to provide strategic advice on areas such as superannuation, retirement and cashflow without specific reference to financial products,” the SMSF Association submission said.
“A strategic advice model allowing suitably qualified professionals to practise under a ‘no product recommendation’ environment would see advisers given increased ability to provide strategic advice without conflicts of interest. It would also address the false perception that financial advice is simply ‘selling products’ and in time would help to address the issue of trust in the sector.”
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