‘Worst of the worst’: SMSF misconduct concerns weigh on advisers

Inappropriate advice relating to self-managed super funds (SMSFs) has been identified as a pain point for the advice industry, with professionals claiming these vehicles can draw out “the worst of the worst” in financial services.

Speaking at the Financial Advice Association Australia’s (FAAA) annual conference in Brisbane, Phil Anderson, FAAA general manager for policy, advocacy and standards, highlighted how SMSFs were the common denominator in multiple high-profile cases sitting with the Australian Financial Complaints Authority (AFCA) and the Compensation Scheme of Last Resort (CSLR).

According to data from the Australian Taxation Office, assets held in SMSFs have surpassed $1 trillion.

In particular, he took note that SMSFs were a factor with Dixon Advisory and, more recently, United Global Capital.

While both firms have now ceased operations, the fallout has been significant with a large levy of $18.1 million for advisers under the CSLR after affected Dixon consumers made over 2,700 claims to AFCA. 

VIEW ALL

View all

“There is a business model where SMSFs are being recommended and clients are rolling over their super into an SMSF and investing in their own product,” Anderson told audience members.

“This model is drawing out the worst of the worst in financial services. 

“The problem is the product, but because there is a recommendation being made, then the onus falls on the adviser.”

Last month, the CSLR’s submission to the Senate economics references committee inquiry into wealth management companies stated misconduct around SMSFs is a key issue giving rise to claims. 

Of the 202 claims it has received to date that are related to 24 firms, five firms account for 10 or more claims. More specifically, problems at four of these firms are related to misconduct around SMSFs:

• Firm Two (18 claims): Claims focus on advice to establish self-managed superannuation funds (SMSFs) that are often not in the consumer’s best interest, particularly when balances are too low to be cost-effective. High-risk, geared property investments are also a concern.
• Firm Three (13 claims): Claims involve inappropriate advice to set up SMSFs with balances below recommended thresholds, leading to significant risks associated with geared property investments and lack of portfolio diversity. 
• Firm Four (11 claims): Claims highlight overexposure to property within SMSFs, focusing on a single asset class without considering the consumer’s situation or associated risks.
• Firm Five (11 claims): Claims vary, including failure to provide ongoing advice or implement recommendations (generally under $10,000), inappropriate SMSF setup advice due to low balances, and instances of dishonest conduct, such as inducing unaffordable loans and improperly controlling consumer accounts.

Previous SMSF misconduct

There have already been numerous cases this year where ASIC has taken action regarding advice misconduct around SMSFs. 

Last month, DOD Bookkeeping had its AFSL cancelled for failing to pay an AFCA determination which was then paid by the CSLR. The $64,000 payment to an individual related to inappropriate advice to a couple regarding setting up an SMSF and purchasing two residential properties. 

AFCA determined the firm did not provide appropriate advice or act in the complainants’ best interest in relation to the personal investment property or the start of an SMSF, and the complainants were not experienced investors. 

In September, former Melbourne financial planner Bradley Grimm was sentenced following an ASIC investigation over dishonest conduct on five occasions between 18 February 2015 and 12 March 2015.

He was found guilty of transferring funds between two of his clients’ SMSFs to three separate companies of which he was the sole director.

In sentencing, Justice O’Connell remarked that Grimm was “well aware of his obligations” and that he “abused the position of trust that a licensed financial adviser holds”. 

Prior to this, financial advice licensee RM Capital was pulled up in February for failing to take reasonable steps to ensure that its authorised representative, the SMSF Club, did not accept conflicted remuneration.

Also in February, ASIC accepted a court-enforceable undertaking from a former Melbourne financial adviser regarding SMSF advice. Shivdeep Jaidka had a review of his advice conducted by ASIC which found he allegedly failed to comply with s961B and s961G of the Corporations Act in relation to SMSF advice.

Finally in December 2023, Mudasir Mohammed Naseeruddin was sentenced to over four years’ imprisonment after dishonestly obtaining client funds from six investors’ SMSF accounts. 

The former director dishonestly obtained more than $520,000 from six investors, between 13 May 2015 and 6 January 2020, by convincing the victims that the funds would be invested in property developments.

This is in addition to over two dozen SMSF auditors who have seen ASIC action, including disqualifications, suspensions, additional licence conditions, and registration cancellations.