ASIC to scrutinise low balance SMSF advice

The Australian Securities and Investments Commission (ASIC) has stated it sees self-managed superannuation funds (SMSF) with starting balances below $200,000 as not in the client's best interest and related advice would be under increased scrutiny.

ASIC fired the warning shot for accountants and financial advisers in the release of two new information guides regarding the disclosure of costs and risks when giving advice on SMSFs.

In the information guide — titled INFO206 Advice on self-managed superannuation funds: Disclosure of costs — ASIC stated "in many cases, a recommendation for a retail client to set up an SMSF with a starting balance of $200,000 or below is unlikely to be in the client's best interests".

"The costs of establishing and operating an SMSF with a balance of $200,000 or below are unlikely to be competitive, compared to a fund regulated by the Australian Prudential Regulation Authority (APRA). Therefore, the client may not be in a better position when compared to using an APRA-regulated superannuation fund."

ASIC said it has arrived at the $200,000 figure using independent research from Rice Warner, its own consultation on that research and its own assessment on what may be an appropriate minimum starting balance for an SMSF.

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The guide said there were circumstances in which a starting balance of below $200,000 may be in the client's best interests. These included the SMSF trustee taking on the bulk of the administration and the management of the investments of the fund to make it cost-effective or the SMSF being created with the expectation that large assets would be transferred into it within a short time-frame.

ASIC stated it was "likely to look more closely at advice to establish an SMSF, to consider whether the advice complies with the best interests duty and related obligations, if the starting balance of the SMSF is below $200,000".

ASIC also said where an SMSF was established with a low balance the related advice would have to clearly set out the circumstances that influence the adviser to believe the client is likely to end up in a better position, the viability of the SMSFs investment strategy and why the fund is in the best interests of the client.

ASIC stated it had released the information guides rather than make further legislative changes to impose specific disclosure requirements on Australian Financial Services licensees and their authorised representatives who provide SMSF advice.

However, it stated the risks and costs of creating a SMSF should be discussed with clients and disclosed "by the same means as the advice (e.g. in the SOA)".

The release of the two information guides, INFO205 - Advice on self-managed superannuation funds: Disclosure of risks, and INFO206 Advice on self-managed superannuation funds: Disclosure of costs, follows the release of a consultation paper in 2013 and subsequent consultation with 24 industry associations, advice providers, and consumer organisations.