Clients ask me, “What keeps ME awake at night?”
So, what worries me? It is the current flavour of the month – seminars spruiking residential property in SMSFs. And ASIC is concerned too. The commissioner has stated recently, “We are keen to get in early on the property spruiking and make it clear SMSFs should not be the next target. Superannuation is too important.” Too important, but also too late for clients of the Charterhill Group.
Risk is a funny thing. It can be recognised and minimised. It can be understood and managed. It can be known and retained. And it can also be ignored, but still retained (while sometimes not even being aware of the risks).
So what have property and SMSFs got to do with this? Plenty. But first we need to understand the current legislation with regards to advice.
By law, anyone that gives advice relating to a ‘Financial Product’ needs to have qualifications and hold a Financial Services licence. Advice needs to be in writing (‘Statement of Advice’) outlining recommendations and demonstrating the suitability of the recommendations for the client’s circumstances and that the strategy is appropriate. Substantiate, provide research. Disclose all fees and any conflict of interest. Then we get audited every year. Get it wrong and you get fined, sued and lose the ability to give advice.
Property, for some strange reason, isn’t considered a ‘Financial Product’ so a client can potentially make the largest purchase of their life and it falls outside the financial regulatory environment. Anyone can set up and run a “Property through SMSF” seminar. No license. No qualifications and (with just a disclaimer) show clients how to buy a $500 000 property using their super. Sometimes even help you ‘find’ the property. Need a loan? Problem solved.
There is nothing wrong with a SALES seminar. You expect a BMW salesman to sell you a BMW. A real estate person sells you a house. A property developer develops property. But you don’t dress up a sale as strategic advice. I have been cold called several times this month with offers of a ‘Wealth Creation’ seminar based on this. When the spruikers get involved it is time for the warning bells.
SMSFs are a large and growing sector of the superannuation space. They are very suitable for some clients and very, very unsuitable for others. They are only a tax structure – a tool that can be used to support a strategy. A SMSF is required to have a documented Investment Strategy that shows how the retirement objectives of the members are likely to be met. When someone wants to borrow money through their super fund, the bank now requires a Financial Adviser to sign off before the loan is given.
I have had several of these last month with trustees unaware of the obligations, what the strategy was or how it was supposed to meet their objectives. Is diversification considered? Cash flow? Nope. Any plan for paying down the loan or making the required minimum pension payments? Zip. How inflation is managed or any consideration given to the risk of what might go wrong? Any calculations or modelling on expected returns? What about if a member cannot work or dies? Or even to consider the strategy to borrow money at 6% to get a net return of 3%. Huh? Anybody mentioned that the strategy to get a 15% tax deduction from the loss in super instead of a deduction at their marginal tax rate of 37% or 45% might not be such a good idea?
Many clients are being done a great disservice in this sector. I understand some clients only want transactional services and instruct the SMSF and bare trust to be set up, borrow funds, buy a house and then have the tax returns, financials prepared and the fund audited. Unfortunately, the primary objective of all this activity – appropriate professional advice to help the client meet their objectives – is missing.
Generally if we seek advice outside our area of expertise, we ‘don’t know what we don’t know’, but if you are dealing with a group of professionals you would have a reasonable expectation that important issues would be raised.
Recent experience has shown that this is not the case. Yet they are under the impression that they were getting advice. This is worrying – and hopefully the sector will be regulated soon before too much damage is done.