SMSF Cluedo: who, what, when and how

It is critical for practitioners to know if they are providing financial advice to an SMSF member or trustee as this knowledge can also play a part in defining the scope of advice, writes Bryan Ashenden.

Sometimes providing advice on SMSFs can feel like a game of Cluedo. Not because you are trying to get away with murder, of course, but because there always seem to be so many unanswered questions.

Two of the biggest questions in providing advice, whether on SMSFs or not, are related to the how and when: how can I provide scaled advice and when can I provide it.

This has certainly been a hot topic in recent times, with some confusion existing due to the Financial Adviser Standards and Ethics Authority (FASEA) Code of Ethics, announcements from the Australian Securities and Investments Commission (ASIC) around COVID19-related relief and Australian financial services licensee policies.

Let’s start by dispelling some of these myths.

The FASEA issues have arisen as a result of Standard 6 of the code, which requires an adviser to “take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances”. If you have to think broad and long term, how can you scale advice? Doesn’t this lend itself to a more comprehensive analysis?

To this, I would make the following points.

Firstly, we need to distinguish between what we consider and take into account versus what is actually provided to the client. A proper investigation of a client’s circumstances may require us to delve into their affairs to ensure we can provide the right advice. But this doesn’t mean we don’t have the ability to have the scope narrowed, ideally at the direction of the client.

Secondly, the intent of Standard 6 is not to prevent the provision of scaled advice. Indeed, in its latest draft guidance document to the code released in October 2020, FASEA has specifically called out that it recognises the importance scaled advice can play. Rather, the intent of Standard 6 is to ensure if other matters relevant to the advice at hand are discovered during the advice process, they are not to be ignored.

It doesn’t mean they have to be included in the scope, and indeed if their impact is material, they should be and the advice scope widened. What should occur, at a minimum, is that these other matters should be brought to the client’s attention, their potential implications noted and a plan established as to when these matters should or will be addressed.

In terms of ASIC’s announcements over the past year around COVID-19 relief, the regulator has actually promoted the ability to provide scaled advice. Indeed, it has provided even greater relief, such as the ability to use a record of advice in place of a statement of advice where advice has been provided in relation to certain COVID related matters, such as early access to superannuation.

This has demonstrated ASIC’s willingness for scaled advice to be provided, to keep costs down (given there was a maximum fee that could be charged to the client if this relief was to be used) and ultimately to encourage more Australians to seek advice on these matters.

However, despite this relief, the use of scaled advice in these scenarios was perhaps far less common than what the regulator had expected, particularly given many in the financial advice industry had been calling for concessions of this nature.

Why was this the case? Perhaps it was due to many being hesitant and wary of doing the wrong thing. In a post-royal commission environment, ensuring all advice was delivered in a compliant and complete manner has perhaps come at the cost of ensuring advice can be delivered in a way that is easiest for the end consumer to actually consume. In some situations we have seen statements of advice become lengthy due to the level of disclaimers and disclosures being included to ensure nothing has been missed, and that it is clearly called out to the client what constraints or limitations apply to the advice provided. In some cases, the way to reduce the number of those limitations is to actually not limit the advice and broaden its scope.

But does this mean the ability to provide scaled or scoped advice, particularly when it comes to SMSFs, has almost disappeared? The answer to this has to be no.

When it comes to providing SMSF advice, the questions of who and what are vitally important, and the answers to these questions can help guide you through the advice process and help work out whether scaled advice is possible, and even more so, if it is preferable. Who are you advising and what are you advising on?

The who sometimes seems obvious on the face of it – I am providing advice to my client. But the real question is in what capacity are you providing the advice. Are you advising them as an individual/ member of the fund, or are you advising them as an SMSF trustee? In some advice scenarios it could be either, so your decision here becomes important.

To use some examples to illustrate this, consider the following scenarios:

• If you were providing advice to a client about the suitability of establishing an SMSF, you have to be providing that advice to the client as an individual. You cannot be advising them in the capacity as a trustee as the SMSF does not yet exist.

• Advice to roll money into the SMSF, or contribute monies, again would be advice to the individual as it is advice about where the money is coming from, and this is clearly the case where it is the initial monies to help establish the SMSF.

What about advice about how the monies that sit within the SMSF should be invested? Here, things may get a bit more complicated because the answer could be either. Trustees of the SMSF have an obligation to formulate an investment strategy that will set guidelines as to how the monies within an SMSF are invested. However aren’t these guidelines often formulated by considering the risk profile of the members of the fund but the longterm outcomes being sought?

One way to potentially consider the answer to the ‘who’ in a scenario like this is to ask: “What would I do if the client was in a non-SMSF environment, such as in a retail fund?” In a scenario like that, would you address your advice about how your client’s super savings are invested to the trustee of the retail fund? Of course not, you would address you advice to the client directly and, if accepted, then look to implement via the retail super fund. The same logic can be applied when it comes to savings in the client’s SMSF. Address your advice to the client as a member of a super fund, albeit their own SMSF, and then if accepted, implement in the SMSF.

It may, however, be a different approach if your client is a member of an SMSF with another person, often their spouse, and their super savings have been invested via the SMSF in a pooled manner.

In this case, while you may be dealing with a particular account balance for each client, you aren’t really able to advise them individually on underlying investments in their SMSF, as they only have a portion of each underlying investment due to the pooled nature of the investments inside the fund.

Your advice to the clients individually may be about the potential future impacts from their invested superannuation savings in the SMSF, how that affects other plans and the like, but not on the underlying investments themselves. In a pooled investments scenario, your advice may be better directed to the trustees of the SMSF.

Consider how you would approach a situation where a client is about to retire and commence an income stream from super. Again, your advice here would most likely be directed to the member as an individual and not as a trustee. The situation is about how the individual will fund their retirement needs. With no compulsory cashing of superannuation benefits anymore, there is no advice the SMSF trustees would require in these circumstances, other than perhaps regarding how to meet their payment obligations in the event of the passing of a member of the fund.

Closely related to the question of who are you advising or in which capacity is your client receiving the advice, is the question: “What are you advising on?” Knowing what you are advising on can also help you determine who your advice is addressed to.

Certain aspects of SMSF-related advice can, arguably, only be addressed to members in their capacity as trustees. If your client was considering undertaking a limited recourse borrowing arrangement in their SMSF, you should be directing that advice to the trustees, or the clients in that capacity, as it is the fund that is undertaking the borrowing rather than the members personally.

Similarly, advice about the investment strategy of the SMSF, including meeting the requirement to consider the insurance needs of the members, is advice that should be provided to the SMSF trustees as they are the ones who have a legal obligation to discharge these requirements.

Advice about a member’s own insurance needs, for example, whether they need increased life coverage in their circumstances, should be addressed to the member as it is about their personal situation. It can be implemented via the SMSF, but should be addressed to the person requiring the cover.

Getting the answer on who advice can be addressed to can actually assist you in the provision of scaled or scoped advice in a compliant manner. The reason for this is that advice to the trustees of an SMSF must naturally be a form of scoped advice. There are only limited situations in which you would be advising the trustees of the super fund. You would not be advising the SMSF trustees on the ability of a member, for example, to access the age pension. That is advice to the members in their personal capacity.

Having the ability to separate out who you are advising, and what you are advising on, not only can assist you in the ability to appropriately scale and scope your advice, it can also make it much clearer for your SMSF clients what your advice is and in what capacity they are receiving it. This is turn may assist them in being clearer on how to discharge their obligations as a trustee of an SMSF.

Finally, there is perhaps an added benefit from being able to clearly and appropriately scale your advice. Standard 5 of the FASEA Code of Ethics requires you to ensure your clients understand the benefits, costs and risks of the advice you provide. If you can make it simpler and clearer by identifying who you are advising, then this may go a long way to assist you in meeting the requirements under this standard as well.

BRYAN ASHENDEN is head of financial literacy and advocacy at BT Financial Group.