How accountants can avoid common SMSF advice mistakes

Smart practice

Monday 07 March 2016

New regulations will soon apply to providing SMSF advice. Are you ready for the changes?

As of 1 July 2016, accountants won't have the latitude they've previously enjoyed when it comes to dispensing SMSF counsel. If an accountant is unlicensed – and most currently are – he or she will need to confine themselves to offering factual information.

How to stick to the facts

Factual information is defined by the Australian Securities & Investments Commission (ASIC) as "objectively ascertainable information whose truth or accuracy cannot reasonably be questioned". The upcoming Future of Financial Advice (FOFA) reforms do not impact anyone's ability to dispense factual information. However, accountants will need to be much more vigilant about not segueing from providing factual information into offering general or personal advice.

More on that shortly, but first a refresher course on how to stay on solid factual information ground. 

Before providing factual information, clarify with the client that is what you are doing. Stress that you are not intending to imply any recommendation or opinion about a certain course of action or specific product.

You can use personal information about a client to provide factual information that is specific to them, but not offer opinions or recommendations.

Many accountants don't fully understand there are different types of advice…

For example, if a 50-year-old woman with significant assets and a high income walks through the door, you can educate her about how a SMSF differs to a retail or industry fund. You can provide factual information on the establishment, structure and operation of SMSF funds. You can explain the differences between a SMSF and retail or industry fund in relation to the control of investments and in-house asset investment opportunities.

What you can't do is recommend the client set up a SMSF as opposed to keeping her money in a retail or industry fund. Crucially, you can't so much as seem to be hinting at a recommendation about what superannuation choice the client should make.

Personal and general advice

Come the new financial year, if you wish to provide either personal or general advice you will need to have an AFS licence or be authorised by an AFS licence holder. As with factual information, you should start by clarifying with the client that you are providing general or personal advice before doing so.

General advice is given without reference to the client's financial situation, needs, or objectives. This point needs to be communicated to the client and they have to be instructed to consider the advice in light of their circumstances. The General Advice Warning (GAW) should also be provided at the time of the advice and via the same means by which the advice is being provided (i.e. email advice, email GAW; verbal advice, verbal GAW).

The client should also be provided with a Product Disclosure Statement (PDS) if the advice involves acquiring or potentially acquiring a financial product.

Advising a client that many high-income earners, with significant assets and a reasonable level of financial literacy, find SMSFs an attractive option is likely to be general advice. Telling a client you've taken into account their salary, assets and retirement plans and concluded they should set up a SMSF is likely to constitute personal advice.  

Blurred lines

Rob Hayward, Head of Client Solutions, Macquarie Virtual Adviser Network, predicts accountants will find the new arrangements challenging.

"Previously, if a client came to me and said 'I've just inherited $30,000, what should I do with it?" I could tell them to stick it in their SMSF. I didn't need an AFS licence to do that and there was no Statement of Advice or other regulatory documentation involved. That won't be the situation after 30 June 2016."

Hayward suspects the main issue accountants will face is staying within the factual information perimeter.

"Many accountants don't fully understand there are different types of advice. I imagine a lot of accountants will think they can continue talking to their clients about, say, setting up a SMSF and buying a property through it. They'll believe they are providing factual information. What they will actually be doing is providing at least general advice and possibly personal advice. In doing that, they will be breaching who knows how many Corporations Act provisions. If things later go pear-shaped and the client complains to ASIC, the accountant is now looking at financial and regulatory penalties."

So how carefully will accountants without an AFS licence, or authorisation to operate under one, need to tread?

"They can provide basic information, such as the tax rates on SMSFs, but that's it," says Hayward. "The minute they start talking about pros and cons of SMSFs they've strayed into giving general advice and need to be licensed. And if they suggest that an SMSF is appropriate for a client based on their personal circumstances that is personal advice. That means they both need to be licensed and to provide the client with a Statement of Advice."

By continuing to help their clients in the traditional manner, accountants could soon be harming themselves, if not appropriately licensed.

If you'd like further information about how to provide information and advice safely, ASIC's Regulatory Guide 244 is a good place to start.  

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