By James Dickson, Managing Director, Oceanic Consulting Group
The self-managed superannuation fund (SMSF) sector continues to expand and now represents around $1 trillion in assets, or roughly a quarter of Australia’s superannuation system. As this pool of capital grows, ASIC is increasing its focus on how advisers guide clients into SMSFs. ASIC’s Report 824: Review of SMSF Establishment Advice provides a clear message that SMSF recommendations will be scrutinised closely.
While the growth of SMSFs is not a concern in itself, ASIC identifies significant risks when clients enter an SMSF based on poor-quality advice or a misunderstanding of the responsibilities involved. For advisers whose clients seek direct investment exposure, member-directed strategies or property-linked structures, Report 824 is essential reading.
A sector growing in size and risk
ASIC highlights that the number of SMSFs has grown at roughly double the rate of Australia’s population over the past 14 years. Many investors are drawn to the ideas of control and flexibility. However, SMSFs are not suitable for everyone. They require time, capability and a willingness to take on trustee obligations. Clients who exit APRA-regulated funds also lose important consumer protections, including access to AFCA.
For advisers, this means that any discussion about whether an SMSF is an appropriate structure must be supported by clear evidence that the recommendation is in the client’s best interests.
Findings: A high rate of non-compliant advice
ASIC reviewed 100 SMSF establishment advice files from 27 advisers across 12 licensees. The findings were concerning.
- 62 of the 100 files did not demonstrate compliance with the best interests duty and related obligations.
- 27 files raised significant concerns about potential client detriment.
Common problems included:
- insufficient inquiry into the client’s circumstances
- advisers acting as order takers
- SMSFs recommended due to conflicts of interest
- unsuitable high-risk investments, including off-the-plan property and LRBAs
- loss of insurance benefits without proper consideration
ASIC also identified frequent misuse of the idea of control. Advisers often cited control as a justification for establishing an SMSF without exploring what control meant to the client or whether the same benefits could be achieved through an existing superannuation product.
Relevance for the advice profession
Although the report focuses on SMSF establishment, the findings have broader implications across the advice profession.
- Advice must not be structure-led by investments
ASIC is alert to situations where an investment idea appears to dictate the recommendation of an SMSF. Advisers must demonstrate that the SMSF structure itself is appropriate for the client’s skills, objectives, costs and long-term needs.
- High-risk client and advice profiles will be targeted
ASIC identifies several risk indicators that will guide its surveillance. These include high volumes of SMSF establishment by individual advisers, low SMSF starting balances, older clients near retirement, SMSFs with direct property or LRBA exposure, and business models linked to referral arrangements that are not at arm’s length.
These profiles are common in the market and require heightened attention.
- Conflicts of interest remain a major enforcement priority
In 24 of the 27 files where ASIC had significant concerns about client detriment, advisers did not prioritise the client’s interests over their own or those of related parties. These failures were often linked to revenue models or associated property and SMSF administration businesses. Advisers must ensure all conflicts are identified, managed and transparently documented.
ASIC’s message: Expect enforcement
ASIC states that it is considering a range of regulatory responses, including enforcement action. Licensees will also be expected to review and remediate affected clients where SMSF establishment advice did not meet legal obligations.
The regulator’s direction is clear. As the SMSF sector grows, expectations around professional judgement, client suitability assessment and conflict management are rising.
Conclusion
Report 824 is a strong reminder that SMSF establishment advice requires thorough fact finding, a well-documented assessment of risks and benefits, careful handling of conflicts and a clear demonstration that the SMSF structure suits the client’s objectives and capabilities.
Advisers who take a disciplined and transparent approach will be well positioned in this environment. Those relying on generic processes or recommendations driven by investment products rather than client needs face increasing regulatory risk.
