Failing to state why a SMSF suits a client’s circumstances

There are various rules of thumb that people – including regulators – apply to self- managed super funds (SMSFs). These include that there is some specific level of super benefits required to justify the establishment of a new SMSF. For example, the old RG 84 nominated $200,000 as a suggested minimum balance for a SMSF (and this was in 2005!) This minimum value basis for a recommendation presumes that the management expense ratio of the fund (i.e. the cost of managing the fund as a percentage of the benefits held within that fund) is the most important feature to bear in mind. This may be the case, but there are also many other potential benefits that might mean that a SMSF is an appropriate vehicle for a client or clients with a relatively-low balance. Common reasons, other than lowered cost, that clients prefer SMSFs can include:

  • the client’s desire for control;
  • expected (and recommended) large future contributions;
  • compatibility with other components of a financial profile;
  • compatibility with clients’ estate planning;
  • a desire to make or avoid specific investments (for example, a client may wish to avoid some equities on ethical grounds, but are unable to do so using commonly-available managed super options);
  • a client’s professional experience; and/or
  • an intention to gear a residential or commercial property within the SMSF.

Provided that they are genuine, any and all of these reasons may justify using a SMSF for clients who may have a relatively-low super balance. If this is the case, it is very important that the SOA make this clear. The adviser needs to state that there are benefits, other than lowered management costs, to the SMSF – and then list them.  Failing to do so leaves the adviser wide open to the criticism that the recommendation was not in their clients’ best interests. This can be particularly a problem where things do not work out for the client.

The Dover Group