ASIC has expressed concerns regarding certain strategies involving SMSFs borrowing to buy residential property. The concerns focus on the appropriateness of the advice to the individual client’s circumstances and, in effect, whether the strategy is in the client’s best interests.

All SOAs have to be approved by Dover’s compliance team and MLA Lawyers before they are sent to clients. Geared SMSF SOAs are obviously subject to this rule. This is the major compliance check.

More specifically, Dover will not approve a geared SMSF SOA unless a reasonable financial planner would agree the geared SMSF advice is appropriate to your client and in the client’s best interests. Dover’s minimum requirements are:

  1. more than $200,000 in superannuation;
  2. more than $1,000,000 in total assets;
  3. for a couple, combined income above $160,000;
  4. for a single person, an income above $100,000;
  5. capacity for salary sacrifice contributions up to age based limits so that the SMSF has a potential income other than just rent, so liquidity can be maintained; and
  6. no loss of insurance benefits (normally achieved by leaving a reasonable balance in the old super fund but always double check).

Exceptions to the above minimum requirements

Dover will allow exceptions to the above minimum requirements and requests for exceptions should be addressed to compliance@dover.com.au and should set out in detail why the adviser believes the geared SMSF strategy is in the client’s best interests and is appropriate to the client.

ASIC’s disclosure requirements re switching super products

All super SOAs need to comply with ASIC Information sheet INFO 182 which deals specifically with super switching as well as the more the general product switching rules set out in RG 175.160 so the client is aware of the costs, potential and actual loss of benefits and other significant consequences of switching between financial products.

Some practical points to note

Some practical points to note include:

  1.  get the time order right re the SOA, the SMSF, the bare trust, and finally the property, in that order; and
  2. follow Dover’s SMSF guidelines, noting that common sense exceptions are allowed, but have to be approved by Dover before you advise the client); and
  3. if the client is genuinely determined to do this, and has not asked for your advice on the property/gearing transaction, then yourSOA should say this, and should be limited to setting up the SMSF and switching from the existing super, and not advise on the SMSF gearing or subsequent investments.

There can also be situations where no matter how genuine the client’s determination is, you really have to say “No. You should not do this. It will be a big mistake and I am not going to facilitate it for you.”. You are an advisor, not a salesman, and it’s your duty to advise your client as to what is in their best interests, and not to explicitly or implicitly encourage financial folly. Remember, a reasonable financial advisor test applies: you have to act in line with industry norms and standards. ASIC’s recent public announcements are critical guides to what is expected here.

Some clients cannot afford to roll the dice. And a good advisor will stop them from rolling the dice, and tell them not to do it.

Off the plan apartment sales

Off the plan apartment sales and situations where the advisor is connected to the vendor or the vendor’s selling agent are not permitted. The connection to the vendor or the selling agent makes it impossible to satisfy the best interests duty. An advisor cannot satisfy the best interests duty if he or she is getting a back hander from a third party. Disclosure does not change this: it’s still a conflict of interest that is impossible to reconcile with the best interests duty.