I was flat out the last two Fridays, and Friday Reflections just did not happen. So I thought I would compensate with a short Monday Meditation. We are handling about 200 SOAs a week at present, with a stable upwards trend. Most are good and most are not contentious; and so I only look at 20 or so week. Of these contentious SOAs most are fine (even excellent), and those that are not fine usually involve one of two errors of judgment. These are:

  1. inappropriate recommendations to gear SMSFs, outside of our guidelines, and where there is no reason to make an exception; and
  2. inappropriate classifications of clients as being not conservative.

Let me expand on each, with a view to eliminating/minimizing similar errors of judgment in the future.

Inappropriate recommendations to gear SMSFs

The SMSF lending guidelines are:

  1. more than $200,000 in super;
  2. more than $1,000,000 in total net 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 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).

All SOAs need to comply with RG 84: Super Switching Advice: Questions and Answers, and the product switching rules set out in RG 175 and in particular RG 175.160, so that the client is aware of the costs, loss of benefits and other significant consequences when recommending switching between financial products. RG 84 can be accessed here: RG 84 Super Switching Advice and RG 175 can be accessed here: RG 175 ASIC. We will make exceptions to the SMSG lending guidelines on merit. For example if conditions (iii) to (vi) are met, but a client was only, say, age 35, and did not have more than $200,000 in super and did not have more than $1,000,000 in total net assets, we would probably make an exception. It’s a good idea to check with us whether we will make an exception before you advise your client. This may save a bit of embarrassment down the track if we say no. But usually in these cases clients have been happy to revert to a non-geared strategy, involving say ten blue chip shares, rather than a geared property strategy. Client management skills are very important here, but don’t underestimate your client’s preparedness to follow your advice, including your further considered advice to, in reflection, instead adopt a less risky strategy…we have all had to go back to clients and say “…look, I have studied this again and on reflection it does not fly…but I have an even better and more appropriate solution for you…”.

Inappropriate classifications of clients are not being conservative

The most common error we are seeing here involves statements that older clients have high and stable incomes, when in fact they do not. For example, a 55 year old man employed FIFO by a mining company may have a high income, but he does not have a stable income. His income is only as safe as his next contract, and its longevity cannot be more than 6 weeks, or whatever the remaining contract time is. Very often these clients will not have any significant assets, and despite their (very short term) high incomes are actually in financial dire straits. These clients actually need advice on budgeting, cutting costs, retraining to acquire new skills and health management if they are to have any chance of an economically pleasant old age. They do not need a geared hedge fund focussing on emerging economies! J No one has actually said they do, but a few SOAs have been close! Don’t bet his farm. This guy has to stay conservative because he cannot suffer a drop in the market, and both the share market and the main property markets are at all time highs right now. He has to be treated conservatively.

Have a look at Friday Reflections

When we pen Friday Reflections we aim to change the Dover SOA DNA a little, and to get advisers to take on board our comments and recommendations, and to make a good thing better. Please peruse the last few Friday Reflections and take on board their suggestions. Don’t hesitate to contact me if you disagree with anything, or if our requirements are not clear.

Comment on matters other than financial products

Clients want advice on matters other than financial products. Many SOAs never venture outside of the client’s super products and the client’s risk products. We encourage you to go on a much wider excursion into your client’s financial affairs. Can they find a better job? Can they start a business? Should they salary sacrifice into super? Should they pay more off their mortgage? Should they help their kids? Should they help their parents? Should they be relaxed? Should they be worried? These are the questions they want you to answer. Anticipate them. Ask them rhetorically, and watch how they respond. Take you cue, and follow up as appropriate. It’s not hard to do. See a copy of a SOA prepared for a client in 2014. She came in a week ago for a follow up meeting and happily told me she had followed every suggestion and each one had worked out well so far. This is not meant to be a game changing SOA. It’s a simple SOA covering simple matters. If you read it you can see how simple these matters actually are. The client has already booked a meeting for next year. Please think about what your clients are doing, and not doing, and don’t be afraid to let them know what you think. That’s why they made the appointment! Please feel free to send me in a fact finder and call to discuss ideas before your meeting. If I can help, I will. I hope you are well and that all is well.