A new ASIC report has found that a shocking number of SMSF property investors are subject to bad advice that could leave them “significantly” worse off in retirement.
The reports Improving the quality of advice and member experiences and Member experiences with self-managed superannuation funds saw ASIC select 250 client files at random. Out of this selection, 91 per cent did not align with the Corporations Act’s “best interests” duty and related obligations. This included poor record-keeping and process failures in 10 per cent of the files. An additional 10 per cent would have been “significantly worse off” when retiring due to the given advice.
ASIC deputy chair Peter Kell said that making decisions about super is one of the most important decisions a person can make, but there is little knowledge about them.
“ASIC found there is a lack of basic knowledge of the legal obligations in setting up or running an SMSF.”
Among many things, one finding by ASIC was that people were using SMSFs as a vehicle to enter the property market and were using it only to enter the property market without a wider investment strategy.
“For members who had seen property prices increase, particularly in Sydney and Melbourne, an SMSF became a vehicle to start investing in the property market. The surge in property prices created a sense of urgency driven by a fear of missing out,” the report noted.
An increasing usage of one-stop shops was also discovered in the report, where advisers have a relationship with developers or agents and recommend clients to invest into their products, typically geared residential property through an SMSF, regardless of the personal circumstance or the best interest of the client.
“The one-stop shop model creates inherent conflicts of interest that may affect the advice given to a client to set up an SMSF, make subsequent investments or use specific services. These conflicts can arise from direct or indirect commissions, referral payment arrangements, representative remuneration structures or even management pressures,” the report explained.
Peter Koulizos, chairman of the Property Investment Professionals of Australia, does not have a big problem with one-stop shops, but more so with the advice, as he believes no matter who the one-stop shop is, they need to do the best thing for the client.
“In the end, the client needs to be number one, and then the paperwork that the people provide, they need to disclaim all conditions that they collect, and in my opinion, it is very, very hard to justify if a client is paying you a fee for the property investment advice and a developer is giving you a fee for selling one of their units. To me that is a classic conflict of interest,” Mr Koulizos told REB sister publication Smart Property Investment.
“If there is a dispute, who are you really representing? Are you really representing the client and might be giving you a few thousand dollars in fees, or are you really representing the developer who’s willing to give you tens of thousands of dollars in spotter’s fees or commission?
“People need to check their paperwork that shows exactly where this person’s getting their commission from.”
In order to address this, ASIC plans to work alongside other regulators, including the ATO and APRA, to reduce the biased advice given out from one-stop shops.
Mr Koulizos thinks these pairings are a “terrific” idea that he welcomes.
“I think the ATO needs to be involved, because they have a finger in the pie as far as SMSFs are concerned, and I think ASIC also needs to be involved in the provision of investment advice; it needs to be independent and there needs to be no conflict of interest.”
Sasha Karen, Smart Property Investment, 2 July 2018