The Quality of Advice Review

The Quality of Advice Review currently being conducted by Treasury does not specifically have an SMSF focus, but there will still be implications for the sector resulting from the process, head of financial literacy and advocacy at BT Financial Group, Bryan Ashenden explains.

One of the most significant industry events this year is the Quality of Advice Review. It is being conducted by Treasury and comes in response to one of the recommendations from the banking and financial services royal commission. This review will explore a number of areas relevant to the provision of advice, not just the actual advice itself.

What may not be readily apparent is the importance of this review to the SMSF sector, given none of the call-outs in the draft terms of reference make any comments about it, and neither do they specifically say SMSFs or advice relating to them are exempt from the scope. So, how is the exercise relevant to SMSFs?

Some of the answer to this lies in issues that are common across all areas of advice, SMSF-related or not, such as cost, disclosure and compliance. Further, how “clear, concise and effective” the advice is, which are fundamental requirements under the Corporations Act and apply to documentation such as financial services guides, product disclosure statements and statements of advice.

There is no doubt advice in the area of SMSFs can be complex when you move into the realm of related parties, limited recourse borrowings and non-arm’s-length arrangements, to mention just a few.

However, many of the common SMSF advice strategies are not more difficult than what would be employed via a retail or industry superannuation fund. Rather, difficulties often arise due to the question of who you are advising or what hat the client is wearing.

Are they a member of a super fund that just happens to be an SMSF and you are providing some standard contributionrelated advice or advice on their underlying investments in the super fund? Or are they the trustee of the SMSF and you are giving advice around the investment strategy for the fund or insurance needs for the fund overall perhaps as a result of a limited recourse borrowing arrangement? And can we give this advice in one document or does it need to be in separate documents?

Ideally, advisers should be able to provide complex advice without having to produce overly complex documentation that may impede the delivery of that advice. Clearly, the need for advisers to comply with the principles outlined in the Financial Planners and Advisers Code of Ethics is paramount, as is the obligation to comply with the best interests duty under the Corporations Act. This shouldn’t change as a result of the Quality of Advice Review and should be evidenced through the file notes or other records advisers hold to support the advice they provide. But how much of this or to what level of detail really needs to be contained in the documentation that is ultimately provided to the client?

It is pleasing to see this is essentially one of the areas the Quality of Advice Review will be focusing on. According to the draft terms of reference, one area of the review will be exploring “opportunities to streamline and simplify regulatory compliance obligations to reduce cost and remove duplication, recognising that the costs of compliance by businesses are ultimately borne by consumers and serve as an impediment to consumers’ access to quality advice”. This is not a focus on how good the advice was or wasn’t, but on how that advice was produced and what was provided.

Furthermore, the review will consider the terminology that exists in the advice sector. Consistent with a number of previous industry positions and submissions, the review will consider the legislative framework for providing advice, including “key concepts such as ‘financial product advice’, ‘general advice’, ‘personal advice’, as well how they are used, how they are interpreted by consumers, and whether they could be simplified or more clearly demarcated”. In this context, we need to go back and think about the last quality of advice review undertaken in the SMSF space. In June 2018, The Australian Securities and Investments Commission (ASIC) released “Report 575: SMSFs: Improving the quality of advice and member experiences”. Given all that has occurred since then, it may come as a surprise this report was released only three-and-a-half years ago. It came during the midst of the royal commission, although it is important to remember the advice reviewed was provided to clients prior to that commission.

While we don’t need to focus on the outcomes of that review itself, which were not overall positive, what it did identify was a lack of understanding by many SMSF members of exactly what was expected of them when running their own superannuation fund. This clearly demonstrates the need for good client education and is a fundamental principle Standard 5 of the Financial Adviser Standards and Ethics Authority Code of Ethics seeks to address. But providing this education can be challenging.

Even though it did not address the quality of the advice provided, the ASIC report contained comments about the difficulties that can arise when demarcating between the concepts of personal advice, general advice and factual information. This, as noted in the report, is complicated by the perception, perhaps justifiable, that if clients are obtaining information from an expert in the area of SMSFs, those same clients have a belief they are receiving advice that is personal to their needs even if this was never the intention of the provider of that information.

As such, SMSF advisers may be asking themselves the following questions. Has this led to more information being provided within a statement of advice because of the risk that it could be construed as personal advice? Has this added to the complexity of the statement of advice as a result? Has it detracted from the quality of that document as extraneous information has been added that has made it harder to decipher what the true recommendations for the client are?

In looking to address these difficulties, client education is central to the solution. Appropriately qualified practitioners in the SMSF segment, whether it is the adviser, accountant or auditor, can provide this information and should be heralded as the appropriate source of such education and information. The education should be provided in a manner that clearly indicates it is not personal advice to the client, rather it is part of an education process to help them understand what the actual advice they ultimately receive means and what they, as the trustee of an SMSF, need to do in line with their important role as the trustee.

One final area that is proposed to be considered under the Quality of Advice Review is the “processes through which investors are designated as sophisticated investors and wholesale clients, and whether the consent arrangements are working effectively”.

Whether or not SMSFs can be treated or advised on a wholesale basis is a question the industry has grappled with for many years. There was a long-held belief an SMSF could only qualify as a wholesale client if it met the professional investor test, holding at least $10 million of assets. While there were a number of legal opinions that offered alternative views, such as the ability to use the $2.5 million of net assets under the accountants certificate approach, this was not broadly followed. That changed somewhat in August 2014 when ASIC released a statement saying it would not take action where an SMSF was classified as wholesale under the accountants certificate approach. Notably, the regulator’s statement did not prevent clients taking action in the event of a mis-classification.

Clarity around the ability for an SMSF to be classified as a wholesale client, and in what circumstances, would be welcomed. It would be helpful if the review considers the type of advice that can be provided on a wholesale basis. For example, does it make sense an SMSF could be classified as a wholesale investing vehicle and advice provided to the trustees on that basis, while at the same time requiring advice provided to one of that same fund’s trustees in their personal capacity as a member about a contribution to be done so on a retail basis? Is it this distinction, or lack of distinction, that has added to or created some of the uncertainty and complexity?

What about an SMSF that has $6 million in net assets, but all four members have a balance of $1.5 million each? Or an SMSF valued at $3 million, servicing one member with a balance of $2 million and $2.5 million of additional assets outside of super, and another member who has $1 million in fund assets disqualifying them from satisfying the wholesale classification personally? Can the SMSF be treated as a wholesale client in these circumstances? And should it be?

And what if, in the second example above, the member with $2 million dies and their representative steps in to fulfil their responsibility until the benefits are paid out? Should the wholesale classification be retained or lost?

Overall, the Quality of Advice Review should be welcomed by all professional advisers, whether operating in the SMSF sector or not. Advisers should take note of the draft terms of reference, which is on the Treasury website, as it influences what changes could and should be made to enable the delivery of clear, concise, effective and affordable advice. A review process that ultimately aims to achieve this should be applauded and supported by all.