As we deal exclusively with medical professionals, we see a lot of clients that are referred to us have had a Self-Managed Superannuation Fund (SMSF) set up already, or are wanting to look to have one set up, after talking to colleagues about them.
This is to be expected when dealing with people earning large incomes and wanting control over their investment decisions. SMSF’s certainly suit SOME people but definitely do not suit MOST people! Please allow me to expand on that statement;
From the perspective of providing Advice to clients around if an SMSF suits their needs, we are provided the following guidance by the Australian Securities and Investment Commission (ASIC);
“Where a client has a superannuation balance less than $500,000 and you are considering recommending the establishment of an SMSF, you must engage your compliance manager to discuss the appropriateness for the client and seek their approval. Notwithstanding the financial constraints, even where clients have significant amounts to invest in superannuation, an SMSF is only suitable where it is in your client’s best interest and you have satisfied yourself that:”
a) Clients must have sufficient financial literacy to manage superannuation matters
By definition, establishing an SMSF means there is an element of self-management. This includes not only administrative management but also investment management. Accordingly, those clients who lack financial literacy are unlikely to be good candidates for an SMSF.
Assessing financial literacy is to some extent subjective, but when assessing financial literacy the factors to look for include:
- Familiarity with fundamental investment principles -e.g., diversification, liquidity, volatility, and investment risk/return concepts.
- Previous investment activity e.g. has the client have a history of managing a portfolio of assets?
- Understanding of interest rates, inflation, and time value of money.
b) Clients must understand the legal, tax, and administrative requirements, and the time commitment involved in managing the fund.
These include the establishment and ongoing management of trust deeds, the need to prepare annual accounts and lodge tax returns; additional administrative obligations when in the pension phase, ensuring relevant statutory balance and transfer limits are met, and the like. These can be onerous and costly, and the client needs to understand and accept these obligations.
c) Clients must understand the role of trustee;
SMSF Trustees need to understand the obligations of trustee, including:
- Maintaining the fund for the sole purpose of providing retirement benefits to SMSF members, or to their dependants if a member dies before retirement.
- Accepting contributions and paying benefits (pension or lump sums) to members and their beneficiaries in accordance with superannuation and taxation laws and the SMSF trust deed.
- Valuing the fund’s assets at market value for the preparation of financial accounts and statements.
- Having the financial accounts and statements for the SMSF audited each year by an approved SMSF auditor.
- Meeting the reporting and administration obligations imposed by the Australian Taxation Office.
- Responsibility to develop, implement and review an investment strategy for the fund, which includes consideration of insurance requirements for fund members.
- Responsibility for developing an exit strategy.
- Reviewing their own ongoing suitability as Trustees of the fund.
In all circumstances, advisers should recommend that clients undertake an SMSF trustee administration course prior to deciding whether to implement advice to establish an SMSF.
The ATO Publishes a list of approved SMSF trustee education courses available at
d) Clients must properly consider their need for appropriate insurance.
Insurance within an SMSF is often more difficult to obtain and can be more expensive as automatic acceptance levels do not apply and in some instances, group insurance rates are cheaper.
If you are a Limited Authorised Representative; please raise Insurance with the client and that this will need to be considered. As you are not authorized to provide Insurance advice, refer the client to a Full Authorised Representative or contact us if you need to organize a referral relationship.
e) Clients must understand that legal protections of SMSF are not the same as with public offer superannuation funds;
A client should be made aware, and accept, that SMSFs are not subject to the same government protections that are available in APRA-regulated superannuation funds, such as statutory compensation in the event of theft or fraud. In addition, access to dispute resolution mechanisms may be different.
f) Clients must understand the costs of establishment and of ongoing management.
ASIC notes (INFO 206) that there are many costs applicable to setting up, operating, and winding up an SMSF that should be discussed with clients and set out in the advice. Matters that should be discussed and disclosed are:
- The costs that are expected to be incurred in establishing, operating, and winding up an SMSF – in particular, which costs are unavoidable, as well as costs that may vary depending on how much of the SMSF’s administration the trustees are intending to undertake.
- How the average annual operating costs of an SMSF compare with the annual administration costs of the client’s current superannuation fund or other APRA-regulated superannuation funds.
- The cost of having professional service providers do some of the ongoing administration and management tasks for the SMSF.
g) The client must understand the need for advice on continued suitability of an SMSF for a client. This is particularly relevant:
- For existing clients who had established SMSFs with balances below $500,000 when the initial advice was provided. Consideration needs to be given to ongoing appropriateness.
- Where balances fall below $500,000 (e.g. client’s in pension phase).
- Where the health or legal capacity status of the trustees changes;
- Where the residency of the members and/or trustees changes;
- Where the family circumstances and relationships between members changes; and
- Where the credit position of any of the trustees changes.
This will hopefully explain why it may seem like your financial adviser is “trying to talk you out of it”, when you raise the topic of starting an SMSF with them. Once an SMSF has been established, there are considerable administrative costs in de-establishing it, as well as the assets held by the fund having to be sold which may incur either a capital gain or a loss. The analogy we use quite often is that it is like having a child; there are responsibilities you have as the parent, both morally and legally, you need to have the time to spend on it, there are costs involved at every corner and if you change your mind, it not a simple matter to take it back for a refund!
If you are considering establishing an SMSF and would like an earnest discussion around whether it suits you or not, please do not hesitate to contact Steve Jones at Steve@clearfp.com.au or call our office to make a time to discuss with him on 1300 077 123.