‘Trying to find clients for a product’: AFCA puts SMSFs under the microscope

Self-managed super funds (SMSF) and conflicted advice are the “main drivers of our complaint volume”, the Australian Financial Complaints Authority (AFCA) has said.

In its submission to the Senate inquiry into the Dixon Advisory collapse and its impact on the Compensation Scheme of Last Resort (CSLR), the CSLR operator detailed that inappropriate advice to use an SMSF to borrow and/or invest in property was one of the “recurring themes of misconduct” that it had identified since the scheme kicked off.

According to the CSLR, 90 per cent of all personal financial advice claims linked to superannuation in some way.

During AFCA’s member forum last week, Alexandra Sidoti, senior ombudsman – investments and advice, said too often, advice firms are recommending SMSFs to get clients into a conflicted product.

“Complaint volume is the main thing that flows through to costs of the CSLR and the big things that we’re seeing both for CSLR complaints actually, and our business-as-usual complaints, is conflicted advice models and SMSFs,” Sidoti said.

“That is absolutely the main driver of our complaint volume. We’re really observing in these situations, a primary focus on trying to find clients for a product – a conflicted product – rather than the other way around, where we really expect to see advisers trying to find suitable products for a particular client.”

Crucially, she added, it is an issue that is popping up in a number of unrelated complaints, not just in the high-profile ones like United Global Capital (UGC).

“We’re seeing people, it might not be a completely cold call, but there are clearly call centres set up, and it may be someone’s entered their details online to compare their super or something like that,” Sidoti said.

“The next thing they know, they’re getting a call from this call centre who aren’t licensed advisers, but will start to talk to people about the benefits that they might get in having an SMSF and investing in a particular product, and those clients will then find themselves referred to a specific financial advice firm that are the firms that are running these conflicted advice models.

“So, you’re often seeing then people rolling over all of their APRA-regulated funds into an SMSF and investing, sometimes up to 100 per cent of those funds in a related party product of the financial firm – a product that the financial firm’s really getting some sort of a benefit from.”

At the FAAA Roadshow in Sydney last week, Holley Nethercote partner Samantha Hills also highlighted a lack of advice tailored to specific circumstances from firms recommending a high proportion of their clients set up an SMSF as a “red flag”.

SMSFs “tend to be a bit of a risk area”, Hills said, particularly when their use forms part of a pattern.

“One of the things that I would note in relation to SMSFs is a bit of a red flag when we, as a firm, come in and help a licensee by perhaps doing a set of file reviews, is if the same recommendations are consistently made, client after client after client after client,” she said.

“For something like SMSF advice, if we found that a firm was consistently recommending SMSFs to all its clients, that might be a little bit of a red flag, because it suggests that you’re not necessarily tailoring your advice to the client’s circumstances.”

Additionally, it can also raise questions about the motives behind the advice and whether it is being done for the benefit of the client or the adviser.

“Some other red flags that we look for in that context is, ‘What’s in it for you if the client sets up an SMSF?’ Hills said.

“Will they then enter into an ongoing fee arrangement with you, under which you benefit? Will you then recommend that they invest in real estate, and you perhaps get some kind of benefit from the real estate agent, which would be a breach of conflict of remuneration provisions.

“But things like that that might be suggesting patterns, that might suggest that the best interest duties not being met in all cases.”

Structure v motive

Despite the concerns AFCA has raised, Sidoti stressed that SMSFs themselves “aren’t the problem”, it is the reason for the advice to set one up that is causing the issues.

“SMSFs as a superannuation vehicle are appropriate for a lot of consumers, but we really expect that when SMSFs are recommended to clients, it’s very much based on their individual circumstances and considers what that particular vehicle is going to provide for those people,” the AFCA ombudsman said.

“There’s a lot of additional things that come with SMSFs, like the sort of obligations you have as a trustee, for example, is certainly not for everyone. The problem we’re really seeing here is the intersection between the use of SMSFs to basically get people’s superannuation funds invested in a conflicted product of the financial firm.”

The SMSF structure becomes attractive for people engaging in, as SMSF Association chief executive Peter Burgess phrased it, “nefarious activity” because it provides an avenue to access one of the two areas that most Australians hold their assets.

“Most people’s wealth is tied up in their principal place of residence and their superannuation, so what we’re seeing here is advice models where they recommend people establish an SMSF so that those superannuation funds become available for investment in their conflicted in-house products,” Sidoti said.

“That’s the key issue that we see. Often, we’re not really seeing any consideration of client circumstances and the only reason that’s provided for recommending an SMSF as a vehicle is in order to make this investment.”

Shail Singh, AFCA lead ombudsman for investments and advice, added: “The SMSF, per se, is not bad, it just seems to be the vehicle through which they use to access people’s super.”

The comments echo those of Financial Advice Association Australia (FAAA) chief executive Sarah Abood at the SMSF Association national conference in Melbourne last month.

However, Abood acknowledged that the SMSF structure was starting to gain a “reputational issue”, leading advisers and licensees to have a “higher bar” to recommend a client establishes an SMSF.

“We have certainly seen a number of the cases that have gone to the CSLR associated with the structure,” Abood said.

“I don’t think you blame the structure; you blame the people who are using the structure for the wrong reasons.”

According to the CEO, the underlying assets that have caused the problem are a far greater concern than the funds being invested through an SMSF.

“If we’ve seen something blowing up the whole firm, certainly in the case of Dixon Advisory, the SMSF was the structure that was used, but of course, the issue was in fact caused by the URF, the US Masters Residential Property Fund, blowing up and sending the whole thing over a cliff,” Abood said.

“So, while we’ve got to recognise that there’s an association there, I don’t think we need to say that it’s the structure’s fault. Advisers do have that in the back of their mind.”

Heffron director Meg Heffron expressed a similar sentiment, arguing that bad actors utilising the structure for “dodgy” purposes is not a reflection on SMSFs as a whole.

“I think, as a sector, when people either get scammed or take money out illegally, that is a problem for us to care about, to engage in and to be part of the solution. I get nervous when we attach high incidence of complaints and things about schemes that include an SMSF as an SMSF exclusive problem,” Heffron said.

“It is the vehicle of choice for people who are going to do dodgy things. I’d be really reluctant if we, as an industry, let that translate into SMSFs are the problem, as opposed to dodgy people are the problem.”