Do I need a financial advisor to manage my SMSF?

It is optional to engage a financial advisor to manage your SMSF. Your decision to employ the services of a financial advisor depends on your understanding of superannuation laws, tax regulations, and financial markets as well as the desire and time to pick your own investments.

Why would you engage a financial advisor?

If you are thinking of starting an SMSF a financial advisor can assist you with the following frequently asked questions:

• Is an SMSF right for me?
• Do I have enough in super to start an SMSF?
• Can I rollover all of my super into a new SMSF?
• If I can how do I do that?
• Is an SMSF cost effective?
• Can my employer contribute to my SMSF?
• Should I start new insurance policies in my SMSF or retain existing insurance in my industry fund?
• What should my SMSF invest in?
• I want my SMSF to purchase my business premises – how can I do this?
• How should I structure my SMSF?
• What investment strategy suits the members retirement goals?

What are the advantages of engaging a financial advisor?

A financial advisor has the experience and knowledge of financial markets to assist in the preparation of an investment strategy for your fund. After consultation with the members about their specific circumstances and retirement goals, a financial advisor can provide advice on how and where to invest the SMSFs resources.  Investments have a level of inherent risk, and a financial advisor can help to mitigate the risk by ensuring your SMSF portfolio is diversified and well-balanced reducing the risk of losses.

An advisor can also provide strategic planning advice working collaboratively with your SMSF Accountant in relation to:

• making contributions to the fund
• acquiring certain assets from members or related parties
• losing capacity
• death benefit nominations
• dealing with death benefits
• estate planning including recontribution strategy to rebalance the underlying tax components which can potentially save tax for your adult children on your death
• SMSF pension planning
• exit planning

What are the disadvantages of engaging a financial advisor?

Costs of engaging a financial advisor

Careful consideration should be given to the costs of engaging a financial advisor.  All fees must be disclosed so it is crucial to read documents before signing any agreements and always ask questions. A financial advisor can be paid based on commission-only or fee-only.

• Commission-only – the fees are imbedded in the investment and not as transparent i.e. Your advisor receives 3% commission and so a $5,000 investment will include the commission of $150 paid directly to the advisor from the provider and $4,850 is actually invested (noting this is an example only, all commission structures are different)
• Fee-only can be paid as an hourly rate, flat fee or a retainer – fees based on an hourly rate depends on the time your advisor is actually working on your behalf. A flat fee is paid for the services you request and is often preferred when requiring a plan for retirement purposes. A retainer is similar to an hourly fee, but the fee is billed upfront, and a wash-up is done with the fund either paying more for hours worked or a refund if less hours than estimated.
• A combination fee of commission-only and fee-only.

Potential conflict of interest<

There may be potential conflict of interest where the advisor receives a commission for a product recommendation which is why many advisers prefer a fee-only basis.

Control

Control is one of the reasons a lot of people start their own SMSF. Engaging a financial advisor may mean you are relinquishing some control, but you are depending on their expertise and knowledge to make the right investment decisions.

What protection do I have if I engage a financial advisor?

To provide advice in relation to financial services products a person must have an Australian financial services AFS) license or be authorised by an AFS licensee. The Corporations Act 2001 provide the licensing regime and the licensing of financial advisors is regulated by ASIC.

A financial advisor is required to provide a statement of advice (SOA) when providing advice to a person to set up an SMSF as it is considered a financial product. An SOA must also be provided when the SMSF trustee is seeking advice in relation to operating or winding up an SMSF.  Advice provided to an SMSF trustee or member for such things as contribution strategies, pension planning, estate planning and death benefit payments are typically provided in an SOA.

An SOA includes the advisor’s recommendations outlining the reasons for those recommendations, the fees involved and the risks and any potential conflicts of interest. A record of advice (ROA) is similar to an SOA, but it is usually shorter and is generally a top-up or clarification of the original SOA.

ASIC can issue monetary penalties to a financial advisor or strike them of the register for failing to act in the best interest of the client, charging for services not actually provided, inappropriate advice, being dishonest and providing false or misleading information. If the advice is fraudulent, they can be subject to criminal penalties.  Complaints can be made to the Australian Financial Complaints Authority (AFCA) when the complaint is unable to be successfully resolved internally with the financial advisor. Superannuation funds are subject to special rules under AFCA.  However, an SMSF does not fall within those guidelines, but the general investment and financial advice complaints are relevant. For example, a financial advisor recommending a person should establish an SMSF and does not let them know about the risks of starting an SMSF or advises the person to rollover funds into a new SMSF without considering existing insurance coverage may be subject to a complaint to AFCA where the SMSF member suffers a financial loss as a result of acting on that advice.

AFCA decides on an appropriate remedy with the aim of ensuring the SMSF trustee, member or beneficiary is put back in the same place as if the financial advisor had not provided the financial advice or compensate for the loss incurred.

AFCA can also decide the financial advisor firm must compensate for indirect financial loss which is capped at $6,300 per claim after 1s t January 2024 and possibly for non-financial loss.