Property still a big SMSF advice issue, says AFCA

“Basically, you go to a financial firm, and they roll over the money from your industry fund, and they put you into an SMSF, and then another arm of the business picks the property for you. This still happens,” he explained at the SMSF Adviser Technical Strategy Day.

“The most common defence is that the consumer wanted it and that the firm was providing the service that the consumer wanted. However, if you look at the people who were investing, they really weren’t suitable for an SMSF.”

Some of these individuals had very low balances, limited financial literacy and did not have the necessary abilities to run an SMSF, he explained.

Mr Singh also stressed the importance of advisers clearly communicating the scope of their advice to clients where the client is planning to make a property purchase.

He gave an example of a recent case study where the complainant had claimed their adviser had sold them an inappropriate investment strategy.

While the determination was made in favour of the financial firm in this particular case, Mr Singh said it demonstrates the importance of clear communication and documentation in preventing disputes from arising.

The complainant in this case complained that the adviser should have warned him of the risks of the strategy and stated that the financial firm had a conflict of interest in recommending two lines of credit for the investment properties.

The financial firm said that while the adviser would have most likely discussed wealth-creation strategies with the complainant, it stated that where a client of the group decides to invest in direct property, the group is not licensed to advise on property selection.

“[It stated that] its advice was limited to how to finance the investment in a tax-effective manner and undertake an initial assessment of cash flow. It also said it had no obligation to advise on the risks of any such strategy in these circumstances,” Mr Singh said.

While Mr Singh said the panel concluded that the adviser did most likely discuss wealth-creation strategies with the complainant, which included property, there was no evidence that the firm’s advisers had made a specific strategy or property recommendation to the complainant, or otherwise induced him to purchase property.

“[The panel determined] that it was ultimately the complainant’s decision to invest in the properties following discussions with his neighbour who was a property developer selling house and land packages,” he said.

In relation to the first property, the adviser had merely referred the complainant to a mortgage broker who worked for another company within the same group of companies and had not provided any other service.

In regard to the second property, the adviser had provided advice on financing the asset in a tax-effective manner and did an initial cash flow analysis. He also recommended the complainant use Westpac Loans for the lines of credit for the strategy.

The panel determined that the loan advice to maximise deductible debt and minimise non-deductible debt was a tax-effective strategy.

It also concluded that the terms of engagement did not require the firm’s advisers to advise the complainant on the risks of the strategy.

“While it would have been prudent to reconfirm these terms of engagement at the time of the services in dispute, the SOAs provided to the complainant over the course of the relationship clearly explain the limitations on the services the financial firm could provide,” explained Mr Singh.

Mr Singh noted that in this particular scenario, there was no benefit derived from the financial firm in relation to the property purchase, and there was no evidence that the adviser made a specific strategy or property recommendation.

“However, we’ve seen a lot of cases of the years where there’s a very similar situation, but there’s a realty arm associated with the financial firm and a commission derived for the group, which would change the context.”

Both the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) have previously flagged concerns about one-stop-shop models where an organisation sets someone up with an SMSF, finds them a property and organises their borrowing arrangements.

ASIC stated that with these types of models, there is often very little discussion around issues such as liquidity and the risk of falling property prices.

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