The failure of advice providers to consider the insurance needs of investors is leading to poor outcomes in the self-managed superannuation sector, according to the Australian Securities and Investments Commission (ASIC).
The regulator has released a report into the quality of advice provided by both accountants and financial advisers to SMSF trustees. The report summarises the findings of the ASIC SMSF taskforce, which reviewed over 100 pieces of advice provided to investors.
… only a small number of investors received an insurance recommendation before setting up an SMSF
While the majority of the advice was rated ‘adequate’, ASIC found that just under 30% of the personal advice provided was of poor quality, resulting in the investor being worse off after having received the advice. One of the problem areas leading to poor advice outcomes, according to ASIC, was the absence or inadequacy of insurance recommendations.
The regulator’s investigation found that only a small number of investors received an insurance recommendation before setting up an SMSF. ASIC said that providing general or educational information in an SOA was not a substitute for providing appropriate personal advice recommendations.
‘The potential loss of insurance benefits is an important issue that advice providers and investors should discuss before setting up an SMSF,’ ASIC said in its report. ‘Investors who switch all of their superannuation money out of an APRA-regulated fund and into an SMSF need to understand that they will be uninsured unless they purchase a new insurance policy.’
Other examples of poor insurance-related advice included:
- Inappropriately excluding insurance from the scope of the advice
- Keeping some money in an APRA-regulated fund for insurance purposes without discussing the advantages and disadvantages of this approach
- Some small pockets of over-insurance
Since August 2012, SMSF trustees have been required to review the insurance needs of members as part of the fund’s investment strategy (see: SMSFs Need Professional Insurance Advice). ASIC said that in nearly half of the files it reviewed, investors were not told by their adviser that they were required to put in place an investment strategy for the fund, or the elements this strategy should contain. Trustees are also required to regularly review and document their investment strategy, including whether or not insurance is to be provided. The regulator cautioned advice providers to explain all the duties and obligations attached to an SMSF to trustees.
ASIC recommended that advice providers discuss the following with their SMSF clients, to ensure their advice is of a high quality:
- Their existing insurance coverage
- The level of insurance coverage they will need in future
- The cost and options for maintaining, increasing or decreasing (as appropriate) their existing insurance coverage through an SMSF
- Whether the investor has any health issues that may affect their ability to get insurance coverage
- The advantages and disadvantages of retaining a portion of their APRA-regulated superannuation for insurance purposes (if considered appropriate)
- The impact of the insurance recommendation on the investor’s SMSF balance
If the advice provider identifies that an investor needs advice on insurance, but does not have the necessary expertise to provide insurance advice, ASIC recommends that the provider notifies the investor and refers the investor to an advice provider who has the expertise to provide the advice.
The potential loss of insurance benefits is an important issue that advice providers and investors should discuss
“The decision to establish an SMSF is one of the most significant steps an investor can take in relation to their retirement savings. It involves taking greater personal responsibility for retirement investments. ASIC therefore wants to make sure those investors can be confident they can obtain good quality advice through gatekeepers such as accountants and financial planners,” ASIC Commissioner, Peter Kell said.
“At the very least, investors need to understand the time, resources, compliance obligations and risks associated with do-it-yourself superannuation, before moving their superannuation savings out of an APRA-regulated environment,” he said.
Essencially the governement is progressively gagging accountants from giving advice. We are not allowed to talk about insurance in a specific way as this would constitute financial advice. The typical SMSF client does not want to see a financial adviser. He wants to talk to his accountant.
So I would suggest to ASIC that if we were allowed to speak – we would.
Louis,
For the sake of some additional training and a limited licence application, an accountant may be able to provide advice in this area. You should remember that financial advisers are soon going to be unable to advise the tax implications of advice so the legislation cuts both ways. The aim of the ‘game’ is to provide the best advice to the client. Expertise in these areas is critical and insurance is largely misunderstood by accountants – and some planners.
Lois, the focus should be on what the client NEEDS. Advice givers in the financial services industry need to develop a culture of cross referring (as in the medical profession) for the benefit of the client who needs specialist advice from all areas. Accountants as the ‘gatekeeper’ to the client should encourage this. I am a risk specialist and am part of a network of specialists who cross refer amongst each other and most people I speak to do not share your assessment above, in fact, they embrace it. ASIC should not have to legislate something which almost all SMSF clients need.
Lois, I applaud your desire to assist your clients in this important area. Tony’s advice to seek limited (“Class of Product”) licensing is a very positive suggestion.
Back in my days as an accountant in practice I was passionate about clients having an appropriate personal risk strategy in place. Sadly, I think I was in the minority.
Most accountants don’t proactively raise this issue with clients for the totally misplaced apprehension they will be seen by their clients as “selling”.
I agree with Gavin. Accountants have a duty of care to firstly bring this issue to their clients’ attention and then ensure clients are placed in the hands of a specialist who can put the appropriate cover in place.
As an accountant in public practice I reguarly raise the issue of life cover. About 1 in 20 clients are willing to talk to my trusted insurance advisor, of which about 1 in 5 actually sign an application. People when healthy don’t see the need or are not prepared to pay the cost.
I don’t believe that most accountants ignore the issue but clients just don’t want it.
Life assurance is a product that must be sold only rarely does a consumer seek life cover.
If ASIC want more life cover taken out they need to reduce compliance to the bare minimum.
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