Secure your Client’s Retirement Income or Lose Yours … Seriously

Head’s Up: In this session I am looking at how to really conduct a client interview using Life Values Consulting but more importantly covering all the compliance, technical and strategy bases so we maximise our revenue and DON’T lose our shirt at the new Australian Financial Complaints Authority or in a strict liability suit.

Every day there is a broadening of the regulatory sphere of influence into SMSFs. And it will continue as total assets march towards the magical $1 trillion mark and 750,000 funds. As SMSF advisers and Trustees we are all aware of the Commissioner of Taxation’s impact on the industry. In Chapter 11 of “The Guru’s Guide to SMSFs” I emphasised:

Chris Jordan quote

However, it is not just the Commissioner of Taxation that we need to worry about. The Australian Securities and Investments Commission are the regulators of Part 7 of the Corporations Act 2001 (“CA 2001”) that deals with financial products. For SMSFs, any accountant, financial planner, auditor or administrator that discusses, advises or recommends any of the following to a member or prospective member of a Fund (not Trustees) is providing financial advice:

  • Setting up a SMSF
  • Becoming a member of a SMSF
  • Contributing to a SMSF
  • Taking a lump sum
  • Commencing or commuting an income stream or pension – whether a TRIS or account-based pension
  • Estate planning including the making of a Binding Death Benefit Nomination
  • Winding up a SMSF
  • Paying out a death benefit from a SMSF

In RG 175, ASIC has stated that “Part 7.7 and Div 2 of Pt 7.7A of the Corporations Act 2001 require persons who provide financial product advice to retail clients to comply with certain conduct and disclosure obligations. These obligations are designed to ensure that retail clients receive good quality advice about financial products and are able to make informed decisions about that advice.”

Law Suits lurking behind every Client

When it comes to SMSFs there are a lot of different SMSF advice practices. These range from the lack of any procedure, duty or CA 2001 responsibility by accountants still unaware of the application of Part 7.7 to their SMSF advice to procedures offered by AFSL licensees to their authorised representatives. Some of the AFSL procedures that I have reviewed are stultifying, not practical and so way off mark that they breach the CA 2001 and leave the adviser open to a strict liability law suit under the SIS Act 1993. If you have not heard or seen one of those in operation, put it this way think of a negligence action on steroids with no proof of negligence required. It is the BIG sleeper of modern day SMSF advising and will be used with great effect to recover investment losses in the next market downturn. Full recovery from AFSLs, accountants, financial planners, administrators and even auditors with no requirement to show negligence.

Plus the new AFCA Compensation system

Anyway, let’s not get too down and out here. I never want to see any of my students, colleagues or clients being hit with a strict liability law suit. However, let’s keep it in the back of our minds and also be aware that any hint, and I mean hint, of a issue with a SMSF, the Trustees and more particularly the members can lodge a complaint to the new Australian Financial Complaints Authority (“AFCA”). This has taken over from the Financial Services Ombudsman and has bigger teeth and bigger awards. Plus complaints can be lodged by your clients for FREE and takes minutes! With a rollout no later than 1 November 2018 and with AFCA to also take responsibility for superannuation complaints, against retail and industry super fund trustees (not SMSF Trustees) expect broader payouts against all financial product providers and professionals.

Word of Warning: Make sure your Professional Indemnity Insurance covers breaches of the SIS Act 93 as well as being updated for AFCA complaints.

The Guru’s Practical Guide to SMSF Pension Advising

When dealing with a SMSF member and advising on a retirement income stream here is a short guide on what to do:

  1. Make sure you are well aware and well versed of the law, regulations and guidelines around commencing an income stream. If you are deemed competent then AFCA can bring you down as can the SIS Act 93 – see Australian Prudential Regulation Authority v Holloway [2000] FCA 579. While we are on the subject of competency, you may have completed a course, conference or attended a seminar that gives you CPD but that means nothing unless improves your competency to read, understand and apply the law. This is the core competency standard for SMSF advising under the CA 2001. And you don’t want a good lawyer testing you on it in AFCA or the Court.
  2. Set up a video-taped client interview. Unless you want to get caught in hearsay at a later time, ensure that all client interviews are taped. As I work mainly on-line giving advice around Australia I use Zoom to handle teleconferences plus make a recording of the advisory session. I give this to the client afterwards. If they are coming in I suggest that you use a phone camera with good sound so that you can hear their responses and if you are using a whiteboard any drawings you may do on the white board. I always use it as I can highlight and emphasise key client points and issues on the board and keep referring to them throughout the session. Apart from education it also has the added benefit of keeping our advice in check so to speak. Let the client do the talking!
  3. What’s in the SMSF interview. Tell them what the session is about, that is which financial product you will be covering, such as “retirement income by setting up a SMSF pension” and what you will not be covering such as insurances, investments, contributions, etc.
  4. Let’s use Life Values Consulting and get specific. I am assuming that the client has already been though LVC and has a fund so we need to delve deeper with a LVC question “What is important to you about your retirement income stream?”. Write their responses on the whiteboard ask them to rank them in order of importance from most important down. Ask for their consent to focus on the top three only noting it is impossible to cover all their preferences. These are there top three “Retirement Income Values”. If you have two members with two account balances I advise that you have two sessions.
  5. If using a whiteboard put on the left hand side of the whiteboard their current position in the SMSF and then on the right hand side show a range of options! And it should only be options as our role under the CA 2001 is to inform the SMsF member enabling them to make an informed decision. Not us – them!
  6. Income stream options: these could be, amongst more than ten options, an accounts based pension, a reversionary pension, an auto-commuting pension or multi-pensions. The more the better as it provides greater value for the client and also highlights our competency.
  7. Discuss and EDUCATE the member, don’t ever refer to them as Trustee, on the various issues regarding each option and ask them how that fits with their retirement income values and most importantly their personal and family situation.
  8. Once the formal part of interview is completed, close on the following:
    1. An option papers will be produced for their review and consideration.
    2. A Product Disclosure Statement will be issued on behalf of the Trustee of the Fund.
    3. A review of their favoured option will be undertaken and a Statement of Advice will be prepared as such, based on their informed choice.
    4. A copy of “The Guru’s Guide to SMSFs” will be sent to them.
    5. An execution and implementation plan will be put in place including updating relevant documents such as deeds, company constitutions and pension documents.
    6. Relevant video and other records will be forwarded to them on the payment of the accounts.
    7. A set fee to be agreed upon up front.

If they don’t agree on the fee then you need to inform them that they will become a no-advice client and you will send them a disclaimer as such. This needs to disclaim responsibility under the SIS Act 93 and CA 2001.

My Advice to You

We have no option, unlike our clients, but to do things right. Strict liability under the SIS Act 93 means zero tolerance plus I am really worried about AFCA. We need to be able to prove our competency each and every day, whether at meetings, researching, training staff or just being a SMSF adviser. So I highly recommend:

  1. Get a copy of The Guru’s Guide to SMSFs and keep it as your go to guide when researching, discussing or documenting any strategy or advice. It your insight into how to deal with SMSF clients, advise properly and most important of all build comprehensive and bullet proof strategies.
  2. I have so much knowledge in my head at the moment with all the new laws, plus ATO rulings from the past few years, brand new strategies, Life Values Consulting and ways of dealing with clients and building a compliance wall to protect ourselves from AFCA, the ATO and the lawyers that I would love to get a few advisers in the room and go through the laws like they are supposed to be done. From there we can pick them apart, look for client opportunities and build strategies. A four day SMSF intensive covering all the subjects in “The Guru’s Guide” but at a deep, strategic level. If you are interested please contact us – and we will put you down on a list and make plans for the first I Love SMSF Specialist Adviser Course with more than 30 CPD points.
  3. If you feel confident in your competency and confidence give your clients a copy of “The Guru’s Guide to SMSFs” as it will empower and motivate them. Imagine how much easier your client strategy interviews will be if the client is well schooled on SMSFs and can understand not only the basics but also the nuances of your strategy. And here is a promise to you. Even if a client knew all that was in the book I always tell them to get and adviser as a backstop if something goes wrong.