Big rise in disputes about financial advice for DIY super funds

PORTFOLIO.101007.AFR PIC BY PETER BRAIG. HOW TO CONSTRUCT A DIY SUPER FUND PORTFOLIO. TOOLS, WORKSHOP.
PORTFOLIO.101007.AFR PIC BY PETER BRAIG. HOW TO CONSTRUCT A DIY SUPER FUND PORTFOLIO. TOOLS, WORKSHOP.

There's a significant rise in the number of disputes going before the Financial Ombudsman Service (FOS) concerning self-managed super funds and financial advice.

For the year to June 30, 2017, there were 149 disputes, most of which were related to advice.

While that's a tiny number considering there are roughly 600,000 DIY super funds, the latest numbers, which come from a detailed breakdown provided to Money by FOS, is an increase of about 50 per cent over the past two years.

Most of the complaints are against financial planners. June Smith, the lead ombudsman (investments and advice) at FOS, says problem areas include where a recommendation is made to start a DIY fund and to rollover money from a large fund where the person loses some or all of the life insurance cover.

Many large funds offer their members life insurance cover, at least to a certain amount, where there is automatic acceptance without the need for a medical examination.

Smith says advisers must consider pre-existing insurance cover and advise the client if they will need to disclose pre-existing medical conditions in applying for new life insurance and if there are any policy waiting periods.

Other problems concerning advice to set up a DIY fund include whether it's really appropriate after due consideration is given to whether the person being given the advice has enough money to start a fund and justify the fees and whether they understand their obligations as a trustee.

A further area of disputes concerns "one-stop shops" that facilitate real estate sales, with recommendations to borrow to buy property, to set up an SMSF and put the property inside it.

This is an area in which the regulator, the Australian Securities and Investments Commission, has been on the front foot.

As early as 2013, the corporate watchdog issued a report on financial advice and SMSFs in which it said most of the poor pockets of advice related to recommendations that investors start a DIY fund and borrow to invest in real estate inside the fund.

At the time ASIC said it did not want to see SMSFs become the vehicle of choice for property spruikers.

In its 2013 report, the regulator found examples of unlicensed SMSF advice and misleading marketing and said it would be taking regulatory action. That's what the regulator has been doing.

ASIC has made it abundantly clear that even though the "sell" may be property, which is not a financial product, an SMSF is a financial product and any advice to acquire property in a DIY fund requires a financial services licence.

June Smith says while SMSFs can be a great vehicle for many people, there are some people they don't suit.

Only time will tell whether the spike in complaints to FOS is the start of a trend. It if turns out to be so, ASIC will need to give it even closer attention.

Follow John Collett on Twitter.

This story Big rise in disputes about financial advice for DIY super funds first appeared on The Sydney Morning Herald.