Force SMSFs to get financial advice before borrowing: AFA

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AFA: Financial System Inquiry (FSI) - require financial advice for SMSF borrowing (LRBA)The Association of Financial Advisers (AFA) have recommended that before SMSFs are allowed to borrow they be forced to seek financial advice.

“It is our suggestion that SMSF’s should need to obtain advice from an appropriately licensed financial adviser before they can enter into a limited recourse borrowing arrangement within the fund.”

This recommendation was made by the AFA in a second-round submission to the Financial System Inquiry (FSI).

The submission says this recommendation is motivated by the “mounting evidence that poor practices are emerging creating issues of liquidity, over-gearing and poor trustee decision making.”

Several other submissions have raised concern of consumers being inappropriately advised to set up SMSFs for borrowing, this recommendation from the AFA would do nothing to confront this issue.

“Of greatest concern are examples where uninformed consumers are taking on the role of trustee of a SMSF for the purpose of gearing into property without sufficient understanding of their obligations and the risks associated,” said the AFA.

According to the AFA submission this, required, advice would need to set out the risks of LRBAs and “model the outcome of the investment strategy including sensitivity to a change in interest rates.”

“By requiring advice from a licensed financial adviser backed by the Best Interests Duty requirement, we can have greater confidence that only appropriate gearing strategies will proceed,” said the AFA.

While financial advice can be valuable, and LRBAs are complex and require careful consideration, a recommendation from the AFA of forcing SMSF trustees to seek financial advice seems self-serving.

People are free to set up SMSFs, and make any number of other financial transactions, without needing to pay a financial planner.

Also, if this recommendation was taken seriously, what would be the consequence of the financial adviser not recommending that the client proceeds with the borrowing? Ordinarily clients are not compelled to follow the advice of a financial planner.

The AFA says the cost of this advice is “likely to be relatively insignificant,” compared to the value of the asset purchased.

The Financial System Inquiry is scheduled to submit its final report to the Treasurer in November.

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