Advisers must examine risk profiles of SMSFs and their members

Advisers should look at the risk profile of self-managed superannuation funds (SMSFs) as well as the risk profiles of individual members, because the risk tolerance of a fund will differ to that of its members.

According to Claire Wivell Plater of practice management consultants Gold Seal, an SMSF must be independent of its members — and its investment strategy needs to take into account its objectives and obligations, as well as the likely obligations of the fund to pay or roll out member benefits. Wivell Plater said the risk tolerance of a fund will be different to that of its members, even if there is only one member in the fund.

Wivell Plater based this commentary on a case overseen by the Financial Ombudsman Service (FOS), in which it found that an adviser had erred in assessing the risk profile of the individual member of the fund. She stated that the adviser should have looked at the SMSF fund itself.

The adviser had recommended what he believed to be a fixed interest investment for an SMSF. The investor was risk averse and the risk profiler recommended that he be placed in low return/low risk investments with 0 per cent high-risk investments. However, the adviser recommended the international fixed interest investment as it was highly recommended on his licensee’s Approved Product List (APL) — even though the product research did not say for what risk profile it was suitable, or provide an in-depth analysis of its financial position. Although it paid a regular distribution, FOS found that the fund did not accord with the general attributes of fixed income investments — and the reasons for this were apparent on reading the Product Disclosure Statement and the research notes.

FOS found that the licensee and the adviser did not properly research the investment at the time it was recommended, and therefore could not explain the true nature of the investment to the client.

Wivell Plater said the case demonstrates that it is not enough for an adviser to rely on the APL provided by its licensee.

“Advisers must have a clear and detailed understanding of the products they recommend so that they can evaluate their suitability for the particular client and explain the product’s features and risks to the client,” she added.