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Self Managed Super Fund (SMSF) Article
Super fund trustees use professional advice

By Tony Negline.

This article may be out of date.

21st October 2008

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A fair proportion of super fund trustees use various investment professionals to provide assistance and guidance on investing the funds assets.

The super laws allow any fund to officially appoint an investment manager "to invest on behalf of the trustee".  Primarily these rules have been put in place for large funds but unwittingly they could apply to small super funds.

A super fund trustee is not under any legal obligation to use an investment manager but if one or more are used then the trustees must comply with certain rules when appointing and managing an investment professional.

For example, the super fund's trustees must ensure a proper selection process of any investment manager has been undertaken and the trustees due diligence examinations should be documented.

There must be a written agreement between the investment manager and the super fund trustee.  The agreement should clearly specify the function the investment manager must follow and address issues such as the required investment parameters or constraints, performance standards and benchmarks, regular reporting processes, fees and charges, termination clauses, ownership of books and records, dispute resolution procedures and indemnification conditions.

The super laws make it impossible for the agreement between the trustee and the investment manager to exempt the investment manager from liability for negligence or to limit that liability.  The trustee is obliged to ensure that the mandate enables the trustee to seek information from the investment manager at any time.

The investment manager must be a body corporate and must be allowed by the super laws to perform this role.

Is a licensed financial planner an investment manager under these laws?  This will very much depend on what the planner has been employed to do.

If his job were solely to advise the fund on what life insurances to put in place then it would be difficult to argue that the adviser's job is to "invest on behalf of the trustee".

If the planner's job is to recommend investments to the trustee and also to monitor those investments for the trustee and, if necessary, recommend replacement investments then the situation becomes a little less clear.

Michael Hallinan of Townsends Business and Corporate Lawyers says that in his view "a financial planner would only be an investment manager if the financial planner had the authority from the trustees to buy and sell the assets of the super fund without the prior authority of the trustees.

"If the adviser provides advice to the trustees, which is accepted by the trustees and then the adviser (at the request of the trustees) undertakes the necessary sales/purchasers to implement that advice then the adviser is not an investment manager [under the super laws].

"The critical element is the independent authority to invest of the investment manager (there may be limits/excluded assets or maximum/minimum asset ranges –however these mandates would not detract from the discretion and authority of independent sale/purchase).  If the adviser does not have the authority to buy/sell but must obtain instructions from the trustees then the adviser is not an investment manager," Hallinan said.

If the financial planner has the power to sell/buy any percentage of a fund's assets, then in Mr Hallinan's view they would be an investment manager (possibly with the exception that if the discretion is only over the bank account the investment manager requirements would not apply).

A Tax Office spokeswoman told DIY Super that, "An investment manager appointed under the super laws goes beyond just providing financial or investment advice to a super fund trustee."  However a financial planner might be a super law investment manager if their "role extends beyond providing financial advice and to more of a role of managing the fund's investments on behalf of the trustee under the authority of the trustee".

In order to determine if they have engaged the services of an investment manager when appointing a financial planner the trustees would have to refer to the documentation given to them by the planner.  For example the Financial Services Guide (which is describes the services the planner provides) and the Statement of Advice (which provides written recommendation on which products the client should invest in and why they should be used).

Under the laws which govern how financial planners provide services to their clients laws were introduced last year which allow a planner to issue a Record of Further Advice.  This type of document can only be used when a planner has an existing relationship with a client whose circumstances have not significantly changed since previous advice was provided and the planner has already provided relevant product information.  Technically it's possible for a planner to use these documents without actually giving the client a copy of them.

Typically financial planning groups demand that their advisers get an investor's written approval to proceed with investment recommendations before the adviser can to implement it.  But some advisers are better at making sure this paper-work is done than others.  Without a super fund trustees official approval would the planner be an investment manager under the super laws?

If the trustees decide (or discover!) that the financial planner they are working with is an investment manager then they must go through the formal process of appointing that manager in writing and making sure that the financial planning licensee they are working for is also corporation (it is possible under the Corporations Act 2001 to appoint individuals as holders of financial planning licenses.

A penalty of up to $5,000 can be imposed for breaking the super laws investment management rules.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

 
 
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