Many years ago, my publishing company produced a magazine for a financial planning group and we pitched an idea to do a regular section where we intended to explain the complex terms of the finance industry. Our contact, who represented the planning group, put the kibosh on the idea saying that the planners would not like this because it would give too much information to clients! The point was that this “inside knowledge” was what made clients come to the planners and our little innovation would be bad for business.
Along the way, the Australian Securities and Investments Commission (ASIC) and successive federal governments have made life harder for consumers wanting help and financial planners desperate to do a great job for clients. The whole rules of client-planner engagement are convoluted, complex, dangerous for advisers and too expensive for many consumers. Let me say here, Australian consumers of financial planning services have a tendency to be on the scabby side, having little appreciation of how a good plan can net them future riches.
On the other hand, they are happy to live with their usual money chaos, ignorant of what it costs them in the short term, let alone the long term, where the losses are considerable. Simplifying the rules of engagement, reducing the need to spend too many hours knowing the client for limited advice, and making the finance laws of this country easier to understand would be a great achievement for Senator Nick Sherry, the Minister for Superannuation and Corporate Law.
These thoughts came to me as I tried to get my head around the new rules, which have led many to believe that we can now borrow inside super. “This new section does not permit a superannuation fund to borrow, it relaxes the prohibition in section 67(1), but only if the conditions within the new expectations are met,” said Peter Bobbin, a senior partner with The Argyle Partnership Lawyers, at a recent conference. For the purists we’re talking about section 67(4A) of the Superannuation Industry Supervision Act. According to SuperReview.com.au, Bobbin argues the proper starting point for analysis of this new law is not with section 67(4A) but with the prohibition in section 67(1).
This reads: “a superannuation fund must not borrow or maintain an existing borrowing”. And Bobbin says this rule still applies! “Section 67(4A) is an exclusion section that saves a superannuation fund from being in breach of the borrowing prohibition,” Bobbin insists. And this will surprise many. He warns the exclusion only works when what you do in your super fund complies precisely with the elements expressed in the new section. And note well, there is no room for error. Bobbin even takes issue with the notion that it is actually borrowing. Instead, it’s actually a debt funded asset acquisition.
To everyone but a lawyer and the “super police” at the Australian Taxation Office (ATO), it sounds like borrowing. I think everyone has got excited because the new law permits do-it-yourself (DIY) super funds to gear into property in particular, but as one critic observed: it might be easier, but it’s not simpler. Instalment warrant makers have come up with warrants over property, shares, managed funds and even private equity investment. Note there is no direct loan for the fund, but the SMSF signs up for a contract to pay instalments for the underlying assets.
For many, an SMSF with or without an adviser will find these new products confusing and the fees will need to be examined very closely. The products will vary between producers of these warrants, and that could be a trap for young players. One I came across lets you invest in residential property, but you need 25 per cent of the funds, plus transaction costs and stamp duty. And the costs on top of the underlying interest rate make you want to look more closely at geared funds, which could easily produce results as good as most properties. The complexity is good for planner business, but it creates more dangers where a client could claim bad advice. When will someone make this finance game simpler and easier? Well, Nick? {mos_fb_discuss:20}
