As the popularity of placing real property inside an SMSF grows, so too does the lenders’ choice to adopt the use of financial advice certificates. For those who have been asked to sign a financial advice certificate, it can be a source of stress and anxiety given the short amount of time to prepare these documents.
A financial advice certificate is usually provided where money is lent to SMSFs in a limited recourse borrowing arrangement. Typically the financial advice certificate is presented to the clients before settlement; some financial advisers have complained that the client is provided with the financial advice certificate 24 hours before settlement. The client is then required to find a financial adviser who is willing to sign off on the certificate and send it back to the lender before settlement on the property can progress.
Be careful
Many clients do not appreciate what goes into signing one of these documents and as a result many do not want to pay a financial adviser what it should cost to sign off on these documents. It may simply be a case of the client conducting a Yellow Pages search for a local financial adviser in the hope they will sign the financial advice certificate.
Many of these clients will be quite stressed, particularly if they have found out close to settlement that they need to have the financial advice certificate signed. In these situations the client may be pushing the financial adviser to cut corners to get the financial advice certificate signed.
Personal or general advice?
By signing one of these documents you are essentially providing the client with personal advice because you have to consider the client’s personal circumstances. Many of these certificates ask the financial adviser to confirm that they have made enquiries about the client’s financial affairs.
This then brings into question how a financial adviser should provide their advice to the client, for example in the form of an SoA or an RoA. Given most of these documents are required urgently the financial adviser may be able to satisfy themselves that the client needs time-critical advice. However, an SoA would still need to be provided to the client within five days.
Best practice
As unpopular as it may sound to some advisers, it is best practice that the correct document is a full SoA, particularly if the financial adviser has never dealt with the client. The reason for this view is that the financial adviser is usually required to confirm any of the following:
• To advise on the financial impact of a limited recourse borrowing arrangement for an SMSF;
• Make enquiries about the client’s financial circumstances which are necessary to provide advice to the clients;
• Explain the risks associated with gearing and investments;
• That the amount borrowed must be repaid; and
• That the acquisition of the property is within the investment strategy of the super fund for which the borrower is the trustee.
Many of these financial advice certificates also ask the financial adviser to confirm that the client is aware of:
• The financial components of the loan;
• The costs and benefits of the loan;
• The investment strategy of the fund;
• The risks of direct property investing and gearing; and
• The costs of running an SMSF.
The problem with some of the above points is that it starts to stray into credit advice as the financial adviser is being asked to confirm that the client is aware of the financial components of the particular loan. If the financial adviser is not qualified to provide credit advice then they may not be able to sign off on the financial advice certificate. In the event of a claim the financial adviser’s professional indemnity may not respond to a claim if it is found credit advice is provided and the financial adviser is not qualified to do so.
What to charge
One may then ask how much a financial adviser can charge for signing one of these documents. Considering the financial adviser is required to comply with the best interests obligations under the Corporations Act, the financial adviser is going to have to properly know the client in accordance with section 961 of the Corporations Act and conduct a full fact find on the client, even if the advice is scaled down to the signing of the financial advice certificate only.
The financial adviser must be able to demonstrate that they have had regard to factors such as affordability and informed consent on the part of the client. To produce good quality advice in this space the financial adviser cannot take short cuts in the advice process and should treat this process as full advice and charge accordingly. If the client is not willing to pay a fair price for the work and the risk they are asking the financial adviser to assume the financial adviser should let the client walk. As we all know providing advice in time critical and high pressure scenarios only increases the risk and likelihood that a mistake will be made.
Responsible lending
Interestingly, some of the lenders can refer a client to one of their own financial advisers to sign off on a financial advice certificate however the cost can run can into the thousands. It is worth remembering if a client attends upon your office wanting you to sign one of these documents that lenders are bound by responsible lending requirements and they are not supposed to lend money to people who cannot afford it. It seems that one of the purposes of the financial advice certificate is to outsource some of the lenders risks associated with limited recourse borrowing loans.
