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Self-managed super funds – be wary of relying solely on professional advice

in Business Law by Jessica Latimer on

Two recent determinations of the Financial Ombudsman Service (FOS) examined the responsibility of trustees of self-managed super funds (SMSF) for investment losses in circumstances where the trustees had complained about inappropriate investment advice. 

One determination found the trustee had failed to take reasonable care and was partly responsible for the losses suffered by the SMSF, the other did not. FOS is an alternative dispute resolution forum that hears, among other things, complaints about financial advisors. 

 

CASE STUDIES

Trustee not responsible

The first complaint was brought by the corporate trustee of a SMSF.  The SMSF’s financial advisor had recommended it establish an options trading strategy.  The complaint was that the options trading advice was inappropriate for the SMSF, had no reasonable basis and did not adequately disclose risks. 

The options trading advice was set out in a Statement of Advice.  The strategy was complex and entailed writing/selling positions without any cover or protection in place.  This strategy (a strangle strategy) had the risk of causing significant losses.  The matter was determined by the Panel which found that the advice was inappropriate – the options trading strategy was too risky given the purpose of a SMSF, being to provide benefits for members on retirement or death – and the Panel referred to APRA guidance on the use of uncovered derivatives trading or “speculation” by SMSFs.

The SMSF was entitled to $30,018.21 compensation from the advisor.  To minimise its exposure, the advisor had alleged that the trustee was itself partly responsible for the losses of the SMSF. FOS disagreed. While the Panel acknowledged that some attempt at risk disclosure was made by financial advisor, and that the trustee of an SMSF has significant responsibilities at law to manage risks, monitor performance and to manage investments, the trustee was not responsible. 

The trustee submitted that it made many phone calls to the advisor about losses emerging in 2013 and that on each occasion it was reassured that the options positions were reasonable. The director of the trustee had no prior experience with options trading. 

For those reasons, the 2015 Panel determination found that the trustee did not contribute to the losses of the SMSF and was entitled to be fully compensated by the advisor.

 

Trustee partly contributed to SMSF losses

By contrast, in a different 2015 determination, the panel found that the trustees of a SMSF had contributed to the losses suffered. The investment made by the SMSF were loans totalling $150,000 to two companies. The loans had not been repaid. The trustees complained to FOS that its advisor had recommended the loans be taken out, and that amounted to inappropriate investment advice. 

It was determined that indeed the advisor recommended the loans and that the loans were not consistent with the SMSF’s own investment strategy, and that the advisor mislead the trustees by representing that the loans were secure investments when they weren’t. 

The determination reduced the amount of compensation payable by the advisor by 50%.  It was found that the trustees ought to have taken greater care when making the recommended loans.  It was determined that the trustees owed a duty to the SMSF to act with reasonable diligence in relation to the property and affairs of the SMSF. Although the losses were quantified at $149,820.66, the advisor was only required to pay $74,910.33 (plus interest).

While the trustees’ said they took reasonable care by seeking and relying on advice from a reputable advisor, the Tribunal disagreed. The advice to take out the loans was given during a brief telephone conversation and contained limited detail as to the terms of the loans, what security would be obtained or the operation of the borrower companies.  The trustees did not ask for any documents concerning the loans or further information.  The trustees proceeded to lend the money without seeing or signing any loan documents. In the circumstances, the Panel found that by simply accepting and adopting recommendations on the basis of a short telephone conversation and very little information the trustees had not met their obligations. 

 

CONCLUSION

While a FOS determination is a final decision on the merits of a complaint and is a final decision by the tribunal it is not binding on the parties unless the Applicant accepts the determination. It remains open to an Applicant to reject a determination and to subsequently take further action including in Court. Nevertheless, the above decisions ought to be of caution to trustees of SMSFs and to their advisors.  

 

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Jessica Latimer
Senior Associate, Commercial Litigation Claims
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