In 2012, the complainants obtained advice from authorised representatives of a financial firm. The advice was set out in a Statement of Advice (SOA) and recommended the establishment of the SMSF and recorded the intent for the SMSF to purchase direct property investments following the publication of a Ruling from the Australian Taxation Office.  

The complainants said the advice was inappropriate as:  

• there was insufficient asset diversification in the SMSF  
• the strategy required an unacceptable level of gearing and the risks were poorly explained  
• the advisers did not properly consider the complainants’ personal circumstances and  
• the strategy breached regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994.  

The complainants claimed losses for: 

• the decrease in the capital value of two properties, worth $155,000 and $120,000 respectively; and  
• the mortgage repayments and property expenses exceeding the rental income on those properties causing a significant erosion of the SMSF’s assets over time.  

The financial firm said the advice was limited in scope to establishing an SMSF and investing in property generally, but specific properties were not recommended. It said there was reasonable consideration of both complainants’ circumstances, needs and objectives and of the subject matter of the advice. The advice was therefore appropriate. 

This complaint could not be resolved by conciliation, so it progressed to a determination.  

Outcome 

AFCA’s investigation found the complainants were experienced property investors and their SMSF had already entered into a Contract of Sale for a property prior to the Statement of Advice (SOA) being received. As a result, the complainants had not relied on the SOA when commencing the strategy.  

Following case law from the Court of Appeal, AFCA also determined that the advisers did not need to counsel clients about risks that were not material to the financial advice relating to the SMSF (i.e. risks specific to investing in property), if it was reasonable to assume the clients were already aware of those potential risks. 

While the advisers had an obligation to provide advice about the appropriateness of the strategy in the context of the advice being provided, the advice was not required to disclose basic risks of property investment.

As a result, AFCA found in favour of the financial firm.  

Significance 

This determination examines to what extent an adviser (financial firm) is obligated to provide warnings to a complainant about potential financial risks they’re already aware of. 

In this case, as the complainants were experienced property investors, it was reasonable to assume they did not need to be informed of the risks of capital decline or the risk that rental income might not cover the interest on the SMSF’s borrowing arrangements.