Self-Managed Super Funds Case Study

Frank Barnes, at 61 years of age, has been running a successful furniture business, called Frank's Furniture for over 20 years. The business turnover last year was $1.2 m and is located in Sydney outer western suburbs in a building which he has now paid off.

Frank and his wife Heather (also 61) own their home in Edithvale, valued last year at $625,000.  They have a share portfolio valued at $125,000 which contains only Telstra, Commonwealth Bank and AMP all of which were purchased on or near when these companies floated on the market (cost base $39,000). They have $35,000 in a term deposit account and currently have no debt. While Frank has run a successful business for many years, he has only limited investment experience and Frank and Heather describe themselves as growth motivated investors.

Frank and Heather established the Edithvale Retirement Fund, their Self-Managed Superannuation Fund in 2003. It was set up by their accountant with all the documents drawn up by a solicitor. They are both trustees of the fund. Their son Benjamin joined the fund two year ago when he started working full time for the business. Ben is now a member of the fund, but no formal arrangements have been put in place. The Edithvale Retirement Fund has total assets of around $625K. Frank's member account is approximately $380,000, Heather's $220,000 and Ben's is $25,000. See table below for the fund's assets.

Frank wants to retire over the next two years and let Benjamin (age 28) take over the business. The problem is that Benjamin cannot get a loan to buy the property because, like most people his age, he couldn't afford a deposit for a $1M property at this early stage of his financial life. The current fair rent for such a commercial property is $75k.

Benjamin is looking at settling down and marrying his girlfriend of three years.  They are expecting their first child at the end of the year.

1 - Establish Relationship with Client

Please describe how you would establish your credibility, create rapport and comply with legislation:   

a) Give some thought to the sort of things you would cover.  Include any legal requirements and other documentation which may be helpful in the interview. Keep in mind the legal documentation needed to set up a SMSF.

b) How might you ask the clients to prepare for the first meeting?

c) To establish a relationship with your clients, what strategies might you use to build rapport during the interview process?

d) What are the four points you must cover when presenting an FSG?

e) List the type of fees/charges/commissions you could receive for your advice in relation to SMSF.  What are the benefits of explaining these fees to your clients?

f) Nominate the range of financial products and services you expect to provide advice in.  Name the benefits of explaining these to your client.

Life Insurance-, Income Protection Insurance-,

g) Outline the three steps your clients should take if they have a complaint or dispute prior to contacting the ASIC.

2 - Identify Client Objectives and Financial Situation

a) What are the general features a client should have to meet the need of a SMSF?  Please explain why.

The decision to set up a SMSF should not be taken lightly and the following issues should be considered.

Likely longevity of the fund-there should be an expectation that the fund will exist for some time and continue to be beneficial for the members.

Commonality of Purpose- The trustees must understand why they are setting up the fund and how they as members will benefit from the structure. Setting up a fund on the 'whim' of one member or to be 'fashionable' are not good reasons.

Making trustee decisions together-While one trustee may take a leading role in the running of the fund, all the trustees are equally responsible for the fund and need to be able to have amicable discussions and make decisions together.

Responsibility- trustees must be prepared to accept the responsibility of the trusteeship and possible consequences if they breach their trust deed or superannuation law.

b) Please give some REASONS as to why as a financial planner we might recommend to utilise a SMSF structures:

In circumstances where real business property owned outside the super fund can be sold to the super fund

c) Please highlight some BENEFITS OR ADVANTAGES of a SMSF using the headings as guidance:

Personal control

Cost control- The Trustees are able to obtain fixed fee services for professional advice and assistance. They are also able to carry out functions like preparation of accounts and placing of investments thereby reducing outsourcing costs.

Investment flexibility-Within constraints of the rules relating to investments in a SMSF the Trustees have a greater degree of flexibility of investments, allowing members to hold a wide range of direct assets through their fund including business real property.

Retirement Income Streams

Protection from Creditors

Life Insurance

Estate Planning- A key advantage of a SMSF is the estate planning benefits, allowing family members to combine their assets to grow for retirement. Also a specific asset can be allocated within a SMSF via an in-specie allocation and specific rules can also be put in place as to how assets are distributed.

Taxation Planning

d) Describe four possible disadvantages of Self-Managed Superannuation Funds

3- Analyse Client Objectives & Financial Situation

Will these clients meet their requirements without your assistance?

a) Why/why not?

b) List the assumptions you made.

c) Reference information sources that you have relied on in forming your view.

d) List some of the absolute "must not do" investment restrictions in relation to SMSF.

4 - Develop Appropriate Strategies & Solutions

Referring to the Case Study, develop Appropriate Strategies and Solutions by addressing the following requirements:

a) Please provide a review of the current structure and investment strategy of the Edithvale Retirement Fund. Comment on any compliance issues that the fund might currently have and your recommendation on how they could remedy these problems.

b) Please provide a possible solution of the Barnes family to transfer the business property into the Edithvale Retirement Fund.  Provide reasons, justifications and the advantage of any recommendations.

c) Using the headings below, briefly outline what recommendations you could make for all these three clients. Please incorporate all the information provided, and ensure your recommendations include the appropriate levels of contributions (and caps), any tax payable, and final superannuation balances including the tax free and taxable components after each strategy. 

Strategic Planning

Tax planning and structuring

Superannuation and retirement

Estate and succession planning

Risk management

Asset protection

Investment advice 

Cashflow management

Personal budgeting

5 - Present Strategies and Negotiate Solutions

Prior to Presentation

a) Describe what preparations you would undertake to present your strategies to the clients.

b) How would you describe the steps of transferring existing assets into Superannuation? What are in Specie Contributions? What about real estate transfers? What about Capital Gains Tax Implications?

 During the Presentation

c) List 2 objections or concerns your clients might raise? How would you address these in order to gain agreement?

6 - Co-ordinate Implementation

The clients have agreed to your plan. 

a) What are the steps that need to be taken before a SMSF can operate?

b) Complete an Implementation Plan, in order, that details the steps to setting up a compliant SMSF. How long does it take to get through all of these steps and have a complying SMSF in place? 

A - Adviser C - Client

7 - Provide ongoing service

You now have to address the issue of providing ongoing advice.

a) What environmental (economic, market, regulatory) changes, or changes to your client's personal or financial situation would cause a review of their SMSF plan?

b) Describe 2 activities you regularly undertake to keep up-to-date with current legal, ethical and regulatory requirements of the finance sector, in relation to SMS Funds.

c) What level of ongoing service would you propose for these clients?

• "No service"
• "Portfolio valuation"
• "Portfolio review"
• "Financial Plan review"
• "Other" - Describe

d) Describe the option recommended for your clients, and why you have recommended this option.  Describe the level of service you will provide and the associated fees.