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Recent AFCA decision protects SMSF interests

A recent Australian Financial Complaints Authority (AFCA) decision highlights the consequences for financial advisers when they fail to meet their service obligations.

Under the Corporations Act 2001 (Cth) (CA) financial advisers are required to ‘act in the best interests of the client’ and ‘must only provide advice if it would be reasonable to conclude that the advice is appropriate to the client’. Further references to legislation are to the CA unless stated otherwise.

Where a self managed superannuation fund (SMSF) trustee believes that it has relied on financial advice that was not appropriate, the SMSF trustee may be entitled to lodge a complaint to AFCA.

Broadly, AFCA assists applicants to resolve complaints against licensed financial advisers.

We summarise a recent AFCA decision that outlines when a financial institution breaches its obligations — AFCA case number: 716627.

AFCA overview

Financial advisers that are members of AFCA are bound by the AFCA Complaint Resolution Scheme Rules (AFCA Rules). The AFCA Rules, among other things, consider the following:

  • The scheme is free of charge for complainants and complainants do not need legal or other paid representation.
  • A determination is binding upon the parties to the dispute once accepted by the complainant.
  • If a complainant rejects a determination, they can pursue other legal avenues such as the courts.

In short, an SMSF can lodge a complaint for free and, if they obtain a favourable AFCA determination, a debt that is due and payable can be established. However, if that debt is not paid, then further legal proceedings may be required to recover that amount.

Safe harbour steps

Financial advisers must act in the best interests of the client (s 961B). The adviser satisfies this obligation where they can prove that they have followed the safe harbour steps in s 961B(2). The safe harbor steps include:

  • identifying the objectives, financial situation and needs of the client;
  • taking the necessary steps to obtain accurate information regarding the client’s relevant circumstances;
  • assessing whether the adviser has the relevant expertise to provide the client advice (and decline to advise if they do not);
  • conducting a reasonable investigation into the financial products that might achieve the needs and objectives of the client;
  • basing all judgements in advising the client on the client’s relevant circumstances; and
  • taking any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

If the adviser cannot prove that they have followed the safe harbour steps and their client has suffered a loss, then the adviser may be liable to compensate the client to the extent of any loss suffered.

Summary of AFCA decision — 716627

An SMSF trustee engaged a financial firm from 2012 to 2019 (Relevant Years). Throughout the Relevant Years, the members of the SMSF and directors of the SMSF corporate trustee were Mr D, 64, retired and Mrs D, 59, intending to retire within the next few years. Combined, they had almost $1 million in retirement funds. We refer to the financial firm’s client as being the SMSF trustee.

From the beginning of the engagement with the financial firm, the SMSF trustee had specific goals for their investments — these goals included:

  • having the flexibility to alter the portfolio should their circumstances or financial objectives change; and
  • to have access to some of their funds in case of unexpected emergencies.

Risk analysis

The financial firm assessed the SMSF trustee’s risk profile as ‘balanced’. This risk profile remained consistent throughout the Relevant Years.

Based on the SMSF trustee’s balanced risk profile, the financial firm recommended the following asset allocation:

  • 40%-50% in defensive assets such as cash, term deposits, income investments and gold;
  • 25%-35% in growth assets such as Australian shares, international shares, private investments and resources; and
  • 20%-30% in assets with both defensive and growth characteristics.

Despite the SMSF trustee’s risk profile and the above recommended asset allocation, the financial firm subsequently recommended a high-risk investment in an entity related to the financial firm. This high-risk investment was described to the SMSF trustee as ‘growth and defensive’. As such, this investment carried more risk than the SMSF trustee understood or needed.

The asset allocation described to the SMSF trustee was that it would be 40-50% defensive and 50-60% growth. However, starting from 2014, the asset allocation fell outside this range. By 2018 and 2019, the actual asset allocation was closer to 20% defensive and 80% growth. This was not consistent with the SMSF trustee’s ‘balanced’ risk profile.

Furthermore, the financial firm did not diversify the ‘growth’ asset class as a substantial amount was invested in property.

Thus, the financial firm’s recommendations were contrary to the SMSF trustee’s goals.

Related entity investments

Throughout most of the Relevant Years, the proportion of the related entity investments was more than 66% of the entire portfolio. This peaked in 2014 with almost 75% of the SMSF trustee’s investment being in a related party of the financial firm.

While it is not illegal for a financial firm to invest into related parties, they must be able to justify that the investments are in the best interests of the client. Further, a financial firm must give priority to the client where they know there is a conflict (s 961J).

AFCA considered that for the financial firm to not be in breach of its conflict priority, ‘they should be able to clearly demonstrate the additional benefits to the client of investing in the related entity investments opposed to a similar investment which does not give rise to the same conflicts’.

The financial firm was unable to present sufficient evidence to support its claim that the investment in a related party was justified and in the client’s best interests.


AFCA found that the financial firm provided inappropriate advice and failed to act in the best interests of the client. Thus, the financial firm was in breach of its obligations. AFCA then needed to determine whether the SMSF trustee would have been better off if their investment portfolio matched the SMSF trustee’s risk profile.

AFCA formed that view that the Vanguard Balanced Fund was an appropriate comparison as it is designed for investors with a similar tolerance to risk as the SMSF trustee. Furthermore, the Vanguard Balanced Fund did not include any ‘conflicted’ investments.

AFCA decided that the SMSF trustee was $254,312.72 worse off due to the financial firm’s breaches. Thus, the financial firm was required to compensate the SMSF trustee for its loss plus interest payable thereon.


This decision confirms that SMSFs may have a ready means to seek compensation if they suffer loss resulting from inappropriate investment or financial advice.

Furthermore, this decision highlights that financial advisers need to be aware of their obligations to act in each client’s best interests, to avoid conflicts and to retain sufficient and appropriate records.

While legal representation is not required in respect of making an AFCA complaint, it is strongly recommended. Naturally, DBA Lawyers would be pleased to assist advisers and SMSF trustees, subject to any conflict of interest (if we have previously acted for a particular client).

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit

By Daniel Butler, Director ([email protected]) and Nick Walker, Lawyer ([email protected]).


2 April 2024

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