Views on improving the integrity of global capital markets
04 April 2019

Ethics in Practice: Investing Retirement Assets. Case and Analysis–Week of 1 April

Check the analysis of this week’s case (1 April) to see if you made the right choice.

Case

Duri is a registered account representative providing financial advice to retail clients. She is also principal partner of Tabak Accountants. Duri assists a number of advisory clients who want to move their retirement assets from existing superannuation accounts to establish self-managed superannuation funds (SMSFs) that have the goal of investing in direct residential property. When clients express interest in these types of SMSFs, Duri defers to their reasons for wanting to invest in direct property and presumes that they have the time and expertise to manage their superannuation affairs. She reclassifies their investment objectives as “growth” to match their new investment strategy. Duri charges her clients for establishing the SMSF and recommends that her firm, Tabak Accountants, prepare their annual accounts and tax returns.

Duri’s actions are

  1. acceptable because she is following the directives of her clients.
  2. acceptable if the SMSFs invested in direct residential property provide superior returns to her client’s prior investments.
  3. acceptable if the services provided by Tabak Accountants are reasonable and the costs of services are competitive.
  4. unacceptable.
  5. none of the above.

Analysis

This case relates to acting in the best interests of clients, specifically ensuring the suitability of their investments. CFA Institute Standard III(C): Suitability requires CFA Institute members in an advisory relationship to make a reasonable inquiry into a client’s investment experience, risk and return objectives, and financial constraints to determine whether an investment is suitable to the client’s financial situation and consistent with the client’s objectives and mandates before taking investment action. In this case, it appears that when Duri’s clients want to switch their retirement assets into an SMSF that invests in direct residential property, Duri defers to their reasoning without any apparent suitability analysis. The case facts do not indicate whether Duri does a number of things:

  • Assesses the reasons for her clients interest in investing in direct property
  • Considers her clients’ financial goals
  • Compares the benefits, risks, and costs associated with establishing an SMSF or owning rental property
  • Considers asset diversification
  • Determines whether clients intend to draw a pension from the SMSF once they reach retirement, and how they can achieve this with an illiquid asset, such as investment property
  • Evaluates whether the clients have the time and expertise to manage their superannuation affairs
  • Considers whether the SMSF investment strategy will remain viable if the clients’ income is reduced or the property is unoccupied for a period of time

Without analyzing these and other factors, it would be inappropriate for Duri to move her clients to the SMSF, even if the investment provided a superior return. If her clients request a change in their investment strategy, it is Duri’s responsibility as their investment adviser to conduct an analysis to ensure that the new direction is suitable and appropriate. It appears that Duri classified all clients as growth investors without undertaking an analysis of whether this classification was true to superficially justify their investment in an SMSF vehicle. With regard to the use of Duri’s firm to provide client’s accounting services for the SMSF investments, Standard III(A): Loyalty, Prudence, and Care requires members to act for the benefit of their clients and place their clients’ interests before their own. It appears that Duri recommended these services to create additional income for herself. At a minimum, Duri’s relationship with Tabak must be fully disclosed to clients as a potential conflict of interest. Choice D is the best response.

This case is based on a February 2019 Enforcement Action by the Australia Securities and Investment Commission.

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Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.


More About the Ethics in Practice Series

Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. Each week, we post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.


Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

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