By Phillip La Greca
Executive Manager, SMSF Technical and Strategic Services
Since 5th October 2021, there have been new rules imposed on both businesses that manufacture financial products (fund managers etc.) and those that distribute financial products (platform and advisers).
What products are caught?
These rules apply to most types of financial products but do not apply to credit products such as loans. These rules will not apply to buying listed shares. When you do any of the following these new rules will require you to obtain specific information.
• Open a new bank account including term deposits
• Buy a managed fund or exchange traded fund
• Use a wrap platform
• Invest in a managed account (SMA or MDA)
Why the new rules?
The purpose of these new rules is to ensure that certain classes of financial products identify the type of investor who should purchase them as well as ensuring that products are not actively distributed to other types of persons.
These rules are called Design and Distribution Obligations (DDO) and require parties selling financial products to thoroughly explain the products they offer by outlining the following. These will be included in a new document called a Target Market Determination (TMD).
• The types of client the product is suited for by their needs and objectives
• Investment objective (capital growth, capital reservation or income generation)
• Investment exposure (how much of the investors capital is used - stand-alone, core or small)
• Investment horizon (how long you should stay in the product for under 2 years, 2 to 8 years longer than 8 years)
• Risk and return profile (low, medium, high and very high in terms of number of negative annual returns in a 20-year period)
• Requirement to have redemptions (does the investor need capacity to have daily cash withdrawal)
What will happen now?
If you buy a product directly, the product issuer will require you to confirm that you have read the TMD and fit within the product’s specific target market.
If you invest via a platform then the confirmation will be requested by the platform rather than the product issuer.
If a product is recommended to you by a licensed financial adviser, then the adviser will only recommend product where you meet the target market based on the information they have obtained from you in their fact find.
Ultimately the outcome of these new rules is to help investors know key characteristics of financial products so they only invest in products that are fit for purpose and for SMSF trustees the TMD characteristics should also align the considerations in the SMSF’s investment strategy documents.