When did you last review your SMSF’s investment strategy?
You may be aware that the Australian Tax Office (ATO) has issued letters to nearly 18,000 SMSF trustees as part of a campaign to ensure trustees are aware of their investment obligations.
Of key concern is ensuring that trustees have considered diversification and liquidity of their assets when formulating and executing their fund’s investment strategy.
Importantly, it must be noted that the ATO letters are not an attempt to regulate and limit the control and freedom that SMSF trustees have but rather ensuring that if trustees wish to invest their assets in a certain way that they must clearly articulate their reasons for doing so.
An investment strategy should be considering the SMSF’s blueprint when dealing with the fund’s assets to ensure the SMSF’s investment objectives and members’ goals are met. It provides the parameters to ensure you invest your money in accordance with that strategy. This is where the ATO has a primary function to ensure that trustees act in accordance with these obligations.
An SMSF investment strategy must take into account the following items:
- The risks involving in making, holding and realising the SMSFs investments, their expected return and cash flow requirements of your SMSF.
- The diversification and composition of your SMSF investments.
- The liquidity of your SMSF investments, having regard to expected cash flow requirements.
- The SMSFs ability to pay your current and future liabilities, including benefits to the members.
- Considering whether to hold insurance cover for each member of your SMSF.
An important requirement for you as trustee of your SMSF is to have an investment objective and a strategy to achieve that objective in place, before you start to make decisions about how you want to invest your SMSF money.
Of equal importance is that the investment objective and strategy is not set in stone. You can choose to change the investment objectives you have set for your SMSF at any time.
It’s not uncommon for SMSFs with lower member balances to find diversification a challenge as there is limited money to invest. Nonetheless, you are still required to demonstrate that you adequately understand and mitigate the associated investment risks.
If you find yourself in this position, it is important your investment strategy reflects these risks.
For example, if you have invested in a large illiquid asset such as real property which may form the majority of your fund, it is timely to ensure your strategy reflects the concentration and liquidity risk associated with this investment.
Where you have in place an adequate investment strategy that deals with these risks and can provide the necessary evidence to support your investment decisions, no further action is expected.
Where your fund has not complied with its investment strategy requirements under superannuation law, you may be liable to administrative penalties being imposed by the ATO, as Regulator of the SMSF sector.
Your investment strategy does need to be reviewed at least once a year and this will be evidenced by your approved SMSF auditor. It is also important to review your strategy whenever the circumstances of any of your members change or as often as you feel it is necessary. The following practical tips will help you keep on top of your obligations:
- Put your investment objective and strategy in writing
- Set an investment objective that you can comfortable achieve with the underlying investments you are comfortable to invest in
- There is no template for an investment object and strategy, but make sure they reflect how you intent to invest your SMSF money
- The investments you actually make must be accommodated by the investment strategy you have set
- Most importantly, document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have indeed satisfied your obligations as a trustee in this important area
Source: SMSF Association
3 common SMSF errors and how to avoid them
There are three major errors being made by many Australians invested in the self-managed super fund space, according to investment adviser, Chris Brycki.
Speaking recently on a podcast, Stockspot founder and CEO Chris Brycki explained why simple investment solutions generally provide better results for SMSF investors.
Mr Brycki said that for the average person, “as much as the financial industry likes to sell the idea of trying to beat the market and trying to pick stocks and time when markets are going to go up or down, the reality is that for most people, it’s not possible”.
Not only for amateurs, but for professionals as well.
The investment expert said this has been the case for “30 to 40 years at least now”.
In Mr Brycki’s opinion, people shouldn’t be focused on those market factors when it comes to investing.
Instead, he said “they should be focusing on actually reducing their unforced errors or their mistakes”.
Those errors include “not diversifying enough, paying too much in fees and making too many decisions”.
Relating these errors back to the SMSF space, Mr Brycki provided three key considerations that SMSF participants need to be aware of to prevent them from making similar mistakes.
Diversification
The expert began by stating that “SMSFs historically haven’t been very well diversified”.
Looking at the data, he said “what you can see is that self-managed super funds in Australia have a huge overweight position in Australian shares relative to global shares, and that’s really been a disadvantage to their returns and their diversification”.
In addition, Mr Brycki highlighted that “they also have a big overweight position in cash”.
While conceding cash “ultimately did help some SMSFs weather the storm of the financial crisis”, he considers cash as missing several of the characteristics that are very valuable within bonds.
“Most SMSFs don’t have any high-grade corporate bonds or government bonds, which can really act as a cushion when markets fall and a much better and more effective cushion than cash,” he said.
Costs
Mr Brycki also paid attention to the large amount of data supporting the notion that SMSFs pay too much in fees.
“By paying too much, it actually reduces net returns,” he commented.
His view, is that one of the reasons people are paying too much “is because they are overcomplicating things”.
“They’re under the false belief that by adding more complexity and more different types of investments into their portfolio, they’re going to achieve a better return or a better result.”
“The truth is: that’s not the case,” he said.
Mr Brycki countered the notion by stating that investors are probably going to be better off “by actually having fewer investments and making fewer decisions and reducing their costs”.
Decision-making
Despite the overemphasis on decision making potentially leading to an increase in errors, Mr Brycki did highlight the importance of good decision making in an SMSF.
“One of the responsibilities of setting up an SMSF is being able to fight the temptations to make lots of different decisions,” he noted.
“I know as an investment manager, and I know from a lot of the friends that I have seen invest over the years, that the temptation to make lots of decisions and to chase hot things is very high when you’re managing your investments,” Mr Brycki continued.
“You really need the discipline not to do that.”
He recommends outsourcing such a responsibility “to someone that can help keep you honest and keep you on track with your own strategy”.
“Much like when you see a personal trainer — ultimately, all of those exercises you could do on your own,” he said.
“You could go to the gym, you could go for a run, but a personal trainer keeps you accountable and keeps you on track.”
Even for people that do set up in a self-managed super fund, Mr Brycki said he believes “there is some value in having that personal trainer there to keep your strategy on track, to stop you from making mistakes when markets have gone up or gone down and you’re tempted to change something”.
“Ultimately, that’s going to lead to better results at your retirement.”
Source: SMSF Adviser