If your clients have a self-managed super fund (SMSF), one of their obligations as a trustee is to have a clearly articulated investment strategy for the fund that is reviewed regularly.
In this article, we take a closer look at the key areas to consider.
Super law requires that when formulating an investment strategy, trustees must have regard to diversification. Diversification relates to a consideration about the spread of different investments they might have – or ensuring they don’t end up with all their eggs in one basket.
According to Bryan Ashenden, Head of Financial Literacy and Advocacy at BT, one of the key benefits of diversification is that it can limit exposure to a single asset class – so a fall in one area may be offset by gains in another.
2. Risk and return
The risk involved with, and the likely return from, the investments are also important considerations, and really ties back into the issue of diversification of investment.
What can sound like an exciting possible return on any particular investment, should always be balanced against a consideration of any risks involved with that investment. The difficulty is that both risk and return are assessments of what may happen in the future. It’s important to remember that any historical performance data availably is purely that – historical! For example, historical performance can provide some guidance as to how well a portfolio manager has looked after the monies under their control, thereby providing some insight into their level of governance, but clients should always be cautious in terms of relying on previous performance.
As Ashenden explains: “You shouldn’t look at any investment in isolation, and always compare their performance against peers and over multiple periods of time.”
For example, whilst a share fund that provided an 8% return in the last 12 months might sound relatively good, it’s not if all other comparable share funds were returning in excess of 10% during that same period.
In addition to pure investment risk, you need to consider how much risk the members of the SMSF are willing to take on. The answer may be different for each member of the fund, so you also need to think about whether each member has their own investment portfolio in the fund, or whether everything is pooled together.
Trustees need to ensure that their SMSF is able to pay its liabilities as and when they fall due. Doing this for the ongoing running costs of a fund sounds relatively easy. But you can’t forget about the additional liquidity required as members of the fund approach retirement and start to draw on a pension from the fund.
Trustees are also required to consider the insurance needs of members. This doesn’t mean that the fund has to hold insurance for the members, but this is actually an important consideration. Given that the trustees of an SMSF are also the members, this is about considering whether clients have enough insurance of their own, and if not, should they acquire more coverage through their super or not.1
But clients shouldn’t constrain themselves to personal insurance considerations, depending on the type of investments in your client’s SMSF, they should also consider if they need the fund to take out other types of insurance. This could be a vitally important consideration if property is held.
5. Documenting it all
Ensure plans are well documented. The actual investment strategy document can be long or short, but your clients need to show they have considered the above elements.
In terms of key positions, Ashenden explains that most good investment strategies will have two key positions:
1. An overall goal that the investments of the fund are trying to deliver. For example, the fund could be targeting an overall return 2% above Consumer Price Index on a 5 year rolling basis.
2. Secondly, its sets out acceptable investment parameters. For example, it may say the fund is happy to hold between 30% and 60% of its investments in Australian shares, but is targeting a holding of 45%.
These elements taken together give the trustees something to measure performance against. If the SMSF isn’t meeting these objectives, or its investments fall outside of the expressed permitted range, then the trustees need to be doing something to bring it back in line.
“Overall, a good investment strategy is one that aligns to the future goals of the members and what they are trying to achieve, and ensures this is done with appropriate consideration of the risks in achieving these goals” says Ashenden.
The good news is trustees of SMSFs don’t have to do it all themselves. Professional support can help clients understand how their fund has performed in the past and is currently performing, and also help them to identify the requirements of members and select investment to give them a chance of future success.
1 SMSF Association: https://trustees.smsfassociation.com/topic/question-2-are-you-regularly-reviewing-your-investment-strategy-and-insurance/review-the-insurance-needs-of-members/
Bryan Ashenden is Head of Financial Literacy and Advocacy at BT. The information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. Any taxation consideration outlined in this presentation are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. The tax implications of the relevant products mentioned in this presentation can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.
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BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 (BTPS) operates Panorama Investments and administers Panorama Super. BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 (BTFM) is the trustee and issuer of Panorama Super, which is part of Retirement Wrap ABN 39 827 542 991. Westpac Financial Services Ltd ABN 20 000 241 127 AFSL 233716 (WFSL) is the responsible entity and issuer of interests in BT Managed Portfolios. Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714 (Westpac) is the issuer of the BT Cash Management Account (BT CMA). Together, these products are referred to as the Panorama products. A Product Disclosure Statement or other disclosure document (PDS) for the Panorama products can be obtained by contacting BT on 1300 881 716, or by visiting bt.com.au. You should obtain and consider the relevant PDS before deciding whether to acquire, continue to hold or dispose of interests in the Panorama products.
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