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Investment strategy documentation poor among SMSFs
Too many SMSF professionals are not giving enough focus on their client’s investment strategy for fear of breaching licensing provisions around advice, according to an SMSF training provider.
In a recent blog, Smarter SMSF chief executive and founder Aaron Dunn said too many documented investment strategies were falling short by simply seeking to tick compliance boxes rather than seeing investment strategy as a genuine value-add to a trustee’s retirement outcomes.
“Too often I see SMSF strategy documents supposedly built by trustees that aren’t worth the paper they’re written on,” Mr Dunn said.
“A single-page document, the investment strategy reflects what the operating standard says, having considered risk and return, liquidity, diversification, cash flow and insurance cover for one or more members.
“I’ve long been a critic of this approach within the SMSF sector where the role of the investment strategy has been as a compliance document rather than a tool to help develop and meet retirement outcomes.”
Mr Dunn said he believed this compliance-focused approach to building a trustee’s investment strategy had come about because of accountants’ reluctance to breach licensing provisions following the tightening of restrictions around who could give financial advice to trustees.
However, he said SMSF professionals would need to overcome this given the ATO was cracking down on SMSFs with heavy asset concentration and requiring more detailed documentation around the reasons for investing in a single asset class.
ASIC’s Report 575 into advice and member experiences in SMSFs, released in June last year, would be a key source for trustees, auditors and other SMSF professionals in ensuring their clients adopted a properly documented investment strategy, Mr Dunn said.
In the report, the corporate regulator had outlined a number of essential points that needed to be covered in the investment strategy if clients were highly invested in a single asset class such as property.
These points included the needs and circumstances of the fund’s members, how long it would take for members to repay any relevant loans, the fund’s ability to repay loans in the event of unexpected events and how the members’ retirement would ultimately be funded by the property investment.
“All of these areas can be easily transferable into actions or requirements that trustees should be addressing as part of formulating their fund’s investment strategy,” Mr Dunn said.
You may not like it Aaron - but as the ATO has happily for ever accepted the 1 page BS Investment Strategy that spits out of SMSF accounting software with a couple of members names added along with some asset allocation % bands - then nothing will change.
Will chasing excess property asset exposure change this ?
I dont think so, as that is more just an ongoing push from the Industry Funds and Labor pollies to keep having a go at LRBA's and ASIC / ATO towing the line of their Labor & Industry Fund buddies.0- Investment strategies and Death Benefit nominations - neither should be in the 'compliance basket' but whilst ever are produced as templates with the trust deed, will be viewed as such.
The IS provisions seem to have been built for the APRA fund world and like much of SIS, SMSF are bundled into the same requirements when, modifications are required.
There may be more rigor around SMSF investment strategies if the requirement was less prescriptive. Meanwhile, the impasse between Accountants, Investment Advisers and SMSF Trustees remains
0 - Aaron raises some great issues. An investment strategy that has 0% - 100% for each asset class is not an investment strategy and as Aaron says they should be thrown away. BUT the big downside is that if an administrator or accountant was involved in the production of the purported investment strategy, the Trustee of the Fund can sue them under the strict liability provisions of section 55(3) of SISA 93 to recover any losses. This is not a negligence action, simply the adviser, accountant or administrator has breached the investment strategy rules. The only defence to a recovery action is that the investment was in line with the Fund's investment strategy, which is impossible if the underlying document is not one. Imagine if clients knew that when the market drops and they lose $$$ they can sue for any losses.0
- SMSF trustees are entitled to follow the law, which says the trustees must consider risk, return, liquidity, insurance. Consider, yes. Justify, no.
Written investment strategies were always a stupid idea. A SMSF is like a personal investor. They may decide to buy a property or shares but they seldom write down their deliberations in a “dear diary” entry.
When are the Regulators going to get REAL about SMSFs? We are all consumed in pumping out overly officious minutes, resolutions and documents that it’s obvious the trustees did not write or meet about, or even read before signing in most cases.
An absurdity to placate a regulator who refuses to differentiate between a fund with 100,000 members or just two!
This should not be about making the ATO & ASIC feel comfy cosy about their regulatory efforts.
A rewrite of absurd SIS provisions that are no reflection of what Australians actually do with their SMSFs is what is needed.
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