Ensuring clients’ investment strategy accurately reflects their SMSF’s current asset allocation is an important compliance responsibility.
With continued shifting focus on the compliance of investment strategies, SuperConcepts technical executive manager Graeme Colley said that, while there is a degree of flexibility with respect to movements in their overall asset allocation, it is good practice to start reviewing your client’s current asset allocation against their documented strategy.
“If the fund’s current allocation falls outside the documented strategy, they may wish to make an adjustment to either so they fall into line,” Mr Colley said in a recent online technical update.
“It is reasonable to expect that your client’s SMSF’s asset allocation will have a degree of tolerance over the short term which falls either side of the long-term target. But a regular review is something your client should get into the habit of doing, as it’s required by the super law.
“Some of the more common situations where your client’s SMSF’s investment strategy should be reviewed include trustees purchasing property for their fund but not updating the investment strategy to reflect the purchase, and where asset classes such as listed shares being over the fund’s target position due to significant rises or falls in the underlying holdings.”
Trustees moving from accumulation to pension phase and changing asset allocation due to cash flow needs should also be considered, with SMSFs choosing to invest in predominantly one asset or asset class, 90 per cent or more of the fund, can lead to concentration risk.
In this situation, the fund’s investment strategy needs to document how the trustees have considered the risks associated with a lack of investment diversification, according to Mr Colley. This should include how high concentrations of investments can meet the fund’s investment objectives including predicted returns and cash flow requirements.
“Asset concentration risk is heightened in leveraged funds, especially where the fund has used a limited recourse borrowing arrangement to acquire the asset,” he explained.
“This can expose members to a loss in the value of their retirement savings should the asset decline in value. It could also trigger a forced asset sale if loan covenants (for example, the loan to valuation ratio) are breached.”
