Time to review your clients' investment strategies

Time to review your clients' investment strategies

With many SMSFs now finalising their end of year accounts, now is the ideal time for SMSF practitioners to review their clients' investment strategies.

The first quarter of financial year 2018 has already come to an end. SMSFs have had their funds audited and are likely finalising their accounts for the year. While trustees are focused on the performance and administration requirements of their SMSF, now is an opportune time for accountants to initiate a review of the fund’s investment strategy.

Every SMSF is different, and will need a different investment strategy that aligns to their short, medium and long-term goals.

For many trustees, accountants are the go-to source for SMSF advice. If you’re an accountant under an Australian Financial Services Licence (AFSL) that provides advice to SMSFs, you should recommend an annual review of their investment strategy and advise against taking action from external factors or personal preferences which may result in a deviation from the strategy.

Ideally, you should be reviewing the SMSF’s investment strategy and approach every 12 months to ensure it is still relevant and appropriate for the trustee.

Here are seven indicators that will help determine the right investment strategy for the fund:

1. Age of the fund members:
If the fund’s members are young and retirement is a long way off, they may be able to take on more risk than a fund with older members that may not have as much time to ride out share market fluctuations.

2. Current investments:
Consider the investments the fund currently holds. Are they still right, or should you be looking at a different composition? There is no legislated requirement that SMSFs must be diversified, and many have high exposure to asset classes such as property or cash. However, this is something that ASIC is keeping a pulse on, and a diversified portfolio can provide a buffer if one asset class performs poorly.

3Economic, political and geopolitical factors:
Are there any external factors, such as a new government and political agenda or political tensions, that may adversely affect one or more asset classes the fund currently has exposure to?

4Contributions to the fund:
Accountants should analyse whether there have been regular contributions made to the fund over the financial year.

5. Risk v return, and member resilience to risk:
The level of risk involved in an investment balanced against its potential for return should always be analysed. However, it’s also important to consider members’ appetite and resilience for risk, which can help benchmark the level of risk the fund should be exposed to.

6. Liquidity versus fund growth:
You will need to ensure the fund has liquidity to pay liabilities as and when they come due. For example, to pay ongoing running costs of the fund. Accountants should ensure trustees have a clear understanding on the objectives of the fund, its exposure to risk, the likelihood of returns, and the need for liquidity within the fund.

7. Insurance requirements:
Although insurance isn’t a requirement for an SMSF, accountants should ensure documentation is in place to prove it has been considered by the trustee. At review time, it’s important to consider where insurance needs have shifted. For example, pre-existing policies in or out of the fund, any personal or health issues that have arisen since the fund was established.

Is an SMSF still the most appropriate structure for a client’s retirement savings?

Another crucial consideration is making sure that an SMSF is still appropriate for the client’s circumstances.

SMSFs can provide more control over investment decisions of retirement savings, enable a greater degree of flexibility of investments, and can provide estate-planning benefits. However, there are higher costs and time commitments associated with running them. Key questions accountants should consider of the trustee:

  • Are they prepared to be actively involved in the financial affairs of running the SMSF?
  • Do they understand and is there evidence that they are adhering to their legal and tax obligations?
  • Is the client prepared to dedicate time to administering an SMSF, and do they have the skills needed to do so?

This may sound like it will require a lot of time and resources to continually review your clients’ SMSFs however the rise of digital advice solutions means you can largely automate this process and give trustees the power to drive this themselves.

Best of all, for accountants that don’t have an AFSL, a digital solution allows you to continue providing your clients with SMSF advice under the solution’s licence.

SMSF appropriateness is a pervading issue in the industry but adopting a digital solution can greatly improve your engagement with clients and their engagement with their funds.

Richard Liverpool, head of sales and marketing, Ignition Wealth

Time to review your clients' investment strategies
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