Your investment strategy is not a template
As a valued road map to your ultimate financial goals, a well-defined investment strategy is an essential step in retirement planning, which is often overlooked as a matter of legal conformity. Too often, we see poorly developed investment strategies that are directly copied from default templates without taking a fund’s specific circumstances into consideration.
With extensive experience in auditing self-managed superannuation funds, we at Reliance Auditing Services have outlined a few issues that are often prevalent in investment strategies of self-managed superannuation funds. In this article, Naz Randeria, managing director of Reliance Auditing Services, draws your attention to the top three recurring issues in an investment strategy.
Deviation of fund’s investment from its investment strategy
While auditing, it is often observed that self-managed superannuation funds investing in high-risk assets such as cryptocurrency, collectibles or providing unsecured loans to other parties do not make any provision for such asset classes in the investment strategy. Trustees ought to be aware of this disconnect between the superannuation fund’s investments and the underlying investment strategy.
What should be done?
- Consider if the investment is in line with the members’ risk profile.
- Conduct regular reviews to ensure the fund’s investment meets the objectives of the strategy. For instance, avoid investing in artworks or antiques if the members are looking for regular income rather than capital appreciation.
- If unsecured loans are provided, the investment strategy should clearly define the risk and return from such high-risk investments and justification for entering into such investments.
Broad investment ranges
Recent market volatility has resulted in a greater scrutiny of investment strategies of self-managed superannuation funds by the ATO. Under the guidelines issued by the ATO, a broad investment range of 0 per cent to 100 per cent for all asset classes is no longer acceptable. Although we understand that wide investment ranges offer a significant level of flexibility, we cannot ignore the fact that such an approach simultaneously defeats the purpose of having an investment strategy in the first place.
What should be done?
- Adopt broad investment ranges ONLY when the fund is investing in highly volatile markets with a short- to medium-term investment horizon.
- Use a combination of broad investment ranges and target investment benchmarks for each asset class. This allows for deviation from the target asset allocation to exploit short-term tactical opportunities in the market.
Lack of diversification
Investing 90 per cent or more into a single asset class exposes the fund to high liquidity risk and to the risk of non-compliance with diversification requirements of SIS Regulation 4.09. This risk is exponentially higher in the self-managed superannuation funds with limited recourse borrowing arrangements. In recent years, trustees of SMSFs holding a 90 per cent investment in a single asset class have received letters from the ATO to ensure that the SMSF complies with SISR 4.09.
What should be done?
- Explain how investment in the single asset class aligns with fund members’ needs, their age and risk profiles. If members are young, explain how the fund could potentially achieve returns over a long period of time by investing in a single asset class, which provides high returns for an acceptable level of risk. If LRBAs are entered into for a single asset, explain how the LRBA is justified from an investment perspective.
- Document the super fund’s ability to meet ongoing cash flow and liquidity requirements such as receipt of regular contributions and ensuring steady income growth. Document how the fund will meet capital and interest repayments if an LRBA arrangement is established for the fund.
To address the matters above, trustees are required to regularly review the super fund’s investment strategy. Trustees can make changes to their predefined investment strategy either through an addendum to the investment strategy, trustees’ resolution or by conducting an annual investment strategy review.
Reliance Auditing Services is a specialist independent auditing services firm providing quality audits to SMSFs, listed and unlisted companies, not-for-profits and AFS licensees all over Australia. Reliance Auditing places a huge emphasis on educating our clients to ensure they fulfil their reporting obligations.
DISCLAIMER: This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.
Naz Randeria, managing director of Reliance Auditing Services
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.