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
Wouldn’t it be great if our governments had a strategy to act fiscally responsible. The real loser’s from currency depasement will be investors as inflation takes hold. The government wants inflation to pay back there debt. Hypocracy they say is the greatest sin.
SMSF investment strategies demonstrate the difference between ideals & practicality. I doubt you could find a trustee in this country who has written their own, yet compliant strategy.
Financial advisers typically don’t do them and an SOA is not a compliant SMSF investment strategy. Accountants are told they cannot do them or risk being accused of being unlicensed investment advisers. The burden still falls on accountants & SMSF administrators to run the gauntlet of drafting these documents. Templates from document providers are the fall back position. As the writer suggests, these can be customised by the SMSF administrator by drafting extra extra reasoning and “motherhood” statements to justify investments, but it is still the service providers drafting these things, not the trustees, who just sign them, most without even reading.
Do you see the irony? These documents are being written by those in the industry, not SMSF trustees just to placate the Regulator so they can sleep well at night and pretend the trustees did write it. Should we start adding coffee stains so it looks like the trustees formulated it themselves around the breakfast table?!
What this industry and SMSF Trustees are doing is no different to a school child having some smarter child do their homework!
The Cooper review of Superannuation in 2010 seriously considered the abolition of SMSF investment strategies. It’s a shame that didn’t happen.
SMSF trustees have all avenues available to take professional investment advice if they want it, or to to educate themselves if they want to be self directed. Written investment strategies do nothing at all to determine where investments are made, in fact strategies are typically written after the fact so that the asset allocations are correct for the audit!
Written SMSF investment strategies serve no useful purpose and are a waste of resources, just to comply with ill-conceived regulation that purported to placate the early concern of SIS drafters in the early 1990’s that SMSF trustees would not or were ill-equipped to take their investment decisions seriously. I think most people do when it comes to their hard earned money, whether in super or not.
Everyone in this industry, and regulators and politicians need to acknowledge that SIS Reg 4.09 just doesn’t work, and stop pretending that it does.
Our industry is complicit in this problem by making Reg 4.09 appear to the regulators that it works. We should direct those efforts to something more worthwhile, like lobbying to have it repealed. If that involves telling the real truth as outlined here, so be it.
Well said Anon. There is a whole industry now advising what an investment strategy should contain. Time that could be better spent being productive. The sooner Reg 4.09 is abolished the better. As an aside, I note Reg 4.09 doesn’t require asset allocations or even to be in writing. I presume the intent is that it is in writing. In any case, a waste of time. All the best to you.
There is no way any sane trustee these days would invest in fixed deposits or bonds. 98% in listed equities is rational in an age of currency devaluations against all real assets.