A senior financial service executive has identified the common mistakes trustees are often making with their responsibilities regarding the SMSF investment strategy.
“When we’re on-boarding a client somethings we see, which you might possibly come across as well, is that the investment strategy hasn’t been executed by the current trustees. [Also] there is no evidence [there has been] a regular review,” BDO senior manager business services Simon Conolly told delegates at the Auditors Institute SMSF Auditors Day 2024 held in Sydney.
“Key legislation, such as section 52B of the SIS (Superannuation Industry (Supervision)) Act and [regulation] 4.09(2) of the SIS Regulations, [dictate] trustees must formulate, give effect to, and regularly review the investment strategy,” he added.
Further he pointed out many trustees are inverting the priority that should be afforded to this critical document.
“[For some trustees] it’s that whole tail wagging the dog [scenario] or [putting] the cart before the horse [where] they draft that investment strategy to support an investment decision that they had previously made – particularly for, say, property. So shoehorned it in that way,” he revealed.
A final flaw he said trustees make is not making portfolio allocations in the SMSF that align with the investment strategy.
According to Conolly many trustees include an asset class allocation between 0 and 100 per cent in an attempt to simply fulfil their legal responsibility, an exercise he described as meaningless.
“That’s not to say [specific] asset allocations are not appropriate, they are absolutely appropriate [in] certain circumstances, but they need some consideration beyond a 0 to 100 [per cent band],” he noted.
“I think the ATO agrees that those broad ranges of asset classes don’t really reflect proper consideration of an investment strategy.”
He suggested trustees still require a significant amount of education regarding the investment strategy to assist them in understanding formulation of the document must consider all aspects of the fund such as the risk and return of certain investments, level of diversification included in the SMSF’s portfolio, and the cash flow implications of the fund’s holdings.
