The legal need for the investment strategy of an SMSF to specify the asset allocations to be employed by the fund is a misconception among both trustees and advisers, according to a technical expert servicing the industry.
“Asset allocation ranges are not a legal requirement of an SMSF investment strategy,” Heffron SMSF solutions head of technical services Meg Heffron said.
“The law actually requires that you have to have a plan, you have to consider, among other things, risk and return, diversity and liquidity, the ability to meet liabilities and whether insurance should be held.
“You have to put the plan in place, follow it and review it regularly. There is nothing in there at all about asset allocation ranges.”
Heffron said despite the law not specifying the need for the inclusion of asset allocation ranges, a large number of SMSF investment strategies still contained them.
“Why do they have them? It’s just an easy way to demonstrate they’ve got a plan. How else are you going to demonstrate you’ve got a plan?” she said.
She surmised many SMSFs had an investment strategy containing asset allocation bands because the trustees did not know what a formal strategy document should look like. However, she said most trustees would most likely have a plan for their investments in their heads and those plans could simply be the foundation of the fund’s investment strategy.
“The trustee could say I’m going to invest in a whole lot of ETFs (exchange-traded funds) because that’s a cheap way for me to access this particular type of investment and it makes sense to me,” she said.
“That’s a plan you know and it would be a fine investment strategy. It’s just that I don’t think a trustee is ever going to be able to sit down and write that out for themself.”
She added a lot of current investment strategies were developed on the basis of satisfying a compliance objective, which potentially was not the right approach.
“If you were to seriously be true to what this legislation is trying to achieve, the bigger conversation, and this is where trustees with advisers are actually doing it funnily enough, even if it doesn’t look like it from the piece of paper they have on file, would be to ask the SMSF trustee what is your plan, have you considered all of these things, and are you putting that plan in place and reviewing it regularly?” she said.
“And that’s it. That’s all they have to do.”
