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Strategy oversight produces compliance risks

Failure by trustees to take responsibility and complete structured investment strategies could seriously compromise compliance rules if their house was not in order, according to online service provider SMSFCheck.

Too many SMSF trustees were simply signing a form stating they had carried out an investment strategy review without following a structured process, which could leave them exposed if they came under the ATO’s microscope, SMSFCheck director Rebecca Sullivan said.

“We expect that many SMSF trustees are having a look at their portfolios at the moment given the global share market volatility, but it’s not just their investments they should be looking at,” Sullivan warned.

“An SMSF’s investment strategy should be addressing factors such as risk tolerance and risk protection.

“There should be some clear guidelines for how the fund is going to invest, including identification of asset allocation benchmarks and performance measures.

“Whether trustees are uncomfortable with the current investment environment shouldn’t be the main driving factor for a review – it should be based on an objective, for example, meeting a retirement income need, and identifying the best way to achieve that return over a specified time frame.”

One of the most common mistakes by SMSF trustees was identifying with conservative risk profiles in times of high volatility but having growth-oriented investments, she said.

“The whole point of diversification is [to] trade off some returns for lower risk,” she said.

“If trustees take this approach, they are less likely to need to alter their short-term course because they have longer-term direction.”

Another mistake trustees overlooked by missing a structured investment strategy review was failing to consider whether insurance was needed to protect the ability to achieve retirement income goals and/or protect individual assets, she said.

“There is also some confusion about estate planning in an SMSF and the fact that it’s separate to an individual’s will,” she said.

“Finally, there’s the all-important issue of ensuring the fund is only holding allowable investments.”

Trustees needed to take notes of the review meeting and keep them on file in a secure place so they could be referred to at a later date if necessary, she said.

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