Financial advisers need to use suitable benchmarks to assess the performance of their clients’ SMSFs in order to give trustees the best possible opportunity to make informed investment decisions, an investment analyst has said.
Speaking at recent SMSF Members Association seminar, SMSF Benchmarks founder Nick Shugg said: “Using an inappropriate benchmark means you may not be getting affirmation that your fund is doing well. Maybe it is, but if you haven’t got good information to confirm that, you won’t really know.
“Also, if things aren’t going well, then you are failing to get an early warning that some action could be taken to keep the fund on track or maybe if you are using an incorrect benchmark, that might lead to a trustee taking action based on the wrong sort of information, which could be quite dangerous as well.
“The benefits of good benchmarking information is it puts you in a position of power. You have got better information, which should lead to better decisions and better outcomes over time.”
According to Shugg, the use of incorrect benchmarks to examine SMSF performance was not uncommon and was an easy mistake to make due to the type of information readily available in the market.
“I was talking to an adviser who told me he didn’t need any specific benchmarking reports because he was using reports from a research house regarding its balanced option,” he said.
“But he said the problem with doing that was that all of my clients were underperforming the benchmark.”
He pointed out the benchmark was not applicable to assess SMSF performance as the portfolio asset allocations were not appropriate.
“When we looked at it, at this balanced option, we see that there is 23 per cent in Aussie shares and 21 per cent in international shares. Now that might be how larger funds are investing, but it is not very typical of how a self-managed fund is investing,” he said.
“So it’s not an appropriate benchmark for self-managed funds and he was unnecessarily disturbing his clients by using an inappropriate benchmark.”
In addition, he noted the practice of comparing an SMSF against the performance of a large Australian Prudential Regulation Authority-regulated fund was similarly problematic, again due to the disparity between the asset class weightings of the different portfolios.
