SMSF investment strategies are being used as compliance documents instead of a tool to help fund members meet retirement outcomes, an SMSF expert has claimed.
SmarterSMSF chief executive Aaron Dunn said he often saw SMSF investment strategy documents that comprised a single page and only met what was required under the Superannuation Industry (Supervision) (SIS) Regulations.
Writing as part of blog post on his firm’s website, Dunn said these documents state they have considered risk and return, liquidity, diversification, cash flow and insurance cover for one or more members, and, in some cases, may provide asset allocation ranges to ensure there is no breach of SIS requirements with the fund auditor.
“Too often I see SMSF investment strategy documents supposedly built by trustees that aren’t worth the piece of paper they’re written on,” he said.
“I’ve long been a critic of this approach within the SMSF sector where the role of the investment strategy has been as a compliance document, rather than a tool to help develop and meet retirement outcomes.
“This appears to be a by-product of accountants being scared of the role they can play in helping trustees in this area of the investment strategy, concerned that they may breach any licensing limitations.”
His comments follow recent news the ATO will be writing to 17,700 SMSFs about its concerns the funds in question hold 90 per cent or more of their assets in a single asset or single asset class.
He noted the SMSF regulator had highlighted that it was concerned about a lack of consideration being given to diversification requirements within the fund’s investment strategy, which in turn must comply with the operating standard in SIS Regulation 4.09.
It was expected the majority of funds under scrutiny will have property-based investments, and the ATO’s campaign, while not directly linked, follows on from its role as part of the Council of Financial Regulators (CFR), he added. Earlier this year, the CFR reviewed, and questioned, the ongoing use of limited recourse borrowing arrangements for SMSFs.
Dunn said given this renewed focus on SMSF investment strategies by the ATO, advisers could still draw lessons from ASIC Report 575, released in June 2018, which examined improvements in the quality of advice for SMSFs.
He said the report outlined a number of advice requirements where an SMSF was investing in property, including the age and retirement needs of SMSF members, the length of an LRBA and the fund’s ability to pay the loan if an unexpected event occurs, the upfront costs of purchasing property, how the member’s retirement will be funded by the property investment and can it be sold quickly if required.
“All of these areas can be easily transferable into actions or requirements that trustees should be addressing as part of formulating their fund’s investment strategy,” he said.
