SMSFs have accepted the need for a more robust investment strategy document and are working toward the provision of evidence in areas where they have made large investments into single assets or asset classes, according to an SMSF technical expert.
Smarter SMSF chief executive Aaron Dunn said since the ATO raised the issue of the adequacy of SMSF investment strategies with 17,700 funds in August 2019, there has been an increased focus on ensuring adherence with the regulator’s compliance.
“What the ATO did find positive was the letters heightened interest and expectations in the use of an investment strategy and it led to an expanded narrative on what the ATO requires because it only focused on one part of the requirements in the regulation, and that was to show investment diversity,” Dunn said at his firm’s 2022 SMSF Day in Sydney yesterday.
“What we have seen over the past couple of years is people getting their house in order. The initial strategy has been put in place and people are asking about dating investment strategies and including that information.
“We are also finding they are dealing with heavy asset concentration by adding an additional body of evidence and we are seeing more information included in management letters addressing those areas of risk.”
Addressing questions from attendees, he said the investment strategy was not intended to reflect ongoing market movements unless they cause the investment strategy to become irrelevant or unable to meet the goals of the fund members, at which time it should be recalibrated.
Rather, he said the investment strategy, in a compliance context, could be used as a tool to help SMSF trustees understand why it was important to have both an investment goal and retirement strategy tied to it.
He noted the Retirement Income Covenant, which requires Australian Prudential Regulation Authority (APRA) funds to have a retirement strategy for members, did not cover SMSFs, but there was merit in the idea of having a retirement strategy linked to an investment strategy.
“In a perfect world, an SMSF would probably be better having something that combined some of the elements of retirement income strategy and investment strategy together without having all the pieces that are currently needed in there too,” he said.
“There are things in the strategy requirements that are far more than we really need to do when the trustees have got it under control, but the rules are no different for an SMSF or APRA fund, so these are the rules that we live with and therefore we are required to comply with.”
