SMSF trustees need to be reminded that non-investment risks such as those involved with the establishment and running of a fund exist and seemingly safe choices may introduce other forms of risk to their SMSFs, according to a superannuation technical expert.
Institute of Financial Professionals Australia financial services technician Phil Osborne said while SMSF trustees are often aware of the investment risks related to particular assets, they may be unaware of other risks that may impact how they create an investment strategy.
“It can be very easy for people to say when choosing to invest in a type of asset that there is no risk to it and I see this when people talk about cash or fixed income or term deposits,” Osborne said during an online presentation today.
“They often say that by investing in cash there is no risk because the bank will guarantee deposits to a certain level, but that overlooks the risks that with cash or fixed interest there may not be any sort of return.
“This means the SMSF may miss out on things if it has a long-term investment time horizon and it is not achieving the rate of return that will actually help the members fund their retirement. That is a definite risk, an inflation risk rather than market risk, but definitely a risk.”
He noted that while many SMSFs engaged with property and were aware of the risks related to that investment, liquidity risk was less well known but had become an issue after the ATO raised concerns about diversification risks.
“Diversification is something the ATO will look at, it is required by the Superannuation Industry (Supervision) Act, so the extent to which investments are diverse and liquid is a risk factor,” he said.
He also pointed out that being able to secure reliable valuation information and the ability of the SMSF to discharge its liabilities were also risk factors that were not investment related and impacted the creation of a fund’s investment strategy.
“If the fund is having a valuation prepared on the property every year, is there a cost for that? If the SMSF has to discharge its liabilities, such as paying tax, are we considering what the requirements are and able to make sure the fund can actually do that?” he said.
“Even though fund members may have our own preferences in terms of what they are considering for an investment strategy, as advisers we need to stop and consider the risks involved, make sure we are aware of them and make sure that the client is aware so if they are going to venture into an SMSF, they understand what they’re getting themselves into.”