SMSF Investment Strategy
With the ATO’s guidance released in 2020 (details below) and the current investment market volatility comes an increased risk but also an opportunity for trustees to review their investment strategies. It is a requirement to review, but often we see this exercise as purely a compliance driven requirement. Whilst it is necessary to ensure compliance with the ATO guidance and SiS regulations, there is also an opportunity to actively consider actual asset class of investments and the risks for each class compared to the time horizon for the members’ retirement needs.
It is noteworthy that the 0-100% asset class range is not a valid approach according to the ATO. The only exception I see to this guidance is for cash asset class whereby this percentage can vary widely. This is especially true if the fund is transitioning from one asset class to another eg selling shares to purchase property or vice versa.
Normally your regular SMSF adviser can provide information to guide trustees in the process of updating your investment strategy. The usual caveats apply in relation to licensed advice requirements, knowing that often the accountant or SMSF adviser may not be licensed to provide specific investment advice, which would ordinarily come from a licensed financial advisor.
ATO Guidance:
What needs to be included in my SMSF’s investment strategy?
Your SMSF investment strategy should be in writing. It should also be tailored and specific to the relevant circumstances of your fund rather than a document which just repeats the words in the legislation.
Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
In particular, under the super laws your strategy must consider the following specific factors in regard to the whole circumstances of your fund:
risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification
liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)
fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs
whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.
When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the investment strategy requirements.
The percentage or dollar allocation of the fund’s assets invested in each class of investment should support and reflect your articulated investment approach towards achieving your retirement goals. If you choose not to use allocated portions or percentages in your investment strategy, you should ensure material assets are listed in your investment strategy. You should also include the reasons why investing in those assets will achieve your retirement goals.
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