SMSF investment strategy review
Reviewing your fund’s investment strategy: When to review and what to consider
Superannuation law requires trustees of self-managed super funds (SMSFs) to formulate, regularly review and give effect to an investment strategy that considers the whole of the fund’s circumstances.
A review should consider if the strategy remains appropriate for the members’ needs, investment risks, cash flow requirements and retirement plans. Trustees must also document the review and any decisions made.
How often should you review your SMSF investment strategy?
Although the law does not specify a timeframe for “review regularly”, it is commonly accepted that reviews should occur at least annually. This aligns with the ATO’s website, which states that it expects reviews to occur at least annually.
Some trustees undertake an annual review leading up to, or at the beginning of, a new financial year. Others review their strategy when reviewing the completed financial accounts from the previous financial year.
Neither approach is right or wrong. You need to consider what works best for your situation.
What should you document for your fund’s auditor?
You need to be able to show your fund’s auditor that you have reviewed the investment strategy and documented your decisions. This includes recording either:
Changes you have determined are necessary; or
Your decision that the existing strategy remains appropriate.
What other events should prompt an investment strategy review?
An annual review may not be enough if the fund’s circumstances change. Other appropriate times to review the strategy may include when:
There is a market correction;
A member joins or leaves the fund; or
A member starts a pension in the fund.
What should an SMSF investment policy include?
An investment policy generally comprises two parts: the investment objective and the investment strategy.
Investment objective: What does the fund aim to achieve?
The investment objective outlines the fund’s objectives and expected outcomes. For example, it may aim to achieve a certain level of return over a specified period.
This would generally take into account the members’ ages, retirement needs and investment risk profiles.
Investment strategy: How will the fund achieve its objectives?
The investment strategy outlines how the fund will achieve its stated objectives. For example, it may include investment asset ranges or specific assets the fund will hold.
What must trustees consider when reviewing the strategy?
When reviewing your fund’s investment strategy, consideration must be given to:
Investment risk and returns: The risks of holding particular investments and their returns, having regard to the fund’s objectives and expected cashflow requirements.
Diversification: The composition of the fund’s investments and the risk of inadequate diversification.
Liquidity: The liquidity of investments, having regard to expected cashflow requirements.
Liabilities: The fund’s ability to discharge existing and prospective liabilities.
Member insurance: Whether the fund should hold insurance cover for one or more members.
Although trustees must consider these points, it is up to them to determine how they apply to the circumstances of the fund.
Does an SMSF have to hold diversified investments?
Trustees must consider diversification, but that does not mean they are required to have a diversified investment strategy.
Many funds hold just a property and a bank account, and this may be appropriate for those funds. However, trustees should document:
What consideration they gave to diversification;
Why the lack of diversification is appropriate; and
Why they chose those particular assets.
Does an SMSF have to hold insurance for its members?
There is no legal requirement to hold insurance cover for members. However, trustees need to document that they have considered it.
Why should you review the strategy when a member starts a pension?
A member starting a pension is likely to change the fund’s liquidity considerations and investment profile.
When all members are in the pre-retirement growth phase, expenses are usually more predictable, and many funds do not need large cash reserves.
Once members begin accessing their benefits through pension payments, lump sums or both, cashflow, liquidity and a potential cash buffer become more important considerations.
Can your fund meet its minimum pension payments?
Leading up to the end of the year, it is not uncommon for us to receive enquiries and concerns from trustees who do not have enough cash to satisfy even the minimum pension requirements for the year.
There may be several reasons for this. However, it should raise questions about if the fund’s current investment strategy remains appropriate and whether a review of its asset holdings is warranted.
Is a property-based strategy still suitable in retirement?
A fund holding one property and one bank account may have had a reasonable strategy during the growth phase. But does that strategy remain appropriate during the drawdown phase?
Many people are comfortable with property, and Australian investors generally have an affinity for bricks and mortar. That does not mean property is an appropriate investment in all circumstances.
If rental income cannot support your retirement needs and minimum pension withdrawal requirements, something needs to change.
The same consideration applies to other investments that may not be easily sold, such as holdings in unlisted companies and trusts.
Keep your investment strategy aligned with your retirement needs
Reviewing your fund’s investment strategy, members’ needs and asset holdings should be more than a tick-a-box legal requirement.
You have worked hard to build your retirement wealth. When the time comes, you want to be able to enjoy it. An appropriate investment strategy that supports this is an important part of running an SMSF.
Ready to review your SMSF investment strategy?
Contact Collins Hume to arrange a review of your fund’s investment strategy.
We can help you assess if it remains appropriate for your members’ needs, cash flow requirements and retirement plans, particularly if a member is starting a pension or your fund is struggling to meet pension payments.
