It’s mandatory to review your investment strategy

SMSF technical expert and columnist for The Australian newspaper
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Hot on the heels of recent changes on how you have to value your super fund’s assets, the government has just released another change regarding your investment strategy, and this one may require you to act immediately.

You are now required to review your self-managed super fund’s (SMSF) investment strategy regularly. This means you will need to have documented evidence that an investment strategy review has taken place.

Research over the years has consistently shown that SMSF trustees find drafting and preparing an investment strategy the most difficult task they have to complete.

The super legislation demands that you take into account the following items when preparing an investment strategy: the risk and return, diversification, liquidity requirements and ability to discharge existing and prospective liabilities of the whole fund.

Most people struggle with how to even begin this process.

Set the objectives

At a practical level, you can’t work out a strategy if you’re not trying to attain an objective. I’ve never understood why the super legislation imposes the obligation to draft these strategies without any similar responsibility to create objectives first.

This might need some explanation. When a professional athlete is working out how to win (or at least perform well at) their next sporting event, they sit down and thoroughly plan how they’ll prepare for the event and the approach they’ll take to the event itself. Does anyone seriously think Bradley Wiggins and his Sky Racing Team turned up on the first day of this year’s 3,500km Tour de France without a detailed plan?

If the objective is to win the event then the strategy is how they’ll achieve it.

The same applies with creating your fund’s investment strategy. What do you want your fund to achieve? The strategy is how you, as trustee, will reach those milestones.

For what it’s worth, my family’s self-managed super fund has three main ‘objectives’. Firstly, to pay sufficient inflation-linked income to our members when they retire. Our second priority is, where appropriate, to protect us and our family if a fund member dies or suffers ill health, which stops them working for an extended period. And our third objective is to distribute any excess assets after our death to our chosen beneficiaries.

It’s our investment strategy that determines how we invest in order to meet these objectives.

This new super rule demands that we regularly review our investment strategy by taking into account the changing circumstances of our super fund and its members. The Australian Taxation Office (ATO) hasn’t given guidance on how regular ‘regularly’ is, but you’d be in safe hands if you were to review your strategy quarterly.

Now most of you probably know in your heads what your strategy is, or if you’re changing tactics, but it now has to be formally documented that a strategy review has taken place.

You need to consider insurance

When reviewing your fund’s investment strategy you’ll also now need to consider if you should have insurance over at least one member of your super fund. (You’ll note from our fund’s second objective that we can only satisfy it with sufficient assets in the fund or with various types of life insurances.)

This rule has been put in place because less than 15% of SMSFs purchase life insurance.

You’ll need to consider the type and level of insurance you need for a particular fund member. You can show you’ve considered this issue in documented changes in your fund’s investment strategy or in the minutes of your trustee meetings held throughout the year.

The final change formalises the need to keep your super fund’s assets separate from all your other assets and the assets of your relatives and your related businesses. This has been a requirement for many years, but until this change was made, the ATO hasn’t had the ability to enforce it.

The ATO now has the power to take action against you if you fail to satisfy this requirement.

For more information on creating an investment strategy, please read:

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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