DIVERSE INVESTMENT OPTIONS AVAILABLE TO SMSF TRUSTEES

As the trustee of a self managed superannuation fund (SMSF), you are responsible for the investment decisions the fund makes on behalf of its members. This is a big responsibility, as errors of judgement will have a big impact on the lifestyle of the fund members upon retirement. For this reason, investments cannot be ad-hoc, but must be part of an investment strategy.

This strategy should be in place before you actually make any investments. It should also be in writing and have clear objectives. Without it, you are following the vagaries of the market instead of treading a path that will eventually see those objectives reached or exceeded. Like any strategy, it must be reviewed regularly, and any adjustments and decisions should be recorded. You may need to explain them at some time in the future.

In terms of how to invest through your SMSF, there are some restrictions imposed by the Australian Taxation Office (ATO), but generally, you are able to invest in shares, property and collectibles. However, it appears that fund trustees have different priorities in their investment packages than Australian Prudential Regulation Authority (APRA)-regulated funds.

Statistics released by the ATO show the comparison between SMSFs and APRA-regulated funds as at 31 December 2017. This reveals that APRA-regulated funds have much more diversity in their investments than SMSFs, which concentrate more on cash, property and alternative assets.

For example, SMSFs hold 23% of their investments in cash, 1% in international shares and shares in unlisted companies, 15% in property and 28% in “Other”, which includes trusts, managed investments and collectibles. For APRA-regulated funds, cash makes up just 11% of their portfolios, 24% in international shares and shares in unlisted companies, 8% in property and just 4% in “Other”, which for them includes hedge funds.

Speculation is that SMSF trustees like property because they are familiar with the Australian property market, which has generally performed well for some time. They are also comfortable with holding cash in the safety of our banking system, even though returns have been somewhat low since 2008. Their lack of knowledge about international shares makes them wary of investing there.

Many SMSF fund trustees have handed the administration of their funds over to companies such as SMSF Assure so that they can concentrate on building their investment portfolio. However, there are also many licensed financial advisors who could help them rework their investment strategy to take advantage of opportunities they may be missing. These decisions now may affect the members’ quality of lifestyle in retirement, so getting professional advice should at least be considered.

Protect Your SMSF Assets Against Fraud

According to the Australian Taxation Office (ATO), self managed superannuation funds (SMSFs) held $700 billion in assets as at 30 June 2017. This sector of the superannuation industry has grown steadily and where once the number of funds was counted in the thousands, the ATO advises that there are now more than one million SMSFs, holding almost 30% of the asset value of the $2.2 trillion superannuation sector.

This growth and popularity of SMSFs is fuelled by the desire of many investors to have more control over where their superannuation contributions are invested. However, it may prove to be a double-edged sword if SMSF trustees do not heed the warnings from industry experts to be wary of becoming victims of fraud.

ATO figures show that in the last 10 years, $30 billion has been lost by SMSF trustees and members through fraud and financial misconduct. However, one superannuation research firm suggests that the true losses could be more in the range of $100 billion when the loss of investment returns is factored in. This is very concerning, and fund trustees should be looking at these figures with alarm.

A major issue for SMSF trustees is that there is no compensation scheme available to them should they fall victim to bad advice or deliberate fraud. APRA, the Australian Prudential Regulation Authority, oversees the safeguards in place to protect the assets of regulated funds, which include not-for-profit industry funds and for-profit retail funds.

These trustees can apply to the federal government for compensation on behalf of the members if money is lost through theft or fraud. This compensation scheme is funded by an industry levy on large funds, but no such scheme exists to benefit SMSF trustees and members.

The few avenues open to SMSF trustees come with restrictions. The Financial Ombudsman Service will accept complaints from SMSF trustees who have received bad financial advice, and while the service is free, there are monetary caps in place. Financial planners are also required to have professional indemnity insurance, but this could be a long road for an SMSF trustee as there are exclusions and caps and it would likely require a lengthy legal process with no certainty of success.

SMSF trustees must exercise care when choosing who they approach for financial advice. The integrity and reputation of the advisors will be just as important as their track record, but there are a few things the trustees can do to reduce the risk. One issue they should put to rest first is to secure the services of a reliable company like SMSF Assure to look after the administration and compliance of their fund, so they can concentrate on protecting the investment side.

A good place to start is to ignore over-inflated claims about likely returns and remember that if something is too good to be true, leave it alone. Beware of high pressure sales pitches, and if a scheme is too complicated to understand, give it a miss. Protect yourself by investing in a range of asset classes, and regularly monitor them to check their performance. Lastly, only work with advisors who disclose incentives that they receive from third parties and who will advise conflicts of interest when they make recommendations.