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.

What SMSF Trustees Dislike Most About Running Their Fund

Are you doing a job where you are responsible for the performance of a portfolio of investments, but you have very little time for research? Does this job involve trying to keep up with constantly changing regulations and managing a stack of administration? Are you struggling to set aside time to plan while reviewing your current position? Then you must be a trustee of a self-managed superannuation fund (SMSF).

As many trustees are finding out, there are many responsibilities that go with the role. Chief among them is the knowledge that if a fund trustee makes poor investment choices, their lifestyle and that of the other fund members could be adversely affected in retirement.

A recent survey of SMSF trustees named the five most difficult tasks that come with managing your own fund; the top two were ranked by over 30% of survey respondents. The next two were ranked by 16% of respondents and the final difficult tasks were a lowly 12%.

It is no surprise that choosing investments was the most unpopular task, and the one that weighed heavily on the shoulders of the trustees. They were all doing their best to place SMSF funds in secure investments that gave a good return but were very conscious of the consequences if they made an honest mistake.

Having to deal with changing regulatory requirements was next. Everyone agreed that an environment where superannuation rules were not subject to constant change would give trustees the confidence to make decisions without needing external advice. This kind of uncertainty is stressful and made them apprehensive about even minor issues.

Time is money as the saying goes, and this is very pertinent to those trustees who struggle to find enough time to research investments. This, along with the first unpopular task of choosing investments makes investing an area where inexperienced fund trustees can quickly find themselves in trouble.

Administering the fund, keeping records and lodging the required returns on time are all tasks that require attention to detail and superb organisation. If a trustee does not have these attributes, it will always be a struggle to keep track of everything. Thankfully, there are companies like SMSF Assure that will take over this burden.

Finally, planning and reviewing are the two tasks at the bottom of the list, possibly indicating that most trustees would rather do these than any of the others. However, all tasks are of equal importance because they are all part of the responsibility of being a fund trustee.

Passive Investments An Alternative To Active Participation In The Market

If you are responsible for the investment decisions of a self-managed superannuation fund (SMSF), you may be in a situation where you have found yourself lacking somewhat in the skills required to manage your asset portfolio actively on a regular basis. Rather than stress over your predicament, there is an alternative to second-guessing the stock market.

Passive investments, as the name suggests, if selected carefully, provide a regular income stream without the constant intervention of the fund trustees. They can be concentrated in one asset class, but it is preferable that the fund portfolio is diversified to spread the risk in the event of a severe market correction.

Exchange Traded Funds (ETFs)

There are some passive investments that are especially favoured by SMSFs, but one that has continued to show remarkable growth over the past few years is the ETF or Exchange Traded Fund. All ETFs are listed on the stock exchange, allowing SMSFs to buy and sell the units when markets are open. They represent a portfolio of securities that track how a specific market index like the ASX 100 performs.

ETFs align with the goals of SMSFs in several areas, which is why they are popular with fund trustees who are looking for a long-term result, rather than getting involved in the hurly-burly of regular trading. ETFs offer a higher level of control over investment decisions, they reduce the costs incurred in regular, active investing, the investing process is simpler and more transparent and the tax outcome of the investments is also improved.

Other ETFs

Listed ETFs also offer opportunities for SMSFs to access alternative income asset classes such as equity ETFs and fixed income ETFs. These both suit investors looking for a consistent income return, which is a perfect result for an SMSF. With equity ETFs, the dividend yield is the key criteria to look at when selecting the stock rather than the traditional method of market capitalisation.

Fixed income ETFs invest in debt securities where the returns are fixed at the time the bond is issued. They suit long-term investors who do not intend to trade and when held to maturity, market changes have no impact on returns.

Real Estate

Real estate offers some opportunities for passive investments suitable for SMSFs. Listed Property Trusts (LPTs) or Real Estate Investment Trusts (REITs) invest in commercial real estate such as office buildings, shopping centres, industrial premises, warehouses and the like. The tenants in these premises are usually on long-term leases offering consistency and predictability for SMSF trustees. These funds are managed by experienced professionals, so they are a good option for SMSF trustees with little knowledge of this asset class

Bank Accounts

With interest rates at record lows, the returns on cash in bank accounts are meagre. However, the up side is the security, and the immediate liquidity it offers. When interest rates do move upward, cash in the bank is the ultimate passive investment.

As with any type of investment, getting professional advice before making a move is always essential. If assistance is needed in the administration of the SMSF, there are always companies such as SMSF Assure available to advise the trustees and they make sure their administrative responsibilities are covered.

Keeping Your SMSF Investments In Sync With Long-term Outcomes

If you are an SMSF trustee, you should already know that one of your responsibilities is to manage the fund’s investments in the best interests of the fund members, and in accordance with the law. To do this, you must have an investment strategy that sets out in writing the investment objectives and specifies the types of investments your fund can make.

Is Your Investment Strategy Document up to Date?

This investment strategy is not a static document but should be dynamic in nature, responding to the market and reviewed regularly to ensure that it still reflects the circumstances of its members. Matching your SMSF investments to the objectives outlined in the investment strategy can be challenging, especially in a market that is volatile or stagnant. The former moves rapidly and can catch out fund trustees who don’t move fast enough, while the latter allows otherwise valuable investments to languish, resulting in poor returns.

Issues That Will Have a Long-Term Impact

Trustees reviewing their fund’s investment strategy should be looking at a range of issues so that each member’s risk profile is considered. Among these issues are the length of time each member will take to reach retirement, the amount each member will require in retirement, and whether they have personal savings outside of the SMSF that they can access for living expenses. There are several others.

Could Asset Allocation be the Answer?

One of the ways in which a trustee can match SMSF investments to their objectives is by diversifying the investment portfolio across a range of asset classes to minimise its exposure to any market fall in a particular area. This is called asset allocation. It is achieved by identifying those assets that match the objectives of the SMSF members, and allocating a percentage of the portfolio to each of these asset classes.

There are four major asset classes; cash, shares, fixed interest and listed properties. Of course, there are both risks and benefits associated with each asset class, and an SMSF trustee responsible for deciding the allocation percentages and arranging the transactions can find the pressure is not conducive to making good decisions. As a result, they may become too conservative and risk not meeting the fund objectives.

Other Alternatives Available

A better alternative could be managed investments. These allow for a stronger level of diversification and they are handled by professional investment managers. They make all the difficult decisions that SMSF trustees find a struggle, but with the benefit of extensive market knowledge.

SMSF trustees are finding that running their own fund is proving to be more difficult than they first thought, and are increasingly turning to professional organisations such as SMSF Assure to help with the fund administration, and other licensed professionals for investment advice.

Getting the right financial advice to support your fund’s investment strategy is vital to the performance of the fund, and, in the long term, to the lifestyle aspirations of its members. Don’t be afraid to seek assistance if you are finding it difficult to match your fund’s investment performance to its overall objectives.