Analysis: The SMSF Investment Strategy

The SMSF Investment strategy is a Superannuation Industry (Supervision) Regulation 1994 required document. That sentence alone should reinforce its importance. To go deeper, it is contained deep within SIS Reg 4.09 subregulation 2 or SISR4.09(2) – as well as Section 52 of the Superannuation Industry (Supervision) Act 1993 or SISA s.52 which states that governing rules (separate to, but in close conjunction with, an SMSF’s trust deed) are taken to state that they contain the requirement for trustees or directors of trustees to create (formulate), regularly review and revisit, and action what is in the investment strategy for the SMSF whilst regarding matters of risk and return and how the funds objectives are being met through that, the asset mix or composition to decide whether or not a larger or smaller amount of asset diversity needs to be attained, yet remain liquid enough for the short term liabilities and obligations, whether sufficient and reliable valuation information is available about the investments, of course not forgetting tax and cost incursions along the way.

Aside from all this, due diligence in the investment selection and life insurance considerations must also be expressed in the strategy. Whilst it is not a requirement to obtain life insurance for beneficiaries, they must have considered taking life insurance cover each year – and this is by way of the annual minutes where investment strategies are reviewed. Whilst I’m not legally allowed to advocate for life insurance in smsf’s – it appears the ATO want you to consider it. Sounds like you really should.

Investment strategies are required to be in place before the fund’s very first audit. You see, given the auditor’s requirement is to check whether you have one in place for each and every audit we conduct means that I do check that there is one in the very first year the fund is setup.

When you obtain financial advice usually from a licenced accountant or financial advisor again with the appropriate licence to assist in setting up your / your clients’ smsf, this is when one of these are signed by trustees. From there, they are kept in the smsf’s ‘permanent files’ to and followed throughout the life of the smsf.

Let’s talk diversification and investment strategy ranges.

Many of you would have seen a paragraph in their strategy “indicative asset classes are as set out below:” followed by cash x% - x%; Australian shares x% - x % and so on. Which guide trustees specifically in keeping their mix within that space.

In the not too distant past, I recall the ATO formally and officially sending out emails (and maybe physical mail?) to smsf trustees and auditors surrounding limited diversification of smsf assets. Specifically, they were aiming to thwart smsf’s freely taking out borrowings for real property where the sole asset is the real property – hence creating the lack of diversification whilst having a high amount of gearing in their smsf. What is the problem here really? Well, the ATO believes that given superannuation is for the sole purpose of retirement, and you are supposed to be maximising your retirement benefits – its appropriate to mention that these lack of diversity mixed with high borrowing high risk situations where you become exposed really means that you might be putting your retirement at risk. Guess what, its 2026 and the residential property market has dropped!

Brief mention on Derivative risk statements

These appendages involve stating hedging investment risk and maximising return. Where derivatives are invested in, one of these appendaged statements are required as well.

Also - Statement of advice (SOA) – what is it?

A strategic document issued to you following a meeting with a trustees financial advisor - whilst not the same as an investment strategy – it may recommend or contain an investment strategy separately. In instances where trustees only have an SOA, they are required to execute a separate investment strategy to ensure compliance with SISR4.09

Getting back to the compliance aspect – Strategies are then required to be reviewed annually by trustees per legislation and documented that this has occurred by way of their annual minutes. If you are a trustee - Have you reviewed your investment strategy? If yes, let me see a declaration showing me the trustee has. Going beyond a mere annual minute declaration, it should actually be read, understood, executed and given effect to. Investments must actually be kept in line with what the strategy says.

What happens when the investment strategy becomes obsolete and the trustees feel a new strategy and direction is more appropriate for the fund? Well, then these matters should be brought to the surface on the investment strategy and then kept within the strategies parameters. Any advice needed around changing this should be done by a licenced professional. These matters may include various asset markets going up or down and no longer either fitting within the set parameters of your strategy or you deciding the strategy needs to be revised. Same concept applies to new members joining or leaving your smsf, or even if an existing member starts a new pension account – because now liquidity becomes more important.

SMSF Auditors are required to check that you not only have an investment strategy along with any amendments and that its reviewed annually, but whether your current investment mix sits within the investment strategy parameters. If, for whatever reason an SMSF appears as though it no longer follows what is stated on a strategy might mean potential compliance issues for that year and any future years until such time the strategy or the funds investment mix is changed to coincide with one another.

Do they need to contain ranges?

There is no requirement for investment ranges to be stated on an investment strategy – but you should be aware these are there to limit or control investment freedom and promote diversification. So whilst they are there to assist you in a well balanced fund or strategic direction, they can result in problems where not followed.

Should investment strategies be wet signed?

I don’t believe this is a legal requirement – but I still do recommend wet signatures on this document.

There are plenty of resources out there publically and professionally on the hot topic of investment strategies so I encourage all smsf trustees who are unsure about how to go about ensuring compliance with this requirement to go out and do some research or obtain some advice.