The past couple of years has seen an increased focus on investment strategies within SMSFs.  This focus, whilst initially targeted to a particular segment of the market with LRBAs and heavy asset concentration, has broadened significantly as to the expectations of the Commissioner.

Just by looking at the data from our Smarter SMSF platform, we can see just how much activity there has been with investment strategies over the last 12 or so months. A single-page document that replicates the operating standard is no longer acceptable and furthermore requires trustees to demonstrate how they have considered each of the requirements set out within SISR 4.09.

Which moves me onto this next phase of compliance with SMSF investment strategy – the requirement for regular review.

Investment strategy review

The ATO makes it clear there are a number of circumstances that may warrant a review of the investment strategy, including:

• a market correction
• when a new member joins the fund or departs a fund
• when a member commences receiving a pension. This is to ensure the fund has sufficient liquid assets and cash flow to meet minimum pension payments prior to 30 June each year

The current approach to an investment strategy review in my view will come under much greater scrutiny moving forward as it requires the trustees to demonstrate how they have considered all of the elements within SISR 4.09.  Currently, I see many people relying upon their SMSF software to generate a paragraph that effectively replicates what the operating standard says and it goes something like this:

“the trustee has reviewed the strategy and has considered a risk, liquidity, diversification, the ability to discharge fund liabilities, and considering contracts of insurance. As a result, no change is required to the strategy at this time.”

The reality with this approach is that there has been little or no demonstration as how to the trustees have considered each aspect of the operating standard – in particular areas of diversification when many funds continue to invest within a single asset or asset class. Furthermore, many funds will have been through an event within the past 12 months that may have triggered a need to reflect a review of the investment strategy – think market corrections, rent and/or LRBA relief, etc.

What guidance is available?

Whilst the ATO provided important guidance on their website, QC 23320, there are a number of other resources that can be relied upon to better understand an appropriate approach towards an investment strategy review.  This includes:

• The fund’s deed, which may stipulate considerations for the trustee in preparing and monitoring the fund’s investment strategy.
• ASIC guidance, in particular for advisers with REP 575 on improving the quality of advice and member experiences.
• APRA’s prudential practice guidance, SPG 530 – provides assistance for RSE licensees in the formulation, implementation and ongoing management of investment strategies.

When exploring SPG 530 in the context of SMSFs, there are a number of items that we can look to apply including:

• the expectation to conduct at least an annual review of the key drivers of the investment strategy to ensure that it remains consistent with the investment objectives.
• were no longer appropriate to meet the investment objectives, the trustee would have a documented process in place to adjust the strategy.
• that particular triggers that could lead to an interim review of the investment strategy – economic events, structural change in membership profile, or material outflow of beneficiary funds (i.e. lump sums, pensions).

Addressing the challenge

Just like we did in building an investment strategy report to help improve trustee education and quality of documentation in this area, we are now focused on delivering a suite of additional documents to support trustees and professionals as part of the fund’s regular review process.  This includes the release of an investment strategy review statement and trustee minutes to support any heavy asset concentration (lack of diversification).

Register for upcoming webinar

You can join us for our upcoming free webinar on 19 August 2021, where Aaron will be exploring this topic in more detail, along with sharing details of new documents available as part of the Smarter SMSF document investment strategy.  To find out more, visit the event page