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Bryan Ashenden
Expert
+ About Bryan Ashenden

Bryan Ashenden is the Head of Financial Literacy & Advocacy at BT Financial Group, leading a team of professionals committed to supporting the adviser community with technical, regulatory, policy and research support.

Bryan has many years’ experience in leading and delivery comprehensive technical solutions to advisers and their clients, the last 16 spent with BT Financial Group.

With qualifications in Law, Commerce and Financial Planning, and being a SMSF Association Specialist Advisor, Bryan is a frequent presenter and facilitator at many industry events and regularly contributes to trade and consumer publications.

What makes a good SMSF investment strategy?

Monday, November 06, 2017

By Bryan Ashenden

If you have a self-managed super fund (SMSF), then you should be aware one of the obligations that is placed on you as a trustee is that you must have an investment strategy for the fund that is reviewed regularly. But what makes a good investment strategy? How long does it need to be? How detailed?

These are all great questions, but unfortunately there is no single right answer. However, here are 5 considerations that can help you along the way.

1. Diversification

Super law does require that when formulating an investment strategy, trustees must have regard to diversification. Diversification relates to a consideration about the spread of different investments you might have – or thinking about ensuring you don’t end up with all your eggs in one basket.

However, there isn’t a requirement that an SMSF’s investments must be diversified, and there are some SMSFs that have large investments in a single asset (or asset class). Most commonly this occurs where the SMSF has a direct property investment, with a comparatively smaller investment in cash in order to make any relevant payments as necessary.

The big risk being so concentrated with your investments into one asset or one segment of the market is what if something went wrong? What if a property bubble bursts?

2. Risk and return

The risk involved with, and the likely return from, the investments are also important considerations, and really ties back into the issue of diversification of investment.

What can sound like an exciting possible return on any particular investment, should always be balanced against a consideration of any risks involved with that investment. The difficulty is that both risk and return are assessments of what may happen in the future. It’s important to remember that any historical performance data availably is purely that – i.e. history! It can provide some guidance as to how well a portfolio manager has looked after the monies under their control, thereby providing some insight into their level of governance, but you should always be cautious when it comes to relying on performance history.

You shouldn’t look at any investment in isolation, and always compare their performance against peers and over multiple periods of time. For example, whilst a share fund that provided an 8% return in the last 12 months might sound relatively good, it’s not if all other comparable share funds were returning in excess of 10%.

In addition to pure investment risk, you need to consider how much risk the members of the SMSF are willing to take on. The answer may be different for each member of the fund, so you also need to think about whether each member has their own investment portfolio in the fund, or whether everything is pooled together.

3. Liquidity

As a trustee, you need to ensure that your SMSF is able to pay its liabilities as and when they fall due. Doing this for the ongoing running costs of your fund, sounds relatively easy. But you can’t forget about the additional liquidity required as members of the fund approach retirement and start to draw on a pension from the fund.

4. Insurance

Trustees are also required to consider the insurance needs of members. This doesn’t mean that the fund has to hold insurance for the members, but this is actually an important consideration. Given that the trustees of an SMSF are also the members, this is about considering whether you have enough insurance of your own, and if not, should you acquire more coverage through your super.

But don’t constrain yourself to personal insurance considerations, even though that’s all that’s technically required. Depending on the type of investments in your SMSF, you should also consider if you need the fund to take out other types of insurance. This could be a vitally important consideration if you hold property.

5. Documenting it all

Ensure you document your plans. The actual investment strategy document can be long or short, but you need to show you have considered the above elements. Most good investment strategies will have two key positions within them.

  1. An overall goal that the investments of the fund are trying to deliver. For example, the fund could be targeting an overall return 2% above the Consumer Price Index on a five-year rolling basis.
  2. Second, its sets out acceptable investment parameters. For example, it may say the fund is happy to hold between 30% and 60% of its investments in Australian shares, but is targeting a holding of 45%.

These elements taken together give the trustees something to measure performance against. If the SMSF isn’t meeting these objectives, or its investments fall outside of the expressed permitted range, then the trustees need to be doing something to bring it back in line.

Overall, a good investment strategy is one that aligns to the future goals of the members and what they are trying to achieve, and ensures this is done with appropriate consideration of the risks in achieving these goals.

The good news is that as a trustee of a SMSF, you don’t have to do it all yourself. Professional support can help you understand how your fund has performed in the past and is currently performing, and also help you to identify the requirements of members and select investment to give them a chance of future success.

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Time to review your SMSF strategy

Thursday, September 21, 2017

By Bryan Ashenden

With a new financial year having started and many self-managed superannuation funds (SMSFs) in the process of finalising their accounts for last year, it's an opportune time for trustees to review, and possibly renew, their fund's investment strategy.

The question is: what is a good investment strategy? Unfortunately, there is no simple answer.

Super law does set out some requirements that trustees of regulated super funds need to consider when formulating an investment strategy, including (but not limited to) the composition of investments, risk and return, liquidity, insurance and the ability to pay liabilities (including member benefits) as they become due.

Looking first at the composition of investments, there isn't a requirement that SMSF investments must be diversified, and there are some SMSFs that have large investments in a single asset or asset class. Most commonly this occurs where the fund has a direct property investment, with a comparatively smaller investment in cash in order to make relevant payments as necessary.

Whether or not this approach is right is a question for the trustees of each fund to determine for themselves, but the old saying of "not putting all your eggs in one basket" is worth considering. Using this example, what would happen if the property market was to fall? Do you have enough time to ride out fluctuations and get your money back? This points to the next consideration of risk versus return.

With any investment decision, a consideration of the risk involved in a particular investment balanced against the potential returns or reward should always be undertaken. Of course, these are both forward looking. History may tell us a little about the risks and returns for particular investments over a period of time, but there are no guarantees about what will happen in the future. This is why it's important for trustees to spend some time making an assessment of these important characteristics.

However, don't think that a consideration of risk and return is just limited to the actual investments themselves. The best starting place is to understand what the trustee’s risk and return parameters are. If the market was to fall by 10%, how long would you be willing to stay invested in the same asset to recover your capital? This can help determine how much risk you are willing to take on. And this consideration may not be about a particular investment, but rather the composition of all the assets in the fund. How much to allocate to growth assets which offer a higher risk compared to how much to invest in more capital stable investments which are generally subject to less volatility.

Remember that risk is only one side of the equation - return may be equally as important to consider. In fact, given one of the key objectives of super is to grow wealth towards retirement, generating an appropriate level of return is important, and invariably involves taking on some element of risk.

The third requirement is around consideration of liquidity and the ability to pay liabilities as and when they fall due. There is no doubt that you need to be able to pay for the ongoing running costs of your fund, but consideration of liquidity takes on heightened importance as members approach retirement. With super used to fund members' retirement lifestyles, the need to ensure there is sufficient liquidity is vitally important, and will involve a consideration of how much should be held in cash (or other liquid investments) and how much should stay invested in less liquid investments to provide for future potential growth in the fund.

Trustees are also required to consider the insurance needs of members in formulating the investment strategy. Given that quite often the trustees of an SMSF are also the members of the SMSF, this is about considering whether you have sufficient insurance of your own, and if not, whether you should acquire more cover through your super.

But don't constrain yourself to just considering personal insurance, even though that's all that's technically required. Depending on the type of investments in your SMSF, you should also consider if you need the fund to take out other types of insurance. This could be an important consideration if you hold property.
 
So what makes a good investment strategy? It's one that aligns to the future goals of the members and what they are trying to achieve, and ensures this is done with appropriate consideration of the risks in achieving these goals.

Finally, while the start of new financial year is an opportune time to review the investment strategy for your SMSF, don't forget that it's a requirement for trustees to do so on a regular basis.

This is a sponsored article from BT Financial Group.

Information current as at update August 2017. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.  Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.

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Use your SMSF to teach your kids about finance

Friday, August 18, 2017

By Bryan Ashenden

With self-managed super funds (SMSFs) permitted to have up to four members, it may be a surprise to learn that approximately 70% of SMSFs have only two members and around 23% have just one.  Which means that only 7% of funds have three or four members.

If you consider that most of the two-member SMSFs are likely to be “mum and dad” funds, and single-member funds often arrive when one of the original two members pass away, it begs the question – “where have all the children gone?”

While it is always an important personal decision to set up and start your own SMSF, and an important decision as to who else you want to be in the same SMSF with, there are a couple of important elements you could consider in deciding whether to have your kids join your fund.  Most of these would apply to your children who are at least 18 years old, but there can be some aspects that are important for younger kids as well.

1. Teach your kids about finances and managing money

The first is the opportunity to teach your children more about finances and the importance of managing your money. One of the reasons you’re likely to be in a SMSF is because you want control, and with control comes responsibility. In fact, one of the most important facets of being in an SMSF and being a trustee of your own fund is that you are ultimately responsible for the operation of the fund. As much as you can, and probably should, outsource certain aspects to professional SMSF advisers, ultimately the decisions rest with you.

Having your children involved in managing their finances and being responsible for the decisions they make (both legally as well as personally) is a great way to make them more accountable for their saving and investment decisions. And if they can do that in the safety of an SMSF environment where they have you as co-trustees, hopefully the disciplines can also spread to their other financial decisions outside of the SMSF environment.

While having children under the age of 18 as members of the SMSF is permissible, they can’t be a trustee and usually the parents will assume this responsibility for them until they are of legal age.  However, it doesn’t mean you can’t start to include them as part of the process so they learn.

2. Consider the costs

The second aspect to consider is around cost. For many younger people, superannuation isn’t a huge consideration as they don’t have much of it. Generally their employer sends the compulsory super guarantee off somewhere, often to a default fund, and in most cases, the member hasn’t really chosen how to invest their super or understand what costs are involved. It’s an issue for later in life.  The issue is, in a low-return environment, the costs of their current super environment could actually work against them as it means they could have less super working for them. And over the long term, that could make a difference.

But if they join your SMSF, is there the possibility that their costs will fall? While studies have shown that you may need somewhere between $200,000 and $500,000 in an SMSF to make it economically viable compared to a non-SMSF environment, don’t forget this is for the total amount across all members, rather than per member. If you are already paying a set fee for the administration of your SMSF, will there be much of a change by adding a new member?

3. Opportunity for diversification

Third comes the opportunity for diversification. Members with low balances are often forced to use a default investment arrangement and share risk and return with thousands of other members, simply because they don’t have enough to build their own personalised investment portfolio. In an SMSF, while they may not have enough for their own portfolio to begin with, there may be a greater level of control and understanding by pooling their super with yours to create a bespoke investment portfolio.

4. Estate planning

The last aspect to consider is around estate planning. If your children are of an age where you have appointed them as executor to your will, when you pass away your children will have the ability to step in (as your legal representative) to administer the distribution of you super savings held through the SMSF. To help reduce the burden this can place on your loved ones at that time, introducing your children earlier to your SMSF can make a significant difference as they will have a better understanding of where your super is, who you want it dealt to, how the fund operates and other decisions that need to be made.

Running an SMSF is not easy, but neither is gaining an understanding of finance and the decisions that need to be made at different stages in life. If using your SMSF and the guidance of your professional adviser is an option to get your kids’ financial future on track, isn’t it something worth considering?

First published in the AFR.

This is a sponsored article by BT Financial Group.

Information current as at June 2017. 

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regards to these factors before acting on it.  This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.

BT Financial Group - A Division of Westpac Banking Corporation.

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