At Boutique Advisers Private Wealth we are regularly helping new client’s better structure their Self-Managed Super Fund (SMSF) Investment strategy, so they are both legal and fit for purpose for their family needs.
An investment strategy within a Self-Managed Super Fund is simply a written plan for making, holding, realising and selling fund assets. The legislators have advised that there is no prescribed format for an investment strategy, but it should reflect the purpose and current circumstances of the fund and should be reviewed at least annually.
According to the ATO, an investment strategy should be in writing and must:
- be reviewed regularly to ensure it continues to reflect the purpose and circumstances of the fund and its members (the review and any decisions made should be documented)
- consider whether to hold insurance cover (such as life insurance) for each member of the SMSF, and
- When preparing and reviewing the investment strategy, trustees must take into account the personal circumstances of all fund members, including age and risk tolerance.
At Boutique Advisers Private Wealth, some areas that we help our clients navigate include:
Understanding the Superannuation law requirement of all trustees to formulate, implement and regularly review an investment strategy. These address issues such as:
- diversification (e.g. investing in a range of assets, asset classes, sectors, and economies)
- the risk and likely return from investments, to maximise member returns (e.g. investing in shares and property tends to be more tax effective (and volatile) compared to defensive assets such as cash and bonds)
- the liquidity of fund assets (i.e. how easily they can be converted to cash to meet fund expenses or other payment obligations)
- the fund’s ability to pay benefits when members retire and other expenses the fund incurs
- the members’ retirement needs and circumstances including risk tolerance, investment timeframe, age and attitudes towards risk – see point 3 below
- whether to hold insurance.
Having the ability to articulate what the goals, purpose and legacy needs of the fund are and what they may comprise of, as an example it could include the following:
- A contributions goal – For example, contributing $10,000 of concessional contributions per annum for the next 10 years to age 60.
- A return goal – This is the one most commonly used when establishing a base return rate, for example, return 7% per annum net over the next 10 years to meet capital goals at age 60.
- A passive income goal – This is generally used by property investors who, for example, might set a goal of generating net rental income of $80,000 per annum from their property portfolio that they consider necessary to fund their retirement.
- A pension goal – For example, an SMSF member might like to draw down on its capital base of $100,000 per annum to meet their current retirement income needs until age 85.
- A capital goal – This usually also requires a series of actions to help achieve those goals. An example is to accumulate $1 million over the next 10 years to age 60.
- A legacy goal – to be able to leave $500,000 within superannuation to a surviving spouse or family member.
Trustees and the members having a deep understand of risk
Trustees need to understand the trade-off between risk undertaken and returns required. At Boutique Advisers we believe risk comes in multiple forms and that understanding this risk and how it overlays with the members needs is the first discussion point.
We believe there are three risk discussion points:
- Risk Tolerance – This has historically been assessed with a questionnaire undertaken by the member of the fund. This is indicative of your psychological tolerance towards risk which is influenced by your history with investing, attitude, and relationship with money.
- Risk Capacity – As part of the discovery process, we like to work through a member’s capacity to take on risk when investing for different purposes and for different timeframes. As an example, someone still a while away from retirement and has a longer-term horizon, can afford to take a more growth focus within the superannuation environment.
- Risk Required – This is probably the least discussed however at Boutique through our strategy and modelling stage we spend a lot of time discussing this. Some clients do not require high levels of risk/return to achieve their financial goals in retirement. For some clients this allows them to be more conservative in their investments. Understanding the numbers. Legacy needs and the impact of inflation is key.
Self-Managed Super Funds can be a great way for families to accumulate and grow wealth however they do have more considerations than standalone superannuation funds. To work through your SMSF Investment Strategy call a Boutique Adviser on 08 9381 8779 or contact us via the website.