Investment Strategies – navigating auditor requirements

11 Mar 2021
Meg Heffron

Meg Heffron

Managing Director

I read a great article by Shelley Banton this week in SMSF Adviser (Navigating key compliance issues SMSFs face under ATO’s investment strategy change). She was giving the auditor’s perspective on how to help get this right and made some interesting points.

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In no particular order…

Shelley mentions that SMSF investment strategies often have asset allocation ranges and then from time to time invest outside them. She flagged that this is actually not a hanging offence but the trustee must have valid reasons and provide them to the auditor. Of course. An investment strategy is just that: a strategy. Following a strategy is rarely a linear thing (in business or in life) – often we find ourselves in the position of being outside our ranges for a short time by chance or deliberately. Imagine a fund that generally invests in property but has just sold a major asset and is looking for its next investment. The plan is that this should be property. But right now, it’s not adhering to its own strategy which says the fund will invest in (say) 50% – 80% property. In fact it might have no property at all for several months. Does that mean the strategy is wrong? If this happened to cross over 30 June, would our instinct be to replace the strategy with something that reflected the actual position?

That last approach – replace the strategy because external factors (rather than a change of heart) have caused the fund to go outside its ranges – is a little like shooting an arrow into a wall and then drawing a target around it.

In our view, a better approach would be for the trustee to explain (in writing) why the fund is outside its ranges. In other words, the strategy is still exactly what the trustee is trying to do over the long term but explain why – for now – the actual investments of the fund don’t look that way. In our view, trustees should actually record a proper review of their investment strategy at least annually. (And close reading of most template investment strategies will say exactly that.)

Like many firms, we have historically included that review in the annual year end minute but Shelley makes the good point that this is not the best place to do it. We’re now rethinking our approach with a view to deliberately separating that process out into its own minute. That will make it easy for our clients to show their auditor, the ATO and themselves that they have actually thought about whether their strategy remains appropriate or whether it needs to be changed.

Shelley also makes the good point that “When the ATO sent out those trustee letters, they weren’t telling them to divest themselves of those assets.They were simply telling them that where the fund lacks diversification, the investment strategy needs to document the risks associated with that lack of diversification and also include how that investment will meet the fund’s return objectives and  cash flow requirements at the end of the day.”

Totally true. The staff at the ATO do not pretend to be better investors than typical SMSF trustees. They were also not saying that a lack of diversification was wrong or illegal. They were simply flagging some important points:

  • Trustees have a legal obligation to consider diversification
  • Where a fund does not have a diversified pool of assets, they also have a legal obligation to consider the additional risks this poses

Because of course, a lack of diversification does pose additional risks. They are just risks that  trustees of non diversified funds believe are acceptable and in fact give the fund the best chance of achieving returns that maximise members’ retirement savings. So all the trustee needs to do is put that view (and the reasons) down in writing.

I am a firm believer that most SMSF trustees are in fact the most engaged superannuation members in the country. Unless you have some nefarious purpose, why manage your own super when someone else could do it for you unless you truly want to maximise your retirement savings? No-one gets into an SMSF intending to make poor choices.

So the key with all this investment strategy hubbub is to make sure your clients have clearly communicated the story about their investment decisions.

We have two investment strategy tools within our Super Toolkit – one to prepare an investment strategy and one to record the review of an existing strategy. Our focus has been on helping accountants and advisers work with trustees to tell their own story – if they are outside their asset allocation ranges we prompt with possible reasons and provide space for them to write their own. 

The tool is very deliberately collaborative (an accountant can initiate the review but then immediately digitally hand over the form for completion by the trustee). 

We’re conscious that not only do accountants want to avoid stepping into advice on investment strategies, they also want it to be clear and transparent that they did not do so. What better way than to have the trustee complete the template themselves, with a lot of support and guidance about the law? Read more about our Heffron Super Toolkit here.

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