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How To Advise Your Clients On SMSF Investment Strategies

Anthony Lyon

A guide for authorised representative advisers of IIP 

In this blog post, we will clarify the advisers role in assisting clients with developing investment strategies for the SMSF. There is sometimes confusion as to whose role it is to develop the investment strategy – is that the accountants job, or can you do that as the adviser? 

Does the SMSF Need an Investment Strategy?

Yes, under the SIS Act, the Trustees of an SMSF are responsible and directly accountable for the management of Funds’ Members benefits. Trustees have a duty to make, carry out and document all decisions on how the SMSFs’ assets are invested. This duty will involve formulating and implementing an Investment Strategy. 

The  investment strategy is the trustees plan for making, holding and realising assets consistent with your investment objectives and retirement goals. It should set out why and how you’ve chosen to invest your retirement benefits to meet these goals. The super laws require that you must: 

  • prepare and implement an investment strategy for your SMSF 

  • give effect to and review the strategy regularly. 

As an adviser, your recommendations must be in line with the SMSF’s investment strategy. When making any recommendations on SMSF assets, you will need to retain a copy of the funds Investment Strategy. 

Can I develop the investment strategy, or is that the accountant’s job? 

There are situations where the investment strategy may be deficient or need updating. There is often some confusion about who is responsible for developing the investment strategy – can I do that as the adviser, or does the accountant need to do it? 

You can assist your client in developing their investment objectives and an investment strategy for the SMSF. However, you must ensure that your client understands that, as trustees, they are responsible for managing the investments in the best financial interests of their members and in accordance with the law. 

What needs to be included in a SMSF investment strategy? 

The SMSF investment strategy should be in writing and be tailored and specific to your fund's circumstances. It should not be a repeat of the legislation. 

 

It should explain how your investments meet each member’s retirement objectives. Relevant circumstances of the members may include (but are not limited to) their: 

  • age 

  • employment status 

  • retirement needs which influence the risk appetite. 

 

Under the super laws, your strategy must consider the following specific factors regarding the whole circumstances of your fund2: 

  • risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements 

  • composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification 

  • liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses) 

  • fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs 

  • whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each SMSF member. 

 

When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate: 

  • how you plan to invest your super, or 

  • why you require broad ranges to achieve your investment strategy requirements. 

  • The percentage or dollar allocation of the fund’s assets invested in each asset class should support and reflect your articulated investment approach towards achieving your retirement goals. If you choose not to use allocated portions or percentages in your strategy, you must list material assets. Also include the reasons why investing in those assets will achieve your retirement goals.  

Find more on how to plan, choose and track your investments on moneysmart.gov.au. 

What is the auditor's role? 

When conducting the annual audit, the auditor will check whether it meets the investment strategy requirements under the super laws for the relevant financial year. This means they will check: 

  • the SMSF had an investment strategy in place for the relevant financial year that considered the factors outlined above 

  • the fund’s investments during the relevant financial year were in accordance with that strategy 

  • the strategy had been reviewed at some stage during the relevant financial year. 

Where the trustee doesn’t comply with the investment strategy requirements, the auditor may need to notify the ATO about this by lodging an auditor contravention report (ACR). 

What if the strategy isn't compliant? 

If you identify that the investment strategy has failed to adequately address some of the factors mentioned above, such as the risk of inadequate diversification, as the adviser, you should assist your client in developing their investment objectives and an investment strategy for the SMSF. 

If the client has an existing relationship with an accountant, who is also a representative of an AFSL, and therefore can provide the advice, you should seek confirmation from the client if they want you or the accountant to assist with the development of the strategy. 

Where can I find more information? 

For more information on providing advice to trustees of SMSFs, you can refer to the latest version of the SMSF policy and SMSF checklist in the iC2 Compliance Hub App. 

You can also refer to: