What is an Investment Strategy?
An investment strategy provides you and other trustees with a framework for making investment decisions. When preparing an investment strategy, you as Trustee must consider many factors that will affect its ability to meet the Sole Purpose Test of generating retirement benefits for the members of the fund, or death benefits for their dependents.
The trustees must determine, evaluate and record the following factors:
- the objectives of the fund
- the investment methods by which the investment objectives will be achieved
- the members tolerance to risk
- the members’ needs and circumstances
- the risk and likely return from investment
- the diversification of the funds’ assets
- the liquidity of the funds’ assets
- the funds’ ability to pay benefits
- the funds’ ability to meet other liabilities
- the funds’ use of reserves and derivatives
- the consideration of insurance for all members
Recent Legislative Changes:
Many SMSF investment strategies will need to be replaced following legislative changes which occurred in 2012. Failure to do so may result in the fund becoming non-compliant and as a result face severe tax consequences.
One of the changes to the legislation is the addition of the words ‘review regularly’. There was no prior legislative requirement that, once the investment strategy was in place, it be reviewed on any sort of regular basis. The other major change to the legislation is the requirement that the trustees consider and recorded whether the fund should hold insurance cover for members.
In the past, administrators and auditors have generally assumed that trustees have in place an adequate investment strategy and have not requested to view the document. Our experience is that auditors are now asking to view the investment strategy as an audit requirement.
What should you do?
The issue for trustees is that they are ultimately responsible to ensure that an investment strategy is in place. If your fund already has an investment strategy in place it may need updating to ensure that it complies with the current legislation.
At Wakefield Partners we have established an Investment Strategy Service. Our service involves gathering a small amount of information about the SMSF’s assets and the members’ personal details. We then provide an investment strategy that includes a set of trustee minutes to record the adoption of the strategy. We provide our service either directly to SMSF Trustees or to SMSF Accountants.