ATO to check in on poorly diversified SMSF portfolios
In an unusually proactive move for a large government institution, the ATO announced in August that it would be contacting 17,700 self-managed super fund “SMSF” trustees who may be holding 90% or more of their funds in a single asset (e.g. a commercial property) or asset class (e.g. Australian shares).
They are concerned that some trustees haven’t properly considered the risks of placing “all their eggs in one basket” by investing predominantly in certain assets.
Don’t be worried if you get the call, it’s just a check up on your investment strategy. Some people have acceptable rationales for being overinvested in certain assets. The ATO just want to know if you have a documented investment strategy in place explaining your reasons and how these can meet your retirement needs.
However, in the case where a good rationale isn’t present, the ATO may be saving undiversified trustees considerable grief – and in this case we believe they may be right to make their enquiries. Deploying your super (intended to be your relatively safe retirement nest egg) in an undiversified manner is generally not a good idea; especially if you are in or nearing retirement.
As the trustee of your SMSF, you have a responsibility to ensure your investments fit your risk profile, goals and requirements. For our SMSF clients, where we help establish and administer their funds, we produce a Statement of Advice (like we do for all of our Wealth Management clients) based on those considerations and others.
For the young and ambitious, who can afford to make some mistakes and bear some market corrections, we may be a little more aggressive. For those in or nearing retirement, we obviously take a more stable approach. Our advice is always driven by the needs of our clients. If you are purely self-managed, you should plan your portfolio in just the same way.
It may be impossible to control the market, but in managing your super there are things we can do to reduce the risk of the investment and smooth out your returns. It is generally important to have a diversified range of investments across numerous asset classes; this way, the unpredictable nature of the market can be somewhat stabilised.
Let’s look at an informative chart from one of the world’s leading exchange-traded fund providers, Vanguard, which currently holds around A$7.9 trillion in assets under management:
Vanguard Interactive Index Chart
From the index chart, we can see the volatility of returns across each asset class from 2000 to now.
You can imagine the horror if in 2007 you had all your money invested in international or Australian property or Australian shares. However, if you had invested in those same markets, with the addition of Australian bonds, you may have lost money from some investments but overall survived much more unscathed.
The green line shows the average return of investments across all asset classes. It is much less volatile than any other investment and shows mostly stable, positive growth – this illustrates the benefit of a diversified portfolio.
We often find our SMSF clients opting for a fairly balanced approach to their portfolios, wanting to make good returns (certainly much better than cash in the bank) without exposing themselves to too much risk or volatility.
Our balanced model portfolio did fairly well over the 12 months to 30 June, with a 9.14% average return.
What does this mean for you?
If you are currently holding 90% or more of your funds within one asset or a single asset class, you may be contacted and asked to review your investment strategy. If you choose to keep it this way, you will need to provide clear documentation as to why you have chosen this investment decision. Additionally, this information will need to be ready, so your SMSF approved auditor can ensure the fund is complying.
Find out more about these requirements from an ATO post titled: Does your SMSF investment strategy meet diversification requirements?
At Allworths, we can assist you with all aspects of establishing, planning and running your SMSF.
If you are currently sitting on a poorly diversified SMSF without good reason, be sure to give us a call for a no-obligation chat.
Disclaimer
The content of this post is general in nature. Any general advice has been prepared by Allworths Wealth Management Pty Limited AFSL 457 155 without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest.
