New SMSF trustees face something of a double challenge in 2017-2018. Coming to terms with both the long-standing fundamentals of having your own fund and the biggest changes to super in a decade.
It is critical for new trustees not to neglect any of the fundamentals of self-managed super in their efforts to understand the changing super system from the beginning of July.
The first few months of a new financial year are among the most popular times to establish an SMSF. Often, investors aim to begin their self-managed approach to super with a fresh start for a new financial year and to spread their administration costs over the entire 12 months rather than part of a year.
In many cases, members switching from large APRA-regulated funds would time the establishment of their SMSFs with their retirement at the end of a financial year or relatively early in a new financial year.
If you are aiming to set up an SMSF from the beginning of 2017-18, preparations obviously should begin well in advance.
Fundamentals for would-be SMSF trustees to begin thinking about now include:
Setting a compulsory investment strategy
SMSF trustees are legally required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund. These circumstances include – investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. (There are free courses available for SMSF trustees.)
Investing within the rules
Trustees must maintain a super fund for the sole purpose of providing member retirement benefits, not provide loans or financial assistance to members or their relatives; separate SMSF assets from their own personal or business assets; conduct transactions on an arm’s length basis and adhere to the investment restrictions under the in-house asset rule.
Under the in-house asset rule in superannuation law, an SMSF is generally prohibited from making loans, providing leases or having investments with related parties and entities that exceed 5 per cent of its total asset value. Certain exceptions apply including business property.
Choosing an SMSF’s strategic asset allocation
A portfolio’s asset allocation – the proportions of its total assets that are invested in different asset classes of mainly local and overseas shares, property, fixed interest and cash – spreads risks and opportunities. Research has long found that a diversified portfolio–s strategic asset allocation is responsible for the vast majority of its return over time.
Selecting investments within an SMSF’s strategic asset allocation
SMSFs often adopt a core satellite approach to invest in accordance with their asset allocation. With this strategy, the core of their portfolio is held in low-cost traditional index funds or exchange-traded funds (ETFs) tracking selected indices with smaller satellites of favoured direct securities and/or actively-managed funds. As the Vanguard/Investment Trends 2016 Self-Managed Super Fund Report shows, SMSFs are among the biggest and longest supporters of ETFs.
Deciding whether to take specialist SMSF advice
Most SMSF trustees receive some professional guidance ranging from administration services up to full financial planning. And specialist SMSF advice can be particularly valuable when a fund is being established.
For the past 16 years or so, Vanguard analysts have studied ‘adviser’s alpha’. This is the value that advisers can add through their wealth management and financial planning skills – guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing – and as behavioural coaches.
Skilled advisers can add considerable value by using skillful wealth-management practices together with personally encouraging their clients to adopt disciplined, long-term approaches to investing.
New SMSF trustees in 2017-18 will be joining a force of around 600,000 SMSFs with more than $600 billion in assets.
Robin Bowerman, head of market strategy and communications, Vanguard Australia and vice chairman of the SMSF Association