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How could it be that many Self-Managed Super Funds could be lacking something that the law requires? It’s related to who sets them up.

A typical SMSF is set up by an accountant. This is the level of accountant that looks after small business owners and high net worth people. However, while this accountant has every qualification in the book when it comes to accountancy, this particular one may not be licensed to provide financial services having to do with investments. Some have that qualification and relevant licence, but many do not. So, while they are able and qualified to set up the Self-Managed Super Fund and give advice on how it is to be used, they are not allowed to recommend individual financial products or even classes of financial products. The latter is what must be done in providing an investment strategy for a SMSF.

It’s quite likely that the accountant told his or her client to see a financial advisor and set up the strategy, but there may have been a failure in following up on that. It’s also something that should be picked up in the annual SMSF audit, but perhaps it was overlooked.

Establishing a SMSF investment strategy

So, if you find yourself in that sort of a situation, what do you do? For that matter, you may have a SMSF investment strategy but you really haven’t looked at it years and it means nothing regarding your investment choices.

A good start would be to make an appointment with your financial advisor. As you do so there are some matters that you will need to consider. They include:

• Your risk profile. When it comes to investments, are you a risk taker or a very cautious investor?

• Time to retirement. Regardless of your risk profile, you will need to have investments with specific characteristics once you are in retirement. They need to generate a specified level of income, indexed for inflation, for the rest of your life and the life of others that you want to look after though the SMSF. If you have a high level of growth oriented investments in your Self-Managed Super Fund during the accumulation phase, it would be wise to allow time to transition to the ones needed during retirement so that you can avoid selling them during significant market low points.

• Investment preferences. While you should have a well-diversified portfolio of investments, it is both acceptable and wise to include investments that you understand and are comfortable with. If you include something like ‘residential real property’ as a class of investments, then it will impact upon the allocations to other types of investments.

It may be wise to define the allocations according to the amount of funds from the SMSF that are going into the category of investment. So, if you have an investment property in the fund worth $400,000 and the SMSF has borrowed $200,000 for the purchase, the fund has put roughly $200,000 into that investment, not $400,000.

Working the SMSF investment strategy

Once you have worked out the investment strategy with your financial advisor it will give you a significant degree of direction regarding your investment selections. Depending on how much ‘hands on’ work that you want to do in specific investment selection, you may want to periodically get advice from your financial advisor as you acquire and redeem specific investments. Or you may want to use more of a ‘set and forget’ strategy where your advisor sets up the investments with more or less automatic contributions being paid into them.

In either case, it does need regular reviews to make sure that the investments continue to be suitable, and that they fit within the SMSF investment strategy.

Free SMSF Borrowing eBook

As you consider whether or not to include real property in your SMSF, there are a lot of matters to think about. Get a copy of our free eBook, SMSF Borrowing for more information on what Self-Managed Super Funds are, whom they may suit and how to invest in property through one. Detailed information is provided on SMSF loans for funding the purchase of an investment property, as well as specifics on how they must be set up. A SMSF loan is different than a typical mortgage or home loan, and even the structure within the fund doing the borrowing is unique.

An important note about advice

As a lender, State Custodians has a credit licence under ASIC. They can therefore provide you with advice regarding loans, including SMSF loans. Keep in mind, however, that any advice that we provide you through our website is general advice. It doesn’t take into consideration your situation or individual circumstances. You should seek professional advice from a variety of people with regard to the use of a Self-Managed Superannuation Fund, including an accountant, financial adviser, a credit manager and possibly a lawyer.  Further details are included in the eBook mentioned above.

With regard to financial products we have done our best not to give you any advice. That is to say, we have not directed you towards any particular financial product or any class of financial products. You should seek such advice from a licensed financial advisor.