Category Archives: SMSF

The SMSF Fund’s Investment Strategy

When establishing your Self Managed Superannuation Fund the structure and registration of the fund with the regulators is a prescriptive process.  The key and arguably most important step however, is the formulation, documenting and implementing  a  unique Investment Strategy.

What is an SMSF’s Investment Strategy

Superannuation law requires a SMSF to have an investment strategy.   The Superannuation Industry Supervision Act requires that an Investment Strategy is formulated, reviewed regularly and given effect to.  The investment strategy has regard to the all the circumstances of the fund covering the following;

  • the risk involved in making, holding and realising, the fund’s investments, having regard to its objectives
  • its expected cash flow requirements the likely return from investments
  • the composition of the fund’s investments including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification;
  • the liquidity of the fund’s investments, having regard to its expected cash flow requirements;
  • the ability of the fund to discharge its existing and prospective liabilities

Discipline and commitment to the Strategy is needed

“A successful lifelong investment experience hinges on three critical steps: the development of a prudent investment plan, the full implementation of that plan, and the discipline to maintain the plan in good times and bad.  If you create a good plan and follow it, your probability of financial freedom increases exponentially.”

All about Asset Allocation: by Richard A. Ferri, CFA

This paragraph highlights that the implementation and maintaining the investments strategy is key.  That the SMSF legislation requires trustees to have a written strategy is beneficial as with a written plan one is more likely to follow it.  One should read the strategy regularly especially at the time of making investment decisions.

 

 

Next Steps:

ASX Investment Strategy Page

Moneysmart: Investment Strategy

Recommended Reading: 

All about Asset Allocation: by Richard A. Ferri, CFA

Common Stocks and uncommon profits, by Philip A Fischer

Choosing individual or corporate trustee

Whether to have a corporate or individual trustee structure is a matter of choice.  Arguments in favor of having a corporate trustee are that the assets of the fund are clearly separated from the individual trustees as they are registered in the name of the corporate trustee. There is also an ease with which members can change without having to change the registered details of each asset held by the fund.

The structure of a SMSF must meet certain requirements in terms of the law:

  • it must have four or fewer members,
  • each member must be a trustee / or director of the corporate trustee company
  • no member may be the employer of another (unless related)
  • no trustees are paid for their service

In the writers circumstances the corporate trustee option with the benefits outlined above, was was chosen, although more costly at the outset (approximately $620) and an ongoing, relatively low annual ASIC fee (approximately $50) for the company trustee.

Benefits from having a corporate trustee

The ATO provides information regarding these requirements, the costs, ownership of assets and succession benefits from having a corporate trustee.

Setting up SMSF Self Managed Superannuation Fund

Decision to set up a SMSF

The decision to establish a Self Managed Superannuation Fund (SMSF) is not easy. This decision requires considerable aforethought but any delay in setting up SMSF allows money in superannuation to build up to a level where the maintenance and set up SMSF costs are effective and sustainable. As a result there is no need to rush your decision.  The second consideration is to be mindful to ensure that the “Self” in SMSF is attainable as, without members attending to the administration themselves, the costs would probably be prohibitive. Were one to require professional advisers to establish and maintain the fund then a SMSF may not be appropriate as it may not remain const effective.  As a result there had been considerable planning and thought about these matters ahead of time.

Costs of Setting up SMSF

As my funds within superannuation amounted to just over $250,000, then on an annual basis, the administration costs were amounting to at least $5,900 per annum. What were the the steps in establishing the fund and what were the costs and process.

The ease with which one is able to establish the fund is remarkable. Online there are many service providers but  cleardocs.com was chosen for a suite of Superannuation (SMSF) documents. Their website included an interface to ASIC to register a corporate trustee as this option was chosen in our circumstances. This choice of a corporate trustee is the subject of a separate post. The cost for the founding legal documents of the Superannuation Trust and Company structure was $397 with a further $469 for ASIC’s fee for the registration of the corporate trustee.

Steps setting up SMSF

The cleardocs website calls for:

  • the names of the members of the fund,
  • the trustee company name, addresses, and
  • directors

once provided the Superannuation Trust Documentation Package, consisting of all  legal documents and pre-prepared correspondence is provided.  With the clear guidance online, the detail is easily completed and within minutes the documentation for structure is provided with confirmation of registration of the trustee company instantaneous.

In addition, a Superannuation Fund Establishment Kit is provided. This is very useful and clearly written, setting out all the steps for the proper completion and signing of the documents, and detailing other obligations.

Having received notification of establishment of the corporate trustee then once the trust documents were signed our SMSF was established.  As a result of electronic messaging between ASIC and the Australian Tax Office the fund was also registered with the ATO. This process was simple, very comprehensive and easy navigate and was cost effective.

Next Steps:

Recommended Reading:

Common Stocks and Uncommon Profits

Why choose a SMSF as a saving option

Investing is regarded as complex and confusing right? That’s why you need a financial adviser to help you, isn’t it?

Man Shadow illustrating that costs cast a long shadow

That is true, but the costs of using a financial adviser or even a regular superannuation fund can often erode the investment returns and these costs are often hidden.

Self-managed superannuation fund

While it is probably better to be self-reliant, applying yourself properly to identifying and evaluating investments, takes time and is highly unlikely to result in above average results over the long run.

It’s also risky to not evaluate investments appropriately and act outside your circle of competence.

In Australia however, we have a unique situation that allows hundreds of thousand of small superannuation funds to be managed by their beneficiaries who act as trustees.

In Common Sense on Mutual Funds, John C. Bogle highlights that:

  • although we hear of the benefits of compounding returns we are seldom told about compounding costs or factor this into our long-term plans,
  • very few fund managers achieve market beating returns, especially over the long run, yet they are rewarded with a significant proportion of investment returns,
  • costs do matter and simplicity is the best way to avoid costs

I have realised that for those with the time, skills and discipline there is the opportunity to have more self direction and control over their retirement funds.  On the other hand, those that rely on outside help, will have to pay advisers which will bring them little benefit and cost them dearly in terms of returns on their investment.

The message is clear.  By setting up a SMSF you have the opportunity to eliminate costs by:

  • maintaining a simply structured SMSF, without ongoing professional advice.
  • investing while staying within your circle of competence, achieving appropriate diversification, maintaining high liquidity and staying focused for the long term.