Crafting an investment strategy.
As the number of self-managed super funds (SMSFs) soars, so too does the number of trustees with inadequate investment strategies for reaching their retirement goals, says MGD Wealth director Andrew Albury.
Albury, an FCPA who will be speaking on investment strategies at CPA Australia's SMSF Conference and Expo in July, said the majority of trustees were unsure if they were on track to fund their retirement, firstly because they had poorly designed SMSF investment strategies, and secondly, because those strategies did not complement their wealth outside of super.
“The fundamental thing we see all the time is the super investment strategy process is treated as a bureaucratic piece of nonsense,” says Albury.
“Template word documents are used to just put something in place for an auditor to tick it off and that's the end of it.
“That's just a waste of time in my world.”
Albury says this approach, which has developed into an industry in itself, left many trustees unable to answer the simplest question about their investment goals: that is, how much money did they need to retire?
"It sounds basic, but when we know what their income requirements are going to be from retirement onwards, we can work so much out from that alone to try to help structure and give advice on how you go about this,” he says.
Albury says that this stage of the investment planning process is called the “gap analysis”, in which any shortfalls are identified and suitable strategies developed to close the financial gap.
To do this, he considers all of a client's wealth, both in and out of superannuation.
“We've got some investments in super funds that in isolation look ridiculous, but they're not ridiculous because they’re complementing things in the outside world,” says Albury.
“For example, you might have an outside world that is all in direct property, so it would make sense not to have any direct property in a super fund.”
"There's no other entity that is as tax effective as super." – Andrew Albury FCPA
Failure to synchronise the two worlds often leaves trustees grappling to make up the shortfall in their final working years.
Albury gives the example of a recent client who plans to retire in five years. They have accumulated most of their wealth through property outside of super and while they also have a self-managed super fund, they have not taken it too seriously and it is not the main source of their wealth.
The gap analysis revealed that the client is about $700,000 behind where they need to be in order to fund their retirement at their ideal income.
In this particular case, Albury says it makes sense for the client to offload some of the direct property and move the funds into superannuation due to its tax effectiveness, giving them the best chance of reducing that gap over the short period.
“There's no other entity that is as tax effective as super,” he says.
Having said that, Albury says each individual's case is different and it would not always be wise to put all one's assets into an SMSF, especially if the client is young and needs access to capital. Likewise, not all individuals need to focus their investment strategy on “closing the gap”.
"I quite often find clients who are overfunded, which is quite a nice position to be in, but they're taking an insurmountable amount of risk in their investing and they don't understand that they are doing that," he says.
Albury says the big picture is that we are all arguably trying to get to that perfect point in time where we are not dependent on our personal exertion to earn an income, and to get there, trustees have to make sure all their investments worked together.
“In isolation, a self-managed super fund, or any fund for that matter, doesn't necessarily make any particular sense if it's not coordinated with all the goals and objectives that they may or may not have in the outside world,” he says.
Alia Parker is a finance journalist with more than a decade of experience spanning newspapers, radio and the wires on an international scale. When she's not writing about finance, she heads up The Australian Bicycle Route Project.