Trustee cognition... or ignition

Posted by James Cavanough on 10-Dec-2020 15:34:10
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As featured on Eureka Report, James Cavanough looks into how trustee behaviour and investment decision-making can impact the performance of an SMSF.

Have you ever consciously considered your behaviour as a trustee of your Self Managed Super fund and whether a cost or perhaps weakness has an impact?

A cost or weakness can be in many forms, both direct and indirect, and usually emanates from your behaviour as a trustee. It can be measured in dollars but also less visibly in terms of inefficiency and ineffectiveness over time.

Remember the separation of your duties that you must act not as a member but on behalf of members fulfilling the many requirements such as sole purpose test, future liability and liquidity requirements and objectively considering the investment strategy, preparation of financial statements and so on.

Beyond compliance (because I can hear you yawning already), are you looking objectively enough at your fund’s goals and objectives? What is your bias? Everyone has one, even the analysts in institutional land have one (I used to work there). When did you last stress test the portfolio of assets, for example the underlying securities balance sheets and gearing risk? Is your Super Fund positioned for the 2021 economic recovery and what is the probability of that? Who knows. There are obviously many aspects to consider as a trustee but the key to managing your behaviours and time is to have a regular review and not a read of the newsletters and financial pages circulating that almost merely say the same thing.

A regular thorough review incorporating good trustee behaviours is not just my opinion but ASIC’s as well. Governance failure is one that they have battled recently and ironically so it can happen anywhere.

Back to cost or weakness. Impatience is a big one and short term thinking can harm future returns. Also I see a limited understanding of the components of performance and asset allocation. But overall trustees do not have enough skill and time drawing on limited information to manage their portfolios effectively.

How do you make decisions towards your investments to ensure quality and diversification and line that up to your goals and objectives. Do you have all your eggs in one or two baskets. What is your view towards the role of Cash? What really matters to you, not only as a member, but as a trustee? Have you considered other members interests such as your spouse, why not, she might live longer than you.

As a professional adviser and investor, the SMSF portfolios I see are not scientifically researched enough nor fully considered. Behaviour lacks objectivity and I find a trustee lens is the right hat to put on. Sometimes SMSFs lack diversification into International equities or have too much in small caps. Sometimes they hold too much or too little cash so the risk profile or tolerance does not match the plan. Sometimes sale of assets has to occur for liquidity and pension liability purposes which can occur at the wrong time (case in point - I recently had to redeem a 6 figure total from a Balanced growth Fund in June because the Trustee had not objectively reviewed their expense pattern – this resulted in a 3 year decrease of capital duration. Low and behold, a vaccine announcement merely 4 months later).

In conclusion, I see too many SMSF trustees not adapting to innovation, technique and opportunity. The absence of good trustee behaviour is a perpetual cost and detriment to members and family. Seemingly a widespread sense of control has manifested in SMSFs over time resulting in rigid behaviour, poor decisions and an inability to manage portfolios on a quality basis. But does it really matter while the Age Pension is so generous?

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