In an article for the SMSF Adviser, Shelley Banton discusses why trustees invest in risky assets despite the fact that the returns are meagre to reasonable in a high number of cases and many of them also record losses.
Why investors invest in risky assets
I think trustees will never get wary of investing in risky assets and this can be put down to human psychology. It wants to gulp down quick returns, doesn’t it? Sometimes, the lure of a windfall is enough to drive us away from conducting a risk-benefit analysis.
Auditors have stats that clearly suggest that the ‘risky’ investments are going nowhere and yet they know they are not going to cease either. To make the best of a bad case, the auditors have provided a few tips to make the necessary difference at the audit time.
Auditors want to help as much as they can
Trustees, according to the regulation SISR 13.14 cannot participate in margin lending products and cannot create a mortgage over their properties. Limited recourse borrowing is an exception to the rule. Banton says that another exception is when the trustees create a charge over fund assets backed by derivative investment (CFDs, Options, Futures).
Derivatives Risk Statement (DRS)
A lot of emphasis needs to be given to documentation. In this regard, clear policies on derivatives are a prerequisite. Besides, restrictions and controls related to derivative investment must also be discussed. Compliance protocols must be in place. Agreed that there is no Derivatives Risk Statement (DRS) template that the auditors can provide you but you can be helped by your personal SMSF adviser in choosing the right course of action.
You can read the original article here.
If there is anything which you think you may need an advice on, feel free to contact me. I will be more than glad to help.