How to protect your SMSF from common risks

Managing a self-managed super fund (SMSF) is no ordinary task. As Spider-Man fans will know, "with great power comes great responsibility" – this holds true for both superheroes and SMSF trustees. 

If you're considering establishing an SMSF, it's important to understand that the do-it-yourself nature of these funds places significant responsibility on your shoulders. An SMSF gives you greater control over your retirement savings than an industry or retail super fund, but it also exposes your nest egg to additional risks.

So what are the main risks facing an SMSF, and how can you manage or avoid them? Let's dig in.

What risks do SMSFs and SMSF trustees face?

Perhaps unsurprisingly, most of the risks facing SMSFs and their trustees specifically relate boil down to losing money.

Investing in just about any asset involves the risk of losing money – it's no different for SMSFs aiming to grow retirement wealth. And, if a trustee ends up on the wrong side of super laws, their SMSF could lose tax benefits while they could be personally fined or even barred from operating SMSFs. Finally, plenty of criminals would view a super fund as a honey pot and go out of their way to get their hands on it.

All these risks are important to consider when contemplating establishing an SMSF and worth bearing in mind when managing one. Here's a breakdown of the risks SMSF trustees should bear in mind and best practice to minimise them.

Compliance risks facing SMSFs and trustees

One of the biggest challenges an SMSF trustee must deal with is compliance risk – and it's ever-present.

SMSFs are subject to a range of complex laws and regulations that must be adhered to, including the SIS Act and associated regulations. Failure to comply with these rules can result in significant penalties, including fines, loss of tax concessions, or even the disqualification of the SMSF trustee.

SMSFs deal with two important government agencies: the Australian Tax Office (ATO) and the Australian Securities and Investments Commission (ASIC). The former is arguably the key regulator for SMSFs while the latter oversees the fund's investment activity and insurances.

How to avoid SMSF compliance risks

To steer clear of compliance risks, it's crucial SMSF trustees have a comprehensive understanding of the rules and regulations governing their funds. It might be worth engaging the services of a professional SMSF administrator to manage the fund's day-to-day needs.

Stick to the SMSF's investment strategy

SMSF trustees must ensure a fund sticks to its investment strategy – which should be regularly updated.

Abide by all SMSF laws

It's also critical to make sure the fund is run solely to benefit members in retirement and that any investments made by the fund are 'arm's length' from individual members. A transaction involving an SMSF generally can't provide a greater benefit to a fund member than the same transaction would on the market. Any asset owned by the fund can't benefit a member or their family and must be separate from personal or business assets.

They must also follow laws regarding pension payments and super contributions, lest they be taxed at a higher rate or otherwise penalised.

Have the SMSF audited each year

SMSF trustees must ensure the fund is audited annually to ensure compliance with super laws.

Investment risks facing SMSFs

SMSFs have the freedom to invest in a wide range of assets, including shares, property, and managed funds, as long as all assets align with the fund's investment strategy. However, with such freedom comes the risk of underperforming investments, which can result in significant losses.

How to avoid SMSF investment risks

While it's impossible to remove risk from investing entirely – for SMSFs and individuals alike – there are ways to mitigate and minimise risks. Importantly, however, higher risks can equal higher rewards, and anyone considering an SMSF should also think about the risks they're comfortable taking.

Maintain a clear investment strategy

Every SMSF must have a written investment strategy that outlines how the fund will achieve its objectives. Sticking to this document – and updating it as circumstances change – helps trustees avoid impulsive or overly risky decisions.

Diversify an SMSF's investments

A well-diversified investment portfolio faces significantly less risk than one that keeps all its eggs in one basket. An investment portfolio that's spread out over different asset classes and market sectors has less chance of being significantly impacted by a common market downturn.

For instance, if a fund is invested in housing, shares, and bonds in equal parts, a stock market crash likely won't impact it as significantly as it may have if the fund was entirely invested in shares.

Trustees should regularly analyse their SMSFs investment portfolio and consider rebalancing it if the allocation to a single asset or asset class becomes too large.

Seek professional advice

Trustees can further reduce risk by seeking tailored advice from a licensed financial adviser or investment specialist. A professional can help ensure investment strategies align with both regulatory obligations and the members' long-term retirement goals.

How an SMSF can avoid fraud and scams

SMSFs are increasingly being targeted by criminals who use a range of tactics to trick trustees into investing in sham schemes or transferring funds into fraudulent accounts. Falling victim to one of these scams can result in devastating losses for your retirement savings.

Common SMSF frauds and scams

• Offering to set up an SMSF for you
  You might be on the fence about establishing an SMSF when you receive a call from a supposed 'service provider' offering to do it cheaply on your behalf. You transfer your super into the new 'fund', only to discover it was never legitimate and your savings have disappeared.

• Phishing for your personal details
  Another common scam involves a criminal impersonating a trusted financial institution. They may claim there's a 'problem' and ask you to provide personal or account details to fix it. Those details can then be used to access your super directly or to establish a fake SMSF to which they attempt to redirect your funds.

• Promises of early access to your super
  Some scammers tempt trustees with offers to unlock superannuation before they're legally eligible. While early access might sound appealing, these schemes are illegal and often they're simply a way for criminals to pocket your retirement savings.

How to avoid frauds and scams

Be wary of unsolicited offers and verify who you're dealing with

If you're approached by a financial institution or service provider, don't give them any details. Instead, reach out to them directly using official details found on their website, not in unsolicited emails, texts, or calls.

Protect your information

Never share SMSF, bank, or personal details without verifying who you're talking to and why they're making the request.

Keep your accounts secure and updated

Make sure to choose strong passwords, use multi-factor authentication where possible, and keep account details and passwords in a secure place. Check in on your registered details semi-regularly – particularly if you've moved or your circumstances have otherwise changed – and be aware of your approximate super balance, that way you'll notice if anything goes awry.

Stay informed

Keep up to date with scam alerts from the ATO, ASIC, and Scamwatch.

Estate planning risks facing SMSFs

Estate planning is a crucial aspect of managing an SMSF. Trustees must ensure the fund's assets are distributed according to the member's wishes when a member passes away. This includes having a valid and up-to-date will and considering a binding death benefit nomination, which directs how the SMSF's assets will be distributed.

How to manage SMSF estate planning risk

The best way to minimise estate planning risks is by planning early and keeping your documents current. Start by making a list of all your assets and liabilities and deciding who you want to inherit them.

Clarity is critical – an estate plan that is vague or outdated can lead to disputes, delays, or outcomes you didn't intend.

Review your estate plan regularly, particularly after major life events such as marriage, divorce, or the birth of a child.

Professional advice can also make a big difference. An estate planning lawyer or financial adviser can:

• Explain the legal and financial implications of your estate plan
• Ensure your SMSF estate plan complies with relevant laws and regulations
• Help minimise taxes and administrative costs
• Identify and help you avoid common mistakes that could leave your SMSF exposed

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