Understanding SMSF Trustee

This document provides an in-depth understanding of SMSF trustees, their investment decisions, and the impact of risk aversion and behavioral biases on SMSF management. It discusses the structure of SMSF, risk aversion, investor behavior, market efficiency, and challenges faced by SMSF investors. The document also explores the concept of risk tolerance and risk profiling for SMSF investors.

Running Head: UNDERSTANDING SMSF TRUSTEE
UNDERSTANDING SMSF TRUSTEE
Name of the Student
Name of the University
Author Note

1UNDERSTANDING SMSF TRUSTEE
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................3
Answer to Question 3.................................................................................................................4
Answer to Question 4.................................................................................................................5
Answer to Question 5.................................................................................................................5
Reference....................................................................................................................................9

2UNDERSTANDING SMSF TRUSTEE
Answer to Question 1
a)
SMSF, which is also known as self-managed super fund, is defined as the structure of
superannuation trust that helps in providing the benefits to their members upon the
retirements. The members of the fund are also the trustees of their fund. The aim of the
establishment of SMSF was the aim of giving the financial benefits to the members on their
retirement and to the beneficiaries on the death. In the industry of SMSF, there is the absolute
preference for the risk aversion. Financial risk aversion is defined as the attitudes of taking
the financial risk regarding the approach towards the investments. SMSF is most commonly
established for either single or couple. There are certain trustees who choose to have more
stability in their investments, even if they are getting lower returns. They prefer the portfolio
of investment, which is regarded as defensive or conservative (Blanc-Brude, 2014).
Traditionally, fixed interest accounts, cash, government bonds, fixed interest accounts are
recognized as low-risk assets. These are reliable and provide stability, but it grows slowly and
it provides the lower return through the interest. Including the increased number of these
reliable investments is beneficial for the options of conservative investments and low risk. It
is due to the volatility and high risk factor of the higher risk investments, trustees is not
willing to go for safe option, even though the deterioration of the investment position. Hence,
it can be said that loss aversion results in the willingness of the SMSF trustee for holding on
the deteriorating of the investment position (Sneddon, 2016).
b)
The behavior of the investor and their personality traits affects the way in which they
react to the performance of the portfolio they own. There can be the situation where the two
investors have strategies for making the same investment, however, when there is rise in the

3UNDERSTANDING SMSF TRUSTEE
market average by 10%, it has been accessed that the value of the individual investors rises
by 6%. It has been observed that individuals are very much sensitive to the way of
presentation of decisions. They simply move to the alternatives because of no reasons. The
emotions and the reasons work together, when the individuals are making the investments
decisions (Baiocchi, 2014). However, they produces different results of the investments that
depend upon whether the investment which makes money or losses money. The emotional
strain is magnified at the time when the trustee assumes the responsibility for incurring the
loss. This leads to risk aversion. Hence, it can be said that the emotional frames of self-
control, money influence and investor behavior, influence behavior of the investor (Reeson et
al., 2016).
Answer to Question 2
a)
The investors do not always behave in the predictive, rational and unbiased manner.
The investors exhibit the bias of information processing which causes to under and over react
to the situation of the market. Representativeness is defined as extent of the event, which is
representative of the parent population. It can lead the investors to astray. If the investors is
tempted for forecasting the earnings of the future by using short histories of the high growth
of the earning that is observed in past. Moreover, these estimates help in using the price of
the stock of the company, which would lead to overpricing (Sanderson, 2015). Hence, under
this case the investors are failed for taking into account that, the high growth of earnings
would be just due to chance. Therefore, when the future earning is greater than the forecasted,
there is drop in the stock price considerably. The Frame dependence is defined as the
tendency of the human for viewing the scenario differently that depends upon the way it is
presented and represents the irrational choice by the investor. It usually influence the way of
decisions made by the people about the investments. Investors generally choose different

4UNDERSTANDING SMSF TRUSTEE
options if the options are framed in relation to losses, but they take one decision if the option
is framed in losses. Lastly, the conservative approach of the investors focuses on the stable
and predictable business as well as lower risk approach. The conservative investors generally
make investments in low risk investments and blue-chip stocks (Sanderson, 2015).
The market efficiency is defined as the degree at which the total aggregate decisions of
the market participant reflect the values of the companies and the shares at given time period,
which requires determination of the intrinsic value and updating constantly the valuation that
is new information being known. The more accurate and faster the market for pricing the
securities, the more efficient is the market (Briglia & Butler, 2018).
b)
The overconfidence client indicates that they understand the advice but in reality, they
are not. The overconfident trustees under SMSF are by the nature are bias and reluctant for
seeking any advice. They have very much faith in their own talent and ability for managing
their finances. These investors’ shows the overconfidence in having the ability for managing
the fund despite holding the less sophisticated and under-diversified portfolio as compare to
the peers. Investor’s overconfidence influences the frequency of stock trading within a
SMSF. These overconfident affect the frequency of their trading and size of the portfolio, as
they are more likely to manage underperforming investments of retirements in the longer-
term (Mihaylov, Yawson & Zurbruegg, 2015).
Answer to Question 3
Behavioral finance theory is defined as the study of influence of the psychology of the
behavior of the financial analysts or the investors. It includes the market’s subsequent effects
as well. As per the theory the investors are not rational always, they are affected by their own
bias and they have limits of their self-control. The financial industry do spends lot of time in

5UNDERSTANDING SMSF TRUSTEE
making forecast for the shares. However, whether it is useful or not useful, it depends upon
the decision taken by the investor. Most of the forecast exerts little power of prediction which
means that it will not be able to provide information although it can be useful. The financial
market is consisting of fluctuations and volatility (Earl et al., 2015). Hence, from the point of
view of the investors, market uncertainty has increased the unpredictability and uncertainty.
The judgment of the condition can be done by the standard financial model. Assumption of
the behavioral finance is that the structure of the information as well as the market participant
characteristics systematically influences the decisions of the individual investment and
market outcomes. Hence, the stock market forecast is use continuously by the investors even
though the previous forecasts are inaccurate (Earl et al., 2015).
Answer to Question 4
Answer of A- b.
Answer of B- b.
Answer of C- b.
Answer of D- a.
Answer of E- a.
Answer of F- c.
Answer to Question 5
It has been find that SMSF is not appropriate for all the investors due to involvement
of the responsibility, cost and time for the managing of the SMSF as well as they are not
competitive in terms of cost for the lower account balances. The investors of SMSF faces the
challenges of volatility of market, selection of investment, changes in regulatory. Investors
face a lot of constraint but they do not act as per the model of rationality (Thompson, 2016).

6UNDERSTANDING SMSF TRUSTEE
This approach is concerned with the dealing with the practical challenges for distinguishing
between risk aversion and risk capacity. The risk capacity is applied to the investor’s
objective ability. Capacity depends upon the circumstances of the economic objective such as
income, wealth, liquidity needs, investments horizon of investors, tax rate and so on.
Combination of psychological traits as well as emotional responses determines the
willingness of the investors in order to take financial risk as well as degree of the emotional
or psychological pain which the investors experiences when faced with the financial losses.
Hence, these emotional facts are very important for understanding. The Superannuation is the
structure for holding as well as managing the assets that is required for funding the
retirement. In the context of superannuation and management of all the tradable investments,
the question of active and passive wealth creation and its management is has gained the
considerable interest (Hand, 2016). Active approach of wealth creation involves decisions
regarding making deliberate investments for outperforming the identified benchmark.
However, the passive management doesn’t try for outperforming the identified benchmark.
Risk is considered as potential of the return of the investment that is differ from the return
which is expected. Every investment carries some type of risk which can either lead to less
return or lead to the potential for higher returns. Moreover, volatility and risk are interlinked
with each other and both are considered as important forces for the financial markets
(Wilson, 2014). For the investors of SMSF, it is important for appreciating the work of the
liquidity and risk in the financial markets. It gives the idea for forming the view about the
respond of the portfolio. The investors of the SMSF have to think about their own risk
tolerance. It means they have to decide and think how much volatility they are willing for
accepting. This is affected by the knowledge as well as experience of the investors. The
complexity and willingness of the willingness of the investors for taking risk is the
differentiating factors for the management of the portfolio of investment (Poynton, 2016). All

7UNDERSTANDING SMSF TRUSTEE
the individual investors are different and so their behavior is different. Risk tolerance of the
investors can be measured by the analysis of the sources of the income of the investors,
measurement of their total wealth and stages of life of the investors. In addition to this the
psychological characteristics of the investors have to be accessed. All of these help in
determining the risk tolerance capacity of the SMSF investors. The risk tolerance of the
investors depends upon their ability for coping up with the dips of the value in the
investments. All the facts such as age, health and the ability of the investors for coping up
with the loses of the capital influence the risk tolerance. The investors have to decide where
they are fit on the scale of risk tolerance (De Zwaan, Brimble & Stewart, 2015). Hence, the
process of the risk profiling helps in building the framework which enables in determining
the classes of investments assets that has to be considered and what should have to be
avoided. The profile of risk is based on the three primary considerations, that is tolerance of
the risk, risk required for generating the return and the capacity of the person for the carrying
the risk. Tolerating the risk is basically the level at which the investor feels comfortable with.
In order for the determination of the risk tolerance, the investors have to prepare the
questionnaire (Earl et al., 2015). This step will help in identification of the responses of
behavioral to the range of the scenarios that includes the level of the experiences as investor,
the level of understanding of the working of investment markets, the personal view of the
risk, the confidence in making the investments decision by own and the feeling of the
investor when the financial market fluctuates or rises and fall. The requirement of the risk
means level of the risk of investment that is required to take for achieving the desired
objectives such as life after retirement. The capacity of risk is the financial risk level that can
be afforded for taking, given the time period for the investment, the funds available as well as
taking the chance of market’s negative performance. For assessing the risk capacity, testing

8UNDERSTANDING SMSF TRUSTEE
has been done on the financial outcomes of the portfolio that is based on the various market
conditions (Bird et al., 2018).
It finding has been revealed that the existing situation prevails the poor performance
of the SMSF that implies that the system of superannuation as structured currently may not
be able to generate returns which will be helpful in maximization of the incomes of the
retirements. Hence, for the trustee of SMSF, there should be simple portfolio which divides
the assets between the risk free securities and index funds that is on the basis of risk aversion
of trustee for generating better outcomes as compare to the portfolio of existing (West, 2015).

9UNDERSTANDING SMSF TRUSTEE
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fund trustees before, during and after the 2008 global financial crisis (Doctoral dissertation,
University of Southern Queensland).
Bird, R., Foster, F. D., Gray, J., Raftery, A. M., Thorp, S., & Yeung, D. (2018). Who starts a self-
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