One thing’s for sure, advisers can’t be accused of sitting on the fence when it comes to their views on smoothed funds.
In our latest Smoothed Funds Proposition and Distribution Report, we surveyed 200 financial advisers and interviewed eight investment decision-makers at advice firms to discover what they thought about them.
The answers were sharply divided.
Some wouldn’t construct a cautious or retirement portfolio without them, while others avoided them completely. Yet this is a mainstream product – our findings show 35% of advisers already recommend smoothed funds for new client money.
That puts them ahead of annuities (32%) and just behind multi-asset funds and discretionary model portfolio services (MPS).
In most portfolios, smoothed funds are positioned as a core long-term holding within a diversified strategy
Advisers using smoothed funds typically do so for around 20% of client assets and between 15% and 25% of those assets are held by clients in drawdown, highlighting their important role in retirement planning.
In most portfolios, smoothed funds are positioned as a core long-term holding within a diversified strategy. They rarely replace multi-asset funds or annuities but instead complement them, providing a smoother investment journey for clients with a lower risk tolerance.
Supporters told us they value their ability to reduce volatility, manage sequencing risk and provide emotional reassurance for clients who may be unsettled by market fluctuations.
Non-users’ primary objections were costs, along with opaqueness and concerns around the Consumer Duty. Ongoing charges range from 0.58% to 1.37% – well above the 0.31% average for multi-asset funds or the 0.54% for discretionary MPS.
Competition in the smoothed fund market driving down costs
More than a third of advisers told us smoothed funds are difficult to explain to clients.
Our report identifies two main opportunities for growth in smoothed funds: converting non-users and expanding relationships with ‘reluctant’ users.
Over half (52%) of financial advisers who currently recommend smoothed funds allocate 10% or less of client assets to them. We think the biggest opportunity for growth in smoothed fund assets will be the growing share of wallet with these users.
In our interviews, we heard from those who’d inherited clients in these funds or who recommended them for very risk-averse clients. These advisers are already familiar with the product and the instances when it can be a suitable recommendation to clients.
Looking ahead, the primary challenge is that if the industry wants smoothed funds to move beyond a binary ‘love them or leave them’ framing among advisers, it must work harder to help advisers explain these products and demonstrate clear value for the fees charged.
If the industry wants smoothed funds to move beyond a binary ‘love them or leave them’ framing among advisers, it must work harder to help them explain these products
To overcome fundamental objections, providers must help advisers to explain smoothing mechanisms and their benefits to clients. We found that only 27% of non-users agree it is straightforward to do so.
Providers need to offer more robust education and work on clearer communications and product literature.
Progress has been made on a number of levels and there are signs of diversification in the sector. While M&G’s PruFund continues to dominate the market, Aviva and LV= are also gaining attention from advisers.
There are also continued improvements to platform availability with more smoothed funds appearing on Nucleus, Fidelity and Quilter, which will also reduce operational barriers to adoption.
Focusing on the role smoothing can play to support clients with a very low risk tolerance may help advisers who struggle to convert clients from cash to investing.
Providers, for their part, need to help build confidence in these solutions by supplying client-friendly explanations of smoothing mechanisms and clear fair-value narratives under the Consumer Duty.
Heather Hopkins is managing director of NextWealth
