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Are advisers doing their homework on fund selection?

“Past performance is not a guide to future performance.” Advisers will have seen this fund disclaimer so many times for it to become meaningless. But instead of this concept being entrenched when it comes to investment selection, some advisers are choosing to blithely ignore it altogether.

Research carried out by Money Marketing suggests advice firms are yet to relinquish full control of fund choices for clients, but there may be flaws in some advisers’ investment processes.

While the use of fund data firms such as FE and Morningstar are prevalent, the findings point to an overwhelming reliance on fund groups’ websites and marketing meetings, as well as ratings agencies.

This trend is worrying, given the model adopted by some ratings firms is to get paid for “marketing rights” by fund groups using the rating logos.

There are other biases at play on fund selection: beyond fund buy lists, and deliberately vague objectives on fund factsheets, there are more covert influences as well, not least advisers’ own preferences.

The FCA has previously warned advisers are not good enough at challenging “their own inappropriate bias towards products, services or providers”. One firm has been told to complete a past business review, while other senior execs’ necks are on the block if they are found to have side-stepped recommended changes to their due diligence process.

When we speak to advisers and discretionary fund managers on a one-to-one basis, there is evidence that the picture is not as bleak as our research would first suggest.

There are advisers who are filtering funds based on factors such as charges, active share, consistency of performance, ability to beat the market, how a fund copes in different market conditions, fund size, portfolio turnover, manager tenure, and who go to the trouble of meeting the managers.

There are those that argue if you are not doing all those things, are you really doing the investment selection yourself?

What is clear is there is a large investment universe, and it is advisers’ and DFMs’ job to sort through it as best they can. If they do not, or only attempt research at a surface level, investment due diligence will turn into yet another example of a part of the market the FCA will be going over with a fine tooth comb.

Then it is not long before the words are uttered that every advice firm dreads to hear… “FCA thematic review.”

Natalie Holt is editor of Money Marketing – follow her on Twitter here



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Financial Advisers – with limited resources and limited time – should NOT try to play the role of the investment manager. Otherwise, irrespective of all the good financial planning work they may do, they will be judged by their clients solely on their investment performance….because that’s the bit that’s easiest for the client to measure.

    If ever there was a reason to out-source the day-to-day investment management then this is it.

  2. As I posted elsewhere many advisers don’t select funds at all. I could compile a list of most of the larger forms (10 advisers and upwards) who use back office to select funds.
    The previous post was:
    Actually few advisers do any due diligence at all. Nowadays it is mostly done by the back office and para-planners – who are not even regulated. This is more than an elephant in the room it’s a Diplodocus.

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