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Cut to the core

Fund ranges Advisers could spend their time more fruitfully if providers pruned down the bewildering array of funds on offer, says Scottish Life investment development manager Emma Jones

Every week seems to bring another announcement that a provider is extending its fund range but does bigger necessarily mean better?

Fund selection is not an easy job and there is no single set of foolproof criteria for identifying the best fund.

Fund analysis should ideally result in a full understanding of what each fund manager is trying to achieve and the degree of risk they are prepared to take with their investors’ money, as well as the extent to which they have been successful in the past.

This is a pretty big call on advisers’ time and the in-depth information needed for this type of analysis is not always readily available.

Faced with a growing choice of funds, is it really any wonder that many advisers continue to rely on quantitative measures such as past performance rather than conducting full qualitative fund analysis?

But identifying the best fund is only the beginning. The FSA is clear that every adviser has ongoing responsibility for ensuring that the funds they recommend remain suitable throughout the term of the investment. This means not only checking that client’s needs do not change over time but also that the funds chosen remain appropriate to the reasons why they were originally selected.

How often does this happen? Do all advisers regularly revisit the funds they have recommended in the past to ensure that those sold to medium- risk clients are still run to a medium-risk mandate?

Advisers who do not do this are taking a risk and it is not just clients who are facing a nasty surprise if their funds’ objectives change over time.

The less time that an adviser has to spend analysing funds and reviewing recommen-dations, the more time they are able to dedicate to seeing clients and generating income so how can this burden be reduced?

Advisers are increasingly using in-house expertise to screen the enormous variety of funds available to them and to review funds previously recommended for ongoing suitability.

This certainly removes the analysis burden from the adviser but it comes at a significant cost in terms of the staff and systems that are required.

What if, instead of swamping advisers with a massive range of investment options, life offices leveraged their in-house expertise and systems to complete much of the necessary analysis?

Offering choice is important but what really constitutes choice? Having the option of a large-cap UK equity fund or small- cap UK equity fund really adds value to the client, allowing the adviser to diversify a portfolio or take short-term tactical positions, but does offering 25 small-cap UK equity funds really increase choice in a meaningful way?

The only real differentiators between the funds on offer is going to be the quality of the management process and past performance. Low-quality funds will rarely be used, so why offer them in the first place? Would it not make sense for the provider to screen out the low-quality funds and offer a concentrated range of funds based on investors’ needs?

Most requirements can be satisfied by a fund range which encompasses all the asset classes and geographical regions and which caters for varying investor appetites for risk. A robust selection process will ensure the quality of the funds, which can be marketed according to their sector and risk profile. This will allow the adviser to match funds to clients’ requirements so they can spend less time on finding the best fund and concen-trate on finding the best fund for the job.

This would help reduce the burden of analysis but there remains the problem of ongoing suitability. Isn’t this something that providers can help with as well?

Only the adviser will know if a client’s needs have changed but it will be safe to assume that so long as their requirements stay the same and the fund’s objectives and risk profile remain constant, the fund will continue to be appropriate. This is where the provider comes in.

If each fund is aligned to a particular sector and risk profile in the first place, it should not be difficult to check that the funds on offer remain true to these. This will simplify the review process so it is done once by the provider instead of by each individual adviser firm.

To take the process a step further, funds which deviate from their original objective or change risk profile can be replaced on the provider’s platform and investors’ monies can continue to be invested in the new appropriate fund.

Providers are constantly searching for new ways to help advisers and their businesses. Delivering a fund range which focuses on meeting investor needs rather than simply providing seemingly infinite choice, is a practical way of achieving this.


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