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Smart thinking

Two strands of industry comment have drawn my interest in the last few weeks. They involve the re-emergence of broker funds and the question of whether platform users can justify higher charges.

The new breed of broker funds may use professional fund managers and wraps may provide administrative and relationship benefits but the key issue with both is whether any increased cost to the investor can be justified.

It is extremely difficult to weigh up the increased cost against any advantages that the broker fund or wrap might provide. The current volatile market may provide the ideal environment to test whether investors in broker funds, or with assets on a platform, are more likely than others to have better performance, achieve their investment goals or have their service expectations met.

Turning this debate on its head is the FSA’s recent approval of the first fund to use Smartfund technology. So Smartfund is an authorised unit trust that is an adaptation of the separately managed account concept which has been hailed internationally as the next evolution of platforms. This structure delivers many of the benefits of broker funds and platforms but at a reduced cost to the investor.

Targeted at advisers who want to establish their own fund and/or platform offering, Smartfund provides the legal and technology infrastructure to enable the creation of funds of funds, multi-manager funds, risk-based funds and personalised lifestyling funds. Advisers can appoint the fund manager of their choice, preserving and reinforcing the relationship between IFA and fund manager without changing the regulatory status of either, while sophisticated online capabilities streamline administration of the funds and enable online valuations, reporting and rebalancing.

How can this be delivered for less cost to the investor? It is because Smartfund uses the latest in international platform technology to ensure that the underlying administrative processes are as efficient as possible.

Existing platforms work by linking investor and adviser into one administration platform with one custodian. However, the fund manager continues to administer assets on its own system with its own custodian, meaning there is an amount of duplication between fund manager and platform. This is a cost saving just waiting to happen.

Smartfund’s underlying SMA technology enables it to link the fund manager into the same platform used by the investor and adviser, eliminating duplication. The authorised unit trust structure delivers taxation benefits to the investor as each of the investment models is rebalanced. The fund can be held inside Isas and Sipps.

What does this mean for the client, the adviser and the fund manager?

  • The client gets professional fund management, online reporting, the relationship benefits of a platform and the tax benefits of managing strategy inside a broker fund, plus they pay less.

  • The adviser outsources fund management, streamlines administration and increases the value of their business and revenue stream through ownership of their own fund and platform offering.

  • The fund manager continues doing what they are best at – developing and managing investment strategies and models.

    Smartfund blends a professionally managed fund with the latest in platform technology. It also heralds the entry into a brave new world where technological advances are being used to deliver tangible benefits to investors and advisers.

    John Martin is sales director at Praemium

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