35% of advisers use smoothed funds for new client money but cost and transparency barriers persist finds latest NextWealth data
A new report from NextWealth finds smoothed funds are used by 35% of financial advisers for new client money – more than use annuities (32%), and behind multi asset funds and discretionary model portfolio services at 59% and 48%.
NextWealth’s first Smoothed Funds Proposition and Distribution Report provides a detailed and comprehensive view of the market, comparing provider propositions, smoothing methodologies, platform access, pricing and adviser sentiment.
The research compares the views of adviser users and non-users of smoothed funds and finds sharply polarised views.
Those who recommend smoothed funds say they play an important role in client portfolios for low risk/cautious clients and retired drawdown clients, mitigating sequence risk. Those who don’t, cite higher costs, concerns about transparency and problems explaining the smoothing mechanism to clients.
Heather Hopkins, MD of NextWealth, comments:
“Smoothed funds elicit strong views from advisers who sit in opposing camps depending on whether they’re users or non-users. For many they are a ‘love it or leave it’ solution. Aficionados view them as an essential tool to manage client outcomes and mitigate sequencing risk, in particular riding out volatility for cautious or retired clients. For others, they’re ‘no go’, raising questions around value and transparency and problems with client understanding.
”Several advisers we interviewed expressed a desire for greater clarity on what smoothing costs the client, what instruments are used, and how returns are impacted in different market conditions.”
M&G PruFund dominates sector but newer entrants start to gain traction
M&G’s PruFund continues to dominate the sector but newer entrants are attracting attention. M&G captures 90% of assets in smoothed funds, but only 78% of advisers said they use M&G. Though their share of assets in smoothed funds remains low, 25% of advisers are now using solutions from newer entrants Aviva and LV=, which NextWealth says could reflect an increasing openness to new smoothed fund propositions.
Main growth opportunities for providers
The report identifies two main areas of potential growth for smoothed fund providers:
- Converting non-users – particularly advisers already recommending annuities or those using multi-asset funds.
- Expanding share of wallet with existing users – over half of advisers who use smoothed funds do so for 10% or less of client assets. Some have inherited these assets, while others recommend then for very risk averse clients.
Heather Hopkins comments:
“We think the best opportunity to grow this market lies with what we call ‘reluctant’ users. They’re already familiar with the product but use it in narrow circumstances.
“Focusing on the role smoothing can play to support clients with a very low tolerance to risk will nudge doors open. But providers need to evidence value more clearly and support advisers in understanding and communicating smoothing mechanisms.”
Cost is still a barrier
Charges continue to act as a barrier to wider adoption among users and non-users. The report finds that the ongoing charges figure (OCF) for smoothed funds ranges from 0.58% to 1.37% – significantly higher than the average total cost paid by advised clients for funds (0.31%) or for discretionary model portfolios (0.54%).
“Again, providers must do more to show how smoothing delivers value for the client, especially when priced at a premium,” Hopkins adds. “There’s an opportunity to grow this market – but only if providers work on transparency and equip advisers with the information they need to feel confident in their recommendations.”
