Advisers recognise benefits of smoothed funds but are put off by complexity and price – Wesleyan and the Lang Cat

A new generation of smoothed funds are helping advisers to manage volatility and comply with regulation, but providers must do more to address historic perceptions if smoothing is to be used to its full potential, according to a new study from Wesleyan and the Lang Cat. 

Smoothing the way, compiled following a poll of advisers and a roundtable discussion with leading industry figures, reveals financial intermediaries today are divided on using smoothed funds in their clients’ portfolios. 

The research found a clear majority (65%) of advisers agreed that smoothed funds help to manage client concerns around risk and volatility. 

However, most advisers (62%) said they had a negative perception of smoothed funds. The biggest reasons cited for this view were complexity (68%) and price (68%), followed by their performance versus benchmark (45%) and the need to explain the way they work to clients (34%). 

30% said they had a positive perception of smoothed funds. The biggest reasons cited by this group were smoothed funds’ ability to manage volatility (77%), followed by fewer panicked conversations with clients (52%), their ability to help with client behavioral biases (52%) and predictability of returns (46%). 

With separate research from Wesleyan finding 91% of advisers expect volatility to increase in 2025 and the CEO of the FCA recently ushering in an era of ‘predictable volatility’, the report argues more advisers would use smoothed funds if negative perceptions were addressed.

James Tothill, Investment Specialist at Wesleyan, said: “Many advisers still view smoothed funds as complex and opaque because historically smoothing mechanisms and the extent to which bonuses were guaranteed were discretionary. Today’s funds use clear rules and a systematic, formulaic approach to smooth returns, offering simplicity and transparency. 

“Advisers understand that smoothing can mitigate volatility. But to reverse long-held negative perceptions, providers must do more to communicate how smoothed funds have changed and their wider benefits for investors – and that’s a big reason why we’ve partnered with the Lang Cat on our report.” 

Rich Mayor, Senior Analyst at the Lang Cat, added: “Our research among advisers found there’s a definite ‘marmite’ trend going on in the profession when it comes to smoothed funds. 

“While a good portion of financial planners appreciate their uses for clients, there are many who feel like they don’t know what’s going on behind the scenes; there’s a persistent perception that smoothed funds are opaque and expensive. 

“There’s some appetite for them in the advice profession, but they have to properly challenge these often long-held views on smoothed funds. Those now being added to platforms are different to those of the past. There’s been a concerted effort on improving transparency and lowering fees, as well as adaptations to run within or alongside existing CIPs on platform. 

“The main reason for using them are the same as they’ve always been – to protect from the anxiety of market volatility – and the choppier markets we’ve seen already this year have been a proving ground to show how they’ve evolved.” 

Smoothing the way also explores how advisers today are using smoothed funds to support their clients. 

The majority (62%) said smoothed funds were most appropriate for their clients in retirement, followed by those at retirement (38%) or approaching retirement (34%). Roughly the same proportion (68%) said pensions and SIPPs are the most appropriate tax wrapper. 

Most advisers (57%) also blend asset types in their Centralised Investment Propositions (CIPs), suggesting there is an important role for smoothed funds within their portfolios. 

James Tothill, Investment Specialist at Wesleyan, added: “The applications of smoothed funds are evolving all the time. From a regulatory perspective, the FCA’s ongoing focus on suitability means advisers must consider all the products at their disposal, including smoothed funds, to meet their clients’ specific needs, whatever stage they are at in their financial journey. 

“Smoothed funds have also traditionally been viewed as an off-platform option for advisers. A new generation of ‘platform-native’ options is changing this, allowing advisers to integrate funds into existing portfolios and manage funds without holding periods or unpredictable price movements. 

“Our own smoothed With Profits Growth Fund was the first of its kind on an independent adviser platform. We’re now on three, and will continue to expand in the years ahead to make on-platform smoothed funds more readily available to more advisers.” 

The full Smoothing the way report can be read here: https://www.wesleyan.co.uk/campaigns/smoothing-report.