The adviser community will have noted that recently there has been a move by more big industry players to make smoothed and with-profits funds easier to access.
A greater number of smoothed life and pensions funds are appearing on platforms for use by UK independent financial advisers.
Their move onto platform means they can more easily be integrated into investment portfolios. And, ultimately, their arrival gives even more investors access to smoother returns in unsteady times.
But how do these funds operate? And are they all, fundamentally, the same? What will be the specific features that advisers will want to look out for when assessing their suitability for clients?
How do they work?
Let us start with first principles. What is smoothing?
Investment in the market always comes with risk.
And it can be tempting for advisers, and their clients, to steer clear of too much of it. Especially if the client is close to retirement or looking to preserve the value of their portfolio.
Typically, advisers look to give investors a ‘smoother’ investing journey by diversifying their investments across asset classes, so that if some assets do well and others less well, the overall performance is not as heavily impacted as a concentration in just one class.
Smoothed and with-profits funds operate a similar diversified approach – moderating risk and reducing day-to-day volatility, but reduce volatility further by using an additional process.
They typically provide steady growth through a diverse asset choice and use a mechanism to reduce the impact of day-to-day price changes.
What this means in practice, is that in periods of high fund performance, some of the return is held back. This is then redistributed during periods of weaker fund performance.
Aside from the obvious advantage of lowering the risk of significant falls in value, it can also be a useful tool in the run up to decumulation, reducing sequencing risk and volatility drag.
A smooth return to the market
I like to think that the smoothed and with-profits revival is grounded in demonstrating the value of these products to ordinary investors.
Today, Wesleyan’s With Profits Fund holds more than £4bn of personal investments.
It has an FE Fundinfo risk score of just 11 (as at June 30 2023), which, when compared with the FTSE100, is an 89 per cent lower risk.
While the returns – and risk – speak for themselves, in the past the additional complexity of smoothing may have been off-putting to some investors and IFAs looking at including them in client portfolios.
Polishing the product and putting it on platform
Now, going on-platform can be complex, especially when ensuring that the product is suitable for advisers to incorporate into bespoke and model portfolios.
For funds and providers looking to enter the wider IFA/platform marketplace, these challenges range from finding suitable partners, to developing the fintech to support products and trading, right through to getting cut through to potential customers.
