The use of multi-manager funds by financial advisers has been the subject of strong criticism but advisers say fund of funds can be cost-effective and beneficial for the client.
Advisers using multi-manager funds were described as “lazy middle men” for choosing “off the peg” investment products for clients in a recent Daily Mail article. This has not been recieved well by the advisory community.
The article argues that many advisers “lack the know how and the will” to research and select individual products and so opt for fund of funds to allow the multi-manager to take responsibility for fund picking.
It also suggests these are no more than “off the peg” funds designed for the mass market, which the individual investor could easily access themselves through step-by-step forms on fund websites.
It says: “So when an adviser recommends a packaged fund, you are essentially paying extra for an investment guru to build something you could buy off-the-peg. And because they are designed for a broad type, they might not match your very specific needs.”
The higher charges for using a multi-manager fund also comes under criticism due to the fact that on average their performance does not stack up, although there is also signicant divergence in performance across fund of funds.
Chase De Vere head of communications Patrick Connolly does acknowledge that fund of funds tend to be more of a “one size fits all” product. However he also points out how and when this can work in a client’s favour.
He says: “For a novice or small investor who wants to achieve diversification but doesn’t have enough money to spread it across a range of funds, then a multi-manager fund makes perfect sense. It also works for the individual who needs a long-term investment that they want to leave alone.”
Whitechurch Securities head of research Ben Willis demonstrates the cost-effectiveness of using a multi-manager fund for both the client and adviser. He says: “The biggest reason that advisers use multi-managers is that it is cost effective for clients.
“For clients with, say, less than £50,000 to invest, it is not cost effective for the adviser to construct a tailored portfolio of investments.
“In the RDR transparent charging world, the adviser would have to charge for the work required to carry this out, which could work out as quite a high fee both for the initial work and the subsequent ongoing review, particularly if the adviser worked on an hourly fee basis.”
Murphy Financial associate partner Adrian Murphy adds that when he uses a multi-manager fund, usually for lower value investors, the client is charged less on the basis that full financial planning has not been given.
Advisers agree that, crucially, multi-manager funds are also appropriate products for many financial planners who may not be investment specialists and that this in turn can bring benefit to the end investor.
Bestinvest managing director Jason Hollands says: “You can be superb and know your client, understand their needs and their tax planning but that doesn’t necessarily mean that you are the right person to be managing an investment portfolio.
“The move advisers have made towards multi-manager funds is not necessarily a bad outcome for the client because they end up with a solution that it is professionally managed by an investment specialist, allowing the adviser to focus their time and skills on financial planning.”
Murphy also highlights the “regulatory burden” that may have pushed advisers towards using fund of funds and away from running their own models.
He says: “The FCA paper on centralised investment propositions from last year really put the fear of God into everybody about the requirements just to run your own model. This has contributed to the huge uplift in the use of multi-manager funds.”
Investment Quorum executive director Lee Robertson notes that multi-manager funds currently have higher charges. However he also highlights recent moves to change this.
He says: “Multi-manager funds are more expensive, there is no getting round that. However I would say that prices are dropping because as more advisers opt for a multi-manager style approach post-RDR, there is an economy of scale coming in which means prices are beginning to come down.
“Post-RDR it may be that advisers should be having discussions with multi-managers about the level of costs, because everyone is taking a view now that costs have got to fall.”