There's normally a divide between financial advisers and investment fund managers. Advisers are responsible for the big picture (i.e. how to generally invest your money tax efficiently) while fund managers look after the specifics of running the investments day to day to (hopefully) make you a profit.
There are plenty of bad examples of each, but it's a process that generally works quite well in practice.
A few years back some financial advisers decided to start doing the fund manager job themselves, which led to quite a few 'broker bonds' being launched. However poor performance and/or regulatory problems led to most closing after a while.
But investment funds run by financial advisers have started cropping up again, which begs the question: are they any good or should you avoid them?
Why do advisers launch their own funds?
One word - profit. When financial advisers sell funds run by other investment managers they usually pocket annual 'trail' commission, typically 0.5% of the fund value. Selling their own funds means the adviser company can instead collect around 1% or more a year in management fees - at least doubling their revenue.
The adviser will have to spend some money on a manager and running the funds, but they will also make savings from not having to consult their customers every time they want to change the portfolio (as usually happens when using conventional funds).
Are there any benefits for customers?
Assuming the adviser has a good fund manager then you could benefit from decent investment performance. But, as the examples below highlight, this might be wishful thinking. Some customers may like the hands-off approach of an adviser running the fund (rather than the adviser checking every time they want to suggest a portfolio change), but then others might not. Lower charges could, in theory, be a potential benefit, but in practice customers seem to be paying more, not less, for adviser funds versus conventional.
In summary, I'm struggling to find any benefits other than owning one or two funds (rather than lots) makes capital gains tax planning easier.
What do adviser funds invest in?
The norm is to invest in other funds, i.e. the advisers are running funds of funds. Holdings might include investment trusts, ETFs and hedge funds in addition to unit trusts. Adviser funds only usually invest directly in shares when the management is outsourced to a specialist (an approach St James's Place uses).
How do adviser funds fare?
I've taken a look at the various adviser funds I could find with published performance data (if you know of others please let me know).
|Fund||2010/11 (1 year)||2009/10 (1 year)||2008/09 (1 year)||Sector|
|Return||Sector Rank||Return||Sector Rank||Return||Sector Rank|
|Income & Growth Portfolio
|* fund is in the 'unclassified' sector, I've assumed an appropriate mainstream sector for comparison.|
|MM Balanced Managed
|MM Income & Growth
||UK Equity Income|
|MM Special Situations
|MM Strategic Bond
||UK Strategic Bond|
|Balanced Income MA
|St James's Place|
|Scot Life Towry Defensive
||Mixed 0-35% shares|
|Scot Life Towry Mixed
||Mixed 20-60% shares|
|Scot Life Towry Growth
||Mixed 40-85% shares|
|All figures shown bid to bid with net income reinvested to 18 May 2011.|
Hargreaves Lansdown and Bestinvest run their own funds of funds which are offered alongside conventional funds via their discount broking and advice services. In fairness, they don't appear to unduly push their own offerings above others in the marketplace, seemingly relying on the funds' merits to attract business. Hargreaves Lansdown charges a 1% annual management fee, resulting in total annual fund charges (including underlying funds) in the region of 2%. Bestinvest charges a 1% management fee for investments of £50,000 or more not held on fund supermarkets, but 1.5% for everyone else. The latter means total annual costs approaching 2.5% a year - very high for customers but over double the revenue for Bestinvest! (even after supermarket/fund admin costs).
Towry encourages its customers to exclusively use its own funds. Unfortunately Towry doesn't publish daily performance data for its funds, so I've obtained some examples via pension fund versions of its funds (where the data is published by insurance companies). While we can't judge a company on one year performance, the figures don't look good to date. Towry charges 2% a year to manage the first £100,000 invested, add in advice and underlying fund/admin costs and you'll probably end up paying over 3% a year - far too high.
Heartwood offers clients the choice of its own funds or conventional portfolios. The former only have a mediocre one year track record to date, too short a period to cast a sensible judgement. Annual management charges are 1.25% with total annual fund charges of around 2%.
St James's Place ties its advisers to using its own funds, of which there are over 50. I've just listed the few in the managed sectors above, but they're fairly representative - a mix of good and indifferent performance. The St James's Place approach is different to the advisers above as they largely outsource the management to conventional funds managers (e.g. Invesco Perpetual's Neil Woodford runs the income fund), but probably still more profitable than if they used conventional funds.
Can an adviser really be independent when selling their own funds?
The FSA is considering this question, as it's clear 'distributor influenced funds' (DIFs), i.e. adviser's own funds, could compromise independence. On the flipside, the adviser might argue they are independent as they can hold investments from across the market in the fund. In practice, I think it would be sensible to re-classify 'independent' advisers who place more than 20% of their overall business in their own funds as 'tied' or 'multi- tied'.
Should you use adviser funds?
As things currently stand, my answer is no. The only reason for doing so is if you will benefit from better overall performance (versus a conventional portfolio) after all charges. And evidence to date suggests this is far from certain.
If advisers really wanted to launch funds that were in their customer's best interests they'd charge no more than 0.5% a year in management fees and keep overall costs around the same as conventional (non-fund of) funds. They'd then need to deliver good performance and service to grow their revenue, instead of simply 'up-selling' customers into higher margin product.