Advisers: IMA should take ‘ownership’ over categorisation

The Investment Management Association needs to increase transparency and take more responsibility if it is to continue classifying funds, advisers have said, though several have warned that some advisers have relied too much on the sector classification alone in the past.

The reaction follows news that a draft paper from the Centre for Policy Studies, currently being reviewed by members of the House of Lords, has called for the IMA to cease classifying funds altogether, stating in particular that its categorisation of Arch Cru funds as ‘cautious managed’ contributed to mis-selling.

Author of the paper Michael Johnson was briefly associated with Arch, having occupied a ‘member’ position in which he worked with the firm for nine days over the course of three months in 2008. The position was unpaid.

Responding to the news, Jane Lowe, director of markets at the IMA, told FTAdviser sister publication Investment Adviser the CPS paper “overstated” the function of the IMA sectors.

“The CPS doesn’t quite understand what the sectors are all about,” Ms Lowe said. “They don’t indicate whether you should buy funds – it is up to the individual or the adviser.”

Andrew Reeves, founder and director of The Investment Coach, said: “If they are going to to it they have to take some ownership of it. It’s no good calling things cautious managed and then finding out they aren’t.

“How they come up with the categorisations has got to be crystal clear, especially in the absolute return sector - advisers have relied on the categorisations in the past rightly or wrongly and that’s come back to bite them.

“We have seen Arch Cru and other names come through the system which have been categorised wrongly. It’s worse than if they hadn’t categorised them at all.

“Given the situation I think they should stop because of the danger of getting it wrong, [unless] they are prepared to stand up and say that the investment community can assume we have done due diligence and these funds are what we say they are.”

Another concern repeated by several advisers was the tendency for the IMA to shoe-horn funds into certain classifications that might not necessarily fit any of the IMA categories.

Philip Pearson, partner at P and P Invest, said: “Any classification comes with a health warning in that you need to understand what the fund is investing in and not relying on the label.

“The labels the industry gives to the funds don’t accurately reflect the risks of choosing those funds and it’s the adviser’s job to understand that.”

He argues the principle of caveat emptor: if consumers want to choose their own funds based on IMA ratings without understanding what each fund is invested in, it’s their fate.

However, Mr Pearson added that advisers who rely too much on the IMA ratings alone have only themselves to blame.