There has been a surge in insistent clients demanding advisers turn their capital into cash in the lead-up to the European Union referendum.
The latest FE research found cash funds had replaced popular funds, like Standard Life GARs and Woodford Equity Income, as the most researched funds among financial advisers in the period before and after the Brexit vote.
Ben Willis, head of research at Whitechurch Financial Consultants, said he had spoken to a number of advisers before the Brexit vote whose clients had insisted they liquidate their investments into cash.
Advisers can only offer options and probabilities of what they feel would best suit the client, he said, but will have to carry out the request for cash if the client insists on it.
Mr Willis said these client demands for cash revolve around fear.
He said: “Uncertainty about what lies ahead makes investors nervous and so they head for cash, or other safe havens.
“People who do not understand the drivers behind markets should leave it to the experts.” Tony Catt“Sometimes you could argue it is a lack of understanding, as many clients may have gone to cash over pre-Brexit concerns.”
But he said the problem with making such a move is that you have to call it right the other side of the trade.
“It will be interesting to see how many advisers had advised clients to move straight back into the FTSE 100 immediately after the result, and have therefore benefited from the market rally since.”
Tony Catt, compliance officer at Anthony Catt Limited, said: “People who do not understand the drivers behind markets should leave it to the experts,” adding, however, even the experts can have a pretty poor record sometimes.
He said staying the market tends to be better than jumping in and out and paying all the costs of each transaction.
But other advisers denied that insistent clients are a problem as a result of the Brexit.
Danny Cox, chartered financial planner and head of advice at Hargreaves Lansdown, said: “If clients are that worried about the markets, and very few are, then it means their risk tolerance has changed.”
Mr Cox also said he is not aware of advisers recommending cash funds, adding: “Cash funds pay virtually nothing, so those wanting to increase cash should look to standard bank and building society accounts to get a better return.
“Advisers should be recommending that their clients stick to their long-term plan and not move money based on short term macro events such as Brexit.”
Darius McDermott, managing director of Chelsea Financial Services, said cash funds are more liquid and short-term than cash deposits, which means they are often useful for investors who want to quickly switch in and out.
But the downside of cash funds, he said, is they all return around the base rate, which is currently very low, and they also have the added burden of management fees.
Mr McDermott added his firm has never used cash funds and clients can instead use a cash holding facility on the platform.
Simon Mansell, managing director and IFA at Temple Bar, said the immediate reaction for uneducated investors can be to move as far away from shares as possible, and towards less risky assets like cash and fixed interest securities.
“But why have an adviser if the client instructs the adviser to park funds in cash?” he said, adding fund management is about education.
Mr Mansell also said some advisers could be using the ‘defensive medicine’ approach by recommending investments which are not necessarily the best option for clients to protect themselves from litigation.
Back in 2015, the Financial Conduct Authority’s technical specialist Rory Percival outlined a three-step process to help advisers not get caught out by insistent clients.
He said they should provide advice in a concise manner, emphasising the need to ensure the client’s understanding of the recommendations.
Secondly, advisers should make clear what the risks are if a client wishes to go down a different route to the one the adviser has recommended. Finally, if the client decides to go ahead, advisers must be clear that this was not their recommendation.
Everything should be well documented, the FCA added.
But many in the industry said they believed even if they followed the FCA’s guidance on how to handle insistent clients they could still face future claims via the Financial Ombudsman Service.
katherine.denham@ft.com
