CPD  

The role of smoothed funds in a volatile environment

  • Understand how smoothed funds can be useful
  • Identify types of clients smoothed funds are suitable for
  • Describe the different propositions in the market
CPD
Approx.30min

In particular, let’s think about a group we know as the mass-affluent. 

They have retirement savings of between £100,000 and £500,000, and will probably spend all their money securing an income and long-term care during their retirement.

As such they are most affected by volatile markets and any potential losses, as they near retirement or start to take an income from their pension pot. 

Their needs are very different to people who find themselves in more straightforward situations as they approach retirement.

For example someone with a £2m pension pot is unlikely to spend their entire fund in retirement, will have tax planning needs and is likely to be interested in how best to pass wealth on to future generations.

So, if you have mass-affluent clients it is likely they will be looking to you to help them find a way to invest in a lower risk environment with potential returns in excess of cash deposit rates – a scenario in which smoothed funds could lower a client’s risk exposure as they approach retirement or provide a useful tool to help them start to decumulate their pension savings. 

Who is in the market?

The main players in the smoothed funds market provide access to their funds through a range of products – typically pensions, bonds and Isas – according to a client’s requirements and tax status. 

The funds that these products provide access to are generally risk-rated to help advisers match them to a client’s appetite for risk.

For example, the LV Smoothed Managed Funds are continually risk managed to seek to maintain their 3, 4 and 5 risk-ratings from analysts, including Defaqto and Distribution Technology. 

In practical terms this means that there are smoothed managed funds that make suitable investments for clients with risk profiles of ‘very low risk’, ‘low risk’ or ‘low to medium risk’ – further emphasising the role they can play for investors who find themselves at the stage of their lives where their capacity for loss is low. 

Addressing historic issues and perceptions

Some might say that the reputation of today’s modern smoothed managed funds is still clouded by the legacy of their predecessors; many of them old-fashioned with-profits products, and the issues clients and their advisers have faced down the years.

But the reality is that today’s smoothed funds bear only a passing resemblance to with-profits investments of the past – indeed, not all of them are even with-profits products. 

The product providers still retain a certain degree of discretion, for example the right to suspend smoothing if it puts overall investor security at risk, but the days of the annual and terminal bonuses and discretion for actuaries in grey suits are long gone. 

CPD
Approx.30min

Questions appear on the last page of this article.