How the Woodford debacle has changed adviser behaviour

How the Woodford debacle has changed adviser behaviour
Neil Woodford

Three-quarters of financial advisers have changed their behaviour as a result of the demise of Neil Woodford’s flagship fund equity income.

The most common lesson advisers learnt from the failure of the Woodford Equity Income Fund was around liquidity, with 47 per cent of respondents to a survey conducted by Research in Finance saying they now give more consideration to liquidity when choosing investments.

The poll had captured the views of 106 financial advisers for the Association of Investment Companies between June 16 and July 9.

Around 37 per cent of advisers said they now check the level of exposure to unquoted companies in funds, and 29 per cent discounted the fund manager's reputation when making investment decisions.

Of the advisers surveyed, 58 per cent had at some point recommended Woodford’s Equity Income Fund to clients or had invested clients’ money in the funds.

Of these, 84 per cent had clients whose investments were impacted by the fund’s suspension.

Woodford's flagship fund was suspended in 2019 after he was left scrambling to meet a wave of redemptions from the increasingly illiquid fund.

The suspension meant hundreds of thousands of investors had their savings trapped in the fund, which was eventually closed down.

Richard Stone, chief executive of the Association of Investment Companies, said: “Our research shows that the suspension of Woodford Equity Income came as a surprise to most advisers, as it did to private investors.

"It has left them a lot more cautious about trusting a fund manager’s reputation or investing in a fund that has exposure to illiquid assets."

He added: “Advisers clearly identify the Woodford fund’s exposure to unquoted companies as the number one reason behind its suspension and eventual failure.

"Whenever open-ended funds hold hard-to-sell assets, there will be a risk of such problems. The proposed Long-Term Asset Fund needs to be carefully designed to minimise such risks and, as an untested product, it should not be widely distributed until it has proved itself through an economic cycle.”

The FCA is soon to release the details of the Long Term Asset Fund, a new fund structure where investors would not be able to deal daily, but redeem their investments after a notice period.

The aim of the fund is to allow investors to put their cash into areas such as real estate and infrastructure without the risk of a wave of redemptions that has caused a number of real estate funds to fail, as well as Woodford's fund. 

Three-quarters of advisers (72 per cent) polled by the survey agreed there were insufficient controls on how funds operate when they hold illiquid assets, and 69 per cent said the FCA should impose stronger investor protections when illiquid assets are held in funds.