A cynical reason to recommend balanced managed funds

We are not a big fan of multi-asset funds, for a variety of reasons.

Our research project last summer, which took a detailed look at the cautious managed sector, found a variety of flaws in these funds.

With low suitability scores (based on our quantitative research process), variable performance and high costs, we felt that investors were being poorly served by many of these multi-asset funds.

There might be another reason to avoid multi-asset funds.

According to this article, analysts at HSBC found that the popularity of balanced funds towards the end of 2012 was due to advisers attempting to maximise commission income before the implementation of new rules following the Retail Distribution Review (RDR).

They discovered that funds in the IMA Mixed Investment sectors were noticeably more popular just before the commission ban.

This might be because, once invested, advisers are less likely to switch out of balanced managed funds. Switching out of a fund from 31st December 2013 onwards results in any ongoing ‘trail’ commission being turned off for the adviser.

If commission is turned off, the adviser needs to agree an ongoing adviser charge with the client in order to pay for ongoing service.

Did your adviser recommend a multi-asset fund in one of the IMA Mixed Investment sectors last year? What was their motivation?

Photo credit: Flickr/Rosmary