Advisers acknowledge bias towards mutual funds - the lang cat research

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Four fifths (82%) of the advisers surveyed agreed that there is an inherent bias towards mutual funds within the retail investment sector.

The majority (86%) of financial advisers agree that recent high-profile fund suspensions highlight the importance of considering a full range of asset types amid the acknowledgement the majority are biased towards mutual funds, research conducted by the lang cat and in conjunction with the Association of Investment Companies (AIC) has found.

However, the study, released on Monday (2 November), which surveyed 192 members of the lang cat adviser panel, also found that 91% of the assets held in model portfolios were open-ended funds. This left other fund structures including investment companies a “minority sport”.

Four-fifths (82%) of the advisers surveyed agreed that there is an inherent bias towards mutual funds within the retail investment sector. The sector faced several fund suspensions earlier this year including St. James’s Place and Columbia Threadneedle. Many of these sudden closures were in response to the coronavirus pandemic. 

Elsewhere, the research found that trading costs are one of the principal barriers to the use of investment companies in model portfolios on platforms with more than half (53%) of advisers feeling so. Only four out of the entire mainstream advised platforms were found to be truly asset neutral from a cost perspective. 

Source: the lang cat and AIC

Of those advisers who use DFMs, 81% agreed that part of the reason to outsource to a DFM is because they expect it to make full use of all asset types available. Despite this, 16% of DFM-using advisers were not able to estimate what proportion of a typical client’s portfolio was held in investment companies.

AIC head of intermediary Nick Britton said: “This lang cat paper paints a worrying picture of the contradictions within the model portfolio world. While advisers who outsource to DFMs largely expect them to take an unconstrained view of the investment universe, the reality is that structural issues such as platform costs form barriers to investment company use.”

Meanwhile, lang cat insight director Steve Nelson said: “There’s no doubt in my mind that platforms have changed the intermediated retail sector significantly for the better over the past 15 years or so in terms of open architecture products and technology choice.

“However, with a few notable exceptions, the sector has largely failed to provide unbiased and unlimited investment choice to advised clients.”