Technology has revolutionised the way in which we consume information. An internet search is now the starting point for almost any aspect of life – from planning a holiday, to researching a mortgage, to choosing a restaurant for a night out (at least, when that was more of an option than it is now).
As well as being able to shop the market, consumers have the added benefit of customer reviews and sites such as TripAdvisor to help them determine the suitability of the options on offer to their particular needs. Similarly, in the world of investment, the internet contains a wealth of information on funds available, which advisers can draw on when narrowing their research. This can, however present more problems than solutions.
Advisers have a duty of care to their clients and a regulatory obligation to present their recommendations clearly and in a way that is easily understood. Having discussed their clients’ needs, they need to explain why the funds they have chosen have the potential to meet them. There is, however, no uniform approach to fund selection and the decision-making process will be driven by a range of factors to reflect each client’s specific objectives and requirements.
Unfortunately, the asset management industry has not always done a first-class job of presenting fund information in a way that tallies with financial advisers’ needs. A first port of call might be a fund factsheet on an asset manager’s website, but there is no consistency in the way in which necessary data is presented and the terminology used can frequently be woolly, to say the least.
Increasing transparency
To comply with EU regulations, Key Investor Information Documents (KIIDs) were introduced some eight years ago in an attempt to refine fund information into a concise, jargon-free two-pager. While a step in the right direction in increasing transparency, they are not particularly user-friendly and do not make the job of comparing like-for-like funds any easier. And in a digital era, both these modes of communication seem somewhat archaic.
Advisers are increasingly time-poor. Reporting requirements, compliance and keeping abreast of regulatory requirements eat away at the hours they can spend researching funds, which is arguably where they add the most value.
Information on funds therefore needs to be presented in a straightforward, easily digested format while containing sufficient data to ensure advisers cannot just kick the tyres but get fully under the bonnet of each fund. Importantly, this information should be presented in a standardised format to allow for a meaningful comparison between investment options.
Over the course of the last 12 months, Square Mile has consulted widely among various industry stakeholders including advisers, asset management groups and trade body the Investment Association, to pinpoint which elements of fund information are the most useful in the fund selection process.
The need to collate this information together in one place resulted in the development of the Fund Dashboard, a joint initiative with FE Fundinfo, bringing the provision of fund info into the digital age in a visual format. To date, the adviser feedback on this innovation has been outstanding – we would welcome yours.
Five core areas
Every adviser will place a different emphasis on differing elements, nuanced to suit the individual needs of their clients. One adviser may, for instance, view performance as the most important; another may value environmental, social and governance (ESG) factors; while another may find ratings essential when selecting a fund. While needs are likely to change with time, five core areas were highlighted during this consultation process: opinion, performance, risk, cost and ESG considerations.
* Opinion: Advisers value an objective evaluation of a fund’s ability to meet its stated objectives, which should be based on both qualitative and quantitative assessments. This may act as an initial screen or provide third-party endorsement of an investment choice.
* Performance: While only offering a retrospective view on a fund, performance should be presented in a meaningful way, clearly demonstrating a fund’s absolute annualised return during the timeframe outlined in its objective, and its performance versus its objective.
* Risk: Risk is frequently misunderstood by investors, who might confuse volatility with the risk of a permanent loss of capital. The assessment of risk should reference both that of the fund and the asset class it offers exposure to. Its Synthetic Risk and Reward Indicator (SRRI) profile is an important measure and an indication of the fund’s maximum drawdown over the investment horizon, as stipulated in its objective, should also form part of this assessment.
* Cost: The asset management industry has been accused of a lack of transparency over the costs investors must bear. To counter this, an overview of the fund’s ongoing charges, its transaction costs and total cost of ownership must be presented in a clear and transparent way.
* ESG credentials: Over recent years, ESG considerations have become an increasingly influential element of fund selection. Indeed, incoming regulation will make an assessment of a client’s ESG requirements obligatory as part of an adviser’s suitability fact-find. It is essential, therefore, that advisers can access information on how ESG factors are integrated within a fund’s process, and within the group that offers it.
The industry has a responsibility to help advisers make informed investment choices on behalf of their clients. While the fund manager is ultimately the guardian of investors’ monies, it is the adviser who acts as the gatekeeper.
In order for them to fulfil this role effectively, they must have the appropriate information readily available in a way they can digest easily to determine a fund’s suitability and, importantly, that enables them to explain their recommendations to their clients and why they believe these recommendations will help them meet their investment objectives.
Jake Moeller is senior investment consultant at Square Mile Investment Consulting & Research
