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By Boyd Carson, 12 December 2012

What do IFAs really want to see in a fund?

IFAs

Over the last six months, Sapphire Capital has been meeting with prominent Independent Financial Advisers to find out what the IFAs really want to see in an investment fund. Having seen our fair share of funds that failed to launch we are keen not to suffer that painful (and very costly) experience - so a little bit (actually a lot of) market research was called for.  Quite simply, we wanted to find out which funds they would promote to their clients and which ones they would ignore.

The results were both clear and unsurprising. 

Here are our top five findings:

1) Regulated funds will typically be promoted to retail clients over unregulated funds.  Post credit crunch, investors and IFAs (like us all) have become very risk averse.  Further, the Financial Services Authority ("FSA") has identified the misselling of unregulated collective investment schemes ("UCIS") and close substitutes as a focus area and has recently issued proposals to restrict the exemptions available for sale to retail clients. UCIS, which constituted a significant minority of funds distributed to retail clients falling within a distribution exemption pre-credit crunch are now much harder to raise money from retail investors.

2) The fund and its promoters must clearly address the issue of investment risk.  The IFAs that we spoke to all emphasised that it was important that the fund address the issue of risk in regard to the underlying assets. Most funds clearly state the upside, however not many of them adequately spell out the downside with sufficient prominence. IFAs have to make an assessment of their clients risk tolerance and match their client accordingly.  Being clear about the nature of the risk is always a good thing to do.  Of course, any communication that is a financial promotion subject to the FSA Rules is required to prominently set out the associated risks.

3) It's all about liquidity and the more liquid the fund is the better.  The first thing most IFAs will now ask about is liquidity and the ability of their clients to get out of the fund (i.e. redemptions).  Property funds, due to their very nature, were (and still are) notorious for locking up their investors money for undefined periods of time.  A clear exit strategy demonstrating how and when the investors can get their money back is a must.

4) The track record of the previous funds.  An obvious one - but often overlooked by some fund promoters. IFAs will always appreciate details on the track record of funds that have gone before in the chosen sector.

New Call-to-Action 5) Finally and most importantly - who is behind the fund.  When it comes down to it, most IFAs, like us all, simply want to know that the people running the show (i.e. the fund directors and advisors are competent and will not run away with the money).  Consequently, ensuring that a good management team is in place is a must.  It is not just about having recognised individuals to serve on the board (although that can help) but having a good mix of individuals with different backgrounds and most importantly, having independent directors who will stand up and protect the investors interests if required.