This is the latest trend in commission-based abuse by banks, and it seems to have emerged a few months ago and is here to stay amongst the most unsuspecting investors. The themed funds In short, these are funds of funds whose selection criterion is to maintain a mix of around half a dozen funds which, taken together, match the typical investor profile: Aggressive, Moderate, Dynamic, Conservative, etc. In other words, rather than the adviser at the relevant bank recommending that clients hold 4, 6 or 8 specific funds in their portfolio – replacing some with others when deemed necessary – they will suggest buying just one: the profile-based fund. And it will be the fund’s managers who buy and sell whichever funds they wish at any given time, without the investor even realising it.
It is true that actively selecting which funds to buy and sell is something of a hassle for clients. And that, with a profile-based fund, investors can forget about signing buy, sell and transfer orders, as well as all the other documentation and paperwork required by the regulator (which requires so many signatures confirming agreement and understanding of the products to prevent clients from suing advisers in the future if things go wrong). But that «convenience» costs money – and not a small amount. The fact is that profile-based funds add an overall management fee on top of the various specific management fees that must already be paid to each investment fund in which one invests. In other words, a fee on top of fees – or, as it’s also known in English, the ‘greedy’ fee. double dipping financial. Isn’t it true that now, taking that extra cost into account, it seems less «inconvenient» to have to sign off on buy, sell and transfer orders for every transaction, as has been the case up to now? Yes, I know that in exchange for that double commission, the fees applied to the underlying funds are the institutional rate. But the last thing we need is for the exorbitant fees charged to retail investors to be applied as well, given that these days it’s fair to say they’re only foisted on the worst-advised and least discerning investors. (Here, the reader would do well to recall and re-read that article entitled «Investment funds and the devil take them all…»)
But that unnecessary expense associated with the management fees on themed funds is not the only issue; there is also another drawback that we must not overlook. It is the fact that, when investing through a themed fund, the investor loses control over and/or knowledge of the strategies in which they are being invested. They will no longer be able to identify a fund that is performing particularly poorly and ask their adviser for an explanation of why this is the case. They will not be able to demand that a fund they do not like be swapped for another that has been recommended to them or that they believe to be of better quality. Or simply to have a fund that invests in a geographical area or economic sector they do not like removed from their portfolio and replaced with others they prefer.
It is true that many investors lack the necessary knowledge to assess the quality or mediocrity of the funds recommended by their adviser, and that they ultimately end up placing blind trust in those recommendations (as evidence of the population’s lamentable lack of financial literacy, this article from FundsPeople). But by having all the funds in which you invest clearly laid out, without hiding them beneath the opaque and costly veil of a profile-based fund that does nothing more than save on red tape for clients – and bankers… – even if you don’t understand finance, you can ask your adviser for explanations regarding the funds in your portfolio. And if you find the explanations unconvincing or unsatisfactory regarding the returns you’re getting, you can switch funds, advisors and banks. With a profile-based fund, however, this is not the case. What happens to your fund portfolio under that veil is completely opaque, and you will only see the consolidated return of the profile-based fund – after additional management fees have been deducted, of course.
In short, with the introduction of these profile-based funds, the task previously carried out by advisers – recommending that clients buy, sell or switch between various funds in their portfolios when they deemed it necessary – is now carried out by the managers of the profile-based funds. In other words, the very same advisory task that an adviser used to carry out – or was supposed to carry out – «for free» for their clients is now performed by another manager in the case of profile-based funds, but this time they charge a separate fee for it. And we’ve put the word «free» in quotation marks because, as you know – or ought to know – bank advisers never recommend to their long-suffering clients any fund that doesn’t generate substantial commissions for the institution they work for, however brilliant that fund may be. And now, with profile-based funds that pile commission upon commission, the convenience for the investor of avoiding the usual signatures and paperwork turns into an outrageous rip-off. Mind you, the marketing department ensures that this feast is sold to the client as attractive, brand-new profile-based funds, tailored with pinpoint precision to their investment profile (sic).