Look after managed funds' reputation

It relates to the recent case study and commentary provided by the Banking Ombudsman regarding the methods bank advisers use to sell managed funds.

While the Ombudsman said the product was ok for the customer, she did question the way the bank had sold the fund. This led her to comment that she had an increasing number of these sorts of complaints, and she suggested banks might be "over-selling" their funds.

The issue for the industry is simply that if the Ombudsman's warning is right and banks are overselling then the integrity and reputation of managed funds and advisers could be at risk.

Currently banks capture the majority of the funds flow each quarter into retail managed funds. They do this by employing advisers (salespeople) who can work the bank's database, (essentially an easy goldmine for a good salesperson) and they remunerate them well (including incentives).

The crunch for the industry is that if the banks are so successful at selling managed funds, but at the same time alienating customers there is a risk they will 'taint' managed funds for the general public.

Managed funds and financial planners and advisers could, in the consumers' eye, get the sort of reputation (deserved or otherwise) that insurance products have in the market.

Two other issues this complaint throws up are selling a fund on past performance and making sure investors know what risk they are taking on.

A feature of the complaint is that the fund was bought at a time when it had good positive performance. However after nearly two years of bad market conditions the fund's numbers aren't so flash and the investor would have been better off, in the short term, keeping her money in her term deposit.

It may seem the banks are taking a major hit here. To put this into perspective it is worth pointing out that many of them have spent some years in the advisory game and the people running the operations have developed good advisory processes. (The Ombudsman went as far as to say the product was right for the customer the concerns were over the sales method).

The Ombudsman's comments serve to send a cautionary flag up the mast. Advisers and fund managers need to take note as there is a major shift in the industry to improve distribution, which really means selling more product.

Advisers need to make sure the right product is being sold to the right person.