With the recent increase in market volatility smoothed funds have stepped back into the limelight, with 45% of paraplanners saying they now use them in financial planning and 37% saying they expect to see more of these funds being used than in the past, in particular as the funds are now available on adviser platforms and so are more readily accessible to invest in.
Smoothed and with-profits funds are designed to reduce the impact of short-term market fluctuations by averaging investment returns over time. This smoothing mechanism can help cushion clients from dramatic market drops while still participating in long-term growth. As such, they can help manage market volatility and provide more predictable returns, an increasingly valued feature for clients focused on stability and capital preservation, particularly those with a lower risk tolerance or those nearing or in retirement.
While the smoothing feature does not guarantee returns, it does help provide a buffer against the psychological impact of market downturns, which can be especially useful for clients withdrawing a regular income or needing access to their capital in the short-to-medium term.
Our recent Parameters survey revealed that paraplanners use with-profits and smoothed funds in a variety of contexts, depending on the client’s objectives, risk appetite, and existing portfolio composition.
1. Diversification and volatility management
Paraplanners said that they are using smoothed funds to diversify larger portfolios, such as those held within SIPPs or investment bonds. They can complement more traditional multi-asset or discretionary fund manager (DFM) strategies, helping to reduce overall portfolio volatility without entirely sacrificing growth potential. They are also being used as Trustee investments or as a low-risk component within a broader investment strategy.
As one paraplanner said: “These funds also often offer a level of protection for the original investment, which is crucial for clients who can’t afford to take big risks. It ensures their money grows in a more controlled, steady manner over the long term, giving them peace of mind knowing their investments are being managed carefully.”
2. Support in retirement and income planning
In retirement, where clients are often drawing down from their investments, the smoothing process can protect income streams from being negatively impacted by market downturns, and the effect of limiting volatility is popular with clients, paraplanners say. Other paraplanners said they use the funds in decumulation planning, particularly for high-net-worth clients who may hold significant positions in equities and wish to mitigate downside risk while drawing income.
3. Tax planning benefits
For high-net-worth clients, placing smoothed funds within investment bonds can also provide tax planning advantages. The smoothing mechanism can help avoid sudden gains that might trigger unexpected tax liabilities. By reducing the volatility and ‘spikiness’ of investment returns, paraplanners said they can better manage a client’s tax position over time, making these funds a useful component in overall wealth planning.
4. Client familiarity
A number of paraplanners said that they tend to use smoothed funds where the client is familiar with or already invested in with-profits funds from past financial planning and feel comfortable with them.
Paraplanners also said they that if a client explicitly requests a low-volatility or smoothed return strategy, paraplanners may allocate a portion of their portfolio to these funds—even if they do not form part of the central investment proposition (CIP).
While smoothed funds can offer stability, paraplanners highlighted drawbacks, including higher charges, lack of transparency around how smoothing is applied and what bonuses (if any) are distributed, no guarantee of returns, despite the appearance of security.
While with-profits and smoothed funds can be a useful planning tool for specific client segments, especially those who prioritise stability, predictable income, and protection from volatility, paraplanners say they use them selectively, and questions were raised over their use for clients with longer term investment horizons who are better able to ride out volatility in the markets.
Results from our paraplanner survey:
Do you use with profits/smoothed funds within client portfolios – such as those from M&G (Prudential), LV= and Wesleyan?
Yes 45%
No 54%
Unsure 1%
Where do you use them?
In general accumulation portfolios 43%
In retirement planning 53%
Only if clients ask about them 15%
Other 20%
Do you think with access to with profits/smoothed funds on platforms, we will see more of these funds being used than in the past?
Yes 37%
No 17%
Unsure 45%
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