IFAs play key role in generating income in low interest environment

According to independent financial research company Defaqto, low returns on cash deposits mean people will have to consider investing in riskier assets to supplement their income.

IFAs will therefore need to undertake robust due diligence when selecting funds, and fund managers, to ensure appropriate selections are made for their clients.

With the base-rate remaining at 0.5%, cash deposits are not providing sufficient returns for investors relying on their income.  As a result, clients that need to supplement their income will have to consider investing in assets that have some risk attached to them.

Defaqto data shows, for example, that while the highest rate achievable on a 90-day notice account at the end of April was 3.30% and 3.40% for a 12-month notice account, the highest gross yield achievable on global bonds was 7%, 7.3% on UK equity income funds and 7.4% on strategic bonds.  However, whether investing in fixed interest or equities or property, a wide variety of skill sets are required to manage these asset types.

From an IFA perspective, Defaqto believes that the key to selecting any fund is undertaking sufficient due diligence to satisfy themselves that fund managers have the experience, resource and knowledge to make stock selection decisions on a client's behalf.

Fraser Donaldson, Defaqto's Insight Analyst for Funds, said: "The low interest environment of the last couple of years has had a significant downward impact on returns from cash-based savings.  In these circumstances, people wanting a greater return from their savings will need to look at alternative options.  Although there are a variety of options that offer the potential for greater income, the flip side is that they come with greater risk.

"IFAs have a pivotal role to play in helping their clients achieve greater yields from these alternative options.  More often than not, fund managers will be making the key decisions that influence the income that is generated for an adviser's clients.  Therefore, it is critical that IFAs are satisfied that potential fund managers are able to make right decisions for their clients.  To achieve this, advisers need to ask the right questions to build a detailed understanding of the capability and approach of potential fund manager partners."     

Defaqto has today launched a guide on Income Generating Funds, which provides an overview of the main income generating asset classes, the income they can deliver and potential risks and influences attached to each.  To help IFAs with due diligence on income generating funds, the guide sets out a number of key questions advisers should ask potential partner fund managers.

The guide can be downloaded, free of charge, at defaqto.com/adviser/ifa/guides.