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Half of advisers inaccurately classify term deposits as cash
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Advisers prefer actively managed fixed interest funds
The classification of term deposits as cash by 50% of advisers highlights the need for greater education, according to the world’s largest bond manager PIMCO, which surveyed more than 200 financial advisers in July 2010.
Peter Dorrian, Head of Global Wealth Management at PIMCO, said 47% of advisers’ clients had little or no idea about the illiquid nature of term deposits, which incur hefty break fees when capital is accessed early. Moreover, on average, advisers allocate close to one third (29%) of their client’s fixed income portfolio to term deposits.
“As billions of dollars sit in term deposit accounts, the perception that they are cash indicates advisers are failing to understand the significant limitations of the term deposit structure,” Mr Dorrian said.
“Locking your cash up in term deposits not only means investors can’t access their money when they need to without incurring costs, it also means they’re potentially missing out on higher returns in a rising interest rate environment,” he said.
Mr Dorrian said term deposits were also not defensive assets, despite perceptions they play that role. “Although term deposits provide capital stability, they are technically not defensive assets. A defensive asset will perform better when riskier assets perform poorly, while term deposits will not change due to their illiquid nature. This is in contrast to other fixed income products such as bonds, which capture upside performance when other risk assets are performing poorly,” he said.
Half of the advisers surveyed rated their knowledge of fixed interest markets as average. For advisers’ clients, 53% believed fixed interest products were too technical with 39% highlighting that education material by product providers was inadequate.
“The results from the survey shows there is a gap in the market for simple and easy to understand material explaining the advantages of fixed interest products. With advisers only having an average knowledge of fixed interest, the challenge is to provide easy to digest materials which highlight the benefits of this asset class,” Mr Dorrian said.
Advisers favour actively managed fixed interest funds
Despite misperceptions surrounding term deposits, advisers are favouring actively managed fixed interest funds (42%) compared to term deposits and other fixed interest products. Of those in actively managed funds, 79% said the opportunity for higher returns was the main reason for this exposure followed by the ability to avoid high risk debt (41%).
On the flipside, when advisers were asked about the major risks they perceive in passive fixed interest funds, 65% were concerned about low returns and only 36% believed sovereign risk was an issue.
“Advisers should be aware the real strength of active management in current market conditions is the ability to avoid risky debt. PIMCO’s fixed interest funds outperformed the benchmark this year and actively avoiding high risk debt played a part in achieving this outcome,” he said.
In a New Normal world where global growth is slower and investment returns from higher risk assets will be lower, a greater allocation towards fixed interest products will become crucial to ensuring returns, according to Dorrian.
“We need to work with advisers and their clients to educate them on the benefits fixed interest allocations can have on portfolios in the ‘New Normal’ environment,” Mr Dorrian concluded.
