That seems to be the question now in relation to open-ended property funds. Our friends at Apricity summarised the main proposed changes under the Consultant Paper 20/15 which you can read here, including the options available to you at your firm. Here, we’ll look at some of the practical considerations.
Approach to making changes
Assuming the changes come in (or even if they don’t), you might make a decision on whether to keep or remove open-ended property from your portfolios. You may also have this forced on you if you use an MPS who can’t reconcile the rebalancing issues of a notice period. How will you approach each of the outcomes in terms of new and existing clients?
It may firstly be good practice to consider writing to all affected clients and prompting a review of their portfolio to:
- Outline your views and recommendations for their investment.
- Gather their thoughts on holding an investment with a restrictive access.
Following this, you may decide that (at least) some clients benefit from exposure to property via an open-ended fund.
If you continue to use an open-ended property fund in a portfolio
The main two that stand out are:
- How will you manage rebalancing and portfolio drift and how will you disclose the limitations to clients?
- How will you manage cash balances / proportional fund sales for clients with income needs?
You will need to potentially adjust your process when dealing with clients in the scenarios above.
In both the initial recommendation stage, and the annual suitability review, if a property fund is being recommended, you will need to alert clients to the fact that:
The XXXXX fund requires 90/180 days before holdings in the fund can be sold into cash. It will not therefore be possible for you to access your investment outside this notice period.
This would be followed by the risk warnings around the property fund being illiquid and more susceptible to suspension periods.
The important part here is the impact on annual suitability reviews. In the time between reviews, clients will have potentially gone from holding a fund with illiquid characteristics, to holding a fund that behaves in a similar way to a structure product or fixed rate deposit account (without the ability to ‘give up’ returns for access). It is important clients are made aware of the changes.
In the event an open-ended property is to no longer be included as part of your overall proposition, or a client’s specific portfolio, there are some things to consider.
Removing property funds
You will need to take the steps you would take with a standard fund switch recommendation, and follow the process in terms of assessing suitability.
If property is a vital part of your investment proposition, you may need to consider a closed fund if the open-ended structure with limitations on access will not work. There are a number of investment trust options for property, but there are a wide number of additional considerations you need to make before selecting these.
Alternatively, property as an asset class is not essential to achieve a diversified portfolio and we know of many an investment proposition that does not specifically allocate for property.
The consultation period is open until November and from this point, formal plans and rules are not expected until 2021. You don’t necessarily need to make changes now, but being aware of how you might approach the proposed changes, and what you can potentially do about it, will help you be prepared in the event the proposal comes into force.