Adviser knowledge of term deposits low
Half of advisers are incorrectly classifying term deposits as cash, according to PIMCO research.
A survey of 200 financial advisers in July revealed that 50 per cent classified term deposits as cash while 47 per cent of advisers’ clients had little or no idea about the illiquid nature of term deposits, said PIMCO’s head of global wealth management, Peter Dorrian.
Dorrian noted that the survey revealed that on average advisers allocate 29 per cent of their clients’ 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,” said Dorrian.
He added that not only were they locking their clients’ cash away where they would potentially incur hefty break fees if they needed to access it, but they could also miss out on higher returns in a rising interest rate environment.
Dorrian asserted that term deposits were also not technically defensive assets, which would perform better when riskier assets perform poorly. He said term deposits would 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 added.
Dorrian said these findings revealed a need for greater education around term deposits, adding that half the advisers surveyed rated their knowledge of fixed interest markets as average. Some 53 per cent of clients believed fixed interest products were too technical, while 39 per cent stated that education material by product providers was inadequate.
“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,” said Dorrian.
The survey also found that 42 per cent of advisers were favouring actively managed fixed interest funds compared to term deposits and other fixed interest products.
AUTHOR
Caroline Munro
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