A new study has found that 35% of financial advisers are using smoothed funds for new client money despite concerns about their cost and transparency.

The number using lower risk smoothed funds (35%) is higher than the number of advisers using annuities (32%), the report found.

The report by financial consultancy NextWealth found that the number using smoothed funds was well below those using multi asset funds (59%) and discretionary model portfolio services (48%).

M&G’s giant £64bn PruFund dominates the smoothed fund sector, NextWealth’s first Smoothed Funds Proposition and Distribution Report reveals.

The report compared the views of adviser users and non-users of smoothed funds and found sharply polarised views.

Those who recommend smoothed funds say they play an important role in client portfolios for low risk/cautious clients and retired drawdown clients, mitigating sequence risk. Those who do not, cite higher costs, concerns about transparency and problems explaining the smoothing mechanism to clients.

While M&G's PruFund dominates the sector newer entrants are starting to gain traction. M&G has captured 90% of assets in smoothed funds, but only 78% of advisers said they used M&G. Though their share of assets in smoothed funds remains low, 25% of advisers are now using solutions from newer entrants Aviva and LV=, which NextWealth says could reflect an “increasing openness” to using new smoothed fund propositions.

One barrier to using smoothed funds, according to advisers, is cost. The report found that the ongoing charges figure (OCF) for smoothed funds ranged from 0.58% to 1.37% - significantly higher than the average total cost paid by advised clients for funds (0.31%) or for discretionary model portfolios (0.54%).

The report identified two main areas of potential growth for smoothed fund providers: converting non-users – particularly advisers already recommending annuities or those using multi-asset funds - and expanding the 'share of wallet' with existing users. Over half of advisers who use smoothed funds do so for 10% or less of client assets. Some have inherited these assets, while others recommend then for very risk averse clients.

Heather Hopkins, MD of NextWealth, said: “Smoothed funds elicit strong views from advisers who sit in opposing camps depending on whether they’re users or non-users.

“For many they are a ‘love it or leave it’ solution. Aficionados view them as an essential tool to manage client outcomes and mitigate sequencing risk, in particular riding out volatility for cautious or retired clients. For others, they’re ‘no go’, raising questions around value and transparency and problems with client understanding.

”Several advisers we interviewed expressed a desire for greater clarity on what smoothing costs the client, what instruments are used, and how returns are impacted in different market conditions.”

“Again, providers must do more to show how smoothing delivers value for the client, especially when priced at a premium. There’s an opportunity to grow this market - but only if providers work on transparency and equip advisers with the information they need to feel confident in their recommendations.”

“We think the best opportunity to grow this market lies with what we call ‘reluctant’ users. They’re already familiar with the product but use it in narrow circumstances. Focusing on the role smoothing can play to support clients with a very low tolerance to risk will nudge doors open. But providers need to evidence value more clearly and support advisers in understanding and communicating smoothing mechanisms.”

• The report combined a survey of 200 financial advice professionals (June 2025), interviews with 8 investment decision-makers at advice firms, data and input from 4 leading smoothed fund providers and comparative analysis of propositions, smoothing methodologies, platform access, pricing and adviser sentiment.