Several advisers have hit back strongly over claims they have failed to broaden their investment horizons post-Retail Distribution Review, blaming product complexity, higher risks and lack of access as reasons for underwhelming sales of trusts since 2013.
Providers speculated that the RDR would level the playing field, as advisers could no longer receive trail commission on new business from open-ended funds and the independence rules would force advisers them to consider closed-ended options.
However, as reported by FTAdviser previously, in the fourth quarter of 2013 investment trust sales via advisers reached a record high of £86m, a drop in the ocean compared to sales of open-ended funds, which reached £5.9bn overall in the same period.
A survey of 205 UK financial advisers by JPMorgan Asset Management, the largest investment trust provider in the UK, found that the biggest barriers to advisers recommending the vehicles were lack of knowledge (57 per cent), availability on platforms (55 per cent), perception of complexity (36 per cent) and industry inertia (33 per cent).
The ‘big three’ adviser platforms, Cofunds, FundsNetwork and Skandia, do not offer trusts, though six of the smaller wraps, Ascentric, Elevate, Novia, Nucleus, Raymond James Investment Services and Transact, do offer them.
Phil Billingham, chartered financial planner and founder of the Phil Billingham Partnership, said that the investment trust industry had blamed advisers for not “selling their products” before the RDR because of the lack of commission and were hoping RDR would force the issue.
However, he cited potential premiums and secondary market liquidity concerns as examples of the sort of complexity which explains why sales have not shifted more significantly.
“Investment trusts have basically two sales points: they are a cheaper way to access the same asset classes than unit trusts and Oeics, and there are opportunities to make more money because... [historically] trusts have traded at a discount to net asset value.
“The second argument is a double edged sword; if a share price can trade at a discount to Nav then why can’t it trade at a premium, which of course many of them now do? You’ve got to be aware there’s a mechanism within them that adds risk, with liquidity concerns given the gearing and secondary market.
“Therefore we might not go full speed into these products. I’m not saying we don’t use them, we do, and I think most advisers do... but sometimes you’ve got to blame the product not the middleman.”
Robin Sainty, chartered financial planner at Nurture Financial Planning, agreed that there are a couple of reasons for the slow take-up, with complexity being the first.
He said: “There is inevitably a fear of breaking compliance rules on products that are not ‘mainstream’ and which advisers may be less confident about in terms of their own understanding.
“I think another factor is that a client needs to exhibit a fairly high risk profile for VCTs and investment trusts to be recommended, and our experience of profiling tools is that they tend to result in a lot of 4 to 6s out of 10.”
Jonothan McColgan, director and chartered financial planner at Combined Financial Strategies, told FTAdviser that the problem is not that advisers have not broadened their horizons, rather that the products are not suitable for the majority of clients.
“You also have to remember that investments trusts are geared investments that magnify the affect of the market they invest in, also their price volatility can be enhanced as they are closed-ended and their own share price is subject to investor sentiment.”
“Also, one of the main problems with IT investments is that they tend to be treated as one sector by many of the research houses making effective research and comparison of funds quite difficult,” said Mr McColgan.
He pointed out that RDR led to a squeeze on open-ended fund charges, meaning the lower charging argument in favour of investment trusts is also reducing, while there has been a proliferation of other cheap passive products like exchange traded funds.
Mr Billingham agreed that: “If you look at the current marketplace, we’re in a position where you can access asset classes a lot cheaper than most investment trusts if you’re willing to go passive, its not just a cost conversation anymore.”
Mr Mitchell responded that: “Whilst there has been a closing of the gap, we know that its the net performance that really matters to clients when the difference between fees is so close.”
