From January 1 2013 if advisers want to remain independent they will have to prove they have considered all investment options, including investment trusts, under the RDR.
Investment trusts are still seen by some as an almost niche area, particularly as many investment platforms do not have the ability to offer listed securities. The question is that if this changes after RDR implementation, will it make a difference in terms of popularity and usage of investment trusts?
Holly Mackay, managing director of The Platforum, points out that while there is approximately £175bn on UK platforms today, the vast majority of assets are in mutual funds.
She explains: “We think there are two key factors at play here. First, the fact that Skandia, Cofunds and Fidelity FundsNetwork do not offer listed securities today and they have approximately a 55 per cent adviser platform market share.
“Cofunds and Fidelity have both stated intentions to add listed securities to their platforms and Cofunds recently announced a deal with Barclays. So the world is changing.
“However, availability on the supermarket shelves does not mean people will necessarily buy. Many advisers we have interviewed are still a little uncomfortable with investment trusts. So while we think that investment trusts will make it to the aisles, we’re not convinced that they will start to fly off the shelves come January 2013.”
Michelle Woodburn, manager for fund group relations at Cofunds, explains the company recently appointed Barclays Stockbrokers to provide clients with the Cofunds Stock Trading Service, which has been piloted with an initial 10 accounts offering clients access to listed securities such as investment trusts and exchange traded funds.
“That is already up and running because we have had demand from a number of our clients to be able to access these investments via the Cofunds platform. We recognise that listed securities are important to an independent financial planner and we will look to roll out this pilot further,” she says.
“We still have on our radar more of a Cofunds solution to direct equities and ETFs and investment trusts, but to get it integrated onto the platform would [only happen] roughly mid 2013 at the earliest. Of course, there is this solution in place for those advisers that want it sooner than that.”
Fidelity FundsNetwork also notes the growing demand for investment trusts has encouraged them to expand the remit of the platform.
Klare Baldwin, head of marketing at FundsNetwork, says: “Investment trusts have long been a popular investment vehicle, but with the advent of the RDR a greater number of advisers will wish to consider these broader investment vehicles in their overall client recommendations. In response to increased adviser demand, FundsNetwork plans to add investment trusts on to the platform in the second half of this year.”
James de Sausmarez, head of investment trusts at Henderson Global Investors, admits that investment trusts are not going to be very successful in a post-RDR world if they’re not available on the platforms because advisers will be far less able to buy them.
But he adds: “There is no downside for investment trusts in the RDR. There is only upside. They will come under increasing scrutiny by IFAs. I think they will look at the low charges, they will look at the dividend track records, they will look at the performance and they will realise that investment trusts are an attractive alternative equity based investment vehicle to open ended investment vehicles.
“Obviously there is always room in portfolios for both but I think they will clearly be more attractive and get a wider audience than they have had perhaps historically.”
Tony Stenning, head of UK retail at BlackRock, suggests the new regulations will create a more level playing field. In particular, open-ended fund managers have historically offered IFAs commission if they recommend their products to clients, but investment trust managers have not. However, the RDR bans advisers from accepting commission on new business, which could work in investment trusts’ favour.
“If you look at the mass intermediary marketplace, one of the other key impediments to the usage of closed ended funds has been that they are not on these platforms. The functionality to deal in them has been limited.
“So where you’ve seen this increasing trend of the broader intermediary market effectively outsourcing their middle and back office functions to platforms, it would be almost incongruous to have kept a portion of the portfolio on a completely different system and somehow try to bring that together again for reporting purposes. That has been a challenge.”
However, not everyone is so positive about the effects of the RDR on investment trusts, either on or off platforms.
Dennis Hall, managing director of Yellowtail Financial Planning, argues the biggest problem for investment trusts is they either think the RDR will be the ‘white knight’ that delivers more investors to them through intermediaries, or they’ve already written off the intermediary market.
“I am seeing very little activity from investment trust managers or boards of directors promoting investment trusts. They’re not going to get listed on platforms unless the individual investment trust companies get out there and make it happen.
“Full on business-to-business platforms that are fully open architecture [and accept a full range of external products], such as Raymond James, Transact and so on, will have no problem dealing in investment trusts, but the other platforms/supermarkets are going to need convincing there is a market – and that means marketing, something investment trusts are pretty poor at,” he warns. The need to prove there is demand for the product is highlighted by the fact Skandia, one of the three largest platforms, is not yet planning to include the vehicles as part of its offering.
Graham Bentley, head of proposition at Skandia, explains: “We are always evolving the investment proposition on the platform, and this is likely to include the addition of further investment vehicles in future, including investment trusts.
“However, our development programme is defined by the needs of advisers and customers and investment trusts are not currently a top priority due to relatively low demand. We will consider investment trusts again after the RDR implementation date.”
This view is somewhat supported by research from consultancy firm Aim Two Three, whose survey of 462 IFAs about post-RDR advice shows 28.6 per cent of respondents would never consider investment trusts for their clients, and 33.6 per cent would never consider venture capital trusts (VCTs).
Mr Hall agrees that among advisers, investment trusts are used less frequently than other investment vehicles.
“There is a market and some advisers are better than others, but the bulk of them don’t go anywhere near them. Advisers that are already using investment trusts will continue to do so, but I doubt that there’ll be a significant upswing in usage, because there’s so little promotion. I don’t think there’s an ideal client that suits investment trust investment. They’re suitable for most people that use collective investments of one sort or another.”
Mr de Sausmarez adds that while investment trusts are more complicated than other vehicles, this should not necessarily put advisers off. Instead, they simply have to look at each vehicle on its own merit.
“You should look at what they deliver as being the most important thing. Investment trusts are an investment medium that will be a very useful additional choice for IFAs. Their charging structure and performance alone will make IFAs want to learn about them. I don’t think the fact they have discounts, premiums, bid/offer spreads and gearing, for example, will actually deter IFAs when they’ve seen how cost effective they can be and some of their other attractions.”
Nyree Stewart is deputy features editor at Investment Adviser
