Outsourcing has seen growth in investment trusts: Lowe

More investors are buying closed-end funds without knowing it, because advisers have outsourced clients into discretionary managed funds that use investment trusts, Jamie Lowe has said.

Mr Lowe, the head of Investec’s closed-end funds team, said the retail distribution review had drawn money into the sector because advisers now outsourced to wealth management firms.

He said: “Previously, retail investors have never bought into investment trusts because they have never had commission on them, so for an adviser it was difficult to make money.

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“I think RDR has had both positives and negatives, but I think many wealth management groups are attracting a lot of the assets from advisers, so money has naturally come into the investment trusts sector.

“The net benefit is that more of that bottom-end retail money has come to the higher-end companies, and they have been bigger users of closed-ended funds.”

Therefore, he added, some people may be investing in investment trusts without knowing they are doing so.

Fin Bodman, who also works in Investec’s closed-end funds team, said: “IFAs used to run their own portfolios whereas now they act as a funnel and the money is managed by the more experienced firms.”

Investec, based in London, launched its closed-end funds team in November 2011.

The RDR, which came into effect in January 2013, brought an end to the sales-driven commission model and meant advisers have to now focus on treating clients fairly.

It meant some advisers now outsource some elements of the management of their clients’ investment portfolios to focus on other financial planning issues.

Reaction round-up

Mark Dampier, head of research for Bristol-based Hargreaves Lansdown, said: “IFAs not only have an onus to make sure their clients know where they are investing, but it is their job to do so.

“I have got no problem with people buying investment trusts, but if the real mass market went over to closed-ended funds it would destroy the market.

“I question the price of some of the investment trusts. I would suggest a lot of the increase has come through the discretionary fund manager model so people are buying something which is supposedly cheaper and are actually paying more for it.”

Gordon Bowden, director of Buckinghamshire-based Quainton Hills Financial Planning, said: “The obvious issue is that in a post-commission world it doesn’t make a difference whether IFAs are recommended open-end funds or closed-end funds because there is no commission bias.

“Keeping on top of where the money is being invested and reviewing it regularly is part of the service. But we don’t see the benefit in introducing someone else who will add another layer of charges.”