Fractional share fix elusive for smaller investors

Fractional share fix elusive for smaller investors

Roadblocks delaying the creation of an industry-wide way to implement fractional share trading mean smaller model portfolio clients may face a long wait for equivalence with their larger peers.

Calls for the introduction of fractional share trading have grown in tandem with the rise of model portfolios on platforms.

The inability to trade small portions of exchange-traded funds (ETFs) or investment trusts often means smaller clients hold products in different proportions to larger clients with the same risk profile. In many cases, it means model portfolios do not hold the products at all.

Article continues after advert

The Tax Incentivised Savings Association (Tisa) trade body launched a working group last August to address the issue, but has been confronted with legal and operational problems.

Discretionary managers, meanwhile, are continuing to adjust their investment strategies until a solution is found.

Jonathan Webster-Smith, head of managed portfolio service at Brooks Macdonald, said: ““We have ETFs and we have to replace them on platforms, so we can’t mirror what we do [elsewhere]. If we think it’s the right investment we should be able to put that on platforms. This has an impact on model portfolios, which are growing and are a bigger part of the market.”

Although fractional dealing in open-ended investment companies is permitted, most ETFs are not eligible because they are domiciled in Ireland.

Tisa is now thought to be exploring the feasibility of fractional dealing in Irish structures, which may mean changes to European law.

Lynn Hutchinson, an ETF specialist at Charles Stanley, said she did not expect developments in the near future.

She added: “It has come on the radar a few times over the past few years, but platforms are slow to do anything with their infrastructure. This will take them a while to sort out.”

Industry view

Guy Foster, head of research at Brewin Dolphin, said: “Introducing fractional dealing would expand the range of potential investments for clients. Optically at least, you would get a lower cost from ETFs.”