The two words “yes, but…” sum up the attitude of many advisers to investment trusts.
Investment trusts are is something you keep an open mind about and you would happily use them, but something gets in the way.
That is why 95 per cent of assets on adviser platforms are still sitting in open-ended funds or cash, five years after the Retail Distribution Review (RDR) made considering them a must for every financial adviser.
There are various ‘buts’. A big one is platforms. How good are they at handling listed investments, such as investment trusts and exchange-traded funds? If they are not very good, or do not offer them at all, that is enough to put many people off, even if these investments may be suitable for clients.
A report recently released by the Lang Cat, commissioned by the Association of Investment Companies (AIC), contends that there is an “inherent market bias” against investment trusts and that the cost of trading them on some platforms can be “prohibitive”.
A lot of this boils down to the unhappy combination of high transaction fees (on some platforms) and unlimited ‘ad valorem’ custody charges (on most platforms). The report concludes that adviser platforms are still “hooked on the drug of unlimited percentage-based charging”.
You can see that by looking at direct-to-consumer platforms, many of which are very cost-effective for investment trusts. You can see it, too, by looking at the handful of adviser platforms which adopt an asset-neutral approach to pricing.
Figure 1: Investment trust custody charging
Source: The Lang Cat
There are seven adviser platforms, out of 19 major players, that would charge you exactly the same to hold a £50,000 portfolio of Oeics as a £50,000 portfolio of investment trusts. These are: AJ Bell, Alliance Trust Savings, Ascentric, FundsNetwork, Praemium, Raymond James and 7IM.
Most of these have in-house dealing desks, rather than relying on an external stockbroker.
So platform pricing structures do not have to be an insuperable obstacle. In the words of the Lang Cat report: “If you’re (a) determined to move outside of open-ended funds and (b) willing to put cost as a main factor in a selection/due diligence exercise, many platforms accommodate investment companies without price being a barrier.”
Ease of use
Of course, cost is not everything. Issues around ease of use also loomed large for advisers. And let us not forget there are still one or two adviser platforms that do not offer investment trusts at all.
So if platforms are a barrier to competition between different fund types, should the FCA be doing something about it?
Unfortunately, the 110-page interim report of the FCA’s Investment Platforms Market Study skirted the issue. Instead, it obsessed about the ability (or inability) of platforms to negotiate discounts with asset managers, discounts which can be as little as one basis point.