When you speak with your investment adviser about your investment goals, they are probably not recommending investment trusts. Why? Because advisers generally don’t get paid a commission for making these recommendations. They are more likely to get paid a commission for recommending an open-ended fund (OEIC) or a unit trust.
Commissions clearly have the potential to warp the advice you receive from your investment adviser, and these commissions have kept investment trusts from becoming more mainstream.
Furthermore, the platforms that many advisers use to buy and sell for their clients do not offer investment trusts as an option. Roughly 60% of assets under advisory are associated with three large fund platforms: Skandia, Cofunds and FundsNetwork. With the exception of FundsNetwork, which offers only Fidelity investment trusts, there are no other investment trusts available for sale on any of these platforms.
This double whammy--lack of commission plus lack of availability--has worked against investment trusts, even though they could be considered a very good investment for many kinds of investors and savers. Specifically, many investment trusts (also known as closed-end funds) are well known for paying out dividends. Investment trusts can also retain cash in revenue reserves to help smooth dividend payments during difficult years. This can be highly desirable for income seekers.
Thankfully, change is coming to the industry.
In 2013 the rules for advisers will change. The UK Retail Distribution Review (RDR) will come into effect on January 1, 2013, which will ensure that there will be far more transparency in the investment advice community. The new RDR rules will ban independent financial advisers (IFAs) from making commissions by recommending specific funds to their clients. Now they will have to consider all investments, not just the ones that offer them extra payments. These changes may result in investment advisers beginning to recommend investment trusts more frequently to their clients.
But the problem surrounding lack of availability via fund platforms may persist. Currently financial advisers place most of their business through fund platforms, most of which do not offer investment trusts. Is that because there is no demand, or because lack of availability perpetuates a lack of demand?
To begin generating demand, financial advisers need more education and tools to allow them to better understand investment trusts and compare them with a broader peer group of open-ended funds and ETFs, according to James Saunders Watson, head of investment trust marketing at JP Morgan Asset Management, and Freddie Findlater, head of adviser platforms at The Platforum, who spoke recently at a webinar conference held by BrightTALK. Further education will allow them to see how investment trusts can fit into their client portfolios, they said.
Panelists from this webinar also agreed that the upcoming RDR changes will prevent trading platforms from receiving payments from product providers, which will increase transparency and level the playing field between open-ended funds and investment trusts. Until recently, most platforms, including the three dominant players, followed the ‘bundled’ charging model, where platforms received payments from product providers for their services, usually in the form of a rebate on the fund manager's charges. Since investment trusts do not pay fund manager rebates, there was less incentive for fund supermarkets to sell their products. But now fund platforms are switching to the ‘unbundled’ model, where customers will be charged a separate fee to make a purchase instead of paying indirectly via product charges. It is argued that this will add more clarity and improve comparisons between different investment vehicles.
All said, I believe the upcoming RDR changes should level the playing field between investment trusts, open-ended funds and ETFs. However, it’s disappointing to see that some of the concerns, including education and comparability, have remained since the RDR discussion began. Panelists mentioned a few places to address the above issues, with the AIC and Morningstar.co.uk providing in-depth information and educational tools. Morningstar.co.uk’s educational area dedicated to investment trusts is a good place to start to learn more about closed-end funds. Plus, we have a number of tools including a screener and ratings to help you find suitable investments. Specifically, our Analyst Ratings use quantitative and qualitative research to predict a fund’s future success. These ratings compare investment trusts with peers in the open-end fund and ETF categories, providing a whole-of-market comparison tool that will help you with your financial decisions.
