‘Opaque’ charging will put off clients, trusts warned

Investment companies are not doing enough to benefit from the retail distribution review (RDR) says IFA Dennis Hall.

Last week the Association of Investment Companies (AIC) revealed that 42% of advisers intend to increase allocation to investment companies in the next three years and that attitudes are shifting from “indifferent” to “positive”, based largely on the drive for lower costs.

But Dennis Hall, the founder of Yellowtail Financial Planning, warned delegates at the annual AIC conference that the industry was in danger of being held back by complacency and opaque charging structures. “I don’t seriously believe RDR will compel an adviser to recommend an investment trust to their clients unless you begin to do something about it,” he told an audience of investment trust directors and chairmen.

There were two particular points investment companies needed to consider if trusts were fully to realise the long-term opportunities RDR presents, Hall said.

First, while RDR would dispose of commission in principle, it looked set to remain in practice as “customer agreed remuneration”, upsetting the notion that a lack of commission-based fees would automatically generate interest in trusts. “Many of my peers rely on providers to facilitate payment and my peers will continue to use those providers that deliver a facility for customer-agreed remuneration because this is the path of least resistance,” he said.

Hall revealed that he had personally lost 10% of his turnover ­because of one client’s ­reluctance to pay a fee, which eventually resulted in the loss of the client.

Secondly, investors and advisers were often put off by trusts exhibiting “opaque charging structures” that proved too complicated to consider above simpler, open-ended products, said Hall. “Performance fees, tiered structures, ’high water­marks’ – these things don’t engender … trust because clients will tell you they understand [them] until they see the fees coming through … And they don’t like it.”

Hall urged delegates to be more proactive in promoting the investment trust model and not to confuse a change in rules with a change in attitude among advisers.

“I don’t seriously believe there’s going to be an overnight shift in the attitudes of advisers and, more ­importantly, their compliance ­departments to bring something on that looks a little more complex to them and may carry a little more investment risk because they don’t understand it,” he said