Platforum: What is stopping advisers recommending investment trusts?

Miranda Seath

Some industry commentators predicted that investment trust sales via advisers would take off following the RDR.

Direct investors have long been fans of investment trusts and some investment trust providers regard them as a more valuable market than the clients of financial advisers.

But prior to the RDR advisers were unlikely to receive any commission for recommending investment trusts unless they sold clients F&C or Witan.

Yet post-RDR and post-commission most advisers still avoid investment trusts – the question is why?

As part of our research for our forthcoming report, UK Fund Distribution: Investment Trusts, we have tried to answer this question.

Part of the answer is that investment trusts are generally more complicated products than open-ended mutual funds. So researching investment trusts is a good deal more involved.

Discounts or premiums can make individual investment trusts more or less attractive at different times, while gearing or leverage is perceived as int-
roducing an element of extra risk.

Where there is complexity – especially where it involves potentially higher risks – advisers need to provide more explanations to clients.

Some advisers would argue that investment trusts are probably mostly suitable for more knowledgeable and sophisticated clients.

But lack of liquidity is advisers’ most common reservation about investment trusts. This feeds into the perception that they cannot be held in model portfolios because of the ensuing difficulties in rebalancing.

The thorny issue of holding investment trusts in model portfolios became a familiar refrain when we spoke to advisers for this research. Certainly, there are difficulties to overcome.

One DFM made the point to us that they are perfectly happy to hold investment trusts in bespoke portfolios.

But where advisers are outsourcing to their model portfolio service, they mostly won’t include investment trusts.

The risk of poor liquidity when rebalancing a model portfolio might hold things up.

Importantly, where DFMs are committed to rebalancing on set dates they have little control over whether they would be trading any investment trusts at a premium or a discount.

Nevertheless, financial advisers who are significant users of investment trusts regard perceived lack of liquidity as a rather lame excuse.

One adviser we talked to argues that some investment trusts are illiquid but many investment trusts are perfectly easy to trade: it is all a matter of doing the right due diligence.

The sticky issue of liquidity at the rebalance might be improved by fractional trading of shares.

We are seeing some movement on fractional trading, spearheaded by Winterflood, although it is said to be operationally more complicated to trade investment trusts fractionally than it is to trade ETFs.

If more platforms follow 7IM and Ascentric and stop charging advisers for trading securities, this might remove another barrier to advisers recommending investment trusts.

The availability of investment trusts on some of the largest adviser platforms is another common obstacle. But advisers using FundsNetwork now have access to investment trusts and Cofunds and Old Mutual Wealth will be

We are also seeing evidence that more research agencies are offering robust research on investment trusts while investment trusts are also now starting to be included on fund panels at major adviser networks, although clearly there is still some way to go here.

We are pleased to hear that some advisers do seem to be showing signs of interest in recommending investment trusts to their clients – especially when they are hunting for income.

The dividend yield on some investment trusts – especially those standing at a discount – can make them attractive income yielding vehicles, especially for clients in decumulation.

However, we are surprised that so few advisers are exploiting the advantages of the investment trust structure for income-hungry clients.

Miranda Seath is a senior researcher at Platforum