Author: Will Roberts
Professional Adviser | 14 Mar 2012 | 08:00
Article from IFAonline.co.uk
Platform unbundling will no doubt make investment trusts more accessible – but the jury is still out on whether it will make them more popular.
Investment trusts have long operated in the shadow of OEICs and unit trusts. The products’ complexity, inability to pay commission and higher risk when compared to their open-ended cousins has hindered wider take-up.
Another major factor limiting their appeal is the fact investment trusts cannot be accessed via the three big fund platforms – Skandia, Cofunds and FundsNetwork – which operate bundled charging models.
This is because investment trusts do not pay fund manager rebates – a vital cog in the bundled structure.
But things are set to change as the three ‘big guns’ prepare to launch unbundled offerings in anticipation of a likely ban on platform rebates.
FundsNetwork, which is rolling out an unbundled model in a matter of weeks, plans to add investment trusts in November. Cofunds, meanwhile, has opted not to provide a share trading service itself but is making investment trusts available via a link-up with Barclays.
However Skandia, citing lack of demand, has no immediate plans to offer the products.
Popular
So, with FundsNetwork and Cofunds laying out concrete plans in the investment trust arena, are the products set to enjoy a boom in popularity?
MPL Wealth Management client services manager, Adam Stewart, said a key reason his firm has not been a big user of investment trusts is because they have not been available on all platforms.
“Platform unbundling will definitely make investment trusts more popular,” he said. “After unbundling it will be incumbent on advisers to consider them as an option for clients.”
The Nucleus wrap currently offers about 300 investment trusts, and business development director Barry Neilson agreed unbundling could shake up the market.
“If supermarkets transition to a wrap model there may well be a bigger uptake of investment trusts,” he said.
“Unbundled platforms have models which can facilitate adviser charging, so IFAs can receive adviser charges on investment trusts.”
But others remain sceptical. Skandia said the products’ availability on platforms would not over-ride a more important factor: investor demand. Ascentric also doubts unbundling will have much of an impact.
“There’s no reason why other platforms adopting investment trusts will make uptake any higher,” said managing director Hugo Thorman. “The problem with investment trusts is they are quite difficult to accommodate in a risk-profiling process because they are allowed to gear.”
Thorman added investment trusts are perhaps better suited to execution-only platforms due to the problems advisers face incorporating them into their client risk analysis.
Platform unbundling will no doubt make investment trusts more accessible – but the jury is still out on whether it will make them more popular.
He also argued the commission disincentive does not fully explain why investment trusts are not used more widely now, pointing out index trackers – which do not pay commission either – are popular on the platform.
The ‘fee factor’ is a further problem.
Aegon head of platform sales Martin Coyle said extra fees applied to investment trusts held within portfolios could be hindering uptake.
“We are seeing a move towards model portfolio use and if you have an investment trust within a portfolio there is a cost associated with trading it,” he said. “The cost of rebalancing a portfolio might outweigh the benefits.”
He added demand for investment trusts on the Aegon Retirement Choices platform – an unbundled proposition which launched in November – has been limited to date.
The fact stamp duty is payable on purchases could also prove a deterrent.
“I can see a client pointing out they do not have to pay stamp duty on an OEIC structure,” said MPL’s Stewart.
While unbundling will no doubt make investment trusts more accessible, this does not necessarily equate to wider usage.
If the products are to break into the investment mainstream then providers will need to communicate their benefits more effectively. Historically, unit trusts have been marketed far more aggressively than their closed-ended counterparts.
“Perhaps the investment trust providers have to get out there and explain their products in a simple way to the end investor,” said Cofunds head of proposition Verona Smith. “At the moment they are not doing that and this is a challenge for them.”
Nucleus’s Neilson thinks a more intensive marketing strategy could pay dividends.
“In the medium term, if investment trust companies market their services better and the stock market continues to rise, we will see wider usage,” he said.
Whether the move to unbundled platforms will create fresh appetite for investment trusts is open to debate. Perhaps the greatest boost will come from the regulator in the form of the retail distribution review and its wider whole-of-market requirements on IFAs.
“The RDR will put investment trusts more on the radar because advisers who want to remain fully independent will absolutely have to consider them,” said Prosperity Independent Financial Advisors & Stockbrokers director Mark Newman.
Unbundling:
What the ‘big three’ say
FundsNetwork
• Adding investment trusts in the second half of this year – expected to be November.
• Will initially offer the most popular and liquid trusts before expanding its range.
• Launching investment trusts in response to adviser demand.
Cofunds
• Will not provide a share trading service directly but make investment trusts available via a link-up with Barclays.
• Platform teamed up with Barclays at the end of last year to launch a pilot share trading service enabling advisers to trade any investment listed on the London Stock Exchange – including investment trusts, exchanges traded funds (ETFs) and stocks.
• The service, piloted with ten advisory firms, is expected to be rolled out more widely later this year.
Skandia
• No immediate plans to offer investment trusts – current focus is RDR.
• Investment trusts an option in the future as platform looks to expand investment range.
• Platform said it sees limited demand for investment trusts and ETFs compared to unit trusts and OEICs.
Article from IFAonline.co.uk
