Barriers to advisers using investment companies overstated

According to research carried out by the lang cat, the preference for open-ended funds over investment trusts among financial advisers is not always justified.

Funds and Investment Trusts October 9, 2019 by Tom Bailey

In July this year, investment trust assets under management passed the £200 billion mark for the first time, up from £100 billion six and a half years ago.

However, despite this surge in popularity – and a growing body of literature suggesting their performance is superior to open-ended funds – the number of assets held by open-ended funds was still six times as large.

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One of the reasons for this discrepancy is a general preference for open-ended funds among financial advisers, who often cite several barriers that dissuade them from recommending trusts to their clients. However, according to new research carried out by the lang cat, commissioned by the Association of Investment Companies, some of those barriers are often overstated.

For example, many financial advisers state that the premium/discount mechanism adds an extra layer of complexity that increases risk and is also hard to explain to clients.

However, the lang cat report points out, not all advisers agree. Colin Low of Kingsfleet Wealth says: “The net result over time is that it makes no difference; these things even themselves out.”

Similarly, Andy Parkes of Financial Shop, says he is more likely to use investment trusts when the client expects to be invested for the longer term. He notes: “We generally try and use investment companies where the money is longer term, and we’re not going to need to pull down on the cash with any urgency.”

As well as the fact that an investment trust will trade on a premium or a discount, other features that investment trusts have in their armoury, such as the ability to gear, are also cited by advisers as being difficult to explain to clients.

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Low, however, dismisses these concerns. He says: “Just a bit of extra understanding of how trusts work can illustrate how these various issues are handled by investment trusts.

He continues: “It’s about looking for opportunities as well – there can be very good trusts out there trading at big discounts, but opportunities are being missed because of laziness and a lack of understanding. Too many advisers find reasons not to go down a certain route just because they don’t understand it.”

Financial advisers also often claim that there is a lack of information available on trusts. However, says the lang cat, this assertion is hard to square.

The report notes: “Ample investment company research providers – from Winterflood (albeit for a charge) to Kepler to Hardman & Co to Marten & Co to Edison – make their research widely available.”

At the same time, argues Peter Adcock of Adcock Financial: “Our research process isn’t hugely different [between open-ended and investment trusts], although you have to look at slightly different things.”

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Nick Britton, head of intermediary communications at the AIC, commented: “Our previous research highlighted a number of barriers which stop advisers using investment companies more widely. This report shows that some advisers readily overcome these challenges, or even see them as opportunities.

“The report challenges several preconceptions about adviser use of investment companies, namely that there is a shortage of information available, they are too complex, or that gearing, discounts or liquidity present insurmountable obstacles.”   

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Investment trusts

As someone that has used Investment Trusts for over 25 years I know the benefits well but explaining them to others is often an uphill struggle. Just try explaining a discount control mechanism to someone and watch as they switch off.

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