The same old story?

Investment company managers must sometimes feel as if they’re banging their heads against a brick wall. In the ten years since the Retail Distribution Review shook up the funds sector, they have been working hard to make their case to financial advisers. But for many of those advisers, managers’ pleas continue to fall on deaf ears.

Just one in four of the 6,000 or so advisers on Transact use investment companies, the investment platform’s chief executive has just told the Association of Investment Companies’ annual conference. Investment company assets account for around 5% of all assets held on the platform, a percentage that has barely changed over the past decade.

Transact’s message to the investment companies sector was that more education and promotion may be required. Well, yes, that may indeed prove worthwhile. Equally, however, at what stage do financial advisers take responsibility for ensuring their clients have every possible advantage at their disposal?

The case for investment companies could hardly be clearer. Across multiple sectors, they have a track record, over the long term, of outperforming other types of collective fund. Investment companies have structural advantages that could not be more useful for income-seeking investors. And in illiquid asset classes, from property to infrastructure, they provide a far less risky way to secure exposure; the travails of open-ended property funds have shown that time and again.

Naturally, that doesn’t mean investment companies are right for every single client an adviser may have. Some advisers are nervous about the gearing that funds take on, which can increase volatility. Others fret about the structure of investment companies, which means their shares often trade at discounts or premiums to the value of the underlying assets; this is perceived as adding complexity.

There is also a problem for larger advisers, including intermediaries such as the big investment platforms. Their scale makes it more difficult for them to recommend smaller investment companies, for fear of adversely moving the market.

Nevertheless, it cannot possibly be the case that the 75% of advisers on the Transact platform who don’t use investment companies have looked at the industry and decided these funds are not for their clients. That just doesn’t add up.

Rather, it seems far more likely that many of these advisers are simply stuck in their ways. They invest only in open-ended funds because that’s what they have always done, irrespective of the merits of alternative structures.

Pre-RDR, of course, advisers earned commissions from open-ended funds when recommending them to clients, something that was off-limits to investment companies. But now commissions have been abolished, advisers no longer have a pecuniary motive for disregarding investment companies; unfortunately, old habits die hard.

The really disappointing thing here is that all the evidence suggests investors themselves are embracing investment companies. Data from interactive investor reveals that the share of investment company assets on its platform – where individuals are making their own purchasing decisions rather than depending on advisers – has doubled over the past decade. They see the case for investment companies, even if advisers don’t.

The bottom line is that advisers who simply look past a range of funds that might offer their clients real benefits are not serving those clients properly. It’s one thing for advisers to consider investment companies on behalf of an investor before rejecting them for a rational reason. It’s quite another just not to bother looking – which is what the numbers suggest is really going on here.