Earning your keep

Why do people pay financial advisers? The answer, of course, is for their expertise and experience – they trust advisers to help them make smarter investment decisions and financial planning choices.

This statement of the rather obvious struck me after reading a recent article in one of the trade publications that caters to the financial adviser community. It looked at the first-quarter performance of Global Equity and Global Equity Income funds, picking out two investment companies that have delivered stellar returns. Then it quoted a financial adviser who said he preferred not to recommend closed-end funds because he found their structures “complicated to explain to clients”.

Not to be rude to the adviser in question, but isn’t that what he’s supposed to earn his fees for? Were I to discover that my financial adviser had decided not to recommend an investment product that might produce superior returns to the one he was actually suggesting simply because the former was a more difficult concept to articulate, I might be tempted to take my business elsewhere.

It’s a bit of a cheap shot. The fact that shares in an investment company trade at a discount or premium to the value of the underlying assets does add an extra element of complexity. Advisers have to take a view on how that valuation might change, as well as focusing on the assets themselves.

Moreover, all the evidence suggests that many advisers are now making more use of investment companies than ever before. In each of the past two years, advisers have bought the best part of £1bn worth of closed-end funds for their clients.

Still, it is disappointing to hear some advisers trot out the same old myths about investment companies. The idea that a closed-ended fund is not suitable for most clients should now be completely out-of-date.

Not least this is because for every feature of an investment company that you might consider to be a disadvantage, there is an equally compelling benefit that offers compensation.

So, for example, if you think the premium/discount issue is problematic, what about the fact that the structure of an investment company insulates managers and investors alike from the issues around dealing with large inflows and outflows of funds. The structure of an open-ended fund is often just as problematic, taking into account liquidity issues.

Other attractions of investment companies include their ability to take on gearing and the fact they may retain income to smooth out dividend distributions from one year to next. Then there arguably the biggest advantage of all: the fact investment companies have independent boards with legally binding duties to protect the interest of shareholders. Open-ended funds, by contrast, are creations of the fund managers that run them.

The best financial advisers increasingly recognise the value of these benefits, which is why investment company purchases by intermediaries have soared in recent years. And, yes, these funds can take a bit longer to explain to clients – but that’s a challenge that advisers shouldn’t be afraid of.