Time for change

How time flies: in just two weeks’ time it will be six years since what was then still the Financial Services Authority implemented the retail distribution review. Investment companies have come a long way since then, partly thanks to the levelling of the playing field delivered by the regulation, and partly thanks to their own efforts. But disappointingly, new research suggests there may be more work to do than is widely realised.

A survey published last week by Cicero Research reveals that while 29 per cent of financial advisers routinely consider investment companies when thinking about how to invest for clients, 45 per cent look to the sector only as an exception – and 26 per cent would not recommend a closed-ended fund under any circumstances.

Those are depressing numbers. Even if you don’t buy the argument that investment companies very often offer a better option than an open-ended fund – and there are compelling reasons to make that claim – it seems bizarre to rule out ever recommending one, or to say you will do so only rarely. Clients expect their advisers to have scanned the entire marketplace before recommending the best way to invest – this research suggests many are not doing so.

The obvious question is why. And here again, Cicero’s research is disappointing. It suggests the biggest issue putting off advisers reluctant to recommend investment companies is lack of knowledge, cited by 57 per cent. Another 36 per cent say they do not like the complexity of closed-ended funds

The first of those two statistics is difficult to forgive. Investment companies are mainstream products that have been around in one form or another for more than a century. It’s difficult to understand how an adviser claiming to be sufficiently well-qualified and experienced to make investment recommendations to clients could justify not knowing enough about the closed-ended sector to be confident about using it.

As for the second argument, the complaint about complexity will be familiar to anyone who has followed advisers’ attitudes towards investment companies over the years. It’s frustrating: there is no denying that the closed-ended structure does have additional nuances, but these features are also what often gives it a competitive advantage.

The fact shares trade at a discount or premium to the underlying asset value, for example, is a function of a structure that protects investors from the effects of fund inflows and outflows. That investment companies feature gearing worries some advisers but is also responsible for boosting returns in rising markets.

We shouldn’t be too churlish. All the evidence is that financial advisers are more inclined to recommend investment companies today than at any time in living memory. Data published back in March suggests advisers bought almost £1bn worth of investment company shares through online platforms in 2017 – a 46 per cent increase on the previous year.

Clearly, more and more advisers are waking up to the possibilities that investment companies offer. That doesn’t mean eschewing other types of fund, but simply adding closed-ended vehicles to the list of potential client investments. For the rest, it’s time to get on board. Reluctant advisers concerned about their knowledge of the sector or its complexity should make it a new year’s resolution to get to grips with investment companies.