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What do financial advisers really think about investment companies?

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25 November 2016

David Prosser discusses the recent research from Unbiased and the AIC.

New research published jointly by the AIC and Unbiased shines a light on exactly that question – and contrary to the widespread perception that advisers are nervous about the closed-ended fund sector, the research shows close to half have put investment companies into client portfolios; even more telling is the fact that more than a third of advisers own investment companies for themselves.

It is now almost four years since the retail distribution review (RDR) levelled the playing field between open-ended funds, which had previously been able to pay commissions to advisers but were subsequently banned from doing so, and investment companies, which have never been able to remunerate intermediaries. The reforms did not transform the fortunes of closed-ended funds in an instant, but this research shows steady progress is being made.

Some 43 per cent of advisers now use investment companies in client portfolios, up from 36 per cent prior to RDR; 35 per cent of advisers hold investment companies in their own portfolios. Asked why they are investing, advisers point to the sector’s strong long-term performance, its competitive charges and the potential for closed-ended funds to invest in a broader range of assets.

Given these attractions, you might wonder why more advisers have not been won over – after all, the AIC and Unbiased research also found that 98 per cent of advisers hold open-ended funds in client portfolios. That’s still quite a gap.

The answer lies in the reasons cited by financial advisers for not buying investment companies. The biggest concern was the fact that investment companies take on gearing, a worry cited by 40 per cent of advisers. A further 30 per cent conceded their lack of industry knowledge was holding them back, while 24 per cent pointed to the problem of getting access to investment companies on some platforms.

Gearing is an interesting debate. Clearly, many advisers feel uncomfortable with collective fund exposure where borrowing may exaggerate returns, for better or for worse. However, it’s worth pointing out that across the sector as a whole, the AIC’s statistics show gearing is running at an average of just 7 per cent right now*. And even if you don’t want to expose clients to this modest level of gearing, there are plenty of funds that have none at all - investing in a closed-ended fund doesn’t have to mean exposure to gearing.

This message may sink in as the AIC continues to address advisers’ second concern. There is no doubt that in the immediate aftermath of RDR, many advisers lacked sufficient knowledge of investment companies to confidently recommend them to clients. Since then, the AIC’s education campaigns have helped advisers all around the country to build their understanding of the sector – this work is ongoing, which is important as there is still a knowledge gap to close.

As for the platform issue, we are slowly but surely making progress. Fidelity began offering a much broader selection of investment companies on its FundsNetwork platform earlier this year while Cofunds is following suit after its purchase by Aegon; Old Mutual too has signalled its intention to offer investment companies. Meanwhile, several platforms, including Alliance Trust and Ascentric, already offer a full service.

The bottom line is that the stars are now beginning to align for investment companies. More advisers than ever before are now beginning to consider the sector and the barriers preventing them doing so are being overcome. Still, there is plenty more work to be done – given the attractions of the sector for so many clients, it makes no sense that twice as many advisers use open-ended funds as investment companies. This isn’t a question of ‘either-or’ – both types of fund will be appropriate to particular clients.

*gearing average correct as at 22 November 2016.  

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