Are there any common features among the IFA firms that use investment companies?

Perhaps surprisingly, the quantitative survey uncovered little commonality among advisers using investment companies. In other words, advisers who use investment companies may be from firms that are small, medium-sized or large; investment company users are not, on average, more highly qualified than non-users; and they are not likely to be either older or younger than non-users. The only differences identified between the profiles of users and non-users were not statistically significant. This indicates there may be a broad potential market for investment companies among adviser firms, though it also makes identifying that market harder.

What reasons do IFAs give for non-use of investment companies?

The quantitative survey suggested that the most significant barrier to IFA use of investment companies was that advisers rarely hear about the benefits of investment companies from business development managers (BDMs), sales contacts or fund managers at asset management groups, with 61% agreeing with this statement. Other important barriers according to the quantitative survey were potential liquidity issues (56%), perceived complexity (49%), a lack of information/education (48%) and investment companies not featuring in the filters or screens that IFAs and paraplanners use to select investments (48%). Interestingly, fewer advisers had a genuine dislike of investment companies, with 30% agreeing that investment companies had “certain product features I don’t like” and only 5% citing a “bad experience” with investment companies. This latter finding suggests that the split capital crisis may no longer factor significantly among advisers’ concerns about investment companies.

How did the findings of the in-depth interviews compare with the quantitative survey?

From conducting the 32 in-depth interviews, Research in Finance uncovered “some disparity between what advisers say are the main issues with using investment companies, and what we perceive to be the true barriers”. For example, advisers’ stated concerns about liquidity may in fact highlight a knowledge gap. Researchers found some evidence that it was only when asked about liquidity that advisers considered it might be a barrier. In other words, some stated barriers to investment company use are in fact rationalisations of a decision that may have been made without detailed consideration of relevant information.

What did the research conclude were the true barriers to investment company use?

Putting together the results of the quantitative survey with the in-depth interviews, Research in Finance plotted what they consider to be the true barriers to investment companies on a timeline, based on where they impact advisers on a journey to investment company "acceptance".

More details on the six main barriers are below.

(1) The knowledge gap. Most advisers interviewed “either profess not to have good working knowledge of investment companies, or don’t even know enough to appreciate their lack of knowledge”. As an example of the latter category, one adviser said: “The worry about being closed-ended is if it's coming up to the end of the term and the markets were to fall, then potentially there isn't enough time to recover.” The researchers found that the importance of lack of knowledge as a barrier was emphasised by the fact that more knowledgeable non-users are “relatively open to recommending investment companies in future”.

(2) Inertia. Some advisers readily admitted that open-ended funds represented the path of least resistance for them. They were dubious that the extra work involved in recommending investment companies would improve client outcomes. One paraplanner said: “If [an investment company] came across our desks, we would be obliged to look at it. It's that thing of actually people need to get in front of us.” By the same token, some advisers using investment companies accused others of “lazy” excuses.

(3) A perception of a lack of sales support from asset managers. The vast majority of advisers and paraplanners interviewed reported that they have little to no contact with asset managers regarding investment companies. The researchers found that “this undoubtedly has a big impact on their consideration of these funds”.

(4) The influence of firm- and network-wide policies. Both investment company users and non-users struggle to determine a place for investment companies within centralised investment propositions. In the quantitative survey, 66% of respondents reported that their firm had a centralised panel or buy-list. Separate research from the lang cat suggests that 86% of advisers run a centralised investment proposition. Specific structural issues include:

• investment companies not appearing on centralised buy-lists, or being listed separately from open-ended funds and therefore ignored;
• some adviser networks automatically treating investment companies as higher-risk;
• difficulties including investment companies within advisers’ model portfolios, which form the basis of most clients’ portfolios; and
• adviser firms who base their investment propositions on multi-asset/risk-rated funds not knowing how investment companies would fit within these propositions.

(5) Research constraints. Investment companies may be filtered out in advisers’ research process, or simply not feature in the research tools that advisers use (for example, Dynamic Planner). It can also be difficult to make like-for-like comparisons between open-ended funds and investment companies, with advisers citing problems such as “evaluating [funds] across multiple tabs or patch[ing] fund data together in a spreadsheet”.

(6) Platform-related issues tend to loom larger for advisers who are more knowledgeable about investment companies, and appreciate their benefits. These issues include the availability of investment companies on platforms, trading costs and model portfolio functionality. Two-fifths of non-users use the Quilter (Old Mutual) platform, which doesn’t offer investment companies.

What can we do about these barriers?

There are some barriers within the industry’s direct power to address, while others are more difficult to influence. In relation to the addressable barriers, Research in Finance recommends that the industry adopt a proactive approach to the adviser market to combat the barriers of lack of knowledge and inertia. Specifically:   

• The AIC should continue its educational efforts, given the significance of lack of knowledge as a barrier to the use of investment companies. The research highlights particular areas that should be emphasised in our adviser training and communications, including: investment company “safeguards” such as revenue reserves and board oversight; the AIC’s own research tools; and the ability of investment companies to offer access to illiquid asset classes, such as property. The research also recommends that the AIC focuses on paraplanners, who it describes as "young, technically-minded and ambitious" and "will form the next generation of financial advisers".
   
• Asset managers are encouraged to provide more sales support and to combat the barrier of advisers’ inertia by “disrupt[ing] the rhythm of how [advisers] do things”. Research in Finance adds: “Asset management companies need to give advisers enough knowledge and support so that it becomes difficult for them to justify discounting investment companies and maintain their independence. We appreciate this is difficult when asset management sales teams aren’t incentivised to sell investment companies and marketing resource often has to stretch across wide fund ranges. But widespread take-up of investment companies among advisers is less likely without more sales support from these firms.”

What about the barriers beyond the industry’s control?

Research in Finance believes that barriers to investment company usage have a “chicken and egg” dynamic. For example, research tool providers and platforms will respond to demand from advisers and paraplanners for better investment company support. The research concludes that “demand for investment companies could grow exponentially if concerted education and support efforts set off the right kind of chain reaction”.

If you wish to discuss any of the issues raised by this research, please contact Nick Britton on 020 7282 5559 or [email protected].