RDR and the Rise of Investment Trusts

VIDEO: Financial advisers may soon be recommending more investment trusts to clients as new rules shake-up the investment advice industry

Alanna Petroff 28 November, 2012 | 7:00AM
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This video is part of Morningstar’s special series about the Retail Distribution Review (RDR).

Video Transcript:

Alanna Petroff: The Retail Distribution Review, or RDR for short, is causing a little bit of a renaissance in the investment trust world. So, for example, your investment adviser maybe didn't suggest investment trust beforehand, but as of 2013 they will start suggesting them.

Here to discuss this change is James de Sausmarez. He is a Director and Head of Investment Trusts at Henderson Global Investors. So, James, thanks for coming in.

James de Sausmarez: Thank you.

Petroff: Now let's go over investment trusts and what RDR is going to change about investment trusts and investment advice generally?

James: Well, the big change with the Retail Distribution Review is that it levels the playing field as far as investment products are concerned for financial advisers. Historically, financial advisers were remunerated through commissions that were paid by product providers back to them. Investment trusts have never paid such commissions. Their fees have always been net of their target costs. So they've always been much cheaper than other equity-based products such as open-ended investment companies.

So what's happening with the Retail Distribution Review is that that commission paying no longer is going to be allowed. So the clients of financial advisers will pay for their investment as one fee, they will pay their adviser as a separate fee and they will pay the platform on which their investments are held with a third fee.

What this means is that it levels the playing field across, and that means that financial advisers will be able to offer a whole-of-market choice. So for the first time, investment trusts will become part of their offering.

Petroff: So now generally funds were offering commissions beforehand and investment trusts were not. So that would beforehand get advisers to say, ‘yes, go to this fund’, and they wouldn't consider investment trusts. Why didn't investment trusts offer a commission?

James: Investment trusts, of course – an investment trust is a company. And it’s a company with an independent board of directors and those boards of directors have obviously negotiated fees with the managers. And investment trusts are also old. Investment trusts have been around since the latter part of the 19th century and the tradition of investment trusts has always been at the top end of the market. It has always been to discretionary managers and to informed private investors. As a consequence, the fees have always been more tightly negotiated. So the investment trust industries never really tried to tackle the IFA market, if you like, under the old regime because it didn't want to ruin what it had with its existing client base, offering attractive low fees and good investment.

Petroff: So come 2013, is there going to be a rush of investment trusts being offered to the average investor? Are advisers going to say, ‘oh, yes, I have heard about all these investment trusts and now that I don’t get commission anymore, this is where you should go.’ Is there going to be this rush?

Sausmarez: There isn’t going to be a rush. It is very much going to be slow burn in terms of financial advisers starting to advise on investment trusts.

The biggest hindrance, there’s two big hindrances to advisers advising on investment trusts. The first is a lack of education. They don’t know about investment trusts, because it has never been something that they’ve been – felt able to advise on because of the lack of commission. They don’t know a lot about them. So there’s a big education job to do to get them to understand investment trusts, what the advantages of investment trust are, and how investment trusts can uniquely help them with their client portfolios.

The second big problem that investment trusts have is that the three big major fund platforms, and these are big platforms, which really offer just open-ended funds at the moment, haven’t yet extended their service to include a whole-of-market offering. So you can’t buy investment trusts on the three major platforms.

I think that is a big problem for financial advisers. I think it is a big problem for the regulators, and it is a big problem for the fund platforms themselves, because how can you in a post-retail distribution world not offer a whole-of-market service?

Petroff: So what would you expect in five years from now? How do you see investment trusts developing over five years?

Sausmarez:  I think investment trusts over the next five years will increasingly become an option for financial advisers. They will understand them, they will learn about them, and they will see how they can use them. Investment trusts won’t be the dominant products probably in a financial adviser’s portfolio for its client, but it will be there and it will have an important role to play. So I think it is very exciting for investment trusts. I think investment trusts are going to get a new market and it is going to grow, but it will grow steadily. It won’t grow fast.

Petroff: Okay. Thank you very much for coming in today.

Sausmarez:  Thank you.

Petroff: That was James de Sausmarez. He is the Head of Investment Trusts at Henderson Global Investors. I’m Alanna Petroff. Thank you very much for watching Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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