Financial services consultancy firm the Lang Cat and the Association of Investment Companies (AIC) have released a report on how IFAs should smash through the barriers of utilising investment trusts.
Usually frowned upon in the retail investor market, an investment trust is a public listed company, which is designed to generate profits for its shareholders by investing in the shares of other companies.
Shares in investment trusts are traded on the London Stock Exchange, so investors can buy and sell from the market, rather than dealing with a fund management company.
The report found that the IFA world has eight barriers to using investment trusts including:
- There is an inhererent market bias against investment companies;
- The costs of trading investment companies on some platforms can be prohibitive;
- There are lingering misconceptions about investment companies among advisers;
- Investment companies don’t fit neatly with model porfolios are therefore don’t meet suitability requirements;
- Investments companies are too illiquid and can’t get all clients in at the same price;
- They are harder to analyse and there isn’t as much available information;
- They are hugely complex; and
- They don’t fit with my technology and risk systems.
The Lang Cat and AIC spoke to four IFAs about how clients should be using investment trusts.
Why recommend to clients?
“Investment companies will often give us the opportunity to look at more niche areas and we can take a view that the investment is there for a good number of years,” said Andy Parkes, chief investment officer at IFA firm Finance Shop.
Simon Munday, founder of Prosperity IFA, said: “As independent financial advisers, we feel it’s our duty to have analysed all types of investment when putting together portfolios for our clients, considering unit trusts, investment trusts, ETFs and whatever else is out there as part of building a suitable client recommendation.”
Peter Adcock, founder of Adcock Financial, added: “We think they can be more flexible than mutual funds. They can be cheaper too and can offer more specialisation.”
How do you describe trusts to clients?
Talking to clients about investments in a portfolio can be a big topic for advisers but how do IFAs approach talking about investments trusts?
“It doesn’t really make any difference,” Parkes added. “Sometimes, they may be slightly more specific, such as a private equity trust so that can make it easier.
“In that case, we’d say we bought it for these reasons. With open-ended funds, they’re more generic.”
Munday said: “There are differences in terms of the content, but generally I think it’s the same. Our job is to educate our clients.
“Of course, more clients would have heard of or used unit trusts at some point. It’s not a different conversation, it’s just explaining to them the slightly different structure of an investment trust.”
How do investment trusts fit into centralised investment propositions?Alongside discussing investments with clients, firms also should have an investment gameplan to stick to.
Can investment trust easily fit into this?
Finance Shop’s Parkes added: “We can isolate areas which we think are more likely to outperform. We can look at discounts on investment trusts, or areas where we see long-term value, but don’t lend themselves to being in the model portfolio.
“On the discretionary side as well, we can manage this on an individual basis and can work around elements such as discounts and premiums.
“When we want to personalise portfolios and bespoke them, that’s where using investment companies can be useful.”
Colin Low, managing director of Kingsfleet Wealth, said: “We think investment trusts should be considered in any recommendation.
“The reason we outsource from the IFA business is exactly for that purpose; when we ran our own funds and portfolios we incorporated investment trusts, but we took the view that we need someone who could do that research for us.”
Liquidity issues
The wealth management world has just about recovered from the Neil Woodford scandal, and this begs the question whether there are liquidity problems with investment trusts.
Adcock added: “We’ve not had any liquidity issues so far, probably because we look at specific sectors. In fact, investment companies can avoid many of the issues that their mutual fund counterparts face.
“This issue is important in some sectors, as we have recently witnessed with Neil Woodford’s woes and the suspension of his mutual fund.”
Low said: “It’s about looking for opportunities as well – there can be very good trusts out there trading at big discounts, but opportunities are being missed because of laziness and a lack of understanding.
“Too many advisers find reasons not to go down a certain route just because they don’t understand it.”
Are choices of platform or product influenced by recommending investment trusts?
Parkes said: “100%, I think they need to be. If we are going to use the full array of assets out there, we need a provider that can accommodate that.
“It’s important to find someone that does a fair amount of trading in these types of assets, because otherwise it becomes difficult to manage.”
