RDR expected to boost investment trusts

The impact of the RDR (Retail Distribution Review) on the investment company sector is, to paraphrase Donald Rumsfeld, a "known unknown" for the industry. The FSA’s consultation period is drawing to an end and companies and their boards are now in a position to consider what their response to this new opportunity will be.

We know that, after 2012, commission payments to advisers will be abolished and that new standards of disclosure will apply to financial advice. Advisers will also be required to consider investment companies as part of their wider consideration of retail investment products.

While in theory we should see more advisers recommending investment companies, a greater "unknown" is the extent and speed at which advisers will connect with the sector.

Two camps of opinion have emerged from the debate on how RDR will impact on the investment company industry: some view the event as an enormous opportunity, while others believe that liquidity issues will continue to make the sector a niche, rather than a mass-market proposition.

The AIC believes that the reality is somewhere in between these two views and that RDR will be a "slow-burn" opportunity for the sector.

The body has identified four key areas in the industry’s response to the review that will maximise the advantages of a post-RDR world for investment companies: regulation; access; training and education; and communication and information.

An increasing flow of regulation from Europe has sought to minimise the discretion of EU member states in regulating financial services.

It is important for the types of regulatory risks represented here, for example the MIFID review, to be managed so that a competitive environment for UK investment companies can be maintained and not create any barriers to prevent them being recommended to investors alongside other retail investment products after 2012.

Limited access to buying investment companies has long been a barrier to the growth of the sector. Platforms, one of the main methods of buying funds, is an industry worth £145bn, £105bn (72 per cent) of which is made up of the three biggest platforms: Skandia, Cofunds and Fidelity’s FundsNetwork.

These platforms currently do not offer investment companies, although this is set to change, with all three having committed to do so before 2013.

This represents a huge paradigm shift for the investment company sector, as even a modest foray into this market could greatly contribute to the closed-ended fund industry.

In support of this increased access to investment companies, the AIC will be offering information and assistance to advisers. This will take the form of training and web-based seminars on how to best use investment companies in their clients’ portfolios.

For those advisers who would prefer to outsource investment choices, the site will contain details of discretionary managers and platforms that offer investment companies.

Educating advisers on the benefits of investment companies and removing any barriers to access is the least that can be done prior to RDR; most important of all to advisers and investors alike is the performance of the companies themselves.

While it is true that investment companies may require a little more homework, in a post-RDR world advisers will need to increasingly demonstrate their added value.

Investment companies present an ideal opportunity for them to do this. Their generally strong long-term returns, independent board and flexible, closed-ended structure makes them an ideal complement to a balanced portfolio.

The AIC is doing its bit, and investment companies and their managers need to formulate their own strategies too, to make the most of this "known unknown".

Performance data and key information on every AIC member company can be found on the organisation's website.

Annabel Brodie-Smith is communications director for the Association of Investment Companies. The views expressed here are her own.