Investment Trust Review: Countdown to the RDR begins

The FSA’s Retail Distribution Review has been hailed as a welcome step towards reducing commission bias - one of the review's principal reforms - and could be good news for the closed ended investment company sector.

In essence the lack of adviser commission has long been seen as a stumbling block, leaving investment trusts beyond the pale as far as IFAs are concerned. Before long, the levelling of the playing field between ITs and commission-paying open-ended funds will broaden the advisers' repertoire, and so the choices available to investors.

The RDR also requires advisers to demonstrate whether or not they are truly independent - if they are then they will have to consider investment companies and Exchange Traded Funds for their client portfolios, otherwise they cannot be deemed to be ‘independent’. In theory this should lead to more advisers researching investment companies and ETFs, and therefore greater use being made of them. Add to this the changes proposed regarding commissions and advisers would be incentivised to increase their use of investment companies, not least because of the trusts' lower management charges.

One aspect that will need addressing, however, is the investment companies' wilderness years. In this respect, there are many IFAs who are unfamiliar with the investment trust landscape and this is where the Association of Investment Companies' education programme could come into play, fuelling an expansion in the investment trust universe and much greater engagement between companies and advisers. As momentum builds up, the possibility that companies could also make their presence felt on fund platforms would also help to transform the sector.

But the overall sense of optimism does not come unalloyed with a measure of scepticism. In seeking the views of a group of advisers, the AIC came across the cautious view of Tim Cockerill, the head of research at Rowan & Co. He said: "Many advisers are not familiar with investment companies and the analysis of them is not always easy, so although the RDR looks positive for investment companies on the one hand, they remain at some level difficult to access. Consequently much will depend on the number of advisers who opt for independence because the added workload of being independent may prove too much."

This is countered by Harry Katz of Norwest Consultants, who said: "For many IFAs the RDR is a very emotive topic. However in common with all things new, eventually everyone will get used to it and wonder what all the fuss was about. There are misconceptions about commission, but what is in prospect is that the providers will not set the tariff – the adviser will. And that can only be right. In addition the regulator is muttering about independents viewing a wider product spectrum. It is therefore entirely possible that investment trusts will benefit from these initiatives."

Reviewing the results of their straw poll, Ian Sayers, acting director general of the AIC, summarised: "It is not surprising that there is a range of views amongst financial advisers about the likely impact of the retail distribution review. The AIC is a strong supporter of high-quality financial advice, and believes that more people should take advantage of it. There is little doubt that some consumers have been put off through concerns over commission, so addressing this issue should help make financial advice more attractive to a wider range of consumers. Although we wait to see how the new rules will be implemented, the FSA should be congratulated on taking an important step in the right direction.

"Where investment companies are concerned, commission has been a significant issue. However, although commission is an important issue, there are other issues which need to be dealt with too. Investment companies need to be included on all fund platforms, and supported by adviser training and communication. For advisers willing to do their homework, the investment company sector remains a strong proposition, with compelling long-term returns for their clients."