Time to open platforms to ITs

Baillie Gifford’s James Budden on why platforms should welcome investment trusts.

At the end of Q4 2010, IFA assets on platforms stood at £146bn. Platforms now account for around 35% of all business managed by intermediaries. By way of comparison, the investment trust industry has been going since 1868 and its assets stand at £92bn. Only the odd few million of that £92bn sits on platforms. These statistics clearly show that the investment trust industry has been excluded from the mainstream distribution of collective funds.

This lack of distribution, or put another way, a lack of access for buyers, is one of the major complaints levelled at the investment trust sector by IFAs. After all, if these trusts are not available to sit alongside open-ended funds on platforms favoured by IFAs, then there can be no surprise when they do not appear as part of client portfolios.

Why the lack of exposure?

So why do the big platforms such as Cofunds, Skandia and Fidelity FundsNetwork not carry investment trusts? The answer is that trail commission and platform remuneration were, and still are, bundled together within the annual management fee charged by fund managers, and then rebated back to the interested parties.

A unit can be loaded with these charges to facilitate this transaction, whereas an investment trust is a listed stock market entity and its shares are incapable of offering this flexibility. So no payment of commission to IFAs – and importantly, no payments to platforms – means that no investment trusts sit on key platforms.

The investment trust industry has lobbied leading platforms for inclusion. These businesses remain to be convinced that the demand for investment trusts from intermediaries would justify the systemic changes needed to accommodate trusts alongside funds. This calls for a leap of faith or perhaps something more – the hand of regulation.

At the moment, investment trusts do have some distribution on platforms. However, with the exception of Transact, this is limited to availability as an equity purchase. Investment trusts tend to sit alongside listed companies on platforms such as Ascentric, Axa Elevate and Standard Life. They are not in the body of the church as collective fund options alongside open ended funds.

This perpetuates the myth that investment trusts are almost a separate asset class to unit trusts and OEICs. As a result, despite nominally having access to trusts on a number of platforms, IFAs unsurprisingly still favour funds.

Effect of RDR

The retail distribution review (RDR) is set to change this half wayhouse. RDR will ban the payment of trail commission to IFAs and it also stipulates that retail products, such as investment trusts, will have to be included within the sphere of intermediary advice.

Initially these changes were viewed as creating parity for open and closed-ended funds by removing the concept of commission bias and by enforcing the need to place trusts on the same distribution platforms as OEICs. However as time has gone by the sands have shifted.

Now it looks like commission will go but rebate payments from fund managers to platforms will still be allowed. This therefore removes any regulatory imperative for Cofunds, Skandia and FundsNetwork to include investment trusts on their platforms. Back to square one and do not pass go.

The Catch 22 remains: show us the demand and we will include you; include us and we will show you the demand.