Why the investment trust industry is backing RDR

The investment trust industry is backing the RDR initiative wholeheartedly. Simon Cordery, head of investment trust investor relations at F&C Investments, explains why.

As implementation of the FSA’s Retail Distribution Review approaches at the end of 2012, investment trust businesses have been among the loudest cheerleaders for an initiative that has at best split opinions across the world of financial services.

The theory goes that with IFAs forced to consider the whole investment market, and with upfront commission no longer muddying the waters, the benefits of investment trusts will become so suddenly and blindingly obvious that IFAs will flock to them, at the expense of the open-ended funds that have been most advisers’ stock-in-trade until now.

However this view may be overly simplistic. In reality, there are two opposing views on RDR, either of which may turn out to be right – and only after 2013 will we truly be able to see which one is going to prevail.

Let us look at both sides of the argument, focusing on three points: the need for reform as represented by RDR; IFA appetite for such reform; and whether it is likely to work in the ways the FSA expects.

The need for reform

The past couple of decades have seen increasing regulation of financial advice, driven by issues such as the mis-selling of mortgage endowments and personal pensions in the 1980s and 1990s.

Advisers have had to contend with an alphabet soup of ever-changing regulators, from FIMBRA and LAUTRO to the PIA and now the FSA, which itself is set to lose many of its powers following a change in the political backdrop.

The RDR sceptics argue that wholesale reform has been attempted before but has resulted in little real change to the landscape: banks are still selling financial products under the guise of advice; multi-ties are arguably little different in character from former IFA businesses that drew their recommendations from a set panel of providers; and at the top end of the IFA market advisers are carrying on their business as usual, probably offering their customers a choice as to whether they pay for their advice upfront or as a percentage of their assets. RDR, in the sceptics’ view, is no more likely to succeed in its aims than any of the previous attempts at reform.

The optimists contend the reason previous reforms failed was they did not address the root cause of the problem, which was the way IFAs were incentivised to recommend certain products over others.

By unbundling the charges on open-ended investments and removing the commission element of the initial charge, the optimists believe that RDR will cause IFAs to compare products purely on the basis of their investment merits and the cost to the end investor – a comparison, they say, that will favour investment trusts or at least bring them in to scope for consideration.