A year or more ago, the introduction of the Retail Distribution Review was going to be a watershed for investment trusts and exchange-traded funds as their lack of commission payments meant they were already RDR-compliant.
But the closer we get, the less likely this is to be the case.
Frustration, frustration, frustration
Looking at investment trusts first, any uptake in sales as a result of RDR will take at least five years to come through, according to Annabel Brodie-Smith, communications director at the Association of Investment Companies.
This is partly because those at the top end of the investment wealth manager/adviser spectrum are already using investment trusts. Brodie Smith pointed to research from JP Morgan Asset Management a year ago that showed 31.3% of investment companies were owned by private client brokers and a further 17% by retail investors.
A mere 0.4% is owned by IFAs.
So those who talk about a sea change in the uptake of investment trusts will need to focus on the 99.6% of IFAs - as defined by JP Morgan AM - who do not already use them.
This is all very simple and straightforward but what is slightly less straightforward and distinctly more worrying is the situation for ETFs.
The potential for an increased uptake following RDR is there - more than over 70% UK-based advisers do not have any clients holding ETFs; of those who do, the overwhelming majority hold 5% or less of this type of asset in their portfolio.
This is one of the facts gleaned from recent research from Skandia.
However the worry comes from its conclusion that: “The majority of financial advisers admit that they have little or no understanding of the structure of exchange-traded funds”.
Education, education, education
Another comment coming out of the survey is: “Over two-thirds of advisers indicated that they have little or no understanding of the structure of synthetic ETFs and over half have little or no understanding of asset based ETFs.
As Graham Bentley, head of proposition at Skandia, said: “The structure of ETFs can be inherently complicated. It is therefore understandable that such a significant segment of advisers have little or no understanding of these funds and for the FSA to be concerned about their use in the retail space.
“With a general lack of understanding and increased scrutiny over the use of ETFs it is likely that demand for ETFs will remain limited even after the RDR and our research supports this.”
Advisers’ preference for active strategies is likely to continue well past 1 January next year and any step-change in investment trust/exchange-traded product take-up will come about through better education rather than them latching on to one specific product feature or distinction.