January 1st 2013 saw the biggest change in the financial services industry in a generation with the advent of RDR, which, perhaps surprisingly has had as big an effect on investment trusts as open ended funds.
The Retail Distribution Review or RDR affects the way fund managers, and other providers of investment and pension products can remunerate financial advisers. It forbids the payment of commission in favour of fees. RDR was expected to benefit investment trusts because unlike open ended funds (Unit trusts & OEIC’s), by tradition they didn’t pay commission. This put them at a disadvantage when advisers were recommending funds and resulted in financial advisers being responsible for only one or two per cent of investment trusts shareholder register.
One of the key questions facing the investment trust sector at the start of 2013 was how great would be the impact from RDR? In terms of demand for investment trusts, it is still too early to tell. In their monthly round-up on the sector Winterflood Securities said “the sector is in a healthy state at present as can be seen by the number of funds trading on premiums or around NAV and the amount of capital being raised. However, this does not necessarily signify a significant take-up of investment trusts by intermediaries and, anecdotally, it seems there is still some way to go. We believe that the key breakthrough will be the point at which investment trusts are included on the major platforms”.
Only a few investment trusts are available on Fidelity’s Funds Network, with none available on Cofunds or Skandia. This despite the fact they like the whole industry, they had been planning for RDR for several years.
Despite this, RDR is having a considerable impact on the way a number of investment trusts operate. In the last month three more investment trusts have lowered or simplified their management fees including City of London which removed its performance fee. A number of investment trusts have made changes to their management fees over the last twelve months. The general theme has been one of simplification and competitiveness with more than one eye on the pricing of open-ended funds. Certainly the threat that investment trusts would no longer have the natural advantage of lower fees has been met by a number of funds seeking to remain competitively priced. If anything, the advantage remains given that most open-ended funds are…
