Investors benefits from crackdown on kickbacks

Jeff Salway. Picture: Jane Barlow
Jeff Salway. Picture: Jane Barlow
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IT’S nearly two years now since the City watchdog introduced controversial rules banning advisers from taking kickbacks on investment sales.

Debate still rages over the wisdom of the overhaul, however – most notably because it left more people unable or unwilling to access professional advice.

The consequences of the widening “advice gap” will be more stark than ever when the government’s misguided pension reforms take effect in April. 
Millions of people needing advice to help with complex retirement decisions will be forced to rely on the “guidance” system pledged by the government and which will fall woefully short of what’s needed.

Yet the shake-up has also produced plenty of positives, particularly for investors. Take the recent surge in the sales of investment trusts, for example. These have long been cheaper than “open-ended” funds such as unit trusts, and research suggests they tend to perform better in the long run too.

They’re also a reliable source of the income that so many investors are looking for. A report earlier this year by the Association of Investment Companies found that 35 investment trusts have increased the dividend paid to investors for each of the last ten years, and some for more than 40 consecutive years. Among them are a good proportion of the 41 trusts based in Scotland, including Alliance Trust, the Scottish Investment Trust and Baillie Gifford’s Scottish American and Scottish Mortgage trusts.

Unfortunately, however, many investors were previously denied access to them because most trusts refused to pay kickbacks to advisers, who consequently had a habit of “overlooking” them. The investment trust stance on commission also left them absent from most fund “platforms” or supermarkets.

That was before the commission ban, part of the Retail Distribution Review that took effect at the end 
of 2012 and which aimed 
to remove bias from advisers’ investment recommendations. Several months later the kickback rules surrounding platforms were also tightened up.

With those barriers removed, investment trusts have begun to flourish. Sales of trusts by advisers and wealth managers have more than doubled in the past two years, according to the Association of Investment Companies (although they still lag well behind sales of open-ended funds).

It’s not just advisers that are buying them in greater numbers, however, with the rapidly swelling army of DIY investors also ploughing more money into investment trusts. Hargreaves Lansdown, which in 2011 derided investment trusts as being destined to go the way of the dinosaurs, recently reported a sharp increase in the number of DIY investors buying trusts on its Vantage platform.

There are drawbacks to investment trusts, of course. There is a degree of truth, for instance, in the charge that they are complex, not least because they use “gearing” (borrowing) and are priced at a discount or premium to their value.

However, the growth in their popularity will only accelerate as they benefit from a more level playing field. And that’s good 
news for the investors that for far too long have 
missed out because their adviser has been more interested in the kickback than the client.


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