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Ian Cowie: when will FCA wake up and back investment trusts?

Ian Cowie: when will FCA wake up and back investment trusts?

Why has the Financial Conduct Authority failed to force advisers and other intermediaries to treat investment trusts fairly, more than four years after it banned commission-driven advice?

What is the FCA doing about the massive consumer detriment caused by most retailers of financial services continuing to sell expensive pooled funds while ignoring cheaper competitors?

When will this sleepy watchdog act to ensure individual investors are told about the wealth of evidence that investment trusts often deliver higher returns than their unit trust rivals?

These are important questions to ask on the day that the FCA’s director of competition attends the Association of Investment Companies’ conference for directors.

Mary Starks is addressing the AIC grandees at Bishopsgate this afternoon about: 'A view from the regulator; developing our approach'.

Stay awake at the back, there!

It would be wrong to pre-judge her speech but the omens are not good. Despite the fact that investment trusts are the most long-established form of non-insurance pooled fund in Britain, they only merited a single fleeting mention on page 193 of the FCA’s recent 206-page .

So it seems that it is not just a few flaky salesmen, unscrupulous advisers and not-so-neutral ‘execution-only’ platforms that are determined to ignore the value that investment trusts can deliver. The chief City watchdog has turned its back on best advice, too.

Quis custodiet ipsos custodes – or who will regulate the regulators? Sad to say there is not much chance that fund managers attending the conference will give the FCA a wake-up call about this scandal because the fund management companies themselves are complicit.

The same firms tend to manage both types of fund and there is far more money in unit trusts than there is in investment trusts, plus plumper profit margins. Turkeys do not vote for Christmas and fat cats never call for a crash diet.

More than £1 trillion – or £1,045 billion – is under management in unit trusts and open-ended investment companies or Oeics. Less than a sixth of that sum is held in closed-end funds or investment trusts, despite some of the latter being listed on the London Stock Exchange for more than a century and all of the former being relative newcomers to Britain’s savings and investments market.

Before the regulators published their retail distribution review in December, 2012, it was obvious why most financial intermediaries preferred to sell unit trusts rather than investment trusts. But the review banned most payments of commission to intermediaries in the hope that this would encourage them to seek the best returns for individual investors, rather than the biggest remuneration for themselves.

Unfortunately, most advisers have been around for quite a few decades – this isn’t a kids’ game – and there are practical difficulties for them in suddenly introducing their clients to better-value rival funds. Doing so might prompt obvious and awkward questions, such as: 'What took you so long? Why didn’t you tell me years ago? Whose money is this, anyway?'

So it is much safer for intermediaries to go on as they are and continue to turn a blind eye to investment trusts. This would be a good point for me to emphasise that I have the highest regard for professional financial advisers, intermediaries and execution-only platform providers who put their clients first.

Marketing savings and investment products is difficult because it goes against all the other advertising we are subject to every day. Unlike most consumer goods’ sales pitches, which implicitly accentuate the positive – ‘give us your money and have a wild time now!’ – investment product marketing must be laced with warnings – ‘give us your money and we might lose the lot!’

Perhaps worse, there is the certainty that it will probably take several years – maybe decades – before stock market-based funds or pension plans pay off. This is the opposite of what people want to hear in an age of instant gratification and ever-shorter attention spans.

So I yield to no man in my admiration for professional financial intermediaries who put their clients first. As an individual investor, I know how their expert guidance has real value in the difficult business of making money grow.

This new weekly column will set out to explain how investment trusts can provide you with the tools to tackle that task – as they have done for me since I set up my first £20 a month savings scheme nearly 30 years ago, seeding the seven-figure fund I now own today.

But I do wonder why the regulatory watchdog won’t bare its teeth to help more intermediaries do the right thing by their clients. If it won’t answer these questions today, will it ever do so? If not, why not?

Full disclosure:

Below is a complete list of Ian Cowie’s stock market investments on 6 March, 2017. It is not financial advice nor is any recommendation implied. Share prices may fall without warning and you may get back less than you invest.
Aberdeen Asset Management (ADN), Adidas (ADSGn.DE), Antofagasta (ANTO), Apple (AAPL.O), Archer Daniels Midland (ADM.N), Baillie Gifford Shin Nippon Trust (BGS), Banco Santander (SAN.MC), BHP Billiton (BLT), BlackRock Emerging Europe Trust (BEEP), BlackRock Latin American Trust (BRLA), Boeing (BA.N), Braemar Shipping (BMS), Carnival (CCL), Cluff Natural Resources (CLNR), Daimler (DAIGn.DE), Deere (DE), Diageo (DGE), European Assets Trust (EAT), Fevertree Drinks (FEVR), GlaxoSmithKline (GSK), Heineken (HEIN.AS), Henderson Fa East Income Trust (HFEL), H&M Hennes & Mauritz (HMb.ST), InterContinental Hotels Group (IHG), Johnson Matthey (JMAT), JPMorgan Global Emerging Markets Income Trust (JEMI), JPMorgan Indian Trust (JII), JPMorgan US Smaller Companies Trust (JUSC), McCarthy & Stone (MCS), McDonald’s (MCD.N), National Grid (NG), Nestle (NESN.S), Northern 2 Venture Capital Trust (NTV), Northern 3 Venture Capital Trust (NTN), Polar Capital Technology Trust (PCT), Reckitt Benckiser (RB), Royal Dutch Shell (RDSb), J Sainsbury (SBRY), Scotts Miracle-Gro (SMG.N), Schroder Oriental Income Trust (SOI), Smith & Nephew (SN), Tesla (TSLA.O), Unilever (ULVR), Verizon Communications (VZ.N), Vodafone (VOD), Whitbread (WTB), William Hill (WMH), Woodford Patient Capital Trust (WPCT), Worldwide Healthcare Trust (WWH).

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