Sarah Coles sets out the ground rules for getting advice on investment trusts.

Investment trusts have a huge amount to offer the right investors, but there are over 800 available. To make an informed decision, investors need to make choices about the sector in which a trust invests, the investment objectives of its manager, the gearing policy and the dividend policy, and decide whether they are happy with the discount at which the fund may be trading.

For many people it makes sense to get advice, but how do you go about it? It is not as simple as it should be, partly because a large segment of the adviser community does not advise on them. It partly comes down to the way they are paid. Some advisers are paid by commission, with the product providers remunerating the advisers, while others take a fee from you upfront. There are some that use a combination of the two.

It is no secret in the intermediary community that some advisers refuse to offer investment trusts, simply because there is no commission option for them, even in instances where it may be the best advice for their client.

Darius McDermott, managing director of Chelsea Financial services, says, ‘Under the current regime, advisers working on a commission basis have no incentive to recommend them, because they don’t
pay commission.’

A recent survey by J.P. Morgan found that 29 per cent of investment trust directors believe that the current commission structure is the biggest barrier to investor uptake. However, all this is about to change.

Commission overhaul
The government is currently reviewing how financial products are sold as part of its ‘Retail Distribution Review’ (RDR). This finished its consultation stage in October, and the new rules are expected to come in at some point before 2013.

Under the new rules put forward so far, advisers will not be allowed to work on commission, which will mean that all financial intermediaries will have to work on a fee basis. There are two schools of thought here. Some believe that it will remove any temptation for advisers to recommend the product paying the highest commission, while others say that those unethical advisers will always find other ways around the rules irrespective of the new guidance.
Either way, the new rules will not breed a range of experts overnight, according to those already familiar with the market, so investment trust specialist advisers may remain thin on the ground for some time yet.

David Barron, head of investment trusts at J.P. Morgan Asset Management, says that this is likely to change over time, however. He explains, ‘The RDR proposed including investment trusts in the universe of retail investment products that advisers must consider in order to call themselves “independent”. Such regulatory impacts have the potential to increase the education about investment trusts.’

However, in the interim, if you have an interest in investment trusts you will need to seek out an intermediary that is comfortable advising on them. There are a number of places to look for advisers, including unbiased.co.uk, where you can search by expertise and look specifically for those with knowledge on investment trusts. Alternatively, there is the IFP website at financialplanning.org.uk, which lists certified financial planners.

Choosing an adviser
Naturally, investors need to be confident that the adviser they are using is suitably qualified. Unfortunately, there are no specific qualifications for investment trusts.

However, there are more advanced qualifications such as those offered by the Chartered Insurance Institute, the Institute of Financial Planners, ifs School of Finance, Personal Finance Society and the Securities and Investment Institute (SII). All of these offer one or more investment qualifications covering investment trusts.

For investors that have never used a financial adviser before, it is important to ask about the research to which the adviser has access. The adviser may have greater access to research tools if his firm is part of an adviser network or has an agreement in place with a statistics provider. With over 800 investment trusts available, the temptation for the adviser could be to stick to the one or two trusts that they know.

Before meeting an adviser, investors should consider the length of time for which they are happy to invest and the level of investment volatility they would like to tolerate. In addition, gearing is common in some investment trusts, so the level of risk is another factor. Naturally, there is the potential for greater returns because of gearing, but there is also the downside risk of higher losses.

Tax is another key consideration as an individual’s tax situation can determine just how attractive an investment trust is likely to be. For example, higher rate income taxpayers may often use them to generate capital rather than income.
It is advisable to produce a spreadsheet with all of the investments within a portfolio as well as mapping out assets and debts before you meet an adviser. Consider the aims and goals of your investment strategy: this may include everything from retirement planning to whether you want to have children or to travel the world in five years’ time.

When you get into the adviser meeting, you have the right to ask whatever you want, so make sure you ask all the questions you need to in order to feel comfortable. This is the time to grill the adviser on his or her knowledge and expertise in investment trusts. If you are unconvinced by the individual, there is no compulsion to buy anything. You can also consult as many advisers as you want until you find one with whom you are comfortable.

What will it cost?
Fees typically range from £75 to £250 per hour. The variation will depend on things such as where they are based, the size of the organisation, the individual’s qualifications and expertise, and the size of the investment. The regulations mean that the fees will be outlined clearly to you before you start.

Often the first half-hour is free at the initial meeting, which will give you a chance to get to know your expert without a financial commitment. Once you have decided to use an adviser and go ahead with a full session, you can ask for an estimate of how much the total charges are likely to be. You can also ask them not to exceed a certain level without consulting you first.

Going it alone
If you are not happy paying for advice, an adviser may not be the way for you. Despite the size and complexity of the market, the information is out there for investors with the knowledge, understanding and time to research all the options. You can then invest through a fund supermarket, where the charges will be kept to a bare minimum. The J.P. Morgan survey shows this to be a growing route to investment trusts and one that is expected to become even more important as time goes on.

For some people, the opportunity to get to grips with 800 trusts and find the hidden, undiscovered gems that will enable them to steal a march on the market will be a challenge they relish and one they are willing to put the time in to achieve.

For others, the cost of taking a short cut to the right investment trust by getting the most out of the right financial adviser will be a price well worth paying.