Jeff Salway: Financial advice rule changes set to boost investment trusts

THEY produce better returns and they charge less, yet savers are missing out as investment trusts continue to be snubbed by financial advisers.

Sales of investment trusts are a fraction of those enjoyed by unit trusts and open-ended investment companies (OEICs), despite evidence suggesting they fare better in terms of the long-term returns they deliver to investors.

That may finally be set to to change, however, when new financial advice rules come into force next year.

As it stands, while unit trusts pay commission to advisers for selling them, investment trusts do not.

That goes a long way to explaining why investment trusts account for just 0.5 per cent of the client money placed by independent financial advisers (IFAs), according to the Association of Investment Companies (AIC).

But commission payments from providers to the advisers selling their products will be outlawed from January, under the retail distribution review (RDR) – and investment trusts are expected to benefit.

Richard Wadsworth, financial planner at Carbon Financial in Edinburgh, said: “One of the main reasons investment trusts have not been more widely used by investors is that most advisers still sell products that pay commission, and commission paying unit trusts dominate  client portfolios.

“Once the RDR is implemented on 1 January, 2013, investment trusts will have a more level playing field due to the  removal of commission from unit trusts.”

In other words, if you have a financial adviser who is paid by commission, there’s a good chance they have never recommended investment trusts. Investment trusts and unit trusts are both forms of collective investments (see box for main differences), but the bulk of your money is likely to be in the latter.

Does that mean you’re missing out? It depends who you ask, of course, but fans of investment trusts will point to performance figures showing that the average investment trust often outperforms the typical unit trust.

That was the conclusion of recent  research by Money Management, a specialist magazine aimed at financial advisers.