There is a ‘financial advice gap’ and in an ideal world, broker buy lists should be a lifeline that enables investors to feel confident about fund selection, says Faith Glasgow.
Brokers’ buy lists are once again under the spotlight, following the controversy surrounding the lockdown of Neil Woodford’s flagship Woodford Equity Income fund at the beginning of June.
Despite chronic underperformance for the past three years – culminating in a loss of 21% over the 12 months to mid-June, compared with an average 4% loss for its UK all companies sector peers – the fund continued to be promoted on Hargreaves Lansdown’s Wealth 50 list until it was suspended. Meanwhile, longstanding table-toppers such as Terry Smith’s £18 billion Fundsmith Equity fund have persistently failed to make the Wealth 50 list.
There’s nothing new in this state of affairs. All the managers on Hargreaves’ shortlist, including Woodford, have discounted their management fees for Hargreaves’ customers. Smith, in contrast, refused to play ball.
Now, the Financial Conduct Authority (FCA) has announced it plans to revisit the way buy lists are constructed, to ensure the process is impartial and thorough and that lists are kept up-to-date.
Yet it was only in March, in its wide-ranging platform study, that the City watchdog apparently gave them the all-clear, pointing out that “best buy lists appear to help investors pick well-performing funds. Best buy list funds outperformed non-best buy list funds overall.” It concluded: “Best buy lists have an impact on consumer choices who are likely to expect funds included to be ‘best in class’. We expect best buy lists to be constructed on an impartial basis.”
Considering Hargreaves’ undoubted influence on the growth of Woodford’s fund despite its dire performance, it is unsurprising that questions have been widely asked, including by MPs, as to whether the City watchdog has been dozing on the job.
More broadly, the whole debacle raises some important questions about the increasingly prominent role of these recommended fund lists, and how they should be viewed by investors.
The bottom line is that growing numbers of private investors have had to seek alternative ways to make their investments, following the disappearance of ‘free’ commission-based advice with the overhaul of the financial advice industry in 2012. The commission ban inadvertently created an ‘advice gap’, with advisers less inclined to take on clients with under £50,000 to invest.
Yet most investors are unconfident about their own abilities to pick funds. Financial website Boring Money has published research starkly illustrating the extent of the so-called advice gap: 78% of respondents reported confidence levels of 6 or less out of 10 as far as fund selection was concerned, and a third gave themselves a score of zero. Alternative routes providing pointers or packaged solutions for investors, including the use of brokers’ buy lists and other options such as online ‘robo advisers’, have emerged to take up some of that slack.
But damage has been done. When it surveyed its readers in the aftermath of the Woodford debacle, Boring Money found 68% of respondents rated their confidence that best buy lists will deliver better returns than ‘going it alone’ in fund selection at 6 out of 10 or lower.
As Boring Money’s Holly Mackay observes: “Confidence and trust have been rocked in these recommended fund lists. But the problem they were created to address has not gone away. Millions of customers are using these lists to help inform their decisions. Simply suggesting that people use a financial adviser is not a practical solution.”
So what should investors be able to expect from recommended fund shortlists? Well, the FCA is right about the importance of a robust and impartial methodology. In an ideal world, broker buy lists should be a lifeline that enables investors to feel confident that the fund they are selecting is a sound choice in terms of reliable performance over the medium term, a period of three to five years.
Continuity is beneficial
While Woodford’s underperformance is extreme, I believe a medium-term perspective is important because it enables investors following the list to stick with quality managers whose performance has come off the boil in recent months. Buy lists benefit from continuity.
Money Observer is not a broker, and our Rated Fund list is not a conventional ‘buy list’ but a jumping-off point from which our engaged readership can investigate further and build their own well-balanced portfolios. That means we include current strong performers, but also, on occasion, those where we continue to rate the manager but recognise there have been recent challenges.
In contrast to the Rated Funds, brokers’ buy lists run the risk of being used mainly by investors who do little or no additional research. This really isn’t an area where the FCA can afford to drowse at the wheel.
Faith Glasgow is a member of the fund selection committee for the Super 60 buy list of interactive investor, Money Observer’s parent company.
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