The Financial Conduct Authority (FCA) makes it clear in PERG 8 of its handbook that it considers the Wealth 50 “guidance” as personalised recommendations constitute “advice”. It says publishing a list of ‘best products’ or ‘funds of the month’ would not normally be regarded as a personal recommendation.
In contrast, advice is specific to an investor’s circumstances and financial objectives.
The distinction has come to the fore as retail investors come forward stating they invested in the Woodford fund because the platform giant had featured it on its Wealth 50.
Clients can’t claim ignorance after the event
But the industry is split over how much responsibility retail investors should take for taking heed of the influential buy list.
Nathan Fryer, founder of Plan Works, says the rules are very explicit. “I think we need to move away from this litigious society where clients think they can claim ignorance after the event,” Fryer says. “Providing risk warnings are clear, the general public should know, in the same way as they do in a casino, that you may not get back your original stake.”
Fund Expert managing director Brian Dennehy also felt investors needed to take responsibility for their actions. “The issues with Woodford have been well understood and well publicised for a long time – our own research on ‘issues’ goes back 6 years.
“A simple Google search every few months would have identified the latest news for these Woodford investors. For this, they must accept responsibility, take the pain, learn, and move on.”
Most investors would consider Wealth 50 a recommendation
However, others are more sympathetic to the confusion faced by retail investors.
“Everyone in the land knows that guidance is advice,” says CWC Research managing director Clive Waller. “That is except for the regulator – oh, and advisers who benefit from the ‘new speak’ distinction, which creates an entry barrier to protect those in the club from outsiders. It has long been quite the silliest part of regulation.”
Waller says Hargreaves made a big call on Woodford and “gritted their teeth over the last few weeks when they should have admitted that it was time to admit that it wasn’t working”.
Darren Cooke, chartered financial planner at Red Circle Financial Planning, says several years ago he dealt with a DIY investor who had been with Hargreaves and held Woodford.
“All his funds, bar a Vanguard holding, were in the 150 list, as it was at the time, and that was pretty much the extent of his research. The portfolio was awful, and returns were by luck and generally rising markets – not any coherent strategy.”
Cooke acknowledges within the letter of the law the Wealth 50 isn’t a personal recommendation to an individual investor and therefore doesn’t constitute advice. “That said I’m sure the majority of self-investors look at that list of funds as a recommendation by Hargreaves that these are good funds to invest in.”
Hargreaves business model needs refreshing
Dennehy says the scrutiny faced by Hargreaves could prompt a change to its business model.
“Investing is complex, and selecting a fund is one small part – but Hargreaves did not do enough to make this clear, bearing in mind how heavily their clients leaned on their apparent expertise.
“For too long they have spent too much time building relationships with fund managers and fund groups, and not building relationships with their clients. That must now change. In fact, this can be a very positive moment for Hargreaves. Their 1980s business model (and a hugely successful one at that) can be turned into one fit for today and the decades ahead.”