II praised for sticking to its knitting as it outsources buy list research

‘Clearly it makes sense to take that process outside if it’s not a natural part of the business’

Interactive Investor has been praised for sticking to its core business following its decision to outsource the fund research for its Super 60 buy list to Morningstar.

This week, the D2C platform announced the global funds research house would provide the analysis to populate its main buy list, alongside its ethical sister list, the ACE 40. The methodology and processes that populate the buy list will be set out by II.

Fund research is expensive and complex, according to Avellemy CIO Graham Bentley, and therefore requires the appropriate skills, software and technology to be carried out properly.

“For any business that wants to avoid the suspicion that their selections were made with commercial influence, clearly it makes sense to take that process outside if it’s not a natural part of the business,” Bentley says.

“If that isn’t your normal business, it’s a question of whether you might be better served focusing on your core business and outsourcing to someone else who has it as their core business, like Morningstar for example.”

II repurposes its fund research resources

Interactive Investor had a team of three fulltime analysts researching funds for its buy lists with support from an eight-strong investment selection committee, which was populated with in-house resources and two external consultants.

There will be no redundancies. Instead, the fund research team will now focus on championing personal finance causes, while the investment selection committee will become the investment research monitoring group. It will continue to be overseen by II’s investment governance committee.

At Hargreaves Lansdown, the only D2C platform that surpasses II in size in the UK, there are four quantitative analysts, three investment risk analysts, seven fund analysts and two ESG analysts. The team is supported by its strategic asset allocation, product governance and compliance teams, a spokesperson confirmed. There are also dedicated fund analysts and portfolio managers in the fund management division.

Avoiding conflicts of interest

With its acquisition by Abrdn due to complete in Q2, the platform will soon have a parent with significant fund research resource.

But Lang Cat consultant Mike Barrett says that, through appointing Morningstar, II can point out to its customers that its buy lists are completely independent.

Barrett says it is important for platforms to remove any potential conflicts of interest when it comes to buy lists.

“You’ve got to be careful to have the best possible governance and oversight around a recommended funds list to make sure that there isn’t any possibility of conflicts of interest.”

He points to recommending in-house funds or funds that make sense commercially for the business as examples of bad practice.

“Having an external research agency to make those recommendations separate from the commercial reality of the platform, I think makes a lot of sense.”

What happens if more platforms follow suit

Barrett expects other platforms could follow in the same direction as II.

The FCA dealt briefly with best buy lists in its platform market study, but he reckons they could revisit the issue once the investigation into Woodford is finally published. Additionally, the FCA consultation into high-risk investments that came out this week is another example of the regulator pursuing a wider theme of financial firms only promoting products and investments to a clearly defined target audience.

Hargreaves Lansdown came under fire in 2019, when it retained the Woodford Equity Income on its buy list, then known as the Wealth 50, right up to the moment it was suspended due to liquidity issues. The platform has increased its governance of its fund recommendations in the period since.

Would more platforms following in II’s footsteps lead to a greater concentration of flows into a smaller number of funds?

Bentley says it’s possible but depends on the instructions given by the platform. “The platform may say ‘we think our clients favour this type of fund or this approach’ or whatever. They’ll set out the process that they want Morningstar or whoever it is to follow.

“So, it’s entirely possible for lots of different people to go to use research that’s been provided by Morningstar and yet have different results,” he says. “But I’m pretty sure that you would expect to see a certain degree of commonality.”

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