Last week, the Financial Conduct Authority once again set its sights on direct-to-consumer (D2C) platforms, as part of its comprehensive, ongoing review of the asset management industry.
Looking at data from three platform services, including the UK’s largest D2C firm Hargreaves Lansdown, between 2006 and 2015, the regulatory body found that firms’ best buy lists were significantly more likely to include their own “affiliated funds” over non-affiliated funds.
Similarly, the findings revealed that affiliated funds were less likely to be deleted from recommendation lists than non-affiliated investment vehicles.
The term “affiliated funds” encompasses the firm’s own brand of products, or those it has commercial ties to, which it sells on the platform.
For years, the D2C industry has been harshly criticised for blurring the lines between distributor and asset manager.
With the rise of the individual investor, these “fund supermarkets” have quickly become an integral part of the changing financial services landscape, according to Gordon Cookson, an economist in the FCA’s competition division.
In a recent article, he notes that the sector has grown its assets under administration from £108bn in 2008 to £592bn in 2016.
Cookson finds the prospect of a buy list that includes affiliated funds inherently problematic.
He says: “In essence this means platforms are offering their ‘own brands’ in the supermarket, potentially at the expense of other brands.”
Some have suggested this behaviour harks back to the commissions based relationship between fund houses and financial advisers or investment platforms.
The implication is that “fund supermarkets” have found a potential loophole to exploit post-RDR in the form of these “affiliated funds”.
They may no longer be able to collect commission from selling products but stocking their recommendation lists with their own products seems likely to present a major conflict of interest, or so the argument goes.
Fidelity, for one, currently has nine of its own funds (or nearly one fifth) in its “Select 50” best buy list, designed to guide individual platform investors.
According to the life insurer and asset manager, the “Select” list represents the “highest conviction picks” of its researchers who inspect “thousands of funds a year”. The firm stressed that the list is not a personal recommendation to buy funds on its website.
Hargreaves Lansdown was keen to point out that it did not include any affiliated funds in its recommended list.
The firm’s research director Mark Dampier defended the firm’s fund selection process for the Wealth 150, which he says is founded upon “tens of thousands of hours of research every year and on hundreds of face-to-face interviews with fund managers”.
“Not all batteries, washing up liquids or fund managers perform the same, and likewise some best-buy lists are better than others,” he says.
To avoid any potential conflicts, Tilney Group has made a conscious effort not to recommend any of its own portfolios through its Bestinvest-owned platform.
