In the bad old days, when advisers still took grubby commission from fund groups after touting their wares, the average investor relied on his financial adviser to know what to invest in - and was offered a very limited view of the investment universe.
Tracker funds and investment trusts, to name but the most obvious examples, were rarely placed in front of clients, despite the former often outperforming their open-ended peers and the latter offering by far the cheapest way to allocate to a given geography or sector.
The assumption of many was that they were shunned precisely because they would not pander to the venal advisers that acted as gatekeepers.
Since January 2013 advisers can no longer take commission. Trackers - along with other passive options such as exchange-traded funds - are thriving, while investment trusts sales through platforms are rising rapidly from their low base.
This outcome is a huge victory for the regulator and its Retail Distribution Review, even despite some of the wider criticism legitimately raised in relation to the new rules.
Before anyone starts slapping Messrs McCarthy, Sants and Wheatley on the back too heartily, it is worth noting that this minor success is necessarily limited and millions of savers remain exposed to fund bias.
Most estimates put the number of do-it-yourself investors in the UK at around 5m. It is harder to put a figure on the number of people who instead take advice, but with around 32,000 investment intermediaries left in the market I’d wager it is less, and the balance is by all accounts tilting more towards the former.
While these people do not have an adviser, a great many of them do use discount broker platforms and are therefore exposed to and consequently influenced by the ‘best buy’ lists of top funds that display alarming bias in their fund selections.
Whatever the reason, DIY investors are being given duff advice - for that is surely what it isI read with interest a report in the Your Money section of The Daily Telegraph on Saturday, which highlighted how the major players in this market often populate their lists with a small number of similar funds from household brand fund houses.
According to data compiled for the paper by The Platforum, of 1,500 funds available for UK investors five are recommended by all of the top seven brokers including Hargreaves Lansdown and Bestinvest, while 16 appear on at least five of the lists, and 46 appear on four.
None of these funds are investment trusts and a number would not even come close to most people’s definition of a ‘best buy’. Sound familiar?
According to Morningstar data published by our sister title Money Management, one of these funds, Blackrock Gold and General, has returned just £730 from an initial investment of £1,000 over five years, at a negative annual growth rate of -6.1 per cent.
Another, Old Mutual Global Strategic Bond, lost 7.6 per cent last year and has turned £1,000 into £1,328, slightly below the average Global Bond sector return of £1,358.
It is worth stating for the record that the Blackrock fund does consistently beat its FTSE Gold Miners index benchmark and the Old Mutual fund is hardly tanking.
That is not the point: these funds are recommended by most of the major brokers - the Blackrock vehicle is one of the five listed by all of them as a top pick - to millions of direct investors. More than £1bn is invested in the Gold and General fund and £1.8bn in these two funds alone, with both taking sizable active management fees to achieve of late very little.
Why are they so widely recommended? Theories abound.
One explanation, hinted at in the Telegraph piece, is that marketing payments are still allowed between fund managers and platforms and this could lead to continuing bias (in fact the article unhelpfully conflates the RDR commission ban with these advertising expenses by discussing both as ‘payments to brokers’).
Other possible explanations include that the compilers of these lists stick to tried and trusted names and fund options and move in herds.
Whatever the reason, investors are being given duff advice - for that is surely what it is. A regulated adviser would probably have been telling clients to stay out of gold altogether over the past year at least, or to review the value of bonds in the wake of plummeting yields.
Oh and those marketing payments, well the FCA actually expects advisers to police their compliance with RDR rules. Great, if the client has one.
Sounds to me an awful lot like the RDR has done a good job in making advice the gold standard it should be for those looking to prudently invest their wealth. Now it’s up to the FCA to ensure that more people take it.
