InvestmentsAug 10 2017

Platform best-buy lists under fire

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Platform best-buy lists under fire
ByDamian Fantato

Best-buy fund lists offered by platforms are more likely to recommend affiliated funds and those which share a higher proportion of their revenues with them, a paper published by the Financial Conduct Authority stated.

Research published by the City watchdog found that, all things being equal, affiliated funds are less likely to be deleted from a recommendation list than a non-affiliated fund.

The regulator found that the long-term percentage of recommended affiliated funds in best buy lists is on average 3.8 times larger than the percentage of recommended non-affiliated funds.

It also found that funds with revenue share agreements which were 25 basis points greater increased their chances of being in a best-buy list from 3.87 per cent to 5.18 per cent.

The report said: “It is conceivable that platforms favour affiliated and high revenue-sharing funds in their recommendations because of some characteristic which is unobservable to the econometrician.

“As a further test for this, we investigate whether funds affiliated with a platform and those sharing high levels of revenues with platforms are also favoured in recommendations by analysts producing the Morningstar Analyst Rating who, like platforms, are making forward-looking recommendations (but do not face the same conflicting incentives as platforms), and we find that they are not.”

Despite the research being published by the FCA, and being carried out by a team including an individual from the FCA, the regulator has said it does not necessarily represent its position.

The FCA said it was research which it may use to inform its views.

Despite its findings on affiliated funds and revenue sharing, the research did find that, on average, recommended funds do demonstrate “significantly better” past performance than non-recommended funds.

Recommended funds tend to have a lower expense ratio, making them less costly to investors in fee terms.

Being included in a best-buy list also has a “substantial impact” on flows, with funds seeing an average inflow of £5.9m for every year included in a best-buy list.

But flows are less responsive to the recommendation of a fund affiliated with a platform, which the researchers suggest may be because investors discount, to some extent, a platform’s own-brand recommendations.

Dan Farrow, director of SBN Wealth Management, said: "Best-buy fund lists are targetted at the retail market, not the adviser market and if they are in any way biased through remuneration then they should be fined.

"If they are suggesting people buy funds based on kick-backs it is unethical at based and I think the FCA should be all over them."