Continued consolidation in the adviser market could lead to the fund space being reduced to a small number of "mediocre" providers, Hargreaves Lansdown founder Peter Hargreaves has warned.
Mr Hargreaves said the wave of consolidation seen in the adviser market in recent years had started to show its effects on fund providers as big adviser businesses tended to gravitate towards the more established fund houses, making it difficult for smaller newer ones to enter the market.
This threatened to create a drag on performance as innovation and the willingness to take risk are increasingly lacking, he said.
Mr Hargreaves said: "As you have had small advisers walk away from the industry, their clients have been taken over by big firms, and that increases the concentration of investors in a small number of funds.
"Regulation contributes to that as well, as it causes these big firms to buy a fund that has done well ... they can always justify buying it because it did well for ten years, and never mind if it then did badly for five years, or if the fund manager is two years from retirement and just wants to retire so thinks he doesn’t have to work too hard any more.
"They can be bone idle but because of the ten years of good performance they keep getting money from the big players."
Mr Hargreaves helped to found the Blue Whale Capital investment management business and its associated Blue Whale equity fund in 2017, providing seed funding for both.
The Blue Whale fund was the top performer from more than 200 funds in the IA Global sector in the 2018 calendar year, according to data from FE Analytics, and recently grew to more than £100m in size. But it didn't have an easy start.
Mr Hargreaves said: "It is phenomenally difficult to launch a fund management business right now. The regulation is overpowering, it is at the stage where you have to be exceedingly rich or very well known to launch an asset management business, and fortunately I am both."
Mr Hargreaves put the first £25m of capital into the fund at launch, and has seen the fund gain 11 per cent since launch.
He also retains a 32 per cent stake in Hargreaves Lansdown, the investment platform he co-founded, which at the current share price is worth £2.6bn.
Mr Hargreaves said: "The market is dictated by a few major players. I have been very surprised at how difficult it has been for Blue Whale to gain traction.
"Advisers should support new businesses, or they will be left with a small number of horrible bureaucratic businesses, with funds that have mediocre performance because no one wants to take a risk."
The Blue Whale fund is managed by Stephen Yiu, a former fund manager at Artemis, who had previously worked for Mr Hargreaves at Hargreaves Lansdown.
The idea of launching the fund came from Mr Hargreaves approaching him to manage £25m of family money on his behalf.