The Financial Conduct Authority has been urged to probe the way platforms run their fund buylists amid concerns of potential vested interest.
Shaun Port, chief investment officer at Nutmeg, said vested interests between fund houses and platforms' best buylists should be investigated, while Bella Caridade-Ferreira, consultant at Fundscape, said she believes fund buylists should be regulated altogether.
The calls come in the wake of Neil Woodford’s flagship Equity Income Fund closing to investors amid liquidity concerns on Monday (June 3).
Woodford's £3.7bn Equity Income fund was suspended following a sustained period of underperformance, which prompted investors to pull £9m from the fund every working day in May.
Among the staunch supporters of Woodford were wealth managers St James's Place and Hargreaves Lansdown, the latter of which promoted the fund right up to its suspension but has taken other steps since.
SJP fired Neil Woodford as manager of the £3bn of assets he ran for its clients yesterday (June 6) while Hargreaves Lansdown pulled the fund from its Wealth 50 buylist on Monday and later cut the platform fees for clients invested in it.
Mr Port said: "The impact of the trading suspension on Neil Woodford’s Equity Income Fund is much further reaching than just one fund.
"While investors who bought the Woodford fund based on the recommendations of a best buy list are left wondering when they will be able to redeem their investments, it calls into question the broader appropriateness of best buy fund lists.
"As the Financial Conduct Authority highlighted in their 2017 study, there are concerns around links between funds on best buy lists and the platform providers as well as their performance over the long-term.
"It’s time the regulator revisited best buy fund lists and whether they are acting in the best interest of consumers."
All of the funds on the Hargreaves Wealth 50 list, that was released in January 2019, give a discount on their annual management charge to Hargreaves' clients.
Hargreaves Lansdown has long insisted that firms cannot buy their way onto the favoured funds list by offering a discount, but that both performance and the fund charge are taken into account when selecting the list.
But in the three years to January 2019, Woodford Equity Income lost 12 per cent, while the average fund in the IA UK All Companies sector gained 13 per cent.
And while Woodford's fund is on the list, others, such as the £3bn Merian UK Mid Cap fund, which returned 11 per cent during the same period, and the top performing fund in the IA Global sector over that three-year period, Fundsmith, are not.
Hargreaves benefits from receiving the discounts as it makes the total cost of ownership of the funds cheaper relative to Hargreaves' rivals, even if the rivals charge a lower platform fee.
Mark Dampier, head of research at Hargreaves Lansdown, said he doesn’t believe his firm should be criticised for obtaining discounts from fund houses, as this brings down the cost of ownership for the end clients.
Of Mr Woodford's three retail funds only one did not make it onto the list, the Woodford Patient Capital investment trust, which is the best performing of his funds over the past year.
The reason might be that there are no investment trusts on Hargreaves' buylist. As companies listed on the stock exchange, there is no mechanism for investment trusts to offer a discount to one client ahead of another.
Mr Dampier has defended the exclusion of investment trusts from the buylist in the past by saying they are not "investments for the man in the street" due to the nature of discounts and premia.
A representative of Hargreaves Lansdown told FTAdviser today (June 6): "We use a strict quantitative and qualitative analysis process to identify the funds we think are the best in class.
"Only once we have identified those funds with potential, we then use the negotiating power of 1.2m clients to bring down the costs of investing. The combination informs our decision.
"All of the benefit of the discounts are passed onto clients to reduce the costs of investing. Our aim is to enable our clients to invest in best-in-class funds at lower fees.
"Our favourite fund choices have, for the most part, beaten their sector averages and benchmarks. Not every fund has, and we share our clients' disappointment and frustration when they don’t.
"Those invested with Woodford over the last 10 years will be up 121 per cent however his recent performance has been disappointing."
The regulator already reflected on fund buylists in its Investment Platforms Market Study last year, when it acknowledged they had a likely impact on consumer behaviour but said there were no worrying trends.
At the time it stated: "We expect Best Buy lists to be constructed on an impartial basis.
"Platforms should be free to enter, expand and compete by negotiating with fund managers to secure discounts on fund charges."
It said it had looked at the commercial relationships between platforms and fund managers to see whether these affected their incentives and ability to negotiate.
It found: "On average, discounts are small – around 8 basis points – and the amount of assets under administration in discounted funds increased slightly over 2013-2017.
"Of the largest 100 funds in 2017, 33 per cent have no discounts on any platforms, and the average discount was around 8 basis points and the largest was 38 basis points.
"Larger platforms which have greater influence over investor choices tend to be more successful in negotiating more, and larger, discounts.
"These trends indicate that platforms are under some competitive pressure to negotiate with fund managers. This trend may grow as, under Mifid II, consumers get information about the total cost of investment."
In a statement out yesterday responding to the Woodford fund suspension, the regulator said fund suspensions in general were legitimate and that it does not need to be notified in advance.
"Suspension is not an outcome the FCA seeks to avoid if it is in the best interest of fund investors. Suspensions are recognised as a legitimate tool internationally," it stated.
When Hargreaves waived its fee for Woodford clients it urged Mr Woodford to do the same.
But a representative of Woodford Investment Management said the fee remains unchanged during the period of suspension.
Mr Woodford continues to run the fund day to day, and is presently engaged in the selling of unquoted and illiquid assets to build up a cash pile to meet redemptions, and invest in more liquid assets.
david.thorpe@ft.com
