Wellian Weekly 06.12.2021

Are best buy list a good guide for investors?

The Financial Conduct Authority has recently proposed that all platforms and SIPP providers will be required to draw up their own list of preferred funds to offer as options to non-advised investors. The regulator has published a plan, suggesting that firms would be required to offer a standardised investment strategy to customers as they were concerned that customers who are unwilling or unable to engage with the investments were at risk of poor investment outcomes if they left their savings in cash. However, after the problems with the Neil Woodford and Hargreaves Lansdown saga in 2019, are best buy lists still a good guide for non-advised investors? Many believe they are a help, while others think they are a hindrance and investors should do proper due diligence themselves.

Certainly, there are some positives for investors when using a best buy list. Investing can be complex, and there are thousands of funds available in the market to choose from with different asset classes, regions, market caps and investment styles available. Investors don’t have access to the same tools, data and detailed research that investment professionals do, and so by using a buy list, this reduces the number of options to choose from and highlights a limited number of funds to the investor which have been endorsed by expert analysis, and often may be offered at a discount to the usual ongoing charge. You will know that there has been some due diligence and research carried out on the fund in the first place to ensure that it meets the criteria for investors and is worthy of a place on the buy list. And, with a number of funds being offered, this will give the investor enough choice to be able to create a well-diversified portfolio.

However, a number of concerns remain with them. Whilst having a buy list itself shouldn’t be contentious, what matters is how the panel is constructed, the quality and rigour of the research behind it and whether the process has integrity from an investment perspective. Independence is important - if you get another Woodford situation then this is only going to damage your reputation. Clear communication about a fund’s objectives, risks and charges are critical.

From the investor’s perspective, a number of things need to be considered.

  • Does the investor know what they are buying, and will they choose underlying investments that are compatible with their own investment objectives?
  • They might buy the wrong funds for their own risk profile – funds that are either too high in risk or too low risk with low potential for growth
  • Are there suitable funds for every investor on the list?
  • Will the investor be able to build a diversified portfolio and stop them putting all their eggs in one basket?
  • Once the investments are chosen, will the investor monitor and review their choices on an ongoing basis, especially as they approach retirement when their investment needs may change.
  • How independent is the buy list, and what requirements are there for a fund to be on the list? Is it based on charges or past performance? Does the provider receive any kick back from the favoured fund?
  • Who monitors the list and how often is the list reviewed?
  • What happens if a fund is removed from a list, such as if there is a change in manager, will the investor be notified?

Buy lists are widely used across the investment industry in several ways. The more investment choices available to investors will only lead to more confusion and investors are likely to remain in cash for longer, so a well-constructed and researched buy list can only help break down the jargon and make it easier to choose from. The service has helped many in the past, but there is still room for improvement.

 

 

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