With the Woodford furore well into its second week, the focus has moved onto platforms. Hargreaves Lansdown has a list of questions from the Treasury Select Committee to answer by next Tuesday.
How often are select list inclusions considered and what impact do they have on flows? What influence do discounts have and how much platform revenue is derived from funds on select lists?
Select lists are a key part of the digital investing toolkit these days and investors are overwhelmed by choice without them. If they didn’t influence flows, they wouldn’t being doing their job. So, they are commercially effective for platforms and useful for end-consumers… if they are any good.
Platforms invest heavily in select lists and stress the importance of assessing performance ‘over a cycle’ rather than just over three to five years – all fund selectors accept that good fund managers will have periods of underperformance.
However, Hargreaves Lansdown is open to criticism about how well it assessed Woodford’s consistency of strategy and style during and after establishing his successful track record at Invesco. Hargreaves Lansdown didn’t change its view even after the EU referendum when Woodford substantially changed course.
Investors will also question why Hargreaves Lansdown was unable to identify the implications of the liquidity risk in the fund that concerned others.
Hargreaves Lansdown’s use of its scale to negotiate big discounts for its customers is positive, but because it charges a higher platform fee than competitors it looks like robbing Peter to pay Paul. This looks worse when the discount is a factor for inclusion on the select list. Fees obviously have an impact on performance, but that’s a convenient negotiating point for a relatively expensive platform with an influential select list.
Hargreaves Lansdown increasingly markets its proposition around the Wealth 50 brand. The company’s success in recent years requires it to take investing to a broader audience in order to continue its growth. These people are likely to need help choosing funds and select lists work well for this. Hargreaves Lansdown has lost credibility about its ability to pick winners in this area.
One course is for the FCA to be much more prescriptive about select lists. This would be a minor irritation to Hargreaves Lansdown but could be much more problematic for smaller competitors.
Platforum published D2C Distribution Dynamics in March 2019 with detailed analysis of the evolution and composition of select lists, their influence on fund distribution and how ‘investment solutions’ are offered by platforms. For more information on this report contact:jeremy.fawcett@platforum.co.uk