Tuesday, May 26, 2020

Are DIY Best Buy Funds Really What They Say?

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Financial watchdogs are concerned that online trading platforms are not offering DIY investors the best recommendations with their best buy lists.

Best buys are list of funds selected by platforms as the best deals available in a market sector or asset class.

The picks are based on metrics such as portfolio characteristics, investment goals, past performance and pricing.

The Financial Conduct Authority is less sure the best buys are what they seem because they can influence a DIY investors decisions and do not promote passive funds as well as they should.

Only 6.9% of best buys were passive funds, which means the best buys might not feature the cheapest funds with competitive returns while the listed funds did not significantly outperform peers with lower ratings but not necessarily benchmark funds.

Fund supermarket concerns

Because of the findings, the FCA has indicated more research will be aimed at platforms and fund supermarkets.

The watchdog also has fears over platforms promoting their own funds, which could leave them with a commercial conflict of interest.

For DIY investors locked into a platform, the FCA pointed out that competition between platforms is limited by difficulties customers may experience trying to transfer their investments between them.

Some platforms also impose exit charges and other fees to that can discourage customers from leaving.

For the DIY investor, these are factors that need considering before registering with a platform.

The issues should not arise with an independent wealth or fund manager as their remit is whole of the market rather than focussed on a specific platform.

But the real worry is recent research shows DIY investors are driven by price rather than looking at the service, breadth of investments or how the platform fits their investment plan.

Gurus are not transparent

The motives of so-called investment gurus comes into doubt.

These gurus offering ‘secret financial strategies’ and advice on how to ‘unlock wealth’ are not regulated, so do not have to follow when passing on fund and stock recommendations.

Whereas a regulated adviser must give reasons for their recommendation, the guru does not.

Their advice process is not transparent and they do not disclose if they are receiving any payments for their recommendations.

Instead of relying on platforms and gurus, at least investors taking advice from a wealth manager are protected by a regulator who can enforce compensation in the event of complaints about service or advice.

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