Hargreaves Lansdown under pressure as Woodford fall-out continues

Amid unprecedented finger pointing and revelations about who knew what and who said what to who, Britain’s biggest platform for DIY investors is being forced to review its Wealth 50 best-buy list, after investors who followed its recommendations became trapped in the Woodford Equity Income Fund.

Following months of withdrawals by investors concerned about the performance of the fund it shrank to one third of its previous size of £10.2bn, creating a whole raft of issues around the manager’s ability to reposition it, and its illegal proportion of illiquid assets; time finally ran out for Neil Woodford, Britain’s most high-profile fund manager, as he was forced to halt dealing in his flagship fund, preventing investors pulling out their money.

With literally thousands of funds to choose from, Britain’s largest fund supermarket established its Wealth 50 best-buy list as a kind of Hargreaves Lansdown Metro, serving up a restricted choice of funds that it considered worthy of consideration.

‘a kind of Hargreaves Lansdown Metro, serving up a restricted choice of funds’

With 1.1m active customers and £85bn AUM, its best-buy list is hugely influential, and despite long-term concerns about the performance of the fund, Hargreaves Lansdown has come under fire for keeping Woodford on its list of favourite funds until the day it was suspended.

With increasingly blurred lines between what constitutes financial advice, what is guidance, and where does a recommendation fit, thousands of investors rely on the list to pick their investments; Woodford’s Equity Income fund was backed by a number of fund shops popular with DIY investors, despite years of poor performance, and now brokers are coming under pressure to scrap such lists.

Despite what looks to be a pretty ugly sequence of events, Chris Hill, chief executive of the Bristolian Behemoth, having issued an apology to investors in the ‘gated’ fund, defended the list, saying: ‘The shortcomings of one fund should not detract from the benefits of favourite fund lists like the Wealth 50.

‘We are confident in the robustness of how we analyse, research and compile our favourite fund list with a focus on ensuring best value for customers; nonetheless, we are reviewing this specific situation to ensure we learn from it and address it for the benefit of our customers going forward.’

City watchdog, the Financial Conduct Authority, also faces criticism for being slow to act; it has stated that it had no direct contact with Mr Woodford before, during or after the suspension of the fund, choosing to deal with Link Asset Services, the ‘authorised corporate director’ or ACD meant to ensure the fund toed the line.

‘lacking the ‘special sauce’ to outperform, an increasing number of funds could find themselves mired in mediocrity’

The repercussions from this debacle could reach far and wide, and damage much more than Mr Woodford’s reputation; some have warned that funds could be banned from investing in unlisted stocks, loans and property – ‘illiquid’ holdings, which are harder to sell quickly, worried investors and hamstrung Mr Woodford when they demanded their money back.

The FCA is expected to undertake a review of all illiquid assets, potentially causing hundreds of fund managers to change tack; lacking the ‘special sauce’ to outperform, an increasing number of funds could find themselves mired in mediocrity, with few points of differentiation and part of an M&A money-go-round.

With recent high-profile failures such as London Capital & Finance and Lendy, FCA’s ‘investigations’ into mini-bonds, peer-to-peer lending, rogue funds and best-buy lists look reactive at best and may cause some to question if the regulator has been asleep at the wheel.

One thing for sure is that the industry has to mend some fences; at a time when people will necessarily be required to take more personal responsibility for their financial future, they will want to be reassured that openness and transparency are not just worthy words.