Insurance brokers have warned about the dangers of price comparison websites for years – placing the emphasis almost solely on price rather than on whether the features of the product truly fit the customer; and often including sponsored positions in their listings. So it will come as no surprise then, to find that comparison websites have caught the attention of the UK’s chief regulatory body – albeit within a different sector.
The Financial Conduct Authority (FCA) has released a paper which looks into investment platforms, aka “fund supermarkets”, and suggests investors should take best buy lists (BBLs) with a grain of salt.
The FCA’s Gordon Cookson, one of the authors of the paper, explained that some platforms are affiliated with fund providers – making the fund supermarket an asset manager at the same time.
“In essence, this means platforms are offering their ‘own brands’ in the supermarket, potentially at the expense of other brands,” he said, in an analysis version posted on the FCA’s Insight section.
Another reason cited why BBLs are subject to potential conflicts of interest? Prior to a recent regulatory change, these fund supermarkets in the UK received commissions.
By way of background, the UK platform market has steadily grown over the last eight years, with assets under administration (AUA) for both adviser and direct platforms rising from £108 billion in 2008 to £592 billion in 2016.
As part of the FCA’s review of the asset management industry, Cookson and his co-authors had access to detailed, non-public data for three leading direct-to-consumer platforms over the period 2006–2015, including access to platforms’ recommendations of funds. Together, the three platforms have a share of over 50% of AUA of all UK platforms.
Here’s what they found:
- affiliated funds are significantly more likely to be added to BBLs than non-affiliated funds
- affiliated funds are less likely to be deleted from BBLs than non-affiliated funds
- the tendency to recommend affiliated funds has increased since regulatory changes have been introduced that prohibit commission-sharing with funds
- recommended funds share a higher proportion of their revenues with the platforms than non-recommended funds
- on average, recommended funds had exhibited significantly better past performance than the non-recommended funds on the same platform
- recommended funds tend to have a lower expense ratio, i.e. they are less costly to investors in fee terms
- BBLs have a substantial impact on fund flows
What’s interesting to note is that the research also found some evidence that flows are less responsive to funds that are affiliated with a platform. “In other words, investors may be discounting these own-brand picks,” said Cookson.
He continued: “By contrast, the response of flows to BBLs pre-RDR (Retail Distribution Review) did not vary significantly with the degree of revenue-sharing, suggesting that investors did not offset platforms’ potential biases arising from commission payments.”
Cookson noted that this could be explained by investors not being aware of the amount of commission a given fund paid to distributors. “In short, where the conflict was visible, consumers reacted. Where it wasn’t, they didn’t.”
The occasional paper was co-authored with Tim Jenkinson and Howard Jones of the Saïd Business School, University of Oxford; and Jose Vicente Martinez of the University of Connecticut.
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