Interactive Investor will hand over the day-to-day running of its “best buy” list of funds to Morningstar to guard against conflicts of interest around its influential recommendations of funds to retail investors.
The UK’s second-largest funds supermarket said that the Chicago-based financial data company would take over management of its recommended funds lists, including the flagship Super 60, which help retail buyers choose between the multitude of funds on the market.
While the UK platform said it will still oversee the lists and keep ultimate responsibility for its recommendations, the new arrangement effectively means the two companies will have to agree to major changes, providing a third-party check on how the lists are run.
“It’s very important to us that the process is completely robust and there’s no sense of any conflicts on the rated list,” said Richard Wilson, chief executive of Interactive Investor.
The changes come a month after Interactive Investor struck a deal to be acquired for £1.5bn by FTSE 100 asset manager Abrdn, one of the fund houses that competes to secure coveted spots on the best buy product list. Interactive Investor said the changes were planned long before the deal.
The shift also comes ahead of the Financial Conduct Authority’s hotly anticipated report into the collapse of Neil Woodford’s fund, which froze investors’ cash and left them with painful losses.
“Best buy” lists of funds have come under scrutiny in the aftermath of the Woodford affair. The list run by Hargreaves Lansdown, which recommended Woodford’s fund, was blamed for encouraging investors to buy into the doomed strategy by critics who say the platform has not been held accountable for its role in the scandal.
Hargreaves Lansdown overhauled its own recommended lists following the Woodford affair. The FCA has urged platforms to make sure that they “construct [lists] impartially and manage conflicts”.
The regulator said in a letter to the Treasury select committee last week that “all key evidence” in the Woodford probe had been gathered and it was analysing “what action should be taken and against whom”.
“Platforms will expect to get more pressure and challenge given the Hargreaves and Woodford disaster. So this is part of our process to make sure [the list is] bullet proof,” said Wilson.
Morningstar will bring to bear its vast troves of data and large team of analysts. The firm already has its own extensive set of fund recommendations, including gold, silver and bronze medals dished out by its analysts. Its work for Interactive Investor will use a separate set of criteria, decided and overseen by the UK platform.
“A third party being in the room and running the mechanics is significant,” Wilson said. “Ultimately, both parties need to be comfortable.”
Gavin Corr, global head of Morningstar’s manager selection services, said the company’s funds research is undertaken with “complete independence and without any financial inducement” from the asset managers that create the funds.
“This independent business model ensures that we can partner with Interactive Investor to deliver to their clients the best possible fund research . . . whilst removing any potential conflict of interest with those asset managers,” he said.
Roughly half of retail fund sales in the UK flow through platforms, according to the Investment Association, giving companies like Interactive Investor considerable sway in the industry. The deal with Abrdn will bring the platform’s 400,000 customers within the Edinburgh-headquartered financial group.