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10 Jul 2020

Hargreaves Lansdown revamps 'best buys' after Woodford scandal: can you trust recommended fund lists?

Hargreaves Lansdown's Wealth Shortlist has replaced its Wealth 50 list

Hargreaves Lansdown has published an updated list of its recommended funds, a year after it came under fire for promoting investments run by fund manager Neil Woodford.

The new list, called the Wealth Shortlist, replaces its previous Wealth 50 list and includes almost 70 funds. The provider hopes to restore investor confidence and repair its image following the Woodford scandal, which saw nearly £3bn of investor cash trapped.

The platform says it has 'listened, learned and taken action' and notes the risk monitoring it's doing now is 'significantly greater'.

It says it will now focus on 'performance potential' and will also take into account managers, their processes and the culture of management.

Here, Which? explains why Hargreaves Lansdown overhauled its best buys in more detail, and looks at whether you can ever really trust recommended fund lists.

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Why was the Wealth 50 list overhauled?

Generally, investment platforms require you to make your own investment decisions.

Best buy lists are intended to help DIY investors by providing researched recommendations of funds for their portfolios.

Hargreaves Lansdown had long championed Woodford's funds in its best buys, driving £1.6bn into the Equity Income fund, from which it earned more than £41m in customer fees between 2014 and 2019.

But its actions concerning the fund didn't come short of criticism. Questions were asked as to why Woodford funds were included ahead of those by Terry Smith's Fundsmith Equity, which had a higher performance rate.

The Woodford Equity Income fund was kept on the Wealth 50 list right up until the day it was suspended last June.

Some 133,000 Hargreaves Lansdown customers were invested directly through the platform, and a further 158,000 held the fund indirectly within its multi-manager funds.

Like other Woodford investors, they were prevented from accessing their money until this year, while still paying the fund's fees.

Investors received their first payout earlier this year and an announcement is expected at the end of this month on when they could get a final payout, and how much they could receive.

Our own research into best and worst investment platforms this year saw Hargreaves Lansdown plummet in the rankings. Before this, it had come out on top every year since we started conducting the survey in 2014. Many of those surveyed expressed a sense of betrayal over the provider's handling of the scandal.

How are recommended fund lists compiled?

Fund lists are compiled by teams of analysts, who assess the funds that have consistently beaten their benchmarks in the past and predict the likelihood of them doing so in the future.

Analysts produce risk profiles of funds, assess costs and, in the case of 'active' funds, the value added by the fund manager.

Investment platforms monitor the performance of funds they include in their fund lists and occasionally remove those they have concerns about.

In Hargreaves Lansdown's case, it was criticised for not removing the Woodford fund, despite industry concerns about liquidity issues and fund performance.

Can you ever trust platform 'best buys'?

Recommended fund lists are very popular among DIY investors.

According to Interactive Investor, one of the biggest UK investment platforms, which also publishes rated fund lists, around 75% of investors use such lists to make investment decisions.

Recommended fund lists can be a good starting point to choose investments if you're less experienced.

However, there is no guarantee that platforms will pick winners every time.

Conflicts of interest

The Woodford scandal has prompted concerns over whether there's a potential conflict of interest in the way platforms earn fees as well as a lack of transparency in the fund selection process.

Occasionally, you may be able to get discounts on funds included in the lists, as some may try to beat the competition and entice investors. Platforms aren't allowed to take a commission for recommending discounted funds, although some will negotiate discounted fees on the funds included in the lists.

In February, the Financial Conduct Authority flagged potential problems over best buy lists, writing to the heads of fund platforms to say they should 'construct them impartially and manage conflicts'.

The regulator says platforms need to guard against a 'preference for funds offering discounts over formal and objective criteria'.

It's also important to note that recommended fund lists aren't tailored to your individual needs or risk appetite. If you want to choose investments suited to your needs, you could consider getting independent financial advice.

What do I need to look out for when selecting funds?

You should always research the funds you want to invest in and look at other information, such as fund fact sheets and Key Investor Information Documents, which detail key facts about the way a fund works.

Buying every fund on a recommended list isn't wise either, as this wouldn't necessarily give you a balanced portfolio. It also wouldn't provide the range of asset types that will help your portfolio endure market downturns, such as what we're currently seeing during the coronavirus crisis.

It's your responsibility to manage your portfolio. Therefore a decision to buy or sell a fund should be based only on your own portfolio review.

How to choose an investment platform

If you're new to investing or want to consider switching platforms, there are a range of things you should consider:

  • Fees - some platforms cost far more than others.
  • Type of investments - do you want to buy company shares or invest in a wide range of funds? Or do you want ready-made portfolios for beginners?
  • Tools - do you want live investment news as well as calculators and tracking functionality?

We asked thousands of real users of major investment platforms to rate their services across a range of aspects, from customer service and online functionality to the clarity of charges and value for money.

We ranked customer satisfaction for 13 of the biggest investment platforms in the UK to help you find the one that best suits your needs.