Research agencies and their fund ratings seem to make the headlines every week. Many of the press and industry comments are negative – possibly when a flagship fund has lost a rating or more seriously where they raise doubts about the independence of the agencies’ business models. And now the regulator has joined in.
In its Asset Management Market Study Interim Report, the FCA considers whether research agencies have the effect of actually reducing competition between asset managers.
The regulator points out that advisers may not be aware that research agencies have conflicts of interest as a result of fund groups paying the agencies marketing fees to use their ratings externally. Some advisers tell us they don’t see a conflict and others are not really concerned arguing that the ratings are just one element of their fund selection process. In fact, some advisers are strong advocates for certain research agencies and use their ratings in conversations with clients.
The influence of research agencies in the adviser market
Platforum’s UK Fund Distribution: Third-party Ratings and Research report (coming out next week) reveals that ratings agencies are used by 61% of advisers representing 69% of the total assets under advice. We have also looked at the importance of ratings among the top selling funds on adviser platforms, but as Mr. Trump might say… we’ll keep you in suspense.
It should be no surprise that advisers who design investment strategies in-house rely heavily on third-party research. What is more surprising is that nearly all the advisers who recommend ETFs use third-party research. This could signal demand for research on these products, something that only a few research agencies currently provide.
Another area of FCA concern is that advisers may restrict their use of funds to just those with a rating from a single agency. However, our research suggests that advisers who rely on third-party research for fund selection typically use more than two research agencies. They don’t necessarily consider the ratings from multiple agencies, but it is an indication that advisers tap into different sources to inform their decisions.
Less influence in D2C
Self-directed investors often see third-party ratings when using fund research tools, looking at select lists or by visiting rating websites themselves. However, our data show that third-party ratings do not hugely influence most people who choose their own funds, although they are somewhat important to 57% of active investors.
We think the influence of rating agencies in the D2C space is less than in the adviser market. Even though 11 out of 24 direct platforms make third-party ratings available to customers, some of the biggest platforms just feature their own in-house research.
Select lists are now offered by 14 direct platforms, highlighting a consensus approach to delivering guidance to self-directed investors. The FCA has taken a hard look at select lists and is questioning the added value they provide. We have seen some changes in this area, like Fidelity Personal Investing cutting down the number of funds in their list and we may see others review their lists proposition in light of the FCA work.
Finally, our latest Investor Experience report (which we’re publishing later today), reveals improvements across the board in guidance and mobile. As we announced last week, Hargreaves Lansdown retains the Platforum Best D2C Proposition award, followed on our leaderboard by AJ Bell Youinvest and Interactive Investor. We have seen moves up the leaderboard by TD Direct Investing and Aviva’s D2C proposition and one to watch next year will be the new Barclays direct investing proposition.
Watch out for next week’s newsletter, when we will be making our famous Platforum retail investments predictions for the New Year. Not to be missed!