Direct-to-consumer platforms’ best buy lists favour affiliated funds and those that pay greater commission rates, according to a research paper published by the FCA.
The research paper looks into how platforms recommend funds, what effect those recommendations have on fund flows and whether those recommendations add value to investors.
It has used “non-public” data for three direct-to-consumer platforms from 2006 to 2015 that it collected as part of its review of the asset management market. It says the platforms together have a share of more than 50 per cent of assets under administration of all UK platforms.
The occasional paper finds that best buy lists favour funds with a low cost to investors but also affiliated funds and those that pay higher commission rates to platforms.
The research also found that platform recommendations have a “substantial impact” on flows.
The paper says: “Every year following the addition of a fund to a platform’s recommendation list and while still recommended, that fund experiences an average inflow of £5.9m, equating to 1 per cent of the total assets under management of the fund.”
The researchers found that sterling flows are less responsive to the recommendation of an own-branded fund.
The paper says: “This may indicate that investors discount, to some extent, the own-brand recommendations of platforms. We find no significant effect, however, in the case of percentage flows. On the other hand, the response of flows to recommendations does not vary significantly with revenue-sharing, suggesting that investors do not offset platforms’ biases along this dimension.”
The research also found that best buy list funds outperform non-best buy list funds overall, but affiliated funds included in best buy lists on average do not.
It found that best buy list funds that pay greater commission rates to platforms do not perform worse than others.
The occasional paper was written by authors from the FCA, the University of Oxford and the University of Connecticut.