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Money is lost: Some platforms do not remove funds that they consider too expensive

Investors find themselves in the crosshairs of an industry dispute over mutual funds that allegedly offer poor value for money.

While some investment platforms — the most popular way for consumers to manage DIY portfolios — remove funds they say are too expensive and don’t meet minimum standards, others refuse to do so.

They believe investors should have the right to choose the funds they want, although they warn customers about low-value funds.

Interactive Investor and Fidelity International are among the platforms that are weeding out funds that they say don’t offer good value for money. They argue that they have a duty to protect customers under new consumer duty rules set out by the regulator. AJ Bell and Hargreaves Lansdown do not filter out funds.

According to its own information, Interactive Investor has blocked 66 investment funds. Of these, 53 were traded by customers less than twice last year. In most cases, Interactive Investor was made aware of the poor value by the companies managing the funds.

A spokesman says: “We are satisfied with our interpretation of the rules.” Ultimately, these are a small number of low-value investments.

“Given the requirement under consumer regulations to eliminate funds that do not offer value for money, our move should focus the attention of fund management groups on creating value for investors.”

Customers who invested in the blocked funds have been informed of the platform’s move – and that they can no longer invest in it.

Mike Barrett from financial consultancy The Lang Cat says: “This feels like a positive action.” “The platforms are effectively at your side as an investor.”

Fidelity is the only platform to publish details of the blocked funds. These include the listed investment funds MIGO Opportunities and RIT Capital Partners as well as the investment funds Premier Miton Worldwide Opportunities and Argonaut European Alpha.

It states: “All decisions we make are in the best interests of our customers.”

“We have an obligation to be careful and responsible with the investments we make available.”

The group says it monitors investments offered on its platform to “ensure customers are protected from foreseeable harm.”

When reviewing funds, Fidelity says it takes into account several factors – regulatory considerations, the financial strength of the fund provider and – at the fund level – the price-performance ratio and liquidity of the underlying investments.

Investors who have money in these rejected funds can still use Fidelity’s platform to sell their shares or switch to other funds.

The new consumer protection rules came into force in the summer.

Introduced by the Financial Conduct Authority (FCA), they specifically require platforms to identify – and warn customers about – funds or investment trusts that do not offer “fair value”.

If platforms violate the rules, they can be fined. The FCA says of investment platforms that they “play an important role in bringing products to market and therefore must ensure that their or other fees along the chain do not cumulatively result in the product no longer providing fair value”.

This means that the investment platform fee and the management fee charged for an individual fund together should not be so high that the fund no longer represents a good investment. The Lang Cat’s Barrett says: “The Consumer Duty rules are ‘very explicit’: if an asset manager says one of its funds no longer offers clear value, the platform must remove it.” “That is only the case in extreme cases , but platforms can’t just sit back.”

Holly Mackay of investment website Boring Money believes investors should pay no more than 1.2 percent a year to hold a fund on a platform. This includes the platform fee, typically around 0.35 percent.

She says: “If you’re paying more, you should ask yourself why.” “Sometimes there’s an answer that makes it worth it – for example, exceptional investment performance.”

An example of a fund that has proven to be a successful investment despite high fees is Fundsmith Equity.

This £23bn fund is run by City veteran Terry Smith and has an annual fee of up to 1.5 per cent depending on the platform you buy it on. In terms of performance, it has delivered an annual return of more than 15 percent since its launch in late 2010. Its benchmark, the MSCI World Index, returned the equivalent of 11.1 percent.

Mackay says: “Fundsmith Equity has been one of the best-selling funds for as long as I can remember. Investors know it’s expensive, but they say it’s worth it. The manager also communicates clearly about what the fund is trying to achieve and how it will achieve it.”

Barrett says platforms have been condemned in the past for failing to warn customers about the risks of popular funds.

Hargreaves Lansdown was heavily criticized for promoting investment fund Woodford Equity Income until the day it was suspended in 2019 due to liquidity issues.

This £3.7bn fund, managed by Neil Woodford, was marketed as a source of income for investors from a portfolio of dividend-friendly companies. However, his wealth was heavily invested in illiquid assets.

Barrett says: “Investors were very frustrated and felt Hargreaves Lansdown should have done more to make them aware of the increasing risk in the fund’s portfolio.”

But sometimes fees are misleading

Funds that invest part of their assets in mutual funds are among those that have been blocked by platforms due to high fees. Their abolition has sparked controversy because of the way these fees were calculated.

Funds that hold mutual funds must now calculate their annual fees to include the fees of the funds they hold in their portfolio. This makes them look expensive.

Earlier this month, Baroness Bowles, of Berkhamsted, told this newspaper that this requirement was based on government guidance that was “flawed and misleadingly exaggerated costs”.

For example, Gravis UK Infrastructure Income is an £826 million fund that invests in companies that finance key infrastructure projects. These include onshore and offshore wind turbines as well as solar parks.

Embedded in its investment objectives is a commitment to providing investors with “insight into an important sector for the UK economy”. It currently generates an annual income of about 4.5 percent, paid out quarterly – not as attractive as it used to be when interest rates were lower across the economy.

Although fund managers cap ongoing annual fees at 0.75 percent, new disclosure requirements require them to show investors a “synthetic” ongoing annual fee.

This results in the fee of 0.75 percent plus the average annual fees of the investment companies the company holds in its portfolio – including Greencoat UK Wind and Bluefield Solar Income.

However, the fund’s other ten holdings (e.g. National Grid) are not investment funds and are therefore excluded from the calculations.

The result is that Gravis now reports an ongoing annual fee of 1.65 percent in its investor information – a figure that is extremely off-putting for all investors, investment platforms and asset managers.

The consequences are enormous. Gravis could divest itself of its mutual fund holdings to reduce its fund’s synthetic annual fee – and make the fund more investor-friendly.

Given that most of the exposure that fund managers can take to infrastructure is through listed investment funds – for liquidity reasons – it would be difficult for the Gravis fund to find replacement investments.

In the worst case, it could give up the ghost and accept that it can no longer fulfill its investment mandate.