Guest Post: How Woodford exploited the fundamental flaw in best buy lists

Today’s scribblings is a guest post about Neil Woodford from Chris and James at Bristol based financial advisers Frazer James. They have an expert angle on Bedford Bernie Madoff (or the Wizard of Oxford); villain du jour Neil Woodford (boo hiss) and specifically around how he exploited/benefitted from best buy lists. I’ve written about the problems here and here and here and here but these guys are professionals and have a very different view point from me:

Enjoy, GFF

The rise and fall of the “Oracle of Oxford” highlights the fundamental flaw in best buy lists and potentially costly consequences.

Every active manager has a story to tell about how they will outperform the market.

Neil Woodford is no different. He believed that he could continue his winning streak by investing in companies that were overlooked and undervalued.

To help spread the story, Woodford teamed up with Hargreaves Lansdown, arguably the most influential storyteller in the UK.

In exchange for selling his story to millions of investors, Woodford gave Hargreaves customers a discount to invest in his fund. In return, Hargreaves included his fund in their ‘Wealth 50’ list and encouraged investors to buy.

The Wealth 50 list is a shortlist of their experts favourite funds, a type of best buy list. They’ll tell you that it “isn’t personal advice”, simply a way to narrow the list of more than 3,000 available funds.

But speak to any Hargreaves customer and they’ll paint a very different picture. They’ll say things like, “I invested mainly because Hargreaves Lansdown was promoting it so much and hailing Woodford as a star investor”.

And that’s the problem. Hargreaves may not have been providing advice, but it’s customers didn’t see it that way. They felt that Hargreaves was making a “recommendation”, which they trusted and invested accordingly. (Despite Woodford’s recent fall from grace and the flak that HL are getting, their “best buys list” is still there).

Although best buy lists may have good intentions, there’s a fundamental flaw- what’s good for the platform/manager isn’t always good for the investor.

By including Woodford in the Wealth 50 list , Hargreaves secured a sizable discount for its customers. Naturally, having access to lower cost funds meant that more money flowed in. Hargreaves Lansdown have grown over the years, now looking after over £100 billion pounds of people’s money, have revenues of almost £500 million pounds a year and a terrific net profit margin of over 50% (£247m for 2019). It’s a very very successful business. Hargreaves Lansdown investors personally invested billions with Woodford – in part on Hargreaves Lansdown recommendation (as did GFF by the way).

But when Woodford soured and his funds were losing money on investments (and smart money selling up), he was kept in the Wealth 50 list.  They continued to promote the fund, despite poor performance. If Hargreaves truly believed Woodford was worth keeping, why did their Multi-Manager portfolios sell down the fund, whilst continuing to promote it?

It’s obvious. They knew that Woodford was a bad investment, but there was a commercial incentive to keep him on the list. In fact, they had concerns about the funds liquidity as far back as 2017, but nothing was done about it. As a result, thousands of investors have lost their hard earned savings and public trust in financial services have, once again, wavered.

As an industry, what we’ve done is attempted to get people interested in investing by creating shortcuts in the form of best buy lists. But let’s be frank, shortcuts are designed by experts and used by amateurs. The average investor was generally uninformed about the risks of the Woodford fund, and when things went downhill, they relied on the shortcut they knew, the best buy list.

When best buy lists are designed for profit, rather than for the customers benefit, it’s inevitable that the customer will get burnt. There is a conflict of interests at the heart of all this.

So what can we learn and what should we do?

For starters, there needs to be greater regulatory oversight of best buy lists. Regulation should focus on protecting the customer from potential conflicts of interest. With such influence, a small statement at the bottom of the page telling you that your money is at risk doesn’t quite cut it.

We should also be wary of placing too much faith in the skills of any star manager. The best thing an investor can do is place their money in a well-diversified, low cost index tracking fund. Failing that, they should never buy a fund named after someone (there’s just too much ego).

If there’s one benefit to this whole saga it may be that customers come to appreciate that past performance really is no indication of future performance.

This is a guest post by James Mackay, Independent Financial Adviser at Frazer James

6 Comments

  1. Thanks for hosting this on GFF, I hope your readers enjoy the article.

    I’ll be monitoring the comments board over the next week, so if there are any readers who have comments or questions, feel free to post them. 🙂

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  2. > there needs to be greater regulatory oversight of best buy lists.

    But how do you do that? Widows and orphans have a very different risk profile from a 21 year old embarking on a high-flying job in the City. It’s possible that Woodford might have been OK for the latter, it was a chance they took that didn’t pay off.

    I use HL for my SIPP because they are relatively cheap to wash cash through for the £720/£180 bung (non TP/BR taxpayer) I’ve never been tempted to invest with them because:fees and I’ve never understood the point of a Wealth 150 list. I get suspicious when marketers try and make me feel special, and that’s writ large through pretty much anything HL send through my door. There’s nothing wrong in not being bothered to trawl though the tens of thousands of potential investment products, in that case pick the version of VGLS that roughly matches your aims and stage of life and get on with life. It won’t shoot the lights out and it won’t do a Woodford on you. Or pay someone to fix this for you, particularly in later life.

    You’re just asking to be gulled picking off a Greatest Hits list, whether or not there are backhanders going on.

    Liked by 1 person

    1. very good point – I think that I picked up the “widows and orphans” from you – many of the people who gave Woodford their money are in/near that level of risk aversion but HL and the media liked to talk about how he was something akin to a god – infinitely wise, index-beating and with the midas touch. Unfortunately, in the rush for the exits, many investors got trampled on.

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      1. > infinitely wise, index-beating and with the midas touch

        It was a great story for the media while it lasted, and to be fair it lasted 20 years. Nevertheless, Rule 1, page 1 on the Book of Life sez “There is no silver bullet”

        I know there’s not a whole lot of love in the FI/RE space for paying IFAs but this is really what Middle England should do (and no, I’m not a shill for Frazer James, never used ’em). There are some situations eg how to pay for a care home or people with complex blended family situations where I’d go to an IFA in an instant, because investing for normal retirement is tough enough to get your head round but investing for that sort of tangled web beats the hell out of me. Plus by the time you’re in the care home situation the IFA fees are unlikely to catch up with you over too many years.

        If Middle England doesn’t have the competence to spot market puffery and fails to comprehend the difference between saving and investing then that’s what they need to do, preferably before they spend any money on anything else. Somebody also needs to slap some of these gormless rich buggers around the chops with a wet fish and yell Diversify, diversify in their lugholes till they see stars. I’ve invested in firms that went titsup. It’s part of the investing landscape. At least there’s still some residual value in the twisted wreckage of Woodford’s funds, even if these muppets can’t get hold of it right now.

        Liked by 1 person

      2. then again, I read one “money makeover” piece about a retiree with a million pounds in 40 or so different actively managed funds and his fees were around £20k a year. Diversification can only take you so far.

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