Welcome to our blog, the place we get things of our chest. It's a mix of rants and raves, often about fees and the cost of financial advice, along with anything else we think you might find useful.

Vested interest and ethics

By Justin Modray, published 11 June 2019.

When Ian and I set up Candid Financial Advice it was a pre-requisite for both of us that the company had bullet proof ethics and put client’s interests first.

This meant fair fees and absolutely no vested interest in whichever investments, platforms or products we might recommend to a client. Reinforced by refusing all offers of corporate hospitality, rare for an industry that seems to love attending glamorous sporting events.

From an entrepreneurial point of view this approach is probably a bit dumb, at least short term, since we’ve had to work a lot harder on much thinner margins than a typical financial adviser. But we think it’s the way of the future and the business is progressing well. It’s not a get rich quick approach but it is profitable and, since we have no skeletons in the closet, we sleep peacefully at night. All told, we’re very confident in the long-term future for Candid.

The recent high-profile issues surrounding Neil Woodford and Hargreaves Lansdown are a stark reminder of what can go wrong when financial firms don’t seemingly put clients first.

In some ways Woodford Asset Management launching its Equity Income fund in 2014 was breath of fresh air. Woodford absorbed various add on fees (typically up to 0.15%) within the fund’s 0.75% annual management charge, whereas many rivals charge these in addition. The firm also published a full list of investments held in the fund on its website – rare.

Neil Woodford’s downfall has been getting carried with investing in very small higher risk companies, to the point they dominated his fund. Whilst his heart was in the right place it appears his head wasn’t, since the added risk coupled with some disastrous stock picks led to a sharp downturn in performance and fund size.

What really rubs is that he and his business partner have drawn dividends totalling tens of millions of pounds from the firm whilst investors have lost money. Compounded by a refusal, so far, to waive his annual fee whilst the fund is suspended.

This refusal will, I think, risk losing any remaining goodwill that investors might have for Woodford. I wouldn’t be surprised to see a mass exodus when the fund does eventually re-open its doors. Waiving his fee and pumping some of the fortune drawn from the business back into the fund may demonstrate enough humility for some investors to give him a second chance.

The vested interest at Hargreaves Lansdown appears, to me at least, more pronounced. The firm continued to promote Woodford Equity Income via its Wealth 50 list until it was suspended and continues to hold over £600m via its Multi Manager range of funds. It suggests that Hargreaves’ investment research team either suffered an almighty lack of judgement or were under commercial pressure to retain Woodford Equity Income against their better judgement.

I suspect the reality might be a mix of the two. Hargreaves has made a fortune from selling Woodford’s fund and ended up holding around a third of it on their platform. If the firm had removed the fund from its Wealth 50 list and Multi Manager funds, it would have very likely single-handedly triggered the issues Woodford currently faces. Given such a dilemma, Hargreaves’ approach appears to have been to sit tight and cross their fingers.

Like Woodford, Hargreaves Lansdown has been handsomely rewarded for failure, as have some key employees: Research Director Mark Dampier and his wife sold £5.6 million of Hargreaves’ shares less than three weeks before the Woodford crisis erupted (and HL’s share price plummeted).

Financial services suffers an image problem, namely putting its own interests before its customers. The Financial Conduct Authority (FCA) has been trying harder in recent years to prompt change but, as this debacle highlights, it is still falling short. Let's hope the regulator grows a set of sharp teeth and bites, else I fear Woodford will not the last such example affecting investors.