We don’t need no education
I am no fan of the phrase “financial education” even less “thought control”. When financial experts turn teachers and start treat their customers as children, alarm bells should be ringing. They are clearly ringing at the FT where Jo Cumbo reports on Hargreaves Lansdown’s latest use of data mining to help customers learn what to buy.
Hargreaves’ data system works by assigning each customer a personal score for their level of diversification and for investment risk. Using these numbers, the investment platform can identify clients falling into certain investment traps — such as holding too much in one stock or taking on excessive risk — in real time. It can then target them with timely email or pop-up warnings in the company’s mobile app. One such warning talked about the dangers of “hot stocks” during Covid.
There are a few value judgments here which are bound to cause concern with regulators worried about the boundaries between guidance (the provision of factual information necessary to take a decision) and advice (the provision of a definitive course of action).
I too was disturbed by the implications of data-mining of this kind. I have seen Sipp platforms abnegate all responsibility for the outcomes they provide and know what bad looks like. But the key to a SIPP is self-investment. Having turned this over in my mind, I’ve come to the not very astounding conclusion that you either trust your self-invested pension funds platform – or you don’t.
If you are going down the self-invested route, the platform you purchase matters and you had better be sure you trust the people who run it. Value judgments are critical to non-advised purchasing and the transparent provision of data should be high on every purchaser’s shopping list.
Is data disclosure a marketing tool or proper guidance?
Turn the argument on its head and you might see Hargreaves Lansdown’s approach as part of its “duty of care”. Hargreaves Lansdown do not pretend to be pension trustees but any pension trustee should be asking these questions of their investment consultants and getting answers from their platform and fund managers.
Indeed trustees can now employ a variety of organizations to provide information on costs and charges, carbon footprint, diversification and exposure to thematic risks. They can go further and construct default funds which aim to meet the needs of the average prudent person. Is this any different to what Hargreaves Lansdown is trying to do?
All that Hargreaves Lansdown are doing is using the data they hold to treat each customer as if they were trustee. But this is where alarm bells ring, for Jo Cumbo and the FT
In the past, other forms of recommendations from HL to its clients have prompted criticisms of the investment platform. In 2019, HL’s influential “best buy” funds list was blamed by some clients for encouraging them to buy the former star stockpicker Neil Woodford’s doomed fund.
— Josephine Cumbo (@JosephineCumbo) December 29, 2021
This is the fundamental conflict presented to an investment platform manager. Is the way you present funds to your customers in your interest or theirs?
I am sure that “HL” would say “both”. A few years ago I worked for a summer at Hargreaves Lansdown with Adam Norris (Lando’s Dad). Adam told me he had been able to match the client list of Equitable Life customers with HL’s own client database (as an Equitable customer he had access to all other member’s of the Society). HL were able to target their customers with Equitable policies with preferential transfer terms , to the great advantage of their customers and HL.
The story shows us how a marketing genius (exploiting a loophole in the Society’s constitution) could gain commercial advantage from a highly educated , but very vulnerable client bank. It would be interesting to know how many HL customers who invested in Equitable, also invested in Woodford. It would equally be important to know how many of those customers are now enjoying drawdowns considerable in excess of the guaranteed annuity rates they were denied by the Equitable.
Is Hargreaves Lansdown the new Equitable?
Which brings me to an elephant in this particular room. Are Hargreaves Lansdown holding themselves out as special, because they have financially aware customers? Put another way, are they the new Equitable?
If so, do the normal fiduciary rules apply? The Equitable was a Society which behaved like a club. When things went wrong, policyholders were outraged because they had trusted the club rules, which were fundamentally the rules of the actuarial profession.
Hargreaves Lansdown offers its policyholders a different deal, one where data reveals rather than conceals the truth. Giving your customers metrics as to how much risk you are taking in your portfolio is the exact opposite of what happened with Equitable Life’s provisioning for its guaranteed annuity rates.
Rather than operating under the cloak of mutuality (and paying the executive huge bonuses), HL operates as a PLC and publishes its profits (and the huge bonuses it pays).
But HL is only an investment platform, it is not a fiduciary and though it has some independent governance and an advice facility, it is mainly an execution-only platform. As regards pensions, it uses the tax advantages of an approved personal pension contract but does not offer a trust-based solution. HL has always been clear that it is not taking a fiduciary role in its client’s affairs.
This is how it advertises its best-buy list
The Wealth Shortlist is designed to help investors build well-balanced and diversified portfolios. We put funds under the microscope to make sure the list only contains the funds that our in-depth analysis indicates have the greatest performance potential.
We never take payment or commission for funds to appear on the Shortlist.
This is how it markets its model portfolios
Portfolio+ is not personal advice. If you are unsure if it is an appropriate service for you or which portfolio is suitable for your circumstances, contact us for advice.
Even where HL models the portfolio, executing the choice is a non-advised decision.
HL serves the mass affluent and tailors its approach to its customer’s needs. SJP does the same thing in a different way. These are the two models that most IFAs compete with (other brands are available). The concept of self-improvement through informed investment decision making is at the heart of what makes people become wealth.
So the idea of a self-invested pension is hugely successful, clients enjoy pitting their wits against the market and selecting funds they hope will beat the indices they benchmark. Clients now know exactly what they are paying and have considerable look-through to the underlying assets if they want to understand the risks they are taking. They have access to third party ratings and the benefit of a professional investment administration reducing transition costs.
Contrast this with the Australian funds industry which (coincidentally) is reported on in the FT this same week. This is how Anthony Klan kicks off his report
Disclosure rules for Australian pension funds have been so watered-down that it will be impossible for savers to understand the true risks of a portfolio, according to experts who said the country is failing on financial regulation. Introduced after a decade of delays, the rules to implement a 2012 law do not require a full “look-through” to underlying pension assets, leaving individuals uninformed about where their money has gone.
The regulations mean that Australia’s enormous superannuation sector — the world’s fourth-largest pool of pension assets, behind the US, UK and the Netherlands — remains one of its most opaque, exposing savers to investment risk and potential overcharging.
Are self-invested investment platforms to be trusted?
Whether we like SIPPs or not, they are the predominate means by which the mass affluent manage their retirement money. As mentioned above, HL do not put themselves forward as pension managers, they do not provide annuities , they are investment analysts that use that analysis to put funds on platforms for us to choose. Where they provide model portfolios , or risk analytics, it is with the intent of helping people to make informed choices.
But as with the Equitable, HL is hugely trusted and guards its reputation which was severely dented by Woodford. In practice, reputational risk, is the greatest protection that HL policyholders have from the future abuse of their trust. Managing reputations is what has created HL’s current status.
Hargreaves Lansdown wants to do more to help its clients understand the risks they are taking – by using data it holds. There are two ways that the regulators can react. They can reject the nudge towards better portfolio design as coercive and advisory, or they could consider it an enlightened use of their client’s own data.
There is precious little help for the non-advised customer, let’s not stand in the way of progress, let Hargreaves Lansdown lead the way, publicly and transparently. The regulator can ask no more of them than that.