For years, I have championed the cause of the DIY investor, urging not only FT Money readers, but friends, family and colleagues to get into the habit of regular saving and investing.
Plenty of people don’t. Around one in five of us do not save anything at all, according to a report this week from Scottish Widows.
Others fail to save enough. Three-quarters of women and half of men across all age groups admit they are “unprepared for retirement” according to a separate study of 5,000 workers by Close Brothers.
From my anecdotal experience, the biggest barrier to getting started is pretty similar to a DIY project you might be thinking of tackling at home.
Whether it’s fixing a leak, or plugging a gap in your retirement savings, you may feel you lack the requisite knowledge or don’t have the right tools for the job. You will probably be concerned about the expense. And you will certainly be worried that your DIY efforts may end in disaster.
I confess that I’ve always been terrified of home improvements, putting things off for as long as possible. Yet for all the dust and disruption, I know the pay-off is feeling the benefit of that investment every day. When we replaced our kitchen last year, I said to my husband: “Why didn’t we do this years ago?” (He gave me one of his looks).
Similarly, DIY investors have to take a leap of faith. We hope that by spending less money today, and saving it into a pension or stocks and shares Isa, we will have more to enjoy in the future.
Granted, this is a much longer-term project. We also have to invest our time in understanding the best and most tax-efficient way of doing so. But the tools at our disposal — like the tech that powers online investment platforms — make the task simpler and less daunting.
It angers me that so many DIY investors are caught up in the Woodford disaster, still unable to access savings inside the £3.5bn Equity Income fund nearly six weeks after it suspended redemptions.
One of the most popular funds in recent times, it had been championed by investment platforms — notably Hargreaves Lansdown, where over 130,000 customers have around £1bn in limbo.
Many have been emailing our email@example.com mailbox to share their views. One reader, Elizabeth, said she had all but written off the thousands she had invested.
“It’s nothing compared to what I lost in Equitable Life, or not getting out of RBS shares before the crash,” she says. “Yet the whole thing is so dispiriting. I imagine many Woodford investors are people like me who, lacking superb occupational pensions, have tried to save and provide a better income in retirement — only to end up getting biffed so many times.”
These “biffs” are terrible PR for DIY investing. The latest blow has got me thinking about the power of “best buy” lists produced by investment platforms.
They offer a solution to the biggest barrier — how to get started. If you can’t afford to pay for professional advice, picking from a platform’s list of 50 to 100 recommended funds is much easier than combing through the factsheets of over 3,000. Many platforms also offer ready-made funds. But a careful balance has to be struck.
Until relatively recently, many lists did not even feature passive funds — the low-cost building blocks of my own DIY portfolio. And although no commission changes hands, the pulling power of these lists is huge. Many active managers featured are prepared to offer platforms a discount on their fees — flattering the cost of the platform’s own charges — a relationship I feel regulators are certain to probe in greater depth.
Hargreaves customers are rightly furious it was punting the stricken Equity Income fund in its Wealth 50 list until the moment of its suspension. They found they were not only stuck with a duff investment, but stuck with Hargreaves — as its customers hold a special, discounted Z-class of shares in the fund. Until a U-turn this week, customers had been blocked from transferring their investments to other platforms.
HL has since decided to strike two more funds from the Wealth 50 list — but for rather different reasons.
The Lindsell Train UK Equity and Global Equity funds will be jettisoned as they collectively own about 12 per cent of Hargreaves Lansdown itself, creating a potential conflict of interest.
HL shares fell by as much as 18 per cent following Woodford-gate, but star manager Nick Train has been topping up his holdings. He believes the platform’s reputation will recover in time — shares are now 10 per cent below what they were in early June. Now Woodford investors are unshackled, I wonder how many will vote with their feet?
The Woodford and Lindsell Train funds also feature in some of Hargreaves’s own multi-manager funds, which package together (mostly active) funds under different investment themes. A convenient choice for the time-pressed DIY investor, they come at a high price with ongoing annual charges of up to 1.59 per cent — plus HL’s 0.45 per cent platform charge. Ouch.
In a note to clients this week, Mr Train said he felt the fallout from Woodford-gate would be “damaging to the whole active management industry”, with DIY investors likely to turn to low-cost passive funds, or become “even warier about investing their savings in any kind of equity vehicle.”
It could also dent the huge profits platforms have been able to churn out of their customers by promoting actively managed funds. Given the high costs and poor performance of so many, the Woodford wobble might prompt DIY investors to question if they have right tools for the job ahead, and view these lists with greater scepticism.
Regulators have been making it easier to switch platforms, which could wrench down fees — especially as investors can now go direct to passive providers such as Vanguard for a fraction of the cost. This week, Bestinvest said it would refund up to £500 of exit penalties to investors transferring from rival platforms.
Above all, the industry needs to remember that we are not just investing our cash, but investing our trust. Platforms have a vitally important role in bringing investment to the masses, but if we lose faith, the numbers not saving for retirement can only rise.