At Financial Planning Today we receive a large number of press releases each day, sometimes 100 or more. This morning we received one about a firm recommending a fund which it described as “an attractive offering for investors.”

Nothing immediately wrong about that, you might say and we receive these on a daily basis. But for reasons you might guess, I immediately thought of the Woodford funds and asked myself if the investment sector has learned anything all from the Woodford fall-out.

I wonder just how many people bought Woodford funds because they were ‘recommended’ or on buy lists.

Of course, recommending funds to direct investors is nothing new. Hargreaves Lansdown, Fidelity and many other platforms have been doing it for many years.

For direct or unadvised investors these recommendations may be helpful to some degree but they are the antithesis of comprehensive, balanced advice and sensible long term investing.

There will be health or rather wealth warnings with these and all sorts of caveats and other information but fundamentally a retail investor is being urged to consider buying a fund they will probably have little knowledge of on the basis it may - or may not - produce an ‘attractive’ return. It could of course be a costly mistake and in many cases it will be.

For execution-only investors there is nothing against the rules in following firm’s recommendations or buy lists. For many, faced with searching through thousands of retail funds, the question is: ‘where do you start investing?’

I have some sympathy with this but I do wonder how many direct investors buy funds and investments on the basis of recommendations and then deeply regret their mistake years later, faced with mediocre returns or losses.

It’s clear in the case of Woodford and others that investors seem more interested in a big return, whatever the risk, than with taking some time out to do their own personal due diligence.

I am not convinced that banning recommendations to buy certain ‘hot’ funds or producing buy lists should be banned. I do think they are part of the problem with investors making huge blunders.

Direct investors are often in the dark about what they are doing and this is where the risk lies.

The FCA recently reviewed the asset management sector and found short comings, particularly around competition and cost disclosure areas. It had little to say about buy lists and recommended funds. Perhaps it should cast its eye in this area. I can’t tell them what to do but the language being used is important.

Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with over 30 years of experience.  This topical comment on the news appears most weeks.

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