FSA reveals adviser failures in investment suitability review

What do FSA staff know about investments? Probably nothing. What we are seeing is a risk averse organisation poking it's nose into areas it doesn't understand. The word investment and risk cannot be totally separated. Something the FOS needs to learn as well.

Mr FSA

Usefull observations and your suggestions are ?

Oh by the way can we see your research to back up your observations ?

Those needing to stay in cash and or pay of debt lead to no case to write up - usually this outcome is recognised in the initial client meeting which is often not charged for. To review cases that are written up is bound to give the skewed impression that the FSA is referring to because recommendations to stay in cash is covered off when we agree that we do not need to do any investing for the client.

The problem is Micky that neither do financial advisers know much about investment. That's why they're advisers or investment salesmen rather than investment managers. What most of them know is limited to products that pay them commission.

@Peter Dixon - Totally disagree with your view.

Having used so called wealth managers and discretionary managers in the past how many of them devastated clients wealth in the recent credit crunch or the tech bubble at the end of the decade. I would suggest that many advisors know and act in a far better manner than many of the so called wealth managers and investment companies.

With regards to the FSA, I would remind them that the market is constantly moving and evolving and past performance is no guarantee of future performance. This also applies to cash. Clients are not getting a fair deal from either their building society or banks at this time on cash hence they look elsewhere for returns.

In seeking better returns then they must understand the risk which includes the potential for a loss.

However rather than just criticising, could they not come up with a suitable qnairre which would satisfiy them and us so that we would not be second guessing them and reviews conducted with hindsight.

Did they mention the inflation risk of staying in cash ?

The FSA wants us to back this up with know your customer information but doesn't tell us what form they want this to take because the regulation is based on principles and not rules i.e. create what you think is correct, we'll tell you that you're doing it wrong but we won't tell you how to correct it because there is no template or format that we recommend (god forbid they might be accountable for our ideas!)

What happens if you tell the client that their fund could lose up to 50% in value and it loses 55%, it's 5 % more than they were expecting at which point we welcome the FOS I suppose.

Please Mr FSA tell us how to document, this your manual and principles don't cover this.

I forgot, you're not really too concerned because you have a big stick that you can beat us with regardless!

I, in effect, have no option but to purchase your services and I understand in this day and age that its very much buyer beware. Please can you provide me with a consistent and coherent service and indication of what service we can expect.

As usual lots of valid points. Anyone who has been an adviser for more than 10 minutes is aware that any risk assessment questionnaires have limitations and are of course open to individual interpretation. I am often surprised at the answers I get from clients when carrying out annual reviews, which can often differ wildly from the previous review, depending on what is currently in the media and news, and the clients current perception of what the risks are.

Does the FSA stance on capacity for loss apply at all, where consumers have bought risky investments based on comment made in the press? eh no! However, it is likely with the current direction of adviser levels, that only the wealthier clients will get access to quality advice and the masses will have to rely on the Daily Mail!!

I have read the FSA guidance document and can see where they are coming from to a degree, but they don't seem to be prepared or able to offer clear solutions. And I guess the reason for this is because there aren't any!

Last week I had Strd Life Wealth DFM tell one of my client's that, due to their attitude to risk (ie. capacity for loss), they were going to put him in a "strategic managed" type portfolio - ie. fixed interest and cash.

So, in essence, it seems that the way to manage a client's capacity for loss is by completely de-risking AND/OR investing in equities by paying a little extra for guarantees.

Some IFAs need to stop playing the "i'm a frustrated fund manager" game and start looking at DE-RISKING their approach to client's as well.

Two people from our network have visited me to discuss our processes for explaining to clients the issues of volatility and risk of loss (which, the FSA might note, are not the same thing).

Now, I'm not saying that everyone else should do it the way I do, but IMHO, the best way to demonstrate to clients just how investments can wax and wane (or sometimes bomb and then soar) in value, is to show them what the funds into which you're likely to be recommending they invest have actually done over the past five years.

The crunch question is not, as the FSA seems to think, just: Could you cope with your portfolio (or this element of it) losing, say, 20% of its face value over the course of year but: Could you cope with this degree of paper loss if there was a reasonably good prospect of it recovering by at least as much over the following year, bearing in mind that investments of this type need to be approached as a medium to long term proposition?

That aside, repaying debt should always take priority over making fresh investments or, depending on the state of investment markets, retaining existing investments.

Of the three ‘common approaches that can lead to an inadequate assessment of the risk a customer is willing and able to take.’ -

1. Capacity for loss or volatility? If loss - then any clues on how to determine & measure such capacity? In retirement for example I could lose all of my savings and investments and still SURVIVE on my state benefits. So is my capacity for loss 100%. If we're measuring how much I'd be PREPARED lose - does that mean that if my portfolio drops by that level I have to sell out - thereby crystallising a loss that would have put itself right if left alone? Where does that leave the 'long term' investments? Also does that mean vehicles like CIBs cannot be used if there are exit penalies?

In recent years we've seen massive falls in shares, property and fixed income. So clients who do not have the capacity to lose half their savings/investments shouldn't have remained in cash/cash equivalents?

Do the FSA have any inkling as to how reliant we all are on these markets and what the effect would be if everyone ceased investing in them?

2. The FSA are sounding more like an opposition party by the day - great at criticising - but where then is the guidance on what to do in order to achieve the correct standards? If 'inappropriate weighting' is evident - where is the guidance on what weightings should be used?

3. I have NO "customers best suited to placing their money in cash deposits" because if they should stay in cash they don't become my customers - or is it suggested that EVERYONE goes through the full Fact Find/analysis/report process? " So Mr Smith having analysed your circumstances, goals, objectives and attitude to investment risk, my recommendation is that you ought to keep all of your savings in cash deposits at the bank - that'll be £500 please".

P.S.

Oh, and finally Mr Smith, would you like me to review your situation on a 6-monthly or annual basis?

To Peter Dixon

I agree with a very valid point here about fund managers job and IFAs job. The IFA is not a fund managing expert and hence it's not necessary to charge extra ongoing extra fund based fee as there will be 2 AMCs rather than one e.g. the expert running the fund. That's why RDR is flawed, it's better to pay fee/commission up front rather than have a parasite taking more AMCs in the longer term on funds as this has a greater detrimental impact on clietns funds than just the upfont bit with small renewal. just look at Hargreaves Lansdowne, they have fooled the public by making millions taking lots and many many years of lovely AMCs for themselves. There is nothing wrong with earning a commission/fee for a sale so long as it's done honestly and fairly. As they say, is the system isn't broke....why fix it. Now we have very few savers, few products that pay commissions and a risk averse public thanks to the FSA/RDR. The perfect recipe not to save!

I'd say the FSA do have some valid points here.

the quality of risk assessment questionnaires out there is woeful. Advisers need to evidence their assessment of risk through discussion and communication and then interpret their assessment in practical terms to reach conclusions regarding the suitability of the overall portfolio approach.

This should include an assessment of the need for cash allocations.

Unfortunately too many clients view any cash allocation as non commercial and justify it by bigging up the inflation risk.

If advisers were focussing entirely on client needs to the exclusion of their own commercial considerations this would be eradicated overnight.

If advisers truly embraced charge fees for time spent on providing advice rather than spending time thinking about ways of justifying shifting more and more of a client's cash to commission producing investments, the client experienceand the industry would benefit..

Ian Coley

Partner

Medical Investment Services

Pot, Kettle, Black, comes to mind.

The Qualifications and experience at the FSA in order to make their observations? Questionable; as demonstrated by their own track record - which coincidentally rhyms with cracked record, cracked record,cracked record,cracked record.

Client profile engines are simply a tool for the adviser to 'cover his back'.

Heavily weighted towards the product provider preferences.

This is the situation that brokers find themselves in these days - more concerned about not having complaints than truly looking after clients needs.

The FSA may like to feel that financial services are far better off for their robust approach over the past decade, but ask the average client who doesnt have a clue still about investment and he will say that the whole process goes over his head and that he would still rather trust a bank as they offer a far more simple product.

To Ian Coley

Assessment of risk will always be a subjective judgement and therefore open to criticism. It is also a moving target since the prevailing economic climate and the attitude of the client in that climate tend to change.

As for charging by time spent (as opposed to % of fund value) - tell that to my PI provider, my network, my insurance providers, the taxman etc etc.

I won't claim to have read the new 'final' FSA document as yet so will refrain from posting my thought on that for the moment.

In the meantime, amongst the very valid comments above a number of people have mentioned cash deposits/repaying debt advice.

We received some extremely worthwhile guidance from the FSA at their latest TCF update roadshow - YES, worthhile guidance and FSA in the same line - you saw it here first - and this would seem to apply here.

Basically, make a log of all your non commission paying advice, such as cash deposits, repaying debt etc either alongside your new business register or incorporated into it.

This was from a purely TCF point of view (and although I'm not 100% sure that just because there's no IFA income this is TCF) but it would serve to demonstrate that a lot of the FSAs concerns are being met, before any surplus monies are invested.

Quite right and yes Kevin Murphy, Subjective.

Look what happened to the pension review, for those who were around as i suspect the modern PC misguided attitude shows lack of historic experience and knowledge. The wheel hasn't been re-invented!

Pension review froced on industry due to risk averse attitude by regulator was wrong. Many were compensated for 'potential perceived losses'. And now many of those who received unjustifiable enrichments into their personal pensions would had had a lot less or maybe nothing if they had stayed put in their 'so called final salary schemes' which are in default.

REGULATORS WRONG WRONG WRONG AND WRONG AGAIN AND AGAIN.

To what are you saying Kevin..... that your commercial needs come before your advice?. Perhaps you had better stick to 'smoke & mirrors' guaranteed niche products - high commission and far too complicated for anyone to question.

As always, there is a huge range of opinions. However, I was wondering can we find a universal solution.

Hope you don't mind me saying Ian that you have a profiler on your website which looks very good,

Why don't we try and come up with a universal solution to answer the fsa and then confront them with it.

This is probably the best way forward rather then wasting energy on a regulator who has more holes in its process than a string vest.

Maybe you know which profiler the FSA like - let us know,

Maybe somebody has come up with the solution already - share it with us please.

Telling it straight - can't understand your point. I'm not a not-for-profit organisation - I need to work to pay my bills and therefore I need to make a profit from my clients. I have always fully disclosed my fees/charges/commissions to my clients, I have always given them the advice that I believe is in THEIR best interests and i give them the level of service I have promised. If both parties are happy with that, then who are you to interfere?

Is the glass half full or half empty - what is the correct assessment?

Know your client is the key and try to understand their needs and requirements is what I am reading. Simply because a Fact Find has a series of questions it does not prove you know your client. Personally I have a short information gathering process the rest is all down to documented discussions that demonstrate I get to know a client fairly well. It is a true client/adviser relationship.

Every asset carries some risk. Cash is a bad investment if its going down in value 2% per annum in real terms. Although somebody else may view it entirely differently.

I think financial advice is as much an art as it is a science! The problem we are seeing is at times the FSA are saying it is a Science but they can't fully set down the laws because perhaps it really is an Art.

@ Swanny

I can virtually guarantee that MIS's risk profiler certainly isn't one of the ones the FSA are happy with!

See question 3: 'In comparison with other people..." How is a prospective client supposed to answer this? What other people? Their family? Thier friends? The whole population of the village/town/county/country?

Unfortunately questions like this will conitnue to get the FSAs back up!

A number of points

The FSA is not advising clients. it is there to oversee the advice that the qualified IFA gives. The pot kettle black argument is nonsense in this context.

Risk assessment is highly subjective. personally I think the profiler we use is rubbish. Just slightly less rubbish than most others. We do not rely on the profiler - it is there to provide soe peripheral assistance in reaching our conclusions, but the main assessment is achieved through explaining the different risk invloved in investment and how this relates to the potential for gain and loss.

Chargi9ng fees for advice given on a time spent basis is fair and not difficult. Charging % fees for advice based on fund size is not fair and will become increasingly difficult to justify.

Ongoing fund management fees are a different matter but I would also suggest that difficulties are going to arise for all those who think they can justify their flat percentage model.

I would have to say that an adviser trying to charge me 1% plus 1% per annum would be very unlikely ti get my business.

With regard to the commerciality aspects of advice given, I am not trying to suggest that advisers should not cover the costs of their time and overheads, but in my view anyone adopts an income model that leads to some clients effecively subsidising others is going to have problems.

Ian Coley

Partner

Medical Investment Services

I do think capacity for loss is something that should be taken into account and have been giving it prominence in suitability reports and client meetings rather than being something that is just a part of an assessment since the FSA first brought it up.

There is a big snag though. Capacity for loss reduces drastically if someone looks like actually making a loss.

The important issues are surely time scale and alternative resources.

Again we go back to the banks and building societies who are so blind that they will put someone's life savings in a structured FTSE tracker bond that may or may not perform.

Be prepared for even worse to come as post RDR they will sell these ridiculous products as 'simplified advice'.

To Ian Coley - why are % of fund charges a different matter for fund managers? I appreciate that if they charged a flat fee, then lots of clients couldn't afford their services - so it is for me too! If I charged a flat rate fee, lots of my clients couldn't afford my services and would miss out on the professional advice that they need. As for the subsidy argument, the insurance and annuities industries are based on cross-subsidies, our whole governmental/welfare system in the UK is based on the wealthier subsidising the poorer.

I'm not saying that this makes me right and you wrong - neither is it the other way around. Business/commerce IS the offering of goods and/or services for sale and there is nothing bad about making an honest profit.

Ah the FSA, for once they provide clarity and lo and behold...

There shall never be an exact answer to this scenario as clients and individuals ATRs are a moving targets and driven by sentiment and global events at any given point in time. A robust asset allocation reviewed every six months may just about meet with ones expectations but do not count on it?

I have to say that I welcome what the FSA is saying. It is good that they are looking at this issue. I do agree with some of the posts, stating that the FSA is saying that there are problems with the process but they are not actually stating what the solution is.

There is no one solution but it would be helpful if the FSA worked together with the industry to try and develop what would be an acceptable template. That may be more productive.

I personally find capacity for loss very difficult for clients to fully comprehend. Almost all clients would not say that they could accept a 50% loss. You can actually lose 50% with a low risk portfolio. We cannot know what the loss may be, as that is predicting the future. All we can say is what is the relative chance of a loss occurring. Our role is to try and minimise risk.

Risk is mitigated through time but if the clients’ funds are 50% lower after the first review of a 20 year investment period, the client may still not tolerate it. I do believe that it is our role as advisers to hold their hand through the journey.

As for Peter Dixon, I am not sure where you are getting your information from but you seem to think that all advisers are the same. While I have come across advisers who know disturbingly little about investing, there are a great number of advisers who are very knowledgeable and have done a great deal of investment research and filter out the rubbish to help their clients as much as possible. Bob Donaldson appears to be one of the better ones, from his comments.

As regards to investing in cash, it would always be a valid investment choice. The proportion invested in cash will vary according to the economic environment. The amount invested will depend on the clients' risk profile, their timescales and the relative merits of cash against other asset classes.

Kevin

I am fundamentally opposed to charging a client an amount of money that depends upon -

the amount of money being advised upon, rather than the time taken to provide the advice and even more so

the subsidising of clients by overcharging some clients to pay for the shortfall in cost coverage incurred by dealing with other clients.

As I am sure you know, the pooling of annuity funds and insurance products arises to benefit all policyholders. Applying this to your scenario smacks of a desperate attempt to justify unfair treatment.

Do you alert your wealthier clients that they are paying over the odds to justify the time you spend on your less well off or do you simply hope they will continue not to notice?

I'm afraid to say that the reality of the situation is that if a client cannot afford to pay your standard fees then you need to consider doing some pro bono work or turn the client away.

Ian Coley

Partner

Medical Investment Services

Well put Suhan!

Ian Coley - you're still missing the point I was making. There IS no 'paying over the odds' since my charges are clearly explained to my clients BEFORE we do any business. Everyone is therefore paying an agreed fee for an agreed service. I believe It is fair to charge according to funds because I am charged that way by my network, by the FSCS, my PI provider etc. The more a client invests, the greater the risk to my business if it goes wrong - and before you say anything on that front, I haven't had a single compensation case in the thirteen years I've been in the business.

Finally, have you read your own website? if you are "fundamentally opposed to charging a client an amount of money that depends upon the amount of money being advised upon, rather than the time taken to provide the advice " how come you charge a % of fund value for your "ongoing investment portfolio management service"

I have a new client who was a victim of the Barclays Bank fiasco sticking all his available money into funds that although described as cautious lost over 50% in very short order. I do not know what steps the bank took to assess his attitude to and capacity for risk but at virtually the lowest point in the market he bailed out thus turning a paper loss to a real loss that he could ill afford. Did the bank take the time to educate him, hold his hand and reassure him when markets fell - sadly not and he is now awaiting rulings on his losses from the FOS and it looks like he will receive compensation. Was he mis-sold - I don't really know but there was a clear failure to explain, educate and make sure that they had matched his own requirements to a suitable asset allocation model including adequate liquid cash resources that would have enabled him to cope with the losses on his other funds .

How is this achieved - by belly to belly discussions with the client and taking the time to ensure that no investment that is recommended is not clearly understood and the possibly drawdown examined and tolerance to this scenario checked, agreed and documented. As they say in Poland "weighing a pig never made it fatter" - it is down to absolute honesty and using clear English and always, always checking that the client fully understands the risks of the investments he is undertaking to meet his objectives. Kevin Murphy is right to a point but for financial planners some clients are happy to pay fees to be reassured that they are not going to outlive their funds and that their money is earning returns that match the risk they can take, need to take and are happy to take. If this is cash based then so be it and it is down the client to decide what the value of your service is to them personally.

I am sure that much of the above is

Is the answer to ban all "advice"? Or change to how we assess the client's attitude to loss rather than risk?

Advisers used to be able to rely upon something called "an honestly held opinion" when assessing a client's attitude to risk, now you have to rely upon a regulator's opinion and some loaded questions?

But who is right? Is the person who has been an adviser for 30 years without one single complaint right? Or is the regulator with a string of increasingly large crises left in it's lumbering wake right?

All I can say is that the claims I have seen to date are brought about by only one thing, loss. Whether the loss is temporary or permanent the loss is the only thing being complained of, not the questions asked, not the assessment carried out by the adviser, just the loss.

I can see the need to complain about permanent loss that the client never even considered or was not warned of but redress paid for temporary loss when the investment eventually recovers is quite frankly immoral, but hey, this is one great big compensation machine.

What a great debate and, to some extend, diversity of opinion. That is what makes us IFAs; and also what alignes us to our diverse client bases.

What all of this debate ignores is the fact that the FSA is manned by teams. When a team 'resolves a problem' or 'articulates a solution' it is redundant and should be fired.

In the absence of a firing mechanism idle hands and brains are put to work on creating a project to keep the team busy. They have ample salaries and good accommodation and a fundemental belief that IFAs feed themselves and their families , and staff, from a bottomless pit of money provided by dissatisfied clients.

By creating dissatisfaction the FSA perpetuates its own existance. There must be a better way?

Thank God I have finally got that off my chest. It hurt just being there.

Our diversity , as IFAs, is our strength and our opinions are paramout in that diversity. I have yet to find a case, in 40 years experience, where an adviser of any type has not taken account of cash holdings for contingency risks. Not one.

@ Ian Coley

Isn't pro bono work the ultimate case of client cross subsidy? (i.e. you are in business because of the clients who can afford your fees and are thus able to work on a pro bono basis)

@ Steve

Your point about Science and Art is a very valid one.

@ Evan

I've made the same point (about when losses occur - or more importantly don't really occur) on a number of occassions. Investment returns WILL be positive AND negative over time (and that includes cash) that's the nature of investments. The only products that create a specific loss are, in my opinion, structured products, i.e. those with a spot maturity date.

@ T O'H

You've actually hit the nail on the head - what we do, as IFAs, is give our considered OPINION, backed up, hopefully, by a lot of common sense and knowledge of various aspects of tax legislation.

None of us KNOW what will happen in the future, but then again neither does anyone at the FSA, we merely apply

It seems rediculous to me that one group's opinion (i.e. the FSAs) carries so much weight!

Oh PLEASE!!!!!!

THE POMPOUS ARROGANCE OF THE FSA CONTINUES with it's 'concern' over advisers assessing a client's risk profile, when THEY THEMSELVES were responsible for regulating the banks!!!

The FSA THEMSELVES have stated;

'That many of the risk questionnaires failed to take account of their capacity for loss'.

'That many failed to meet the risk a customer is willing and able to take'

IT ABSOLUTELY BEGGARS BELIEF. SHAMBOLIC, ARROGANT, AND RIDICULOUSLY EXPENSIVE. SHAME ON YOU - ESPECIALLY SANTS AND NICOLL.

Mole

We have a client in exactly the same position as yours and we have just won his claim and got a payout.

It took over two years, how much did we charge ? £0

Does that get me browney points Mr FSA ?

The FSA is just stating the obvious, and well done to it for doing so.

It isnt the FSA's fault that we advisers and planners have not worked out what best practice is when assessing risk. But it is the FSA's job to point this out.

Once again, we have decided to ask product providers for a solution, rather than doing it ourselves. Product providers know how to make products, they dont know how to advise clients, and we shouldnt expect them to.

In a normal profession or industry, a trade body would help its members work out how to solve common problems like this, and then disseminate best practice.

The FSA is being too kind to financial advisers and planners. The reason that there isnt a clearly defined, well researched method of assessing risk is because we won't pay for it, are too lazy to do the research, or cant be bothered.

Dont shoot the messenger when he tells you something self-evident, even if you dont like the messenger.

Whilst I cannot argue with much of the negative comment above, I did read the relavent FSA papers in February and whilst I highlighted sections, I have no negative comments written on my copy, so I broadly agree with what they were saying.

The additional Know your client and evidence we have of that as a firm, along with evidence of client understanding is a full MP3 or wav.doc of the discussion with the client. This can eveidnce how it was agreed to keep or dispose of investments which are out of line with the overall plan, but may be being kept for expediency or some sentimental/irrational reason.

I'll see if I can copy and paste the key points I highlighted to remember... as whilst it is evident some respondends have read the paper, I am concerned some may have only read the Citywire Article.

1

Citywire's system doesn't seem to allow copy and paste from the FSA docs even after taking back to basics in notepad which is a pain.

Kevin

I don;t think I am missing the point, although it is somewhat tangential to the main thrust of this thread. I thought I had clarified that the monetary fee is for specific initial advice where the time spent is easily measured. We do charge % fees for ongoing management and reviews. These have been set to recognise that the time spent decreases in relation to the funds under management - n other words it does not take ten times as long to manage £1 million as £100,000 so we have a tiered scale which is reset to reflect changes in fund value.

You must be joking

"pro bono work is the uiltimate subsidy"

No. If we were always working to maximum capacity and every minute of my day was engaged in chargeable work which I then had to allocate to a client if I| engage in non chargeable work for a pro bono client then you might have a point. But I'm not so the pojnt isn;t valid.

However,dragging this back to the main thrust of the argument my view is generally as follows.

The FSA is charged with ensuring that advisers conform to a minimum standard and in my view this knee jerk lashing ut at the FSA staff qualifications or previous failure doesn't change the fact that there are advisers out there who fail clients and proper business practice continually.

One thing we should be grateful for is that we have mooved compliance away from the ridiculous baskside covering box ticking exercise to a principle based approach that allows advisers to adopt their own processes and method of providing advice as long as it can be shown to cover the requirements for providing good advice appropriate to client needs.

I agree with their views and I''m not g9oing to try and negate their points by referring to my own convenient perception that they are offered for people I wish to criticise or denigrate.

The fact is that any reliance on risk assessment questionnaires to form a valid accurate assessment of their risk attitude is doomed and has to be reinforced by discussion and a recorded agreement of how a rating has been measured and what that rating means, followed by a cogent explanation f how this translates to the risk management advice for the client.

Bringing this argument down to the dismissive level of the FSA is full of people who don;t have the qualifications or the experience to comment in the first place is not very productive and is likely to do nothing to foster a more positive attitude from the FSA, who, like it or not will continue to monitor adviser performance no matter w much one bleats about their shortcomings.

It's time advisers got their own house in order and then maybe the FSA will cease to be as necessary.

ian Coley

Partner

Medical Investment Services

Ian - The only Irony is that Hector Sants in his meeting with the TSC over the RDR is that I am sure he implied that Pirnciples Based regulation was failing and they were going back to more presctiptive rules again....

As I said earlier, I agreed pretty much with the FSA Assessment of suitability paper and as soon as Citwire respond with how I can paste the points Ihighlighted when reading the paper I will do as I think it may help others.

Phil

Is that so?

I was under the impression that the FSA believed principle based was better than the previous and whilst not working perfectly the intention was to continue with this.

I your impression is correct then that would be tragic and advisers need to press their cases.

Whilst appearing to be pro FSA previously on this thread I must also say that I believe advisers and providers alike are not robust enough in defence of their own industry and processes. the FSA do need to be challenged.

Unfortunately whingeing doesn't count as a serious challenge.

Anyway I think I've probably stuck my oar in enough n this debate and I have some pro bono guidance to work on ;-)

Ian Coley

Partner

Medical Investment Services

Hector once said something along the lines of: "you can't have principles based regulation for people who have no principles".

Quite!

Words are cheap. For a 288 page opinion indulge yourselves in 'Hindsight -The Foresight Saga'. Thirty plus years of research dispel the myth of a 10 year financial cycle, the security of gilts, and highlight the omnipotent effect of property values on equity markets and banking capability in our western society.

I am giving it to my clients to mark 40 years in my (wonderful) profession.

Ian wrote of cross subsidies, our life in business is all cross subsidies. That is what commerce is.

The FSA (and its successor organisation) is built on words, volumes of meaningless script produced to fill time and employ unqualified, inexperienced leaders ,like Ms Bowe of RDR initiative fame, and Mr Kenmir, niether of whom had qualifications to match those that the preached to and lorded over.

Much is preached of professionalism - what ACTION are the correspodents in this debate taking? Where are your books to educate and inform? Where are the real words of wisdom from genuine experience?

I have written mine and they are controvercial and accurate, and I have given them to those that matter, MY clients- not the FSA's.

IFA reveals regulator's failure in investment suitability..

Just read an article in Fundstrategy on solvency ii which is close to my heart...

As an adviser of fairly simple brain it seems obvious to me that, post crash, equity purchase has been a pretty good bet - prices are relatively low, there should be a benign regulatory environment because we need to encourage entrepreneurship, and, with the rise of the East, I have a sense it may be better to own a company rather than lend to it.

At the same time, with interest rates at a 40 year low (strange derivatives aside) the last place you would want to be is in any kind of fixed interest. Including sovereign debt as it has become plainly obvious that many governments are rank amateurs when it comes to economics.

So why would you force insurance companies to pile into sovereign debt and out of Equities at just the wrong time?

Sol trader - because if the clients lose money there will always be some way of making the adviser foot the compensation bill?

Correct me if I'm wrong, but after the .com crash, the FSA forced the big institutional investors ((particularly the pension funds) to reduce their equity holdings in favour of fixed income thereby crystallising their losses. They obviously haven't quite got the hang of the 'buy low/sell high' concept!

Also - how many companies with final salary schemes were taking contribution holidays in the good times. Did no-one ever explain to them that markets go down as well as up and that you have to invest through the cycles in order to average out?

Seems to me that the only difference between IFAs and the 'experts' is that we pay when we get it wrong - and very often also pay when THEY get it wrong!

Is there such a thing as Capacity for Loss?

I have just been writing a suitability report for an adventurous investor and despite what I wrote above supporting the general concept, capacity for loss can have many different connotations.

It's not so much capacity for loss as capacity to ride out the storm.

Just make sure that there are other sources of funds for when (as mine did last year) the roof falls in!

Hence I keep banging on about the crucial difference between volatility (of paper valuations) and risk (of actual loss, if the investor panics and crystallises those paper losses).

Above all else, novice investors need to be educated to understand that Unit Trust funds are not turbo-charged cash accounts that only ever go up and up in value from the word go, as all to many such people (especially those who work in the public sector and ESPECIALLY teachers) seem to want to believe.

The term "managing client expectations" seems apt.

Julian, what would you do if you saw your investments plummet by 50% over a six month period? Wait until it was 75% down?

If I'd gone into that particular investment forewarned that to get top returns over the medium to long term, I'd have to risk seeing some pretty scary falls in value in the short term, then I'd sit tight and wait it out.

I have a client ~ an experienced investor ~ who invested £7,000 into Neptune Russia & Greater Russia just before the big blow-up and he was quite unconcerned to see it drop by 60% over the following 6 months. The following year, it rose in value by 130%.

Hmm, I agree with Julian here, although he argued with my points (which were the same as his above) in reltion to Barclays getting screwed over the Aviva stuff - Mrs Smith and her Aston Martin need for cash! - i.e. when is a loss a loss?

As far as Evan's comment above is concerned... there's one thing being hypothetic, but at least make teh hypothesis realistic :-)

We all know that ALL asset classes will at times, produce negative returns (cash is at the moment, gilts will when interest rates finally rise etc etc).

Maybe instead of the usual "the value of investments MAY fall as well as rise" more people should use our own version:

'The value of investments is not guaranteed and will, at times, fall in value as well as rise'

As Julian says, (and so do the TCF principles) its all about managing expectations.

All my humble opinion of course

£7k Julian? The claims I am seeing are £700k...

And yes the losses are 50% or more, old ladies, widows, first time investors. The problem is that they only have three years from the point they should have had 'reasonable knowledge' which more often than not also happens to be the date they 'crystallised' the loss in a state of 'panic'.

None of them were prepared for a roller coaster ride. In my humble opinion it would impossible to manage their particular expectations no matter how many questions you ask them beforehand.

Be careful out there folks.

You must be joking - Beat me to it, I was going to say it is all about "managing clients expectations", if they suffer a fall in value which has been explained as a probability, then whilst a fall of a % in the tens should be invesigated and discussed a knee jerk reaction is not usually a good idea.

Blimey Evan, looks like some serious lack of common sense on the part of some advisers.... I didn't realise those were the sort of cases you were coming up against.

There's Julian and I saying common sense may mean a small holding in something opaque does not skew a portfolio (again I never used Cru), so please don't anyone attack me for trying to be open minded and identify why somone might have been happy to use them while I didn't see a client where I thought their product was the nearest match), but when sums over £100k are involved how on earth can any adviser claim to be using their common sense and justify the advice? What proportio of the clients total portfolios were these Evan?

HOW INTERESTING THE DEBATE HAS BECOME! There is no consensus in the market place. For every OPTOMISTIC purchaser of a share or option there is a PESSIMISTIC seller. Consensus on the ability of an individual to withstand loss is subjective and can, and does change constantly.

The FSA QUEST FOR UNITY OF THOUGHT AND DEED IS A LOST CAUSE.

My clients do not like losses. They do , however, as everyone else who has commented will doubtless report, accept the possibility of recovery and future gain within that recovery; if it is explained properly.

The clients attitude to loss and risk therefore changes with their perception of the facts rather than the facts themselves.

Great debate. 'Hindsight' is the answer to many a prayer.

Phil, how about 100% ?

Unsophisticated people too. Fees and commission, it makes no difference.

Until you see these cases you can't possibly appreciate how bad it is out there, don't forget that the regulators see more of it than I do and will react quite differently because they are.. er.. regulators which is why they go berserk and make all of you justifiably feel you have been unfairly tarred with the same brush.

I am looking at some pensions placed with a Scottish life office which pays 8% CAR, churning like never before and all RDR compliant!

I'm not complaining, it keeps me busy.

With Independant advice, a 100% loss should not happen as common sense alone dictates a broad spread of holdings and investments. My only slight dicomfort when saying that is over the use of Platforms and Wraps, which may well be structered correctly and all be above board, but massive fraud, could still be a problem.

With tied advice, where you are the agent of the employer and not the client, it is a whole different ballgame and having worked for a bank at one point as a tied adviser, there is the all the eggs in one basket problem even if they may be spread across mutlipel FSCS classes, i.e. Investmnet arm, Insurance arm and deposit taking arm and is one reason why not being tied (note I didn't not say Independant in preparation for the change in reuirements for meeting the Independant definition post 2013)

...and presumably none of these miscreants were qualified to level 4?

Kevin, very funny!

Evan - that's the problem - it ISN'T funny!!

The sad truth is that, much as I believe the FSA are trying to do a good job - most of the measures they have taken and propose to take have not and will not stop most of the problems the investing public have suffered over recent years - it just adds to their problems by increasing their costs.

Kevin is right. Increased costs create increased propensity to take risks and ultimately defraud.

The stick has failed the majority. I believe that you are quoting a significantly small minority of cases Evan. A bulldozer is never appropriate for picking cherries even though it gets them all in one go. Terence P

Kevin, all of these people are level 4 or above, most IFAs only need some 'gap filling', one has so many letters after his name they go round to the back of his business card, well not really but you get the drift.

Terry, I am sure that what I am seeing is a tiny fraction of the whole market but they are still shocking me to the core, my IFA friends can't believe what they see which is why they send them to me to sort out. I really need some big cases against banks and one DSF in particular.

No, the RDR will not prevent most of this, just more regulations and more gaps.

If IFAs can be held responsible for putting 100% of their client’s money in a ‘cautious fund’ which CRU was designated to be, then why aren’t local councillors paying out of their pocket for putting public money in two Icelandic Banks which had been suspect well before they finally went bust?”

Besides that: what were they doing with £8 million to £10 million of public money in one bank? ‘Sauce for the Goose’ is ‘sauce for the Gander.’ Beware, because it may be you that ends up with roast potatoes round you!

How come the FSA and Bank of England employees are not paying into a compensation fund when I saw the banking crisis coming in 2007 and wrote to the Mail & Telegraph to tell them?