Will good advice today be mis-selling tomorrow?
Every day it is possible to read about mis-selling of financial products. Dissatisfaction arises because investments fail to meet clients’ expectations. In many cases, investors have simply bought a product rather than receiving advice as part of a co-ordinated wealth management strategy. Endowment policies – a UK cocktail of savings and life assurance – were in vogue during the 1980s, when stock markets consistently provided double-digit returns. They were marketed as an efficient residential mortgage repayment strategy. Assuming markets continued to surge, they would provide sufficient capital to repay the debt, with possibility of a surplus lump sum above maturity value. Most endowments did not guarantee debt repayment. Now, low inflation and a prolonged bear market have left some individuals holding plans unable to repay the outstanding debt. Investors whose plans matured during the last few years tell a different story, with values far exceeding expectations. Was this mis-selling? Investors must be fully aware of the risks – in this case that there are no guarantees. Advisers may be mis-selling if the risk element is not highlighted. The balancing view is that many investors chose this option as an opportunity for increased returns. Many investors complain about pension plans delivering poor performance or negative returns. In fact, a pension is simply a tax- efficient structure that holds investments. It is the investment content that has failed, in some cases, to meet expectations. High or guaranteed income bonds have also come under fire. In many cases, these guaranteed a high level of income – sometimes double the rate paid on cash – but with no guaranteed return of capital. The original investment would be returned only if stock markets did not fall below a certain level. While markets were rising, these bonds provided income without capital erosion but during recent bear markets, investors were simply paying themselves back their own money. The question for both advisers and investors is how can such circumstances be avoided. It comes down to asset allocation and market timing, combined with assessment of an individual’s risk appetite. In addition, these factors need to be combined with the appropriate investment structure based on client objectives. This highlights the need for ongoing professional advice to ensure the chosen strategy continues to match requirements. Christine Ross is head of financial planning at SG Hambros in London Christine Ross
