Education

A steady flow of depressing tales about cases brought to the Financial Ombudsman service (FOS) involving people investing in highly unsuitable assets via Self Invested Pension Plans (SIPPs) makes me fume.

The awards paid out to put consumers back where they should have been are paid by professional indemnity insurers or the financial services compensation scheme, both of which are rising costs for all adviser firms. In other words, the decent firms pay for the folly or plain fraud of others.

One might wonder how advisers seem to tell completely inexperienced investors with not much money that they can safely invest in what seem to be weird and inappropriate assets. Cases recently have involved house building projects and self storage pods! Even investments in gold bullion fall into this category of potential disasters.

Often the assets are outside of the normal regulated investment products and only get caught by regulatory oversight because of the use of the SIPP.

The likely scenario (I have seen this in my working life a few times) is that the client came to the adviser already thinking that they wanted to make a ‘sure-fire’ investment they had read about or a friend had drawn to their attention. The only money they had was in their pension funds and someone suggested (often the promoter of the risky investment) that if they moved their pensions to a SIPP, they could invest.

As most advisers work on percentage fees paid only after they complete an investment (so called contingency fees, which I think ought to be banned), they are motivated to proceed with the transaction. They may well feel protected from future complaints by issuing pages of risk warnings, which of course the client sees as ‘bureaucracy’ and ignores, and adding a little diversification as window dressing. In effect, they say to the client – ‘if you want to do this, who are we to argue? We can make it work, for the right money’.

This is frankly disgraceful and it is a good thing that the FOS will usually assess the suitability of the high risk/illiquid/failed investment relative to the client’s experience and risk profile, irrespective of what any suitability letters or file notes may say. In the worst cases, the adviser is found to have made an extra commission from the promoter of the investment, sometimes at a very high level. To me it odd that such advisers are not immediately banned by the regulator.

What an ethical professional adviser ought to say is that the suggested investment is totally unsuitable for the vast majority of people and should not be touched with the proverbial bargepole! Of course, such good advice may earn them no money and the client may even go somewhere else to get what they want.

A good test of whether or not your adviser is acting in your interest is what is called ‘skin in the game’. Ask the adviser – do you own this investment, or would you buy it in the way you propose that I do?

As an adviser, I usually bought investments in new funds to observe performance before I recommended them – at times I lost money as a result. Good fund managers also own personally many of the shares they have in their portfolios. In simple terms, an adviser should put their money where their mouth is.

And if they think an investment is not something they fancy, they need to talk people out of it, vehemently, or decline to act for them. One problem is that many financial advisers actually have no idea of how to assess the credibility of an investment, having no relevant qualifications or training. Make sure yours does!