Make cautious investors aware of risks, IFA urges

According to RBS, IFAs will not recommend 28 per cent of cautious managed funds because they feel they are too risky and volatile.

Ian Lowes, managing director of Newcastle-based IFA Lowes Financial Management, said the biggest risk people can take is taking no perceived risk at all and opting for 'all cash investment' because of inflation erosion.

He said: "As long as an adviser is making the clients fully aware of the risks they are taking and is providing them with all the necessary documentation, then that is all they can do and the bottom line is that for better returns investors need to take more risk."

RBS research showed that in 2008 to 2009 the average volatility of the top 10 cautious managed funds doubled compared to 2006 to 2007. Some funds show an annualised volatility of more than 16 per cent.

Mark Loydall, director of Leicestershire-based IFA Cambourne Financial Planning Limited, said: "I do not like cautious funds at all. The issues have come to the forefront recently but it has always been there. Some cautious fund performance has been dreadful. Some have not done well even with cash plus targets as benchmarks."

He added that the title 'cautious' does not effectively mean anything and is a misleading label.

Mr Lowes suggested the issues around cautious funds, in part, comes down to a culture where if everything goes wrong people look for someone to blame and compensation options are explored.

He said: "Given all the disclosure and guidance an adviser will offer before a client commits to an investment, in a lot of cases the IFA may be unfairly seen as the one to blame."

Mr Loydall said everybody is looking for a pot of gold at the end of the rainbow and looking for a better yield than cash - given the low base rates - without taking any risk.

"The challenge for providers is to fill the need so that is where these cautious funds come from. It is a great idea but is so hard to achieve in practice," he said.

"Structured deposits are another way to go. You can get returns of 4.5 per cent and have money returned in most cases. But even these should be approached with caution because some are structured slightly differently."

Mr Lowes said structured deposits are without a doubt a good option for more cautious clients but there is still risk.

Mr Loydall said that advisers who do not understand particular products should not sell them.

He concluded: "Advisers should go down the route of explaining that investors can either take some risk for better returns or accept cash returns, because the in-between option, in the form of some cautious funds, will not be the ideal solution."