OpinionSep 4 2014

Fos must be in sync with IFAs before making rulings

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My study text for R02 Investment Principles and Risk is a bit out of date, but there is one chart in it that has been around for years. It is the one where risk is mapped across the bottom and return is mapped up the side of the chart.

You then draw a line from bottom left to top right, and along that line write the main investment categories in risk order. You start with cash in the bottom left-hand corner and in this particular example venture capital is in the top right.

Just below that is Enterprise Investment Schemes, which I personally would have placed higher in the risk spectrum than Venture Capital Trusts, and below that (curiously) is ‘property’, without any further distinction between residential or commercial for example. Then we find ‘unlisted shares’ followed by ‘listed equities’.

Ombudsman adjudications are more important in practice than any other assessment of the suitability of our advice

This type of chart usually includes reference to other countries, distinguishing between the differing risks of UK investments, and developed world holdings or emerging market investments. These distinctions are ignored in this particular chart; something of an error in my view.

But the real reason I mention this is because of a Financial Ombudsman Service ruling in which this understanding of investment risk (contained in the benchmark study text for our benchmark qualification) is turned on its head.

In every discussion of risk and diversification, individual shares are described as higher risk than collective investment funds. They have no investor protection, lack diversification by most measures (number, sector, market, economy) and have little or no asset class diversification.

The adviser cited the client’s portfolio of self-selected FTSE 100 shares as evidence of experience in investing and acceptance of higher risk in investing. But here is the point of which every IFA should be aware. Fos says that FTSE 100 shares are low risk investments.

Instead of fussing about retrospective regulation, Apfa and the SBPP must pursue this much more important concern with Fos through their industry liaison meetings.

Ombudsman adjudications are more important in practice than any other assessment of the suitability of our advice.

If Fos applies a radically different understanding of investing risk than the one in common use in the entire adviser population it judges, then IFAs (and textbook authors) need to know about it as a matter of urgency. If not, no advice will ever meet the appropriate standards.

Gill Cardy is network development director of Validpath