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Secret IFA: What if things go wrong?

Secret IFA: What if things go wrong?

“If we experience Armageddon then we’re all in trouble”. It’s the kind of answer that makes me want to pick the person up by the scruff of their neck and sling them out the door. I don’t, though, perhaps because I should have asked the question differently. After all, the crisis wasn’t Armageddon – it only felt like it.

The question crops up in many guises from clients: what if things go wrong? So when I’m researching products, it’s something I ask providers so as to understand their stress-test modelling. Being told we’ll all be in trouble isn’t helpful frankly. It’s what someone says when they don’t really know the answer, and that’s not good enough.

It’s the kind of answer I might have given when I first started selling investments for a living. People would ask “what happens if the stock market crashes”, and because I’d never experienced a stock market crash, that would be my best answer. I cannot quite fathom why people accepted such an inane response.

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The problem is, I’ve had this answer a few times recently while researching peer-to-peer (P2P) lending platforms. On the face of it their propositions look attractive, with some having contingency funding to meet the costs of bad debts, which is reassuring. However, the question remains regarding what would happen during a significant downturn. What I don’t want to hear is that “we’ll all be in trouble”. What I want to hear is something I can talk to clients about. Doing my best ‘Private Frazer’ impersonation saying “we’re doomed” won’t pass muster I’m afraid.

So although they’re able to tell me that the current default rate is x per cent (and may be adequately covered by a contingency fund) they aren’t able to tell me what the default rate of similar loans was like during the credit crisis? They cannot tell me how this would affect the overall interest rate, or what steps are in place to limit exposure to bad debt? Telling me we’ll be in trouble isn’t an answer, quantify it by telling me how much trouble – then I can make a judgement.

But it’s not just the P2P platforms, it’s anyone on the investment sell side. They all reel off the facts about how good things are/will be but when pressed on the downside, they clam up. And that’s a mistake.

I’m more likely to seriously consider a proposition when I can see and understand how it will play out in both conditions. Pretending it won’t happen – or that it means disaster for all – shows me someone hasn’t done their homework or has something to hide. Neither is acceptable.

By asking the question I’m not trying to trip anyone. It shows I’m interested in the upside potential to want to know about the downside. And if you can show me an asymmetric risk return profile, so much the better.