Beware of alternative investment advice pitfalls

Garry Heath

Garry Heath

I receive proposals for new investments every day.

I suspect that most post-retail distribution review IFAs can confidently advise on mainstream investments. There are numbers to crunch and established companies to assess.

The biggest peril is risk-profiling. Investors can be brave in the comfort of a warm room, but once exposed to the cold light of day their retrospective view of risk can change profoundly.

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The regulator may hate the way advisers concentrate on giving fulsome and clear written advice. Their complaint is that advisers should expose themselves to more claims for bad advice. Advisers are not that stupid, but what about less traditional investments?

In terms of social benefit, funds raised by alternative investments such as enterprise investment schemes are of great value, particularly to new firms.

George Osborne never tires of encouraging them, and in a world of poor returns the attractions of finding the right one is not lost on investors. Even the regulator seems to believe that the ability to advise on alternative investments defines an adviser’s independence. However, to access these investments sophisticated or high net worth investors must self-certify.

My question is, what added value does the adviser actually bring to the process? Tax advice, sure, – but what about stock picking? Let us look at the EIS market. Most companies have no track record. The management may have experience – but is it relevant?

Their product or service – is it truly special? Is the whole scheme fraudulent? So given the investor is deemed to be sophisticated, what is the adviser’s actual added insight worth? I would suggest very little, and to pretend otherwise exposes the adviser to attack and exposes fellow advisers to financial services compensation scheme claims.

There are new software systems that may offer a solution. MICAP is still developing, but it offers to assemble all EIS schemes into one place and then rates each offering.

Currently it’s sold as an adviser’s tool but maybe this should be developed to offer sophisticated investors a comparison system; allowing advisers to give generic and tax advice on alternative investments but leaving stock picking to the client.

Advisers would not dream of charging their clients for advice on how to bet online, so why give your client the comfort blanket of advice on something you cannot properly research? When your client wants to bet, stand aside. The FSCS levy might drop as a result and that would be very welcome.

Garry Heath is editor of The Heath Report