JANUARY 2012 |www.opp.org.uk WORDS | Lee Smith


BUSINESS


Developer profi le INVESTMENTS | 37 Clients with attitude


It’s annoying, but unavoidable - your clients will always have an attitude. If you are involved in alternative investments, whether real estate-asset-backed or not, you should be very wary about how you promote these investments. The process when ‘advising’ clients in this arena is fraught with danger says OPP investment expert Lee Smith.


investment advisor’s understanding of a client’s attitude to risk is central to the legal and regulatory requirements that will be involved in the investment process. Could this approach be coming to the alternative investment markets too?


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It all comes down to the fact that, at the heart of intermediary best practice and regulation, is the concept of the investor’s interest, which should be paramount, naturally. The UK’s Financial Services Authority’s (FSA) sums it up by stating “ascertaining a private customer’s true attitude to risk is critical for any adviser in assessing suitability and making an investment recommendation.”


This is certainly the case for


fi nancial advisors being able to advise on regulated product. However, it is becomingly increasingly unclear on where things stand with unregulated investments currently being offered. With even more scrutiny than ever being placed on those investments that are SELF INVESTED, such as SIPPs (self-invested personal pension plans), I am sure that the question that will start being asked as we move forward will be: “Shouldn’t clients’ investments have to be made following advice from a


ithin the world of regulated investments, it has been said that an


professional?” Surely this would defeat the whole objective of self-invested options such as SIPPs? With many clients taking control of their pension funds, how should we approach all the issues around the “advice” that needs to be given?


It may seem ridiculous to question whether a client’s anxieties or more defi nite views about risk should be taken into account in the investment process. After all, it is the client who loses money if things go wrong. Indeed, the client’s fi nancial plan and priorities are normally the starting point for any investment strategy. However, what looks straightforward may be deceptively diffi cult. If an adviser’s understanding of a client’s ‘true attitude to risk’ is to be a legal and regulatory requirement in the investment process, then surely very intricate conditions must be met?


Following recent market movements and pointers from our own market tracking team, this is where I feel the market is going to be heading, potentially even for so called Self- invested Personal Pensions. Could they really force rules where a level of independent or non-biased advice would need to have been obtained before the execution of the investment, even from a SIPP? It would not surprise me at all. So, with this in mind, it


should be understood that investment risk and the willingness to bear it change over time. Every adviser knows a strategy can start by protecting against one or more risks, say, market risk and tax, only for external factors to alter the sources of risk a few years down the line. Similarly, a client on a high salary may originally feel they can accept exposure to risky assets but have a change of heart when faced with job loss, divorce or diagnosis of a terminal condition. Everyone feels comfortable with the perceived risks when the


“More and more fi nancial advisors will look to gain support from a third party advisory practice”


Balancing | your clients’ money with the risks inherent in property can be tricky


investments are made but what about the future when something goes wrong? And why should clients be expected to have this sort of technical input anyhow? It is being said that fi nancial and investment advising stands alone among professions in passing back to the client a level of responsibility, even liability, that falls well outside the usual with others. Nobody complains about bad advice at the outset; they come when an unexpected future event befalls an unprepared client. It is that future, contingent attitude that ought to be measured, not how the client feels at the beginning when everything is stable. But it is the dynamic, changing nature of risk and its various sources and effects that make truly meaningful measurement at the beginning of the process next to impossible. Thus, if forced upon them, I believe more and more fi nancial advisors will eventually look to gain support from a third party advisory practice taking on this investment advice process and responsibility for doing so. The use of psychometric risk- profi ling questionnaires seems


Lee Smith is a director of Project Kudos and has more than 10 years of experience in international property www.projectkudosgroup.com


connected with the requirement for clients to sign-off on the results of the questionnaire as representative of their true attitude to risk. But, let’s be honest, how would these clients know? Currently, advisors will not proceed without the client’s approval of the profi le results. Many investments make a point within their literature that the client’s signature indicates his or her understanding of the risk involved. Indeed, ‘appetite to invest’ may stand as ‘making the buyer beware’ evidence in defence of any claim brought by the client for investment losses suffered later. So, the arguments swing from the advisor’s stance of “this is how self- investments work” to the authorities’ viewpoint of “advice or promotion on investments is happening without any of the responsibility that should be attached.” I can see only one winner at the end of this fi ght. The authorities will state that potential investors must fi rst go to a professional for expert, technical knowledge, experience and impartial advice. After all, a doctor, dentist, engineer, architect, lawyer or surveyor is there to meet a need and accepts that one’s circumstances, objectives and concerns will be taken into account when the advice is delivered, albeit sometimes with caveats. Nobody would expect a structural engineer to ask the client to sign-off on loading calculations or other technical detail and use it as a defence against a claim if the building subsequently falls down. It is said that transferring risk back to the client only makes sense if the adviser lacks the competence to give investment advice that is capable of mitigating risk. Change is coming, so get your business ready now.


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