Getting risk wrong
Standard Life was on the receiving end of a substantial regulatory fine today, for publishing misleading literature about its Pension Sterling fund.
They received a £2.45m fine from the Financial Services Authority (FSA) who said that Standard Life had misled the 98,000 investors in this fund.
Investors believed they were invested in secure cash holdings when in reality the fund was investing their money in much riskier ‘asset backed’ investments.
Informed Choice chief executive Nick Bamford was quoted on the BBC News website today, commenting on this fine:
“It was a complete cock-up, but they dealt with it well and said they would reimburse people quickly,” said Nick Bamford of IFA Informed Choice.
Getting your understanding of investment risk wrong can have serious consequences if you are an investor.
We often meet with new clients who prefer to take a cautious attitude towards investment risk, beleive this is how their investment or pension portfolios are positioned, and then are shocked when we demonstrate just how much risk they are taking with their money.
Part of our investment advice process is the analysis of the underlying asset allocation of a portfolio. This enables us to plot the portfolio on an efficient frontier graph, displaying a simple graphical representation of how much risk an investor is taking with their money. We can then compare this with how much risk they should be taking.
Too many investors rely on the names of funds, the sector in which a fund appears or the ‘expertise’ of a fund manager to control risk.
Risk control is an important part of investing money. It is often neglected, and this can quickly lead to disappointment. Do you know how much risk you are taking with your investment or pension portfolio?