When you receive investment advice from an authorised and regulated independent financial adviser (IFA) in the UK, you expect them to take responsibility for that advice.
Over the past couple of weeks a couple of cases have arisen where that duty of responsibility has been tested.
The Financial Services Ombudsman recently issued a provisional decision against an IFA who had recommend his clients invest a modest amount in a now collapsed fund from Arch Cru.
This provisional decision found that, despite the various unresolved issues surrounding the pricing and misappropriation of assets within the Arch Cru fund itself, the IFA should have understood the fund involved a significant degree of risk.
Leaving aside the marketing materials for the fund, which have been regularly challenged by advisers as being misleading, they did clearly explain that it would invest in mid-market private equity opportunities throughout Europe.
Despite the fund being classified as ‘cautious’, the Ombudsman says “to an experienced financial adviser these investments would not and should not have appeared to represent a low or cautious investment risk” at the time they were recommended.
It is understandable that many of those advisers who recommended this fund and are now facing client complaints want to place the blame elsewhere. They want to blame the fund manager, the promoter of the fund and even the Financial Services Authority.
Whilst all of these parties may have played some role in the demise of Arch Cru, the ultimate responsibility for the provision of suitable investment advice stays with the financial adviser.
This week we have seen dealing in the EEA Life Settlements Fund, which invests in US ‘death bonds’, suspended following a wave of investment redemptions.
Advisers who recommended this fund claim that the mass redemptions were prompted by the recent FSA proclamation that this asset class was ‘toxic’ and their intention to ban its marketing to retail investors next year.
Even before this FSA announcement, traded life policy investments represented a high risk investment proposition.
They often use complex and opaque product structures, with several different parties involved across multiple jurisdictions. Where this is the case with investment products, roles and responsibilities can be difficult to clarify.
Liquidity is also a major risk factor with traded life policy investments.
If you seek regulated investment advice, the buck stops with the investment adviser. It is their responsibility to look beyond marketing material to ensure the underlying investment they are recommending is suitable for your personal circumstances and objectives.
It is unfortunate that with many of the investment scandals of recent years, the financial adviser responsible for the recommendation has scrambled to pin the blame on other parties to the transaction.
Ultimately it is not those advisers who sell these esoteric investments who pay to reimburse their own investors, but the better capitalised firms who did not every recommend them, via the industry-funded Financial Services Compensation Scheme (FSCS).
Whilst we guess it is only human nature to see some advisers attempt to shirk their responsibilities, we do hope that a more professional retail financial services sector will emerge over the next couple of years, prepared to hold their hands up and admit mistakes, where mistakes are made.
Photo credit: Flickr/Dawn Huczek
