As equity markets continue to struggle, the flight to bonds as an alternative asset class has a distinct smell of short-term sheep mentality.
To an extent, this is understandable. Clients are bound to be nervous of investing new money this week to see it worth less the next, while pension funds are concerned to try to keep fund assets aligned as closely as possible to liabilities.
However, I cannot help but think that far too many advisers have suddenly changed tack when what they should be doing is educating and reassuring their client base. What has happened to all the stock maxims such as:
1: Buy low and sit tight for the recovery.
2: Do not switch asset classes at a time when the one in which you are invested is depressed, 3: Investments in equity-based funds are medium to long-term and do suffer periodic downturns which may be more severe than just the occasional short-term blip.
4: Diversification of any investment portfolio on all parameters dilutes the likelihood of short-term volatility.
5: And this is the one which so many people seem to be overlooking – if interest rates go up then fixed-interest investments will take an immediate tumble, as will the amount of income they are generating.
None but the most sedate types of investment are free of risk and none can be expected to give great returns year on year without suffering the occasional setback, sometimes a bad and prolonged one.
Perhaps, as an industry, we need to bear in mind that all these risk warnings required of us by the regulator are, after all, of value and relevance, particularly when the seas turn stormy.
On the subject of the regulator, for us, the outcome of the FSA-imposed retrospective reviews of past FSAVC sales has resulted, so far, in one case requiring us to pay redress. Technically, the client has lost out because back in 1995 we failed to quantify precisely the differences in the impact of charges between contributing to his employer s in-house compared with a freestanding plan. Even though no regulatory guidelines were in place at the time, we should have foreseen what those guidelines were going to be six years in the future.
We did advise the client that a free-standing arrangement would probably entail heavier charges by comparison with his employer's scheme but set this against all the potential advantages of the free-standing route.
The client could have sought an illustration of possible future benefits so he could see just how the projected benefits at retirement might differ between his employer's in-house AVC scheme and the free-standing plan we were recommending, but he did not want to wait three months. Service was also an issue, you see. The client was happy to accept our advice at the time.
Anyway, as a result of the FSAVC review, an unquantified loss has been established and, within the terms of the FSA's review, the way to correct this which causes maximum financial hurt to the IFA is to surrender the free-standing plan so its full accumulated value (we have to make good the surrender penalties) can be transferred into his employer's in-house AVC scheme.
No other avenues which might be at least as acceptable to the client or less financially disadvantageous to the IFA may be explored.
The thing of it is that the employer's in-house AVC scheme was with Equitable Life. The advice we gave back in 1995 turns out to have been very much to the client's advantage but still we now have to pay £1,104 in compensation. Is this a travesty of justice or what?
WDS Independent Financial Advisers,