However, putting aside these arguments, let US look at what we can do constructively for the sake of our clients and the health of our businesses.
In the due diligence I have done for IFA clients, the cru funds have popped up. Yes, some of my IFA clients used these funds and are feeling the pain of the suspension in discussions with their clients. But at least they are able to have these conversations with clients who were aware of the potential risks posed.
It sounds much like shutting the stable door after the horse has bolted but it is important for us as advisers to ensure we have robust due diligence and investment processes to protect clients and ourselves.
So how would due diligence processes have helped me avoid this investment, you ask? The honest answer is that it probably would not have but it is likely to have ensured that you and your clients were clear about the real market risk. It is unlikely that the fund would be a core investment within your client portfolios and even more unlikely that your cautious clients would have exposure to the funds.
These are bold statements so let’s deconstruct this using the CF Arch cru investment portfolio fund as an example. The fund was touted as “a core portfolio for the cautious investors”. Cru reported the monthly returns as being a percentage above cash returns and benchmarked against the cautious managed sector.
Cru argued that the fund’s underlying investments were not exposed to the volatility of public markets as it invested in, among a number of esoteric ideas, uncorrelated private equity and private finance markets. But robust due diligence would have highlighted that the underlying investments were difficult to obtain independent valuations for and lacking a secondary market such as the FTSE. Liquidity was difficult to define, even though it was structured within a tradable open-ended investment company.
Therefore, it was unlikely to be suitable for cautious clients and should not be a core hold- ing – diversification and asset allocation were key. Some might argue that for suitable clients, cru could have offered an uncorrelated asset, a valuable addition to any portfolio, but only with a clear understanding of potential risks.
Compare this with an adviser we know of who gave clients a cru “passbook” and upd-ated it every month with “interest”, giving the impression this was as cautious as cash.
Where your investment processes are set up to ensure proper due diligence is undertaken, this will help you to assess the various risks. As a result of this, you will be able to manage the liabilities to your business which could be caused by external factors.
Shannon Currie is a director of Perception Support