There is a reason why we have rear-view mirrors in cars. And I can personally attest to the fact that you will not pass your driving test if you don’t check them at the appropriate time.
However, you would be a menace on the road if you kept your eyes glued to them rather than looking at the oncoming traffic. There is a reason why windscreens are larger than wing mirrors.
But I wonder if the regulator has not been guilty of this in recent years. Many in the industry think so. It stands accused of focusing too much on past crimes and misdemeanors, rather than giving its full attention to the dangers lying ahead.
One fund manager I recently met is convinced that the regulator’s focus on “safety first” and its obsession with process, means consumers now get poorer financial advice.
At the crux of this matter is the reliance on questionairres, risk-rated funds and the box-ticking audits, which seem to form the backbone of the advice process. Is this leading some advisors to recommend funds, that they don’t really – hand on heart – have much faith in?
Funds that are solely, or heavily invested in bonds are a good case in point. Interest rates have to go up at some point and when rates do rise it is bound to have a negative effect on the valuation of these bond funds. But as these are less volatile assets, that are suitable for those of a risk averse nature, many middle-aged, middle-class savers are being shovelled into these funds where there is relatively little upside in the medium term, but potentially quite significant downsides when its comes to the preservation of their capital.
But don’t worry, no-one is mis-selling these funds, because the advisor has undertaken all relevant fact finds and risk assessments, the details of which have been property audited and filed correctly.
In some ways I have some sympathy with the FCA. There was a need for far greater due diligence on risk assessment, particularly among the “sales advisors” that used to be prevalent in the banking sector. Many stockmarket-linked bond or equity products were sold on mass to customers, with barely a check as to whether the risks were appropriate for the individual.
Similarly, within the advisory sector there have been problems with a minority recommending high risk unregulated funds without taking proper account of whether it was suitable for each client.
But has the pendulum swung too far the other way? Is this risk-based matrix failing to allow advisers to treat customers as individuals – but simply pooling them into large sub-groups based solely on age and attitude to risk?
There will be 59 year-olds, surely, who may not want all – or any – of their money in bonds, despite the fact that they are approaching retirement. Equally there may be those of a similar age who are quite prepared to take a mortgage into their retirement – whatever the regulation rule book suggests. But it’s a brave IFA who lets his clients take such actions. Presumably you need it signed off in triplicate that you categorically warned against it.
I would bet that the question IFAs hear most often from clients is “what would you do?”. There’s a real danger at present that the regulatory guidance will steer the recommendations down one route, but an IFA’s knowledge, gut instinct and good common sense might suggest quite a different course of action.
But if they follow the latter route they potentially leave themselves open to significant mis-selling claims if the investment does not perform as expected, or some unforseen event derails it.
In an ideal world, I think both options should be explained to the client, with the reasoning behind it. Sadly, in regulatory terms we are still a long way from this utopia.
Emma Simon is a freelance journalist