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FOS rules against adviser over Arch cru fund recommendation

The Financial Ombudsman Service has upheld a complaint against an adviser who is deemed to have inappropriately placed a ‘low to medium risk’ client into the CF Arch cru investment portfolio.

In a decision document issued by the FOS, and seen by Money Marketing, the FOS says the client’s £100,000 investment exposed the capital to a risk greater than the client was prepared for.

The FOS says that the low to medium risk rating did not match the CF Arch cru investment portfolio given the funds’ 55 per cent exposure to private equity. According to the FOS a medium risk investment should hold no more than 5 per cent in private equity.

The FOS also questions the classification as “a low to medium risk investment” sitting “firmly within the cautious managed sector”, due to the inherent counterparty risk increasing risk to the fund. The fund sat in the IMA cautious managed sector.

The adviser has been asked to return the initial investment as well as a capital growth equivalent of 1 per cent more than Bank of England base rate compounded from the date of the investment to the date of the letter minus any withdrawals and any money recovered from the sale of the fund’s underlying investments.

The Arch-cru fund range was suspended due to liquidity concerns on March 13, 2009. According to Capita estimates, the investment portfolio has fallen 40 per cent from March 2009 to September 2009. Capita recently announced that it would begin distributing the suspended fund’s assets, which could take three to five years.

Regulatory Legal Partner Gareth Fatchett says: “This is a worrying development for firms who relied on the IMA cautious rating”

“This case sets a dangerous precedent for firms who risk profiled the portfolio fund as cautious. It would be naïve to think FOS will not use the methodology as a precedent”

The IMA says it cannot comment on individual funds. But it says to qualify to be in an IMA sector, funds must comply with the sector definitions and regulations set out by the FSA.

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Comments

There are 41 comments at the moment, we would love to hear your opinion too.

  1. £100k in one fund? Reliance upon others to assess the risk is no defence. No idea what FSA regulations have to do with it.

  2. Its a shame for the adviser (or his PI provideras they will face the brunt of the payment) but the FOS outcome on this is correct. The fund may have been marketed as low risk fund but with so much of it unknown, it was always higher risk than suggested. Thats not with hindsight either as plenty of advisers, myself included, were telling people not to use this fund as it wasnt what it appeared.

    The IMA classification is not sufficient for advisers to use as a guide to risk. In some sectors you get a very large spread of risk between the funds.

  3. The long and short of it you should not trust what any company is saying and yes do your due diligence although it is sometimes exceptionally hard.

    The problem with our industry is that the investment houses will always tell you what a wonderful product/investment it is but always remember where the buck stops. Having been caught in the splits debacle, rest assured I am the most cynical advisor out there when it comes to the companies telling you things and making promises.

    I bet this advisor will now be the same!!!!

  4. Elizabeth D'Costa 15th December 2009 at 3:12 pm

    I do not know why this is suddenly headline news.

    The FOS has been issuing similar decisions for years and getting away with it without any real recourse. I sure you have a barrister who writes about this regularly

    I am hoping the conservatives stick to their pledge, close it down and set up a professional complaints organisation who understands regulation and risk.

    David and George over to you….

  5. Surely an adviser should look at the asset allocation of the portfolio and would notice that 55% in private equity is by no means low to medium risk? It smacks of a lazy adviser to me.

  6. Incompetent Regulators Awards Team 15th December 2009 at 3:16 pm

    This is an edited story as if we look at the details we may find a different view. The reasons are simple, adjudicators and Ombudsmen at the FOS are mostly unqualified, not very bright and have little experience in the areas they adjudicate in. I know as I have dealt with many. What we need to know is what the adjudicator’s experience is? That we will never know as they have been instrucetd by senior management not to disclose or answer these questions when asked. SECRECY IS THE NAME OF THE GAME.

  7. So we cannot rely now upon the IMA definitions, the FSA authorising of firms and their products or the firms own educational material and marketing literature does not leave a lot of scope for us does it.

  8. The important thing is for The FOS to have a consistency in terms of their rulings. I have previously experienced a client lose a case against a previous IFA where The FOS defended the IFAs right to rely on information provided by a fund manager as to the level of risk on a fund, but I have also seen them uphold a complaint against a firm run by a friend of mine where they were not permitted the same luxury.

    The FSA must also stop using retrospective knowledge to condemn IFAs. This is particularly relevant with structured products. Two or three years ago the FSA issued a paper advising IFAs which areas needed to be covered with clients to satisfy the Regulator. Counterparty risk was not included, and yet the FSA are now strongly criticising IFAs in this area. If the FSA could not forsee the collapse of Lehman’s when they were supposed to be regulating them, what chance for the IFA, except we are an easier target.

  9. It doesn’t do anyone any favours to complain about a specific judgement of this nature. To believe that having 55% in illiquid equities is low to medium risk is frankly unbelievable. The experience of the FOS adjudicators or the IMA sector categorisation notwithstanding.

  10. The guy clearly didn’t do any DD at all on the fund, nor did he bother to diversify or follow a process of asset allocation outside of what the fund manager had told him was already taking place in the fund (55% private equity!)

    He deserves the punishment, because he has not done his job properly.

  11. To: Incompetent Regulators Awards Team

    I’m not sure that you slagging off the FOS in this manner is pertinent to this case. Lots of people warned about this ‘fund’ almost continuously from launch, many people complained to the Regulators and some publications even refused to publish the adverts for Cru!

    I had a conversation with IMA where I cast doubt on why this fund was in CM, they said that the definition of a CM fund was done pre UCITS and therefore this fund did ‘qualify’ to be in the sector. Anyway, any fund sitting in CM can invest up to 60% in equities, with no geographic limit…. so in theory a fund manager could have 60% in a single emerging market!

    There were always misgivings about Cru from the start. How is calling the FOS’s staff ‘….mostly unqualified, not very bright and have little experience in the areas they adjudicate in..’ is relevant here. Are you saying that the adviser was correct to throw £100K of a ‘low/medium risk’ client’s money into a single fund was a good idea, was it good advice….or do you think that having any sort of complaints procedure is wrong and you should be able to do whatever you like, with no redress?

    Please respond, I’d really like to know your thoughts on this.

  12. I was surprised to see so many comments condemning the IFA here and, although I agree with them, I also think that the criticism should be aimed at the regulatory structure as well. It is a massive failing that this fund is marketed as IMA Cautious. Yes, the adviser has failed however, we first of all have advisers of varying experience doing this work and we all rely on such classifications (to a greater or lesser degree) when making decisions about suitable products and, in this case, it doesn’t seem to be a situation where a rogue adviser is selling an unsuitable product for a higher commission. I would say that the adviser has been naive and tried to do something better then average for a client and got it horribly wrong. However, there are a lot of people involved in the regulation of this industry (who are getting paid a lot of money) and they only seem to be effective at punishing advisers who have tried to act within the rules at the time, they are not looking at what is happening now, attacking areas where the regulations etc are wrong, and dealing with them. This whole issue of structured products is another such area. How are we supposed to trust any part of the foundations that the industry is built on if we have to start doubting things as basic as the IMA definitions for each fund? It’s the levels of investment confidence normally associated with banana republics. In fact, based on the this case and the structured products issues, do we really need the FSA for guidance if we can’t rely on the things we believe they are overseeing. If it was made clear to us that we could trust nothing and no one then we could get on and work in that fashion and then just have a body that punishes us when we get it wrong. We’d al save a lot of money.

  13. I am facinated by this concept of “attitude to risk”. I have yet to hear of a “risk adverse” client being required to repay an excessive gain made on a “risky” investment. I have known the FOS to make an award to a “risk adverse” client where they made a loss on one investment, but refused to take into account previous gains made on similar investments!

  14. The IMA is an industry sponsored association setup to promote the interests of its sponsors, in this case the fund management groups.
    The IMA has a select group who advise on the classifications but it is down to how the fund managers present the fund to the selection committee as to how and where the fund will be classified. The fund managers often suggest what category the fund should be in and suggest in their literature to the IMA where the risk profile and investment profiles should sit.
    Don’t blame FOS, the FSA or the IFA, the route cause is often the fund management groups, but the end retailer, i.e. the IFA, will take the blame because he failed to carry put additional Due Diligence. Another case of ‘if only’. Remember 10minutes extra research before signing can save hours of unnecessary aggravation after the event.

  15. Again we see the need for the FSA to stand up and set standards that clients, IFA’s and the whole of the market can rely on.
    The FSA should define each investment before it is allowed to be marketed.
    Then the IFA should do their spread of investments.
    Keep it simple and tell all so we have a transparency which would reduce complaints.

  16. My message to IFAs who advise on investments without appropriate additional experience or qualifications is this – refer it to someone who does, or pay £100 or so a month for independent research.

    Trustnet defines the sector thus –

    …….The IMA restrict these funds to include a maximum equity exposure of up to 60%, coupled with at least 30% invested in fixed interest and cash. Cautious managed portfolios are effectively tailored to include an allocation between stocks and bonds that are designed to provide both income and capital appreciation while avoiding excessive risk. They should be held over the longer term, with a five year view, and are aimed at highly risk averse investors seeking capital preservation, with an exposure to bonds and equities in order generate returns above simply holding cash………

    My understanding is that some/most of the private equity exposure was in the form of debt, so maybe that’s why the Arch Cru fund was able to fit into the sector, at least technically.

  17. I agree with lots said before but can i just ask what is the point of the IMA sectors?

    Surely any fund that obtains approval from the FSA would need to provide documentation that would then be used to define which sector it “fits” into. Surely some due diligence by both the FSA and IMA is required otherwise fund management companies can “badge” their funds to suit themselves. Yes the IFA needs to complete due diligence and sometimes query the information being given but surely we have to believe what other supposedly independent bodies have concluded.
    If not what a shower of an industry we are that things like this can happen and continue to happen.

  18. These sorts of stories really put a lot of wind into the sails of those advisers who use passive funds on a low-cost platform to create asset-allocation models for clients. Not much chance of being accused of misleading clients into buying unsuitable products when you’re simply replicating indices, is there? Or being accused of overcharging!

  19. So we cannot rely now upon the IMA definitions, the FSA authorising of firms and their products or the firms own educational material and marketing literature does not leave a lot of scope for us does it.

  20. John

    You have never been able to ‘rely on the IMA’s definitions….IMA sectors are simply a rough guide to the general slant of the funds contained within it, and sometimes a way to measure performance against their peers. Just because a fund is in the CM sector does not mean it is ‘cautious’, indeed it can be argued that the CM sector as a whole has failed significantly in the light of the events of the last few years.

    For an IMA sector which has potential trouble written all over it, look no further than the Absolute Return sector. Different funds, doing wildly different things, some UK focused, some international. Comparisons are meaningless, in the same way that comparisons within ‘Specialist’ are meaningless. IMA do warn about this in the definition of Specialist:

    Specialist

    Funds that have an investment universe that is not accommodated by the mainstream sectors. Performance ranking of funds within the sector as a whole is inappropriate, given the diverse nature of its constituents.

    Due diligence is required…. remember who always gets it in the neck when things go wrong, yup, the PBIFA (Poor B****y IFA!)

    Oh, and to any Account Managers from Standard Life who may be reading this, I hope this is not too negative! 🙂

    DS

  21. to Phil Ham

    I have to agree Phil. We have done exactly that for two years now. Our defensive portfolios have outperformed the IMA Cautious Managed Sector, our Balanced portfolio has outperformed the IMA Balanced Managed Sector and our Aggressive portfolios….well you get the picture.

    The use of passive investment funds (ETF and Index Tracking UTs) also enabled us to increase our own advice fees to 1% whilst still maintaining an overall client charge of less than 1.75% including Wrap costs.

    I am about to launch a fee based service (payable by the IFA not the client!) outsourcing the Intellectual Property behind our portfolios to enable other firms to migrate to a 1% charging structure in a cost neutral way for the client. Please contact me on 01462 687 337 for further information

  22. This is why I’ve always tried to sub contract wealth management above £25K to discretionary managers who I know & trust. It might mean I have less income, but then again less headaches.

    Risk & Return has been turned on it’s head in the past 12 months. However where was the regulator in all this??!!! Why didn’t the FSA step in & regulate funds as to their description??!!…Seems to me a bit like the KeyData fiasco…The IFA is going to be made responsible for a regulated product that did not do what it said on the tin…

    So who regulated the providers… the IFA or the FSA.???

  23. I had a £75000 in arch cru. My advisor told me that this was as safe as cash or as the previous MD of arch cru put it you could bet your grannys pension on it! I am deligted at this news and will be starting down this road. I have looked at all the information and the amount of warnings that were made before my investment was made the company sounds like a complete joke, and i cannot believe my advisor still pushed this. 4% upfront commission probably played a part! I wanted to keep my investment as cash as i was worried about the unstable situation in the economy but i unfortunately agreed to do it. A lesson learnt. I will never make another investment without doing serious research first. Its a shame because i thought that was meant to be the ifas job!

  24. Dear Anon – 10.36pm.

    The error you made was not on selection of the investment, but on selection of the IFA. This was always so obviously a car crash witing to happen.

    A. No doubt you saw performance charts that showed a line going straight up? You did? And you believed it? B. Did you notice Mr Maguire’s brochures had pictures of girls on them? You did? And you thought that looked reassuring?

    Crucify your IFA: he short-changed you and is not competent in our industry. Re: your 4% initial commission – you either agreed that so its your fault, or you didn’t in which case you’ll get it back.

    The competent IFA sector looks at items such as A and B above and walks away. The FSA have not got a clue and could not see what was so, so clear to anyone with an understanding of our industry. But don’t feel if you’re alone….5,000 investors put £5bn into an AIG fund via the banks, and the FSA could spot that one either.

  25. How do you know when a representative of an investment company/insurance company is lying? Their lips are moving.
    Sadly if you accept what the providers are saying without DD and scepticism you and your client will get hit.
    Portfolio constrction is key but even then can you fully acccess the truth behind any fund eg Morgan Grenfell – tech exposure

  26. I agree with a previous answer how on earth can anyone claim this particular fund is low to medium risk given the holding in private equity and surely no one in their right mind would place £100000 into one fund. If this adviser cannot determine what risk any given fund poses I fear he will have many more judgments against him

  27. This is the problem in a nutshell here with our industry Annon above says he wanted to be as safe as cash – well lucky he wasn’t advised to place it in cash in an Icelandic bank in the Isle of Mann. lucky has wasn’t advised to invest with AIG , or a “safe and guaranteed” structured product backed by Lehman’s he could have had an asset allocation split between all of the above and he might be worse off than he is going to be.
    As it happens the safest and most profitable place to have been was in UK Govt Gilts, Global Bonds, Gold and very high risk emerging market equities.
    Hindsight great isn’t it.
    i am concerned though about the lack or seeming lack of asset mix in these cases – Who are these advisers still not using all the tools we now have available to help with this – this is much more important than knowing what brand of corn flakes the client has for breakfast and making them cry on owning up to not having achieved their school days ambitions.

  28. That reply to me from John Whipple probably sums up why i have got no faith in ifas anymore! He says that i should feel lucky ive only lost 40% because i could of lost more money in a different investment. Now i feel much better thankyou for your insight! Infact i might send my advisor a christmas bonus in appreciation for saving me some money! I mean hes lost me £30000 but saved me £45000. Unfortunately ifas with your deluded attitude give the rest a bad name a mean that me along with many others will stick to 5% guarenteed bonds at my local building society! I am glad to see you are in the minority as many ifas were saying what a bad investment before March 2009. The warnings were their and any who didnt properly research Arch Cru deserve what they get!

  29. To John Whipple….

    ‘or a “safe and guaranteed” structured product backed by Lehman’s ‘

    Hmm, have you ever heard of a risk factor called ‘Counterparty Risk’?! 🙂 Obviously not!

    To ‘Anon’… there are some cracking IFAs out there who spotted all the wonderful smoke and mirror products which Mr Whipple discussed, and did not touch them with a barge pole. I’d trust some IFA’s I know with my last penny.

    Like choosing a lawyer, dentist, plumber etc personal recommendation is always the best place to start……

    Personally I think the FOS will take a least a nanosecond thinking about your claim efore finding in your favour, for me a clear case of misselling,as long as what you posted above is true… If you wanted cash on deposit then any kind of fund structure, let alone this one would have been too risky for you.

    By the way, watch out for the ‘guaranteed bonds’ at your local BS. They might be Structured Products in disguise, with a Counterparty providing the financial instrument. Personally I’d not touch a BS salesguy with a bargepole. Find a damn good IFA and he/she will do give you great advice!

  30. Thanks for your input Dathan i hope your right! Im sure there are good ifas about but its difficult to seperate the good from the useless as the useless ones are normally the best talkers! I had a bit of a rant but it is frustrating when people talk about losses of tens of thousands of pounds with a “get over it” attitude. In the real world to real people that is an awful lot of money. Thanks for the advice on the bonds ill look in to it. Im tempted to stash all my money under the bed!

  31. Dear Anonymous
    My post was not a reply to you per say but I was trying to point out that
    1) We have just been through the worst financial crisis since the 1930’s.
    2) Yes, it could have been worse for you even if your IFA had used what was once considered low risk type investments.
    3) One has to ask why £75,000 was placed with one provider in it seems one fund (unless this is a part of a larger of say a £750,000 holding overall which of course it maybe).
    4) Others had/have already pointed out the worrying Arch Cru premise – as it happens I have never recommended Arch Cru nor any Life Settlements either (tic tock).
    This is after all a blog – asking for reactions and comments to get a feeling of the mood of the readers (mostly professionals) not a forum for deep essay like answers which might be picked apart in court someday.
    Of course you have lost on this investment and feel sore but because you used an IFA then there are set procedure to follow and if you are correct then I suspect that in a year or two you will be compensated for any losses plus interest.
    As to where to go in the future shop around ask for a report, ask for a portfolio to be built for you, ask how your objectives are to met, ask how the portfolio is to be managed ongoing and how is the risk to be managed. Be prepared to pay a fee for advice.

  32. Dathan
    “safe and guaranteed” structured product backed by Lehman’s ‘
    Doh!
    I thought you were an IFA – the ” ” was meant to say to you that non of these were safe nor guaranteed despite being marketed to you as safe and guaranteed and now it turns out that Keydata was NOT authorised by the FSA as a Product Provider although they marketed themselves as such so now we who did not punt this dodgy stuff out to as many people as possible are facing a £50 million bill – which is why AIFA are I understand to challenge this in the courts.

  33. It is part of my pension the rest is all in cash. Fortunately! I hope this is a real wake up call to the lazy ifa’s out there who seem quite happy to gamble with everyone else’s money. All any of us want is straight forward honest well researched advice with the risks clearly pointed out. The risks seem to of been ignored by most of the ifas using Arch Cru as many people were sold it the same way i was that it was a safe low reward but more importantly low risk investment. Clearly either by deception or stupidy(not researching or understanding the company structure) the ifa’s did not point that out.

  34. To John W

    Apologies, I misread your post.

    Scary though that FSA’s report on the sale of Lehman’s backed products threw up scary finds. Of course, we would need to know which firms they were looking at….bets on large nationals anyone??! 🙂

    As you say, tis disgusting that decent IFAs will end up having to pay out for the mistakes of the foolish and the greedy…..

    I agree whole heartedly with your comments on the American Life Settlement funds and other 2nd hand life policy funds…..actually similar issues re Cru, Valuation and Liquidity….. tick tock indeed.

    DS 🙂

  35. Dear Annonymous
    If this is part of your SIPP then you really do need proper portfolio management.
    Your funds should be exposed by no more than £50,000 to one provider and I work on no more than 10% in any one fund or holding for medium sized pots.
    The portfolio should hold at least 4 sectors and be split geographically around the world.
    This is just the basics.
    Risk is mitigated by asset allocation (and provider mix) returns are likewise.

  36. Dear Anon

    Ah, you did not early mention that it is in a pension wrapper… that puts a slightly different slant on things.

    John W has covered the basics above. IMHO what you need is someone to have a good look at all your financial affairs, and advise you according to your age, time till retirement, attitude to and capacity for risk, retirement plans, other sources of income/capital in retirement etc etc… obviously we don’t know all these details and as financial plans are individually tailored to individual circumstances then a broad overview is all we can offer on here.

    I think a decent IFA is the way forward. Get some recommendations from friends/work colleagues etc, and go and meet a few of the IFAs. Have a coffee, ask them questions and then make an objective judgement.

    unbiased.co.uk has a small list of questions to ask when meeting an IFA. I’m sure a google search will reveal a few more.

    http://www.unbiased.co.uk/independent-financial-advice/questions-to-ask/

    DS 🙂

  37. Thanks Dathan –
    Yes, I think you’ll find you are right about who they are looking at – large firms that have panels, preferred partners, commercial understandings, etc. etc.
    I

  38. What rubbish has been written in the comment by Anonymous | 15 Dec 2009 3:23 pm.
    We were sold a NDFA Structured Product by an IFA who had been instructed in writing that we only wanted a SAFE investment. We also instructed the IFA that we were not interested in any investment that had association with American Markets.
    What did we end up with – A Leman backed product that we only found out to be associated with Lehman’s after their collapse.
    Why were we adverse to the American Markets? Answer – We as novice investors were fully aware of the Sub Prime fiasco and the trouble Lehman’s was known to be in as far back as March 2008.
    So I ask why our IFA and NDFA were ignorant of this.
    We consider that NDFA could be construed as being irresponsible selling a Lehman backed product.
    We also feel that the IFA should have known as we do now that Structured Products at best can not be considered SAFE.
    We have spoken to other IFA’s and it could be called hindsight, but we have been told by several of them that it would be irresponsible to recommend a Structured Product with an unknown counter party especially to an novice investor only wishing for a SAFE investment.
    So I congratulate the FOS stance with the ARCH Cru adviser and hope the same will be applied to IFA’s who recommended NDFA Lehman backed Structured Products.

  39. What’s the point in having an IMA classification system if a breach by the investment house in meeting the fund criteria is then held against the IFA?

    I agree, due dilligence by the IFA was lacking, however the IFA should not be held responsible for classifing the investment.

    As to the amount in one fund, surely this depends on what percentage this £100,000 represented of the client’s assets.

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