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FSA says IFAs don&#39t see how low inflation affects advice

The FSA is concerned that some IFAs do not understand the effect that a low-inflation, low-equity-return environment has on the advice they should give.

Speaking at the Ernst & Young Financial Services Summit in Edinburgh last week, managing director (regulatory processes & risk directorate) Carol Sergeant said long-term planning adv-ice should stress the importance of reducing debt capital in an era of low inflation.

She told delegates that advisers and consumers who chose high-income products returning close to 10 per cent such as splits and precipice bonds should be aware that these products now constitute high-risk investments when such ret-urns would not have been high risk in times of higher inflation.

Sergeant said IFAs should remind clients with big mortgages that they are no longer in a high-inflation environment where inflation erodes the capital value of the debt. She warned that low interest rates were tempting consumers into borrowing big sums which would not be substantially eroded as inflation is low.

Sergeant said: “People who buy or sell high-return products in a low-inflation environment have to ask themselves whether they are not taking on a high level of risk. We come across firms of advisers who do not understand the concerns of a lowinflation environment and that concerns us a lot. ”

Dickson Lishman Prince partner Richard Lishman says: “There are a number of financial advisers who do not explain the underlying investment returns to their clients – maybe they are scared that the client will not take the product when they realise how low the return actually is.

“If people want 10 per cent growth, then the adviser can point them to the products. But there is no such thing as a free lunch.”

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