Lorna Bourke states: “If 15 warnings in the prospectus for the Lloyds
TSB extra income and growth plan that you may not get your money back
are not enough, what are the product providers to do?” (Money
Marketing, January 30).
Logically, if a timebomb is surrounded by 15 warnings, all should
keep away, however harmless the bomb appears.
The peril of such plans is that each represents poor value for the
consumer when risk is taken into account. The product provider can
calculate risk. Consumers are miles from doing so. Which IFAs are
conversant with risk and can undertake a calculation?
The usual way of measuring risk is by using something called a
standard deviation, a measure of share price volatility. The higher
the number, the greater the ups and downs in price.
In June 2002, the standard deviation for Aberdeen technology was 43
whereas Aberdeen gilt was five.
Measuring risk by looking at the volatility of past returns makes
sense only if the past is a good guide to the future. Past volatility
is itself variable. There is no one correct way to measure volatility.
Volatility is only one aspect of measuring risk. There are others
such as liquidity risk, event occurrence risk and benchmark risk.
Which IFAs are conversant with standard deviation, beta, correlation
and the Sharpe ratio?
The consumer punter is betting at even money when the true odds may be 5-1.
Congratulations to the FSA on opening the door to claims for
compensation for 50,000 Lloyds TSB bondholders – ironically, a factor
which was not allowed in the product provider's event risk
calculation. Even the product provider did not correctly assess risk,
which highlights the complexity of the several components of risk.
Malcolm Ward Cumbria Insurance Brokers,Carlisle