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IFAs deserve more reward for higher risk

We were interested in the follow-up article last week to our original Comment, Dirty deeds on the IoM in the July 14 edition of Money Marketing, looking at the exposure of IFAs to the increased risks connected with the offshore market and non-regulated funds. This is especially relevant in the light of the collapse of the Shepherds’ funds, which were based in the Isle of Man.

We feel that some comments in the follow-up article missed the point.

The key point we are making is simple. Offshore products, by their nature, carry increased risks compared with products regulated by the FSA. The more esoteric the product, the greater the risk, and the less there is due diligence by a regulator, the greater the risk. The risk is greatly increased if the product is operated from multi-domiciles.

It is simple economics to expect an increased level of return to compensate for the increased risk that the client and IFA are taking. Where are these greater returns to the IFA?

We would not expect individuals employed by offshore firms to identify any issues with that market. Promoting the sector is their job but the quotes throw up some interesting points.

First, David McGarry correctly identifies “a huge responsibility on fund promoters and administrators” but fails to include auditors. Could this omission have anything to do with the fact that KPMG were the auditors of Shepherds? How can he reasonably expect IFAs to “make sure the offering document that is available to investors entirely addresses all of the risks of the fund”?

He implies that the IFA is being held responsible for the way that other parties do, or do not do, their job. Why is that a good idea for IFAs?

It seems to us that in the case of a non-regulated IoM fund authorised under the Experienced Investor Legislation, IFAs and their clients can only rely on the promoters, fund admini-strators and auditors to ensure the completeness of the offering document and that the fund operates according to the terms defined in this document.

If anything goes wrong, there is no other recourse for clients other than to go after the IFA, as they are the only UK-regulated entity involved in the process. We do not believe that IFAs “spend all their time advising on these products’ or that, by their very nature, they pose “unacceptable risks”. We merely point out that they pose increased risks – not the same thing.

As for IFAs being “blind” not to have realised the risks involved, this raises some interesting issues. One is that, in the case of Shepherds, there are, as a matter of record, some concerns with respect to the administration of the fund and the auditing of that fund. These issues still require investigation. If these concerns are well founded, then that takes us back to our start point – that IFAs are the first point of call for clients who have suffered possibly 80 per cent losses in this instance but are, in fact, suffering for the actions of others.

To summarise, we do not believe that all IFAs spend all their time advising on these cases or that this market is one which IFAs should always avoid. We do believe it is a market that carries increased risk to both the IFA and the client and that both should be rewarded for this increased risk. Isn’t that how free markets work?

Paul NedasIndependent consultant,

Phil BillinghamManaging director, PBA

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