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Independent view

Have we got more now than when we started? Products? Regulation? Guidance? Respect? Expertise? Opinion? Qualifications?

There is today a sense of impending revolution about financial services. That is precisely the point – it is always “impending”. We have had Sandler and Pickering and we have endured a ferocious bear market that suddenly turned very nasty after a long period of sideways movement for the major indices. Many investors are down 30 per cent or more.

The dotcom bubble seems an eternity ago and we are all probably frantically reassuring investors that property and consumer spending are not bubbles. The IFA is faced with depolarisation, shrinking margins and the need for greater study and qualification, which is balanced rather equitably with the chance of selling his or her practice to a life office or bank within five years. It all feels a bit odd doesn&#39t it?

Sandler missed out on covering a great deal of his brief, as did Pickering, but he made some very succinct and pertinent suggestions. You will have already read about simplifying products, removing the 5 per cent allowance from bonds and demanding specialist knowledge for the higher-risk investment areas.

I believe there was scope for looking more closely at the rules for unit trusts and investment managers to bring them more in line with hedge funds, which are still growing in popularity. Man Group has become a FTSE 100 darling on the back of this success.

On September 23, the London Stock Exchange will launch a market for securitised derivatives aimed at UK private investors. It will probably incorporate covered warrants, certificates and bespoke derivatives products, which will be listed and traded like equities.

The certificates will allow long or short exposure but will not allow gearing. This will be allowed with warrants whose entire return will come as capital gain (no dividends, of course) which is useful for tax planning. I suspect the structured products will develop themes such as IT, banking, gold mining or whatever.

The point is that this initiative is so characteristic of a stuttering market. The market will always invent new ways for investors to make money from falling prices or static markets.

If you want to find out when it has happened before I recommend The Moneymaker – a book recounting the life of John Law, an economist in the 18th Century generally heralded as the inventor of credit.

Or perhaps look at Sandy Nairn&#39s excellent Engines That Move Markets. You see the market is always efficient and finds ways to survive, that is why too much regulation or manipulation is dangerous. We need to protect ignorant consumers from their own greed but we must not go too far.

You will have noticed that investment experts have suddenly taken to discussing “information ratios”, “beta”, “volatility indices” or other terms and expressions taken from investment textbooks. These are extremely useful in justifying a 20 per cent loss by allowing statistics to convince the investor that actually his fund did very well against the average. This only happens when returns are negative – it is as if the operation was a huge success but the patient died.

Where unit trust managers have been hamstrung has been when good-yielding FTSE100 stocks have tumbled, creating huge capital losses for their unitholders. Many perhaps would have considered Put options as a way of insuring their gains if they had been allowed to but it was left to shrewd (and lucky) hedge funds to steal that limelight and many investors have now been left feeling short-changed. “If the market was falling, why didn&#39t you sell?” they ask. Quite.

I maintain that if Sandler had proposed a comprehensive review of the rules governing unit trusts and Oeics, as part of a general overhaul for the UK retail investment market, then he would have done more at a stroke than is ever likely to happen in reality. Is it acceptable that a buy-and-hold fund in Japan should have gone nowhere for 10 years?

A well managed portfolio of derivatives could still have achieved positive returns even in that most protracted of bear markets – you can sell calls and puts as well, effectively betting that the market will never go through those levels.

We have all lived through spectacular tech gains in 1998, the bursting bubble in 2000, September 11, the split-cap investment trust scandal, the rise in popularity of emerging market debt funds, and now a tottery housing market.

It is time for all IFAs to wake up to the fact that we have a duty to lobby, educate and preach the merits of strategy in investment so clients can apply one simple rule when evaluating their investments – have I got more now than when I started?

Steve Buttercase is senior adviser at Lamendorf IFA


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