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Neil Liversidge: Go heavy on the risk warnings

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I am innately cautious with other people’s money, which is one of the reasons why our clients have not had Keydata, Arch Cru or any other unpleasant surprises in their portfolios in the 10 years since I set up West Riding. I also recognise the risk, however, that over-caution paradoxically represents.

Were it not for the willingness of individuals to take risks, we would have none of the conveniences and benefits of the modern age. Not only would history be different, there would be a lot less of it.

Investment is risky business. We put risk up front in every discussion we have with clients about their money. We make it known to them from minute one that if we have another 1987 Black Monday-style event, then their portfolios can be worth maybe 30 per cent less the following day.

Put bluntly, I try to frighten investment clients away. We only want to invest money for people who can accept the risk that stockmarket investment involves and we bend over backwards to explain risk in all its forms. I have even written a pamphlet dedicated to the subject and we give it to every client to read before we make any investment on their behalf. When our website is revamped, the material will go on there too.

I can say with absolute honesty I have never spent a minute of my life persuading anyone to invest money but I have spent countless hours persuading some potential clients not to do so.

The only promise we make is that we will do our best for them and that we shall never knowingly put them into any investment that we believe has any identifiable risk of going to zero.  That one promise has saved my clients, me and my PI insurers a lot of heartache over the years. I do not plan changing my game plan any time soon.

This is, of course, a luxury I enjoy on account of the fact that it is my own firm. In a sales-driven environment, (and, let’s face it, they still exist, for all the spin that they don’t), I would be fired for wasting leads. My philosophy is pretty simple, though, in that I only want clients who can accept realistic risk and who can sleep at night. That way so can I.

The result of this has been that through the entire 2007/08 financial crisis, we did not lose a single client and we had not a single call from an investor worried at what was happening. All without exception remained invested to benefit from the upswing and recovery.

Far from hog-tying us, this approach gives us great freedom of action. Risk-modelling software might spew out model asset allocations with large allocations in UK fixed inter-est but, with prices high, yields low and interest-rate risk obvious, we are not buying.

My advice to any firm in the modern regulatory environment is to go as heavy on the risk warnings as possible. Use the fag packet approach because misled clients will damage your wealth.

Neil Liversidge is managing director of West Riding Personal Financial Solutions

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Sadly, all the risk warnings in the world will not protect you against the wrath of the Ombudsman…. he can and will say with hindsight as his guide ‘ah yes but you should have known better’. I have seen an Ombudsman letter saying those of 55/60 should not have equities because they are risky. Never be complacent and price-in the inevitable complaint or two according to the simple number of clients you service – sorry, it’s a modern fact of life and will become worse with Claims’ chasers on the prowl and people on their uppers prepared to chance anything and through their integrity to the wind.

    If the investments go up – everyone happy. If they don’t, for whatever reasons, then beware as someone, or even his representative or beneficiary within an estate, will challenge you at some point.

    What is risk anyway? The biggest thing which goes wrong tomorrow and which people and the ‘system’ never thought could erupt….

    We have now had interest rates at 0.5% for five years. So even if savers have been fortunate to receive the interest rate charged by the Bank of England to borrow, they will have had a simple 2.5% over that time. The FTSE100 has increased 92.5% in the same period and on top of that, there will have been net of tax dividends of another say 25%. Hindsight is a wonderful thing and the starting point was very low but what a colossal risk that lost opportunity will have created. If like me you have borrowings to invest as well, you’ll have been paying 5%pa on your mortgage say, (perhaps 25%) and earnt 117.5% on your investments as well. I and our clients have had a particularly phenomenal five years.

    Why does the majority now have a repayment mortgage as opposed to say an ISA mortgage when rates are so low and when investment values were so cheap….? Just a question, that’s all (remembering most people took-out endowments in 1988 when interest rates were their highest ever so the required return would have needed to gross over 20% just to match it)…. odd, eh!

    When will the first complaint be upheld by the FOS that we failed to advise someone to have a market-linked investment to a saver – awards of ‘appropriate’ market indices as opposed to simply returning the client to the position he otherwise would have been in are being made already so beware!

  2. Good points – If only investors had not been encouraged to invest in technology at the end of the 90’s PEP Season , perhaps the tech bubble could have been avoided ?

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