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Risk and reward

Offshore funds are often viewed (but not always justly) to be riskier than their onshore counterparts but two recent cases have pushed one IFA to raise awareness of this issue within the advice industry.

PBA Ltd managing director Phil Billingham says his article in Money Marketing (July 14) was prompted by the “recent debacle” of Shepherds’ funds. He says the level of regulation which seemed to be in place for Shepherds was not really there and IFAs just relied on the assumption that the Isle of Man was well regulated. “My concern is if IFAs have got to place their clients’ money offshore, by the very nature of the beast that is taking an additional risk to them because you are removing the money and the regulation from the FSA. What this all means is that if it all goes wrong, there is nobody else for the client to go after but the IFA.”

The second case he refers to is the Seymour v Ockwell ruling in which Zifa was made two-thirds responsible for the losses incurred by an IFA client. “It has poten-tially put public providers in the frame for client losses and this is an issue that some of the offshore product providers are going to need to consider very carefully.”

Billingham says he has seen no evidence that offshore funds offer significantly higher returns than onshore funds. “The IFA is taking the same income or commission or fee very broadly for the two but yet there is additional risk in the system, whether that risk is a currency risk, a regulatory risk or the lack of compen-sation scheme risk. What I am saying is think about the risk, if you can’t see a clear additional reward, why do it?”

Anand Associates man-aging director Bhupinder Anand says as long as the client has their eyes wide open when they invest, there is little for IFAs to be concerned about.

Anand says offshore invest-ing is not a mainstream acti-vity and only a certain type of client goes in for this. He says: “If an adviser is not getting his client to under-stand those risks but is only talking about the upside, the adviser deserves to be sued.”

Scottish Equitable International head of marketing Steven Whalley says: “In my view, Phil is making some broad generalisations about the offshore market because there are different comp-anies offering different things to different customers and I think he is using a broad brush. His analogy of the wild West was, I think, really unfortunate.”

Whalley is not concerned by the potential risk of offshore funds to both clients and IFAs because, he says, there are very definite guidelines as to who can be classed as an experienced investor and, therefore, who is able to buy these type of schemes.

He says: “I do not think any IFAs are spending all their time just selling all these schemes to all their clients. I think an unreg-ulated investment to an experienced investor, providing everybody is going into that thing with their eyes open, might be the right thing to do.”

KPMG Isle of Man senior partner David McGarry says offshore funds offer the investor something different to invest their money in and says this is why the offshore hedge fund industry has been so successful. He says: “Frankly, the whole of the offshore funds industry would not exist if the world took the view that they represented an unneccesary degree of risk or an unacc-eptable degree of risk.”

Referring to the Isle of Man situation in particular, McGarry says an IFA would have to be “blind” to not realise the risks involved in investing in unregulated offshore funds.

This is because at the front of any experienced investor fund document, he says, it is made clear that these funds are not regulated by the Isle of Man financial supervision commission. “It is right up there in lights that these are unregulated funds.”

He adds: “What is terribly important, and is a huge responsibility on fund promotors and adminis-trators and the IFA, is to make sure the offering document that is available to investors entirely addresses all of the risks of the fund.”

But Billingham says. “There has been a drift of offshore becoming a more main-stream activity. I have certainly seen cases where advisers are perhaps not as experienced at dealing in offshore as others and maybe that additional level of risk has not been disclosed to the client and therefore the IFA is more vulnerable.”


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