Scenario: You and your co-directors have built up an advisory and discretionary management practice with a client portfolio of broad-based blue-chip investments with an element of cash retained on the platform. The clients are high-net-worth and typically have sufficient liquid funds available to them. They are aged 50 to 60 and nearing the end of their careers.
You have been discussing a particular structured investment with the operators of the scheme. From your discussions with the operator and your own due diligence of the investment, you believe the investment would complement some of your client’s investment strategies and portfolios.
You have reviewed the prospectus (with your investment committee) and feel although the investment is complex, the strategy seems robust. You are confident the risk/reward structure is aligned to the investment strategies of some of your clients.
The prospectus is complex. How would you explain the investment?
The operator is responsible for the prospectus but you should ensure it is clear for your clients. If you feel the prospectus does not provide the information in a clear, fair and not misleading way, then you should approach the scheme operator and ask them to produce material which is more consumer-friendly. If the operator is unable or unwilling to do this, you must consider if the scheme is really appropriate for retail clients? Are there any risks that the operator does not seem to consider key where you want them to be made clear?
You must also document in simple terms all the advantages, disadvantages and risks. This should also be explained verbally in a way that shows how the investment will complement their strategy and existing portfolio while meeting their objectives, investment experience, risk profile and capacity for loss. If you are in any doubt as to whether the client fully understands the nature of the investment, then you should revaluate the appropriateness of the investment.
FSA Principle 7 (Communications with Clients) is clear in the expectations that a client must be communicated in a way that is clear, fair and not misleading and that the communication needs of the client are paramount and do not rest with the scheme operator solely.
You have been discussing the scheme with a couple (who have a joint portfolio as well as separate Sipp portfolios). One is more of a risk-taker and this is reflected in the portfolio objectives and assets. The other is more cautious and is not overly interested in how the portfolio is managed and invested. Partner A gives the go ahead for investment in the scheme as they have authority and states that Partner B should also invest in the scheme.
What do you do?
The partners should be treated as separate individuals. The decisions in respect of the joint portfolio in reality may be led by one individual but you must obtain agreement from both.
With regard to Partner B’s Sipp, you must ensure the investment meets their objectives and risk profile in respect of the Sipp. If Partner B’s risk profile does not match the investment, then this must not be purchased for her portfolio despite it possibly being purchased in the joint portfolio.
Simon Collins is managing director of Resources Compliance