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The final performance

From June, new FSA rules will stop the use of past performance in advertising to investors unless it is used within strict boundaries. Some experts expect the move will have a profound impact on fund firms&#39 marketing but it may have little impact on clients&#39 choices.

The regulator is imposing rules to standardise the presentation of fund data. The aim is to stop fund comp-anies using only favourable timeframes in advertising.

The rules stipulate that past performance can only be used if accompanied by a table showing discrete five-year annual returns expressed as a percentage. Fund groups must also put less emphasis on past performance and warnings must appear in the main body of an ad rather than being buried in the small print.

The FSA is hoping that consumers will become better informed and more able to compare products through the new rules.

CCHM chairman Lucian Camp believes the clampdown could be the final nail in the coffin for off-the-page advertising of investment products. He says: “It is not as if this sector is in rude health anyway – it works out at about £1,000 per response and cold-mailing is now generally seen as a loss-making activity – but one of my big investment house clients says they will simply stop using off-the-page advertising in the light of the FSA&#39s plans.

“The question for the FSA is, is this what they wanted? I very much doubt it wanted to see fewer companies persuading people to save more but this is what is likely to happen.”

Camp expects, with the exception of a few companies – he names Fidelity and Legal & General – that most investment companies will abandon off-the-page advertising and this could mean that more investment business will be diverted to either the IFA or multi-tie channels.

He points out this will lead to the FSA having less control over the use of past performance as a sales tool. “Will brokers take the time to talk investors through five-year performance grids? Probably not.” That said, many advisers are happy that the FSA has tackled the mishandling of past performance in advertising.

Hargreaves Lansdown investment manager Ben Yearsley says: “There have been some problems in the past. Some of the highest-profile examples were by Scottish Widows and New Star.”

Investment advisers will remember New Star&#39s use of quartile performance figures in some of its advertising. The firm listed quartile figures showing a sequence of three ones and one four. This is factual and illustrates to those in the know that performance can go up as well as down but whether it is meaningful to investors is arguable.

Yearsley says: “Yes, it is factual, but what it means is only likely to be known by advisers and sophisticated investors. The rest might think something like, three first places followed by one fourth isn&#39t bad.”

Advisers might also recall that Scottish Widows was still trying to persuade investors to plough cash into its European fund over a year after star fund manager Albert Morillo had left. Widows justified the use of past performance in this context with the defence that returns were down to a strong team effort, not just one leading light.

The new rules will not outlaw this sort of use of past performance. Yearsley says: “The FSA should definitely look at this. Widows argued that it was a team effort but if an obvious star fund manager leaves, then the company should not highlight performance while he or she was at the helm.”

Some are unconvinced that restrictions on past performance will have any great impact on what investors buy. Torquil Clark investment strategist Philippa Gee believes that a good IFA should not make recommendations based on past performance anyway. “Advising clients should not be about persuading investors to go into one fund over another, it should be about sticking to finding out the client&#39s financial goals and working from these,” she says.

Camp feels that off-the-page adv-ertising only works when investors are strongly motivated by greed and there is an exceptionally attractive proposition. He says: “A classic example of this scenario was tech funds in 2000. We do not have these sorts of conditions at the moment.” He says the introduction of the new rules will not be a huge shock to investment houses but the impact will still be significant.

“Firms already feel the FSA is ready to pounce if they appear to be using past performance in what it feels is an unbalanced way. Companies who use past performance in this way can often expect a fierce letter from the regulator. That said, the new rules will still have a huge impact and are likely to bring selling directly to investors to its knees,” he says.


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