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Verity&#39s View

IFAs rarely have a reason to feel good about whichever scandal happens to be the latest to engulf the financial services industry.

There may be some satisfaction in watching firms that have succeeded only by stepping over regulatory boundaries getting their comeuppance. But whatever pleasure there might be in that is inevitably cancelled out by higher professional indemnity premiums and the impact on client confidence of yet further tarnishing of the sector&#39s reputation.

In the case of split-capital investment trusts, though, most IFAs steered well clear. So they could be forgiven for privately taking some pleasure in the spectacle. Not because it is fun to watch nearly 50,000 investors lose a great deal of their life savings but because in this case a large part of the blame can be attributed not them but to us, the financial press.

Last week I went out to do an interview with one split-cap investor, a single mother named Merilyn Moos, who had invested £8,000 in zero-dividend preference shares in one of Aberdeen&#39s split-cap trusts two years ago. The idea was that her 15-year-old son would have money when he went to university.

Her son, off for half-term and sleeping in until noon, took a while to emerge from his bedroom so we could film him with mum. But even he woke up when he heard what she had lost. Her investment was now worth £70.40.

Merilyn learned that her investment was bombing, not from Aberdeen of course, which sent her an anodyne standard letter which she felt explained nothing, but instead from the financial press.

So us personal finance hacks might collectively feel we had done a good job to alert her. The trouble is, it was also from the financial press that she got the idea to buy zeros in the first place.

The Treasury select committee has highlighted how Aberdeen&#39s marketing staff wrote articles for a rival of Money Marketing, putting the zero-dividend preference shares in the same risk bracket as Government gilts.

Between two and four years ago, almost every personal finance section in the national press at one time or another pointed out the benefits of zeros.

So a large number of zero-dividend preference shares were bought without advice, on an execution-only basis. Those articles were all very understandable. With the equity market at that time looking exhausted, there was still a great deal of investors&#39 spare cash looking for a home. As ever, there was huge demand for an investment that would generate better returns than a savings account, without the volatility of normal shares.

Not only did zeros seem to supply that demand, they also seemed to do it in a predictable way. Indeed, they seemed not all that far from being a cert. Who, after all, would have thought it would be difficult for a successful investment trust to achieve a negative hurdle rate? If you wanted a safe equity investment, zeros, or so it seemed, were the answer.

Now, of course, no investor should look on financial advice as perfect – especially if it comes from a newspaper. There are certain facts which both an IFA and a personal finance journalist can be expected to know – and certain facts which they have no way of knowing. In the case of split-caps, few IFAs or journalists could have been expected to know the extent to which some trusts were gearing up with debt and investing in each other, or the systemic risk which resulted.

Or at least, they could not be expected to know until some of their colleagues started writing about it at the end of 2000.

On the other hand, us journos should acknowledge that in some cases at least, there was an element of naivety in the way we went along with the zeros hype.

We broke the same golden rule that was broken by both sales person and client in almost every financial scandal, from personal pensions to endowments to tech stocks to split-cap trusts – if it looks too good to be true, it probably is.

Now we should never allow ourselves to be accused of hypocrisy. So perhaps when we report this debacle we should avoid being too righteous.

Andrew Verity is a personal finance reporter at the BBC


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