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Zeros tolerance

For some time, financial advisers have been actively encouraged to study for Advanced Financial Planning qualifications.

Course G70 contains the following statements:

a: “Split capital investments trusts are designed to appeal to many different types of investor.”

b: “The return on zeros is not guaranteed but there is a very strong likelihood that the return will be paid.”

c: Zeros…are particularly attractive to investors who are not subject to capital gains tax or those able to use their annual CGT exemption.”

Course G20 states that zeros “are relatively low-risk as trust assets are often sufficient to cover their repayment”. By implication, the consumer market segment identified from these statements would not have to be particularly wealthy or sophisticated.

Furthermore, until recently, the marketing literature of most split-capital providers continued to position zeros between gilts and corporate bonds on the risk continuum.

Against this background, the FSA&#39s press release, dated May 16, 2002, stated: “Financial advisers who recommend and promote the sale of investment trust shares must comply with rules which are designed to ensure that investors receive information which is clear and not misleading.”

Literally, this implies that acting in good faith as a conduit for misleading marketing information produced by an unrelated provider could constitute a rule breach for which an IFA could be fined or sued or both.

So what has changed? The CII&#39s AFPC guidance, the suitability of an IFA&#39s advice or the fundamental composition of investment trusts?

Clearly, cross-holdings and increased gearing have raised the risk stakes while the marketing message to IFAs has remained unchanged. It was simply not possible to disentangle this web at the time that advisers were promoting zeros, as the necessary information was not in the public domain.

While the FSA is critical of IFAs for a failure to analyse splits further before recomm-ending them, such analysis would have demanded an availability of relevant data and a level of competency which extended beyond Advanced Financial Planning standards.

To investigate collusive behaviour is laudable but to suggest that IFAs bear guilt by association and are responsible for opportunistic and covert investment decisions beyond their control is unreasonable.

At this rate, consumers will indeed receive the advisory sector they deserve.

Philip Dodd

Managing director,

PSD Investment Planning,

Manchester

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