It seems that every time we open the financial press, there’s a new story about failed funds. My recent investigation into unsuccessful investment funds suggests that failure is often caused by managers rolling the dice once too often. Some are just bad ideas where the fund manager was trying to make a ‘silk purse from a sow’s ear’, others are a result of literature being economical with the truth, and then there are the downright dishonest and fraudulent scams.
Most people know how to safeguard their homes and property from thieves and vagabonds. It is possible to protect your wealth with a similar level of care. The ‘regulatory authorities’ worldwide have also put support measures in place to combat financial crime.
Regulators Oversee The Conduct Of Advisers
The UK has a robust regulatory body called the Financial Conduct Authority (FCA) and a thriving advice sector. The Retail Distribution Review (RDR) was a set of new rules designed in 2013 to protect individuals that make investments. The aim was to ensure that there is more transparency and fairness in the financial services industry. The most significant change resulting from the review was that financial advisers will no longer receive commissions from fund management companies when they sell investment products.
The RDR separated advisers into clear categories:
- Independent advisers
- Tied agents
Independent Financial Advisers (IFAs) are obliged to provide ‘best advice’ to clients. They charge hourly fees to clients as opposed to receiving commission payments from providers.
Tied agents are allowed to be paid by commission. However, they have a duty to pass enquiries on to IFAs when their company does not provide products in particular areas. They must also declare their non-independence and disclose commission payments.
Investigation into investment funds: Draining The Swamp
The objective of the RDR was to ‘drain the swamp’ and offer the general public peace of mind in the knowledge that they are dealing with regulated and qualified professionals at all times. Although IFAs and tied agents do indeed provide quality advice, rip-offs and scams seem to have multiplied like out-of-control computer malware.
Commission payments may have been the cause of poor advice in the past; however, they are not the only example. There is a significant difference between poor advice and outright fraud. By the same token, commission payments will not make a great deal of difference with funds that turn out to be dogs. Unfortunately, there appear to be many funds in this category.
Poor Performing Esoteric Funds
On the subject of dogs, one particular fund invested in ‘recycling’ comes to mind. On the face of it, this fund had a good story. The move towards recycling and renewable energy sources has been well-publicized. The forecasts are very positive for the future of green investments. However, this fund failed as a result of being incredibly restrictive in its investment remit. On further investigation, it transpired that the fund contained shares issued by one company only. The brochure did not highlight this; the facts only came to light after the fund’s collapse. As it only invested in one shareholding, the fund’s risk rating should have been much higher than it actually was. That was not how it was sold to the public!
Unregulated Collective Investment Schemes
Funds such as Unregulated Collective Investment Schemes (UCIS) tend to be based in secretive offshore islands. Although many of these territories protest their innocence, it is of no surprise that fraudulent funds choose to be registered in them. Not all funds based in secretive offshore centres are bad ones. However, my investigation into investment funds suggests that most bad funds tend to be based in secretive offshore centres!
The last part of the investigation into investment funds concerned professional fund management. It is important to have confidence in the person/manager responsible for the investment of your money. One disturbing finding was that at least 70% of inexperienced investors tend to buy and sell at the wrong moments. Unfortunately, members of the public are often seduced into purchasing investments based on past performance figures. This leads to many buying high and selling low. Let’s not forget the adage: Investments can go down as well as up.
Discretionary Fund Management
Investors can improve their chances of good returns and downside protection by taking certain steps. One such option is to employ professional advisers to manage your money via a Discretionary Fund Management (DFM) product. Many city stockbrokers and fund management groups offer DFM’s. The basic principle is that they select a wide range of funds and securities sourced from the market as a whole. DFM’s are regularly monitored and adjusted to reflect both risk and the economic outlook. No individual investor, or IFA, could afford the time and resources needed to compete with a company whose sole ‘raison d’etre’ is looking after your money. Whether you are investing in a pension, a QROPS, or an investment portfolio, DFM’s are worth considering.
Tips For Conducting An Investigation Into Investment Funds
Below are several investment tips:
- Steer clear of UCIS funds based in secretive offshore centres
- It is important to choose your adviser carefully
- You should be dubious of investing with someone who has cold-called you
- Look beyond the glossy brochures and sales-speak
- Be very sceptical about esoteric themes
- A good adviser will always explain the charges to you. Ask him to do so
- Fees and commissions are both acceptable as as long as you receive value for money