FSA suspends two more firms from Ucis advice in clampdown

With Jon Maguire returning to this market with Voila no wonder the FSA is clamping down in this area.

There is very rarely any justification for unregulated products. How often does a client approach you to invest in something like that? How often would you recommend one if you were fee based, after conducting a thorough financial planning analysis - where you have put a plan in action.

How often does the financial planning process end with a recommendation to invest in an unregulated, often quite complex and illiquid investment?

In my case, not very often! In fact - never, not once. My cleints certainly don't feel like they're missing out.

But, each to their own. As long as the adviser feels comfortable enough with the product and supports it with their own money I don't really have a problem.

'Confused' you are!

Unregulated products form an extremely useful part of a properly diversified client portfolio. If you dismiss these products outright you are not fulfilling your duty to your clients.

Some of the regulated products on the market are infinitely more complex than some unregulated offerings. I could name a few mainstream products that I would be surprised if even their sales team understand exactly how the fund is structured, the asset class works and how fees are calculated.

Also, there are tonnes of illiquid regulated products like property PAIFs etc. I assume because they are regulated you overlook the liquidity concern?

Hate to tell you this but under RDR you will HAVE to consider UCIS.

Most UCIS are pants but not all, just like insurance company products.

@confused

A client would never approach you to invest into a UCIS as this type of fund cannot be promoted directly to clients unless they meet specific criteria.

More often than not these schemes are 'promoted' to clients by IFA's.

Many IFA's are taken in by charismatic fund distributors like Jon Maguire and Voila and the high commission levels that many of these funds offer.

These fund distributors do not have to be FSA regulated so the FSA is powerless to stop them returning under a new name.

Perhaps the FSA will instead focus on the FSA regulated entities that operate these schemes because every fund structured as a UCIS must have a firm authorised by the Financial Services Authority to act as its 'operator'.

This is because establishing, operating or winding up a collective investment scheme is a regulated activity and carrying out the activity without the proper permissions is a criminal offence.

So in my view the FSA spotlight will fall on the authorised 'operators' of these schemes, particularly those who have links with fund distributors / marketing firms that have caused IFA and investor concerns in the past.

Jon Maguire of Arch Cru fame, Gateway and Integrity spring immediately to mind.

I would be very interested to know what type of products the FSA are looking into within the sector, as I am confused by their stance on this. Are they being told about advisers recommending these products by the providers themselves or by a 3rd party?

There are unregulated products that are not illiquid and can provide a better outcome than regulated products but as the old saying goes 'if you wouldn't put your own money in don't ask someone else to do so'.

@Hugh I am sure the FSA have access to Google and certain firms have to disclose when they are receiving commission levels in excess of 4% for advising on certain products.

You are correct in saying that not all unregulated products are illiquid, typically the liquidity of the fund is chosen to suit the liquidity of the asset class which makes more sense. Property is an illiquid asset and you could argue against it being in an open ended fund.

The reason some funds have to go down the unregulated route is because the asset class does not fit the criteria for a regulated ucits fund based on allowable asset allocations etc etc.

The FSA is not against these unregulated products it even says it does not want to stifle innovation.

The FSA's main concerns are about how and who these schemes are promoted to and whether those advising on these funds are influenced by the often high levels of IFA commission.

To make matters worse it cannot help that well known figures, for the wrong reasons, like Jon Maguire are involved with distributing funds in this area.

"Honister Capital, owner of Sage Financial Services and Burns Anderson, has launched a new due diligence service for its 1,300 member advisers to help them assess alternative investments"

Interesting statement at the end of the article. I wonder whether this new due diligence service will mean they will look at who is distributing the fund to avoid a repeat of the Arch Cru debacle.

I can make it easy for Honister. If it's promoted by Jon Maguire and his new outfit Voila avoid it. Don't say I didn't warn you.

UCIS should always be considered where they are appropriate for clients who are preared to accept more risk, especially once you get into the corner of a client's portfolio and allocating to alternatives.

The art is in understanding the investment opportunity and identifying the risks that follow.

There are plenty of regulated products that have a lot of rocket science embedded within them and can often be more toxic that UCIS.

Interesting that the normally very restrictive Burns Anderson have started this - there are at least some of their members promoting Film Partnerships etc to all who will hear that I know of.

Reminds me of the Police retirees who were offered a scheme which returned 15-20% every year with no risk and the returns kept rolling in, amazing that these were people who dealt with the harshest realities and even some of them believed it.

I've read all the comments and nothing written here makes me change my mind - if a client of mine wants to do unregulated products I gladly send them your way.

I have a great little business that allows me plenty of time with the wife and children with the bulk of my income each year coming in by standing order from a loyal and happy cleint bank.

As for the concept that I'd ignore liquidity and other risks from regulated investments, don't be daft. I look very closely at everything my cleints invest in regardless of what it is.

All I can say is a good night's sleep is a great outcome for both the planner and the client from solid financial planning.

Strip out the ridiculous commission levels and see what happens to the vibrant UCIS sector. These things are often sold by tele-sales teams on a commission only basis.

Neither I nor my clients want or need to take these risks so we don't. Happiness all around.

Any IFAs want to shove some land in their clients' SIPP? Will be included within the LDP early 2011. A bargain! Buy now while stocks last.

There are some very knowledgeable people on here, can they tell me if hotel rooms with a buy-back guarantee are suitable 'unregulated investments', or how about some US life policies, policyholder still breathing? Or a teak forest? Tickets to Mars?

Oh, I forgot to say that one of the purveyors of 'unregulated investments' told me one his salesmen earned £186,000 in 6 months, who were the IFAs he was flogging these rooms to? When did the FSA find out about this? Who told them? What else is the regulator missing? A shedload of stuff and the innocent IFA who keeps his nose clean will end up paying via the FSCS, as per Keydata.

Someone once said that all this useless regulation will become the nation's prison, or something like that.

Confused:

I don't think anyone should argue with your business model because clearly it suits you and your clients.

However, the point you have underlined is that you don't believe in unregulated products, so you discount them entirely for your clients.

I know plenty of people who have lost fortunes investing in regulated funds providing exposure to traditional asset classes. What would you say to their advisers?

The problems arise when unregulated products are sold to retail investors.

They should only be promoted to HNW and Sophisticated investors who, in theory at least, should have the wit and imagination to obtain proper legal, tax and investment advice before proceeding.

It may be better all round if advisers classified their clients accordingly.

UCIS are not covered by the FSCS, though advice on them is. So, if you recommend a UCIS and the provider fails, the client's only hope of compensation is to make a sucessful complaint against the adviser, the key word being successful.

Also, the FSA considers recommendations to products of this type to be suitable only to individuals who are HNW (and it would not be deemed appropriate to recommend a UCIS for any more than a modest proportion of the client's overall investment portfolio), sophisticated (as in having experience of such investments or similar) and/or professional (as in working in the financial services industry).

Probably, this information is buried somewhere deep within the labrynth of the FSA's website. Finding it is another matter. It's all very well for the FSA to produce mountains of consultation papers, regulatory updates, guidance notes and all the rest of it, then claim that it's doing it's best to keep the industry abreast of its requirements. However, if the tonnage of material involved is such as to make it practically impossible for anyone trying to make a living to keep up with it all, then is its production a sensible and worthwhile expensiture of money and resources? On this, the FSA seems to have very little idea of the real world in which the rest of us have to operate.

We have to be seen to be doing something of actual value in order to get paid. The FSA on the other hand merely has to identify areas which, in its opinion, require attention, regardless of whether anyone else agrees, so simple solutions to relatively simple problems somehow get sidelined for ever and a day or drowned in yet another expensive third party consultation exercise. This is presumably on the implicit assumption that any opinions expressed by the industry itself are based on self interest rather than cooperation in pursuit of finding a better way forward for everyone.

Still, never mind. The RDR will sort everything out and we'll all live happily ever after.

I think you will find everything to which you refer in RAO and FPO as it relates to Section 21 of FSMA - Restrictions on financial promotions.

Picking up on what Julian has said above and linking back to the story on Keydata and Regulatory Legals opinion that the liklehood is that FSCS will not find a "civil liability" to exist hence clients will not be abel to claim, you could as easily replace UCIS in the below with "Keydata"

Julian said "UCIS are not covered by the FSCS, though advice on them is. So, if you recommend a UCIS and the provider fails, the client's only hope of compensation is to make a sucessful complaint against the adviser, the key word being successful."

@Evan

what about some nice hotel rooms in york, portugese man of war farming, wind farms in Tuscany, villas in cape verde, geared wine funds, assessed financial claims offsetting and oh yes a new and improved life settlement fund from the Big Apple NYC?

I am sure that the commissions on the wrapper and on the investment do not influence advisers - as Luxembuger said these are sophisticated investor vehicles not for joey blogs. Like others I have seen these marketed to the Blogs and not just the financially sophisticated.

Sadly, what ends up being sold to retail is often a corruption of a high quality institutional product.

A number of institutional investors have made serious money investing in life settlements and one or two investment banks have invested huge amounts developing longevity indices. Retail wont see that benefit for some time to come and will get sold the tail of those investments just as the real risk starts to kick-in and the investment banks seek to shift it off their books.

Mind you, having said thayt it may arrive in retail a bit quicker if the Prop Desks all get closed down!!

"Life settlements" and "High quality institutional product"

It is a gamble, it is indeed a casino, they win some and keep it in bonuses and when they lose the bet the taxpayer picks up the tab. Is that a win, win situation for these institutions? They belong in an institution.

I think I'll use a pseudonym, how about Hamburguesas?

And, of course, investing in funds or equities isn't a gamble, is it?

How much money has been "lost" by investing in equity funds over the last ten years? The initial spread, the AMC, the trade commissions (which could amount to a huge percentage of the original investment where the managers turn over the fund by 100% a year). Over that period it is possible the adviser and the fund manager have both earned more on the investment than the poor, wretched investor.

Have to agree with Luxemburger. Many funds and asset classes are at the top of the market when they become available to retail. Retail investors jump on the bandwagon pushing prices higher and the smart money leaves, often the poor retail investors are left carrying the can.

Unregulated funds often give sophisticated investors the opportunity to be first in on this type of investment, by virtue of being a sophisticated investor they should in consultation with their advisers be able to understand and quantify the risk involved with this type of investment

OK, you win. Life is a gamble, life is a masquerade old friend.

For some the main issue is do you understand it? Can you explain the risks? And ultimately can the client? This is after all is said and done what the FOS considers, your honestly help opinion is of no value.

And then there is the FSCS.

Whilst I appreciate equity investments have struggled I don't accept your (Luxemburger) argument that it necessarily has to be like you describe. An appropriate risk graded portfolio of passive funds that is regularly rebalanced has made money over the last 10 years.

You might be thinking I'm part of the Dimensional 'cult' here and ... you'd be right! I recognise their weaknesses, but my clients have all done very well from investing passively the last decade.

Through my financial planning process we might decide that a client requires a rate of return of say inflation plus 2%, so therefore we don't take any more risk. Hence we don't need the exciting returns that unregulated funds can generate, especially if the trade-off is a possible loss of capital.

As my remunaration is not linked to making investments that suits me just fine.

Listen, my approach doesn't work for every client. The art is to 'politely disengage from a client relationship' when their view on making investments disagrees with mine - i.e. they want to speculate rather than invest.

I don't have the necessary skill set to determine whether UCIS is good or not and therefore I don't even try. The same with trying to pick active funds.

If the client doesn't like it then tough. I'm not the guy for them.

If the FSA insist on it post RDR I'm sure there will be plenty of research I can buy and stick on my TCF plan to show that I've looked at it!

Confused:

Now you're talking! I'm a huge fan of passive investment for the core, medium to long term strategy. Low cost is really good over this period.

I'm happy to pay when I want to make a deliberate deviation from that strategy to take advantage of short term opportunities. Unregulated products are always considered but very few get through the gate.

As Evan says, the art is being able to understand them and often they are incomprehensible. Missed a couple of crackers in the pharma space and lost money in others, but able to lay off some of the downside risk on HMRC.

Luxemburger, I've really enjoyed the chat. I think you're right in that there are opportunities in the slightly off-piste areas for the guys that are more sophisticated.

This is just my view, but I think if the FSA took a look at a book of business they'd be much better off looking at sophistication rather than simple net worth when they judge suitability.

I've got some young clients in the City (who invest passively through me because they know their employers strip out so much in fees!) who are far more sophisticated but lack the high net worth of some of my retired widows with large portfolios. They are far more capable of judging a UCIS type proposition.

In all of this I do feel a bit sorry for clients. You probably have the same experience as I have, once you sit down in front of a client you want to take on you will always win the business. But how does a client compare between firms and advisers? It must be so hard, it is impossible to know whether you're dealing with someone like yourself who seems to know their way around the UCIS and alternative market, and someone that simply sells what the latest rep came around and marketed to them!

In my experience, clients will only deal with you if they like and trust you.

What always bothers me about IFA world is that advisers are often very good at giving financial advice and hopeless at giving investment advice. In my view, unless advisers have a background in actually managing money then they should contract out that discipline to professional money managers.

Too many believe they earn their money by selecting investments and collecting the commission and few have the resources, time, experience or skills to do the job effectively.

I hope it will all change with RDR. Historically advisers provided access to funds for their clients through a variety of tax wrappers as the first point of call, with investment bonds a preferred wrapper for obvious reasons. Much of the time, the underlying investment strategy failed to generate sufficient returns to justify the cost of wrapper overlay and re-balancing under the wrap rarely took place, largely because advisers had no process for re-balancing portfolios.

Post RDR, advisers will be able to set themselves apart by being able to explain their investment philosophy and the processes they employ as part of the overall service they offer.

IFA world will consolidate over the next couple of years and fewer firms will exist post-RDR. I sympathise with those IFA who have offered a service to those clients who would not fit into the HNW category, because they will become increasingly marginalised and find it tough to make a decent living going forward unless technology makes this possible. Even then, you can only see so many people in a day.

The model of an adviser having 200 clients paying at least £1,000 each a year in fees will prevail.

Its all well and good debating the pros and cons of UCIS, but (if you have not done so already) I would suggest everyone has a read of the report the FSA recently did on their investigation into the promotion of these products. In fact, if you ever advise clients on UCIS I would say it is essential you read it. Whilst some UCIS may have their merits, there seems to be endemic failings in the way IFAs promote and recommend them as well as some gross mis-selling.

Are all the closed end funds, such as the Greater China Fund (GCH), which are listed on the NYSE considered UCIS? Also, what about the open ended funds registered in the US? They are unregulated here but not in the US and are very valuable components in any portfolio of diverse assets.

Festinalente. I think the FSA Register includes a list of Regulated Collective Investment Schemes. You can search this on their website. If it is not on the list then I assume it is classed as an Unregulated Scheme.

Jon,

Many thanks. I'm hoping that because the NYSE is a recognised exchange that they are exempt. OR because they are incorporated, that they are considered body corporates and, therefore, exempt. They are hundreds of them on the NYSE, AMEX and generally well regulated.

Festinalente,

I think funds which are incorporated overseas can apply to be "recognised" by the FSA, and these are also listed on the FSA CIS register. However, if a fund is not specifically regulated or recognised by the FSA, then I think you would be best to treat it as a UCIS. The main issue with the FSA is not whether the fund is well regulated, but that UK investors do not have the same consumer protection (FSCS and FOS) if they invest in UCIS.

I did have some good news in that clients that are resident outside of the UK seem to be exempt and as long as they were not in the UK when purchasing the fund. That accounts for the majority. For the rest, I will have to make, as compliance keeps saying, copious notes on suitability etc. Many thanks for your input.