7:00AM GMT 10 Dec 2011
As we draw closer to the ban on commission payments on financial products, which will take effect in 2013, there is growing concern about a rise in the mis-selling of products and fears that some advisers and salesmen are grabbing what they can now.
"I've never seen so many cases of poor advice as I have in the last six months – from advisers 'churning' pension plans to selling unregulated products such as overseas property investments," said Philippa Gee of Philippa Gee Wealth Management. In some cases, she said, advisers were pocketing between 8pc and 10pc of the investment.
"We never see clients who have been mis-sold a National Savings product or a cheap tracker fund," said Ms Gee. "Inevitably, they've been sold a product they don't fully understand and are taking too much risk with their money. But the adviser has received a generous commission fee for it."
Alarm bells should ring if any adviser recommends a product where there is a toxic mix of high charges, commissions and complex terms. This doesn't mean that there aren't certain cases where such products may be appropriate. But evidence suggests that these are few and far between. Despite this, such products are sold to thousands of consumers each year.
With less scrupulous advisers making hay while they can, and the difficult investment environment perhaps tempting consumers to take risks, we look at five products where you should always think twice before signing on the dotted line.
Investment bonds
These made headlines this week when HSBC was fined £10.3m for selling bonds to elderly customers to pay nursing home fees. Regulators ruled that the bonds were mis-sold, given that the customers' average age was 83 and that there were penalties on withdrawals within five years, as well as a degree of investment risk.
These bonds aren't sold just to people needing long-term care. They are routinely offered to those with a sizeable cash sum to invest, whether they're saving for retirement or supplementing a pension. Ms Gee said: "Whenever I see a customer who's been ripped off, they've almost always been sold an investment bond."
These bonds are typically sold by insurers and allow customers to invest in a range of underlying funds. Their main advantage is that investors can withdraw 5pc of their capital each year without incurring a tax charge. But if the investment growth is less than this, capital can quickly deplete.
Most people are investing tens of thousands of pounds in these bonds (the average investment with HSBC was £115,000) and advisers earn commission of 6pc to 8pc. Investors should ask whether a diversified spread of low-cost equity or fixed-interest funds would be better. Ms Gee said: "Undoubtedly these bonds are oversold. I've advised hundreds of clients, but there's only one case I can think of where this was the most suitable product."
Structured products
These purport to offer a simple solution to nervous investors: get exposure to equity returns without putting your money at risk. Sadly, you will get far less than the market return (most investors don't get dividends, for example) and your capital could still be at risk.
Behind this persuasive "sell" are complex products that rely on derivatives and expose you to counterparty risk. Before signing up, make sure you are clear what the risks are and what return you will get. Santander recently sold "guaranteed" bonds which, it later admitted, weren't fully guaranteed, because of counterparty risk.
As with many types of investment, it's a mixed bag, with good, bad and downright ugly versions. Some structured deposits will be covered by the Financial Services Compensation Scheme (FSCS), so even if the bank selling it, or the counterparty underwriting the deal, went bust, up to £85,000 of your money would be protected. Others are "structured investments" where money can fall at twice the rate of the stock market in certain conditions. Always ask what the downside risk is, both in terms of market falls and the unlikely event of a bank backing it going bust.
"If you are not happy with stock market risk, I would not advise being in the stock market at all," said Ms Gee. "A well-diversified portfolio can often be a better way of managing such risks."
Multi-manager funds
Here, investors are paying a double layer of charges, often without any significant boost to performance. David Norman, the joint chief executive of TCF Investment, pointed out that the typical TER (total expense ratio) on unit trusts was 1.7pc, but on a multi-manager fund the average was 2.3pc, with many funds charging closer to 3pc.
These figures don't include dealing costs or any upfront fees. Some multi-managers don't include the charges on exchange-traded funds either, meaning the published TER may bear little resemblance to the charges deducted from your fund every year.
"Long-term investors are looking to beat inflation," said Mr Norman. "Historically, equities deliver 4.5pc more than gilts. But if you are paying more than 3pc to get a 4.5pc return, it's like trying to go up the down escalator."
These aren't just niche products, aimed solely at high-net-worth investors. Increasingly, these are the default options offered by a banks, including HSBC, Santander and RBS. Mr Norman added: "The principle of diversification is good, so these funds seem a simple, sensible option. But in a low-return environment it's important to keep an eye on costs. Most of these funds are charging too much."
Inflation-linked bonds
Popular at present are bonds where returns are linked to the retail prices index, rather than the stock market. With RPI now standing at 5.4pc and most banks paying less than 2pc, it's not hard to see why they are selling well. But investors should ensure they understand the more complex terms and conditions. If an account pays RPI plus 1pc, this does not mean you get 6.4pc today. Most are five-year accounts, and the return will be the difference in prices between now and the maturity date. Many people are expecting inflation to fall next year, once the rise in VAT drops out of the year-on-year calculation. As with structured products, there may be counterparty risks as well, although most are "structured deposits" that will be covered by the FSCS.
Exchange-traded funds (ETFs)
ETFs don't pay commission and have very low charges. So how can consumers go wrong? Sadly, they are far from simple products. There are physical ETFs, where the manager holds the shares or commodities of the index being tracked. But there are also synthetic versions, where there can be tracking errors and problems with liquidity if too many holders try to sell quickly. Many of these rely on complex derivatives. Worse, some offer "geared exposure", where the fund borrows to boost returns – but this can magnify losses if the market is against you.
Richard Saunders, the chief executive of the Investment Management Association, warned customers to make sure they knew what type of ETF they were buying. The term ETF is often used to describe their riskier cousins, known as exchange-traded products (ETPs), which don't offer the same level of investor protection. Investors should also ensure they look at all charges. The iShares FTSE 100 ETF has an expense ratio of only 0.4pc but annual platform charges make it more expensive than the Fidelity Moneybuilder UK Index fund or the Vanguard FTSE UK Equity Index fund.
Gary Shaughnessy of Fidelity said: "Fees reduce the value of your investments, so everyone should be clear about what they are paying. It's like deciding to fly with a flagship airline or its no-frills rival. There's more to the comparison than the eye-catching price in the advert. If you've been stung by extra charges for baggage, checking in and so on, you know that what matters is the total cost."
http://www.telegraph.co.uk/finance/personalfinance/investing/8946740/Five-investment-hazards.html
http://www.telegraph.co.uk/finance/personalfinance/investing/8946740/Five-investment-hazards.html