A quick flick through confirmed that this would still not be my paper of choice but, as I lay it down beside me, I noticed an advert on the back page:
“Have you suffered losses because you were mis-sold an investment by your bank, building society or financial adviser?” It then went on to list circumstances in which a claim could be possible:
Some interesting scenarios, some of which I am sure we all recognise, some of which are worded so widely as to make little sense, and a few real fishing expeditions.
The interesting point for me is that, in most of these cases, the actual transaction is probably not in itself wrong, but it can lead to a variety of different outcomes depending on many other influences. Even then an outcome - either positive or negative - may not be absolute, and can change over time or with the ‘buyer’s’ attitude to risk.
The very nature of a long-term investment product means there is rarely an absolute success level, but there is soon a failure level. (In behavioural finance, prospect theory suggests that we value losses and gains differently – in fact, our tolerance for losses is actually lower than our appreciation of gains.)
This has become even more important with some of the volatile markets that we have seen in the last few years, in which we may only be part way to the destination but currently be sitting at a lower value than anticipated - perhaps even lower than the starting point.
Changing client circumstances might also make people think twice about a long-term financial commitment – particularly when there is the option of immediate cash back for no cost!
This fits in very neatly with the 2011 FSA paper “Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection” and subsequent Dear CEO letters. Since this work there has been a whole industry generated around risk profiling and assessing a client’s attitude to risk (for me, the key phrase in the paper’s title was “willing and able to take”). There has also been a further call for a focus on capacity for loss.
Such an advert also preys a bit on current fashions – what is “a poorly performing annuity”? I am not sure - but the press is full of headlines about falling annuity rates and the benefits of shopping around. Similarly, with falling annuity rates income drawdown has become more popular - even for those who perhaps would not have considered income drawdown in the first instance.
In such circumstances, successful investment management could mean that the decision was vindicated, while falls could mean a claim that it was the wrong thing to do – even if any success was perhaps more by luck than judgement.
The most important thing though - and the point of this article - is the need for comprehensive record keeping and documentation. It is essential to know your client, to document investment risk, capacity for loss and the reasons decisions were taken, and to evidence it all with a date and the client’s signature. Hindsight can be 20/20 vision, so be prepared to have the evidence to avoid this.
I guess our industry does involve a lot of intangibles over a long period of time. Obviously, it also involves money. This leaves it open for such claims, so we must, like the FSA, always focus on risk and suitability for the end consumer.
Mike Morrison