Editor’s Column: A risky business

I was reminded of this during the week with some new research from the FCA on risk warnings on high risk or riskier investments.

At the root of many recent investment cock-ups was a failure to warn clients about the risks they were taking.

Many high profile investment failures, whether that be in SIPPs, mini-bonds or whatever, were often connected to investors being sucked in by promises of high returns and low risk – the mirage that most investors chase.

In the case of the failed London Capital & Finance mini-bond venture many investors were beguiled by the promise of good returns from so-called ‘bonds’. Bond itself is a word that provides a picture of safety and security and it’s no surprised many failed investment firms have used the term to lure investors.

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The FCA is cottoning on to all this and the findings from its research are pretty shocking.

The regulator found that 45% of self-directed investors it surveyed were not aware that “losing some money” was a potential risk of investing. That’s almost unbelievable.

The FCA also found that there was an increase in money being invested in high-risk investments during the Coronavirus pandemic despite all the bad press about investment scams and the like. I believe the sharp rise in inflation recently may also encourage more investors to take more risk than they can handle in the near future.

We need to separate here, advised clients and non-advised. Financial Planners go to great lengths to discuss risk with clients and even then some do not understand what that means but at least the effort has been made and the guiding hand of a planner can steer clients towards ‘appropriate’ risk and away from risk that is simply not necessary.

A lot of this will depend on the clients’ wealth position, age and other factors. Too little risk can be as bad in some cases as too much, as the FCA is realising with concern expressed recently about the amount of pension cash held in deposit accounts.

For self-invested investors, at least those with little investment experience or knowledge, the investment risks are ten-fold. Many have no real understanding of the risks they are taking or only a vague notion that they could lose their shirt instead of making 8% a year.

To tackle all this the FCS is rightly beginning to look at the types of warnings on high risk investments and whether they are enough. I cannot predict what they will conclude but to my mind many investors are already exposed to poor understanding of risk warnings. 

If we are to put the brakes on the mounting compensation bill for failed investments, vulnerable and naive investors must be kept away from very high risk investments and from companies spending more time seeking ways to rip off clients than invest their money.

I’ve never felt, too, that the standard: ‘Your investments can go down as well as up’ is enough. It just does not make clear that investors could lose 20% or 50% of their investment or even the whole lot.

The whole area of risk warnings needs radical reform if we are not to repeat the investment mistakes of the past 10 years. Investments need as clear a warning as cigarette packets.

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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience in finance, business and mainstream news. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days. Follow @FPT_Kevin 

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