Risk-averse advice costs investors

New rules are leading advisers to recommend wrong options to clients. Kate Hughes reports

F ears are growing that investors could be missing out on thousands of pounds in lost returns because their financial advisers are too worried about regulation to recommend riskier investment options.

Despite painfully low rates on "inappropriate", cash-based choices including savings and bonds, huge numbers of advisers are afraid to suggest equities that could be far better suited to long-term investors, according to a new study.

Research from business consultant BDO warns that more than a quarter of the UK's independent financial advisers are increasingly recommending investments that are completely wrong for many clients. And the problem is set to get much worse in the new year. Almost 90 per cent of advisers said equity-based products such as equity individual savings accounts (ISAs) were appropriate for investors looking for long-term growth. But despite this, 26 per cent would be pushed to recommending cash-based products regardless of that fact because of a raft of recent regulatory developments.

The imminent Financial Services Bill introduces two new regulators in place of the current Financial Services Authority (FSA), part of which is expected to place greater emphasis on investment risk.

"All financial regulatory changes are politically driven and politicians are desperate to maintain the UK's global leadership in financial services," says Alex Ellerton, the director of BDO's risk and regulatory practice. "The vast majority of changes are focused on banking regulation without adequately considering the role of the investment adviser."

As a result, hundreds of advisers have warned that consumers expecting advice that places their best interests front and centre will instead find far more money goes into cash-based vehicles which appear less risky but which offer rates that are lower than inflation.

"It's wrong for any adviser to err on the side of caution for fear of censure by the FSA if their client actually needs exposure to some form of risk investments," adds Patrick Murphy of chartered financial adviser Zen Wealth. "But many people think risk is only about how volatile your portfolio is. There are several forms of risk that could erode your personal wealth including liquidity or how easy it is to get to, and diversity. The biggest risk though, particularly to those who only hold their money in cash or near-cash, is inflation."

For example, if £10,000 was placed in a savings account in December 2000, you would have needed an average interest rate of 3 per cent every year since to have the same "purchasing power" today. In other words your £10,000 would now need to be £14,181 just to tread water as the cost of goods and services increased by more than 41 per cent.

Currently, the best instant-access savings rate is around 2.2 per cent gross every year or the best instant-access cash ISA offers an annual 2.5 per cent tax-free. Today's Retail Prices Index measure of inflation stands at 3.2 per cent for October 2012, up from 2.6 per cent in September.

But even locking up your cash for the medium term won't necessarily solve the problem as the leading four-year, fixed-rate bonds are only around 3.5 per cent before tax.

Experts also warn that just because a product offers low returns doesn't make it risk-free by default. Corporate bonds in particular, which appear to guarantee a better rate of return than straightforward cash savings, vary dramatically in safety.

"You really need to consider how financially secure the company is – in other words, what the likelihood is of getting your money back," says Adrian Lowcock, a senior investment manager for Hargreaves Lansdown. "Smaller or at-risk companies like high street retailers may not be a great idea."

Equity-based options that offer a higher reward for a higher risk are not only more much more likely to beat inflation but could also lead to a significant increase in value as that growth compounds over the years.

And even in challenging markets, there are opportunities for growth. We're regularly told that past performance is no guarantee for future returns but it's worth noting that over the past three, turbulent years the UK mid-cap sector (with the FTSE 250 up 13.1 per cent), US equities (the S&P 500 is up 11.7 per cent), and high-yield funds (up over 13 per cent), have all performed strongly according to figures from Barclays Capital.

In fact, fund manager Rathbone says it expects FTSE returns of around 5-6 per cent in 2013 but warns that it also expects equity volatility levels to rise next year.

Mike Kellard, the chief executive of Axa Wealth, argues that the flight from equities may not all be one way. "More than regulation, financial behaviour and investor psychology lead to many lost opportunities," he says, arguing that people's natural inclination is to pull their money out of long-term investments when the markets are going down – the exact opposite of what they should do.

"If something is cheap, people will normally buy it, but the opposite is true of equities. There's almost a climate of risk-averse, anti-equity feeling among consumers at the moment. And yet the professionals see now as the right time to buy."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Sport
The giant banner displayed by Legia Warsaw supporters last night
football Polish side was ejected from Champions League
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
News
i100(and it's got nothing to do with the Great British Bake Off)
PROMOTED VIDEO
News
news It's not just the world that's a mess at the moment...
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
news
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone