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

Voices
Barn owls are among species that could be affected
charity appeal
Sport
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
Life and Style
food + drink
Voices
John Profumo and his wife Valerie Robson in 1959
voicesWard committed no crime, and the truth is still being covered up, writes Geoffrey Robertson QC
PROMOTED VIDEO
News
news... you won't believe how bad their skills were
News
people

Arts and Entertainment
Mark Wright and Mark Wright
tvStrictly goes head-to-head with Apprentice
Sport
footballPremier League preview: All the talking points ahead of this weekend's clashes
News
i100
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

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Ashdown Group: Marketing Services Manager - (communications, testing, DM)

    £32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

    Guru Careers: Finance Account Manager

    £Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas