When a fund that screams success doesn't do what it says on the tin ...

Sam Dunn reports on moves to protect investors from misleading claims in adverts

Slick advertisements aren't just the provenance of sleek sports cars and exotic cosmetics. The financial services industry is also awash with highly polished marketing campaigns encouraging us to spend our money. Think of the ubiquitous Howard Brown at the Halifax and the black horse used in the Lloyds TSB ads.

Slick advertisements aren't just the provenance of sleek sports cars and exotic cosmetics. The financial services industry is also awash with highly polished marketing campaigns encouraging us to spend our money. Think of the ubiquitous Howard Brown at the Halifax and the black horse used in the Lloyds TSB ads.

The latest celebrity endorsement comes with Barclaycard recruiting Friends star Jennifer Aniston as the face of its new campaign, even though research from Raising Standards, the quality mark scheme, suggests just 1 per cent of us are swayed by such endorsements.

But it isn't just our own cynicism that stops us falling for beguiling advertisements: the regulatory bodies have also taken steps to protect us from some of the more outlandish claims made by the finance companies.

Barclaycard had its knuckles rapped in November when the Office of Fair Trading (OFT) forced it to withdraw its "0 per cent forever" deal, trumpeted in an advertisement, for being "highly misleading"; the interest rate paid by customers on balance transfers was far higher in many cases.

And last week City watchdog the Financial Services Authority (FSA) introduced more consumer protection, preventing fund managers from "cherry picking" their best performance figures to use in their adverts. Managers must now disclose year-on-year statistics when using past performance figures in marketing campaigns, rather than plucking out the most eye-popping headline figure.

In the past, for example, an investment house with a fund that had done well over five years but not so well over, say, 12 months might well have used the five-year figure in its advertising. But under the new rules it would have to reveal its performance - good or bad - over individual 12-month periods.

Expressed as a percentage rise or fall, the FSA says the figures will give consumers a much clearer picture of what sort of product they might be buying - by revealing how the investment has fared each year and by highlighting any volatility.

Originally, the FSA had proposed to do away with the use of past performance figures in advertising, after research suggested this data was no indicator of future success.

But the watchdog has since come to the conclusion that such figures highlight consistency - a valuable tool in helping investors choose a fund, says Paul Ilott of independent financial adviser (IFA) Bates Investment. Two funds showing remarkably similar performance over five years, he explains, may display huge differences once this is broken down into 12-month chunks.

"As a result," says Mr Ilott, [the consumer's] choice of fund is likely to change in favour of those showing more consistent performance."

Research from Bates Investment highlights such disparities, comparing the Solus Special Situations and Artemis UK Growth funds, which are ranked sixth and eighth respectively for five-year performance out of 199 funds in the UK All Companies sector.

Their performance over a different period, though, paints a vastly different picture. If you had invested £1,000 in each fund five years ago, your Artemis investment would now be worth £1,626.60 - about £30 more than your Solus investment. But the pattern of returns from Solus has been "much more exaggerated", according to the analysis: if you had been invested in the Solus fund at any point during the past three years, you could have suffered a loss of up to 58.13 per cent instead.

"Only one other fund in the [same] sector would have produced bigger losses than this - despite the fund producing the eighth-best overall return over the past five years," says Mr Ilott.

Greater transparency may help investors decide whether to opt for a fund or not, but it should form only part of their decision - not be the sole driver.

"Fund manager moves, fund mergers and any changes in a fund's investment objectives all have to be taken into account," advises Mr Ilott. "Yet there is a danger that people will always be seduced by percentages. People are more focused on the short-term view rather than the longer term, but with stock markets you should be taking a much longer view."

Philippa Gee of IFA Torquil Clark agrees that you shouldn't put too much emphasis on performance figures. "Investors may make snap decisions after seeing a poster, but with some funds, [performance figures] are not an accurate record of what's going on 'under the bonnet'," she says.

"It is still all down to persuasive marketing and that won't stop."

Financial consumers have long displayed an unhealthy interest in percentage figures that show by how much a fund has grown. This is because they offer a tempting snapshot of potential riches. In contrast, the FSA wants to see more balanced advertising, says spokesman Rob McIvor, which might mean, say, greater use of charts and less strident slogans. "We don't want to see past performance as the most prominent thing [on the poster]. It's all about tone."

Whether you consult an IFA or do your own research, check before you buy into a fund how long the manager has been in charge: if he has recently joined, he can't claim responsibility for any stellar performance. And investigate how the fund has performed through difficult economic times.

While you should treat past performance with a degree of scepticism, if a fund doesn't use these figures at all in its advertising, it should raise alarm bells, says Mr Ilott. "The figures may not paint a pretty picture.".

Conversely, don't automatically assume the worst if an advertisement contains no past performance figures: if a fund has been around for less than 12 months, it will have no point of comparison.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Tax Manager / Accountant

    £35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

    Ashdown Group: Contracts Executive - City of London

    £35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

    Recruitment Genius: Call Centre Debt Collector - Multiple Roles

    £21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

    Day In a Page

    Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

    Uganda's giants are flourishing once again

    After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
    The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

    After 350 years, the riddle of Britain's exploding fleet is finally solved

    Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
    Airbus has patented a jet that could fly from London to New York in one hour

    Airbus has patented a jet that could fly from London to New York in one hour

    The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
    Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

    Tate Sensorium

    New exhibition at Tate Britain invites art lovers to taste, smell and hear art
    10 best sun creams for kids

    10 best sun creams for kids

    Protect delicate and sensitive skin with products specially formulated for little ones
    Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

    Nice guy Finn is making up for lost time – and quickly

    He was man-of-the-match in the third Test following his recall to the England side
    Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

    Remember Ashton Agar?

    The No 11 that nearly toppled England
    Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

    US betrayal of old ally brings limited reward

    Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
    VIPs gather for opening of second Suez Canal - but doubts linger over security

    'A gift from Egypt to the rest of the world'

    VIPs gather for opening of second Suez Canal - but is it really needed?
    Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

    Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

    Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
    The male menopause and intimations of mortality

    Aches, pains and an inkling of mortality

    So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
    Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

    'How can I possibly be on the list with these writers I have idolised?'

    Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
    Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

    Bettany Hughes interview

    The historian on how Socrates would have solved Greece's problems
    Art of the state: Pyongyang propaganda posters to be exhibited in China

    Art of the state

    Pyongyang propaganda posters to be exhibited in China
    Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

    Vegetarian food gets a makeover

    Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks