Here at Ovation we meet around one hundred potential clients each year, some need our help, many don’t. Frequently Ovation are one of several advisers with whom the prospective client is meeting. Where the client has met with other advisers there’s often a similar theme to the meeting, the conversation eventually comes around to the question of, “what returns can I expect?”
This leads to a broader discussion about risk, return, objectives and time horizons, all of which impact the likely returns. It also encourages a conversation about losses; how much the client would be prepared to see their portfolio fall without making any rash and expensive moves. Invariably, losses aren’t something the other advisers have discussed in any detail with the client. It might sound obvious, but it is crucial that you consider the benefits and possible drawbacks whenever you’re making an investment decision, as a recent and awful news story highlights.
London Capital & Finance have been in the press a lot lately. If you haven’t come across them, let me tell you about them. They recently marketed a “fixed rate ISA” which promised returns as high as 8% and 11,500 customers decided to take them up on their offer of guaranteed tax-free growth. A total of £236m of their hard-earned savings was collectively invested. The investment, it turned out, wasn’t a fixed rate ISA at all, it was an unregulated mini-bond. Unfortunately, London Capital & Finance collapsed in early March and it is likely that the majority of the £236m will never be repaid, because unregulated investments aren’t covered by the Financial Services Compensation Scheme.
A burden of responsibility must fall on the regulator, The Financial Conduct Authority. Concerns were raised about LCF back in December, but they failed to act quickly enough to avoid the collapse and the loss of investors’ money. LCF’s advertising was misleading at best, untruthful at worst. The investment was high risk, but not advertised as such. And to top it all it wasn’t even an ISA.
But should the regulator take 100% responsibility? I suspect the vast majority of those 11,500 investors would have realised that an 8% return was significantly higher than returns available from other cash ISAs or bank accounts. Perhaps this should have set alarm bells ringing! Greed is not good where returns are concerned without exception higher returns mean a higher risk of you losing your capital. There are no easy wins or shortcuts, so we recommend you always follow the following advice:
- Make sure the investment is covered under the Financial Services Compensation Scheme (FSCS). That is not the same as the provider being regulated by the Financial Conduct Authority. If you’re unsure contact the FCA or a Chartered Financial Planner and ask them.
- Compare the promised rates of return against what’s available from your bank. If they are significantly higher you should start to smell a rat. At best it’s higher risk than it looks, at worst it’s a scam designed to part you from your cash.
- And before you decide, get the advice of an independent financial adviser.