Report Says Mass Affluent Being Badly Served By Investment Advisers

Jason Gorringe, Tax-News.com, London

14 November 2000

A report commissioned by Close Wealth Management in Guernsey says that 11 million 'mass affluent' investors in the UK are paying too much in 'unnecessary charges for inappropriate and expensive investments'.

The report, entitled 'Stealth Financial Charges and the Mass Affluent', by Professor Merlin Stone of Bristol Business School claims that financial intermediaries recommend over-priced and under-performing investment products which often don't match the needs of the investors they are sold to.

The 'mass affluent', or 'poor rich', are flavour of the week for the investment industry, having seemingly come from nowhere in the last ten years, bridging the divide between the wealthy and the wage-slaves both in terms of their wealth (£25,000 to £250,000 in free cash) and in terms of the products they need. What is truly astonishing is their numbers: variously estimated at between 40m and 90m in Europe alone.

Members of this newly-recognised investing community are not gullible, but they may be too trusting, accepting bad advice in good faith and not knowing enough to question it. Says Martin Smith, Managing Director of Close Wealth Management: "This is another scandal within the financial services sector that to a great extent has been overlooked. We estimate that the mass affluent has paid around £3.8 billion in unnecessary investment charges alone.'

The report claims that the financial services sector is misrepresenting investment products to the affluent by:

• Confusing them into thinking low risk investments can only be achieved by 'packaging' products which often have over-priced guarantees on returns;
  
• Using strategies such as with-profits to needlessly 'smooth' or average out returns. Investors have to pay for this through expensive invisible charges;
  
• Confusing income yields with the potential to provide money over the long term. Those receiving an income from their investment can lose sight of the fact that they can cash them in by simply selling the shares or bonds that are providing the income.
  

In addition to this, the report criticised financial advisers for not understanding the level of risk their investors wish to take. Professor Stone said: "Many will typically ask them directly for this but their risk profile can only be gauged if they systematically define their requirements from a particular class of investments. Very few financial advisers do this. To ascertain the risk profile of customers, as well as talking about the likely strong returns from a number of investment propositions, it is vital to highlight any possible worst case scenarios. This illustrates the maximum loss the investor would be prepared to sustain over a particular period of time. An individual investor's benchmark should be determined by their mix of investments rather than a random stock market index, industry average or inappropriate deposit rate, for example.'

The report then sets out a series of 'best-practice' guidelines for advisers to follow. Martin Smith says that failure by advisers to adhere to these common-sense rules leads to wrong investments: "In addition to exorbitant charges, the affluent are also losing billions of pounds in returns. They are not investing their money properly because they are either wary of taking financial advice and are therefore leaving much of it in low interest deposit accounts or are making the wrong investment decisions because they receive bad advice."

.

Recommended

Write a comment