An aside on technology

In October 2009, I purchased a Livescribe Pulse Smartpen, directly from the UK supplier, intending to test it out in the field, and (assuming it performed adequately) expecting that I might recommend its usage to ValidPath Members.

In the event, things did not run that smoothly.  My first pen underwent total battery failure during a Dimensional Fund Advisers 'Science of Investing' conference - not the most convenient of moments to find oneself let down by technology.  This, initially at least, had the effect of undermining confidence in the use of this piece of kit in a regulated environment.

Since then, my replacement Pulse Smartpen has not put a foot wrong, consistently delivers what I need for reliable, compliance-related note-taking, and the manufacturer has brought out a new version called the 'echo'.  You can find out more about it by clicking here.

Why am I writing about this?  It's just a gadget, right?

Actually, this is all about information - how you record it, what you do with it, how you manage it.  And that, to me, seems to be the absolute core of good practice when it comes to compliant advice.  So, here's what this particular 'smartpen' allows me to do:

• I take notes, exactly as anyone of us would do, except not on a random piece of paper, or in an instantly forgettable notepad, but within a robust notebook dedicated to everything financial (the Livescribe can manage up to four separate notebooks at any given time, and identifies each one separately);
• However, by using my Livescribe pen, simply through the action of writing, I create an exact digital copy of my notes - this uploads automatically onto my PC or Mac when I dock the pen either at home or in the office;
• The PC/Mac software supplied provides me with a desktop to view and file my notes - I can print, email, file specific pages and I can just drag the relevant pages onto the Evernote icon (you'll need an Evernote account).  This means that colleagues who subscribe to my Evernote account, can also share my Livescribe notes - this provides an idiot-proof mechanism for sharing handwritten notes;
• In practice, this kind of 'connectedness' between the pen, and the kinds of application we use every day makes it extremely easy to ensure that the handwritten notes taken in client meetings find their way onto our practice-management system, Clarity - thus supporting the whole FactFind process;
• But there's more - for the more paranoid amongst us, the Livescribe pens will also record (if you want) the audio of a conversation, whilst you're writing your notes.  This means you can replay the actual words being spoken, from the precise point during a meeting, simply by clicking on the electronic version of the text (once uploaded) or by tapping your pen nib on the paper notes themselves.  This may be a useful facility for the context of strategic planning meetings, or when interacting with 'difficult' clients.  Technically, as a matter of courtesy, you should obtain the other participants' permission to record the meeting - but this additional functionality does adequately address the potential accusation (later) that you have inaccurately recorded the client's details, objectives or preferences;
• There's more here that I don't use much currently - such as a downloadable App that converts your handwritten notes into editable text, or the facility to publish your scribblings to 'the cloud'.

No end in sight: the Keydata saga

Sometimes, the UK financial services market is a bit like watching 'Jaws'.  Just when you think it's safe to venture back into the water, some shadowy monster with big teeth is swimming around, with every intention of extracting another pound of flesh.

OK, so I am conflating two genre - a Spielberg film and Shakespeare's 'Merchant of Venice', but the connection to the latest FSCS initiative is not entirely tenuous.

The previous KeyData saga appears now to be reaching the end of its process.  Advisers who may have recommended KeyData products are now probably bitterly regretting having done so, having paid for the privilege thrice over - via their FSCS Levy, and then subsequently through the FSCS' class action, and finally through elevated PII premiums. 

Now there is a subsequent episode to this sorry saga, a kind of repeat performance, but this time focused on the KeyData products issued by Lifemark S.A.  Lifemark, a company which fell under the Luxembourg jurisdiction went into administration in November 2009, a mere four months after issuing their latest voluminous index of bond issues.

Somewhat surprisingly for a firm which is no longer trading, it is possible still to access that final Lifemark prospectus, a monolithic publication of some 183 pages and, in my humble opinion, one of the most incomprehensible documents I have ever fallen into a coma over.  As I flicked my way through the interminable verbiage, apparently neverending lists and unedifying explanation of 'risk factors', one is left with one overriding question:  Why?  Why would any thoughtful adviser, with at least half an eye open in the direction of the future, even think about using this stuff?  Yet, 162 IFA firms (including some of the big names, presumably operating 'best advice panels') did so.

In taking a view of this kind of issue, there is a balance to be struck.  I remain unconvinced that the FSCS's actions are in fact ethical, and inevitably one must feel sympathy for smaller IFA firms where clients badgered them for this kind of product and then complained as soon as things went wrong.  Having reviewed the FSCS' public statements in respect of the 'inappropriate risk' of the first batch of KeyData settlements, it is hard to shake off the impression that they are missing the point, perhaps in their haste to secure redress from their captive funding base.  Neverless, a reading of the literature conveys a persuasive impression that this stuff was, at a fundamental level, toxic - my conclusion is that IFAs who sold the Lifemark products simply did not read the small print.  And that does tend to undermine any other arguments about fairness and FSCS policy.

There is no real future for intermediaries which operate in this way.  None of us want to be part of a market which lurches from one product-driven crisis to the next, and yet there is little evidence in some quarters of lessons being learned.  As I have checked my correspondence database, I note that we challenged the FSCS in 2005 and 2006 in respect of their fund-raising methodologies - yet in the meantime whilst nothing has changed there, it seems, sadly, as if the same is true with a sizeable number of IFAs.

Our focus at ValidPath continues to be on building sustainable practices, using a consistent, repeatable methodology, based on products which are transparent, simple and low-cost.

"I wish..."

1. the sheer futility and irrelevance of 99% of everything that has emanated from politicians and rule-makers, and the consequent lack of 'reality' for most normal people who will, in any case, just put up with whatever comes along; and
2. the fact that I have spent thirty years of my life working with this stuff, trying to make sense of it, trying to help clients through a maze that keeps changing direction and, it transpires, appears to be going nowhere substantive or useful.

• I wish I'd had the courage to live a life true to myself, not the life others expected of me;
• I wish I hadn't worked so hard;
• I wish I'd had the courage to express my feelings;
• I wish I had stayed in touch with my friends;
• I wish that I had let myself be happier.

A state of mind

The FSA's Policy Statement (PS12/3) on the issue of RDR Adviser Charging incorporates the amendments to be made to the Conduct of Business Sourcebook (COBS) in order to implement the new regime when it comes to adviser remuneration. This is not in any way a consultative document, but very much presents the detail of how the FSA envisages intermediaries will get paid from the 1st January 2013 onwards. ValidPath Members have already received our analysis of what this will mean for them, and I am pleased to report that most of our people have already developed their model ready for the Brave New World - indeed, quite a few have been occupying this space for several years now.

What, however, is not yet 'policy' is what is contained within the FSA's Guidance Consultation 12/3, published around the same time. This seeks to provide some definition to the ambiguities inherent in the 'independent vs restricted advice' spectrum - ambiguities which one or two very well-funded 'restricted' firms have been attempting to exploit when attempting to entice ICAEW-connected firms to join them!

Independent advice must be "based on a comprehensive and fair analysis of the relevant market; and be both unbiased and unrestricted."  Restricted advice is any kind of advice which does not fit this standard, and would include what used to be called 'basic advice' or 'simplified advice'.

GC12/3 gives us some ideas as to what what is involved for intermediary firms in order to meet the 'independence standard', as it were:

• It is perfectly feasible for IFAs to take a view on certain kinds of FSA-mandated products in order to exclude them from their recommendations, without jeopardising their independent status.  You would need to exercise some care here, but the kinds of products that the FSA has in mind would include UCIS and TLPIs;
• An intermediary's 'independence' is defined in relation to its own client base - for example, if you find yourself advising a client with 'ethical' investment preferences, you are not forced to consider the entire market of products which includes those without any kind of ethical criteria;
• Networks or large IFA firms which operate panels must allow their advisers to operate off-panel - this won't cause too many problems at ValidPath as we do not impose panels on our members, having recognised a long time ago that this is (usually) simply a rather thinly-disguised revenue-raising strategy!
• Relying on a single Wrap/Platform is going to be insufficient - and, since we launched our ValidPath Investment Proposition, we've been recommending that our Members draw up a philosophy where a range of Wraps are selected to support (a) varying investment models or (b) the spectrum of complexity of client needs;
• Where IFA firms use model portfolios, they should still cater for clients' own individual circumstances.  With our ValidPath Investment Proposition, this is something we have sought to 'build in' to our methodology, (a) by making it risk-driven, (b) by linking it to the world's best, independent risk-profiling system, and (c) by effectively making it Platform-independent;
• In order to present themselves as 'independent', IFA firms do not have to offer specialist services in areas such as pension transfers or long-term care insurance (although we would argue that anyone who routinely advises elderly clients on their wealth-management, ought to have the latter expertise).

Risk Outlook

So, the FSA has published its 'Financial Conduct Risk Outlook 2012'.

This is an annual event that we look forward to with some interest, as it helps to flag up the issues  which we, in IFA-dom, may need to consider when it comes to our own due-diligence.  Because the RCRO addresses the entire retail financial services market, one has to exercise great care in drawing conclusions (there is much that is more relevant to the somewhat dubious practices of the highstreet banks), but broadly speaking this qualifies as a 'useful document'.  We now have copies for every previous year of issue, and our sense is that, actually, the FSA is progressively becoming more accurate and grounded in their assessments of where the risks lie.

Here's my take on a few key issues identified by the FSA...

(1) Complexity in retail products and services
We (at ValidPath) are continually being told by the providers of structured products that they are vastly improved from the bad old days, when failure rates were relatively high.  Buzzwords such as 'greater transparency' are bandied around.  Providers frequently extol the quality of their supporting literature in an effort to alleviate our anxieties about the hidden risks.

Interestingly, the FSA observe that there has been a trend for such products to become "more complex and exotic in terms of design and features".  Now, whilst complexity and exoticism are not, in and of themselves, bad things, I guess that we would contend that such qualities mean that structured products should, increasingly only be used for select clients who might appreciate (and by that, I mean understand) such aspects.  In practice, of course, the widespread selling of such products to normal retail investors by the highstreet banks would tend to militate against such an understanding - and I have yet to meet a customer who actually understood what it was that he had bought from his bank.

So, "complexity and exoticism" should be confined only to that narrow, special group of clients who have already addressed the mainstream, orthodox, 'core' needs of their financial-planning, and are looking for something else.  It would seem to us to be entirely inappropriate that an IFA firm would get itself excited about the complex and exotic when it cannot motivate itself to speak to its clients about the core issues that would really make a difference.

(2) Unregulated Collective Investment Schemes (UCIS)
One a certain level, the kind of warning bells which ought to sound in relation to the widespread use of structured products, ought to be positively deafening us when it comes to UCIS - and, clearly, the FSA thinks so too.

The evidence is that these things are, increasingly, being sold to the wrong categories of client, and that the IFAs themselves do not possess an adequate understanding of products that they are increasingly being targeted to sell by provider firms.  IFA firms ought, by now, to have developed a viable business model, underpinned by a coherent philosophy of investment - it therefore begs the question why (apparently) so many are subverted into selling products which (a) don't fit the model and (b) usually have no proven track-record associated with them.  It does seem to be wholly inappropriate for professional intermediary firms to be dabbling in what is effectively a 'buyer-beware' market.

Watch out for a major FSA review on this one, later in 2012!

(3) Investment risk profiling
This is an aspect of the advice process which we have been working on since Summer 2009 when we ran our investment proposition workshops.  ValidPath Members (ValidPartners) can access the substantially re-written guidance by clicking here.  We have accumulated for the benefits of our Members an extremely good range of resources to help them manage risk effectively, and also to help understand the subject thoroughly.

The FSA is concerned that the potential for 'unsuitable sales' remains high in an environment where the client's risk and return aspirations are fundamentally incompatible.  There is (apparently) still widespread evidence that clients are being sold investment solutions which do not suit their "risk appetite".  I am not entirely convinced about the use of this terminology - very few clients that I have encountered actually have an "appetite" for risk - what they have is an "appetite" for an improved investment outcome, and they may be inadequately apprised of the attaching risks.

That may be a moot point - the FSA is arguing that mismatching is still widespread, which is why we've worked so hard to create the ValidPath Investment Proposition, which is designed to be (a) risk-driven, and (b) entirely explicit throughout regarding the interaction of risk and return.

There is much more here, but only so much space in a Blog!  If you want to think more about de-risking your advisory proposition, please click here.

N.B.  RECOMMENDED READING!
James Montier's magnum opus on behavioural investing comes highly recommended - access it on Amazon, and see our review by clicking here.

If you are at all concerned about the sheer complexity of modern financial products, then you'll want to read Richard Bookstaber's excellent introduction, entitled 'A Demon of Our Own Design' where we have also written a review.

Here we go again...

It is with that weary sense of deja vu that I have opened the weekend papers and encountered the latest misselling scandal.

Our highstreet banks, beneficiaries of the biggest publicly-funded handout in history, and so recently rocked by the PPI misselling scandal which will result in billions being paid in redress, are now immured in a series of mass actions in relation to highly complex  interest rate swap products which were sold to small business customers, to protect loans.  The case is that these devices were 'unnecessarily complex' and 'inappropriate' for the customers to whom they were sold.

There seems to be a prima facie case that these products either did not work effectively, or (perhaps to be more charitable) did not work in the real world where interest rates could go down as well as up.  That customers did not understand the risks involved when rates decreased seems reasonably evident - or perhaps it is more probable that neither those selling the products, nor those buying them fully understood them.  It is of course entirely possible that a cluster of dangerous buying behaviours (wishful thinking, a closing of the eyes to potential risks) may have combined with a cluster of equally dangerous selling behaviours (opportunism, greed, a focus on 'bank procedure') to produce the end result - namely huge additional costs for customers, with many going out of business as a result.

Whenever I read of such cases, I ask the question 'Why?'  Why were, in particular, the banks so prone to this particular kind of misselling?  There's a lot here to do with corporate culture, and the 'we will do it because we can do it' kind of mentality with the expectation that someone else will carry the can if it all goes wrong.  Why were such obviously or potentially flawed products sold to those who clearly had little hope of understanding them?

In this case, the answer may simply boil down to greed.  One case cited by The Sunday Telegraph is clear about the matter - experts have calculated that selling one of these products to a businessman to 'protect' a £970,000 loan would have netted the bank in question a £100,000 profit.  The small business concerned 'netted' around £180,000 in additional costs as a result.  Perhaps the banks made the cynical calculation that there was so much profit to be made by selling these products, that they would worry about the consequences if and when they occurred.

Now, this is the banks we're talking about and it's easy to point the finger.  And just a little satisfying too.

But the circumstances which have led to this latest misselling scandal share some parallels at least with what goes on within the IFA or intermediary sector.  At the present time, I am still involved in trying to help a client who was sold a Film Partnership scheme years ago by an IFA who has quietly disappeared from the scene - and where it is evident that, with some determination from HMRC, chickens have been systematically coming home to roost.  And there are still specialist companies that, month after month, continue to churn out ever-newer incarnations of highly complex investment and tax-planning products, where in order to even attempt to arrive at an understanding of the internal machinations would require the routine use of mind-altering drugs.

There are crumbs of comfort to be gained by the fact that the type of client which may wish to purchase such products, is hardly likely to be yer average retail client, but for me this does beg the question as to why supposedly 'sophisticated' or HNW investors should be such adrenalin junkies when it comes to investing?  Just because I can sprint across six lanes of the M4 with my eyes closed, doesn't necessarily make it a smart move.

[P.S.  A year ago when we launched our ValidPath Investment Proposition (simple, straightforward, low-cost, risk-based, easy to access, based on tried-and-tested ingredients etc) an IFA came to tell me that he wasn't going to use it, and to show me what he had in mind as an alternative.  It was a Hedge Fund.  Under the skin was a complex brew of derivatives and other 'alternatives'.  Its costs were at least twice those of the VIP.  It was highly illiquid.  Its track-record belied its 'absolute return' mandate.  It was managed by an entity that, after thirty years in the industry I'd never heard of.  I still have a copy of the annotated technical factsheet that I had analysed: it's the kind of thing which would make any conscientious IFA wake up in the middle of the night in a cold sweat.  Why would we choose to do this to clients...and ourselves?]