Skandia says subjective fund labels such as Cautious Managed can be misleading and is backing a European-wide standardised risk score to help consumers better understand their investments.
The platform says half of all Cautious Managed funds invest in alternative investment strategies - including futures, foreign exchange, private equity and structured products - none of which fit the cautious description.
Having a consistent, standardised risk score, as proposed under UCITS IV regulations, will help funds better illustrate their level of risk and prevent further miss-selling scandals, it says.
"Barclays has already been hit with a record fine for miss-selling Aviva's Global Cautious Income and Global Balanced Income funds and is having to pay out tens of millions in compensation to customers," says Skandia head of investment proposition Graham Bentley (pictured).
"This is a clear sign the current labels given to funds can be misleading and result in people not understanding their investments."
Given there is sometimes a discrepancy between fund names or descriptions and the actual underlying nature of investments, Skandia is calling for the removal of "spurious" fund names and the establishment of a standardised risk score to better illustrate risk levels.
It welcomes the new regulatory requirements of UCITS IV wherby all new UCITS funds will be required to illustrate their risk in a standardised fashion from July 2011. Existing UCITS funds will have to adopt the same structure from July 2012.
To meet these requirements, all new UCITS funds must be accompanied by a Key Investor Information (KII) document which must be two sides long and written in clear, non-technical, legible text.
Furthermore the KII must include a volatility rating using a standardised Synthetic Risk & Reward Indicator (SRRI) which measures volatility on a 7 point scale.
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