The investigation into Spanish-based expatriate investment advisers (see front page) has thrown into...
The investigation into Spanish-based expatriate investment advisers (see front page) has thrown into sharp relief the differences between a well-regulated jurisdiction and one that has been left entirely free of the touch of government control.
Having few regulatory burdens would generally be regarded by most advisers as a godsend; the issue of the increasing costs of compliance and due diligence is well known. However, when the investor turns around to complain, there are few protections for either side of the transaction. Very often it comes down to the word of the adviser against the word of the client. And in jurisdictions where consumer protection is regarded as a key part of the financial services offering, it is obvious which way the coin will drop.
So while the lack of a unified regulatory body has been a help to many advisers in the past who were setting up new businesses, in this increasingly litigious world, the legislative leash acts as protection as much as a constraint.
Across Europe, there are continuing efforts to harmonise the financial services industry and although there are protests from all sides that their interests are being damaged, in the end there will be a level of expectation between an adviser and a client. How informed, cool-headed and rational can a client be expected to be? When that question is answered, the adviser will have a base line from which to work.
As it currently stands, the product providers are often complained to when a client is disgruntled. This is usually because they are the biggest targets and more likely to pour oil on troubled waters with a settlement than cause trouble with a stout defence.
Given the lack of a unified structure for resolution of disputes of this nature, it is not surprising that Peter Hart, ombudsman at the Offshore Trade Association, has had 50 complaints put his way. Of the 50, only 15 have turned into official cases and of those 15, only half will be taken further, but the popularity of the scheme is undeniable.
The lack of court cases around the world shows that, at this moment, the current system is relatively stable. Indeed, as long as advisers make the risks of various strategies clear to their clients, there should be no cause for unpleasantness in the case of underperformance.
However, it is not as simple as that. Firstly, the ability of an investor to make a rational decision depends very strongly on the array of options presented to him or her. So an adviser needs to be aware that no matter how carefully chosen his words, he is psychologically manipulating his client. Secondly, the product provider is a vital part of the marketing machine of any adviser, providing marketing materials, road shows, and expertise. The agendas of those companies will similarly have an effect on intermediaries.
So, despite all the best intentions, it is impossible to give entirely objective advice. On these grounds, the advisory community should welcome a certain level of regulation - cautiously, but nonetheless welcome it, as the basis upon which a solid process of investment advice and portfolio construction can be built.
Partner Insight: Continuing the Architas education series for clients.
What made financial headlines over the weekend?
290,000 already affected
Putting the tech into protection
Square Mile’s series of informal interviews