Should intermediaries give investment advice?

Decisions made about investments are probably amongst the most important decisions an individual can make. Wrong choices can result in a lifetime of regrets and the need to work well into the old age.

For most people a paid-for home should be the number one goal and surplus funds should be directed at reducing the mortgage. This would give a guaranteed rate of return after tax and would involve no risk. With mortgages at 12.5% interest, not many investments can give a guaranteed rate of return, without risk, at that rate.

All too often individuals reach retirement age with undesirable debt and inappropriate investments that have not performed. If, however, the individual has excess funds after mortgage payments, choices become critical.

Most intermediaries have extensive training in financial needs analysis and life and investment products. But, does this qualify them to give investment advice?

The range of unit trusts available is enormous and it would be all too easy to pick the winners of the last few years. Intermediaries concerned about the risk of getting it wrong, will often split the client’s portfolio across numerous unit trusts ranging from low to high risk – to hedge their bets. This is similar to a roulette player betting on the rows, the columns and the colours! The outcome of this strategy may be self preservation for the intermediary, but it is rarely in the best interest of the clients. Will the performance of the portfolio be monitored? If it is not meeting the client’s requirements, what will the intermediary do? Pick another selection? What criteria will be used when selecting these? Switching fees will need to be paid in each case and there is no guarantee that the new portfolio will be any better than the old.

The best any intermediary can do, given the above scenario, is not to directly choose unit trusts. Intermediaries have no training in selection of these and should not open themselves up to litigation by making such choices.

All unit trust companies now have risk-profiled portfolios where highly trained asset managers select the most appropriate unit trusts, to achieve particular performance goals, at a certain level of risk. The best service an intermediary can provide is to encourage clients to submit to a full risk profile analysis – keep this up to date and leave unit trusts selection to the experts.