The Financial Services Authority (FSA) has warned consumers of the dangers of taking investment advice that does not factor in the level of risk they wish to take in their investment portfolios.

The Financial Services Authority revealed that investment risks were not properly taken into account in half of the individual investment files it examined in the two and a half year period between March 2008 and September 2010. As a result, clients were potentially exposed to a higher level of investment risk than they would have expected or desired, when reviewing or setting up investments with their investment adviser.

The FSA also emphasised the importance of other suitability criteria, in addition to risk levels, when advisers are formulating investments advice.

When responding to an investment enquiry from a new client, the first step a good adviser will take is to ask relevant questions to assess their desired risk level.

Risk levels are generally matched to six categories, ranging from the highly conservative ‘very defensive’  investor, who may be best suited to extremely stable cash or near-cash investments or savings products. Levels of risk then move through the other five categories, becoming gradually less conservative as they go: defensive, cautious, balanced, aggressive, and very aggressive.

The ‘very aggressive’ investor at the top end of the risk scale is he who feels comfortable with relatively high degrees of volatility in his investments, and may be happy to invest, for instance, in emerging markets such as China, Russia or Indonesia, in the hope of achieving high investment returns from rapidly growing companies there.

The FSA further recommended the use of properly formulated risk profiler tools, such as the Principle First risk profiler, as a good standard procedure which will ensure that advisers clarify each client’s attitude to risk.

Almost 90% of UK investors are working to stabilise or reduce the risk level of their investments, following the difficult market conditions of 2007 to 2009, according to a new report* this week from the Investment Management Association (IMA). The report highlights the value of  good investment advice, and the key role of the investment adviser in reviewing your existing investments.

While 61% of UK investors surveyed will add to their investment portfolios, either by further investment or my taking out a new investment product in the coming year, 45% said they are looking for ways to take less risk and 46% said they would be keeping their risk profile unchanged. Only 9% of investors would be choosing to take higher risk, in the search for a higher return, the Investment Management Association said.

With the assistance of an independent investment adviser, these investors will be able to access any of the growing range of guaranteed investments now available on the UK market. Guaranteed investments offer exposure to the growth potential of the stock market, but at no risk to capital – in simple terms, you are guaranteed to get back the full sum you put in.

Quality investments advice from an independent adviser will also enable more adventurous investors to identify investments whose potential may have even been enhanced as we emerge from the recession. Many funds and fund managers are now identifying undervalued opportunities in the markets.

The assistance of an unbiased investment adviser with a whole of market overview may be very beneficial to the 29% of investors in the IMA survey who were not confident about investing in the coming 6 months, as well as to the 34% who were upbeat about investment prospects.

*Source: IMA Investor Perspectives Survey 2010, surveying 2,100 UK residents currently holding one or more investment products.

Retirement planning, pension planning, and annuity advice were by far the most popular topics during June 2010, among consumers seeking independent financial advice from financial planners online.

The changes in the June 2010 budget were undoubtedly spurring consumers to think ahead, she said, and reevaluate their financial plan with the help of independent financial advice. “Retirement planning in particular is a vastly complex area and only an independent financial adviser can look at all the factors relevant to an individual and their circumstances and recommend the best solution for them.”

A further quarter of consumers seeking help with their financial plan searched for independent financial advice on savings and investments.

In a sluggish market, mortgages accounted for just 11% of requests for independent financial advice. Within that, for those seeking independent financial advice on homebuying, first time buyer mortgages accounted for 36% of enquiries, while 32% of online enquiries targeted independent financial advice on remortgages.

The value of independent financial advice in building your financial plan was summed up by Karen Barrett, chief executive of unbiased.co.uk.: “Financial advice is an area that can be daunting for consumers, many people who may have previously relied on their bank or building society for product advice are now realising that this didn’t necessarily give them exposure to the best product for their individual circumstances.

Seeking independent financial advice on your financial plan from properly qualified financial planners was ‘an invaluable step in making sure you are getting advice from across the whole of market, with no ties to certain product providers,” she said.

Recent research by Google showed a marked increase in online searches for independent financial advice, which rose by 19% in 2009 alone.

Banks and building societies in many of the 27 EU countries are now offering consumers special deals on one savings product or investment, provided that they also sign up for additional services or an additional investment at the same time. However, such “tied” deals involving 2 linked products are not always in the best interests of the consumer, according to the EU, and investments advice from an independent investment planner is essential, to evaluate the overall benefit.

In the UK and throughout the EU, the most common such deal relates to bank current accounts, offered only if a salary is lodged into the account each month. However, mortgages and loans are also widely-used as ‘gateway’ products to sign customers up for additional business. In many instances, consumers are required by their investment adviser to sign up for an extra credit card, when seeking a loan.

In the UK, one such example of a tied product is Yorkshire Building Society’s attractive rate of 6% on investments in its Combination Bond, which is available only if you simultaneously invest the same amount in a Legal & General investment bond.

Santander and Saffron Building Society also offer tied deals, but stress that this happens only in conjunction with investments advice to their customers. However, since the investment planner giving the investments advice is an employee of the lender, there is no independent aspect to the investments advice received.

The result may be that the customer sets up an investment in a bond product which they otherwise might have neither sought nor taken, and the value of which can fall as well as rise, the EU concluded.

Another potential disadvantage of tied products is that they form a double link, which limits the customer’s freedom to switch to another lender. The EU estimates that investment advice which leads customers to take on tied products has created a total of 572 million contracts which would be switched, if the customer were not tied and felt they had greater mobility.

The EU report criticised lenders offering tied products for imposing ”choice distortion” on consumers, by limiting their options in the marketplace, and called the condition of having to take an additional product or service a “coercion factor” resulting in an investment decision that otherwise might not have been made.

Independent investment advice by a qualified investment planner capable of a full market overview may help the consumer evaluate the overall benefits and risks associated with such two-part tied deals.

Barclays has revealed that it did not advise its clients of changes to the risk profile of some of its investment funds, following a review of its funds products during 2007.

As a result, some Barclays customers were unaware that their investment portfolio carried a level of risk higher than their preferences, as stated in their individual ‘risk profile’.

The news has emphasised the need for funds investors to constantly and regularly review their funds investments, with the help of independent financial advice.

An annual or semi-annual review of funds investments can check that the volatility and risk level of the funds in a client’s portfolio are still in keeping with their risk profile, as assessed by the financial adviser when the investments were made.

At Principle First, we use a system of risk profiling based on 6 distinct categories, which guarantees to the client that his money is invested in keeping with his chosen risk strategy.

The first two categories are for those clients whose risk profile identifies them as ‘Very Defensive’ or ‘Defensive’. Investors in these two categories are most comfortable with a very low-risk strategy.

The ‘Cautious’ risk profile reflects the investor seeking returns that are better than a bank deposit account, but without major fluctuations in the short term.

The ‘Balanced’ investor is prepared to accept a certain amount of short-term fluctuation, for a healthy balance of risk and reward.

The ‘Moderately Aggressive’ and ‘Aggressive’ categories are suitable for those for whom capital growth is the driving concern. These investors are comfortable with considerable short-term fluctuations in the value of their investments, even if these exceed 25% in any given year. The aggressive investor may consider relatively high-risk funds, for example, those which invest in the emerging economies of the Far East, in the hope of above-average returns on their investment.

With just a few simple questions, our online Risk Profiler will identify your personal risk profile.

With the lack of investing advice, many people have poor-performing ISA’s or bonds, and have not adequate pension provisions in place. A good financial planning firm should be able to explain all aspects of investments, giving you investment advice that suits your risk profile, and giving your investments the best chance for growth.

There are many different investments in the market, and some 3076 investment funds now available. A good financial planning firm should be able to show you where your existing investments stand in relation to their peers. We recommend seeking financial advice on your investments, and if possible use a firm of Independent Financial Advisers, as this is the highest quality standard given to a financial or investment advisor firm.

Principle First are now offering online investment advice. For clients that want to receive an analysis of their investments over the telephone and post, this is now an option, we currently give many clients the option of remote financial advice.

If you would like to review your existing options, enquire online, or call us on 0800 678 5929

Click Here for Investment Advice

Over two-thirds (65%) of UK adults rely on internet searches or newspaper articles when selecting where to place their savings, instead of seeking the help of a professional adviser in their financial planning, according to Prudential’s Retirement Savings Business Director, Trevor Cheal. 

It is staggering how few are seeking financial advice, Cheal said.

Those who invest in the stock market have taken the first step towards benefiting from the long-term growth of the economy, but they stand a greater chance of maximising its value if they re-evaluate their savings regularly.

One-fifth (20%) of those surveyed said they would review their investment only once a year, while more than half of those surveyed (53%) said they check on their investment funds only once every six months.

Be aware, that when advising clients and building our Principle First portfolios, we are continuously making use of the information we get at these meetings.

Global Emerging Markets and Asia, is where Invesco think the majority of growth will occur over the next year. they feel that Corporate Bonds will continue to do well until the end of the second quarter next year. Invesco Perpetual’s Corporate Bond is one of the largest funds of its type.

They also highlighted those clients who feel they do not wish to venture outside the UK investment market. These clients may still be heavily exposed to the world economy, as companies within the UK funds often have considerable operations offshore. These firms are also very open to volatile exchange rates. It’s worth thinking about. I have commissioned John Doherty our Editor and chief researcher to look into this more.

For those investors who believe they can invest in the short term, and not the medium to long term, here is a great piece of information:

79% of shares purchased on a 1 year period are purchased by sentiment.

18% of shares purchased on a 5 year period are purchased on sentiment.

Leave sentiment for the losers; invest for the medium term.

Fixed rate bonds are guaranteed investments that offer relatively good returns by the end of their term, but carry heavy penalties for those wishing to withdraw their money early. Interest is paid monthly or annually into the bond.

Some of the best deals this week are Skipton Building Society’s 5-year bond offering 5.35% gross, Yorkshire Building Society’s 5-year bond at 5.30% and the 5-year bonds from Barclays and the Halifax, which both offer 5.25%.

Among these, the Yorkshire’s bond stands out with a low minimum investment of just £100, compared with the £500 minimum for the others mentioned.

But with low interest rates, the only way is up - and many savers may feel reluctant to tie up their cash for a full five years, at the present time.

For them, the medium term fixed rate bond market may be the perfect compromise, with a few good 3-year deals now on offer.

ICICI Bank UK is currently offering 4.7% in its 3-year bond, albeit with a high minimum deposit of £1,000, compared to the SAGA 3-year fixed-rate bond offering 4.65% with a minimum investment of just £1.

Furthermore, there is a risk in tying your money up in a bond. If interest rates do begin to rise, bonds could be overtaken and other savings alternatives could become more attractive again. These opportunities would bypass savers who have locked their cash up in a bond.

However the fact remains that over the last ten years the average returns of all investment funds has grown over 3.5 times more than investing your money in cash. Remember this is the average. With the correct advice many have achieved growth over and above this.

Banks attract our savings to invest and get a better return than they would get by investing in say, another bank. With this in mind, if you could find out were your bank invests your money, would you invest it in a similar manner, or invest it in a way that gives you a lower return? Of course you need to take into account the fact that there is less risk placing your money in a bank, than say investing in a global fund. However the potential return is also relative.

There are many clients that have a positive experience in investing within funds, and have achieved al greater growth than those that have kept money in cash funds over the medium to long term.

There is one common difference between the above categories of clients. The client that has had continuous growth realises that their investments are something that need to be reviewed on an annual basis. They sit down with a financial adviser once a year and discuss their risk profile, current and forecasted economic climates, and then develop a strategy for the next year.

If you are not reviewing your finances on an annual basis with your finanical planner / financial adviser it is probably due to the following reasons:

1. You are concerned about your investments, pensions or bank deposit savings and are scared to get bad news.
2. You have tried to contact your financial adviser and they have not returned your call.
3. You were not aware that is was important to review your financial plan on a regular basis.
4. You have no faith in finanical products as the direct debit you signed 15 years ago for £100 per month into a pension has not performed as well as the finanical adviser told you it would have.

If you fall into the above categories, then it is time that you reviewed your finanical policies and investments with an independent financial adviser.

We all aspire to reach a point of finanical independence. The point in our life where we can say “I don’t have to work if I don’t want to”. Some people will be able to achieve this, others will not. However a sound finanical planner should discuss this with you. To be achievable, you must discuss this on an annual basis. An experienced and well qualified financial planner should develop a strategy to get you to the point of financial independence. If this is not an option good finanical planning should get you as close as possible. This type of service will require an annual review.

In the US and Austrialia, people visit their financial planner on an annual basis, just like they will visit their accountant or book keeper. A recent advertisement from the Financial Planning Association of Austrialia, highlighted the fact that developing a strategy to build your money is as important as recording how it is spent.

The fact remains that in order to get the best return from your capital, or build up a sufficient amount of capital, you have to review your savings, investments and pensions on an annual basis. By doing so, you will ensure that you are invested in the correct funds at that time and have a greater opportunity for growth year on year. Do this with a finanical adviser that is transparent and educates you in making the correct decisions.