Regulation: Higher qualifications for high-risk investing

Sheriar Bradbury, managing director of Bradbury Hamilton, says advising on high-risk products should mean higher qualifications, and stricter capital adequacy requirements.

Investing in high-risk funds can be a cause for sleepless nights for both advisers and their clients, but this is the nature of the beast when investors have discussed their goals and attitude to risk and the result is a relatively high-risk portfolio.

To ensure that these high-risk products are treated with the respect they should command, the FSA needs to flex its muscles by rolling out a procedure to categorise products by their level of risk.

Treading water over FSA fees

Standardising the risk-profiling of products would go a considerable way to ensure that clients do not buy into funds that are more volatile than they had anticipated. Once profiled, the FSA should also enforce mandatory higher capital adequacy, as well as a higher qualification standard for advisers who recommend from the high-risk category.

Realistically, we all know that the FSA does not have the time and resources to be checking every product in detail for its risk criteria, especially as the financial burden would most likely be pushed back onto advisers who are already treading water on the fees they incur from the regulator. However, a broad risk categorisation would be well within the FSA’s remit and would ensure that consumers are aware of the risk and advisers are properly prepared.

Once advisers decide they want to include high-risk products in their remit, it makes sense for them to be qualified to the highest level. Our profession can move forward only if investors have the utmost confidence in their advisers and increasing the qualification standard for those advising on high-risk products is a positive step to do just this. On the other hand, advisers who are content to sell products that do not fall into the high-risk category will not have to dedicate time and expense to obtaining higher qualifications.

Along with qualifications, the capital adequacy level of adviser businesses that are offering these products should also be reassessed and increased to recognise the increased risk, not just to the client but to the adviser business itself.

This would mean that when cases of mis-selling come to light, such as the recent example of Keydata, this money would be specifically earmarked for clients and the orderly wind down of the business.

Capital adequacy defence

As I have mentioned in previous blogs, the FSA needs to ensure that it looks out for consumer interests by guarding capital adequacy funds for clients and not allow them to be doled out on a first-come first-served basis. Putting the proper regulation in place around the high-risk category will ensure that both advisers and their clients are in full understanding of the pitfalls of high-risk investing.

With support from paraplanners and administration staff getting underneath the skin of high-risk products, advisers who are properly qualified and capitalised can take on these risky products and investors can profit from their expertise and hopefully come away with higher returns.