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Clean up the “murky world” of offshore investment

Killik & Co’s Sarah Lord says asset allocation and risk appetite are alien concepts to offshore IFAs

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They are not aware of the implications or risks of the funds they are invested in and this has got my thinking what is driving the weird and wonderful world of investing in the offshore market.

Over recent years we have seen the choice of investment funds increase substantially, many of these funds are regulated investments but, also, many are not. It tends to be what I can only describe as “exotic” funds that catch the imagination of the offshore adviser and therefore ultimately the offshore investor.

The majority of these are unregulated funds and often, the small print will flag up that they are for experienced or professional investors.  For example, a fund that invests in Brazilian Eucalyptus trees or a fund that invests in distressed properties in the north of England, through to the well-known and much publicised life settlement/viatical funds.

In addition, we have seen a plethora of structured products/funds and notes enter the market. These can play a very small part in a client’s overall portfolio but we are in danger in the offshore market of complete mis-selling of structured products and funds.

There are so many individuals in the Middle East who have been told to invest in structured products as there is a guarantee return of X in Y years time.

However, the client is not made aware of any of the risks associated with this type of investment; liquidity risk, counterparty risk, capital risk, the list goes on.

Instead, because there tends to be little or no secondary market in the structured notes recommended, the individual is stuck with an investment for the next five years that they don’t understand and often does not meet with their requirements.

This was never more true than with the client I met in Dubai who had been advised to invest his whole savings ($500k) into one 6 year structured note. He didn’t understand the risks involved, the commissions paid or, importantly, that it is effectively an illiquid investment.

It frustrates me that often, admittedly not all the time, as there are some good advisers in the offshore market, but there seems to be little asset allocation advice given to clients.

Instead, funds selected by many offshore advisers are based on either 1) It’s the next big thing to invest in, 2) past performance (and we all know that past performance is no guarantee of future performance) or 3) dare I say it, the commission payable to the adviser by the fund.

Many of the unregulated funds being marketed in the offshore market are paying “soft” commission to advisers to act as inducement for them to invest in these funds. These commissions can be up to 5%, which is an interesting enticement for an adviser who is only interested in being paid for selling a plan and then walking away.

There should be greater policing of the marketing of investments – though admittedly the number of offshore or international jurisdictions and different regulatory regimes makes this difficult. 

The research that companies carry out before recommending investments to clients should also be subject to greater scrutiny.

Certainly in the UAE, and I am sure it is the same in many other places such as Europe, there are many companies that fly in to flog their fund and fly out again. This should stop, if a fund wants to do business in a country then play by the rules of the country, set up an office and incur the expense – maybe I am asking too much on this one!

I question the level of research many financial advisers carry out on the investments that they are recommending to clients. At Killik & Co we have an exhaustive research process and are constantly monitoring the funds we are recommending to clients, as well as regularly reviewing clients’ portfolios. This should be the norm not the exception in the offshore market.

In my opinion, and I am sure many will share the same view, we need to base our investment recommendations on thorough documented research and the basic principles of asset allocation to create a diversified portfolio of regulated investments that meet the clients’ objectives, time horizons and, vitally, attitude to investment risk.

Let’s be honest, financial services globally does not have the best reputation. With scandals in recent years such as Lehamn Brother’s and Madoff, it is easy to understand why, but the reputation is being hindered further by some of the investment recommendations being made to clients by offshore advisers that have little or no knowledge on investment markets and practice.

We need to work together to clean up the murky world of investing in the offshore market.

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