- A case study of how an adviser can mis-sell even without knowing

A case study of how an adviser can mis-sell even without knowing

Written by Wilfred Ling

Thursday, 05 March 2009

Here is how an adviser can mis-sell without even knowing. This is a real life case but as usual certain facts have been changed to protect the identities but key points remain the same:

An elderly man was approached by an adviser to buy an investment linked annuity plan. However, the adviser did not realize that the elderly person has more than 50% of his net asset in equities. If the client would to invest in the unit-linked annuity, his exposure to market risk will exceed 90% of his net asset. Thus, from this example it can be seen that the adviser is liable for mis-selling because the client will end up large exposure to market risk. However, it is also unlikely such an adviser knows he or she is liable for mis-selling because there was no fact find. Although an annuity plan hedges the risk of longetivity, from a portfolio point of view the client’s is overexposed to market risk. Therefore, adviser who sells products – even with good intention – can easily find themselves ruining their client’s financial wealth being.

Recently there has been a great interest in managed futures hedge funds. Managed futures have done exceptionally well last year due to most assets suffering in a declining market. Managed futures like AHL, Superfund and IQS have done very well last year. Both the distribution channels and investors are keen on these. Currently, managed futures is the latest “hot fund.” When two persons came to me to expressing their desire to buy these managed futures, I did not recommend it to them The reason is because one of them had already bought Superfund (from someobody else – I think it was through an online portal) sometime ago. The other person had bought from me the Man’s OM-IP 3ECLIPSE which invests significantly with AHL. I told both of them that for the sake of prudent diversification, they should not commit further into the similar strategy. Actually I hardly have any details of these two persons’ detailed asset breakdown. So I don’t know whether will they be overexposed. Nevertheless, I knew they already had bought similar products previously. That’s why I refused to permit them to purchase more unless I have a helicopter view of their finances. It is better to be safe than sorry.

Some people think my way of doing business is unbecoming of a businessman. Nope, I don’t think this profession is a business profession. I always believe this – if I am in my client’s shoe and if I will not buy it – I will not sell it. If the client insists on buying, I will still refuse to sell it and I’ll tell them to find someone else. Unlike other advisers in such situation who will ask the client to sign a disclaimer and than transact to take that commission, I’ll not even consider the transaction. The test of whether to transact or not is this: If the client allows, will the adviser dare to tell the whole world how he earn that commission or fee? Will he look like a con-man or a true professional?

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