The moral dilemma which never was – dealing with poor advice about Arch Cru

2nd September 2013

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Advisers complain about the cost of the compensation scheme, where good advisers (and ultimately their clients) compensate the clients of bad ones. But faced with clients who had been disastrously advised to put all their money into Arch Cru, Investment Quorum’s Lee Robertson discusses a moral dilemma which never was.

A couple of years back I was approached by potential new clients to discuss taking over the management of the investments they had both made for their daughters’ education.  If I am being completely honest, there weren’t really much in the way of investments to manage at this point.  The clients had seen a local independent financial adviser who had suggested moving them out of the perfectly adequate fund choices they had already with larger fund groups and into the dreaded Arch Cru, funds which subsequently collapsed.  Not just some of the not inconsiderable money in the funds, but all of them.

Upon reviewing the whole sorry story I could see that originally under their own steam they had made a very decent job of diversifying their assets. Perhaps not in the exact way or in the funds I would have suggested, but all in all a very reasonable portfolio which included equities, bonds, cash and property with security being their main objective.

The so-called professional adviser they then approached convinced them that they were wrong, transferred the funds out of their very reasonable self-directed portfolio and into Arch Cru as a low risk alternative and pocketed an excessively large commission on the way.  We all know what happened then, of course, disaster struck.  Despite its obviously wrong external billing as a low risk fund and, to quote Jeff Prestridge, it’s entirely undeserved badge of respectability, the fund foundered leaving some 20,000 investors facing huge losses and a long term fight for compensation.  This is still rumbling on and despite some small interim pay-outs to investors’ very real hardship is still the order of the day for many.  There are lots who should share in the blame here, the fund managers, those large organisations which were meant to safeguard the interests of investors ranging from regulators to banks and custodians but my main beef here is with the adviser.

Unsurprisingly, the original adviser is now out of business. In common with so many adviser businesses which seem to just shut up shop (often to re-appear in another guise) whenever large complaints and compensation may be looming from disgruntled investors.

In common with most advisers I am heartily fed up with the mentality which seems to pervade our regulatory and consumer protection organisations which says we have unlimited resources to compensate for the poor work done by others who should have had far more scrutiny than they had up to the point of the disaster striking.

Don’t misunderstand me here, I absolutely believe that consumers should be protected in situations like this but the constant post-event chasing after the catastrophic failures such as this of those of us who would never succumb to the slick marketing hype, deviate from rigorous due diligence processes or go near a huge up-front payment from the fund group which just seems wrong.  The Financial Services Compensation Scheme and The Financial Ombudsman do a very difficult job in extremely difficult circumstances, the marketing practices of the some of our largest banks down to the very small adviser who I am writing about here, means that they are having to continually seek redress for private investors and quite rightly so.  If those who sought to take advantage of their clients had not done so we would not be in this situation but it still hurts when we all see just how big our share of the bills is each year.

This is where I get to the moral dilemma which never really was.  I quickly concluded that the advice given by the original adviser was entirely flawed.  He had moved the clients away from a decently constructed and diversified portfolio so his advice was wrong and taken them way up the risk scale beyond where they were comfortable.  I therefore assisted my new clients construct and pursue a complaint with the Financial Ombudsman which they have now won and have now received their rightful compensation which is now properly invested in a well-diversified portfolio which takes proper account of their objectives, risk tolerance and capacity for loss.  The very same compensation which we all fund and which I have grumbled about here at some length.

However, here, finally, is the point I am making – it was absolutely the right thing to do.

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