Rant: You can't uncouple risk and return

It’s terribly important that you know you can sell the investments your financial planner has recommended to you.

That’s how we work here. I sometimes tell clients: “If you need your money for any reason, you can get it back tomorrow, whether you want to spend it urgently, give it to your family, or hide it under the mattress.”

Unfortunately, not every fund operates that way, which results in scandals such as these:

Scandal 1

Harlequin Property “guaranteed” high returns for investing in a low-risk luxury holiday resort in the Caribbean. The scheme was endorsed by TV property expert Phil Spencer, football pundit Andy Townsend and Liverpool Football Club. This tempted thousands of people to invest their SIPPs (personal pensions) into the scheme.

Despite investments totalling more than £400 million, only 300 of the 6,000 properties planned were actually built, and the scheme went bankrupt. It’s now under investigation by the Serious Fraud Office (SFO) for mis-selling and fraud.

Scandal 2

11,600 savers invested £237m in London Capital & Finance minibonds. Savers were promised high returns for low risks, because LCF said it would lend the money to hundreds of businesses to help them grow.

It turned out that the fund owners only lent to a small number of borrowers as well as spending on horses, a helicopter, and lifetime membership of a Mayfair club. LCF went into administration in 2019.

Savers are left out of pocket because minibonds are not regulated by the FCA, so they are covered by the FCFS compensation scheme.

Scandal 3

In 2007/8, consumers were urged to invest in Lehman Brothers ‘structured notes’. They were mis-sold as “100% principal protected” so they appeared safe and secure to conservative investors.

Lehman Brothers had been in business since 1850, so the public didn’t expect the bank to go bankrupt in 2008 – but that’s what happened (because they had made too many sub-prime loans). Since then, investors have only been able to reclaim 20% of their losses.

Risk and return ARE related

Unfortunately, it’s impossible to both have your cake AND eat it.

If a scheme isn’t working or faces a liquidity crisis, and you want your money back, you won’t get it from a Ponzi-type scheme like Harlequin, nor from one that is not.

If you’re invested in a business that goes bust, claims are administered by the Financial Services Compensation Scheme (FSCS), adjudicated by the Financial Ombudsman Service (FOS). If they find in your favour, the FSCS will pay you compensation.

But don’t assume this takes away your risk and makes everything OK.

FSCS compensation is funded by advisers like us – the good guys within the financial services industry. My annual FCA fee goes up because I’m paying to help fund the compensation scheme. It’s one of our business expenses. Over time, this pushes up fees to you, our clients.

What this means to you

We often urge you not to pay attention to the media, because they will try to convince you that risk is unrelated to return. If you want higher returns, you need to take higher risks.

Risk is usually implied as volatility. But although volatility might mean risk in the short-term, the risk is much diminished in the long-term. We’ll explain more about this next month.  Meanwhile, if you’d like more information, give us a call.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100