Ruminating about Risk

I have been a subscriber to the Fleet Street Letter for the last three years.  I don't agree with everything it says, but generally find useful ideas there that I can apply to my personal investments.  Lately, the FSL has 'discovered' structured products - I do not recall there ever having been an emphasis on this type of 'protected' investment hitherto, and the FSL acknowledges that the focus is driven largely by the circumstances we find ourselves in.

I did email the FSL with a query about the change in approach, but never received a reply.  Currently, the FSL is recommending the Privalto Stabiliser Protected Fund - I will leave readers to determine whether this is a viable product or not.  What does interest me, however, is the terminology used in the FSL.  Try the following for size...

"This is a full 100% capital protection product...our investment offers a full capital protection if held for the full term."

"The bonds are held by a BNP custodian which also acts as custodian for other BNP funds.  There is a risk to capital if the custodian becomes insolvent.  However, BNP Paribas has a AA+ credit rating from S&P, the ratings agency."

To my somewhat overskeptical mind, one cannot utter both those statements and be accurate.  The recent Lehmann Brothers structured product, offered via DRL in the UK was underwritten by an S&P AA-rated institution which promptly went belly up a few days after marketing the product.  The very use of the kinds of terminology evident within the FSL has to be suspect - and I trust that no IFA that we regulate as a Network would be that casual about throwing such claims around.  This raises for me two key issues:

• the style of our communications, and the ways in which we represent risk to the client, and
• how much we, as financial planners, understand the issues of connected risk

This leads me to establish for myself at least the following kinds of discipline:

1. the absolute central importance of due-diligence when identifying products from the whole market (I don't incidentally think for one minute that FSL have failed in this department).  Please take a look at Future Value Consultants for support in this area.
2. the avoidance of making claims that we know cannot be true in an absolute sense (such as the above)
3. ensuring that we understand what connected parties may bring to the table in terms of a risk component
4. establish an advice process which never allocates a risk level to clients which (a) they cannot reasonably bear, and (b) is not actually required given their stated objectives.  For instance, if a client appears amenable to a 'high risk' investment approach, is that actually necessary to achieve their objectives?  In our experience, some IFAs actually get quite gung-ho when confronted by a client who isn't too risk-averse!
5. when selecting an investment wrapper, to identify beyond reasonable doubt where the client places his or her priorities - for instance, would selecting an IOM offshore bond introduce an unwarranted element of risk when perhaps tax-deferral is not that high a priority, relatively speaking?
6. to apply a 'worst-case scenario' perspective when analysing the technical blurb in product specifications