There are thousands of investment funds available to invest in. Besides the traditional ones that invest in equities, bonds and real assets, you may have seen funds advertised that sound more interesting and seem to offer better returns, ranging from schemes investing in foreign property to second hand life insurance policies. Unfortunately, being interesting or popular does not make them suitable, and you need to carefully evaluate the risks.
Funds which pool investors’ money in non-traditional scheme assets are known as Unregulated Collective Investment Schemes (UCIS). A variety of these schemes have been on offer over the past decade or so, particularly in the offshore market. Unfortunately, many of them have been suspended or liquidated, leaving investors without access to their capital or, worse still, facing heavy losses.
The UK’s Financial Conduct Authority (FCA) continues to have concerns about them. After noting that “consumers have lost substantial amounts of money investing in UCIS and similar products in recent years” it introduced rules in 2014 to prevent UCIS and certain close substitutes (such as Traded Life Policy Investments) from being promoted to the general public.
In theory, they should now only be promoted to certified high net worth investors, sophisticated investors and existing UCIS investors.
Even if you fit these categories, caution is still advised. “Sophisticated” investor funds tend to be complex with inherent risks. The sophisticated element is not always made clear to investors, so they may have little idea of the real level of risk they are taking.
It is difficult to do due diligence on these funds due to the nature of the holdings in many cases. The risks they carry are often disproportionate to the potential returns and they are usually completely unsuitable for mainstream investors.
Despite the rules, the FCA has seen evidence that ordinary members of the public are being sold UCIS, with some customers being advised to invest their self-invested pension (SIPP) into them. And of course the FCA is focused on the UK market; expatriates have to be extra careful.
The Traded Life Policy Investments mentioned above invest in life assurance policies, normally of US citizens – hence they are sometimes referred to as ‘death bonds’. Investors hope to benefit by buying the right to the insurance payments upon the death of the original policyholder. Most are sold as UCIS, but some take other legal forms.
Research by the FCA found levels of unsuitable advice when selling these funds. It advises that, due to a number of factors, these are high risk investments which can fail entirely. It is worried the market could grow and cause more investors to lose significant amounts of money in future.
Here is another example of the dangers of investing in unusual funds. We recently met with a retired couple in Spain who have lost around £100,000 investing in a sports betting investment scheme. They initially invested a little of their savings into the scheme, but when returns were good they moved more capital out of traditional investments into it. The scheme has now collapsed. According to a BBC article in December, it was promoted as offering huge, risk-free returns, and had £27 million invested in it.
So how do you choose investments?
The most important rule of investing is that your overall portfolio should be specifically designed around your personal objectives, circumstances, time horizon and risk profile – obtain an objective analysis of your risk profile. You should hold a diversified mix of assets as this will help reduce the overall risk of your portfolio. You need to keep all this in mind when considering a new fund, and how it fits with your existing holdings.
For most investors, plain vanilla is best. It is not just a question of sticking to tried and tested investment assets, but also of investing in regulated products which do not have complex, hard-to-value structures.
Regulation is very important when considering a fund. While most financial centres have a regulatory system, the level, quality and reliability varies across territories. You want to make sure that your investments are supervised by a body that is on a par with the UK’s Financial Conduct Authority, which is considered one of the best in the world.
Finding reliable expertise
It is just as important to evaluate the regulation of the adviser who is making the recommendation. Always speak to an experienced, trustworthy and regulated wealth manager, which carries out a high level of due diligence when recommending funds. They should carry the highest degree of regulation and only recommend authorised funds from highly recommended jurisdictions.
Blevins Franks Financial Management Limited is regulated by the Financial Conduct Authority in the UK. Our investment advisers are all qualified to the minimum level required by the FCA.
Our team of experienced in-house specialists enables us to provide integrated tax, wealth management and estate planning services to our clients in Mallorca and across Europe. Our investment specialists have strong relationships with various investment firms and consultancies. They provide detailed research and analysis on the funds and assets most appropriate to the varied financial goals of our clients.
Our pension specialists are qualified to advise on UK pension schemes and regulation as well as offshore schemes such as QROPS. They can carefully analyse all the available options and structure our clients’ pension arrangements to meet their particular needs. Our tax team is made up of fully qualified chartered tax advisers. They offer vast technical knowledge of the fiscal issues affecting UK nationals living or planning to live abroad.
Established over 40 years ago, Blevins Franks are the leading international tax and wealth management advisers to UK nationals living in Europe. We have 20 offices across seven countries – the head office in London, our operations hub in Malta, and regional offices across Spain, France, Portugal, Cyprus and Monaco.
We have had an office in Mallorca for 20 years and have in-depth experience advising expatriates and property owners here on their wealth management.
All advice received from Blevins Franks is personalised and provided in writing; this article, however, should not be construed as providing any personalised investment advice.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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Blevins Franks Mallorca specialises in giving advice for tax-driven, wealth management investments. […] Blevins Franks Tax & Wealth Management Specialists
Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts and companies. Blevins Franks Tax Limited provides taxation advice; its advisers are fully qualified tax specialists. This promotion has been approved and issued by BFFM.
This article was written on the 12th of June, 2017.