Just about any investment product can be mis-sold. The problems do not often lie with the product but instead with the explanations given at the time of purchase. Here are four of the most commonly mis-sold investment products.
Stocks and Shares ISAs
ISAs are popular as they don't attract income tax or capital gains tax. Not all ISAs are the same, however. There are lots of different types available, but most fall into the following categories:
- Cash ISA
- Stocks and shares ISA
A cash ISA is simply a savings account, albeit one where you don’t have to pay tax. With a stocks and shares ISA, however, the money you put in is invested in, as the name suggests, stocks and shares. As stocks and shares can decrease in value as well as increase, there is an element of risk involved with stocks and shares ISAs.
Many people accept this risk, but it is essential the risk is properly explained upfront. Problems arise when this explanation is inadequate. In addition, financial advisers should take other things into account when selling you a stocks and shares ISA including your financial situation and your attitude to risk. If this didn't happen, you may have been mis-sold.
2. Managed Portfolios
Managed portfolios are an excellent investment strategy for many people. The portfolio usually includes multiple asset classes to spread the risk, plus it involves investing your capital with other people's capital, giving you an opportunity to take advantage of a range of different schemes.
Things aren’t guaranteed to go smoothly with managed portfolios, though, and they are not suitable for everyone. Even if a managed portfolio is suitable for you when you first invest, a change in circumstances can reverse this suitability. Consequently, managed portfolios are one of the most commonly mis-sold investments.
3. Profit Bonds
Profit bonds are an ideal investment if you want a low-risk strategy as they spread your risk between different asset classes.
In addition, you get an annual bonus based on the performance of the investment rather than its day-to-day change in value. As it is a bonus, fund managers adopt smoothing strategies which can result in you getting a lower bonus in good years so there are reserves available to continue paying bonuses in bad years.
In other words, there is minimal volatility which is appealing to investors who don't like risk.
Problems occur around penalties, however. These apply in a range of circumstances and if you are not made aware of them beforehand, you may have been mis-sold.
4. OIEC Investments
OIEC stands for Open Ended Investment Companies. They let investors with small amounts of capital spread the risk of their investment by pooling their money with other investors. The pooled money is then invested in a diversified way.
As with many investment products, there are risks as well as benefits. Mis-selling occurs when investors don’t get a proper explanation of the risks. This particularly applies to the potential volatility of the market which means you should hold many OIEC investments for a minimum of five years.
Another problem is fees. They are not always properly explained and can significantly reduce or even eliminate any growth in capital from the investment.
Common Investment Product Mis-Selling Traits
Most mis-selling of investment products is the result of inadequate explanations of risk, and of not considering personal financial circumstances. Avoiding this sort of mis-selling is not easy, but if there is little discussion about your personal situation or minimal explanation of the potential risks, you should be cautious.