# Wealth Options Global Absolute Return Bond



## Monksfield (3 Sep 2012)

If the Dolmen product is a testament to financial engineering where does that leave the [broken link removed] product? I gather that this has sold very well and it leaves me wondering what real analysis can have gone into the 'reasons why' letters given to investors by IFAs. If they really undertood the product they would never recommend it.


GARS is a small mountain of derivatives and managed to a volatility level of 6-8%. With BNP's help a volatility control mechanism targetting a level of 5% has been put in place. This is financial engineering gone mad.


Furthermore there are four parties involved before the product gets to the IFA - Wealth Options,Standard Life,BNP and Ulster Bank. The disclosed fee of 4.75% (of which 3% goes to the IFA) would not look like nearly enough to feed all the mouths if the deposit and options are priced at 'arms length'.


Someone willing to take a 5 year risk on Ulster Bank could earn an atractive return holding RBS' 5 year senior bonds which they can get a price on daily and sell in minutes. When I looked at this last the yield to redemption on the RBS bonds was better than the return GARS would deliver even if it achieved its performance objective.


Averaging in the final year is a standard feature of tracker/structured products normally because it makes the option cheaper. It can work in the investor's favour but is most unlikely to do so with a volatility control mechanism wrapped aroud an absolute return fund.


Perhaps a themed inspection looking at the 'reasons why' letters in relation to trackers/structured products might make IFAs think long and hard about recommending over-engineered and frankly bad products such as this?


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## Brendan Burgess (4 Sep 2012)

Hi Monksfield

Your profile of the Wealth Options Global Absolute Return Bond provides a very different picture from the picture portrayed on its website: 


*Key Features:* 


100% Capital Protection at maturity
100% participation in the positive performance of the BNP Paribas SLI Enhanced Absolute Return Index
No Cap on Maximum Potential Returns
No annual management fee
Would you have the time to do a simple guide to this product? It is very popular and if it's as bad as you say, customers and their advisors obviously don't understand it. 



It seems to invest in the BNP Standard Life Enhanced Absolute Return Index.


Can I invest in this index directly or is it just an index? 

If I invest in the Wealth Options Global Absolute Return Bond , surely Wealth Options and the IFA will have to get fees along the way as well?


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## Brendan Burgess (4 Sep 2012)

Conor Pope recommended the fund for consideration by retiring public servants in [broken link removed]



> Wealth Options has a five-year Global Absolute Return Bond, which is  linked to the Standard Life Investments Global Absolute Return  Strategies Fund with the stated aim of providing “positive investment  returns in all market conditions over the medium to long term”. It also  has a multi-asset global bond.


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## Brendan Burgess (4 Sep 2012)

I see that Wealth Options produced a poster for brokers to display in their window promoting the merits of the Global Absolute Return Bond. 

They then ran a competition for their brokers called "Display and Win" where the brokers took photos of the poster in their window and were entered for a €500 prize. 

Monksfield, I think you should produce a poster

"Why I would not recommend the Wealth Options Global Absolute Return Bond"


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## Monksfield (4 Sep 2012)

I dont have time to do a more detailed post now. I would be very surprised to hear that it is possible to invest directly in that index. 

How well equipped Conor Pope is to opine on something as complex as this I have no idea. Unlike IFAs he has no duty of care to investors in the fund .


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## Monksfield (4 Sep 2012)

*Wealth Options GARS*

Brendan

in relation to some of your specific points:

(a) 100% guarantee

*yes* - available on many of these products

(b) 100% participation in the BNP Enhanced SLI Absolute Return index- 

*yes*

(c)no cap on potential returns

*yes,but* ....the performance objective (gross) of GARS is 6 month Euribor +5%. This is quite an ambitious target for a fund run within volatility of 6-8%. With the volatility control mechanism operated by BNP targetting 5% and averaging over the last 12 months this index will almost certainly deliver a lower return than GARS itself .

(d) no annual management fee

*yes,but*.....does anyone seriously believe that the only revenue being earned between all the parties is 1.75%? While I am certainly not accusing Wealth Options of mis-representing the situation they only have to disclose the explicit charges. I would think that getting 5 year money in at the price paid was commercially advantageous to Ulster Bank and that BNP would have booked profit on writing the option.

The IFA gets 3% out of the 4.75% of explicit charges.

As for doing an alternative poster I would not waste my time. Most IFAs dont want to hear criticism of this kind. It suits them to combine the excitement of GARS with a guarantee using the magic of financial enginering. How it happens or whether it represents value for the customer seems secondary to selling something in hard times.

The transaction could not hang together at all if UB was not forced to pay up for longer term funding but that could be exploited buying a perfectly liquid corporate bond. This is the crux issue in terms of 'reasons why' - a slight probability of outperformance ( adulterated GARS over 5 year re to RBS senior bond) is being traded off for giving up liquidity. 

It is probably an outstanding piece of financial engineering and product development from the perspective of sales (great for WO and in the short term for IFAs) but in my opinion it is not something which IFAs should be recommending.

A 'reasons why' letter which says "the customer wanted a guarantee so I gave him one" will hardly satisfy the regulator and questions of how well the IFA understood what it was linked to and the structure of the product are likely to expose the lack of analysis.

I wonder are those questions likely to be asked?


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## Duke of Marmalade (4 Sep 2012)

GARBage

Awful product. Totally misleading disclosure.

Volatility control of 5% means the Cash Bonus is of very little worth, on a Black Scholes formula less than 50% of the 15.25% value disclosed in the brochure.

As with all Ulster Bank Tracker Bonds it totally avoids the requirements of the Consumer Protection Code to disclose all costs. The only costs disclosed here are the 4% intermediation costs. The actual costs including Ulster Bank's are way in excess of 10%.

The return on the deposit portion is okay but only if a deposit guarantee applies. They have not returned my call on a query regarding the level if any of deposit guarantee which applies.

For those of a sneaky inclination, have a punt. If it works out, fine. If it fails, there is so much flaunting of the Consumer Protection Code here you should be able to sue for your money back plus interest

This kind of parasite product will give GARS a bad name. GARS itself seems to be quite a suitable fund for direct investment.


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## Monksfield (4 Sep 2012)

I thought it unusual that the brochure did not refer to the Deposit Guarantee Scheme. It is probably because they have said that it is suitable for ARFs the exact legal position of which is not well defined - AFAIK ARFs are outside the DGS.


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## offiah (4 Sep 2012)

To clarify GARS fund targets cash +5% over rolling 3 year periods with a volatility range of 4% to 8%. The fund has achieved this over the last 6 plus years. 
You can compare the BNP enhanced absolute return fund versus GARS if you have access to Bloomberg. Needless to say GARS is outperforming it.
The biggest risk for investors today is counterparty risk and most CPPI products carry a high degree of this. 
Would I lock monies away for 5 years in this world? Not a chance. Key for me is diversification and liquidity. Then I look at risk and return.


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## Duke of Marmalade (5 Sep 2012)

More thoughts on why this is a poor proposition. Let us compare it with GARS itself.

1) It _seems_ that after 5 years you will get the exact same return on this bond as if you invested directly in GARS. I am presuming here that when the brochure states that the customer does not benefit from the underlying income that they are misunderstanding their own product GARS return without its income would be truly awful.

Except:

2) If GARS is negative after 5 years you get your money back. The nature of GARS is that there is virtually no chance of it being below water in 5 years, it is effectively a glorified cash fund. So the capital protection, unlike with conventional Trackers, is next to worthless.

3) You are averaged out over the last 18 months. Even for a volatile underlying this is OTT, for GARS it serves almost entirely to reduce the ultimate return with the minimum of advantage from the protection against last minute falls.

4) And of course you have no access to your investment for 5 years. This is the price one has to pay, say, for a Eurostoxx Tracker but at least it can be justified by the fact that Eurostoxx should be regarded on this timescale anyway. GARS is a completely different kettle of fish, as I say it is in effect a glorified cash fund. Locking into GARS for 5 years is really silly.

Other points:

Why oh why volatility control this animal? GARS volatility is between 4% and 6%, volatility control serves very little purpose except of course to sound oh so sophisticated. The brochure waxes with diagrams on how vol control increases your exposure in rising markets and reduces it in falling markets. This is a very dubious proposition for conventional assets, for GARS it has no basis whatsoever. How do the compliance people in these outfits pass these brochures? Oh I know, they don't understand it and are blinded by the geniuses in the back office.

And I repeat the disclosure of charges in this brochure is totally misleading and completely disregards the requirements of the CPC. _Monksfield_ makes the point. The following mouths get fed from this beast:

*Dolmen* 1%.
The *intermediary* 3% , these two are the extent of the disclosure
*Ulster Bank*, I would expect that UB get at least as much again as the above two
*Standard Life *the charges on GARS are not inconsiderable. The investor is indirectly paying these. This is unlike conventional underlyings which are typically indexes of share prices i.e. with no management charges.
*Paribas* for providing the totally unnecessary volatility control.


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## Monksfield (5 Sep 2012)

@Duke

Afraid I disagree strongly with the statement that GARS is a glorified cash fund. It was up 19% in 2009 and shows a correlation with global equities of around 0.55.

It could quite easily lose money in a given year especially as being managed against a 3 year time horizon - one of its strengths.


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## Duke of Marmalade (5 Sep 2012)

Monksfield said:


> @Duke
> 
> Afraid I disagree strongly with the statement that GARS is a glorified cash fund. It was up 19% in 2009 and shows a correlation with global equities of around 0.55.
> 
> It could quite easily lose money in a given year especially as being managed against a 3 year time horizon - one of its strengths.


That's an impressive return indeed. Nonetheless Standard Life benchmarks it against cash, hence my description. It also states that in aggregate it will never have more than 40% invested in equities. That looks cautious to me and they themselves put it in the low volatility category. Hence totally unsuitable for Tracker style product and I stand by my comments.

Though I repeat that 19% looks mighty impressive for a fund that could never be more than 40% in equities


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## offiah (5 Sep 2012)

1) GARS (UK fund gross of fees) has returned 8.2% pa over the last 5 years to the end of August 2012. This is definitely more than cash over the last 5 years! I very much doubt that this bond will deliver a return like this over 5 years! More like your money back. But what will inflation be over the next 5 years? The investor could end up with a negative real return!

2) GARS is not a glorified cash fund! Fact.

3) GARS volatility range is 4% to 8%.

4) GARS benchmark is cash as it is an absolute return fund which is looking to get a positive return in all market conditions. Hence you need a benchmark that will always be positive and is priced daily. The fund uses 6m Euribor.

5) GARS can not hold more than 40% of its risk budget in equities (or any asset class) which is different than 40% of exposure in equities. This is to make sure the fund has diversification.

6) I think the reason why there has been a growth in guaranteed absolute return funds is that the odds are the investor will at least get their monies back while all parties get paid. As you have pointed out there is no AMC on these products however all the underlying parties get well paid. I make it 6 mouths that get feed - the fund manager, BNP, the guarantor (Ulster), the product provider (Wealth Options), the platform (Irish Life) and the broker. This fee will definitely reduce the potential of making money for the investor. 
If I was investing in a CPPI fund I'd like to invest in something very high risk as I'm guaranteed to get my money back so I'm looking to max potential upsides. Obviously this is very expensive and risky for the product providers to do this at this point in the cycle.


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## Duke of Marmalade (5 Sep 2012)

Okay, I stand ejected, GARS is not a glorified cash fund. 

But other criticisms of this particular GARBage stand:

5 year capital protection almost worthless, because of low volatility in first place.

Straight investment in GARS without the 5 year lock in much better.

18 month averaging confers practically nil policyholder benefit but denies 9 months return.

Volatility control totally unnecessary given that it is low volatility to begin with, there is no early access (main reason for volatility control is to smooth ups and downs), 18 month averaging means there is no exposure to final volatility. Volatility control is an unnecessary cost providing no benefits.

Brochure is offensive in promoting the inherent investment magic of volatility control.

Far too many mouths to feed.

Disclosure is totally misleading on charges and is in brazen contempt of the CPC.

And if it does not enjoy a deposit guarantee, I am not hearing anything on that yet, I wouldn't touch it with a 40 foot pole.


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## Monksfield (5 Sep 2012)

*Another mouth?*

@Offiah

When did Irish Life become involved in or with Wealth Options GARS ?

There is no mention of them in the brochure I have.

I thought there were more than enough mouths to feed here already !

@Duke

My brochure has 12 month averaging but you may be looking at a more recent tranche of the product in which it moved to 18 months.


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## Duke of Marmalade (5 Sep 2012)

Yep 18 months in the latest offering _Monkie, _I'm looking at the link in your OP, Version 7 of the GARB.

Thinking about it again and without withdrawing any of my criticisms, one appears to be getting 100% of GARS and with no "explicit" entry charge as would apply to direct investment in GARS.  Though I presume after 5 years there is no penalty and therefore no explicit entry charge on GARS itself.  So on a five year view direct investment almost bound to be superior with only a very small chance of it being below its initial value. Can't see any reasonj whatsoever to chose GARB over GARS and plenty of reasons not to.

The 18 month averaging is obviously a major contributor to the costs of this product. The other major contributor are the charges within GARS itself. The various parties in the food chain will be taking a share of these charges.


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## Monksfield (5 Sep 2012)

Because of the volatility control mechanism, the averaging and the charges there is little or no chance of performance coming in anywhere near that of GARS itself. In turn GARS will be doing well to match the performance of the (liquid) senior bonds of RBS which are essentially the same credit risk.

Because of the guarantee you might be willing to sacrifice quite a bit of the performance but in buying GARS itself you have something liquid (probably early surrender penalties) but realiseable in a couple of days.

I would have thought that liquidity as a concept is now better appreciated and that you would want to be well rewarded for giving it up.


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## Duke of Marmalade (5 Sep 2012)

Monksfield said:


> Because of the volatility control mechanism, the averaging and the charges there is little or no chance of performance coming in anywhere near that of GARS itself.


 I have rather let this volatility control mechanism slip under my radar. 

You said in OP that GARS targets volatility in 6% to 8% range. That means that a 5% volatility control mechanism will be exposed to GARS in the range 5/8 (62%) to 5/6 (83%). But its worse, it seems to me that it is entirely inappropriate for GARS. Let me explain. GARS itself manages its exposure to risky assets. Its apparent good performance so far must be down to being risky at the right time. Volatility control will reduce its exposure to GARS at exactly those times when the managers think the risks are worth taking. 

And there's me thinking volatility control was harmless - it is another mechanism for squeezing charges out of this product and as _Monkie_ says should seriously detract from performance compared to GARS itself.


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## Monksfield (5 Sep 2012)

*Correction*

Duke is correct in saying that the volatility range applied to GARS by Standard Life is 4-8% rather than the 6-8% I quoted. I think I may have used data on actual volatility from a previous report which took in a period when market volatility was particularly high. 

This makes wrapping it with another volatility control mechanism targetting volatility of 5% even more ludicrous.


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## Duke of Marmalade (6 Sep 2012)

I have been able to calculate the Volatility Controlled GARS back to 1/1/2008. The results are as I might have expected. On average the VolCon was 89% invested in GARS and over the period came in at 7% less than natural GARS.


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## Monksfield (6 Sep 2012)

Thanks for taking the trouble Duke.....not sure how you worked that out but fair play. Always good to see facts, though past stats are really for information and indicative (with strong health warnings).

Volatility waxes and wanes and is, well.....volatile!!


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## Brendan Burgess (6 Sep 2012)

Attachment courtesty of the Duke


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## Duke of Marmalade (7 Sep 2012)

And just for completion, at this point in time 18 month averaging knocks 4.5% off the return. I accept that this will be more susceptible to actual future outcomes than some of the other measures. 

Nonetheless given the nature of GARS, 18 month averaging conveys much more potential performance deficit compared to the minor protection against final downturns.


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## offiah (7 Sep 2012)

Clients access this product through an Irish Life wrapper - if clients want an ARF version or personal pension version Irish Life will wrap the Ulster Bank Deposit - and charge a hefty fee. 

I've heard that this also creates an opportunity for double commission *ie Irish Life will pay commission on the pension product on top of the Wealth Options commission payment. 
Nially Brady wrote about this in the Sunday Times earlier this year that commission can be as high as 9% on this deal 

So when Irish Life are involved its just another layer of charges - not sure if the customers need are really being met here?


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## Monksfield (7 Sep 2012)

*Standard Life*

@Duke

"This kind of parasite product will give GARS a bad name. GARS itself seems to be quite a suitable fund for direct investment. "

I let this most interesting statement slip by during earlier exchanges - with such a mega-successful product on its hands and looming though not immediate capacity issues ,why on earth does Standard Life allow GARS to be tied into this crock?

We cannot expect WO to stop selling a product the market wants (no matter how bad it is). As long as their paperwork is compliant they are home and hosed, at least until the disgruntled investors start kicking up.

There doesn't seem to be much hope of IFAs getting more rigorous in their analysis in the near future. 

The regulator probably has much bigger fish to fry. 

Standard Life is best placed to stop this nonsense as the WO product seriously detracts from GARS and absorbs capacity. Do they care ?

@Offiah

Yes I had heard about the double charging Niall Brady reported on -  two levels of commission seems obscene. Surely the regulator should be all over behaviour of this sort?


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## kateball (9 Sep 2012)

I am not sure that Standard Life can stop Wealth Options selling this product - looking at the brochure i see that the product is linked to a BNP Index and not directly Standard Life GARS. It appears that BNP have constructed an obscure index that invests a very small % in the GARS Sicav.

Whats important here is that customers think they are investing in GARS with a capital guarantee - and they are not. 

Wealth Options are going around telling brokers they have a guaranteed version of GARS. From what i can see the index may not even have a close correlation to GARS - we wont know what the pay out is until the maturity date. By that time Wealth Options and BNP and Ulster Bank and Irish Life will have all been paid (oh and i forgot the broker!!)
and the customer will be left with a return of ?%. There is only one loser here.


Its time for the regulator to pre-approve these disgraceful products before they can be promoted in the market.


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## Duke of Marmalade (9 Sep 2012)

_Niall Brady_ has a piece in today's _Sunday Times_ were he says Standard Life have issued a warning about this product.  I wonder has this thread had anything to do with that.


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## Rory Gillen (9 Sep 2012)

I got carried away and wrote a tome on the issue, hope it is worth it for you!

The way I have found it easiest to understand these complicated products is to stand back and ask how the fund can produce a return in the first place as well as provide a guarantee. Of course, it can't most of the time and here are possible reasons why!

Equity markets in the developed world have delivered a 9-10% per annum return (before costs) on average since 1900. That level of return was 5-6% over inflation and 3-4% over the risk-free alternative (long-dated government bonds). This extra 3-4% over long-dated government bonds is the premium return one obtained for taking the risk.

Hedge and absolute return funds follow a variety of strategies to extract the risk premium available from equities as well as from other financial instruments and currencies. One such strategy might be to buy a high yielding currency and sell a lower yielding currency in an attempt to extract the differential. Another might be to buy equities, financial instruments or currencies that are trending upwards and sell those that are trending downwards - also referred to as trend or momentum investing. Still another strategy might be to buy high yielding non-investment grade corporate debt and finance it with cheap short-term debt. But in my travels, I have not come across any strategy where the risk premium available is better than simple equities. And this makes sense to me as businesses actually produce goods and services to sell, and they make profits as a result. The returns to business on the capital invested, in aggregate, will generally be higher than bank deposits. If this was not the case, why would the businessman bother?

Hence, hedge and absolute return strategies can generally only outpace equity-like returns by using leverage (debt), and that entails higher risk.

I think we can conclude, therefore, that, without leverage, hedge and absolute return funds cannot, in aggregate, generate returns higher than equities. Indeed, as the costs in hedge and absolute return funds are much higher than standard equity funds, we can reasonably conclude that achievable returns from the hedge fund industry might be in the order of 6-7% per annum and below the 9-10% achieved by equities this past century.

The ability of hedge funds to go short (sell what they don’t own) as well as long in pursuit of the risk premium provides returns that are less volatile, and this can add balance to an investment portfolio. However, my own studies show that the global hedge fund industry has delivered miniscule returns since 2002, and negative returns after inflation. In addition, the industry acted in a highly correlated fashion to equities in both of the down years of 2008 and 2011. What I mean by this is that hedge funds, in aggregate, lost money alongside equities in both 2008 and 2011. In effect, they did not provide offsetting returns, which is supposed to be their main attraction. Is it possible that the industry is now much more correlated to standard equities just as Ireland is embracing the product - or should I say just as the IFAs, banks and stockbroking community are in desperate need to sell something other than a standard equity or property product? But let's put aside these additional reservations and assume a 6-7% annual return from the hedge fund industry!

This 6-7% still does not leave much room for the costs of providing the guarantee or the considerable (and often poorly outlined) costs of manufacturing and distribution of these structured products to the consumer.

Hedge and absolute return funds are a valid asset class but their returns will be below equities, and probably considerably below, in the medium to long-term. As we have been in an equity bear market for the past 13 years, this fact is easily forgotten.

In addition, if hedge funds are supposed to deliver positive returns with lower volatility than equities, then why does one need a guarantee? You can reduce, if not eliminate, the risk of any particular hedge or absolute return fund letting you down by buying a range of them.

I think most people reading this will rightly conclude that a guaranteed hedge fund product exists solely to reward the sellers. In Ireland, at present, the offer of capital protection alongside equity-like returns is being advertised. However, these claims surely depend on the high deposit interest rates still being offered by the Irish banks. In other words, these high return claims are possible only because the banks, which remain credit risks, are providing high interest rates at a time when the ECB overnight rate is 0.75%. This allows the manufacturer of a guaranteed structured product to place less of the monies raised on deposit with the bank as, at the higher rates of interest, this lesser amount will roll up to provide the 100% capital guarantee. In turn, this frees up a greater proportion of the monies for investment into the hedge fund tracker instrument. 

So long as the customer fully understands this underlying credit risk, then I see no issue. But then surely in this instance the customer might be as well off simply placing his money in a medium-term deposit account with that same bank. At least he gets the higher than normal bank interest return and can understand the risk (the bank). But, of course, there is no room in this logic for investment intermediaries other than those who charge a fee.

However, in normal market conditions (which most of us can't remember), if it is a high return, no risk investment you want, it does not exist. 

It is my view that this industry we have works against the customer, and for as long as IFAs, stockbrokers and banks are allowed to earn commission from product sales, it will remain this way. One cannot expect the customer to understand these issues. Is that not why an IFA exists - to provide impartial financial and investment advice to his client? Indeed, I have come around to the view that banks should be banned from selling investment products of any nature to customers...they are wholly conflicted. 

Many IFAs reading this may conclude that I am overly negative on the industry. But my thinking also leads to me to conclude that if the Regulator would ban banks and stockbrokers from selling investment products for commissions then the opportunity exists to have a professional IFA network in Ireland perhaps a multiple of its current size, manned by properly trained IFAs earnings a fee like any other profession, and in a better position to serve the consumer in an impartial way, as do accountants, solicitors, doctors and tax advisors (largely).

That guaranteed hedge & absolute return funds are selling in huge quantities in Ireland at present - as technology funds were in the late 1990s and as geared property funds were in the 2005-07 period - is surely a symptom of a dysfunctional market where the customer's returns are silently transferred to the seller. Only the Regulator can change this, in my view!


*Rory Gillen*
*Founder, GillenMarkets.com*


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## Monksfield (11 Sep 2012)

@Kateball

I am sure that this product could not be put together without the agreement of Standard Life. 

You make an interesting point in saying that WO are presenting this as GARS with a guarantee. It is a derivative of GARS which could turn out to be quite a long way off (because of VolCon & 18 month averaging). If that happens many people will be annoyed but they probably wont have any come-back. Caveat Emptor and all that but when it comes to heavily engineered products like this the consumer should be better protected.

@Rory

You are probably right but by the time I got to the end I was worn out !


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## Rory Gillen (12 Sep 2012)

@Monkfield

I wore myself out, too.

Rory


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