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The Dos & Don’ts of Investing

Posted in: Guest Blogs
Author: Christopher's Blog

The Citizens Advice Bureau is often approached by individuals that have had negative experiences when it comes to investing for various reasons. Many come with complaints that their investment seems to be riskier than they expected or that the returns are more volatile than they would like. Occasionally there are people that have invested in funds that become ‘suspended’ which greatly affects the individuals access to their invested capital and can keep them tied up in the investment for a much longer duration than was their intention. Unfortunately the aforementioned pitfalls of investing are all too common but the good news is that it is very easy for these negatives to be greatly minimised (and in most cases completely removed) just by following a few simple rules. The following is a generic guide of what the investment process between a prospective investor and a financial adviser should look like:

Step 1 – Establishing the client and adviser relationship

At the first meeting with your financial adviser you should be presented with a ‘Client Agreement’. This document should provide some basic information on the company that the adviser works for, by whom that company is regulated, the duration of the agreement, the frequency of contact thereafter (e.g. quarterly / biannual reviews) and remuneration. This is quite an important part of the investment process and the absence of a client agreement form would already at this very early stage suggest that something is amiss.

Step 2 – Providing the adviser with information

In order for the adviser to be able to put together an investment proposal he will first require certain pieces of information from the prospective investor. This information will be gathered by the adviser via a ‘fact find’ or similar questionnaire. The purpose of this data gathering process is so the adviser can establish the client’s needs & objectives, assets and liabilities, income and expenditure, and their financial priorities. As this information is private it is absolutely the prerogative of the client to withhold information but ultimately this will in turn limit the level of advice the adviser is able to provide. Another exercise of data gathering that should take place at this stage is for the adviser to establish the clients ‘attitude to risk’ or ‘risk profile’. This is very important as it informs the adviser of the types of investment which are suitable and appropriate for the client e.g. a client that has a very conservative attitude to risk shouldn’t be investing in the shares of a company based in Kazakhstan (a frontier market) whereas a client with an adventurous attitude to risk probably won’t be happy having their money invested in a Santander fixed term deposit. The way in which an individual’s attitude to risk is identified is usually by means of a questionnaire with each question having a quantifiable response relating to a risk rating.

Step 3 – Being presented with the investment proposal

Once you have provided the adviser with all of the necessary information they will then go away and put together their recommendations for an investment portfolio correlating to your specific criteria. This process will usually take a couple of days. Once completed the adviser will then go through their recommendation which will be accompanied by a report often called a ‘reasons why letter’ or ‘suitability letter’. The report should confirm your circumstances as per the information you provided at the first meeting and then outline the recommendations often making reference to your individual situation and why that particular investment is appropriate. The report should also contain some information on the alternative investments that were considered but ultimately rejected and the reasons for the rejection. The proposed investment portfolio should be in line with your attitude to risk as established in the first meeting.

Step 4 – Proceed or don’t

Once the recommendation has been made and you are happy that you have a good understanding of exactly what is being proposed, you are then in a position to either continue in the process and initiate the investment or withdraw from the process.

The issue of liquidity!!!

Certain types of investments are less ‘liquid’ than others. The liquidity of an investment / asset refers to the speed at which it can be converted back into cash and returned to the investor. A savings account with a bank can be considered very liquid as the funds are pretty much available for the investor to withdraw at very short notice. Investing directly in a rental property such as a holiday let can be considered far less liquid as in order to withdraw the money from that particular investment the property will need to be sold which is often a lengthy process.

There are some investment funds available that invest primarily in assets that aren’t highly liquid (property funds for example). This doesn’t necessarily mean that they are ‘bad’ investments, it simply means that extra precaution and consideration needs to be taken before the decision to invest is made. Occasionally, a fund that invests in illiquid assets can be performing well but due to events outside of anything that effects the performance of the fund (bad press, a general change in investor sentiment) investors may decide to withdraw their money. Whilst most funds hold a certain percentage of their assets in cash and so are able to return investors money when it is requested, if too many withdrawal requests are received by the fund at the same time then the fund may not have sufficient readily available cash to meet all the withdrawal demands. In this situation it is likely that the fund will move into a period of suspension which basically means that withdrawals from the fund will be restricted or possibly even unavailable until the fund is able to liquidise some of its assets. Often funds can continue to produce good returns during periods of suspension, they simply don’t have enough cash to meet all the withdrawal demands.

The main points of consideration when investing!!!

  1. Make sure you are dealing with a reputable company that is regulated
  2. Make sure you receive a ‘Client Agreement’ from the investment adviser
  3. Provide as much information as possible to the adviser during the data gathering process to ensure that the most appropriate and suitable investments are recommended
  4. Check that the individual investments proposed match your attitude to risk
  5. Enquire about the types of investment proposed and their level of liquidity
  6. Be completely happy and comfortable with the financial company, adviser and investment proposal before proceeding with the investment


Please note: The information provided is based upon our understanding of current legislation. It is not legal advice but is provided freely to enable you to be properly informed. We recommend that if you are considering taking action, you should seek professional advice.

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