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Finance Expertise

by Mr Peter Temple
Financial Journalist, Investment Analyst & Author
(More about Mr Temple)

Times of recession, financial scandal and stock market crashes are an apt occasion to summarise the role and qualifications needed for experts in the sphere of finance and investment. As recent news items demonstrate, recessions bring in their wake the possibility of:

  • malpractice
  • fraud
  • dubious financial dealing
  • complaints about ill-judged investment decisions and
  • other potential litigation scenarios.

Few areas are quite as multifaceted as finance and investment. But there are a number of broad themes. For example:

  • poor advice
  • a failure of acquired companies to meet warranted profits
  • excessive compensation
  • the failure of directors and advisers to discharge properly their responsibilities
  • investment advisers failing to act in line with a pre-set brief from their clients
  • insider dealing.

Valuation, risk and returns

Where experts can help frequently boils down to advising on issues of valuation and performance, and on the degree to which advisers or directors have acted with reasonable prudence. Few investment professionals could have been expected to avoid completely the consequences of the recent stock market turmoil: the issue is often whether they did as their clients instructed, or whether they performed better than the average.

While not unknown, cases of outright fraud are relatively rare. But many clients are sold investments whose value is opaque and whose structure is obscure.

  • Are investments of this nature suitable for the client to whom they were marketed?
  • Was the client likely to have been fully aware of the way in which the product would behave in times of extreme market stress?

One problem area is that, as the events of the last year or so demonstrate, there is no such thing as a sure-fire return that is free of risk. As investment returns increase, so do the implied risks attached. If neither the client nor the adviser has observed the risk, this does not mean it does not exist – as the fullness of time will invariably bear out.

It is, for example, difficult for any expert to support a claim that a client’s investment returns would have continued at x per cent a year in perpetuity, based on his past performance. Cases have been argued successfully on grounds like this, but they are more likely to result in disappointment.

Different categories of expertise

Experts with financial expertise fall into a number of categories.

  • Cases with a life assurance and pensions dimension may require an expert with actuarial expertise.
  • Those involving corporate fraud, malpractice or mismanagement may be more appropriate for a qualified accountant, especially one with prior boardroom experience.
  • Issues related to the marketing of investments and the suitability of a specific investment for a particular category of client, or indeed the valuation of a company, require expertise from a qualified accountant with practical experience of the investment scene and relevant investment analysis experience.

One important point to bear in mind is that where stock market listed investments are concerned, there is a whole subset of categories that may call for different types of expertise. For example, an expert with detailed knowledge of the way in which bond markets operate may not be the best person to instruct if the case involves equity options. Complex derivatives involving credit default swaps and mortgage-backed securities are a whole separate area of investing.

Some experts may be comfortable advising on bonds and shares but not on derivatives; some may be equity share or share option specialists; some may have a company valuation bias; some may have experience of more than one area. It goes without saying that it is important to fit the right expert in the right hole.

Another issue relates to the career experience of the expert. No individual will fit the bill entirely. Indeed, someone whose experience and expertise have been in advising large companies or institutional investors may be less well suited to advising on the issues involved in a case relating to advice given to a private client.

Qualifications and experience

In the 1970s, stock market expertise was picked up through ‘on the job’ training and few formal qualifications were demanded. Stock exchange membership examinations were sat by the ambitious, as membership was a pre-requisite for advancing to a partnership. These examinations required just a basic knowledge of the elements of stock exchange practice, taxation, accountancy and company valuation.

These exams subsequently morphed into the qualifications of the Securities and Investment Institute, an independent standard-setting body founded in 1992 and which now has some 40,000 members across 89 countries. Some of those with former stock exchange membership and other relevant qualifications were ‘grandfathered in’ at Diploma member (MSI) and Fellowship (FSI) levels. New entrants have to sit examinations. There are basic examination qualifications for those giving advice to clients, in the form of simple Registered Representative examinations.

Investment analysis expertise is increasingly being measured by Chartered Financial Analyst (CFA) qualifications. Formerly an import from the USA, they are now recognised in the UK in their own right as a result of a name change within what was formerly known as the UK Society of Investment Professionals (UKSIP) and, prior to that, by one of its main constituent parts, the Society of Investment Analysts (SIA). The new body will award CFA qualifications, but experienced practitioners may still have the ASIP or ASIA letters after their name.

The exigencies of particular cases may require a different type of expert. For example:

  • assessing the implications of a fraud case may call for someone with an accountancy qualification as well as an investment qualification and some experience of corporate finance
  • making a judgement about product suitability, risk or the quality or otherwise of investment advice and subsequent performance may need someone with the perspective a long-experienced practitioner can bring.

And one last point, the older an individual, the more likely he is to have had experience of the previous periods of extreme market turbulence. In short, there are few substitutes for grey hair and a dash of common sense, even in the most complex cases!

by Mr Peter Temple
Financial Journalist, Investment Analyst & Author
(More about Mr Temple)


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