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, such as funds that invest in property, timber and fine wines. But being interesting or popular does not make them suitable for you, or safe.

Funds like these that invest in non-traditional scheme assets are known as Unregulated Collective Investment Schemes. The UK’s Financial Conduct Authority has had a number of concerns about them.

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.

Consumers have lost substantial amounts of money investing in UCIS and similar products in recent years. The Financial Conduct Authority found that three out of every four sales of UCIS products to retail clients were unsuitable for the investor and many promotions breached the UCIS marketing restrictions.

In the Financial Conduct Authority’s view, UCIS are unlikely to be suitable for the vast majority of retail investors. Under regulations launched in 2014, UCIS, and certain close substitutes (such as Traded Life Policy Investments) may not be promoted to the public and can only be marketed where an exemption is available – for example, for individuals who are certified as sophisticated or high net worth 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.

The Financial Conduct Authority explains: “These assets may sometimes appear to offer better returns with less volatility than more usual investment types but they are often actually higher-risk investments. For example, they may be illiquid, difficult to value and prices may be volatile.”

It is difficult to do due diligence on these funds because of 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.

Often these illiquid funds are based in jurisdictions with low levels of supervision and compliance, and this is a lesson for everyone to be diligent about which funds they choose.

Since the Financial Conduct Authority banned UCIS in the UK, salespeople looking to exploit lax regulation abroad have increasingly been promoting them to expatriates.

Being interesting or popular investment funds does not make them suitable for you, or safe

AES International calculates there has been a 50 per cent rise of UCIS being sold to ordinary retail clients outside the UK. Those selling them often get high commissions, with much of the cost usually hidden from clients.

Last year, Tobias Haynes, a paralegal with the law firm Regulatory Legal Solicitors, said that investors are typically told of exaggerated returns, low risks and various guarantees. However, in fact, “funds in overseas schemes that are unregulated are high-risk, offer no access to redress for investors through regulatory means and are ultimately difficult to verify or value. Caution should always be taken when entering into such volatile products, and they are a definite no-go for retail clients”.

So how does one choose their 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.

Always remember the maxim: if it sounds too good to be true, it probably is.

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 vary 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.

It is just as important to evaluate the regulation of the adviser who is making the recommendation. For advice on your funds and portfolio planning, always speak to an experienced, trustworthy and regulated wealth manager, who carries out a high level of due diligence when recomending funds. They should carry the highest degree of regulation and only recommend authorised funds from highly recommended jurisdictions.

To keep in touch with the latest developments in the offshore world, visit www.blevinsfranks.com.

Jean Chapelle is a financial planning and business development senior manager with Blevins Franks.

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