Unit trusts and OEICs

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27. Buy with or without advice?

The fundamental choice that the investor faces when dealing in funds is whether or not to take advice.

1. Execution Only

   Purchases or sales that are made without taking advice from an authorised financial adviser are known as execution only. This means that you buy or sell personally or instruct an advisor to buy and sell on your behalf without taking or asking for advice.

   The disadvantage of transacting execution only (or taking advice from an unauthorised source) is that you do not fall under the protection of the Financial Services Act if the investment turns out to be unsuitable and you lose money.

   The advantage of transacting execution-only is that you may be able to negotiate lower charges because the fund provider is not going to have to pay commission or fees to an adviser.

2. Taking Advice

   There are two categories of authorised financial advisers: -

   • Tied Agents (Appointed Representatives or Company Representatives) who represent just one provider and are not allowed to advise on funds outside that provider's range.
   • Independent Financial Advisers (IFAs) who represent the investor rather than any product provider, and who are authorised to give advice on funds from across the market.

Both kinds of advisers have to justify their investment advice.

• In the first instance, this entails completing a fact-find that records the prospective investor's goals, preferences (e.g. risk and time horizons), financial resources, commitments and existing arrangements.

The fact-find forms the basis of all recommendations and remains open to inspection by the FSA.

• All recommendations made by an authorised financial adviser have to be justified in a 'Reason-Why' letter to the investor after the sale.

As noted, the advantage of taking financial advice is that you have redress under the Financial Services Act if the advice turns out be unsuitable and you lose money. However, the mere fact that an investment falls in value does not necessarily mean that inappropriate advice has been given.

The disadvantage is that the procedure is time-consuming and bureaucratic. The time spent in completing the paperwork is often disproportionate to the advice sought and has to be paid for in terms of commission or fees.

1. What is a unit trust? 2. What is a unit? 3. The trust deed and scheme particulars 4. The people behind a unit trust 5. Charging structure of unit trusts 6. Pricing of units - FSA rules on maximum offer price 7. Pricing of units - FSA rules on minimum bid price 8. Pricing of units - in practice 9. Pricing of units - historic and forward pricing 10. OEICs - Open Ended Investment Companies 11. Shares in OEICs 12. OEICs - pricing 13. OEICs - charges 14. Taxation of unit trusts and OEICs - Introduction 15. Tax treatment of dividends from equity funds 16. Tax treatment of coupons from non-equity funds 17. Capital Gains Tax 18. Tax shelters 19. Investment powers of fund managers: 'eligible investments' 20. Diversification 21. Fund classification: risk gradings 22. Selecting a fund: Defining your objectives 23. Selecting a fund: Active vs passive 24. Selecting a fund: lump sum vs regular savings 25. Selecting a fund: Past performance 26. Where to buy unit trusts and OEICs 27. Buy with or without advice? 28. The mechanics of buying 29. The mechanics of selling 30. Share exchanges and fund switches 31. Investor protection 32. Conclusion

• Exchange Traded Funds