A guarantee is no guarantee
Some financial advisers have expressed alarm at UBS’ recent announcement that capital protection will not apply to loans it made to clients to invest in the failed Rubicon International Leaders Fund (Capital Protected Series 1).
They are questioning the value of capital protection in other sold capital guaranteed products on the basis of UBS’ announcement that its Rubicon investor loans are not protected because the fund has ceased to exist.
UBS said the fund prospectus clear ly stated that capital protection only applied at maturity (2015) and that the capital protection had lapsed with the fund’s recent winding up.
Adviser Paul Moran, of Cameron Walshe affiliate Paul Moran Financial Planning, said the UBS decision had “thrown into relief” the value of capital protec tion in all funds where the protec tion is guaranteed by derivative structures.
Moran believes the protection in a “good number” of these funds, which form the vast majority of capital guar anteed products sold in Australia, will be at risk in the event of any further underlying funds collapsing.
Products guaranteed by derivative structures, such as the Rubicon fund, use a long-term put option to ‘guaran tee’ an investor’s capital at some point in the future, he said.
“However, it’s only guaranteed on the basis that the market makers who provide it can actually execute the guar antee when the investment matures, as the financial crisis is now revealing.”
Moran added he had “never seen any fine print in any available prospectus to say a capital guaranteed product is guar anteed only in certain circumstances”.
“It has been generally held by advis ers at business development meetings that the protection of capital guaran teed products was guaranteed in all market circumstances.”
John Yanoulis, financial planner at IMAX Business Group, said he too was always under the impression a capital guarantee was guaranteed in all circumstances.
However, he said in his experience the terms and conditions that surround the guarantee are “always so many and so complicated it’s not impossible to end thinking that there’s a catch in there somewhere”.
Recommended for you
With the final tally for FY25 now confirmed, how many advisers left during the financial year and how does it compare to the previous year?
HUB24 has appointed Matt Willis from Vanguard as an executive general manager of platform growth to strengthen the platform’s relationships with industry stakeholders.
Investment manager Drummond Capital Partners has announced a raft of adviser-focused updates, including a practice growth division, relaunched manager research capabilities, and a passive model portfolio suite.
When it comes to M&A activity, the share of financial buyers such as private equity firms in Australia fell from 67 per cent to 12 per cent in the last financial year.
