Aren't we protected by regulation?

The regulator has rules for the advertising and promotion of financial products. These are well-intentioned and often effective. They also make the job of shifting the product more challenging. However product providers still have many weapons.

Impressive Historical Performance

See Data Games

Star Managers

Investment is, or ought to be, a highly skilled activity. We ought to be prepared to pay a premium for proven good performers.

But there is a problem. Not one of the many studies of fund performance has managed to establish a link between past performance and future success. In other words, the past is no guide to the future.

The regulator has recognised this by banning the use of past performance statistics in fund advertising. So even if there are stars out there how are we going to pick them?

And they move around. You invest in a fund. The fund employs the manager. One third of managers move jobs every year. If you want to follow the manager, selling his old fund and buying the new one is expensive.

You wouldn't take high risks with your own money. But what if it was someone else's money (ie you are a fund manager)? If it goes right, you are a star. If it goes wrong - you can fold the fund or merge it into another one. People have short memories. You can start another fund later.

Of course, this is an unfair over-simplification of a much more subtle process. But two things are true:

• Cautious, safe managers will never be stars.

• Average managers can achieve stardom by taking high risks and praying.

Picking Peaks

A randomly lucky result is presented as though it is representative of the system/scheme/fund as a whole.

We are used to this in advertisements - for tipsheets e.g. But it's very common in journalism (because extremes make a better story than the boring average)

Names

The use of the word "bank" in your business name is illegal, unless you are one. But there are many other words that exude financial skill and probity that even your local estate agent could probably use if he had a mind: "Global", "Trust", "Value", "Fenchurch Street", "Mutual".

Best of all is a name like "Lazards" or "Rothschild". The latter are real names of distinguished banking families and are therefore spoken for. But beware of other names with the right associations that nevertheless started life in the marketing department.

Tipsheet ploys

Consider the following proposition. You pay us £100 and we guarantee you can chose the sex of your next child. In fact we will refund your money if we get it wrong.

Get it? We send out random answers. Half of them will be right and we'll keep the money. Half of them will be wrong but we won't lose.

You should now be able to recognise lots of tipsheet ploys.

....and a warning about leverage

Funds can increase risk and prospective returns by leveraging, so you should be particularly careful with funds that permit it. It's a legitimate weapon in the hands of good managers, but, as always, it's hard to tell good from bad.