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Advice industry on the edge of a precipice

Jeff Prestridge, Mail on Sunday
11 January 2004

TO begin with, it merited only a paragraph in one national newspaper. But no one involved in financial services - from consumers to journalists to regulators - should dismiss the demise of the David Aaron Partnership, one of the more colourful independent financial advisers.

Sadly, no one comes out of this sorry affair with any credit. DAP, formed more than 30 years ago, went into administration just before Christmas. Receiver KPMG is seeking a buyer for the family-controlled business, which was run like a fiefdom by 63-year-old David Aaron. Fellow directors were his wife Doreen, sons Michael and Stephen, and a long-standing colleague, Andrew Jones.

It is understood that the company's sudden fall from grace was triggered by two interdependent events - mis-selling and poor financial health.

DAP faces massive compensation claims over the alleged mis-selling of high-risk 'precipice' bonds. These were linked to the performance of a basket of shares or one or more stock market indices. When shares rose, the bonds performed satisfactorily. But when markets collapsed, as they did shortly after most of these plans were bought, the value could fall two or three times more than the drop in the index. Hence the name 'precipice'.

Though DAP was not the only broker to sell these bonds in their thousands, its gravest misjudgment, perpetrated more than by any other adviser, was to market them as low-risk investments when patently they were not.

As part of this misrepresentation, it used a panel of financial journalists and its own public relations adviser in marketing literature to endorse the bonds as low-risk, providing convincing 'independent' confirmation of DAP's misguided view that these bonds were pretty safe. It amounts to deception using these experts to risk-grade the plans when (a) they were being paid by DAP for their 'views' and (b) they did not have the expertise to make such judgments.

Over the next three months, investors who bought bonds through DAP face losses of anything between £1 million and £3 million as their plans mature. Once they receive their pathetic maturity cheques and grasp the extent of their losses, many will make claims for compensation. I believe that DAP realised this, hence its decision to be placed in administration. If it is established that DAP cannot meet these liabilities, any investor claims for compensation are likely to be taken on by the Financial Services Compensation Scheme.

DAP was in far poorer financial health than its magnificent offices and glitzy cars would have had us believe. The last report and accounts filed at Companies House for the main Aaron business, David Aaron (Personal Financial Planners) Ltd, show that for the year ending 2001, it made pre-tax profits of £886,006 on turnover of £8,678,165. But more revealingly, the Aarons were not shy about taking money from the business.

Dividends of £105,000 were paid to three of the five directors (Michael and Stephen Aaron and Andrew Jones) in 2001 while directors' pay added up to £474,551. Also, David and Doreen Aaron received £67,200 in rent for business use of their two homes - one in Woburn Sands, Buckinghamshire, where the business is based, and one in London. The five directors also enjoyed interest-free loans from the business totalling £521,549.

A number of obvious questions arise from the collapse of DAP. First, why didn't the Financial Services Authority step in from the start and stop DAP selling precipice bonds with advertising which, to a trained eye, was obviously misleading? If it had done this, rather than wait until last year to start raising concerns, the financial services industry would not be submerged in yet another scandal.

Surely the role of an effective financial services regulator is to prevent mis-selling rather than turn a blind eye until complaints start coming in and then take action, usually in the form of a fine?

Second, while journalists, including those at Financial Mail, have been eager to report the poor performance of most precipice bonds since their launch, why did none of us highlight the misleading nature of DAP's marketing literature when it was issued rather than three years after the event?

We all talked about it at the time, especially the use of Aaron's public relations adviser as some kind of financial guru, but none of us had the courage of our convictions to put our thoughts in print. We failed in our duty to protect the consumer and for that we apologise.

Finally, what has this sorry affair done for the reputation of independent financial advice? Immense damage is the answer. Unless the sell-at-any-cost approach is ditched, the whole lot could go the same way as the David Aaron Partnership.