According to Mr Lucas, by singling out certain products as ‘complex’ there is a risk of creating the impression that assets such as shares, bonds and property are not complex.
“The simple fact is that most financial products are complex,” he said.
“Let’s take shares, for example. How to buy and sell shares would be understood by most investors. But that’s completely different to knowing whether an individual share investment is a sound or complex proposition.”
Companies that issue shares have many “moving parts”, he said – including management, the amount of leverage on the balance sheet, the health of the sector they operate in, intellectual property and business model risk.
“More often than not, companies will be involved in derivative transactions to manage their risk, hedging their foreign exchange or forward-selling their products. The list is endless, and similar to many of the concerns raised for so-called complex products,” said Mr Lucas.
A properly informed investor ought to understand all of these factors – and it is up to their adviser to make sure they know about it, he said.
“This is why I believe looking at any individual product is the wrong approach. What investors need to focus on is the overall investment strategy of their portfolio to ensure it is diversified,” Mr Lucas said.
“This is where the debate should be at – getting investors to understand the importance of asset allocation, risk management and the value of advice. The discussion about a product’s complexity is, in my view, a side issue,” he said.
ASIC signalled its intention to target what it refers to as ‘complex products’ with the release of Report 384: Regulating complex products at the beginning of February.
In the report, ASIC voiced its concerns about a lack of understanding by investors of complex products and the risk of ‘mis-selling’ by product providers.
Complex products, as defined by ASIC, include agribusiness managed investment schemes, exchange-traded options strategy, hedge funds, hybrid securities, leveraged derivate products, complex managed funds, structured products and non-vanilla warrants.
