The National Securities Market Commission ( hereinafter, CNMV) has created a tool to make it easier for every client to know the risk in the investments they make, since many products marketed by financial institutions are too complex to be properly understood by the individual client (as we have seen, for example, with preferred securities). Let us see the positive repercussions this can have.
Confusion about investment risk
This traffic light, as we say, will allow us to know the risks we face in an investment. Its justification? The difficult understanding of some financial assets and the frequent bad practices carried out by certain asset managers or financial advisors. This malpractice translates into not explaining the negative or risky part of the investments, giving account only of the most optimistic aspects of them.
One of the clearest examples is the treatment that certain people give to fixed income, considering it an insured, guaranteed investment. Nothing could be further from the truth.
The real risk of fixed income
Losses on fixed income are explained by the fact that if there is a rise in interest rates, new issues offer higher yields on our investment, so prices on previously issued bonds fall. The new rates are obviously more interesting as they offer higher coupons, and so the old securities have to drop in price in order to continue to be marketed.
This explanation can be visualized in certain fixed income investments have had losses above 4% in years such as 2010 or 2011, for example.
In short, any investment referenced to fixed income (not even mixed) in the long term should be considered as medium risk and not low or null as some managers sell to the client.
Traffic light justification and ethical customer management
This traffic light created by the CNMV aims to avoid these bad practices, seeking to simplify the investor’s knowledge of the asset in which he is depositing his savings. It is structured in 6 risk levels, increasing as the risk increases.
From the Savings Department of PIB Group Iberia e Inversión, we want to highlight how there are still interesting alternatives in the market with the lowest level of risk (Class 1), which offer guaranteed returns higher in some cases than 1% APR for the client. In this way, we would protect ourselves against pension plans marketed in financial institutions with the highest level of risk (Class 6).
A good manager should know the risk profile of each client, and based on this, create an investment portfolio accordingly; in order to avoid some cases, in which we find people over 60 years old, with more than half of their assets in shares, assuming a risk of which they are not aware, without wanting it. Here we leave an entry in which we give some advice when choosing a pension plan.
If you want us to help you, call us or ask for information about insured pension plans (with guaranteed return, PPA) or pension plans (with higher return potential but assuming some risk).
