Too good to be true? 

Seasoned IFAs may have been keeping a weather-eye open on the long-running dispute between Ingenious Film Partnerships and HMRC.  This week, the torrid saga has taken another step forwards, as reported in the media.  However, it's not the kind of advance which is likely to leave anyone feeling all that happy.

I found my attention grabbed by a spokesperson for HMRC, Jennie Granger ('DG of enforcement and compliance'), who said:

“These were some of the biggest films of all time, and the schemes involved people claiming far more in tax than they invested in the first place. 

“We always say that if something is too good to be true then it probably is, and in this case the long legal battle will mean that investors face even big bills for interest and legal costs.”

Now, ValidPath were not interested in this subject because we had our own clients tied up in these things - other than refugees who came to us because their financial worlds had become infinitely more complex and expensive than they were led to believe by their advisers a decade or so ago.  We were interested, because the Film Partnerships (as originally sold) were examples of over-engineered mechanisms which were over-engineered in order to sail as close to the wind as possible.  In any field of manufacture, products created to such tight tolerances, and designed to function in extreme conditions, are prone to breakdown, especially when the elements (in this case, HMRC) are chucking everything they can at them.

I remember looking at the illustrative paperwork for one of these schemes, many years back.  It was impressive, but in an Elizabethan Alchemical kind of way - the transmuting of base metal into gold, via a mystical process that clearly meant something to its enthusiasts, but left cautious advisers like myself with more questions than answers.  "If something looks too good to be true, then it probably is" was my own mantra at the time, and I am still grateful for it as a kind of general rule underpinning my advice - but I have, over the years, encountered plenty of advisers (and Accountants) who'd just get sucked into this stuff.  It is helpful, in a way, to hear a representative of a body as prosaic as HMRC underscoring the principle's continued relevance to financial products, because none of us can reliably build our financial advisory propositions on something as flimsy as wishful thinking.

There are different tiers of unhelpfulness contained within an advisory process where the result was the client investing in Film Partnerships.  The first, and most basic was the product itself - one which was so complex and fraught with potential subversion that it contained a category of risk which most (sane) investors would not wish to contend with.  The second, the icing on the cake, was an advisory model which never (it seemed) adequately explored that key 'what-if?' comprising the possibility of failure.  Every financial refugee, coming to ValidPath for solace over the years, did so because there was no effective backup plan in place - indeed, in some instances, the original adviser (conveniently no longer around) handled the business on an execution-only basis, in order to minimise the risks to him or herself in the (probable) outcome of everything going belly-up.  These clients exhibit a kind of stoicism in the face of circumstances that neither Ingenious nor their advisers appear to have anticipated - and whilst stoicism may be in some ways an admirable quality, it is still very far from a happy state of being: their lives and other financial objectives remain corralled in a kind of limbo-land whilst the legal action persists in the background, and whilst HMRC reappears periodically demanding more money alongside the budgeted repayments.  Investors within these schemes are effectively disempowered, whereas financial-planning is all about giving the client more choices and options.  An irony, indeed.

Of course, Film Partnerships are very much past tense, not that you would be forgiven for thinking otherwise, given the frequency with which references to the Ingenious Saga features in the weekend papers (there is no escape for the victim!).  But the principle remains:  IFAs tend to be suckers for 'new stuff', and the additional bells and whistles apparently makes over-complex products irresistibly attractive to the iPad generation, or to those clients who have an elevated view of their own sophistication.  It is also worth noting that, all-too-frequently, the manufacturers of these kinds of products resorted to sales practices that almost inevitably left intermediaries high and dry when those products failed - which is why few culprits remain in business to date.

It's good to have those little rules of thumb in place, a simple mental mantra to help us deploy a little clarity when we are feeling enticed by something new and glitzy:  If it looks too good to be true...