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Not all index trackers are comprehensible to everyone

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The Netherlands Authority for the Financial Markets (AFM) has recently conducted a review of index trackers, for reasons including that these products are increasingly being offered to private investors. The review assessed the extent to which index trackers are comprehensible to the average private investor, or ‘consumer’. The assessment was made on the degree of complexity of the product’s structure, the effort needed to understand how it works, and the accessibility of the product information.

The AFM expects the index trackers offered to consumers to be restricted to those products that can be understood by this target group. Whenever consumers purchase products that they do not understand, there is a high chance that this will lead to disappointment at a later date, for instance if the returns or costs involved are not as expected. If consumers are not able to properly estimate the risks associated with a product in advance, this can lead to unexpected losses if one of these risks occurs.  

The most important conclusion of the review is that some types of index trackers are so complex, that they are – for the average consumer – extremely difficult, if not impossible, to understand. The AFM’s opinion is that these products should not be offered to consumers, or should only be offered to consumers through the intermediation of an advisor or an asset manager. This intermediation should take place under the stipulation that the advisor is an expert in these products, and is able to assess the suitability of a product for his clients on the basis of the available product information. In this context, the AFM notes that the information provided on index trackers is not sufficient or clear enough to provide a good understanding of the operation and risks of the product concerned – not even for advisors and asset managers. If such products are to be offered to average private investors without the intermediation of an advisor or asset manager, an effort will first have to be made to ensure that the products are sufficiently comprehensible.

The findings and recommendations of the review are given in the report ‘Review of index trackers in 2012’. This report is a translation of the Dutch report ‘Onderzoek indextrackers 2012’. It should be noted that the report is translated into English as accurately as possible, but the Dutch text is prevalent. The AFM expects providers to assess both their current product offering and the product information that they make available in light of the findings and recommendations in the report, and to make adjustments where necessary. The AFM’s intention is that providers should adopt the recommendations of the AFM when developing products for, or offering products to, consumers in the Netherlands. The recommendations can assist advisers and asset managers in the selection of suitable products for their clients. Providers of execution-only services can use the recommendations in the selection of products suitable for offering via this channel.

If you have any questions or comments you can contact the Financial Markets Information Line on: 0800-5400 540 (free of charge).

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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