This is from a recent article in the Financial Times. It describes something that happened in the UK but is see the same problem here in the US. I deal weekly with smart people who have virtually no financial sophistication and who find themselves in a box from which they cannot escape. Unfortunately, they are often the same folks who rail against the need for financial regulation and consumer protections. Here it is…

In the summer of 2006, bankers at Barclays had an idea. Millions of their UK customers were approaching retirement and in need of a steady income. So the bank tied up with Morley, part of the insurer Aviva, to create two investment funds that could be sold to anyone who walked into a branch. The funds were labelled “cautious” and “balanced” and were marketed to people including pensioners as low-risk investments.

Fast forward two years to the height of the financial crisis, when the letters from customers started to roll in. Some had suffered falls of up to 40 per cent in a matter of months on an investment they thought was secure. Many had little experience of stock markets and knew nothing beyond what the adviser at their local branch had told them.

Anna Quick and her husband Geffrey, from East Preston on England’s south coast, were among the investors who lost money in a fund sold by Barclays as “balanced”. The couple invested more than £100,000 in the product, telling the bank in 2007 they wanted something that would pay them a monthly income in retirement.

When global stock markets started to spiral downwards, the couple made frantic but unfruitful phone calls to the bank from Australia, where they were visiting their daughter. On arriving home they found there was just £60,000 left in their fund. “I was always brought up to trust the bank – we’d been with Barclays since the early 1960s,” says Mrs Quick. “We knew nothing about investment. We just wanted a monthly income.”

This January, Barclays was fined a record £7.7m ($12.7m) for failing properly to explain the risks of these products to its customers. At least part of the problem, the authorities and many others believe, was the reassuring word that appeared in their name.

The approach of the financial industry towards marketing products to consumers is unsettling regulators from Hong Kong to London to New York. The global crisis exposed all sorts of hidden risks in products with safe-sounding names. So-called structured products, which offer a cut of any return on the stock market over a given period in return for some capital protection, frequently called themselves “guaranteed” despite relying on banks, such as the since-collapsed Lehman Brothers, to provide the return. “Cautious” funds turned out to have as much as 60 per cent in equities, which many consumers had not noticed.

Yet in the past couple of years, sales of these kinds of products have shot up. Cautious funds have topped the bestseller lists in the UK in the past 18 months. “Absolute return” funds, which aim to deliver a real return to investors in both bull and bear markets, have been gaining ground in the UK and the US as people seek to protect their capital against big losses. In fact, most such funds aim to produce only a real return over a three-year period, and some UK funds have lost 10 per cent or more in the past year.

These inflows are likely to prompt increased concerns after the renewed stock market slides of recent weeks. “By and large, people are given funds that don’t match their risk appetite – they want low risk and high growth but they can’t have both, so the adviser puts them in something higher risk and hopes for the best,” says Robert Morfee, a lawyer at Clarke Wilmott in Bristol who represents consumers who think they have been mis-sold investments.

It’s a buyer beware world out there. It has been for a long time and it’s not going away.