Those ISA claims ain't necessarily so

It is hard to walk down the street, catch the Tube, open a paper or switch on the TV at the moment without being bombar-ded with adverts for individual savings accounts (ISAs).

It is hard to walk down the street, catch the Tube, open a paper or switch on the TV at the moment without being bombar-ded with adverts for individual savings accounts (ISAs).

For those of us who haven't yet used up this year's tax-free ISA allowance - £7,000 - and are wondering where to invest before the 5 April deadline, it can be confusing. Many of us are in danger of making choices on the basis of these adverts. But how do we read between the lines of misleading ads?

The first point to remember is that just because a fund management company has spent a lot of money on advertising, it doesn't mean its ISA is necessarily the one for you. Bigger houses can afford to throw millions of pounds at ad campaigns but this has no bearing on the quality of fund. Often the most prolific are advertising on the back of a good year - so they can boast about last year's performance or ranking, compared with rivals.

While past performance is no guarantee of future returns, it is widely used to promote ISAs because many investors rely on it when choosing a fund. Ads often quote impressive returns over one year or estimated annual yields which seem too good to miss. Past performance can be taken into consideration but shouldn't be the only factor in a decision.

The trouble is that investors often seem obsessed with how well a fund has done. "Consum- ers like to know what the past performance of a fund is," says a spokeswoman for the Financial Services Authority (FSA). "Any talk that we are thinking of abolishing past performance in advertising is not true." An FSA taskforce is currently looking at past performance and how it is used in advertising. It is due to report in the summer.

"The public will always buy what is at the top of the charts," says Don Clark, managing director of discount broker Torquil Clark. "But though numbers aren't everything, we will never get away from the phenomenon of people investing in bull markets and avoiding bear markets, when it should be the other way round."

Buying last year's best performer could mean you end up with high-risk investments in your portfolio. To perform really well in a single year, a fund needs to take on a significant amount of risk, so it can go down just as fast as it went up - just look at technology funds.

Choosing each year's ISA in isolation is not the best way to organise your investments either. It is essential to consider your existing investments and take into account your risk profile. It is worth reading as many articles as you can for guidance. The Independent on Sunday has also issued one of the few free, true independent guides (see below).

One of the traps investors fall into is following the investment "guides" which drop out of some newspapers or are mailed to you at home and are little more than advertising for specific funds. One Sunday paper was forced to apologise to readers last week after a reporter wrote the forward to such a guide, which gave the impression that it was endorsing the ISA selection.

As fund managers have to pay to be included in these guides, there is no independence, argues Mr Clark. "Insurance companies and fund managers pay small fortunes to a discount broker in order to be included in the pseudo-guide," he says. "Typically, each fund manager pays £70,000, although the amount does vary somewhat."

When choosing your ISA, there are steps you can take to make sure you don't fall for the most common scams. The five-year growth performance figure must appear somewhere in the advert but is usually relegated to the small print. Compare it with the headline figure, which is often the performance between two carefully selected dates and will undoubtedly be much more impressive.

Be wary of any fund which is billed as a "top performer" in case it compares the ISA with only a small selection of rival firms. Funds ranked "first" may just refer to the quartile - again, check the small print.

Even worse are adverts which fail to compare figures with any rival, which should sound warning bells.

Just because a company says it is "Britain's best-selling ISA manager" does not make it any better than its rivals. Lots of people may be buying the fund but it doesn't automatically make it suitable for you or guarantee good performance. Use ads as a starting point for further research.

* The 'IoS' has produced a free guide to ISAs in association with The ISA Shop. The booklet, written by Melanie Bien, personal finance editor, is available on 0115 958 7555 (quoting ref IND). Or send a postcard with your name and address to: The ISA Shop Ltd, Freepost Mid 17891, Nottingham NG1 6YA (quoting ref IND).