The woes of Woodford Investment Management have been well chronicled by Financial Planning Today and others. I will not repeat them hear suffice to say that the curtain is coming down on a painful episode in fund management, as Mr Woodford described it himself.

The failure of the firm will obviously create negative currents in the investment pool for some time to come but will investors learn their lesson? Maybe. Will some shun funds for a good while to come? Possibly.

The coverage of the failure was considerable and I was intrigued to read several stories in the national newspapers of smaller investors who had placed a few thousand and in some cases tens of thousands in the care of Woodford's funds.

Some were long term fans, part of the 'Woodford can do no wrong' club. Some had been recommended to invest by financial advisers and others were beguiled by the impressive support from firms like Hargreaves Lansdown. All of these now have questions to answer.

As planners and paraplanners well know, Woodford is not the first firm to pull down the shutters and it will not be the last. Investing is risky, that's part of the deal.

At the root of it all, however, is not just a poor understanding of the risks of investing, which many smaller investors seem, apparently, to have little appreciation of, but a seeming failure of due diligence by both advisers and investors.

I am beginning to think many smaller investors believe the biggest risk they take is only that their fund might drop a bit only to recover again a few years later. Defining a bit is a tough one. Some might say 10% would be bad news, others are braced for a 25% loss. At a recent Financial Planning conference I attended a 'disaster' scenario would be a 50% portfolio loss and many years of recovery. Defining capacity for loss is always going to be a tough one.

In the case of Woodford investors it will take them many months or even potentially a year or two to get what's left of their money back. Some have already lost 40% from the peak of Woodford funds. Overall I believe many could lost 50% or more once time out of the market is taken into account. This will hurt and many will change their strategies.

I've no doubt the FCA will be looking closely into what went wrong at Woodford and, just as importantly, what could go wrong at other fund managers. Are there risks we still have little understanding of - these are questions the FCA should be asking to avoid a repeat of Woodford? 

The sorry Woodford saga is one the financial sector can learn much from. Opaque funds, volatile performance, illiquidity and a 'star' approach to fund management should all set off the alarms. Sadly many ignored the warning signs.

• I'm on leave for a week or so celebrating our 30th wedding anniversary so this column will be taking a short, but well-earned, break in the sunshine and yes it's not in the UK! I'll be back at the end of October. While I'm away, don't forget to check out our new subscription packages offering access to a wider range of services including our new print magazine. Sign up for our daily newsletters for details of a special introductory offer.

Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience.  This topical comment on the Financial Planning news appears most weeks.

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