Death knell sounds for with-profit bonds - at lastPosted on: 01 March 2010 by Mark O'haire
Independent financial advisor Peter McGahan reveals the secrets behind the rip-off investment plans of profit bonds.
I am hoping that twelve years after writing my first column on with profit bonds that this will be one of my last. I faced heavy criticism from many about the initial articles, but thankfully the basic natural laws brought this contrived rip off 'investment' crashing to its knees.
The FSA were even guilty of this plan, referring to it as having 'smoothed' investment returns - a point they will be eternally embarrassed about.
It is difficult to know how much money is still wasting away in the compost that is known as with profits, but Norwich union (Aviva) alone detail their investments at over £50 billion. That is staggering and for the life of me I cannot see why £1 was ever invested into such a contrived bucket of twaddle.
Let's investigate. Firstly if commission for an investment bond was capped at 3% rather than the 8% these products can pay, less would be sold. In a couple of years when commission is thankfully banned, the level playing field will mean that advisers have no financial benefit from this commission quandary.
Second reason is very similar to the reason you, as investors are being sold structured or 'protected' investments. Many so called advisers are not comfortable with explaining what risk means to the investor.
A with profit bond simply hides risk by effectively 'lying' to you about the value of your plan. It is only when you actually ask what the surrender value will be that you will know what you have been put into.
'Advisers' often do not really want to explain risk as this may affect whether or not an investor will invest, which, as a commission based salesman, means they will not get paid.
If investors were explained how risk really works, and how it is beneficial to them, coupled with how returns are actually achieved with their investments over time, they would never ever invest in either a with profit bond, or a structured contract. The latter, I understand has over $41bn invested in them! I despair.
Customers are also lied to about how their investments are managed. When they invest, they are told they receive an 'extra allocation'.
If you have been subjected to this, it will look something like '103% of your capital will be invested'.
This is completely misleading and will be banned when the next FSA review is put into place within the next two-three years. This contrived process simply states you have more money invested and then it takes it back via an establishment charge over five years, just in time for 'with profit bond salesman' to come back again for their next round of commission.
Post the next review, your independent financial adviser will have to tell you exactly how you are charged.
Investors are also not explained to how a with profit bond actually works, and indeed how the market value reduction could actually affect them. I'll explain next week exactly how with profits do work.
Every investor is told (when I say told, it's a one line in a document they have to give you, but you'll never see it. In fact it's the ultimate get-out-clause for an adviser).
A market value reduction simply says that the firm can apply, at will, a penalty that will reduce the value of your investments. This simply means your returns are down to an actuary.
You'll be made to feel guilty by their marketing boys who say 'it's to protect other with profit policy holders' but in reality that's nonsense. It's to protect the actuary who may well have got his numbers wrong.
In the meantime, investors who took out with profits bonds in 2000 to 2002 and curdled £38.4 billion into with profits should not miss out on the ten year guarantee which allows them to exit their plan without an MVR.
Check your start date and ten year anniversary and go to a fee based independent financial adviser for advice.
For a free initial check on your with profit plan call Peter on 0845 230 9876, email firstname.lastname@example.org.
By Peter McGahan
Need Expert Advice?
Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email email@example.com.
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