Time to die, Mr Bond

Posted on: 21 October 2011 by Andrew Stallard

Andrew Stallard finds similarities between 007's action films and the financial services industry.

James BondChristmas isn't a traditional Christmas without slumping in front of an oft-repeated James Bond film on the TV. But have you ever noticed the similarities between the exploits of James Bond and the financial services industry? 

Both feature sharks and incomprehensible acronyms: in the world of OO7 films, SMERSH and SPECTRE, and in the world of financial products: MVA, MVR and one you will hear much more of in the next 445 days - RDR, or Retail Distribution Review to give it its full name. 

The Retail Distribution Review is part of a strategy by the Financial Services Authority to protect consumers - not from confusing acronyms, but from the far bigger problem of confusing and unfair charges. 

RDR aims to ensure customers are given clear and fair payment options for the advice they receive. This should spell the end for one of the worst and most oversold (in our opinion) financial products in the UK - the onshore Investment bond.

When you look for advice from an adviser, the product recommended should be the very best for tax, investment choice and flexibility. An investment bond is more like a 000 than a 007. An Investment bond attracts basic rate tax as it grows and potentially higher rate tax. In contrast, an ISA is tax efficient, returning you growth which is free of capital gains tax and is not subject to income tax. 

Investment bonds are hugely complicated and they feature unpleasant surprises such as exit penalties and Market Value Reductions (MVR) which are all different ways of saying you have lost money. 

Another pitfall is the huge commission paid to advisers. Perhaps not surprisingly the highest commission paying bonds seem to achieve the greatest number of sales - a licence to fleece, perhaps.

While an ISA might typically pay a financial adviser 3% in commission, an investment bond will often pay 7-9%. And it gets better… for the adviser. When the investment bond exit penalties expire, usually after five years, the commission driven adviser receives the green light to sell you another bond, generating yet more commission.

Investment bonds also offer you a little something called 'enhanced allocation'. Sounds good, right? Unfortunately not. Enhanced allocation is simply a way of disguising the charges and exit penalties above and is designed to keep you invested, which in turn allows the provider to recoup the commission they have paid to the adviser.

The RDR aims to put a stop to this stealth charging, so you know exactly what you are paying, and exactly what you are paying for.

Many people have told us that the “very nice” financial adviser in the bank they bought an investment bond from had not charged them for advice. Unfortunately all too often the adviser and the bank have received payment from the provider of the investment product, which has not been made clear to the client; instead, it is buried at the back of a lengthy document. 

These hidden fees compromise the independence of the advice. Once these products are examined closely, you can see that the advice is not free, but very expensive indeed. The RDR aims to outlaw commission payments on investment products, and make advisers charge a clear fee for the advice they give. 

So the good guys and gals of the FSA defeat the bond villains, save the day, and save your money?

If only it was that easy. 

With 445 days to go until the RDR deadline, we predict the goldfingered bond salesmen could be out in force during 2012, peddling their investment bond wares.

Many of these salesmen will not be able survive in the new post RDR world where every adviser must be more highly qualified and able to prove their continued commitment to professional development.

If you have an investment bond or are being sold one seek independent financial advice.

For a guide to the most efficient investment products call Andrew Stallard on 0845 230 9876, e-mail info@wwfp.net or take a look at our website wwfp.net.

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