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A switch in time

O&M Systems director Graham Miller’s warning that advi-sers should cover their backs by reviewing all their with-profits policies with a view to switching has met with gen-eral agreement but it has also raised questions over how to judge what course of action will benefit the client most.

The FSA would not comment specifically on with-profits but it expects firms to abide by the principles of treating customers fairly at all times.

Beachcroft Wansborough managing director Richard Hobbs says there is nothing definite in the FSA rulebook regarding exactly what to do with with-profits policies but it could be argued that the FSA’s TCF rules could apply to a situation where an adviser did not keep a client up to date with potential changes to with-profits policies.

Hobbs says: “It is incumbent on every adviser to keep the needs of clients under active review and any self-res-pecting adviser should want to keep a review system in place for their client’s interests as well as added remuneration.”

But Hobbs warns that swit-ching business on the grounds that you believe other forms of investment will outper- form is a major step not to be taken lightly.

He says that with de-risked closed funds, it is quite easy to work out whether money can be better placed, for example, compared with cash, but as there is a wide range of performances likely for with-profits, future performance is hard to forecast.

Hobbs also says future returns are just one factor, with the overriding factor being the circumstances of the individual and their investment needs.

Worldwide Financial Planning IFA John Shackleton says there are many considerations over the issue of switching with-profits policies but str- esses the difficulty of reviewing every client, especially with GPP clients, where work would be very labour-intensive.

Shackleton says the firm regularly reviews the with-profits policies of bigger clients and produces factsheets for ,smaller clients about the pros and cons of switching.

But he does not believe that switching should be a blanket decision as it depends on cli- ent risk and lifestyle. He says: “The adviser has to work out how the client has been engaged by the adviser. Are you providing ongoing advice or just selling products?”

Thinc financial planning director Patrick Murphy bel-ieves there is no choice in the matter and there is a very good chance that an adviser who is not reviewing a client’s with-profits policies could be seen to be negligent.

Murphy says it is vitally important to review the underlying investments of the pol- icies to see if a client’s needs are being met. He also says that client worries about paying the MVA are often unfounded and it is normally easy to convince clients of the financial advantages of switching out of with- profits policies.

Murphy says: “The reality is that bonuses on with-profits policies are going to remain low for many years. The MVA is not really a penalty as it shows the underlying value of the fund and enables clients to increase profits by moving to another fund.”

Bestinvest investment manager Justin Modray disagrees about the effect the MVA has on the decision to switch. He says: “The outlook is pretty bleak for many with-profits funds as they have little exposure to the stockmarket and so will not benefit from any turn-round. But generally clients do not want to suffer the MVA exit penalty. It is human nature.”

Modray says every with-profits policy must be reviewed and says the firm is estimating how well a fund has done based on the surrender value v ano-ther balanced fund.

He says the big problem is that with-profits policies are opaque so differences are hard to judge. He says his firm, as a policy, does not tell clients what to do but gives them the facts and leaves it up to them.

Modray says there is more potential for misselling if adv-isers move clients out of with- profits en masse without costing the move properly.

From a provider’s viewpoint, Aegon UK director of industry development Ken Hogg says this sort of check should form part of an adviser’s ongoing review of clients anyway. He says Aegon has recently launched a tool to allow advisers to check whe-ther policies meet client objectives, acknowledging the pot-ential problems ahead.

Hogg says Aegon’s next generation with-profits policies have been designed to be more transparent to ensure that customers get “exactly what it says on the tin”.

Standard Life marketing managing director Simon Douglas says advisers should regularly review with-profits policies as their investment mix will change from time to time.

But Douglas also brings up the issue of the expense of switching out of a with-profits fund. He says: “It is often cheaper for the client and more convenient for the IFA to simply adjust the mix of other assets held by their client to achieve the desired outcome at a portfolio level.”

But 1st Software executive chairman Rory Curran says the emergence of wrap platforms could be an added incentive for advisers switching from with- profits policies, eclipsing the problems of having to pay an up-front MVA. He says the transparency and freedom to change asset allocation in wraps can be used to justify to the client the fact that they have to pay the exit penalty.

He says: “With-profits policies leave the client stuck in a rigid inflexible system while moving client money out of with-profits into a wrap gives greater freedom to the client as well as increased remuneration for the adviser.”

IFAs may feel that they are damned if they do and damned if they don’t but whatever course of action they take, they must be able to show that they have addressed the issue.

Fund NameS&P Fund1 yr3 yrStars%%

New Star UK Strategic IncomeJJJ31.985.02Schroder Inst European Sml CosJJJ30.2125.90New Star Hidden Value Ptfl BJJJJJ29.3044.46MW Joint Investors Smaller CoJJJJ27.7936.96Threadneedle Eur Sm Cos Gth 1JJJJJ27.2559.52CF Ruffer European 26.90N/A

Nucleus Sm Securities TrustJJ26.8716.51Merrill Lynch UK Sm Cos IncJJJJ26.8746.24Framlington UK Sm Cos IncJJJJJ26.8673.50First State Brit SmallerCos AJJJJJ26.0082.64Average3.775.09Fund NameS&P Fund1 yr3 yrStars%%

ELIT Zero 2008 1833.33-53.23Zero Preference Growth-Grth 426.4913.57New Fulcrum-OrdJJJJJ234.71199.06Framlington Second Dual -OrdJJJJJ222.71401.59Royal London UK Eq&Inc OrdJJJ189.47-80.07Ecofin Water & Power Opps-Cap 175.1974.88Premium Trust-CapJJJJJ150.00-23.08Murray Extra Return-Inc 143.3633.48BFS Inc & Grth Zero 138.5416.45Income & Growth Tst-Inc 122.0062.36Average27.0928.93Fund NameS&P Fund1 yr3 yrStars%%

Skandia/Odin NorwayJJJJJ39.4460.17Norwich Union JPMF Euro SC 4 31.21N/A

Norwich Union Thrndl Eur SC 4 31.16N/A

Norwich Union ML UK Sm Cos 4 29.59N/A

Skandia/Odin NordenJJJJJ29.5163.93Norwich Union INV Per Eu SC 4 29.21N/A

Norwich Union Thrndl Eur SC 3JJJJJ28.2852.18Norwich Union JPMF Euro SC 3JJJJJ28.2643.24Norwich Union ML UK Sm Cos 3JJJJ26.9241.32Norwich Union INV Per Eu SC 3JJJJ26.3027.70Average3.072.08Fund NameS&P Fund1 yr3 yrStars%%

Skandia/Merrill Lynch UK Ssp 37.52N/A

Skandia/OldMut UK Se Sm C SP 34.83N/A

Skandia/Schroder Eu Sm Co SP 33.27N/A

SW Merrill Lynch UK Smll Co 2JJJJJ32.1054.50Skandia/INVPerp Euro Sm C SP 31.91N/A

Skandia/Artemis UK Sm Cos SP 31.26N/A

Skandia/Henderson Euro Sm SP 30.72N/A

Zurich European Smaller Cos 30.69N/A

Skandia/Merrill Lynch UK Sm CJJJJ29.7146.97Skandia/Aberdeen Prop Sh SP 29.29N/A

Average5.524.92

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