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Friends Provident International mixes it with unit-linked bond

Type: Unit-linked bond

Aim: Growth by investing in a choice of with-profit fund (series 5),
managed, UK index tracker, open managed portfolio, international
stewardship, UK equity growth, stewardship ethical, global equity,
North American growth, European growth, Far East growth, fixed
interest, cash deposit, protected global growth, secure growth
portfolio, balanced portfolio, managed portfolio and growth portfolio

Minimum investment: Lump sum £5,000

Place of registration: Guernsey

Investment choice: Choice of with profit-fund (series 5), managed, UK
index tracker, open managed portfolio, international stewardship, UK
equity growth, stewardship ethical, global equity, North American
growth, European growth, Far East growth, fixed interest, cash
deposit, protected global growth, secure growth portfolio, balanced
portfolio, managed portfolio and growth portfolio

Charges: Reward option &#45 initial 6%, annual 1 &#45 1.25%, loyalty option
&#45 annual 1- 1.25%

Bonus rate: 0.5% a year after year five and 2% on tenth anniversary

Commission: Choice of initial 5.25%, initial 4.25%, renewal 0.25% or
initial 3.25%, renewal 0.5%

Tel: 01722 311611

BROKER PANEL

Michael Both, proprietor, Michael Philips, Godfrey Bloom, research
director, TBO Corporate Benefit Consultants, David Cuthbert,
corporate sales manager, Russell Plaice and Partners, Steve Laird,
senior partner, Laird Financial Planning, Bruce Macfarlane, partner,
Capital Trust Financial Management

BROKER RATINGS

Flexibility 6.2

Bonus rate 2.4

Company&#39s reputation 6.2

Past performance 5.8

Charges 5.4

Commission 5.4

Product literature 7.0

International investment bond is a Guernsey-based unit-linked bond,
which is aimed at non-UK residents. It is designed for growth by
investing in a range of actively managed funds, tracker funds and
ethical funds from a variety of sectors.

The panel first assess how the bond fits into the market. Macfarlane
says it is plain vanilla and little different from other similar bonds. On
this basis he thinks it will slot in but not make any impact. Both says:
“It is unusual in that it offers a with-profits fund to the offshore market.
A choice of charging structures is good, although it might struggle to
fit in with Sandler&#39s recommendations.” Bloom and Cuthbert think
that because the bond is for non-UK residents, the market is
probably limited for brokers who do not have offshore clients. Laird
says: “It appears to be a straight replacement for the existing offering
with a few tweaks here and there.”

Commenting on the type of client for whom the bond is suitable Both
says: “The more passive offshore investor, who still has faith in
with-profits funds.” Macfarlane considers investors with varying
attitudes to risk. Bloom says: “Expatriate clients seeking a traditional
bond utilising offshore advantages, like tax-free investment roll up.”
Cuthbert says: “Capital rich expatriates and foreign nationals living
outside the UK.”

Moving on to the sorts of marketing opportunities the bond will
provide Bloom says: “Friends Provident International has a good
name and expatriates should find this a useful product.” Macfarlane
thinks very few because it is much like all the other bonds and it is
just a revamp of the old contract. Laird says: “We are in the process
of expanding our business with expatriates, but this product is not
attractive enough to encourage us to market it specifically.” Both says
the Sandler review of insurance bond taxation will not increase its
marketability. However, Cuthbert says: “Clients who are about to
move abroad for some years or clients who may decide to retire
abroad.”

The panel consider the main useful features and strong points of the
bond. Bloom says: “Access to offshore with-profits funds is
sometimes limited, so a with-profits option is a strong
recommendation, notwithstanding ill-informed media coverage and
regulatory criticism of the genre.” Laird says: “Clients have the choice
of paying an upfront charge or spreading the charge over the life of
the investment. The choice of four model portfolios will be attractive to
some.” Cuthbert highlights the tax-free growth on funds and a good
range of investment portfolios and funds. Both says: “The with-profits
fund is the only special feature, everything else is distinctly run of the
mill.” Macfarlane favours the two different charging structures and the
loyalty bonus option.

Turning to the bond&#39s bonus rates Cuthbert says: “I can&#39t comment on
with-profits bonus rates as they are not shown in the literature.” Both
says the massive uncertainty over equity values and interest rates
means that future rates can only be a wild guess. Macfarlane says:
“Should the investor choose the loyalty option charging structure, a
loyalty bonus payable after five and ten years has been designed to
take the bad look off the excessively high charging structure.” Bloom
thinks it is too early to make a judgement. Laird says: “About average
for an offshore with-profits fund. According to the website, the series
1 offshore with-profits fund achieved 37.6 per cent growth over the
past five years &#45 I doubt it!”

The panel next consider the bond&#39s disadvantages. Both says: “The
less than clear charging structure, narrow choice of external funds
(via the open manager portfolio fund only) and the lack of brand
awareness in the offshore market.” Macfarlane reckons the bond has
nothing new to offer and would be expensive on early encashment.
Laird says: “If you&#39ve invested in the protected global growth fund you
may, in exceptional circumstances, have to wait up to three months to
receive the proceeds of any encashment and there are no other
external fund choices apart from this one.” Bloom and Cuthbert think
the main one is that it is not available to UK residents.

Looking at the flexibility offered by the bond, Cuthbert says it is about
par for the course, while Both says: “It is unusually poor for an
offshore bond, especially now that Friends Provident has bought the
Royal & SunAlliance brand, which includes some extremely flexible
plans.” Laird thinks flexibility is improved because up to 999
clustered policies are available and there are now 12 free switches a
year. Bloom says: “It is not as flexible in the range of funds as some
bonds, but I would think it is adequate for most clients.” Macfarlane
finds the fund diversity and switching excellent, but says the high exit
penalties reduce flexibility.

Friends Provident International&#39s reputation is under the spotlight
next. Both says: “Far less known than most of the existing players, it
needs to do something special to enlarge its niche and this isn&#39t the
product to do it.” Laird says: “It wouldn&#39t be my first choice of offshore
life company. I hope the acquisition of Royal & SunAlliance
International will change it for the better.” Bloom says: “It doesn&#39t
really have one yet! Cuthbert says it is a good company.

The panel next comment on Friends Provident International&#39s past
performance record. Both feels it is mediocre at best, based on
Standard & Poor&#39s consistency data. Cuthbert and Macfarlane say it
is particularly good in the ethical sector. Laird thinks it is dismal,
citing the example of its managed fund which is fourth quartile over
the past three years.

When asked which products they see as the main competition to this
bond, the panel mention the bonds from Royal Skandia, Canada Life
International, Clerical Medical International, the Former Royal &
SunAliance International products, Scottish Equitable International,
Axa International, Norwich Union International, Pan Euro Life
The bond&#39s charges are analysed next. Both thinks they are a little on
the high side. Cuthbert agrees, especially when compared to UK
investment bonds. Macfarlane says the reward option is especially
punitive with a high initial charge and early encashment charge.
However, Bloom thinks they are competitive except for the
discontinuance charge, which newer providers like Pan Euro Life do
not charge. Laird says they are at the lower end of the offshore
spectrum.

The panel then move on to the commission structure of the bond.
Both says: “There is a good range of options, although it would be
better if we could agree terms with the client and have the provider
adhere to them. For example, a fixed initial fee and agreed
fund-based renewal commission.” Bloom and Laird think the
commission is fair and reasonable. However, Macfarlane says:
“Commission on the contract is too high, bearing in mind current
market conditions. But commission can be rebated to enhance a
client&#39s investment.”

Finally, the panel give their opinions on the product literature. Both
says it is less than expansive. Macfarlane thinks it is the best part of
the package, well presented and attractive. Bloom says: “It is high
quality but slightly old fashioned.” Cuthbert thinks it is well set out,
clear, easy to understand and quite attractive. Laird says: “There&#39s a
lot of red in it. I felt I was reading a Labour Party manifesto. It&#39s well
laid out and reasonably clear, though.”

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