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Get ready for the new bond

IFAs need to be prepared for a new generation of with-profits products

Does the recent launch of the Liverpool Victoria new generation with-profits all-in-one investment bond mark the end of with-profits or a new beginning? If a company with such a successful track record in this market believes it needs to revamp its product, then this could be a turning point.

The most attractive feature of the new Liverpool Victoria product is the ability to buy five-year capital guarantees at times that suit the investor. Someone investing for 20 years might well decide that they can sit out the ups and downs of the stock market for the first 15 years, opting to protect their accumulated investment against a last minute downturn in the market by buying a guarantee for the last five years.

The second attractive feature is the ability to switch between cautious, balanced and growth fund – something which is not on offer from traditional with-profits investments. Indeed, the vast majority of holders of with-profits investments have little or no idea what investments back their policies.

Many would be horrified to discover that the exposure to equities in many with-profits funds, in particular the closed funds, is little or nothing. The whole point of a with-profits investment is that it provides a return better than cash on deposit, without the roller-coaster ride generally associated with equities.

The guarantees and the choice of investment profiles and targets are attractive features of the new Liverpool Victoria product. But will the investors make good use of them? Probably not but since these new generation with-profits products are likely to be sold through intermediaries, it will be up to the IFA to keep a watch on the investors’ best interests and decide when it might be appropriate to switch funds, or buy a guarantee.

The next question is, will these new products do better than the traditional with-profits investments in the long term and should clients switch? It is estimated that up to 11 million investors and more than 160bn is still invested in traditional with-profits funds, much of which may never have been reviewed since the initial investment was made.

But it is not just a question of relative performance. The reputation of traditional with-profits products has been almost irretrievably damaged by the mortgage endowment debacle, the collapse of Equitable Life and the closing of many with-profits funds to new business, locking in reluctant investors who suffer a big penalty for wanting their money back.

According to a survey by Datamonitor, between 2000-2004 with-profits bond new business declined at a compound rate of 42 per cent, bringing down the majority of the with-profits market with it. Although the rate of decline has fallen, with a year-on-year fall of 46 per cent in 2003-2004 compared with 76 per cent in 2002-2003, this is largely because there is little room left for the market to fall.

This huge decline reflects investors disappointment at the way their investment has performed and the way in which MVRs have been applied and it will be difficult, if not impossible, to restore confidence in old-style with-profits products.

The decline of the with-profits market has resulted in several new products being developed as replacements, including distribution bonds, structured products linked to the stockmarket using CPPI, target return funds as well as new generation with-profits products such as the Liverpool Vic offering.

Whether or not these new products take the place of traditional with-profits, only time will tell. One thing is certain, these products are no easier to understand than traditional with-profits and investors will need good advice on whether or not to purchase. IFAs will need to be clued up on the relative merits of old v new.

Money Marketing50 Poland Street, London W1F 7AX

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