Following the introduction of Friends Provident's Homebuyer mortgage endowment, we asked our broker panel to compare it with two existing products, Home Purchaser from Scottish Amicable and Homeplan from Standard Life.
Looking at how well the Friends Provident product fits into the market compared with the other plans, Riach says: “Unfavourable media comments relating to mortgage endowment policies have led many of my clients to utilise Isa mortgage contracts. However, I still believe endowments are suitable mortgage repayment policies as long as the client fully understands endowment illustrations and projected growth rates and is prepared to take action in response to the insurance companies' policy review recommendations.
“I do not believe the Friends Provident endowment plan is any more suitable than the Standard Life and Scottish Amicable products.”
Buckingham says: “For homebuyers and mortgage borrowers who express a preference for low-cost endowments, yet wish to keep costs down, the Friends Provident product compares well. It will also appeal to those who wish to take advantage of the comprehensive income protection benefits option.
“However, in other respects, I do not feel it is on par with Scottish Amicable's and Standard Life's products because it is more restrictive.”
Kemp says: “Friends Provident's new endowment mortgage is very suitable for the market. It is much improved on the company's last one and maintains Friends Provident's position as one of the leading companies in this area. However, the traditional market is shrinking rapidly and extra features may be the key to maintaining market share. Scottish Amicable is well ahead on this basis but Standard Life is well behind.”
Temple says: “The Friends Provident mortgage endowment has been designed with current publicity about the topic in mind. The plan has a minimum term of 15 years andcannot be taken out past state retirement age, therefore avoiding short-term plans for older clients which are more likely to require an unachievable yield.”
Looking at the types of marketing opportunities that the products provide, Buckingham says: “One example of marketing opportunities is the cost. I obtained an illustration from each company based on joint borrowers aged 30 next birthday, both non-smokers, borrowing £100,000 over 25 years, including critical-illness benefit. Friends Provident is the cheapest at £189.90 a month compared with Scottish Amicable at £195.50 and Standard Life at £208.40.”
Riach does not believe the Friends Provident plan offers any additional marketing opportunities, while Kemp says: “Friends Provident has very much focused on fulfilling the Government guidelines on endowments. However, endowments are generally mistrusted and we do not believe that there are any good marketing opportunities at present.”
Evaluating how the structure and flexibility of the Friends Provident plan compares with the others, Buckingham thinks it comes a poor third. He says: “The review options do not seem so good. In addition, the minimum £15,000 sum assured could mean Friends Provident misses out when borrowers are looking for a more modest top-up to an existing low-cost endowment package.”
Temple says: “The Friends Provident plan is a level-charged plan very similar to Standard Life. Only with-profits is available as an investment choice whereas Scottish Amicable offers a wide range of its own funds and external fund links. Standard Life also offers a good range of its own funds.”
Kemp says: “The structure of the Friends Provident plan is very good – better than Standard Life. The level-costed structure is much cheaper than the old initial-costed structure. However, Friends does not offer the payment flexibility that Scottish Amicable offers.
“Friends Provident does not have the fund links that Scottish Amicable offers and, therefore, lacks the innovation that has made Scottish Amicable the market leader.”
Turning to the strong points and useful features of the contracts, Temple says: “The Friends product is a simple low-cost endowment based on a reasonable rate of return from with-profits investment. A wide range of additional cover is available, including serious illness, disability, waiver of contribution, income protection and hospitalisation benefit.”
Riach says: “All three contracts appear to be reasonably flexible and it is good to see that all three also offer non-smoker rates. Friends Provident allocates bonus units after the plan has been in force for five years. Another strong point is that Friends allows annual premiums to be paid by cheque, as this option can be useful for the client who does not have an account that accepts direct debits.”
Kemp says: “The strong points of the Friends Provident plan include the with-profits past performance and the cost. Both of these have been hallmarks at the company. However, in performance terms, Standard Life is not far behind and Scottish Amicable tends to be more competitive on costs.”
Assessing the drawbacks of the Friends product compared with the other two, Buckingham says: “There is no low-start option, no clustering and no unit-linked option. All these are major drawbacks. I feel it is a great shame that higher-risk, higher-potential-reward funds are excluded. The minimum £15,000 sum assured will exclude many potential top-up borrowers. Also, the age limits and free cover features do not appear to be as favourable as Standard Life and Scottish Amicable's products.”
Riach says: “The Friends Provident policy does not offer any fund choice other than with-profits. Also, unlike Standard Life and Scottish Amicable, the Friends policy does not offer clients a low-start option. This can be a valuable option.
“Only Scottish Amicable offers an option to add the critical-illness cover at a later date. I would like to see this option added to all contracts. The Friends policy has a maximum age at entry of 50 and the maximum expiry date age is 65. This will limit applications for older clients who have mortgages beyond age 65.”
Comparing the reputations of the three companies, Buckingham says: “All three are regarded highly. However, Standard Life appears to be receiving unfavourable publicity due to the recent battle over demutualisation. This could give a comparative advantage to the other two.”
Riach says: “All three companies have excellent long-term reputations as providers of this type of product and all three are household names. They also have superior long-term investment records. Most clients will have heard of these companies and should be comfortable with arranging a policy with them.”
Asked whether the Friends Provident product is likely to generate more demand from clients than the other two plans, Temple says: “I think the Friends Provident product has a good range of cover available and gives a simple investment together with charging structure. It may be in demand for clients wishing for a simple investment-backed mortgage product. The product would appeal to lower-risk clients who require a full package of cover incorporated in one payment.”
But Kemp says: “There is very little demand for endowments at present and they tend to be sold rather than bought. I do not believe the Friends Provident endowment will generate any more demand from clients. However, it may generate demand from advisers.”
Riach says: “I do not believe the Friends Provident contract will generate more demand than the other two companies.”
Evaluating how the product literature and sales aids for the three products compare, Temple says: “Friends Provident's literature is rather bland although the client booklet is easy to read. More explanation of the assumed growth rate and how the money is invested would be helpful. It compares well with the literature from Standard Life and Scottish Amicable.”
Kemp says: “Friends provides excellent product literature and this is as clear as the literature provided by Standard Life and Scottish Amicable. Friends Provident also has very good sales aids – far better than the other two.”
Buckingham says: “Friends' literature is pleasant but maybe not as emotive as that provided by Scottish Amicable nor as substantial as that from Standard Life. Through necessity, all three providers have application forms that seem as daunting as income tax returns and they all prove very difficult for clients to complete without the help of an IFA.”
To sum up, Kemp says: “Friends Provident obviously sees this endowment fitting between repayment and Isa mortgages, with a low-cost with-profits fund designed to repay loans. It also offers a full flexible package of cover.”
Paul Temple, managing director, Paul Temple Financial Services,
Dan Kemp, financial adviser, Holden Meehan,
Geoff Buckingham, chairman, G Buckingham & Co,
Bob Riach, proprietor, Riach Independent Financial Advisers.