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Inside Edge – Tony Kempster

In a Saturday FT article a couple of weeks ago, Stuart Fowler exhorted Ron Sandler to force the closure of all with-profits funds and insist those clients move their cash into other investment vehicles where they can see what exactly is happening to their money. He thinks this would be good for investor education and good for competition.

Of all the mad things I have heard or read about with-profits recently that is just about the maddest. The fact that Mr Fowler&#39s article is thoughtful and well reasoned does not take away from the madness of his conclusion.

It is a bit like sky diving with two parachutes and chucking away the second one because the first one did not work and therefore probably the second one will not work either.

It is typical of the more irrational conclusions doing the rounds on with-profits which then obscure some real truths that many IFAs and the more forward thinking product prov-iders might well sign up for.

For example, that the prov-iders need to work much harder at improving the transparency of their products or that the general level of investment expertise within the IFA community needs to continue to rise.

Fowler&#39s efforts to ridicule the work of the FSA to drive these kind of improvements across the industry serve to undermine the genuine efforts being made by many product providers to address the legitimate concerns of policyholders and advisers. Prudential has been working hard and we are already providing clearer explanations of the smoothing mechanism, developing transparent fund charging structures and ensuring clearer disclosure to customers about what they have been advised to buy. You might be surprised to learn that we might well sign up for a third-party review of how we manage clients&#39 money invested in the with-profits fund. At the core of this debate is the key issue of whether the with-profits smoothing mechanism meets the real needs of real customers. What is missing from much of the criticism is an understanding of those needs.

It is clear that in a low-interest, low-inflation environment, even risk-averse customers will seek to find ways other than simply putting their money on deposit to secure higher ret-urns. However, the volatility of share price movements in recent years has leapt dramatically and the vast majority of such customers have no app-etite for exposing all their life savings to the rollercoaster movements of equities.

Having a major financial institution smooth out the peaks and troughs in exposed investment returns is an attractive option for many of them. Hence, the growing market share of with-profits investment vehicles and the continuing high level of sales despite the usually ill-informed negative publicity we see so much of.

There is no doubt that many advisers appreciate the role that with-profits can play in their overall financial planning for clients but that they also recognise the need to understand at a deeper level how with-profits operates.

We need to tackle the objections and negativity used to talk down with-profits and work together to restore confidence in the market. One of the most useful things we can do bet-ween us is to dispel the myth that those who promote with-profits do so to the exclusion of all else. With-profits is a potentially important element within a balanced portfolio. In these turbulent and increasingly volatile times it&#39s likely to be a more important element in future, not less important.

Tony Kempster is director of Prudential UK Intermediaries

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