Advisers have expressed frustration at the wildly differing growth rates used by providers when estimating returns from different asset classes.
CTC Software’s annual market review of growth rates shows the breadth of expected returns produced by 40 insurers, Sipp and wealth management firms.
The FCA tells investment, life and pension providers how they calculate the potential future value of savings. In April 2014 these were set for pensions and Isas at 2 per cent, 5 per cent and 8 per cent for low, mid and high projected returns.
However, the report shows the difference between the lowest and highest mid-rates quoted by providers is typically around 3 or 4 percentage points for each asset class, growing to 5 percentage points for cash.
Advisers say consistency is needed across the market to allow meaningful comparison.
Meldon & Co managing director Mark Meldon says: “Nominal returns have always confused consumers and their advisers. We need to use projected real returns after inflation and we need to be mindful of a difficult few years ahead.”
Meldon suggests focusing on charges instead of future returns.
He says: “The problem is if you are trying to work out standardised project rates for Sipps you’re herding cats and every portfolio will be different unless you use model portfolios. The only thing you can measure accurately going forward is the cost of running the portfolio, that’s a much more meaningful figure than projections.”
David Michael Financial Services managing director David Bunyan agrees providers’ differing stances are frustrating.
He says: “The problem is some providers use FCA standard growth rates and some don’t. It’s more helpful when providers give their own projections because over the long-term it is unlikely returns will match FCA standard figures. It’s frustrating when you’re doing comparison for clients to get different growth rates.”
The survey shows Sipp providers are much more likely than insurers to use the 5 per cent mid-point growth rate as a standard across all asset classes.
Report author and CTC managing director Nigel Chambers warns: “Although this may be understandable at the point of a new business application where no indication of investments has been obtained, it does not seem to tie in with the FCA’s view that a Sipp administrator needs to understand the underlying investments in a client’s portfolio.”
The highest mid-rate quoted by providers was 8 per cent for equity and property, which Chambers adds is “out of step with the market generally”.
He says: “In any customer journey the use of consistent assumptions and calculations can reduce the possibility of late confusion when the formal key features illustrations are produced.
“In a world where there are an increasing number of execution-only clients, with no intermediary standing between the client and the providers, this becomes even more important.”