MONTHLY FIXED INCOME PLAN
Type: Guaranteed equity bond
Aim: Income linked to the FTSE 100 index
Minimum-maximum investment: £3,000-no maximum, Isa £3,000-£7,000
Term: Five years
Guarantee: Original capital returned in full provided the FTSE 100 does not fall by more than 30% and returns to at least its starting level
Return: 0.47% income a month, Isa 5.75% income a year, 31.28% rolled up income at end of term
Closing date: September 15, 2003
Commission: Initial 3%
Tel: 0845 6072439
The panel: Gillian Colsell, Financial adviser, Capital Planning UK,
Julian Melling, Investment consultant, Clearwater Financial Services (Isle of Man),
Peter Pickup, Principal, Peter Pickup IFA
Suitability to market 7.0
Company's reputation 7.7
Product literature 6.3
The Norwich Union monthly fixed income plan is a FTSE 100-linked guaranteed equity bond that is also available as an Isa. It provides a choice of monthly, annual or rolled up income over a five-year term, but annual income is only offered through an Isa.
Looking at how the bond fits into the market Pickup says: “Clients seeking a fixed income and who are prepared to take a risk with their capital.” Colsell says: “There are a number of income plans on the market giving a regular income stream where the capital return is linked to an index or indices. I feel the risk return ratio is not particularly attractive. Why link your capital to the stockmarket for a return of only 5.45 per cent a year?” Melling says: “The plan provides a fixed income for five years. As long as the FTSE 100 does not fall 30 per cent below the initial level and not recover, capital is returned at the end of the term.”
Highlighting suitable clients for the product Melling says: “The plan is suitable for clients who require the income level the product offers, but who understand the risks associated with it and do not require access to their capital during the term.” Pickup goes for existing customers taking an income from an alternative product and retired clients looking to increase their income.
Colsell says: “The client who will buy the product probably falls into two categories. Firstly, those who have been disappointed by poor returns on previous fixed income or growth plans. Secondly, those seeking a better return than building societies currently provide, especially those requiring regular monthly income. It is not so attractive for 40 per cent taxpayers who would be better placed taking a growth rather than an income option.”
Discussing the potential marketing opportunities for the bond Colsell suggests targeting retired people or those at the point of retirement to complement pension provision. Pickup thinks the product could be marketed at existing Isa and Pep transfer customers, clients with post office income bonds and retired clients. Melling says: “With cash rates at a low and uncertainty in bond markets, the plan may appal to those trying to maintain income levels and who are willing to take higher risks in doing so.”
The panel draw out the main useful features and strong points of the plan. Pickup mentions the provision of fixed income above normal interest rates. He also says the returns can be tax free through the Isa, it is relatively low risk and provides income over five years. Colsell says: “It is unlikely that the FTSE 100 will be lower at the end of the five-year term than it is today and even if it was, the investment would only experience a 1 per cent reduction for each 1 per cent fall in value. Strong points are the provision of monthly or annual income or income all at the end.”
Melling says: “The plan can be held as an Isa for tax efficiency. The terms are simple - if the FTSE 100 drops below 30 per cent of the initial level and does not recover the by the end of the term, you are not going to get all your capital back. Income can also be rolled up.”
Turning to the drawbacks of the plan Colsell says: “There is the added risk of there being a default by the A+ rated company on its medium term notes. Clients will be locked in for five years and if normal equities perform well, you might have a disgruntled client looking at a 5.45 per cent a year return.” Pickup says: “The capital is not guaranteed, there is no appreciation in capital but there is positive loss and the capital is tied up for five years.” Melling says: “Although the product terms are simple, trying to explain the real risks behind these terms can be difficult. What is the real risk of the FTSE falling by 30 per cent? I also feel the risk/reward ratio is low on this plan.”
Next, the plan's flexibility is put under the panel's spotlight. Pickup says: “It is not really flexible, it is a 'set in concrete' type of product. Melling says: “Rolling up income in the Isa option is a good feature. Colsell says: “It is not that flexible. You cannot switch between monthly and annual income as you can with an investment bond. There is choice at the outset but no flexibility.”
Assessing Norwich Union's reputation Pickup says: “It is excellent.” Melling says: “Norwich Union has a good reputation on the investment side of its business. Other providers of this type of product such as nvesta, NDF and Premier, haven't got the same profile level.” Colsell says: “The company has to build bridges on the marketing side with IFAs.”
The panel discuss Norwich Union's past performance record, which Pickup regards as good but Colsell views as run-of-the-mill. However, they agree that it is not relevant to an assessment of this product.
Discussing the likely competition the plan will face Melling says: “Structured products are coming out every week but the likes of NDF and nvesta will be competing in the same market.” Pickup says: “Income and high income products from NDF, Keydata, GE Life and others.” Colsell suggests structured products that are currently available to intermediaries.
The panel agree that the commission is fair and reasonable.
Casting an eye over the product literature Pickup regards it is adequate and simple to understand. Melling says: “It is clear in laying out the terms and well explained.” Colsell says: “It's okay. It reads well and projects the image of the end user as well as explaining the product.”
Summing up, Pickup concludes: “Overall, it is a very good product and should be easy to sell if time can be found to market it.”