Product providers and advisers have urged caution over a new generation of precipice bonds, warning that investors must fully understand that capital is at risk to ensure the disasters of the past are not repeated.
A spate of new launches offer higher headline rate returns in the market but are not 100 per cent capital-protected.
Blue Sky Asset Management’s income protection plan is designed to offer a fixed income of 10 per cent a year and a full capital return, provided none of the five big UK banks do not see their share price slashed by 65 per cent or more during its six-year term.
Helm Godfrey managing director Bruce Wilson says: “When markets are being hit, these products look attractive but the risks are there, given that you are factoring in five different share prices across one sector in financials. I would say that the majority of investors and financial planners do not know the risks.”
Barclays Wealth director Colin Dickie says: “Where some providers tend to operate in the cautious to balanced area of the market, others seem to be chasing higher headline rates, which is fine, provided investors understand all the risks involved and that 100 per cent capital protection is not necessarily assured in all situations.”
Lowes Financial Management managing director Ian Lowes says: “The fear is that these sorts of products could be mass-marketed. It is essential these types of plans are offered on an individual basis as those investors who are not necessarily as knowledgeable will be drawn in by the 10 per cent a year return.”
Blue Sky Asset Management chief executive Chris Taylor says: “I agree that investors do need to act with caution but people need to realise that many investors need income above risk-free levels and provided those calculated risks are transparent and fair, as ours are, I feel this product provides a strong income solution.”