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Product matters

Royal London invites investors to “enjoy the life of Riley” with its new Riley investment bond. Investors can choose between a FTSE 350 tracker fund and an active FTSE 350 fund managed by Schroders and then protect up to 110 per cent of their initial investment at a specified date in future.

The product appears to be pitched at disillusioned with-profits investors – certainly a big potential market.

The concept is good and Royal London seems to have made a pretty good stab at creating a straightforward, transparent product. However, based on the examples given in the product literature, the cost of protection, provided via Goldman Sachs, appears prohibitive.

Royal London’s examples suggest that providing 100 per cent capital protection over 10 years would cost a whopping 15 per cent, meaning a 10,000 investment would be reduced to just 8,500 at day one. If you factor in the lost potential growth on this protection money (at 6 per cent a year) the true opportunity cost could be more than a quarter of the initial investment over 10 years.

On a wider note, I also have concerns over the extent to which invest- ment bonds are sold to individuals where using capital gains-taxable investments would be more tax-efficient as gains can be offset against the annual CGT allowance.

The high initial commission paid on bonds causes some advisers to overlook this aspect.

Royal London deserves credit for innovation but in practice I just cannot see the point of the Riley bond.

Why pay an arm and a leg for protection when the chances of losing money in a well-diversified portfolio over 10 years are slim and the upside probably higher?

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