Research highlights ‘misleading’ investment illustrations

Tablet-Technology-Computer-Business-700x450.jpgNew research shows the wide disparity in growth rates used in pension and investment fund illustrations.

CTC Software, which carried out the research, said these discrepancies could mislead consumers and “hinder clarity” on Key Information Documents and Statutory Money Purchase Illustrations.

Over the past month there has been concern that the new standalone KIDs, required by the Priips regulation, might contain misleading performance scenarios.

This is partly due to the fact that for the past five years providers have been able to select the illustration rate they think is most appropriate for an asset class. As a result illustration numbers may be different for very similar products.

For example, the CTC research found that some providers were using growth rates of up to 9 per cent for overseas equities, while other firms were using less than 4 per cent.

For UK equities, growth rates of between 4 and 8 per cent were being used, while for corporate bond illustrations rates of between 2 and 5 per cent were being used.

These projections may be based on firms’ economic forecasts, but there is a danger that investors may be inadvertently encouraged to invest in those using higher growth rates.

The FCA has said advisers who were concerned about “overly optimistic” performance scenarios could include additional information for clients.

CTC Software commercial director Philip Hodges says: “Reasonably the FCA does not prescribe the exact growth rates to be used for illustrations, but the consequences and risks are becoming greater.”

He says the disparity in rates can show up in many more places as consumers are increasingly using online planning tools and self-directed services that include these illustrations in their mandated KIDs.

He adds: “The introduction of Mifid II is calling for greater transparency, but calculations using different assumptions in this situation will only increase the confusion.”

However, he added that the difference between the highest and lowest projections had narrowed in the five years that CTC Software had been conducting this research.

CTC Software’s chief executive, actuary Nigel Chambers points out the other area of concern was with defined benefit transfers.

He says: We are concerned that in the FCA’s proposals for a new Transfer Value Comparator, the growth rate used in the calculation – which will be specific to the fund chosen for future investment – will impact on how good or bad the transfer value will appear to the individual.

“For a person who is 15 years away from retirement with a £100,000 pension fund, a 1 per cent difference in the growth rate will make the transfer appear over £15,000 better or worse. This may not only influence which pension fund is chosen, but whether they decide to transfer at all.”

He adds: “DB transfers are too important for there to be any competition in terms of the growth rates used.”

The research shows not only are providers using different growth rates, but there is also a significant difference depending on what type of provider is chosen. For example, with drawdown the average growth rate used by insurers for equities is 1 per cent higher than Sipp providers.

Chambers adds: “Consistency in growth rates used is going to become more and more important as the take-up of planning tools growth in line with the increasingly online user base.”

Recommended

Business-Document-Technology-Growth-700x450.jpg

Warning over misleading Priips document for investment trusts

Advisers must use common sense when selecting investment trusts through the new Priips’ Key Information Document as it could be misleading for investors. That is the view of analyst Numis Securities, which has published a report about the KID and investment trusts. Priips, which will apply to a wide range of firms including banks, insurers, […]

Business-Document-Technology-Growth-700x450.jpg
2

IA calls for ‘urgent’ review of Key Information Documents

The Investment Association has called for an “urgent” review new Key Information Documents issued to investors. Since January 1, Priips legislation has meant advisers now have to publish a stand-alone, standardised KID to their client including performance scenarios, risks, and the total cost of products. Yesterday, however, the FCA gave advisers licence to go further […]

19

What do suitability reports tell us about DB transfer advice?

Compliance experts have urged advisers to improve their report writing for defined benefit transfers in the wake of heightened regulatory scrutiny. The FCA has expressed suitability concerns on several occasions in recent months, many of them garnered from the final reports produced by advisers recommending a transfer to their clients. When it comes to the […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment