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Security charges

Our panel discuss the cost of protection on the new Riley bond, plus should IFAs be concerned over wrap data?

The launch of Royal London’s Riley investment bond has received some negative reactions. The charging structure has been criticised for being expensive. What is your view on the product?

Pegley: I agree this is aimed at disillusioned with-profits investors and people who traditionally would have invested in this sector. There is little argument that with-profits is discredited and future returns will be poor, so an alternative is needed and welcome.

Having said that, the cost of protection is high. The figure quoted in Royal London’s literature is 15 per cent of the investment amount for 100 per cent protection in 10 years time. The choice of investment funds is hardly broad – a FTSE 350 tracker or managed fund. There are better products that offer equity returns and capital protection.

Davidson: Yes, we agree it is expensive. The charges are similar to the types of charges that one would expect on an offshore bond. That said, capital protection needs to be paid for. If an investor wants security, then one would expect the charges to be higher to cover the greater costs of providing this protection. The literature is very cheesy and Riley looks like an irritating escapee from a kids’ TV programme.

Catt: The first thing I knew about this product was an invitation to a Riley roadshow. I am never entirely convinced with packaged products like this because all the added bells and whistles cost money and this tends to dilute the investment returns.

I am sure it is a wonderful product but I cannot think that I would ever use it for my clients. There are other providers of this type of product that have finer charging structures, more choice of funds and built-in protection. It would have to be a jolly good roadshow.

First State Investments global opportunities manager Andrew Dalrymple is leaving to set up his own boutique operation and the 65.4m fund will be taken over by Habib Subjally. What has been your reaction to this? Is this a buy, sell or hold situation?

Pegley: I do not like making rash decisions when fund managers change and prefer to give the new person six months or so to bed down. The exception to the rule was probably when Neil Pegrum left Insight, leaving no real stockpickers to take over. I think too many advisers either panic and recommend a sell due to a lack of information or recommend a sell for the wrong reasons.

Habib Subjally, although not well known, appears to have plenty of experience with stockpickers such as Invesco and Credit Suisse. First State is also a research- driven stockpicking company so I believe the fund is a hold, at least for now.

Davidson: We have not been great supporters of this fund in the past. Now that Forsyth-OBSR has withdrawn its rating, we are unlikely to be recommending it at the moment. Past performance has been quite good so we would not urge investors to leave but would monitor the situation. It is currently fourth quartile over three and six months, which is a concern, so one to watch.

Catt: I do not tend to chase individual fund managers around so I do not think the departure of a fund manager should ever really cause a kneejerk reaction in any direction. Most fund management houses have big teams supporting managers and presumably the incoming manager will work to the same investment mandate with largely the same investment strategy.

Are you in any way concerned over the client data issues voiced by Bankhall chief executive Peter Mann in regard to handing over client information to wrap services?

Pegley: I fully agree with Peter Mann’s thoughts. I have great difficulty trusting product providers to continue to recognise the IFA as their client and not to cut us out of the loop. Years of cross-selling by product providers and the recent trend of reducing renewal as part of treating customers fairly have done nothing to reassure me.

I am certain that, in time, possibly following merger and acquisitions of UK wrap providers, IFAs will be cut out and their clients hijacked or held to ransom by the product providers. Wraps appear to offer little or no benefit to our clients but bring them additional cost, making them a hard proposition for me to understand.

Davidson:It is the adviser who holds the principal client relationship and the most important one at that. It is up to advisers to weld their clients to them so that any encroachment is dispatched by the client.

That said, it is irritating if there are salvos from wraps or product providers. IFAs need to ensure that these parties see themselves in partnership, not in competition, and protect themselves accordingly.

Catt: I would have more concerns over passing my client information to a network than to a third-party administrator of a wrap service. If I am looking after my clients, they are likely to ask me about any marketing material they receive. In fact, this could be quite positive if it leads to more regular enquiries and contact with clients. An excellent opportunity for a review.

Fidelity has been seeing significant outflows, to the tune of 500m, from Anthony Bolton’s special situations fund ahead of its September split. Do you expect this pattern to continue or even get worse?

Pegley: Some of the rationale for the outflows has been sound. The global special situations fund is not the UK fund that people bought and does not now fit their asset allocation. But Anthony Bolton is sticking around in an advisory capacity and he has faith in Korhonen to look after his baby, so I am confident the fund will prosper, at least in the short term, and as a result many investors should wait and see how he does.

Having said that, continuing press coverage and adviser sell advice – for potentially questionable reasons – combined with little new money means that the outflows will continue.

Davidson: Some attrition of the Fidelity special situations fund was to be expected, given the changes and that the new arrangements and fund manager have not had a chance to bed down and prove their spurs.

I would expect a fund management group of Fidelity’s standing to have anticipated outflows from the fund and to have planned accordingly. Significant outflows are more likely to happen initially, with settling down after this.

However, Fidelity will need to think carefully who it appoints to run Anthony Bolton’s half of the fund as an unpopular decision could see further attrition at that stage. Our advice to clients has been to hold this fund and this remains our view at the moment.

Catt: Anthony Bolton has a fantastic track record and will be a hard act to follow. The splitting of the fund gives Fidelity the opportunity to offer more focused investment and time will tell whether one side of the split fund vastly outperforms the other. I guess advisers will continue to move clients’ money away from the fund.

According to IFA Promotion, 1,933 people have searched its website for an ethical IFA in the last quarter – an increase of over 100 per cent over the same period in 2005. Has your business experienced a mass increase in interest in ethical products?

Pegley: We have seen an increase in the number of clients interested in ethical investments and it probably is of the order of 100 per cent but this is coming from a very low starting level. People are becoming more aware of where their money is invested and not wanting to fund armaments, for example.

This, in conjunction with some pretty good performance figures from the likes of Jupiter ecology, means that ethical no longer means lentil-eating crackpots who do not want their money to perform. But while there has been growth, I would not say there has been a mass increase in interest in ethical products.

Davidson: Having had 15 years advising clients on ethical funds, advising in this area is second nature now. Over the years, I have seen a greater interest as the funds move more into the mainstream and have more impact on mainstream funds too.

Engagement has had the effect of opening up the area of ethical investment and has generated more interest among clients. There is also more performance data on the funds, encouraging more clients to get involved.

I cannot say the last quarter or so has seen a massive increase. For me, it has been a continual evolvement.

Catt: I get regular enquiries generated from IFA Promotion but not necessarily for ethical investments. I am finding there is a greater awareness of ethical investment as environmental issues are in the press every day. As an aside, I have been disappointed to note that the ethical funds are quite difficult to match with clients’ ethical criteria as the funds often tend to be “least unpalatable” rather than “most ethical”.

A number of firms are starting to market their venture capital trusts as good holdings for self-invested personal pension investors. Are they worth a punt at the margins or do you believe they are too risky for a pension?

Pegley: As a rule, I do not like VCTs because the risk is too great for most clients. That Gordon Brown is still happy to throw 30 per cent tax relief at them does not instil much confidence. All too often, VCTs are marketed as being lower risk than they are and the tax relief makes them a surefire winner.

What I think is being proposed is that investors buy the VCTs personally, benefiting from the 30 per cent tax relief, then after the three-year qualifying period sell them to their Sipp. on which their contributions have received 40 per cent tax relief.

Assuming that the VCT does not fall in value, this would give total tax relief of 58 per cent so the numbers do look pretty attractive. This would only work for 40 per cent taxpayers and I would not recommend it to any but my highest earning, most risk-tolerant clients.

Davidson: I do not think that VCTs per se are too risky for a pension portfolio. IFAs need to make the mental shift that a Sipp is simply a portfolio that happens to be in a pension wrapper so it will depend on the client’s risk profile and the quality of the VCT investment itself. Some will be appropriate for some clients in some circumstances. Use with caution.

Catt: The suitability of VCTs as a pension holding is entirely governed by the client’s circumstances, including investment risk profile, size of fund, time to retirement and so on – all the usual criteria used to make any decision about investment. Since the funds in Sipps tend to be greater than personal pensions, the VCTs will offer some diversity to the standard core holdings in the Sipp.


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