Reviewing with-profits bonds can be like peering into muddy waters but the benefits of navigating through a review can be great.
Reassuring a client that their policy is good or advising them to switch from a poorly performing bond, perhaps laden with fixed income and cash, to a more appropriate investment are equally rewarding.
The latter is a point worth making because it is wrong to suggest that all with-profits products are rotten. Some bonds continue to live up to the promises made by the companies.
However, some do not, which is why a review is an important part of an adviser’s role.
For many IFAs, the obstacles to the review process mean they do not relish the task.
Couple this with the scrutiny of advice on with-profits and many IFAs approach the decision to recommend a switch with extreme caution, not least because of the lack of information provided by life companies.
Even before the review begins, the obstacles loom into view.
First, you have to identify the correct life office and then the correct policy. In some cases, this will be a simple task as the client will come equipped with relevant documentation, leading you straight to their policy details. Other cases will be less simple.
If you were not responsible for selling the policy, you will be starting from scratch and the client may not have all the policy details to hand.
Even if they do, you might have to piece together a complex corporate history to identify the policy they now hold. This is because many of the players in the with-profits market – big and small – have merged, been bought out, sold or in some other way blended into today’s market.
For example, Phoenix Life Assurance – not to be confused with Phoenix Life or Phoenix and London Assurance – was previously known as Abbey National Life, a whollyowned subsidiary of Abbey National. Abbey, as it is now known, sold its life businesses in 2006 so Phoenix Life Assurance is now a subsidiary of Resolution and its with-profits bonds are reinsured to Scottish Mutual, a subsidiary of Resolution. Resolution is in merger talks with Friends Provident, which has its own with-profits fund, although Standard Life and Pearl are rumoured to be interested in a potential approach. Both those companies also have with-profits funds.
Confused? Trying to keep track of with-profits bond providers is anything but simple and this is just one example of many in the with-profits universe.
The ability to retrieve information on the policy from the provider can be one of the biggest obstacles to with-profits reviews.
However, Access to information on policy investments is improving and product providers have made great efforts to comply with the FSA’s directives on investment disclosure. Gone are the days when it was impossible to get bond valuations.
In some cases, the information is just a few clicks away but it can be slow to arrive from offices which choose not to publish their documents on the internet. When it does arrive, it might be bound within documents many pages long – the principles and practices of financial management or PPFM. Reviewing these tomes can prove difficult and time-consuming while comparisons between them are even more so.
Even reviewing the shortened and improbably named CFPPFMs – the consumer-friendly versions – can be time-consuming and will not reveal much, if anything, about the precise nature of the asset mixes held in the fund.
The PPFM, in all its forms, is full of with-profits jargon and the glossary alone might run to three pages. This documentation all uses a common style. Reading one is not like flicking through the pages of a magazine or sales brochure. Think back to your introduction to Shakespeare at O level and you begin to get the picture.
In the context of assessing the suitability of the policy as an investment vehicle for the client, these forms of information suffer for being general statements of principle rather than reports of the position now.
As a source of the current asset mix, they are close to useless. They will describe the principles of the investment manager but have no current information.
For this, you will have to approach the life office or a third party which specialises in obtaining and presenting with-profits investment information. The scale of the task is demonstrated by the thriving industry that is growing around the procurement and assessment of with-profits policy details.
The analysis and comparison of the data you receive will eventually boil down to three things that summarise the suitability of the product for the client.
These three things assess whether the policy is still able to do what it was supposed to and at reasonable total cost. They are:
- Investment freedom – whether the investment decision-makers have the flexibility to invest as they wish or are bound by a weak balance sheet.
- The capability to offer smoothing – does the scope of the investment freedom enable the fund to outperform in good years and pay bonuses in bad?
- The impact of charges and fees – how high are the charges for investment management, administration and other fees such as market value reductions?
The availability of any guarantees or MVR-free windows should be considered as they will have a material impact on the timing of any investment decisions.
It is not quite the same as deciding which bearing to take at the helm but might feel like it.
Advising a client to stick to, or switch from, a with-profits bond is a big decision in itself but can be the most simple task at the end of a long road of research.
As more pressure is applied by the regulator and more clients demand portfolio reviews, including an assessment of their with-profits bonds, the work of some of the third parties offering with-profits tools may prove invaluable to help advisers.
These tools offer support, often with past performance and asset allocation details to be considered alongside PPFMs.
Perhaps the key point is they can provide a consistent and compliant framework to help cut through the confusion and help advisers steer clients towards safer waters.