After all, if the base rate in the market is 5 per cent of their deposits, then anyone who is paying 7 per cent or above has a risk addition of at least 20 per cent. This may seem oversimplistic but sometimes I think we have to be overly simplistic if we are going to get the message across to clients.
I therefore note with some alarm that personal accounts have an assumption built in that they will deliver a return of 3.5 per cent ahead of inflation. I am sure that someone out there will tell me that figure was set by actuaries but, having said that, it was actuaries that have also been managing final-salary schemes in the UK so perhaps that is not something to dwell upon.
Running with such a high-risk premium is very bold and could mean that personal accounts become a disaster, not just in respect of the interaction with means- tested benefits but also from an investment perspective.
I was then further amazed that one of the directors of the Personal Accounts Delivery Authority was a director at Bradford & Bingley and I would suggest that having him remain with the authority is possibly not the most careful course of action.
A recent report from the CII and the Reform group referred to the iPod generation, standing for insecure, pressured, overtaxed and debt ridden and I think that is probably a reasonable series of bullet points to describe most 18-34-year-olds. For these individuals to take up financial products or to make any commitment to long-term saving, we have to make significant adjustments to the level of complexity which is generally seen as acceptable because it will not be acceptable to this segment of the population.
The recent letters berating Peter Hargreaves for his attack on structured products simply proves that many people fail to recognise their inherent flaws.
Many years ago, I gave a presentation which referred to with-profits and was entitled, With profits – I never liked it since I first fully understood it. I think I could probably substitute structured products in place of with-profits.
Come to think of it, isn’t with-profits the original structured product – something that has a generic title but a non-generic list of features and that is dangerous?
People therefore are not turned on by complexity. It generally leads to higher cost and perhaps the most important lesson that people can learn is that there are risks attaching to all investments and the question is not so much “what is your attitude to risk?”, it is more a question of “what is your capacity for risk, can you recover from a downturn?”
After all, some of the people who have seen their portfolios drop dramatically have no real need to withdraw the money from those portfolios and therefore shouldn’t they focus on the fact that that is what a professional adviser delivers.
A professional adviser or a seasoned professional takes clients through the bad times and lets them get on with life. It is not as if they suddenly need to withdraw their entire portfolio to keep going.
Someone once said to me that professional advisers should market the fact that what they are selling is pru- dence and not performance.