View more on these topics

Too much to bear for reserves

It is interesting to read of the apparent dilemmas surrounding advice to clients on whether they should remain invested in with-profits or go into something else.

First, I think perhaps that the FSA may be quoting somewhat conveniently out of context the IFA who is reported to have asked whether he was expected to understand the with-profits policies on which he had been advising for the past 10 years.

The benefits distributed to investors in with-profits funds have always been subject to a high degree of actuarial discretion and few people outside that profession could reasonably be expected to understand the workings of the actuarial mind. But, in a nutshell, an actuary is employed to strike a carefully chosen balance between what policyholders will accept as a satisfactory return on their investment and what his employing company can get away with creaming off for itself. That is about the measure of it, isn’t it? How many life office actuaries ever invested their own money in with-profits? Reportedly, hardly any.

Three or four years ago, it seemed to most advisers unconscionably vindictive of the FSA to start sticking the boot into with-profits funds at the very time when they were most vulnerable to attack. But, nearly three years after the UK stock-market finally bottomed out and started what has been a strong recovery, we are still seeing feeble levels of reversionary bonuses (if any), little if anything in the way of terminal bonuses and savage MVRs only now starting to become an unpleasant memory.

What really caused with-profits to come so badly unstuck was a longer bear market than they had ever had to cope with before, revealing that their traditional reserves against bad times were in fact of very finite capacity. As Ned Cazalet has pointed out, a bear market any longer than two years was simply more than with-profits funds had ever been equipped to deal with.

So, when I write to clients about their with-profits investments (mainly single-premium bonds), I point out:

l The average annualised return on their investment achieved over the past however many years (usually less than 5 per cent).

l The current levels of reversionary bonus.

l The amount by which investors have missed out on what world stockmarkets have achieved since mid-2003 and, in the light of the reforms imposed by the FSA as to the way in which with-profits funds are run (which, in themselves, are not entirely unreasonable, I have to admit).

l The future outlook for the with-profits investment medium.

Most clients need little persuading that with-profits is a dinosaur investment medium that has basically had its day. Of what value are smoothed returns mechanisms that manifestly fail when the going gets tougher than an 18-month or two-year stockmarket downturn?

Nearly all our clients just want out from their with-profits bonds as soon as this can be achieved without an MVR. Churning? Not a problem. All you need to do is take reduced commission on the reinvestment and there is no reason for the client not to feel quite satisfied that they are being treated fairly. All that is needed is an under-standing of the issues and an ability to communicate them properly.

Julian Stevens




Making allowances

An important issue in respect of the new A-Day legislation which still requires clarifi-cation is whether personal contributions in excess of an individual’s earnings to a registered pension scheme made after A-Day will count towards the annual allowance. According to the CII, personal contributions in excess of the greater of 3,600 gross and an indiv-idual’s […]

The women of the year

Debbie Boyes was named Mortgage Adviser of the Year award at the Women’s Financial Adviser Group award ceremony in London’s Dock- lands last Friday. Boyes runs her own mortgage brokerage Debbie J Boyes, which she set up in July 2004, and she has plans to expand her team of four staff. She was previously a […]

Ailo brochure explains bonds

The Association of International Life Offices is offering a brochure to help UK advisers understand offshore investment bonds and why they might be suitable for their clients.

Come Fry with me

Friends Provident PR Russell Spink tells us that while he was working at the BBC, he once met Stephen Fry in the Green Room and asked him to call his mum to wish her a happy birthday. Mr Fry kindly obliged, telling his mum: “Hello, it’s Stephen Fry here. Happy f**king birthday.” The gesture certainly […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm