Three years of negative stockmarket returns has taken its toll on investor confidence and now some would-be investors are choosing to keep their money on deposit. But we need to remind investors that keeping their medium to long-term money on deposit is seldom the best solution.
Interest rates are at their lowest level for over 40 years and headline rates advertised in banks and building societies do not reflect any tax that must be paid which makes them even poorer. The truth is that deposit account returns are poor and they cannot be expected to outpace inflation.
Leaving medium to long-term money on deposit might not be the best solution for investors but what alternatives should advisers explore with their clients?
There is always direct investment in the stockmarket. Over the long term, the stockmarket can deliver positive returns. However, investors are also acutely aware that the journey is not always smooth. Returns from the stockmarket can be volatile and nobody can accurately predict what will happen.
Some people are happy to ride the peaks and troughs of the stockmarket, confident that the destination will compensate for the journey. They realise there will be detours along the way but they believe they will get there in the end. But trackers are not for everyone. Trackers are not suitable for investors who cannot bear to watch the value of their investment rise or fall on a daily basis.
Trackers are not for investors who want a professional to actively manage their investment on their behalf and trackers will not be suitable for investors looking for balanced opportunities, for example, the FTSE 100 has a heaving weigh-ting in banks and building societies. A FTSE 100 tracker would be sensitive to any changes affecting this sector.
For the investor who wants to avoid the above, there is a product that fits the bill – with-profits. It offers investors the opportunity to hold a balanced investment managed by experienced fund managers. Most with-profits funds will include equities, property and fixed-rate investments. The fund manager will change the asset mix to suit different investment climates and opportunities, aiming to maximise the performance of the investment and have a smoother journey along the way. The asset mix combined with the with-profits smoothing mechanism helps smooth fluctuations in investment value.
Some advisers and commentators have felt that despite active fund management and asset allocation, balanced growth opportunities and a smoother ride, they have still had concerns about with-profits. Falling bonus rates were once a concern but lower bonus rates alone are not an issue. Lower bonus rates reflect today's economic environment.
Market value reductions have been a bone of contention. MVRs can cause distress and undermine some investors' confidence in with-profits. However, it should be remembered why MVRs are necessary. MVRs play a key role in maintaining fairness between those policyholders leaving a fund and those remaining.
If an MVR is not applied when necessary and a policyholder is allowed to take more than their fair share of the return of the fund, it would be at the expense of remaining policyholders and/or the fund's financial strength. It should also be remembered that MVRs only affect people leaving the fund, people who remain invested are protected by MVRs.
With-profits has delivered competitive returns but some remain to be convinced that with-profits is a good place to be invested for the future and, in some cases, they are right to be wary.
The downturn in stockmarkets in recent years has weakened funds and caused some providers to close their funds to new business. For some providers, this means they will have to hold lower risk/lower return assets in their with-profits fund in the future, even when higher returns are expected elsewhere. This will take its toll on the fund's future growth prospects.
This is indeed a real issue for some funds but others are being found guilty by association. There are still a number of with-profits funds that have the financial strength and investment freedom to invest in higher risk/return assets when appropriate. For strong funds, there is no reason why they are unable to deliver competitive returns in the future.
The stockmarket can be unpredictable. Some investors are happy to follow an index on its journey, others would rather take another route. Which route is most suitable for your clients? For many, it is with-profits.