Rob Noble-Warren, director of Independence Wealth Management, outlines his concerns about these popular retail financial products
The chain of intermediation in equity investment – registrars, custodians, nominees, fund managers, fund of fund managers, asset allocators, trustees, investment consultants, platforms, IFAs, and more – is too long: it costs too much” – Professor John Kay, The Kay Review July 2012
‘Suitable’ is teasingly left by the Financial Services Authority (FSA) to history to define.
The common man may say “a suitable product is one that benefits me more or less in the way I expect it to”. The adviser then has three tasks: – to record what the person wants; why the solution will probably meet that want; and what the customer expects.
As readers will know, the amount likely to be returned from a personal pension cannot be estimated from the FSA illustrations, which are a measure of charges. On the safe assumption that there are no managers able to consistently obtain better-than-market returns, you need to make your own estimates of growth of the markets and all charges, to end up with ‘likely return’. If this is less than 3%, then the common man will wonder why a personal pension was ‘suitable’.
The nice thing about selling financial products as a life company is you can be vague about ‘growth’ and happily leave the choice of fund in the customer’s hands. But if you go beyond basic advice (and I am not suggesting it is commercial to do so) you need to research, state and assume the markets’ future risk and return – what Kay refers to as “asset allocators”.
Given that the developed markets have achieved 10% p.a. in the last 60 years, 8% in the last 40, and 0% over the last 15, this is a tricky time. We estimate 6% growth as the optimum for the risk that an ‘average’ customer is prepared to take.
A personal pension is likely to be invested in a ‘managed fund’, which invests mainly in the UK equity market and is unlikely to be altered as the years go by, unless the customer asks for ‘asset allocation’ advice. In the FSA paper An additional perspective for retail financial products and their regulation, Isaac Alfon quotes Jones (2002) “on average consumers in managed unit trusts or life office products pay about 50% more than they should pay”, and what they do pay is not easily discovered.
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