Five years ago with-profits were sold by many advisers as being medium to low-risk products but ho...
Five years ago with-profits were sold by many advisers as being medium to low-risk products but how does this look with hindsight?
The most popular offices were considered financially strong, quite rightly so, and the products themselves benefited from the very useful smoothing effect. Annual bonuses could not be taken away, the terminal bonuses were a very nice contributor to the maturity values which saw the average policy producing an annualised return of 8%-9%.
At the time the biggest problems with-profits faced were the comparatively low returns compared to the 13%-15% annualised the equity market was producing and the complaints of lack of transparency and high charging structures by consumers.
With hindsight these seem like minor problems.
The last five years has effectively wiped out the benefit of annual bonuses, to the point where many offices are either not issuing them or cutting them to a level not much about the cash deposit rate. Combine this with the apparent weak and weakening financial state of all offices and the introduction of punitive MVAs across the board and it means with-profits are a different proposition. Does this mean that with hindsight with-profits was mis-sold five or even 10 years ago?
In the current compensation-culture and regulatory environment advisers are just sitting there waiting for the announcement of yet another mis-selling review to be announced. Because with hindsight it could be argued that with-profits were mis-sold. Hindsight is the crucial word which seems to be driving the regulatory regime currently and it is in danger of rapidly strangling the financial services market at a time when there are already enough obstacles.
Contrast the role of the Bank of England with that of the FSA. Both are independent bodies ' independent, in theory, of government policy. The Bank pursues its role actively with the interests of the economy as its core focus and so will move to cut or raise interest rates in what ever direction it sees fit to meet this objective. The FSA's role is the interest of the consumer and the interests of the consumer must best be served by being encouraged to take greater interest in their financial affairs and to make greater personal provision.
With stock markets in free fall, the world in the grip of recession and fear of international terrorism, surely the FSA's role is to increase consumer confidence in the financial services industry. Yet the regulator's current stream of policy initiatives are constantly undermining the whole financial advice process ' from criticising advisers and their practices through to criticising the product providers and the product structures ' usually with the benefit of hindsight.
The regulator must stamp out bad practices but it needs to be forward thinking and create a framework which will restore confidence in the industry. It's foresight not hindsight which is currently needed.
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