By Richard Leeson, Investment Relationship Manager, Prudential As we near the end of the su...
By Richard Leeson, Investment Relationship Manager, Prudential
As we near the end of the summer many clients are wondering whether the rises in the FTSE over recent weeks are going to be sustained and supported by stronger trading volumes. In other words is this the start of the recovery or are we to see the markets slip back again?
With the level of uncertainty surrounding equity investment over recent years, it is little wonder that so many people are sitting in cash with a "wait and see" attitude. What can we offer such customers when fixed interest investments may have seen better days and fears are being voiced over a "toppy" property market? In the past the answer was a with-profit bond – ideal for the client who wanted some exposure to equity investment but was concerned about volatility. But has the market for a product with such an outstanding track record changed so radically? We believe not.
Admittedly the poor press over the last two or three years, surrounding the with-profits market, has dissuaded many IFAs from recommending such products. The press was concerned, and rightly so, about the lack of transparency in the way that with-profits operated and this applied mainly to traditional polices where there were sums assured, reversionary bonuses and terminal bonuses.
However, many of the actual facts often tend to be forgotten. We should remember that with-profit bonds have had a much higher degree of transparency than regular premium policies and in the last year a great deal has been done to clarify how they operate. The press and IFAs were also concerned over recent years about the application of active MVRs to policies by providers. What is surprising is the negative image that this has created when the returns over the last seven years (a period during which investment arguably has suffered at the hands of the worst bear market in memory) have outperformed other forms of investment. So despite the negative press with-profit bonds have delivered superior returns to the investor. A story the average investor is sure to interested in hearing.
There is also growing unease that any new money going in to a with-profit bond will be used to shore up the reserves to the benefit of existing policyholders. It is this latter point that is of most concern for IFAs and customers considering dipping their toes back in to equity investment. In the case of Prudential, recent announcements have removed such concerns.
The reality that investors perceive all with-profit products as being the same remains an issue. Thankfully, with-profits product and provider differentiation is alive and well. Again, as an industry, provider and intermediary alike, we need to highlight that this is the case. Financial strength and the flexibility to choose an asset mix separate the strong providers from the weak ones. There has been an assumption that all providers work the same way when in truth those companies that are financially strong have been able to deliver fair value for all investors. The key point to remember is that not all with-profit bonds work the same way and it is possible to invest in with-profit bonds that do not penalise the new investor at the expense of the old.
The message is that the events of recent years have knocked confidence in a product that delivers excellent value, superior returns and meets the needs of the vast majority of the investing public.
We strongly urge IFAs to look carefully at this market again since it provides that unique balance that so many investors are looking for – higher returns than the Building Society with lower volatility than direct investment in to the equity markets.
If ever there was a case for IFAs to go back to the future and revisit with-profit bonds - now is that time.
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