With-profits products have been a popular recommendation for years by intermediaries, because they h...
With-profits products have been a popular recommendation for years by intermediaries, because they have in the past offered good returns on investments without carrying substantial risks to the original assets.
But is that really the case now? Do with-profits products offer a good returns on the long-term, and how can you know?
Many IFAs still believe with-profits bonds and pensions are good products to recommend to the cautious investor, however, people are also questioning whether there should also be regular statements not just about the returns on individual funds but about the state of the companies themselves.
Contrary to popular belief, it is NOT possible to tell how a firm is doing simply by looking at the free asset ratio. In fact, one industry expert has likened the free asset ratio to "stuffing a sock down your trousers to make your physique look better".
According to sources, product providers are becoming increasingly frustrated because they say intermediaries do not understand the with-profits market. As a result, a large amount of with-profits business may be going to companies which are in a worse financial state than those who perhaps deserve it.
Indeed, there were hints within the Myners Report of concerns that life offices are competing on the basis of their free asset ratio.
The only sensible way to know the with-profits market is to understand what a company is worth and to take a look at those complex pages of financial figures released every year. This does involve quantum analysis but the key to understanding with-profits products is in assessing the financial status long and short-term liabilities, cash reserves, future profits and break down each element of the company piece by piece to find evidence if how the company is doing.
This is, quite frankly, the sort of involved work which many intermediaries do not want to do, however, you have to remember with-profits products are effectively investing in life office's business. Justifying your decision as to why this particular with-profits product is better than another, or indeed why it is better over a different type of investment.
So much public talk of concerns about with-profits will eventually lead consumers to ask you - their IFA - to explain how you select with-profits products and why. If that happens, you have to be able to justify your decision and your due diligence, otherwise your reputation as an individual adviser could be called into question.
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